SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10/A
(Amendment No. 3)
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
Duck Head Apparel Company, Inc.
(formerly named DH Apparel Company, Inc.)
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(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-2510086
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1020 Barrow Industrial Pkwy, Winder, GA 30680
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(Address of Principal Executive Offices) (Zip Code)
(770) 867-3111
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(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
To Be So Registered Each Class Is To Be Registered
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Common Stock, par value $0.01 American Stock Exchange
Common Stock Purchase Rights American Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act:
None
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Except as otherwise indicated below, the information required to be
contained in this Registration Statement on Form 10/A of Duck Head Apparel
Company, Inc., a Georgia corporation, formerly named DH Apparel Company, Inc.
("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 Nine Months of Fiscal Year 2000
versus First Nine 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"
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ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See "Relationships Among Duck Head, Delta Woodside and Delta
Apparel"
"Interests of Directors and Executive Officers in the Duck
Head Distribution"
ITEM 8. LEGAL PROCEEDINGS.
See "Business of Duck Head -- Legal Proceedings"
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
See "Trading Market"
"MD&A -- Dividends and Purchases by Duck Head of its Own
Shares"
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
See "Description of Duck Head Capital Stock - Recent Sales of
Unregistered Securities"
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
See "Description of Duck Head Capital Stock"
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
See "Description of Duck Head Capital Stock -- Limitation on
Liability of Directors" and "-- Indemnification of
Directors"
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Unaudited Pro Forma Combined Financial Statements
Audited Combined Financial Statements
Unaudited Condensed Combined Financial Statements
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
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(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. (excluding schedules
and exhibits).
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.*
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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.)
10.8.1 Collateral Assignment of Acquisition Agreements dated May 16,
2000 by and among DH Apparel Company, Inc., Delta Apparel,
Inc. in favor of Congress Financial Corporation (Southern).
10.8.2 Loan and Security Agreement by and between Congress Financial
Corporation (Southern), DH Apparel Company, Inc. and Delta
Merchandising, Inc., dated May 16, 2000 (excluding exhibits and
schedules).
10.8.3 Term Promissory Note in the principal amount of $5,760,000 dated
May 16, 2000 by DH Apparel Company, Inc. and Delta
Merchandising, Inc. in favor of Congress Financial Corporation
(Southern).
10.8.4 Pledge and Security Agreement dated May 16, 2000 by DH
Apparel Company, Inc. by and in favor of Congress Financial
Corporation (Southern) (excluding exhibits and schedules).
10.8.5 Trademark Security Agreement dated May 16, 2000 by and
between DH Apparel Company, Inc. and Congress Financial
Corporation (Southern) (excluding exhibits and schedules).
21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule (electronic filing only).
99.1 Information Statement of Duck Head Apparel Company, Inc.
99.2 Valuation and Qualifying Accounts *
* Previously filed with initial filing, Amendment No. 1 or
Amendment No. 2.
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The registrant agrees to furnish supplementally to the
Securities and Exchange Commission a copy of any omitted
schedule or exhibit to any of the above filed exhibits upon
request of the Commission.
<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.
DUCK HEAD APPAREL COMPANY, INC.
Date: May 24, 2000 By: /s/ Robert D. Rockey, Jr.
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Robert D. Rockey, Jr., Chairman,
President & Chief Executive Officer
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EXHIBITS
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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.)
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10.8.1 Collateral Assignment of Acquisition Agreements dated May 16, 2000 by and among DH
Apparel Company, Inc., Delta Apparel, Inc. in favor of Congress Financial Corporation
(Southern).
10.8.2 Loan and Security Agreement by and between Congress Financial Corporation
(Southern), DH Apparel Company, Inc. and Delta Merchandising, Inc., dated May 16,
2000 (excluding exhibits and schedules).
10.8.3 Term Promissory Note in the principal amount of $5,760,000 dated May 16, 2000 by DH
Apparel Company, Inc. and Delta Merchandising, Inc. in favor of Congress Financial
Corporation (Southern).
10.8.4 Pledge and Security Agreement dated May 16, 2000 by DH Apparel Company, Inc. by
and in favor of Congress Financial Corporation (Southern) (excluding exhibits and
schedules).
10.8.5 Trademark Security Agreement dated May 16, 2000 by and between DH Apparel
Company, Inc. and Congress Financial Corporation (Southern) (excluding exhibits and
schedules).
21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule (electronic filing only).
99.1 Information Statement of Duck Head Apparel Company, Inc.
99.2 Valuation and Qualifying Accounts *
* Previously filed with initial filing, Amendment No. 1 or Amendment No. 2.
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DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT (this "Distribution Agreement"), dated as of
March 15, 2000, is entered into by and among DELTA WOODSIDE INDUSTRIES, INC., a
South Carolina corporation ("Delta Woodside"), DH APPAREL COMPANY, INC., a
Georgia corporation to be renamed Duck Head Apparel Company, Inc. ("Duck Head"),
and DELTA APPAREL, INC., a Georgia corporation ("Delta Apparel").
WHEREAS, the respective Boards of Directors of Delta Woodside, Duck Head
and Delta Apparel have approved the transactions contemplated by this
Distribution Agreement, upon the terms and subject to the conditions set forth
herein, as being in the best interests of Delta Woodside, Duck Head and Delta
Apparel, respectively;
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein the parties hereto
agree as follows:
ARTICLE 1
CERTAIN DEFINITIONS
1.1 Definitions. (a) As used herein, the following terms have the following
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meanings:
"Action" means any claim, suit, action, arbitration, inquiry, investigation
or other proceeding of any nature (whether criminal, civil, legislative,
administrative, regulatory, prosecutorial or otherwise) by or before any
arbitrator or Governmental Entity.
"Affiliate" means, with respect to any Person, any other Person, directly
or indirectly, controlling, controlled by, or under common control with, that
Person. For the purposes of this definition, the term "control" (including the
correlative terms "controlling", "controlled by" and "under common control
with") means the direct or indirect possession of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract, or otherwise. For purposes of this
Distribution Agreement, no member of one Group shall be treated as an Affiliate
of any member of another Group.
"Business" means the Delta Woodside Business, the Duck Head Business or the
Delta Apparel Business, as the context may indicate.
"Business Day" means any day other than a Saturday, Sunday or one on which
banks are authorized or required by law to close in Greenville, South Carolina.
"Contract" shall mean any note, bond, mortgage, indenture, lease, contract,
agreement, obligation, understanding, commitment or other similar arrangement,
whether written or oral.
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"Defense Materials" means, with respect to any Group, any and all written
or oral information (including, without limitation, any and all (A) written or
electronic communications, (B) documents (including electronic versions
thereof), (C) factual and legal analyses and memoranda, (D) interview reports
and reports of experts, consultants or investigators, (E) meetings in person or
by telephone and e-mail or other forms of electronic communication, and (F)
records, reports or testimony regarding those communications, documents,
memoranda or meetings) (i) within the custody or control, within the meaning of
Rule 34 of the Federal Rules of Civil Procedure, of or reasonably accessible by
that Group or its Representatives and (ii) directly or indirectly arising out of
or relating to, the preparation or litigation of any Action in which Delta
Woodside, Duck Head and/or Delta Apparel have a common interest.
"Delta Apparel Board" means the Board of Directors of Delta Apparel.
"Delta Apparel Business" means the businesses and operations of the Delta
Apparel Group, whether conducted prior to, at or after the Effective Time, which
include the manufacturing, marketing and sale of knit apparel.
"Delta Apparel Common Stock" means the common stock, par value $0.01 per
share, of Delta Apparel.
"Delta Apparel Disclosure Documents" means the Delta Apparel Information
Statement, the Delta Apparel Form 10 and each other report or filing made by
Delta Apparel under the Securities Act or the Exchange Act or with the American
Stock Exchange in connection with the matters contemplated by any of the
Distribution Documents, in each case as amended or supplemented.
"Delta Apparel Employees" means those individuals listed on the payroll
records of any member of the Delta Apparel Group after the Effective Time, or
who are identified as a Delta Apparel Employee on the Delta Apparel Disclosure
Schedule, and shall not include individuals who are Delta Woodside Employees or
Duck Head Employees.
"Delta Apparel Employee Group" means all Delta Apparel Employees and Delta
Apparel Retirees and their respective beneficiaries.
"Delta Apparel Form 10" means the registration statement on Form 10 that
Delta Apparel has filed with the SEC to register the Delta Apparel Common Stock
under the Exchange Act in connection with the Distribution, as that registration
statement may be amended from time to time.
"Delta Apparel Group" means, on and after the Effective Time, Delta Apparel
and the Subsidiaries of Delta Apparel, including all predecessors (other than
any member of the Delta Woodside Group or any member of the Duck Head Group) and
successors to each of those Persons.
"Delta Apparel Group Liabilities" means, except as otherwise specifically
provided in any Distribution Document, all Liabilities, whether arising before,
at or after the Effective Time, (i) of
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or in any way relating, in whole or in part, to any member of the Delta Apparel
Group (other than any Liabilities arising primarily from the conduct of or in
connection with, in whole or in part, the Delta Woodside Business or the Duck
Head Business) or (ii) arising from the conduct of, in connection with or in any
way relating to, in whole or in part, the Delta Apparel Business, or the
ownership or use of assets or property in connection with the Delta Apparel
Business or (iii) arising under Contracts included in the Delta Apparel Assets
(including any Liabilities under such Contracts resulting from the consummation
of the transactions contemplated by this Distribution Agreement) or (iv) of
Delta Apparel arising under any of the Distribution Documents. Notwithstanding
the foregoing, "Delta Apparel Group Liabilities" shall exclude (i) all
Liabilities for Taxes of any member of the Delta Apparel Group (because the Tax
Sharing Agreement will govern those Liabilities) and (ii) all Liabilities for
the fees, costs, expenses and transfer taxes (and other similar fees and
expenses), or portion thereof, that a specific provision of this Distribution
Agreement imposes on Delta Woodside or Duck Head. Without limiting the
generality of the foregoing, Delta Apparel Group Liabilities include all
liabilities that may arise under or in connection with that certain litigation
captioned Scelza et al. v. Caldor, Inc. et al. that is pending in the Supreme
Court of the State of New York in New York County, New York.
"Delta Apparel Information Statement" means the information statement,
substantially complying with the disclosure items of Schedule 14C of the
Exchange Act, that Delta Apparel will file as an exhibit to the Delta Apparel
Form 10 and send to each Delta Woodside Stockholder of record as of the Record
Date in connection with the Distribution.
"Delta Apparel Material Adverse Effect" shall be deemed to occur if the
aggregate consequences of all breaches and inaccuracies of covenants and
representations of Delta Apparel, when read without any exception or
qualification for a Delta Apparel Material Adverse Effect, are reasonably likely
to have a material adverse effect on Delta Apparel's ability to consummate the
transactions contemplated by this Distribution Agreement or on the business,
operations or financial condition of Delta Apparel and its Subsidiaries, Delta
Woodside and its Subsidiaries (excluding the Duck Head Group and the Delta
Apparel Group) or Duck Head and its Subsidiaries taken as a whole.
"Delta Apparel Retirees" means those individuals who were employed in the
Delta Apparel Business immediately before those individuals' retirement or other
termination of employment or who are identified as Delta Apparel Retirees on the
Delta Apparel Disclosure Schedule.
"Delta Apparel Share" means a share of the Delta Apparel Common Stock.
"Delta Woodside Board" means the Board of Directors of Delta Woodside.
"Delta Woodside Business" means the businesses and operations of the Delta
Woodside Group (but excluding the Delta Apparel Business and the Duck Head
Business), whether conducted prior to, at or after the Effective Time, which
include the manufacturing, marketing and sale of woven textile products.
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"Delta Woodside Common Stock" means the common stock, par value $0.01 per
share, of Delta Woodside.
"Delta Woodside Disclosure Documents" means each report or filing made by
Delta Woodside under the Exchange Act in connection with the matters
contemplated by any of the Distribution Documents, any information in the Duck
Head Information Statement, the Duck Head Form 10, the Delta Apparel Information
Statement or the Delta Apparel Form 10 that is provided by Delta Woodside or its
Representatives (other than a matter relating to the Duck Head Group or the
Delta Apparel Group) and each other report or filing made by Delta Woodside
under the Securities Act or the Exchange Act in connection with the matters
contemplated by any of the Distribution Documents, in each case as amended or
supplemented.
"Delta Woodside Employees" means those individuals listed on the payroll
records of any member of the Delta Woodside Group after the Effective Time, or
who are identified as a Delta Woodside Employee on the Delta Woodside Disclosure
Schedule, and shall not include individuals who are Delta Apparel Employees or
Duck Head Employees.
"Delta Woodside Employee Group" means all Delta Woodside Employees and
Delta Woodside Retirees and their respective beneficiaries.
"Delta Woodside Group" means, on and after the Effective Time, Delta
Woodside and the Subsidiaries of Delta Woodside, including all predecessors and
successors to each of those Persons (other than any member of the Delta Apparel
Group or the Duck Head Group).
"Delta Woodside Group Liabilities" means, except as otherwise specifically
provided in any Distribution Document, all Liabilities, whether arising before,
at or after the Effective Time, (i) of or in any way relating, in whole or in
part, to any member of the Delta Woodside Group (other than any Liabilities
arising primarily from the conduct of or in connection with, in whole or in
part, the Duck Head Business or the Delta Apparel Business) or (ii) arising from
the conduct of, in connection with or in any way relating to, in whole or in
part, the Delta Woodside Business, or the ownership or use of assets or property
in connection with the Delta Woodside Business or (iii) arising under Contracts
under which any of Delta Woodside or any of its Subsidiaries has any Liability
and that are not included in the Delta Apparel Assets or the Duck Head Assets
(including any Liabilities under such Contracts resulting from the consummation
of the transactions contemplated by this Distribution Agreement) or (iv) of
Delta Woodside arising under any of the Distribution Documents. Notwithstanding
the foregoing, "Delta Woodside Group Liabilities" shall exclude (i) all
Liabilities for Taxes of any member of the Delta Woodside Group (because the Tax
Sharing Agreement will govern those Liabilities) and (ii) all Liabilities for
the fees, costs, expenses and transfer taxes (and other similar fees and
expenses), or portion thereof, that a specific provision of this Distribution
Agreement imposes on Duck Head or Delta Apparel.
"Delta Woodside Material Adverse Effect" shall be deemed to occur if the
aggregate consequences of all breaches and inaccuracies of covenants and
representations of Delta Woodside,
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when read without any exception or qualification for a Delta Woodside Material
Adverse Effect, are reasonably likely to have a material adverse effect on Delta
Woodside's ability to consummate the transactions contemplated by this
Distribution Agreement or on the business, operations or financial condition of
Delta Woodside and its Subsidiaries (excluding the Duck Head Group and the Delta
Apparel Group), Duck Head and its Subsidiaries or Delta Apparel and its
Subsidiaries, taken as a whole.
"Delta Woodside Retirees" means those individuals who were employed in the
Delta Woodside Business immediately before those individuals' retirement or
other termination of employment or who are identified as Delta Woodside Retirees
on the Delta Woodside Disclosure Schedule.
"Delta Woodside Share" means a share of the Delta Woodside Common Stock.
"Delta Woodside Stockholders" means the holders of the Delta Woodside
Common Stock.
"Distribution" means the distribution by Delta Woodside, pursuant to the
terms and subject to the conditions of this Distribution Agreement, of all of
the outstanding Duck Head Shares and all of the outstanding Delta Apparel Shares
to the Delta Woodside Stockholders of record as of the Record Date.
"Distribution Agent" means First Union National Bank or its successor.
"Distribution Agent Agreement" means an agreement to be entered into prior
to the Effective Time by the Distribution Agent with respect to the
Distribution.
"Distribution Date" means the Business Day on which the Distribution is
effected.
"Distribution Documents" means this Distribution Agreement, the Tax Sharing
Agreement, and the exhibits and schedules to those agreements.
"Duck Head Board" means the Board of Directors of Duck Head.
"Duck Head Business" means the businesses and operations of the Duck Head
Group, whether conducted prior to, at or after the Effective Time, which include
the manufacturing, marketing and sale of apparel bearing the Duck Head
trademark.
"Duck Head Common Stock" means the common stock, par value $0.01 per share,
of Duck Head.
"Duck Head Disclosure Documents" means the Duck Head Information Statement,
the Duck Head Form 10 and each other report or filing made by Duck Head under
the Securities Act or the Exchange Act or with the American Stock Exchange in
connection with the matters contemplated by any of the Distribution Documents,
in each case as amended or supplemented.
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"Duck Head Employees" means those individuals listed on the payroll records
of any member of the Duck Head Group after the Effective Time, or who are
identified as a Duck Head Employee on the Duck Head Disclosure Schedule, and
shall not include individuals who are Delta Woodside Employees or Delta Apparel
Employees.
"Duck Head Employee Group" means all Duck Head Employees and Duck Head
Retirees and their respective beneficiaries.
"Duck Head Form 10" means the registration statement on Form 10 that Duck
Head has filed with the SEC to register the Duck Head Common Stock under the
Exchange Act in connection with the Distribution, as that registration statement
may be amended from time to time.
"Duck Head Group" means, on and after the Effective Time, Duck Head and the
Subsidiaries of Duck Head, including all predecessors (other than any member of
the Delta Woodside Group or any member of the Delta Apparel Group) and
successors to each of those Persons.
"Duck Head Group Liabilities" means, except as otherwise specifically
provided in any Distribution Document, all Liabilities, whether arising before,
at or after the Effective Time, (i) of or in any way relating, in whole or in
part, to any member of the Duck Head Group (other than any Liabilities arising
primarily from the conduct of or in connection with, in whole or in part, the
Delta Woodside Business or the Delta Apparel Business) or (ii) arising from the
conduct of, in connection with or in any way relating to, in whole or in part,
the Duck Head Business, or the ownership or use of assets or property in
connection with the Duck Head Business or (iii) arising under Contracts included
in the Duck Head Assets (including any Liabilities under such Contracts
resulting from the consummation of the transactions contemplated by this
Distribution Agreement) or (iv) of Duck Head arising under any of the
Distribution Documents. Notwithstanding the foregoing, "Duck Head Group
Liabilities" shall exclude (i) all Liabilities for Taxes of any member of the
Duck Head Group (because the Tax Sharing Agreement will govern those
Liabilities) and (ii) all Liabilities for the fees, costs, expenses and transfer
taxes (and other similar fees and expenses), or portion thereof, that a specific
provision of this Distribution Agreement imposes on Delta Woodside or Delta
Apparel.
"Duck Head Information Statement" means the information statement,
substantially complying with the disclosure items of Schedule 14C of the
Exchange Act, that Duck Head will file as an exhibit to the Duck Head Form 10
and send to each Delta Woodside Stockholder of record as of the Record Date in
connection with the Distribution.
"Duck Head Material Adverse Effect" shall be deemed to occur if the
aggregate consequences of all breaches and inaccuracies of covenants and
representations of Duck Head, when read without any exception or qualification
for a Duck Head Material Adverse Effect, are reasonably likely to have a
material adverse effect on Duck Head's ability to consummate the transactions
contemplated by this Distribution Agreement or on the business, operations or
financial condition
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of Duck Head and its Subsidiaries, Delta Woodside and its Subsidiaries
(excluding the Duck Head Group and the Delta Apparel Group) or Delta Apparel and
its Subsidiaries taken as a whole.
"Duck Head Retirees" means those individuals who were employed in the Duck
Head Business immediately before those individuals' retirement or other
termination of employment or who are identified as Duck Head Retirees on the
Duck Head Disclosure Schedule.
"Duck Head Share" means a share of the Duck Head Common Stock.
"Effective Time" means the time immediately before the close of business on
the Distribution Date.
"Governmental Entity" means any government or any state, department or
other political subdivision thereof, or any governmental body, agency, authority
(including, but not limited to, any central bank or taxing authority) or
instrumentality (including, but not limited to, any court, tribunal or grand
jury) exercising executive, prosecutorial, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Group" means, as the context requires, the Delta Woodside Group, the Duck
Head Group or the Delta Apparel Group.
"Knowledge," "best knowledge" or any similar formulation of "knowledge"
shall mean the knowledge of Delta Woodside's, Duck Head's or Delta Apparel's
respective executive officers with respect to Delta Woodside, Duck Head and
Delta Apparel, respectively.
"Liabilities" means any and all claims, debts, liabilities, assessments,
fines, penalties, damages, losses, disgorgements and obligations, of any kind,
character or description (whether fixed, absolute, contingent, matured, not
matured, liquidated, unliquidated, accrued, not accrued, known, unknown, direct,
indirect, derivative or otherwise), whenever and however arising, whether or not
the same would be required by generally accepted accounting principles to be
reflected in financial statements or disclosed in the notes thereto, including,
but not limited to, all costs and expenses relating thereto (including, but not
limited to, all expenses of investigation, all attorneys' fees and all
out-of-pocket expenses in connection with any Action or threatened Action).
"Person" means an individual, corporation, limited liability company,
limited liability partnership, partnership, association, trust or other entity
or organization, including a Governmental Entity.
"Record Date" means the date determined by the Delta Woodside Board (or by
a committee of that board or any other Person acting under authority duly
delegated to that committee or Person by the Delta Woodside Board or a committee
of that board) as the record date for determining the Delta Woodside
Stockholders of record entitled to receive the Distribution.
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"Representatives" means, with respect to any party hereto, such party's
directors, officers, employees, agents, consultants, attorneys and advisors.
"SEC" means the Securities and Exchange Commission.
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other Persons performing
similar functions are at the time directly or indirectly owned by that Person.
"Tax" has the meaning assigned to that term in the Tax Sharing Agreement.
"Tax Sharing Agreement" means the Tax Sharing Agreement to be dated as of
the Distribution Date among Delta Woodside, Duck Head and Delta Apparel.
"Welfare Benefits" means medical, surgical or hospital care or benefits, or
benefits in the event of sickness, accident, disability, death or unemployment,
or vacation benefits, apprenticeship or other training programs, or day care
centers, scholarship funds or prepaid legal services; provided that Welfare
Benefits do not include pensions on retirement or death or insurance to provide
those pensions.
(b) Each of the following terms is defined in the Section (or Article) set
forth opposite that term:
Term Section (or Article)
Alchem 2.1
BNY 4.2
COBRA Coverage 8.8
Code 4.10
Consent 4.4
Damages 14.1
Delta Apparel 401(k) Plan 8.3
Delta Apparel Assets 2.1
Delta Apparel Benefit Plans 6.9
Delta Apparel Disclosure Schedule Article 6
Delta Apparel Financing 2.2
Delta Apparel Interim Financial Statements 6.5
Delta Apparel Obligations 2.1
Delta Apparel Permits 6.12
Delta Apparel Preferred Stock 6.2
Delta Consolidated 2.1
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Delta Merchandising 2.1
Delta Mills 2.1
Delta Mills Credit Agreement 4.2
Delta Woodside 401(k) Plan 8.3
Delta Woodside Benefit Plans 4.9
Delta Woodside Credit Agreement 4.2
Delta Woodside Disclosure Schedule Article 4
Delta Woodside Interim Financial Statements 4.5
Delta Woodside Permits 4.12
Delta Woodside Preferred Stock 4.2
Delta Woodside SEC Reports 4.5
Delta Woodside Stock Options 4.2
DHAC 2.1
Duck Head 401(k) Plan 8.3
Duck Head Assets 2.1
Duck Head Benefit Plans 5.9
Duck Head Disclosure Schedule Article 5
Duck Head Financing 2.2
Duck Head Interim Financial Statements 5.5
Duck Head Obligations 2.1
Duck Head Permits 5.12
Duck Head Preferred Stock 5.2
Environmental Law 4.16
ERISA 4.9
Exchange Act 4.4
GAAP 4.5
GECC 4.2
Hazardous Substance 4.16
Intercompany Reorganization 2.1
IRS 4.10
Lien 4.4
New Delta Woodside Financing 9.7
Permitted Acquisition Proposal 9.6
Rainsford Plant Purchase 2.1
Securities Act 4.4
Violation 4.4
WARN Act 8.11
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ARTICLE 2
PRE-DISTRIBUTION TRANSACTIONS
2.1 Effectuation of Intercompany Reorganization. No later than the
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Effective Time, Delta Woodside, Duck Head and Delta Apparel shall have caused,
to the extent within their respective powers, the following (collectively, the
"Intercompany Reorganization") to have been effected:
(a) Delta Woodside shall contribute and shall cause Alchem and each other
subsidiary (other than Delta Mills, Inc.) that is a creditor with respect to
intercompany debt to contribute, as contributions to capital, to one or more
direct or indirect subsidiaries of Delta Woodside all net debt amounts owed to
Delta Woodside, Alchem or such creditor subsidiary by each of Delta Consolidated
Corporation ("Delta Consolidated"), Delta Merchandising, Inc. ("Delta
Merchandising"), Duck Head Apparel Company, Inc. ("DHAC"), International Apparel
Marketing Corporation ("IAMC"), Cargud, S.A. ("Cargud"), Armonia Textil, S.A.
("Armonia") and Delta Apparel Honduras, S.A. ("Delta Honduras"), and make other
contributions of intercompany debt to one or more direct or indirect
subsidiaries of Delta Woodside, so that, with respect to all such contributions
of intercompany debt, all intercompany debt owed by Duck Head or any of its
subsidiaries (except, if any, by Duck Head or any of its subsidiaries to Duck
Head or any of its subsidiaries) or by Delta Apparel or any of its subsidiaries
(except, if any, by Delta Apparel or any of its subsidiaries to Delta Apparel or
any of its subsidiaries) shall no longer exist as of the Effective Time, with
the exceptions of
(i) with respect to Duck Head, the lesser of (A) the intercompany debt
that is attributable to amounts borrowed since January 1, 2000 from GECC
under the Delta Woodside Credit Agreement for use in the Duck Head Apparel
Company division's business and that have not been not repaid with funds
provided by the Duck Head Apparel Company division or (B) the aggregate
amount that will be borrowed by Duck Head under the Duck Head Financing at
the closing of the Duck Head Financing to repay GECC under the Delta
Woodside Credit Agreement or to pay to Delta Woodside (which borrowing and
payments will cancel the intercompany debt described in clause (A)); and
(ii) with respect to Delta Apparel, (A) the lesser of (1) the
intercompany debt that is attributable to amounts borrowed since January 1,
2000 from GECC under the Delta Woodside Credit Agreement for use in the
Delta Apparel Company division's business and that have not been not repaid
with funds provided by the Delta Apparel Company division or (2) the
aggregate amount that will be borrowed by Delta Apparel under the Delta
Apparel Financing at the closing of the Delta Apparel Financing to repay
GECC under the Delta Woodside Credit Agreement or to pay to Delta Woodside
(which borrowing and payments will cancel the intercompany debt described
in clause (1)) and (B) any amounts owed by Delta Apparel to the Delta
Woodside Group for yarn sold by the Delta Woodside Group to Delta Apparel,
which amounts shall be paid in the ordinary course of business;
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provided, however, that any and all obligations and liabilities that arise under
this Distribution Agreement or the Tax Sharing Agreement remain and will remain
in existence.
(b) Alchem Capital Corporation ("Alchem") shall transfer, as a contribution
to capital, to DHAC all of the outstanding capital stock of Delta Consolidated
and Delta Merchandising.
(c) DHAC shall transfer, as a contribution to capital, to Delta
Consolidated all of the outstanding capital stock of Delta Apparel Honduras,
S.A. that is beneficially owned by DHAC. Each of Delta Woodside, Alchem, Delta
Consolidated and Cargud, S.A. shall sell to a director of Delta Apparel, to be
designated by Delta Apparel, the one share of Delta Apparel Honduras, S.A. that
is owned by such selling corporation (provided that each such director enters
into a sale agreement with Delta Apparel with respect to such share that is
satisfactory to Delta Apparel).
(d) Delta Woodside shall cause title to all assets used in the operation of
the Delta Apparel Company division of various subsidiaries of Delta Woodside and
all assets that pertain to such operation or to such assets (collectively, the
"Delta Apparel Assets"), other than any intellectual property assets owned by
Alchem that are part of the Delta Apparel Assets, any Delta Apparel Assets
already owned by Delta Consolidated, the assets owned by Delta Apparel Honduras,
S.A., the assets owned by Delta Apparel and the Rainsford Plant located in
Edgefield, SC, to be transferred to Delta Consolidated. In order to accomplish
this, among other matters, DHAC shall transfer to Delta Consolidated, as a
contribution to capital, all assets owned by DHAC that are part of the Delta
Apparel Assets.
(e) DHAC shall transfer, as a contribution to capital, to Delta Apparel all
of the outstanding capital stock of Delta Consolidated.
(f) Delta Consolidated shall merge with and into Delta Apparel, with Delta
Apparel to be the surviving corporation in the merger.
(g) Delta Mills, Inc. ("Delta Mills") shall sell to Delta Apparel, and
Delta Apparel shall purchase from Delta Mills, the Rainsford Plant, located in
Edgefield, SC, for a purchase price equal to the book value of the purchased
assets, which Delta Woodside and Delta Apparel believe equals the fair market
value of those assets (the "Rainsford Plant Purchase").
(h) Delta Apparel (either directly or through Delta Consolidated) shall
assume all of the Liabilities of the Delta Apparel Company division of various
subsidiaries of Delta Woodside, including without limitation the Delta Apparel
Group Liabilities (collectively, the "Delta Apparel Obligations"), and shall
cause all holders of indebtedness for borrowed money that are part of the Delta
Apparel Obligations and all lessors of leases that are part of the Delta Apparel
Obligations to release all obligors (other than any member of the Delta Apparel
Group) of such indebtedness and under such leases and to release all related
liens covering the property of any Person other than a
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member of the Delta Apparel Group (except where Delta Woodside or Duck Head, as
applicable, consents to not being released from the obligations).
(i) Delta Woodside shall cause those individuals who are employed by the
Delta Apparel Company division of various subsidiaries of Delta Woodside to
become employees of Delta Apparel, Delta Apparel shall assume the accrued
employee benefits of such employees and Delta Woodside shall cause the account
balance of each such employee in any and all of Delta Woodside's employee
benefit plans (other than the Delta Woodside Stock Option Plan, the Delta
Woodside Incentive Stock Award Plan and the Delta Woodside Long Term Incentive
Plan, if any) to be transferred to a comparable employee benefit plan of Delta
Apparel.
(j) DHAC shall transfer, as a contribution to capital, to Duck Head all of
the outstanding capital stock of Delta Merchandising and Cargud, S.A.
(k) Delta Woodside shall cause title to all assets used in the operation of
the Duck Head Apparel Company division of various subsidiaries of Delta Woodside
and all assets that pertain to such operation or to such assets (collectively,
the "Duck Head Assets"), other than the intellectual property assets owned by
Alchem that are part of the Duck Head Assets, the Duck Head Assets already owned
by Duck Head, the Duck Head Assets owned by Delta Consolidated or Delta Apparel,
the Duck Head Assets owned by Cargud, S.A. (or any other Costa Rican corporation
that is a direct or indirect subsidiary of DHAC) and the Distribution Facility,
located in Winder, GA, that is owned by Delta Woodside and is part of the Duck
Head Assets, to be transferred to Duck Head. In order to accomplish this, among
other matters, DHAC shall transfer to Duck Head, as a contribution to capital,
all assets owned by DHAC that are part of the Duck Head Assets.
(l) Duck Head shall assume all of the Liabilities of the Duck Head Apparel
Company division of Delta Woodside and various subsidiaries of Delta Woodside,
including without limitation the Duck Head Group Liabilities (collectively, the
"Duck Head Obligations"), and shall cause all holders of indebtedness for
borrowed money that are part of the Duck Head Obligations and all lessors of
leases that are part of the Duck Head Obligations to release all obligors (other
than any member of the Duck Head Group) of such indebtedness and under such
leases and to release all related liens covering the property of any Person
other than a member of the Duck Head Group (except where Delta Woodside or Delta
Apparel, as applicable, consents to not being released from the obligations).
(m) Delta Woodside shall cause those individuals who are employed by the
Duck Head Apparel Company division of Delta Woodside and various subsidiaries of
Delta Woodside to become employees of Duck Head, Duck Head shall assume the
accrued employee benefits of such employees and Delta Woodside shall cause the
account balance of each such employee in any and all of Delta Woodside's
employee benefit plans (other than the Delta Woodside Stock Option Plan, the
Delta Woodside Incentive Stock Award Plan and the Delta Woodside Long Term
Incentive Plan, if any) to be transferred to a comparable employee benefit plan
of Duck Head.
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(n) Delta Woodside shall cause all holders of indebtedness for borrowed
money that are not part of the Duck Head Obligations or the Delta Apparel
Obligations and all lessors of leases that are not part of the Duck Head
Obligations or the Delta Apparel Obligations to release all obligors (other than
any member of the Delta Woodside Group) of such indebtedness and under such
leases and to release all related liens covering the property of any Person
other than a member of the Delta Woodside Group (except where Duck Head or Delta
Apparel, as the case may be, consents to not being released from the
obligations).
(o) Delta Apparel shall transfer to Duck Head all of the Duck Head Assets
of Delta Apparel that, immediately prior to the merger described in paragraph
(f) above, were those of the Duck Head Apparel division of Delta Consolidated,
and Duck Head shall assume all of Delta Apparel's obligations relating to such
assets and the portion of the business of Delta Apparel that, immediately prior
to the merger described in paragraph (f) above, was the business of the Duck
Head Apparel division of Delta Consolidated, in exchange for a purchase price
(including assumed liabilities) equal to the fair market value of the purchased
assets.
(p) DHAC and IAMC shall merge with and into Alchem, with Alchem to be in
each case the surviving corporation in the merger.
(q) Alchem shall transfer to Delta Apparel, as a contribution to capital,
all intellectual property assets, if any, owned by Alchem that are part of the
Delta Apparel Assets.
(r) Alchem shall transfer to Duck Head, as a contribution to capital, all
intellectual property assets owned by Alchem that are part of the Duck Head
Assets.
(s) Alchem shall merge with and into Delta Woodside, with Delta Woodside to
be the surviving corporation in the merger.
(t) Delta Woodside shall transfer to Duck Head the Distribution Facility,
located in Winder, GA, that is owned by Delta Woodside and is part of the Duck
Head Assets.
(u) Duck Head shall be renamed "Duck Head Apparel Company, Inc."
2.2 Duck Head Financing and Delta Apparel Financing.
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(a) Prior to the Effective Time, Duck Head shall have obtained credit
facilities (the "Duck Head Financing") that Duck Head believes will be
sufficient to satisfy its reasonably anticipated working capital needs.
(b) Prior to the Effective Time, Delta Apparel shall have obtained credit
facilities (the "Delta Apparel Financing") that Delta Apparel believes will be
sufficient to pay the cash portion of the purchase price in the Rainsford Plant
Purchase and to satisfy Delta Apparel's reasonably anticipated working capital
needs.
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ARTICLE 3
THE DISTRIBUTION
3.1 Cooperation Before the Distribution.
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(a) Duck Head.
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(i) Delta Woodside and Duck Head have prepared, and Duck Head has
filed with the SEC, the Duck Head Form 10, which includes as an exhibit the
Duck Head Information Statement. The Duck Head Information Statement sets
forth disclosure concerning Duck Head and the Distribution. Delta Woodside
and Duck Head shall use all commercially reasonable efforts to cause the
Duck Head Form 10 (together with the Duck Head Information Statement
attached as an exhibit) to become effective under the Exchange Act as soon
as practicable. After the Duck Head Form 10 (together with the Duck Head
Information Statement attached as an exhibit) has become effective, Delta
Woodside shall mail the Duck Head Information Statement as promptly as
practicable to the Delta Woodside Stockholders of record as of the Record
Date.
(ii) As promptly as practicable, Duck Head shall prepare, file and
pursue an application to permit the listing of shares of the Duck Head
Common Stock on the American Stock Exchange.
(b) Delta Apparel.
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(i) Delta Woodside and Delta Apparel have prepared, and Delta Apparel
has filed with the SEC, the Delta Apparel Form 10, which includes as an
exhibit the Delta Apparel Information Statement. The Delta Apparel
Information Statement sets forth disclosure concerning Delta Apparel and
the Distribution. Delta Woodside and Delta Apparel shall use all
commercially reasonable efforts to cause the Delta Apparel Form 10
(together with the Delta Apparel Information Statement attached as an
exhibit) to become effective under the Exchange Act as soon as practicable.
After the Delta Apparel Form 10 (together with the Delta Apparel
Information Statement attached as an exhibit) has become effective, Delta
Woodside shall mail the Delta Apparel Information Statement as promptly as
practicable to the Delta Woodside Stockholders of record as of the Record
Date.
(ii) As promptly as practicable, Delta Apparel shall prepare, file and
pursue an application to permit the listing of shares of the Delta Apparel
Common Stock on the American Stock Exchange.
(c) Plans. Delta Woodside, Duck Head and Delta Apparel shall cooperate in
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preparing and filing with the SEC and causing to become effective any
registration statements or amendments
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thereto that are necessary or appropriate to reflect the establishment of or
amendments to any employee benefit and other plans contemplated by the
Distribution Documents.
(d) Blue Sky Laws. Delta Woodside, Duck Head and Delta Apparel shall take
--------------
all actions as may be necessary or appropriate under the securities or blue sky
laws of states or other political subdivisions of the United States in
connection with the transactions contemplated by the Distribution Documents.
3.2 Delta Woodside Board Action. The Delta Woodside Board shall, in its
-----------------------------
discretion, establish (or delegate authority to establish) the Record Date and
the Distribution Date and any appropriate procedures in connection with the
Distribution.
3.3 The Distribution. Subject to the terms and conditions set forth or
------------------
described in this Distribution Agreement, (i) on or before the Distribution
Date, Delta Woodside shall deliver or cause to be delivered to the Distribution
Agent for the benefit of the Delta Woodside Stockholders of record on the Record
Date, a stock certificate or certificates, endorsed by Delta Woodside in blank,
representing all of the then outstanding shares of Duck Head Common Stock, (ii)
on or before the Distribution Date, Delta Woodside shall deliver or cause to be
delivered to the Distribution Agent for the benefit of the Delta Woodside
Stockholders of record on the Record Date, a stock certificate or certificates,
endorsed by Delta Woodside in blank, representing all of the then outstanding
shares of Delta Apparel Common Stock, (iii) the Distribution shall be effective
as of the Effective Time, (iv) Delta Woodside and Duck Head shall instruct the
Distribution Agent to distribute to, or make book-entry credits for, on or as
soon as practicable after the Distribution Date, each Delta Woodside Stockholder
of record as of the Record Date one Duck Head Share for every ten Delta Woodside
Shares so held (subject to Section 3.5), and (v) Delta Woodside and Delta
Apparel shall instruct the Distribution Agent to distribute to, or make
book-entry credits for, on or as soon as practicable after the Distribution
Date, each Delta Woodside Stockholder of record as of the Record Date one Delta
Apparel Share for every ten Delta Woodside Shares so held (subject to Section
3.5). Duck Head agrees to (x) provide all certificates for Duck Head Shares that
Delta Woodside shall require (after giving effect to Sections 3.4 and 3.5) in
order to effect the Distribution and (y) take all necessary actions to adopt a
stock transfer and registration system for Duck Head effective as of the
Distribution Date. Delta Apparel agrees to (x) provide all certificates for
Delta Apparel Shares that Delta Woodside shall require (after giving effect to
Sections 3.4 and 3.5) in order to effect the Distribution and (y) take all
necessary actions to adopt a stock transfer and registration system for Delta
Apparel effective as of the Distribution Date.
3.4 Stock Dividends.
----------------
(a) Duck Head. On or before the Distribution Date, Duck Head shall issue to
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Delta Woodside as a stock dividend the number of additional shares of Duck Head
Common Stock that, together with the shares of Duck Head Common Stock already
held by Delta Woodside, will provide Delta Woodside with the number of shares of
Duck Head Common Stock that is required to effect the Distribution, as certified
by the Distribution Agent.
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(b) Delta Apparel. On or before the Distribution Date, Delta Apparel shall
--------------
issue to Delta Woodside as a stock dividend the number of additional shares of
Delta Apparel Common Stock that, together with the shares of Delta Apparel
Common Stock already held by Delta Woodside, will provide Delta Woodside with
the number of shares of Delta Apparel Common Stock that is required to effect
the Distribution, as certified by the Distribution Agent.
3.5 Fractional Shares. No certificate or scrip representing fractional
-------------------
shares of Duck Head Common Stock or Delta Apparel Common Stock will be issued in
the Distribution. In lieu of any such fractional share, each holder of Delta
Woodside Shares who otherwise would be entitled to a fractional share of Duck
Head Common Stock or Delta Apparel Common Stock shall be entitled to receive
promptly from the Distribution Agent a cash payment, without any interest,
representing such holder's proportionate interest in the net proceeds from the
sale or sales by the Distribution Agent on behalf of all such holders of the
aggregate fractional shares of Duck Head Common Stock and Delta Apparel Common
Stock, as applicable, pursuant to this Section 3.5 and the terms of the
Distribution Agent Agreement, after making appropriate deductions of the amount
required, if any, to be withheld for United States federal income tax purposes.
The Distribution Agent shall determine, in its sole discretion, when, how,
through which broker-dealer and at what price such sale(s) shall be made. All
cash in lieu of fractional Duck Head Shares or fractional Delta Apparel Shares
to be paid pursuant to this Section 3.5, if unclaimed at the first anniversary
of the Effective Time, shall be released and paid by the Distribution Agent to
Duck Head (in the case of the sale of fractional Duck Head Shares) and Delta
Apparel (in the case of the sale of fractional Delta Apparel Shares), after
which time persons entitled thereto may look, subject to applicable escheat and
other similar laws, only to the Duck Head or Delta Apparel, respectively, for
payment thereof. Delta Woodside, Duck Head and Delta Apparel will instruct the
Distribution Agent to do the following, as soon as practicable (subject to the
provisions set forth above) after the Effective Time: (a) to determine the
number of whole shares and fractional shares of Duck Head Common Stock and Delta
Apparel Common Stock allocable to each Delta Woodside Stockholder of record as
of the Record Date who, as a result of the Distribution, would own a fractional
share of Duck Head Common Stock or Delta Apparel Common Stock, as applicable,
(b) to aggregate all fractional shares of Duck Head Common Stock and all
fractional shares of Delta Apparel Common Stock held by those holders, and (c)
to sell the whole shares attributable to the aggregate of those fractional
shares, in one or more open market transactions, in each case at the then
prevailing market prices, and to cause to be distributed to each such holder, in
lieu of any fractional share, without interest, that holder's ratable share of
the proceeds of that sale, after making appropriate deductions of the amount
required, if any, to be withheld for United States federal income tax purposes.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF DELTA WOODSIDE
Delta Woodside represents and warrants to Duck Head and Delta Apparel that,
except as disclosed in the Delta Woodside Disclosure Schedule that has been
delivered to Duck Head and
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Delta Apparel prior to the execution of this Distribution Agreement (the "Delta
Woodside Disclosure Schedule") or as contemplated by this Distribution
Agreement, as of immediately prior to the Effective Time the following will be
true and accurate:
4.1 Organization . Delta Woodside is a corporation duly organized and
------------
validly existing under the laws of the State of South Carolina.
4.2 Capitalization. (a) The authorized capital stock of Delta Woodside
---------------
consists of 50,000,000 shares of Delta Woodside Common Stock and 10,000,000
shares of Preferred Stock, $250,000,000 maximum par value per share (the "Delta
Woodside Preferred Stock"). As of the date hereof, 23,307,645 shares of Delta
Woodside Common Stock and no shares of Delta Woodside Preferred Stock are issued
and outstanding, and all such issued and outstanding shares of Delta Woodside
Common Stock were validly issued and are fully paid and nonassessable. As of the
date hereof, except for stock options to acquire an aggregate of 363,818 shares
of Delta Woodside Common Stock (collectively, the "Delta Woodside Stock
Options"), and except as contemplated by this Distribution Agreement, there are
no options, warrants, calls or other rights, agreements or commitments currently
outstanding obligating Delta Woodside to issue, deliver or sell shares of its
capital stock, or obligating Delta Woodside to grant, extend or enter into any
such option, warrant, call or other such right, agreement or commitment.
(b) All the outstanding shares of capital stock of each of Alchem, Delta
Consolidated, Delta Merchandising and DHAC are validly issued, fully paid and
nonassessable and are owned by Delta Woodside or by a wholly-owned Subsidiary of
Delta Woodside, free and clear of any Liens (other than Liens on the capital
stock of certain Subsidiaries of Delta Woodside granted in favor of General
Electric Capital Corporation ("GECC") in connection with the Credit Agreement to
which GECC, Delta Woodside and various Subsidiaries of Delta Woodside are
parties (the "Delta Woodside Credit Agreement") or granted in favor of BNY
Financial Corporation ("BNY"), as Collateral Agent, in connection with the
Credit Agreement to which Delta Mills, BNY and Bank of America, N.A., as
Administrative Agent, are parties (the "Delta Mills Credit Agreement")). All of
the outstanding shares of capital stock of each of Duck Head and Delta Apparel
are owned by Delta Woodside, free and clear of any Liens (other than Liens
granted in favor of GECC in connection with the Delta Woodside Credit Agreement,
which will be released prior to the Effective Time). There are no existing
options, warrants, calls or other rights, agreements or commitments of any
character relating to the sale, issuance or voting of any shares of the issued
or unissued capital stock of any of Alchem, Delta Consolidated, Delta
Merchandising or DHAC that have been issued, granted or entered into by Delta
Woodside or any of its Subsidiaries.
4.3 Authority Relative to this Distribution Agreement. Delta Woodside has
---------------------------------------------------
the necessary corporate power and authority to execute and deliver this
Distribution Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Distribution Agreement and the consummation
of the transactions contemplated hereby by Delta Woodside have been duly and
validly authorized and approved by Delta Woodside's Board of Directors and no
other corporate proceedings on the part of Delta Woodside are necessary to
authorize or approve this
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Distribution Agreement or to consummate the transactions contemplated hereby.
This Distribution Agreement has been duly executed and delivered by Delta
Woodside, and, assuming the due authorization, execution and delivery by Duck
Head and Delta Apparel, constitutes the valid and binding obligation of Delta
Woodside enforceable against Delta Woodside in accordance with its terms except
as such enforceability may be limited by general principles of equity or
principles applicable to creditors' rights generally.
4.4 No Conflicts, Required Filings and Consents. (a) None of the execution
---------------------------------------------
and delivery of this Distribution Agreement by Delta Woodside, the consummation
by Delta Woodside of the transactions contemplated hereby or compliance by Delta
Woodside with any of the provisions hereof will (i) conflict with or violate the
Articles of Incorporation or By-laws of Delta Woodside or the comparable
organizational documents of any of Alchem, Delta Consolidated, Delta
Merchandising or DHAC, (ii) subject to receipt or filing of the required
Consents (as defined herein) referred to in Section 4.4(b), conflict with or
violate any statute, ordinance, rule, regulation, order, judgment or decree
applicable to Delta Woodside or any of Delta Woodside's Subsidiaries (other than
a member of the Duck Head Group or a member of the Delta Apparel Group), or by
which any of them or any of their respective properties or assets may be bound
or affected, or (iii) subject to receipt or filing of the required Consents
referred to in Section 4.4(b), result in a violation or breach of or constitute
a default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of any lien, charge,
security interest, pledge, or encumbrance of any kind or nature (any of the
foregoing being a "Lien") on any of the property or assets of Delta Woodside or
any of Delta Woodside's Subsidiaries (other than a member of the Duck Head Group
or a member of the Delta Apparel Group) (any of the foregoing referred to in
clause (ii) or this clause (iii) being a "Violation") pursuant to, any note,
bond, mortgage, indenture, Contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Delta Woodside or any of
Delta Woodside's Subsidiaries (other than a member of the Duck Head Group or a
member of the Delta Apparel Group) is a party or by which Delta Woodside or any
of Delta Woodside's Subsidiaries (other than a member of the Duck Head Group or
a member of the Delta Apparel Group) or any of their respective properties may
be bound or affected, except in the case of the foregoing clause (ii) or (iii)
for any such Violations that would not have a Delta Woodside Material Adverse
Effect.
(b) None of the execution and delivery of this Distribution Agreement by
Delta Woodside, the consummation by Delta Woodside of the transactions
contemplated hereby or compliance by Delta Woodside with any of the provisions
hereof will require any consent, waiver, license, approval, authorization, order
or permit of, or registration or filing with or notification to (any of the
foregoing being a "Consent"), any Governmental Entity, except for (i) compliance
with any applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), (ii) compliance with any applicable requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (iii) certain
state takeover, securities, "blue sky" and environmental statutes, (iv) such
filings as may be required in connection with the taxes described in Section
15.12 (b), and (v) Consents the failure of which to obtain or make would not
have a Delta Woodside Material Adverse Effect.
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4.5 Reports and Financial Statements. (a) Delta Woodside has filed with the
---------------------------------
SEC all forms, reports, schedules, registration statements and definitive proxy
statements (the "Delta Woodside SEC Reports") required to be filed by it with
the SEC since July 3, 1999, including without limitation those required to be
filed in connection with the Distribution. As of their respective dates, the
Delta Woodside SEC Reports complied as to form in all material respects with the
requirements of the Exchange Act or the Securities Act, as the case may be, and
the rules and regulations of the SEC thereunder applicable to such Delta
Woodside SEC Reports. As of their respective dates, the Delta Woodside SEC
Reports did not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(b) The consolidated balance sheets as of July 3, 1999 and June 27, 1998
and the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the three years in the period ended July 3, 1999
(including the related notes and schedules thereto) of Delta Woodside contained
in the Form 10-K of Delta Woodside for the year ended July 3, 1999 present
fairly, in all material respects, the consolidated financial position and the
consolidated results of operations and cash flows of Delta Woodside and its
consolidated subsidiaries as of the dates or for the periods presented therein
in conformity with United States generally accepted accounting principles
("GAAP") applied on a consistent basis during the periods involved except as
otherwise noted therein, including in the related notes.
(c) The consolidated balance sheets and the related consolidated statements
of earnings and cash flows (including, in each case, the related notes thereto)
of Delta Woodside contained in the Form 10-Q of Delta Woodside for the quarterly
period ended January 1, 2000 (the "Delta Woodside Interim Financial Statements")
have been prepared in accordance with the requirements for interim financial
statements contained in Regulation S-X, which do not require all the information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with GAAP. The Delta Woodside Interim
Financial Statements reflect all adjustments necessary to present fairly in
accordance with GAAP (except as indicated), in all material respects, the
consolidated financial position, results of operations and cash flows of Delta
Woodside for all periods presented therein.
4.6 Information. None of the information supplied or to be supplied by
------------
Delta Woodside or its Representatives for inclusion or incorporation by
reference in the Duck Head Information Statement or the Delta Apparel
Information Statement will or did, at the time of their distribution to the
Delta Woodside Stockholders as of the Record Date or the time of the
effectiveness of the Duck Head Form 10 or the Delta Apparel Form 10 with the
SEC, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
4.7 Litigation. Except as disclosed in the Delta Woodside SEC Reports, as
-----------
of the date hereof, there is no suit, action or proceeding pending or, to the
knowledge of Delta Woodside, threatened
19
<PAGE>
against or affecting Delta Woodside or any of its Subsidiaries, nor is there any
judgment, decree, injunction or order of any Governmental Entity or arbitrator
outstanding against Delta Woodside or any of its Subsidiaries, that is
reasonably expected to have a Delta Woodside Material Adverse Effect or to
prevent or materially delay the consummation of the transactions contemplated in
this Distribution Agreement.
4.8 Absence of Certain Changes or Events. Except as disclosed in the Delta
-------------------------------------
Woodside SEC Reports or as contemplated by this Distribution Agreement, since
January 1, 2000, Delta Woodside has conducted its business only in the ordinary
course and there has not been any change that would have a Delta Woodside
Material Adverse Effect, other than changes relating to or arising from general
economic conditions.
4.9 Employee Benefit Plans. Except as disclosed in the Delta Woodside SEC
------------------------
Reports or the Delta Woodside Disclosure Schedule, there are no (a) employee
benefit or compensation plans, agreements or arrangements, including "employee
benefit plans," as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and including, but not limited to,
plans, agreements or arrangements relating to former employees, including, but
not limited to, retiree medical plans or life insurance, maintained by Delta
Woodside or any of its Subsidiaries (other than a member of the Duck Head Group
or a member of the Delta Apparel Group) or (b) collective bargaining agreements
to which Delta Woodside or any of its Subsidiaries (other than a member of the
Duck Head Group or a member of the Delta Apparel Group) is a party
(collectively, the "Delta Woodside Benefit Plans"), other than plans, agreements
or arrangements that, in the aggregate, are not material to Delta Woodside and
its Subsidiaries (other than members of the Duck Head Group or members of the
Delta Apparel Group) as a whole. Delta Woodside and its Subsidiaries (other than
members of the Duck Head Group or members of the Delta Apparel Group) have
complied with the terms of all Delta Woodside Benefit Plans, except for such
noncompliance that would not have a Delta Woodside Material Adverse Effect, and
no default exists with respect to the obligations of Delta Woodside or any of
its Subsidiaries (other than members of the Duck Head Group or members of the
Delta Apparel Group) under such Delta Woodside Benefit Plans that would have a
Delta Woodside Material Adverse Effect. Since July 3, 1999, there have been no
disputes, grievances subject to any grievance procedure, unfair labor practice
proceedings, arbitration or litigation (or, to the knowledge of Delta Woodside,
threatened proceedings or grievances) under such Delta Woodside Benefit Plans,
that have not been finally resolved, settled or otherwise disposed of, nor is
there any default, or any condition that, with notice or lapse of time or both,
would constitute such a default, under any such Delta Woodside Benefit Plan, by
Delta Woodside or its Subsidiaries (excluding members of the Duck Head Group and
members of the Delta Apparel Group) or, to the best knowledge of Delta Woodside,
any other party thereto, other than disputes, grievances, arbitration,
litigation, proceedings, threatened proceedings or grievances, defaults or
conditions that would not have a Delta Woodside Material Adverse Effect. Since
July 3, 1999, there have been no strikes, lockouts or work stoppages or
slowdowns, or to the best knowledge of Delta Woodside, labor jurisdictional
disputes or labor organizing activity occurring or threatened with respect to
the business or operations of Delta Woodside or its Subsidiaries (excluding
members of the Duck Head Group and members of the Delta Apparel Group) that have
had or would have a Delta Woodside Material Adverse Effect.
20
<PAGE>
4.10 ERISA. All Delta Woodside Benefit Plans are in compliance with the
------
applicable provisions of ERISA, the Internal Revenue Code of 1986, as amended
(the "Code"), all other applicable laws and all applicable collective bargaining
agreements, in each case, to the extent applicable, except where such failures
to administer or comply would not have a Delta Woodside Material Adverse Effect.
Each of the Delta Woodside Benefit Plans that is intended to meet the
requirements of Section 401(a) of the Code has been determined by the Internal
Revenue Service ("IRS") to be "qualified," within the meaning of such Section of
the Code and Delta Woodside does not know of any circumstance likely to result
in revocation of such determination. No Delta Woodside Benefit Plan is subject
to Title IV of ERISA or Section 412 of the Code. Neither Delta Woodside nor any
of its Subsidiaries (excluding members of the Duck Head Group and member of the
Delta Apparel Group) (i) has made a complete or partial withdrawal, within the
meaning of Section 4201 of ERISA, from any multiemployer plan or (ii) currently
is a sponsor of or contributes to a multiemployer plan. Neither Delta Woodside
nor any of its Subsidiaries (excluding members of the Duck Head Group and
members of the Delta Apparel Group) has maintained a plan subject to Title IV of
ERISA at any time within the last five years. Except as disclosed in the Delta
Woodside SEC Reports or in the Delta Woodside Disclosure Schedule, neither the
execution and delivery of this Distribution Agreement nor the consummation of
the transactions contemplated hereby will (i) materially increase any benefits
otherwise payable under any Delta Woodside Benefit Plan or (ii) result in the
acceleration of the time of payment or vesting of any such benefits to any
material extent.
4.11 Taxes. Delta Woodside and its Subsidiaries (excluding members of the
------
Duck Head Group and members of the Delta Apparel Group) have duly filed all
foreign, federal, state and local income, franchise, excise, real and personal
property and other tax returns and reports (including, but not limited to, those
filed on a consolidated, combined or unitary basis) required to have been filed
by Delta Woodside and its Subsidiaries (excluding members of the Duck Head Group
and members of the Delta Apparel Group) prior to the Distribution Date, except
for such returns or reports the failure to file which would not have a Delta
Woodside Material Adverse Effect. All of the foregoing returns and reports are
true and correct in all material respects, and Delta Woodside and its
Subsidiaries (excluding members of the Duck Head Group and members of the Delta
Apparel Group) have paid, or prior to the Effective Time will pay, all taxes,
interest and penalties shown on such returns or reports as being due or (except
to the extent the same are contested in good faith) claimed to be due to any
federal, state, local or other taxing authority. Delta Woodside and its
Subsidiaries (other than any member of the Duck Head Group or the Delta Apparel
Group) have paid and will pay all installments of estimated taxes due on or
before the Effective Time, except for any failure to do so that would not have a
Delta Woodside Material Adverse Effect. All taxes and state assessments and
levies that Delta Woodside and its Subsidiaries (excluding members of the Duck
Head Group and members of the Delta Apparel Group) are required by law to
withhold or collect have been withheld or collected and have been paid to the
proper governmental authorities or are held by Delta Woodside for such payment,
except for any failure to do so that would not have a Delta Woodside Material
Adverse Effect. Except as disclosed in the Delta Woodside Disclosure
21
<PAGE>
Schedule, as of the date hereof, all deficiencies proposed as a result of any
audits have been paid or settled.
4.12 Compliance with Applicable Laws. Delta Woodside and its Subsidiaries
---------------------------------
(excluding members of the Duck Head Group and members of the Delta Apparel
Group) hold all permits, licenses, variances, exemptions, orders and approvals
of all Governmental Entities necessary for them to own, lease or operate their
properties and assets and to carry on their businesses substantially as now
conducted (the "Delta Woodside Permits"), except for such permits, licenses,
variances, exemptions, orders and approvals the failure of which to hold would
not have a Delta Woodside Material Adverse Effect. Delta Woodside and its
Subsidiaries (excluding members of the Duck Head Group and members of the Delta
Apparel Group) are in compliance with all applicable laws and the terms of Delta
Woodside Permits, except for such failures so to comply that would not have a
Delta Woodside Material Adverse Effect.
4.13 No Voting Requirement. No vote of the holders of any class or series
-----------------------
of Delta Woodside's capital stock is necessary to approve this Distribution
Agreement and the transactions contemplated by this Distribution Agreement.
4.14 Brokers. No broker or finder is entitled to any broker's or finder's
--------
fee in connection with the transactions contemplated by this Distribution
Agreement based upon arrangements made by or on behalf of Delta Woodside.
4.15 Undisclosed Liabilities. Except as disclosed in Delta Woodside's
-------------------------
Quarterly Report on Form 10-Q for the fiscal quarter ended January 1, 2000 (or
in any subsequently filed Delta Woodside SEC Reports), neither Delta Woodside
nor any of its Subsidiaries (excluding members of the Duck Head Group and
members of the Delta Apparel Group) has any liabilities or any obligations of
any nature whether or not accrued, contingent or otherwise, that would be
required by GAAP to be reflected on a consolidated balance sheet of Delta
Woodside and its Subsidiaries (including the notes thereto) (excluding members
of the Duck Head Group and members of the Delta Apparel Group), except for
liabilities or obligations incurred in the ordinary course of business since
January 1, 2000 that would not have a Delta Woodside Material Adverse Effect or
contemplated to be incurred by this Distribution Agreement.
4.16 Environmental Matters. Except as disclosed in the Delta Woodside SEC
-----------------------
Reports or as would not reasonably be expected to have a Delta Woodside Material
Adverse Effect: (i) to the best knowledge of Delta Woodside no real property
currently or formerly owned or operated by Delta Woodside or any current
Subsidiary (excluding members of the Duck Head Group and members of the Delta
Apparel Group) is contaminated with any Hazardous Substances (as defined below)
to an extent or in a manner or condition now requiring remediation under any
Environmental Law (as defined below); (ii) no judicial or administrative
proceeding is pending or to the best knowledge of Delta Woodside threatened
against Delta Woodside or any of its Subsidiaries (excluding members of the Duck
Head Group and members of the Delta Apparel Group) relating to liability for any
off-site disposal or contamination; and (iii) Delta Woodside and its
Subsidiaries (excluding members
22
<PAGE>
of the Duck Head Group and members of the Delta Apparel Group) have not received
any claims or notices alleging liability under any Environmental Law, and Delta
Woodside has no knowledge of any circumstances that could result in such claims.
"Environmental Law" means any applicable federal, state or local law,
regulation, order, decree or judicial opinion or other agency requirement having
the force and effect of law and relating to noise, odor, Hazardous Substance or
the protection of the environment. "Hazardous Substance" means any toxic or
hazardous substance that is regulated by or under authority of any Environmental
Law, including any petroleum products, asbestos or polychlorinated biphenyls.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF DUCK HEAD
Duck Head represents and warrants to Delta Woodside and Delta Apparel that,
except as disclosed in the Duck Head Disclosure Schedule that has been delivered
to Delta Woodside and Delta Apparel prior to the execution of this Distribution
Agreement (the "Duck Head Disclosure Schedule") or as contemplated by this
Distribution Agreement, as of immediately prior to the Effective Time the
following will be true and accurate:
5.1 Organization and Qualification. Duck Head is a corporation duly
---------------------------------
organized, validly existing and in good standing under the laws of the State of
Georgia. Each of Duck Head and each of its Subsidiaries has the requisite
corporate power and authority to carry on its business as it is now being
conducted and is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified will not have a Duck Head
Material Adverse Effect.
5.2 Capitalization. (a) The authorized capital stock of Duck Head consists
---------------
of 9,000,000 shares of Duck Head Common Stock and 2,000,000 shares of Preferred
Stock, $0.01 par value per share (the "Duck Head Preferred Stock"). As of the
date hereof, 100 shares of Duck Head Common Stock and no shares of Duck Head
Preferred Stock were issued and outstanding, and all such issued and outstanding
shares of Duck Head Common Stock were validly issued and are fully paid and
nonassessable. As of the date hereof, except for a right held by Robert D.
Rockey, Jr. to acquire 1,000,000 shares of Duck Head Common Stock and an
agreement to grant to Mr. Rockey incentive stock awards and stock options to
acquire shares of Duck Head Common Stock, and except as contemplated by this
Distribution Agreement, there were no options, warrants, calls or other rights,
agreements or commitments currently outstanding obligating Duck Head to issue,
deliver or sell shares of its capital stock, or obligating Duck Head to grant,
extend or enter into any such option, warrant, call or other such right,
agreement or commitment.
(b) All the outstanding shares of capital stock of each Subsidiary of Duck
Head are validly issued, fully paid and nonassessable and are owned by Duck Head
or by a wholly-owned Subsidiary
23
<PAGE>
of Duck Head, free and clear of any Liens (except Liens granted to GECC in
connection with the Delta Woodside Credit Facility, which will be released prior
to the Effective Time). There are no existing options, warrants, calls or other
rights, agreements or commitments of any character relating to the sale,
issuance or voting of any shares of the issued or unissued capital stock of any
of the Subsidiaries of Duck Head that have been issued, granted or entered into
by Duck Head or any of its Subsidiaries.
5.3 Authority Relative to This Distribution Agreement. Duck Head has the
----------------------------------------------------
necessary corporate power and authority to execute and deliver this Distribution
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Distribution Agreement and the consummation of the
transactions contemplated hereby by Duck Head have been duly and validly
authorized and approved by Duck Head's Board of Directors and no other corporate
proceedings on the part of Duck Head are necessary to authorize or approve this
Distribution Agreement or to consummate the transactions contemplated hereby.
This Distribution Agreement has been duly executed and delivered by Duck Head,
and, assuming the due authorization, execution and delivery by Delta Woodside
and Delta Apparel, constitutes the valid and binding obligation of Duck Head
enforceable against Duck Head in accordance with its terms except as such
enforceability may be limited by general principles of equity or principles
applicable to creditors' rights generally.
5.4 No Conflicts, Required Filings and Consents. (a) None of the execution
---------------------------------------------
and delivery of this Distribution Agreement by Duck Head, the consummation by
Duck Head of the transactions contemplated hereby or compliance by Duck Head
with any of the provisions hereof will (i) conflict with or violate the Articles
of Incorporation or By-laws of Duck Head or the comparable organizational
documents of any of Duck Head's Subsidiaries, (ii) subject to receipt or filing
of the required Consents referred to in Section 5.4(b), result in a Violation of
any statute, ordinance, rule, regulation, order, judgment or decree applicable
to Duck Head or any of Duck Head's Subsidiaries, or by which any of them or any
of their respective properties or assets may be bound or affected, or (iii)
subject to receipt or filing of the required Consents referred to in Section
5.4(b), result in a Violation pursuant to, any note, bond, mortgage, indenture,
Contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Duck Head or any of Duck Head's Subsidiaries is a party or
by which Duck Head or any of Duck Head's Subsidiaries or any of their respective
properties may be bound or affected, except in the case of the foregoing clause
(ii) or (iii) for any such Violations that would not have a Duck Head Material
Adverse Effect.
(b) None of the execution and delivery of this Distribution Agreement by
Duck Head, the consummation by Duck Head of the transactions contemplated hereby
or compliance by Duck Head with any of the provisions hereof will require any
Consent of any Governmental Entity, except for (i) compliance with any
applicable requirements of the Securities Act and the Exchange Act, (ii) certain
state takeover, securities, "blue sky" and environmental statutes, (iii) such
filings as may be required in connection with the taxes described in Section
15.12(b), and (iv) Consents the failure of which to obtain or make would not
have a Duck Head Material Adverse Effect.
5.5 Reports and Financial Statements. (a) Duck Head has filed with the SEC
---------------------------------
the Duck Head
24
<PAGE>
Form 10, and the Duck Head Form 10 will be the only registration statement
required to be filed by it with the SEC in connection with the Distribution. As
of its effective date, the Duck Head Form 10 complied as to form in all material
respects with the requirements of the Exchange Act and the applicable rules and
regulations of the SEC. As of its effective date and as of the date that the
Duck Head Information Statement is distributed to the Delta Woodside
Stockholders as of the Record Date, the Duck Head Form 10 did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) The combined balance sheets as of July 3, 1999 and June 27, 1998 and
the related combined statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended July 3, 1999 (including the
related notes and schedules thereto) of Duck Head that are contained in the Duck
Head Information Statement present fairly, in all material respects, the
combined financial position and the combined results of operations and cash
flows of Duck Head and its consolidated Subsidiaries as of the dates or for the
periods presented therein in conformity with GAAP applied on a consistent basis
during the periods involved except as otherwise noted therein, including in the
related notes.
(c) The combined balance sheets and the related statements of earnings and
cash flows (including, in each case, the related notes thereto) of Duck Head
that are contained in the Duck Head Information Statement for the six months
ended January 1, 2000 (the "Duck Head Interim Financial Statements") have been
prepared in accordance with the requirements for interim financial statements
contained in Regulation S-X, which do not require all the information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with GAAP. The Duck Head Interim
Financial Statements reflect all adjustments necessary to present fairly in
accordance with GAAP (except as indicated), in all material respects, the
combined financial position, results of operations and cash flows of Duck Head
for all periods presented therein.
(d) The combined pro forma balance sheet as of January 1, 2000 and the
related combined pro forma statements of operations for the year ended July 3,
1999 and the six months ended January 1, 2000 (including the related notes and
schedules thereto) of Duck Head contained in the Duck Head Information Statement
have been prepared in accordance with the requirements for pro forma financial
statements contained in Regulation S-X, which do not require all the information
and footnotes necessary for a fair presentation of financial position or results
of operations in conformity with GAAP, and reflect all adjustments necessary to
present fairly in accordance with GAAP (except as indicated), in all material
respects, the combined pro forma financial position and results of operations of
Duck Head as of the dates and for the periods presented therein.
5.6 Information. None of the information supplied or to be supplied by Duck
------------
Head or its Representatives for inclusion or incorporation by reference in the
Duck Head Form 10 or the Duck Head Information Statement will or did, at the
time of its distribution to the Delta Woodside
25
<PAGE>
Stockholders as of the Record Date or the time of the effectiveness of the Duck
Head Form 10 with the SEC, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Duck Head Form 10 and the Duck Head
Information Statement comply as to form in all material respects with the
applicable provisions of the Securities Act and the Exchange Act and the rules
and regulations thereunder, except that no representation is made by Duck Head
with respect to statements made or incorporated by reference therein based on
information supplied by Delta Woodside or Delta Apparel for inclusion or
incorporation by reference therein.
5.7 Litigation. Except as disclosed in the Duck Head Disclosure Statement,
-----------
as of the date hereof, there is no suit, action or proceeding pending or, to the
knowledge of Duck Head, threatened against or affecting Duck Head or any of its
Subsidiaries, nor is there any judgment, decree, injunction or order of any
Governmental Entity or arbitrator outstanding against Duck Head or any of its
Subsidiaries, that is reasonably expected to have a Duck Head Material Adverse
Effect or to prevent or materially delay the consummation of the transactions
contemplated in this Distribution Agreement.
5.8 Absence of Certain Changes or Events. Except as disclosed in the Duck
--------------------------------------
Head Information Statement or as contemplated by this Distribution Agreement,
since January 1, 2000, Duck Head has conducted its business only in the ordinary
course, and there has not been any change that would have a Duck Head Material
Adverse Effect, other than changes relating to or arising from general economic
conditions.
5.9 Employee Benefit Plans. Except as disclosed in the Duck Head
-------------------------
Information Statement or the Duck Head Disclosure Schedule, there are no (a)
employee benefit or compensation plans, agreements or arrangements, including
"employee benefit plans," as defined in Section 3(3) of ERISA, and including,
but not limited to, plans, agreements or arrangements relating to former
employees, including, but not limited to, retiree medical plans or life
insurance, maintained by Duck Head or any of its Subsidiaries or (b) collective
bargaining agreements to which Duck Head or any of its Subsidiaries is a party
(collectively, the "Duck Head Benefit Plans"), other than plans, agreements or
arrangements that, in the aggregate, are not material to Duck Head and its
Subsidiaries as a whole. Duck Head and its Subsidiaries have complied with the
terms of all Duck Head Benefit Plans, except for such noncompliance that would
not have a Duck Head Material Adverse Effect, and no default exists with respect
to the obligations of Duck Head or any of its Subsidiaries under such Duck Head
Benefit Plans that would have a Duck Head Material Adverse Effect. Since July 3,
1999, there have been no disputes, grievances subject to any grievance
procedure, unfair labor practice proceedings, arbitration or litigation (or, to
the knowledge of Duck Head, threatened proceedings or grievances) under such
Duck Head Benefit Plans, that have not been finally resolved, settled or
otherwise disposed of, nor is there any default, or any condition that, with
notice or lapse of time or both, would constitute such a default, under any such
Duck Head Benefit Plans, by Duck Head or its Subsidiaries or, to the best
knowledge of Duck Head, any other party thereto, other than disputes,
grievances, arbitration, litigation, proceedings, threatened proceedings or
grievances,
26
<PAGE>
defaults or conditions that would not have a Duck Head Material Adverse Effect.
Since July 3, 1999, there have been no strikes, lockouts or work stoppages or
slowdowns, or to the best knowledge of Duck Head, labor jurisdictional disputes
or labor organizing activity occurring or threatened with respect to the
business or operations of Duck Head or its Subsidiaries that have had or would
have a Duck Head Material Adverse Effect.
5.10 ERISA. All the Duck Head Benefit Plans are in compliance with the
------
applicable provisions of ERISA, the Code, all other applicable laws and all
applicable collective bargaining agreements, in each case, to the extent
applicable, except where such failures to administer or comply would not have a
Duck Head Material Adverse Effect. Each of the Duck Head Benefit Plans that is
intended to meet the requirements of Section 401(a) of the Code has been or will
be determined by the IRS to be "qualified," within the meaning of such Section
of the Code and Duck Head does not know of any circumstances likely to result in
revocation of such determination. No Duck Head Benefit Plan is subject to Title
IV of ERISA or Section 412 of the Code. Neither Duck Head nor any of its
Subsidiaries (i) has made a complete or partial withdrawal, within the meaning
of Section 4201 of ERISA, from any multiemployer plan or (ii) currently is a
sponsor of or contributes to a multiemployer plan. Neither Duck Head nor any of
its Subsidiaries has maintained a plan subject to Title IV of ERISA at any time
within the last five years. Except in their capacities as shareholders of Delta
Woodside and except as disclosed in the Duck Head Information Statement or in
the Duck Head Disclosure Schedule, neither the execution and delivery of this
Distribution Agreement nor the consummation of the transactions contemplated
hereby will (i) result in any material payment (including, without limitation,
severance, unemployment compensation or golden parachute) becoming due to any
director or executive officer of Duck Head, (ii) materially increase any
benefits otherwise payable under any Duck Head Benefit Plan or (iii) result in
the acceleration of the time of payment or vesting of any such benefits to any
material extent.
5.11 Taxes. Duck Head and its Subsidiaries have duly filed all foreign,
------
federal, state and local income, franchise, excise, real and personal property
and other tax returns and reports (including, but not limited to, those filed on
a consolidated, combined or unitary basis) required to have been filed by Duck
Head and its Subsidiaries prior to the date hereof, except for such returns or
reports the failure to file which would not have a Duck Head Material Adverse
Effect. All of the foregoing returns and reports are true and correct in all
material respects, and Duck Head and its Subsidiaries have paid or, prior to the
Effective Time will pay, all taxes, interest and penalties shown on such returns
or reports as being due or (except to the extent the same are contested in good
faith) claimed to be due to any federal, state, local or other taxing authority.
Duck Head and its Subsidiaries have paid and will pay all installments of
estimated taxes due on or before the Effective Time, except for any failure to
do so that would not have a Duck Head Material Adverse Effect. All taxes and
state assessments and levies that Duck Head and its Subsidiaries are required by
law to withhold or collect have been withheld or collected and have been paid to
the proper governmental authorities or are held by Duck Head for such payment,
except for any failure to do so that would not have a Duck Head Material Adverse
Effect. Duck Head and its Subsidiaries have paid or made adequate provision in
the financial statements of Duck Head for all taxes payable in respect of all
periods ended on or prior to January 1, 2000, except for such taxes that would
not have a Duck Head
27
<PAGE>
Material Adverse Effect. As of the date hereof, all deficiencies proposed as a
result of any audits have been paid or settled.
5.12 Compliance with Applicable Laws. Duck Head and its Subsidiaries hold
--------------------------------
all permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities necessary for them to own, lease or operate their
properties and assets and to carry on their businesses substantially as now
conducted (the "Duck Head Permits"), except for such permits, licenses,
variances, exemptions, orders and approvals the failure of which to hold would
not have a Duck Head Material Adverse Effect. Duck Head and its Subsidiaries are
in compliance with all applicable laws and the terms of Duck Head Permits,
except for such failures so to comply that would not have a Duck Head Material
Adverse Effect.
5.13 Brokers. No broker or finder is entitled to any broker's or finder's
--------
fee in connection with the transactions contemplated by this Distribution
Agreement based upon arrangements made by or on behalf of Duck Head.
5.14 Undisclosed Liabilities. Except as disclosed in the Duck Head
-------------------------
Information Statement, neither Duck Head nor any of its Subsidiaries has any
liabilities or any obligations of any nature whether or not accrued, contingent
or otherwise, that would be required by GAAP to be reflected on a consolidated
balance sheet of Duck Head and its Subsidiaries (including the notes thereto),
except for liabilities or obligations incurred in the ordinary course of
business since January 1, 2000 that would not have a Duck Head Material Adverse
Effect or contemplated to be incurred by this Distribution Agreement.
5.15 Environmental Matters. Except as disclosed in the Duck Head SEC
-----------------------
Reports or as would not reasonably be expected to have a Duck Head Material
Adverse Effect: (i) to the best knowledge of Duck Head no real property
currently or formerly owned or operated by Duck Head or any current Subsidiary
is contaminated with any Hazardous Substances to an extent or in a manner or
condition now requiring remediation under any Environmental Law; (ii) no
judicial or administrative proceeding is pending or to the best knowledge of
Duck Head threatened against Duck Head or its Subsidiaries relating to liability
for any off-site disposal or contamination; and (iii) Duck Head and its
Subsidiaries have not received any claims or notices alleging liability under
any Environmental Law, and Duck Head has no knowledge of any circumstance that
could result in such claims.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF DELTA APPAREL
Delta Apparel represents and warrants to Delta Woodside and Duck Head that,
except as disclosed in the Delta Apparel Disclosure Schedule that has been
delivered to Delta Woodside and Duck Head prior to the execution of this
Distribution Agreement (the "Delta Apparel Disclosure Schedule") or as
contemplated by this Distribution Agreement, as of immediately prior to the
Effective Time the following will be true and accurate:
28
<PAGE>
6.1 Organization and Qualification. Delta Apparel is a corporation duly
---------------------------------
organized, validly existing and in good standing under the laws of the State of
Georgia. Each of Delta Apparel and each of its Subsidiaries has the requisite
corporate power and authority to carry on its business as it is now being
conducted and is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified will not have a Delta
Apparel Material Adverse Effect.
6.2 Capitalization. (a) The authorized capital stock of Delta Apparel
---------------
consists of 7,500,000 shares of Delta Apparel Common Stock and 2,000,000 shares
of Preferred Stock, $0.01 par value per share (the "Delta Apparel Preferred
Stock"). As of the date hereof, 100 shares of Delta Apparel Common Stock and no
shares of Delta Apparel Preferred Stock were issued and outstanding, and all
such issued and outstanding shares of Delta Apparel Common Stock were validly
issued and are fully paid and nonassessable. As of the date hereof, except as
contemplated by this Distribution Agreement, there were no options, warrants,
calls or other rights, agreements or commitments currently outstanding
obligating Delta Apparel to issue, deliver or sell shares of its capital stock,
or obligating Delta Apparel to grant, extend or enter into any such option,
warrant, call or other such right, agreement or commitment.
(b) All the outstanding shares of capital stock of each Subsidiary of Delta
Apparel are validly issued, fully paid and nonassessable and are owned by Delta
Apparel or by a wholly-owned Subsidiary of Delta Apparel (except for certain
shares of the preferred stock of Delta Apparel Honduras, S.A. that are held by
directors of Delta Apparel as a result of Honduran law requirements), free and
clear of any Liens (except Liens granted to GECC in connection with the Delta
Woodside Credit Facility). There are no existing options, warrants, calls or
other rights, agreements or commitments of any character relating to the sale,
issuance or voting of any shares of the issued or unissued capital stock of any
of the Subsidiaries of Delta Apparel that have been issued, granted or entered
into by Delta Apparel or any of its Subsidiaries.
6.3 Authority Relative to This Distribution Agreement. Delta Apparel has
----------------------------------------------------
the necessary corporate power and authority to execute and deliver this
Distribution Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Distribution Agreement and the consummation
of the transactions contemplated hereby by Delta Apparel have been duly and
validly authorized and approved by Delta Apparel's Board of Directors and no
other corporate proceedings on the part of Delta Apparel are necessary to
authorize or approve this Distribution Agreement or to consummate the
transactions contemplated hereby. This Distribution Agreement has been duly
executed and delivered by Delta Apparel, and, assuming the due authorization,
execution and delivery by Delta Woodside and Duck Head, constitutes the valid
and binding obligation of Delta Apparel enforceable against Delta Apparel in
accordance with its terms except as such enforceability may be limited by
general principles of equity or principles applicable to creditors' rights
generally.
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6.4 No Conflicts, Required Filings and Consents. (a) None of the execution
---------------------------------------------
and delivery of this Distribution Agreement by Delta Apparel, the consummation
by Delta Apparel of the transactions contemplated hereby or compliance by Delta
Apparel with any of the provisions hereof will (i) conflict with or violate the
Articles of Incorporation or By-laws of Delta Apparel or the comparable
organizational documents of any of Delta Apparel's Subsidiaries, (ii) subject to
receipt or filing of the required Consents referred to in Section 6.4(b), result
in a Violation of any statute, ordinance, rule, regulation, order, judgment or
decree applicable to Delta Apparel or any of Delta Apparel's Subsidiaries, or by
which any of them or any of their respective properties or assets may be bound
or affected, or (iii) subject to receipt or filing of the required Consents
referred to in Section 6.4(b), result in a Violation pursuant to, any note,
bond, mortgage, indenture, Contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Delta Apparel or any of
Delta Apparel's Subsidiaries is a party or by which Delta Apparel or any of
Delta Apparel's Subsidiaries or any of their respective properties may be bound
or affected, except in the case of the foregoing clause (ii) or (iii) for any
such Violations that would not have a Delta Apparel Material Adverse Effect.
(b) None of the execution and delivery of this Distribution Agreement by
Delta Apparel, the consummation by Delta Apparel of the transactions
contemplated hereby or compliance by Delta Apparel with any of the provisions
hereof will require any Consent of any Governmental Entity, except for (i)
compliance with any applicable requirements of the Securities Act and the
Exchange Act, (ii) certain state takeover, securities, "blue sky" and
environmental statutes, (iii) such filings as may be required in connection with
the taxes described in Section 15.12(b), and (iv) Consents the failure of which
to obtain or make would not have a Delta Apparel Material Adverse Effect.
6.5 Reports and Financial Statements. (a) Delta Apparel has filed with the
---------------------------------
SEC the Delta Apparel Form 10, and the Delta Apparel Form 10 will be the only
registration statement required to be filed by it with the SEC in connection
with the Distribution. As of its effective date, the Delta Apparel Form 10
complied as to form in all material respects with the requirements of the
Exchange Act and the applicable rules and regulations of the SEC. As of its
effective date and as of the date that the Delta Apparel Information Statement
is distributed to the Delta Woodside Stockholders as of the Record Date, the
Delta Apparel Form 10 did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(b) The combined balance sheets as of July 3, 1999 and June 27, 1998 and
the related combined statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended July 3, 1999 (including the
related notes and schedules thereto) of Delta Apparel that are contained in the
Delta Apparel Information Statement present fairly, in all material respects,
the combined financial position and the combined results of operations and cash
flows of Delta Apparel and its consolidated Subsidiaries as of the dates or for
the periods presented therein in conformity with GAAP applied on a consistent
basis during the periods involved except as otherwise noted therein, including
in the related notes.
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(c) The combined balance sheets and the related statements of earnings and
cash flows (including, in each case, the related notes thereto) of Delta Apparel
that are contained in the Delta Apparel Information Statement for the six months
ended January 1, 2000 (the "Delta Apparel Interim Financial Statements") have
been prepared in accordance with the requirements for interim financial
statements contained in Regulation S-X, which do not require all the information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with GAAP. The Delta Apparel Interim
Financial Statements reflect all adjustments necessary to present fairly in
accordance with GAAP (except as indicated), in all material respects, the
combined financial position, results of operations and cash flows of Delta
Apparel for all periods presented therein.
(d) The combined pro forma balance sheet as of January 1, 2000 and the
related combined pro forma statements of operations for the year ended July 3,
1999 and the six months ended January 1, 2000 (including the related notes and
schedules thereto) of Delta Apparel contained in the Delta Apparel Information
Statement have been prepared in accordance with the requirements for pro forma
financial statements contained in Regulation S-X, which do not require all the
information and footnotes necessary for a fair presentation of financial
position or results of operations in conformity with GAAP, and reflect all
adjustments necessary to present fairly in accordance with GAAP (except as
indicated), in all material respects, the combined pro forma financial position
and results of operations of Delta Apparel as of the dates and for the periods
presented therein.
6.6 Information. None of the information supplied or to be supplied by
------------
Delta Apparel or its Representatives for inclusion or incorporation by reference
in the Delta Apparel Form 10 or the Delta Apparel Information Statement will or
did, at the time of its distribution to the Delta Woodside Stockholders as of
the Record Date or the time of the effectiveness of the Delta Apparel Form 10
with the SEC, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. The Delta Apparel Form 10 and the Delta Apparel Information
Statement comply as to form in all material respects with the applicable
provisions of the Securities Act and the Exchange Act and the rules and
regulations thereunder, except that no representation is made by Delta Apparel
with respect to statements made or incorporated by reference therein based on
information supplied by Delta Woodside or Duck Head for inclusion or
incorporation by reference therein.
6.7 Litigation. Except as disclosed in the Delta Apparel Disclosure
-----------
Statement, as of the date hereof, there is no suit, action or proceeding pending
or, to the knowledge of Delta Apparel, threatened against or affecting Delta
Apparel or any of its Subsidiaries, nor is there any judgment, decree,
injunction or order of any Governmental Entity or arbitrator outstanding against
Delta Apparel or any of its Subsidiaries, that is reasonably expected to have a
Delta Apparel Material Adverse Effect or to prevent or materially delay the
consummation of the transactions contemplated in this Distribution Agreement.
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<PAGE>
6.8 Absence of Certain Changes or Events. Except as disclosed in the Delta
-------------------------------------
Apparel Information Statement or as contemplated by this Distribution Agreement,
since January 1, 2000, Delta Apparel has conducted its business only in the
ordinary course, and there has not been any change that would have a Delta
Apparel Material Adverse Effect, other than changes relating to or arising from
general economic conditions.
6.9 Employee Benefit Plans. Except as disclosed in the Delta Apparel
-------------------------
Information Statement or the Delta Apparel Disclosure Schedule, there are no (a)
employee benefit or compensation plans, agreements or arrangements, including
"employee benefit plans," as defined in Section 3(3) of ERISA, and including,
but not limited to, plans, agreements or arrangements relating to former
employees, including, but not limited to, retiree medical plans or life
insurance, maintained by Delta Apparel or any of its Subsidiaries or (b)
collective bargaining agreements to which Delta Apparel or any of its
Subsidiaries is a party (collectively, the "Delta Apparel Benefit Plans"), other
than plans, agreements or arrangements that, in the aggregate, are not material
to Delta Apparel and its Subsidiaries as a whole. Delta Apparel and its
Subsidiaries have complied with the terms of all Delta Apparel Benefit Plans,
except for such noncompliance that would not have a Delta Apparel Material
Adverse Effect, and no default exists with respect to the obligations of Delta
Apparel or any of its Subsidiaries under such Delta Apparel Benefit Plans that
would have a Delta Apparel Material Adverse Effect. Since July 3, 1999, there
have been no disputes, grievances subject to any grievance procedure, unfair
labor practice proceedings, arbitration or litigation (or, to the knowledge of
Delta Apparel, threatened proceedings or grievances) under such Delta Apparel
Benefit Plans, that have not been finally resolved, settled or otherwise
disposed of, nor is there any default, or any condition that, with notice or
lapse of time or both, would constitute such a default, under any such Delta
Apparel Benefit Plans, by Delta Apparel or its Subsidiaries or, to the best
knowledge of Delta Apparel, any other party thereto, other than disputes,
grievances, arbitration, litigation, proceedings, threatened proceedings or
grievances, defaults or conditions that would not have a Delta Apparel Material
Adverse Effect. Since July 3, 1999, there have been no strikes, lockouts or work
stoppages or slowdowns, or to the best knowledge of Delta Apparel, labor
jurisdictional disputes or labor organizing activity occurring or threatened
with respect to the business or operations of Delta Apparel or its Subsidiaries
that have had or would have a Delta Apparel Material Adverse Effect.
6.10 ERISA. All the Delta Apparel Benefit Plans are in compliance with the
------
applicable provisions of ERISA, the Code, all other applicable laws and all
applicable collective bargaining agreements, in each case, to the extent
applicable, except where such failures to administer or comply would not have a
Delta Apparel Material Adverse Effect. Each of the Delta Apparel Benefit Plans
that is intended to meet the requirements of Section 401(a) of the Code has been
or will be determined by the IRS to be "qualified," within the meaning of such
Section of the Code and Delta Apparel does not know of any circumstances likely
to result in revocation of such determination. No Delta Apparel Benefit Plan is
subject to Title IV of ERISA or Section 412 of the Code. Neither Delta Apparel
32
<PAGE>
nor any of its Subsidiaries (i) has made a complete or partial withdrawal,
within the meaning of Section 4201 of ERISA, from any multiemployer plan or (ii)
currently is a sponsor of or contributes to a multiemployer plan. Neither Delta
Apparel nor any of its Subsidiaries has maintained a plan subject to Title IV of
ERISA at any time within the last five years. Except in their capacities as
shareholders of Delta Woodside and except as disclosed in the Delta Apparel
Information Statement or in the Delta Apparel Disclosure Schedule, neither the
execution and delivery of this Distribution Agreement nor the consummation of
the transactions contemplated hereby will (i) result in any material payment
(including, without limitation, severance, unemployment compensation or golden
parachute) becoming due to any director or executive officer of Delta Apparel,
(ii) materially increase any benefits otherwise payable under any Delta Apparel
Benefit Plan or (iii) result in the acceleration of the time of payment or
vesting of any such benefits to any material extent.
6.11 Taxes. Delta Apparel and its Subsidiaries have duly filed all foreign,
------
federal, state and local income, franchise, excise, real and personal property
and other tax returns and reports (including, but not limited to, those filed on
a consolidated, combined or unitary basis) required to have been filed by Delta
Apparel and its Subsidiaries prior to the date hereof, except for such returns
or reports the failure to file which would not have a Delta Apparel Material
Adverse Effect. All of the foregoing returns and reports are true and correct in
all material respects, and Delta Apparel and its Subsidiaries have paid or,
prior to the Effective Time will pay, all taxes, interest and penalties shown on
such returns or reports as being due or (except to the extent the same are
contested in good faith) claimed to be due to any federal, state, local or other
taxing authority. Delta Apparel and its Subsidiaries have paid and will pay all
installments of estimated taxes due on or before the Effective Time, except for
any failure to do so that would not have a Delta Apparel Material Adverse
Effect. All taxes and state assessments and levies that Delta Apparel and its
Subsidiaries are required by law to withhold or collect have been withheld or
collected and have been paid to the proper governmental authorities or are held
by Delta Apparel for such payment, except for any failure to do so that would
not have a Delta Apparel Material Adverse Effect. Delta Apparel and its
Subsidiaries have paid or made adequate provision in the financial statements of
Delta Apparel for all taxes payable in respect of all periods ended on or prior
to January 1, 2000, except for such taxes that would not have a Delta Apparel
Material Adverse Effect. As of the date hereof, all deficiencies proposed as a
result of any audits have been paid or settled.
6.12 Compliance with Applicable Laws. Delta Apparel and its Subsidiaries
---------------------------------
hold all permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities necessary for them to own, lease or operate their
properties and assets and to carry on their businesses substantially as now
conducted (the "Delta Apparel Permits"), except for such permits, licenses,
variances, exemptions, orders and approvals the failure of which to hold would
not have a Delta Apparel Material Adverse Effect. Delta Apparel and its
Subsidiaries are in compliance with all applicable laws and the terms of Delta
Apparel Permits, except for such failures so to comply that would not have a
Delta Apparel Material Adverse Effect.
6.13 Brokers. No broker or finder is entitled to any broker's or finder's
--------
fee in connection with the transactions contemplated by this Distribution
Agreement based upon arrangements made by or on behalf of Delta Apparel.
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<PAGE>
6.14 Undisclosed Liabilities. Except as disclosed in the Delta Apparel
-------------------------
Information Statement, neither Delta Apparel nor any of its Subsidiaries has any
liabilities or any obligations of any nature whether or not accrued, contingent
or otherwise, that would be required by GAAP to be reflected on a consolidated
balance sheet of Delta Apparel and its Subsidiaries (including the notes
thereto), except for liabilities or obligations incurred in the ordinary course
of business since January 1, 2000 that would not have a Delta Apparel Material
Adverse Effect or contemplated to be incurred by this Distribution Agreement.
6.15 Environmental Matters. Except as disclosed in the Delta Apparel SEC
-----------------------
Reports or as would not reasonably be expected to have a Delta Apparel Material
Adverse Effect: (i) to the best knowledge of Delta Apparel no real property
currently or formerly owned or operated by Delta Apparel or any current
Subsidiary is contaminated with any Hazardous Substances to an extent or in a
manner or condition now requiring remediation under any Environmental Law; (ii)
no judicial or administrative proceeding is pending or to the best knowledge of
Delta Apparel threatened against Delta Apparel or its Subsidiaries relating to
liability for any off_site disposal or contamination; and (iii) Delta Apparel
and its Subsidiaries have not received any claims or notices alleging liability
under any Environmental Law, and Delta Apparel has no knowledge of any
circumstance that could result in such claims.
ARTICLE 7
CONDITIONS PRECEDENT
7.1 Conditions to Each Party's Obligation to Effect the Distribution. The
------------------------------------------------------------------
respective obligations of each party to effect the Distribution shall be subject
to the fulfillment (or waiver by all parties) at or prior to the Effective Time
of the following conditions:
(a) All Consents from Governmental Entities and other third parties
that in any case are required to be received prior to the Effective Time
with respect to the transactions contemplated hereby shall have been
received other than those Consents the absence of which would not have a
Delta Woodside Material Adverse Effect, a Duck Head Material Adverse Effect
or a Delta Apparel Material Adverse Effect;
(b) Without limiting the generality of paragraph (a) above, the Duck
Head Form 10 shall have been declared effective by the SEC and the Delta
Apparel Form 10 shall have been declared effective by the SEC;
(c) The Intercompany Reorganization shall have been completed;
(d) The Duck Head Financing shall have been completed;
34
<PAGE>
(e) The Delta Apparel Financing shall have been completed;
(f) The New Delta Woodside Financing shall have been completed;
(g) Each of the Board of Directors of Delta Woodside and the Board of
Directors of Duck Head shall have received an opinion, addressed and
satisfactory to it, in its sole discretion, from an independent solvency
firm selected by such Board, and shall otherwise be satisfied in its sole
discretion, as to matters relating to the solvency and adequacy of capital
of Duck Head after giving effect to the consummation of the transactions
contemplated by this Distribution Agreement;
(h) Each of the Board of Directors of Delta Woodside and the Board of
Directors of Delta Apparel shall have received an opinion, addressed and
satisfactory to it, in its sole discretion, from an independent solvency
firm selected by such Board, and shall otherwise be satisfied in its sole
discretion, as to matters relating to the solvency and adequacy of capital
of Delta Apparel after giving effect to the consummation of the
transactions contemplated by this Distribution Agreement; and
(i) The consummation of the Distribution shall not be restrained,
enjoined or prohibited by any order, judgment, decree, injunction or ruling
of a court of competent jurisdiction; provided, however, that the parties
shall comply with the provisions of Sections 9.4, 10.4 and 11.4 and shall
further use their respective best efforts to cause any such order,
judgment, decree, injunction or ruling to be vacated or lifted.
7.2 Conditions to Obligation of Delta Woodside to Effect the Distribution.
-----------------------------------------------------------------------
The obligation of Delta Woodside to effect the Distribution shall be subject to
the fulfillment at or prior to the Effective Time of the additional conditions,
unless waived by Delta Woodside, that
(a) Duck Head and Delta Apparel shall have performed in all material
respects their respective agreements contained in this Distribution
Agreement required to be performed at or prior to the Effective Time and
the representations and warranties of Duck Head and Delta Apparel contained
in this Distribution Agreement shall be true, except as contemplated by
this Distribution Agreement and except for inaccuracies in representations
and warranties and failures to perform their respective agreements that in
the aggregate do not constitute a Delta Woodside Material Adverse Effect, a
Duck Head Material Adverse Effect or a Delta Apparel Material Adverse
Effect; and Delta Woodside shall have received a certificate of the Chief
Executive Officer of each of Duck Head and Delta Apparel to that effect;
and
(b) The Delta Woodside Board, in its sole discretion, shall have
determined to effect the Distribution.
7.3 Conditions to Obligations of Duck Head to Effect the Distribution. The
------------------------------------------------------------------
obligation of Duck Head to effect the Distribution shall be subject to the
fulfillment at or prior to the Effective Time of the additional condition,
35
<PAGE>
unless waived by Duck Head, that Delta Woodside and Delta Apparel shall have
performed in all respects their respective agreements contained in this
Distribution Agreement required to be performed at or prior to the Effective
Time and the representations and warranties of Delta Woodside and Delta Apparel
contained in this Distribution Agreement shall be true, except as contemplated
by this Distribution Agreement and except for inaccuracies in representations
and warranties and failures to perform its agreements that in the aggregate do
not constitute a Delta Woodside Material Adverse Effect, a Duck Head Material
Adverse Effect or a Delta Apparel Material Adverse Effect; and Duck Head shall
have received a certificate of the Chief Executive Officer of each of Delta
Woodside and Delta Apparel to that effect.
7.4 Conditions to Obligations of Delta Apparel to Effect the Distribution.
-----------------------------------------------------------------------
The obligation of Delta Apparel to effect the Distribution shall be subject to
the fulfillment at or prior to the Effective Time of the additional condition,
unless waived by Delta Apparel, that Delta Woodside and Duck Head shall have
performed in all respects their respective agreements contained in this
Distribution Agreement required to be performed at or prior to the Effective
Time and the representations and warranties of Delta Woodside and Duck Head
contained in this Distribution Agreement shall be true, except as contemplated
by this Distribution Agreement and except for inaccuracies in representations
and warranties and failures to perform its agreements that in the aggregate do
not constitute a Delta Woodside Material Adverse Effect, a Duck Head Material
Adverse Effect or a Delta Apparel Material Adverse Effect; and Delta Apparel
shall have received a certificate of the Chief Executive Officer of each of
Delta Woodside and Duck Head to that effect.
ARTICLE 8
EMPLOYMENT MATTERS
8.1 Stock Options.
--------------
(a) Prior to the Effective Time, Delta Woodside shall provide holders of
Delta Woodside Stock Options, whether or not then exercisable or vested, the
opportunity to amend the terms of their respective Delta Woodside Stock Options
to provide that (i) all unexercisable portions of such Delta Woodside Stock
Options shall become immediately exercisable in full on a date that is not later
than five (5) business days prior to the Record Date and (ii) if the holder
elects not to exercise all or part of the holder's Delta Woodside Stock Options
prior to the Record Date, such unexercised Delta Woodside Stock Options shall
remain exercisable for the same number of Delta Woodside Shares at the same
exercise price after the Distribution as before the Distribution (and for no
other securities), notwithstanding the occurrence of the Distribution. Delta
Woodside shall amend the Delta Woodside Stock Option Plan to accomplish the
provisions of this paragraph (a), if it deems such amendment advisable.
(b) Prior to the Effective Time, Delta Woodside shall amend the Delta
Woodside Stock Option Plan to provide 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
36
<PAGE>
until the end of their stated term (with the termination of such employment with
Duck Head or any of its subsidiaries to be treated in the same manner as a
termination of employment with Delta Woodside or any of its subsidiaries would
have been) and so long as a Delta Apparel employee who holds Delta Woodside
Stock Options remains an employee of Delta Apparel or any of its subsidiaries,
those Delta Woodside Stock Options will remain outstanding until the end of
their stated term (with the termination of such employment with Delta Apparel or
any of its subsidiaries to be treated in the same manner as a termination of
employment with Delta Woodside or any of its subsidiaries would have been).
(c) Notwithstanding anything to the contrary herein, if it is determined
that compliance with paragraph (a) or (b) of this Section 8.1 may cause any
individual subject to Section 16 of the Exchange Act to become subject to the
profit recovery provisions thereof, the parties hereto will cooperate, including
by providing alternate arrangements, so as to achieve the intent of the
foregoing together with minimizing or not giving such profit recovery.
8.2 Employees.
----------
(a) Duck Head shall, or shall cause a member of the Duck Head Group to,
assume, honor and be bound by any employment and/or severance agreements between
or among each Duck Head Employee and any member of the Delta Woodside Group, the
Duck Head Group and/or the Delta Apparel Group.
(b) Delta Apparel shall, or shall cause a member of the Delta Apparel Group
to, assume, honor and be bound by any employment and/or severance agreements
between or among each Delta Apparel Employee and any member of the Delta
Woodside Group, the Duck Head Group and/or the Delta Apparel Group.
(c) Delta Woodside shall, or shall cause a member of the Delta Woodside
Group to, assume, honor and be bound by any employment and/or severance
agreements between or among any Delta Woodside Employee and any member the Delta
Woodside Group, the Duck Head Group and/or the Delta Apparel Group.
8.3. Qualified Defined Contribution Plans.
-------------------------------------
(a) No member of the Duck Head Group or the Delta Apparel Group shall have
any obligation to make contributions to the Delta Woodside Industries, Inc.
Savings and Investment Plan (the "Delta Woodside 401(k) Plan") in respect of any
member of the Duck Head Employee Group or the Delta Apparel Employee Group or
otherwise after the Effective Time, except for accrued but unpaid employee and
employer contributions, if any, relating to that employee's compensation earned
before the Effective Time.
(b) Effective not later than the Effective Time, Duck Head shall, or shall
cause a member of the Duck Head Group to, adopt or designate a defined
contribution plan intended to qualify under Section 401(a) and Section 401(k) of
37
<PAGE>
the Code (the "Duck Head 401(k) Plan"). Members of the Duck Head Employee Group
shall be vested in their benefits under and eligible to participate in the Duck
Head 401(k) Plan on and after the Effective Time to the same extent that those
members were vested in their benefits under and eligible to participate in the
Delta Woodside 401(k) Plan immediately before the Effective Time.
(c) Effective not later than the Effective Time, Delta Apparel shall, or
shall cause a member of the Delta Apparel Group to, adopt or designate a defined
contribution plan intended to qualify under Section 401(a) and Section 401(k) of
the Code (the "Delta Apparel 401(k) Plan"). Members of the Delta Apparel
Employee Group shall be vested in their benefits under and eligible to
participate in the Delta Apparel 401(k) Plan on and after the Effective Time to
the same extent that those members were vested in their benefits under and
eligible to participate in the Delta Woodside 401(k) Plan immediately before the
Effective Time.
(d) As soon as practicable after the adoption or designation of the Duck
Head 401(k) Plan, Delta Woodside shall cause to be transferred to the Duck Head
401(k) Plan cash or, to the extent provided below, other assets as the parties
may agree, having a fair market value equal to the aggregate value of the
account balances in the Delta Woodside 401(k) Plan, and any allocable portion of
any suspense account, as of the date of the plan asset transfer for each member
of the Duck Head Employee Group. The plan asset transfer contemplated by this
paragraph (d) shall include any notes evidencing loans to members of the Duck
Head Employee Group from their account balances, securities, Delta Woodside
Shares, if any, Duck Head Shares, if any, and Delta Apparel Shares, if any, held
in any such member's account and the balance in cash, and shall also include all
qualified domestic relations orders, within the meaning of Section 414(p) of the
Code, applicable to members of the Duck Head Employee Group. The transfer of
assets contemplated by this paragraph (d) shall be made only after Duck Head has
supplied to Delta Woodside a written representation from Duck Head (with
appropriate indemnities) to the effect that the Duck Head 401(k) Plan has been
established in accordance with the Code and ERISA, and an agreement that Duck
Head has requested or will request a determination letter from the IRS and will
make any and all changes to the Duck Head 401(k) Plan necessary to receive a
favorable determination letter.
(e) As soon as practicable after the adoption or designation of the Delta
Apparel 401(k) Plan, Delta Woodside shall cause to be transferred to the Delta
Apparel 401(k) Plan cash or, to the extent provided below, other assets as the
parties may agree, having a fair market value equal to the aggregate value of
the account balances in the Delta Woodside 401(k) Plan, and any allocable
portion of any suspense account, as of the date of the plan asset transfer for
each member of the Delta Apparel Employee Group. The plan asset transfer
contemplated by this paragraph (e) shall include any notes evidencing loans to
members of the Delta Apparel Employee Group from their account balances,
securities, Delta Woodside Shares, if any, Duck Head Shares, if any, and Delta
Apparel Shares, if any, held in any such member's account and the balance in
cash, and shall also include all qualified domestic relations orders, within the
meaning of Section 414(p) of the Code, applicable to members of the Delta
Apparel Employee Group. The transfer of assets contemplated by this paragraph
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<PAGE>
(e) shall be made only after Delta Apparel has supplied to Delta Woodside a
written representation from Delta Apparel (with appropriate indemnities) to the
effect that the Delta Apparel 401(k) Plan has been established in accordance
with the Code and ERISA, and an agreement that Delta Apparel has requested or
will request a determination letter from the IRS and will make any and all
changes to the Delta Apparel 401(k) Plan necessary to receive a favorable
determination letter.
(f) In any event, the transfer of plan assets provided for in paragraphs
(d) and (e) above shall occur such that each participant in the Delta Woodside
401(k) Plan immediately prior to the transfer of assets would receive a benefit
immediately after the transfer of assets (if the Delta Woodside 401(k) Plan, the
Duck Head 401(k) Plan and the Delta Apparel 401(k) Plan were then terminated)
that would be equal to or greater than the benefit such participant would have
received immediately before the transfer of assets (if the Delta Woodside 401(k)
Plan had then terminated).
(g) Delta Woodside, Duck Head and Delta Apparel shall cooperate with each
other during the period beginning on the date hereof and ending on the date that
the assets are transferred to the trust maintained under the Duck Head 401(k)
Plan or Delta Apparel 401(k) Plan, as applicable, to ensure the ongoing
operation and administration of the Delta Woodside 401(k) Plan, the Duck Head
401(k) Plan and the Delta Apparel 401(k) Plan with respect to the members of the
Delta Woodside Employee Group, the Duck Head Employee Group and the Delta
Apparel Employee Group. After those transfers of assets, (i) Duck Head shall
assume all of the Delta Woodside Group Liabilities under the Delta Woodside
401(k) Plan with respect to each member of the Duck Head Employee Group and the
Delta Woodside Group shall have no further liability, under this Distribution
Agreement or otherwise, to any member of the Duck Head Group or any member of
the Duck Head Employee Group under the Delta Woodside 401(k) Plan other than
liability arising out of any breach of fiduciary duties or any non-exempt
prohibited transaction occurring before that transfer of assets and liabilities,
and (ii) Delta Apparel shall assume all of the Delta Woodside Group Liabilities
under the Delta Woodside 401(k) Plan with respect to each member of the Delta
Apparel Employee Group and the Delta Woodside Group shall have no further
liability, under this Distribution Agreement or otherwise, to any member of the
Delta Apparel Group or any member of the Delta Apparel Employee Group under the
Delta Woodside 401(k) Plan other than liability arising out of any breach of
fiduciary duties or any non-exempt prohibited transaction occurring before that
transfer of assets and liabilities.
8.4. Welfare Benefit Plans.
----------------------
(a) (i) Effective as of the Effective Time, no member of the Duck Head
Employee Group or the Delta Apparel Employee Group shall be eligible to
participate in any "Employee Welfare Benefit Plan" (within the meaning of
Section 3(1) of ERISA) sponsored by Delta Woodside or any member of the Delta
Woodside Group and neither Delta Woodside nor any member of the Delta Woodside
Group shall have any liability after the Effective Time for Welfare Benefits
(within the contemplation of Section 3(1) of ERISA) of any member of the Duck
Head Employee Group or the Delta Apparel Employee Group.
39
<PAGE>
(ii) Delta Woodside shall be responsible for all Welfare Benefits payable
to or in respect of each member of the Delta Woodside Employee Group regardless
of whether the event(s) giving rise to payment of those benefits occurred
before, on or after the Effective Time.
(b) (i) Effective as of the Effective Time, Duck Head shall establish or
designate one or more Employee Welfare Benefit Plans covering members of the
Duck Head Employee Group as Duck Head, in its sole discretion, shall determine.
(ii) Except as set forth in Section 8.4(d), Duck Head shall be responsible
for all Welfare Benefits payable after the Effective Time to or in respect of
each member of the Duck Head Employee Group including, without limitation,
post-employment medical, dental and life insurance benefits, if any.
(c) (i) Effective as of the Effective Time, Delta Apparel shall establish
or designate one or more Employee Welfare Benefit Plans covering members of the
Delta Apparel Employee Group as Delta Apparel, in its sole discretion, shall
determine.
(ii) Except as set forth in Section 8.4(d), Delta Apparel shall be
responsible for all Welfare Benefits payable after the Effective Time to or in
respect of each member of the Delta Apparel Employee Group including, without
limitation, post-employment medical, dental and life insurance benefits, if any.
(d) Expenses incurred by each member of the Duck Head Employee Group or the
Delta Apparel Employee Group under Delta Woodside's medical and dental plans
during the calendar year that includes the Effective Time shall be taken into
account for purposes of satisfying deductible and coinsurance requirements and
satisfaction of out-of-pocket provisions of the Duck Head Group's or the Delta
Apparel Group's, as applicable, medical and dental plans for that year. Duck
Head shall be liable, and shall to the extent necessary reimburse Delta
Woodside, for all medical or dental claims incurred before the Effective Time by
any member of the Duck Head Employee Group and for life insurance claims in
respect of any member of the Duck Head Employee Group who dies on or before the
Effective Time. Delta Apparel shall be liable, and shall to the extent necessary
reimburse Delta Woodside, for all medical or dental claims incurred before the
Effective Time by any member of the Delta Apparel Employee Group and for life
insurance claims in respect of any member of the Delta Apparel Employee Group
who dies on or before the Effective Time. For purposes of this Section 8.4, a
medical or dental claim shall be deemed "incurred" when the relevant service is
provided or item is purchased.
8.5 Directors. Delta Woodside shall retain all liabilities and related
----------
assets, if any, existing as of the Effective Time relating to any director of
Delta Woodside with respect to his service as a director of Delta Woodside.
40
<PAGE>
8.6 Deferred Compensation.
----------------------
(a) All deferred compensation liabilities to the extent applicable to any
member of the Duck Head Employee Group, and any assets allocable to those
liabilities, shall be transferred to and assumed by Duck Head as of the
Effective Time, and all deferred compensation liabilities to the extent
applicable to any member of the Delta Apparel Employee Group, and any assets
allocable to those liabilities, shall be transferred to and assumed by Delta
Apparel as of the Effective Time.
(b) Delta Woodside shall retain all deferred compensation liabilities, and
any assets allocable to those liabilities, to the extent applicable to any
member of the Delta Woodside Employee Group under the Delta Woodside Deferred
Compensation Plan.
8.7 Employee Benefit Transition Services. Pursuant to and on the terms and
-------------------------------------
conditions set forth in Schedule 8.7 hereto, each party agrees to provide
certain administrative services to the other parties in respect of the members
of the Delta Woodside Employee Group, the Duck Head Employee Group and the Delta
Apparel Employee Group, including but not limited to payroll services, record
keeping services and claims processing services and for the applicable period
set forth in that Schedule. The administrative services contemplated by this
Section 8.7 shall not affect the allocation of liabilities and obligations as
set forth in this Article 8.
8.8 COBRA.
------
(a) As of the Effective Time, Duck Head shall, or shall cause a member of
the Duck Head Group to, assume Delta Woodside's obligations and responsibilities
under ERISA Title I, Subtitle 8, Part 6 and Code Section 4980B ("COBRA
Coverage") to each member of the Duck Head Employee Group.
(b) As of the Effective Time, Delta Apparel shall, or shall cause a member
of the Delta Apparel Group to, assume Delta Woodside's obligations and
responsibilities to provide COBRA Coverage to each member of the Delta Apparel
Employee Group.
(c) Delta Woodside shall, or shall cause a member of the Delta Woodside
Group to, retain the obligation and responsibility to provide COBRA Coverage to
each member of the Delta Woodside Employee Group.
8.9 Third Party Beneficiaries. No provision of this Distribution Agreement
--------------------------
(including without limitation this Article 8) shall (a) create any third party
beneficiary rights in any Person (including any beneficiary or dependent
thereof) in respect of continued employment or resumed employment with the Delta
Woodside Group, the Duck Head Group or the Delta Apparel Group, (b) create any
rights that do not already exist in any Person in respect of any benefits that
may be provided, directly or indirectly, under any employee benefit plan or
benefit arrangement sponsored or to be sponsored by any member of the Delta
Woodside Group, the Duck Head Group or the Delta Apparel Group, or (c) otherwise
establish or create any rights that do not already exist on the part of any
41
<PAGE>
third party. 8.10 No Right to Continued Employment. Nothing in this Article 8
shall confer any right to continued employment before or after the Effective
Time on any member of the Delta Woodside Employee Group, the Duck Head Employee
Group or the Delta Apparel Employee Group.
8.11 WARN Act.
---------
(a) Delta Woodside shall be responsible for providing any notification that
may be required under the Workers Adjustment and Retraining Notification Act
("WARN Act") with respect to any member of the Delta Woodside Employee Group on
or after the Effective Time.
(b) Duck Head shall be responsible for providing any notification that may
be required under the WARN Act with respect to any member of the Duck Head
Employee Group on or after the Effective Time.
(c) Delta Apparel shall be responsible for providing any notification that
may be required under the WARN Act with respect to any member of the Delta
Apparel Employee Group on or after the Effective Time.
ARTICLE 9
ADDITIONAL AGREEMENTS OF DELTA WOODSIDE
9.1 Access to Information. From the date hereof through the Effective Time,
----------------------
Delta Woodside and its Subsidiaries shall afford to Duck Head and Delta Apparel
and their respective accountants, counsel and other representatives full and
reasonable access (subject, however, to existing confidentiality and similar
non_disclosure obligations and the preservation of attorney/client and work
product privileges) during normal business hours (and at such other times as the
parties may mutually agree) to its properties, books, contracts, commitments,
records and personnel and, during such period, shall furnish promptly to Duck
Head and Delta Apparel (i) a copy of each report, schedule and other document
filed or received by it pursuant to the requirements of federal securities laws,
and (ii) all other information concerning its business, properties and personnel
as Duck Head or Delta Apparel may reasonably request.
9.2 Preparation of the Duck Head Form 10, Duck Head Information Statement,
-----------------------------------------------------------------------
Delta Apparel Form 10 and Delta Apparel Information Statement. Delta Woodside
- ----------------------------------------------------------------
will assist Duck Head to comply with Duck Head's obligations under Section 10.2
and will assist Delta Apparel to comply with Delta Apparel's obligations under
Section 11.2. Delta Woodside will cooperate and furnish promptly (a) all
information requested by Duck Head or otherwise required for inclusion in the
Duck Head Form 10 or the Duck Head Information Statement and (b) all information
requested by Delta Apparel or otherwise required for inclusion in the Delta
Apparel Form 10 or the Delta Apparel Information Statement. If at any time prior
42
<PAGE>
to the Effective Time any event or circumstance relating to Delta Woodside or
any of its Subsidiaries, or their respective officers or directors, should be
discovered by Delta Woodside that should be set forth in an amendment or a
supplement to the Duck Head Form 10, the Duck Head Information Statement, the
Delta Apparel Form 10 or the Delta Apparel Information Statement, Delta Woodside
shall promptly inform Duck Head or Delta Apparel, as applicable, thereof and
take appropriate action in respect thereof.
9.3 Public Announcements. So long as this Distribution Agreement is in
----------------------
effect, Delta Woodside agrees to use its reasonable efforts to consult with Duck
Head and Delta Apparel before issuing any press release or otherwise making any
public statement with respect to the transactions contemplated by this
Distribution Agreement.
9.4 Efforts; Consents. (a) Subject to the terms and conditions herein
-------------------
provided, Delta Woodside agrees to use its best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Distribution Agreement and to cooperate with
Duck Head and Delta Apparel in connection with the foregoing. Without limiting
the generality of the foregoing, Delta Woodside shall make or cause to be made
all required filings with or applications to Governmental Entities (including
under the Securities Act and the Exchange Act) to be made by it, and use its
best efforts to (i) obtain all necessary waivers of any Violations and other
Consents of all Governmental Entities and other third parties necessary for the
parties to consummate the transactions contemplated hereby, (ii) oppose, lift or
rescind any injunction or restraining order or other order adversely affecting
the ability of the parties to consummate the transactions contemplated hereby,
and (iii) fulfill all conditions to this Distribution Agreement.
(b) Delta Woodside shall promptly provide Duck Head and Delta Apparel
copies of (i) all filings made by Delta Woodside with any Governmental Entity in
connection with this Distribution Agreement and the transactions contemplated
hereby, and (ii) any inquiry or request for information (including notice of any
oral request for information), pleading, order or other document Delta Woodside
receives from any Governmental Entity with respect to the matters referred to in
this Section 9.4.
9.5 Notice of Breaches. Delta Woodside shall give prompt notice to Duck
-------------------
Head and Delta Apparel of (i) any representation or warranty made by it
contained in this Distribution Agreement that has become untrue or inaccurate in
any material respect, or (ii) the failure by it to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Distribution Agreement; provided, however, that such
notification shall not excuse or otherwise affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Distribution Agreement.
9.6 Acquisition Proposals Respecting the Duck Head Group or the Delta
----------------------------------------------------------------------
Apparel Group. The parties agree that, prior to the Effective Time, Delta
- ---------------
Woodside, its Subsidiaries and their respective Representatives (including,
without limitation, any investment banker, attorney or accountant retained by
Delta Woodside or any of its Subsidiaries) may initiate, continue, solicit and
43
<PAGE>
encourage, directly or indirectly, any inquiries and the making of any proposal
or offer to Delta Woodside and/or any of its Subsidiaries, and engage in any
negotiations concerning, and provide any confidential information or data to,
and have any discussions with, any Person, with respect to a merger,
consolidation or similar transaction involving, or any sale of all or any
significant portion of the assets or any equity securities of, the Delta
Woodside Group, the Duck Head Group or the Delta Apparel Group, singly or
together (any such proposal or offer being hereinafter referred to as an
"Permitted Acquisition Proposal"), and otherwise knowingly facilitate any effort
or attempt to make or implement a Permitted Acquisition Proposal and enter into
any agreement or understanding with any other Person with the intent to effect
any Permitted Acquisition Proposal. Delta Woodside will notify Duck Head and
Delta Apparel of any written Permitted Acquisition Proposals or oral Permitted
Acquisition Proposals made to the Chief Executive Officer of Delta Woodside.
Following receipt of a Permitted Acquisition Proposal, Delta Woodside's Board of
Directors may elect to terminate this Distribution Agreement as provided in
Section 13.1 or to modify the terms of the Distribution and this Distribution
Agreement to permit consummation of the Permitted Acquisition Proposal and
thereby to delete from the Distribution shares of Duck Head Common Stock or
shares of Delta Apparel Common Stock. If Duck Head and Delta Apparel consent to
such modification, the parties shall amend this Distribution Agreement
accordingly, and shall (if still practicable), subject to the other provisions
of this Distribution Agreement, as so modified, use their respective best
efforts to cause the Distribution to be consummated.
9.7 Completion of Financing. No later than the Effective Time, Delta
--------------------------
Woodside or one or more of its Subsidiaries (other than the Duck Head Group and
the Delta Apparel Group) shall have incurred or repaid such indebtedness and
entered into such credit facilities or amendments to credit facilities, if any,
as shall be necessary for Delta Woodside to be able to consummate the
transactions contemplated by this Distribution Agreement (the "New Delta
Woodside Financing").
9.8 Other Securities Law Actions. Delta Woodside shall prepare and file
-------------------------------
with the SEC and cause to become effective any registration statements or
amendments thereto that are necessary or appropriate to reflect the
establishment of or amendments to any employee benefit and other plans of the
Delta Woodside Group contemplated by this Distribution Agreement. Delta Woodside
shall take all actions as may be necessary or appropriate under the securities
or blue sky laws of states or other political subdivisions of the United States
in connection with the transactions contemplated by this Distribution Agreement.
9.9 Delta Woodside Group Liabilities. Except as specifically set forth in
----------------------------------
any of the Distribution Documents, from and after the Effective Time, Delta
Woodside shall, and shall use its reasonable best efforts to cause its
Subsidiaries to, pay, perform and discharge in due course all of the Delta
Woodside Group Liabilities for which such entity is liable
44
<PAGE>
ARTICLE 10
ADDITIONAL AGREEMENTS OF DUCK HEAD
10.1 Access to Information. From the date hereof through the Effective
-----------------------
Time, Duck Head and its Subsidiaries shall afford to Delta Woodside and Delta
Apparel and their respective accountants, counsel and other representatives full
and reasonable access (subject, however, to existing confidentiality and similar
non_disclosure obligations and the preservation of attorney/client and work
product privileges) during normal business hours (and at such other times as the
parties may mutually agree) to its properties, books, contracts, commitments,
records and personnel and, during such period, shall furnish promptly to Delta
Woodside and Delta Apparel (i) a copy of each report, schedule and other
document filed or received by it pursuant to the requirements of federal
securities laws, and (ii) all other information concerning its business,
properties and personnel as Delta Woodside or Delta Apparel may reasonably
request.
10.2 Preparation of Duck Head Form 10 and Duck Head Information Statement.
----------------------------------------------------------------------
To the extent not already accomplished, Duck Head will, as soon as practicable
following the date of this Distribution Agreement, prepare and file the Duck
Head Form 10 and a preliminary Duck Head Information Statement with the SEC and
will use all reasonable efforts to respond to any comments of the SEC or its
staff and to cause the Duck Head Form 10 to be declared effective by the SEC and
the Duck Head Information Statement to be mailed to the Delta Woodside
Stockholders as promptly as practicable after responding to all such comments to
the satisfaction of the SEC or its staff. Duck Head will provide Delta Woodside
and Delta Apparel with a copy of the Duck Head Form 10 and the preliminary Duck
Head Information Statement and all modifications thereto prior to filing or
delivery to the SEC and will consult with Delta Woodside and Delta Apparel in
connection therewith. Duck Head will notify Delta Woodside and Delta Apparel
promptly of the receipt of any comments from the SEC or its staff and of any
request by the SEC or its staff for amendments or supplements to the Duck Head
Form 10 or the Duck Head Information Statement or for additional information and
will supply Delta Woodside and Delta Apparel with copies of all correspondence
between Duck Head or any of its Representatives, on the one hand, and the SEC or
its staff, on the other hand, with respect to the Duck Head Form 10, the Duck
Head Information Statement or the Distribution. Duck Head will cooperate and
furnish promptly all information requested by Delta Woodside or Delta Apparel or
otherwise required for inclusion in any Delta Woodside Disclosure Document or
the Delta Apparel Form 10 or the Delta Apparel Information Statement, as the
case may be. If at any time prior to the Effective Time there shall occur any
event that should be set forth in an amendment or supplement to the Duck Head
Form 10 or the Duck Head Information Statement, Duck Head will promptly, as
appropriate, file with the SEC or prepare and mail to the Delta Woodside
Stockholders such an amendment or supplement. If at any time prior to the
Effective Time any event or circumstance relating to Duck Head, or its officers
or directors, should be discovered by Duck Head that should be set forth in an
amendment or a supplement to any Delta Woodside Disclosure Document or the Delta
Apparel Form 10 or the Delta Apparel Information Statement, Duck Head shall
promptly inform Delta Woodside or Delta Apparel (as the case may be) thereof and
take appropriate action in respect thereof.
45
<PAGE>
10.3 Public Announcements. So long as this Distribution Agreement is in
----------------------
effect, Duck Head agrees to use its reasonable efforts to consult with Delta
Woodside and Delta Apparel before issuing any press release or otherwise making
any public statement with respect to the transactions contemplated by this
Distribution Agreement. Prior to the Effective Time, Duck Head shall not issue
any press release or otherwise make any public statement without the consent of
Delta Woodside.
10.4 Efforts; Consents. (a) Subject to the terms and conditions herein
-------------------
provided, Duck Head agrees to use its best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Distribution Agreement and the Distribution
and to cooperate with Delta Woodside and Delta Apparel in connection with the
foregoing. Without limiting the generality of the foregoing, Duck Head shall
make or cause to be made all required filings with or applications to
Governmental Entities (including under the Securities Act and the Exchange Act)
to be made by it, and use its best efforts to (i) obtain all necessary waivers
of any Violations and other Consents of all Governmental Entities and other
third parties, necessary for the parties to consummate the transactions
contemplated hereby, (ii) oppose, lift or rescind any injunction or restraining
order or other order adversely affecting the ability of the parties to
consummate the transactions contemplated hereby, and (iii) fulfill all
conditions to this Distribution Agreement.
(b) Duck Head shall promptly provide Delta Woodside and Delta Apparel
copies of (i) all filings made by Duck Head with any Governmental Entity in
connection with this Distribution Agreement and the transactions contemplated
hereby, and (ii) any inquiry or request for information (including notice of any
oral request for information), pleading, order or other document Duck Head
receives from any Governmental Entity with respect to the matters referred to in
this Section 10.4.
10.5 Notice of Breaches. Duck Head shall give prompt notice to Delta
--------------------
Woodside and Delta Apparel of (i) any representation or warranty made by it
contained in this Distribution Agreement that has become untrue or inaccurate in
any material respect, or (ii) the failure by it to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Distribution Agreement; provided, however, that such
notification shall not excuse or otherwise affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Distribution Agreement.
10.6 Effectuation of Intercompany Reorganization and Duck Head Financing.
----------------------------------------------------------------------
Duck Head shall perform all actions necessary or appropriate, and within its
power, to accomplish the Intercompany Reorganization, as contemplated by Section
2.1, and the Duck Head Financing, as contemplated by Section 2.2.
10.7 AMEX Listing. As promptly as practicable, Duck Head shall prepare,
-------------
file and pursue an application to permit the listing of the Duck Head Common
Stock on the AMEX, and such listing shall be completed by the Effective Time.
46
<PAGE>
10.8 Other Securities Law Actions. Duck Head shall prepare and file with
-------------------------------
the SEC and cause to become effective any registration statements or amendments
thereto that are necessary or appropriate to reflect the establishment of or
amendments to any employee benefit and other plans of the Duck Head Group
contemplated by this Distribution Agreement. Duck Head shall take all actions as
may be necessary or appropriate under the securities or blue sky laws of states
or other political subdivisions of the United States in connection with the
transactions contemplated by this Distribution Agreement.
10.9 Duck Head Common Stock. Duck Head agrees to provide to the
--------------------------
Distribution Agent all certificates for shares of Duck Head Common Stock that
shall be required in order to consummate the transactions contemplated by this
Distribution Agreement.
10.10 Duck Head Group Liabilities. Except as specifically set forth in any
----------------------------
of the Distribution Documents, from and after the Effective Time, Duck Head
shall, and shall use its reasonable best efforts to cause its Subsidiaries to,
pay, perform and discharge in due course all of the Duck Head Group Liabilities
for which such entity is liable.
ARTICLE 11
ADDITIONAL AGREEMENTS OF DELTA APPAREL
11.1 Access to Information. From the date hereof through the Effective
-----------------------
Time, Delta Apparel and its Subsidiaries shall afford to Delta Woodside and Duck
Head and their respective accountants, counsel and other representatives full
and reasonable access (subject, however, to existing confidentiality and similar
non-disclosure obligations and the preservation of attorney/client and work
product privileges) during normal business hours (and at such other times as the
parties may mutually agree) to its properties, books, contracts, commitments,
records and personnel and, during such period, shall furnish promptly to Delta
Woodside and Duck Head (i) a copy of each report, schedule and other document
filed or received by it pursuant to the requirements of federal securities laws,
and (ii) all other information concerning its business, properties and personnel
as Delta Woodside or Duck Head may reasonably request.
11.2 Preparation of Delta Apparel Form 10 and Delta Apparel Information
---------------------------------------------------------------------
Statement. To the extent not already accomplished, Delta Apparel will, as soon
- ----------
as practicable following the date of this Distribution Agreement, prepare and
file the Delta Apparel Form 10 and a preliminary Delta Apparel Information
Statement with the SEC and will use all reasonable efforts to respond to any
comments of the SEC or its staff and to cause the Delta Apparel Form 10 to be
declared effective by the SEC and the Delta Apparel Information Statement to be
mailed to the Delta Woodside Stockholders as promptly as practicable after
responding to all such comments to the satisfaction of the SEC or its staff.
Delta Apparel will provide Delta Woodside and Duck Head with a copy of the Delta
Apparel Form 10 and the preliminary Delta Apparel Information Statement and all
modifications thereto prior to filing or delivery to the SEC and will consult
with Delta Woodside and Duck Head in connection therewith. Delta Apparel will
notify Delta Woodside and Duck Head promptly of the receipt of any comments from
47
<PAGE>
the SEC or its staff and of any request by the SEC or its staff for amendments
or supplements to the Delta Apparel Form 10 or the Delta Apparel Information
Statement or for additional information and will supply Delta Woodside and Duck
Head with copies of all correspondence between Delta Apparel or any of its
Representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the Delta Apparel Form 10, the Delta Apparel Information
Statement or the Distribution. Delta Apparel will cooperate and furnish promptly
all information requested by Delta Woodside or Duck Head or otherwise required
for inclusion in any Delta Woodside Disclosure Document or the Duck Head Form 10
or the Duck Head Information Statement, as the case may be. If at any time prior
to the Effective Time there shall occur any event that should be set forth in an
amendment or supplement to the Delta Apparel Form 10 or the Delta Apparel
Information Statement, Delta Apparel will promptly, as appropriate, file with
the SEC or prepare and mail to the Delta Woodside Stockholders such an amendment
or supplement. If at any time prior to the Effective Time any event or
circumstance relating to Delta Apparel, or its officers or directors, should be
discovered by Delta Apparel that should be set forth in an amendment or a
supplement to any Delta Woodside Disclosure Document or the Duck Head Form 10 or
the Duck Head Information Statement, Delta Apparel shall promptly inform Delta
Woodside or Duck Head (as the case may be) thereof and take appropriate action
in respect thereof.
11.3 Public Announcements. So long as this Distribution Agreement is in
----------------------
effect, Delta Apparel agrees to use its reasonable efforts to consult with Delta
Woodside and Duck Head before issuing any press release or otherwise making any
public statement with respect to the transactions contemplated by this
Distribution Agreement. Prior to the Effective Time, Delta Apparel shall not
issue any press release or otherwise make any public statement without the
consent of Delta Woodside.
11.4 Efforts; Consents. (a) Subject to the terms and conditions herein
-------------------
provided, Delta Apparel agrees to use its best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Distribution Agreement and the Distribution
and to cooperate with Delta Woodside and Duck Head in connection with the
foregoing. Without limiting the generality of the foregoing, Delta Apparel shall
make or cause to be made all required filings with or applications to
Governmental Entities (including under the Securities Act and the Exchange Act)
to be made by it, and use its best efforts to (i) obtain all necessary waivers
of any Violations and other Consents of all Governmental Entities and other
third parties, necessary for the parties to consummate the transactions
contemplated hereby, (ii) oppose, lift or rescind any injunction or restraining
order or other order adversely affecting the ability of the parties to
consummate the transactions contemplated hereby, and (iii) fulfill all
conditions to this Distribution Agreement.
(b) Delta Apparel shall promptly provide Delta Woodside and Duck Head
copies of (i) all filings made by Delta Apparel with any Governmental Entity in
connection with this Distribution Agreement and the transactions contemplated
hereby, and (ii) any inquiry or request for information (including notice of any
oral request for information), pleading, order or other document Delta Apparel
receives from any Governmental Entity with respect to the matters referred to in
this Section 11.4.
48
<PAGE>
11.5 Notice of Breaches. Delta Apparel shall give prompt notice to Delta
-------------------
Woodside and Duck Head of (i) any representation or warranty made by it
contained in this Distribution Agreement that has become untrue or inaccurate in
any material respect, or (ii) the failure by it to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Distribution Agreement; provided, however, that such
notification shall not excuse or otherwise affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Distribution Agreement.
11.6 Effectuation of Intercompany Reorganization and Delta Apparel
---------------------------------------------------------------------
Financing. Delta Apparel shall perform all actions necessary or appropriate, and
- ----------
within its power, to accomplish the Intercompany Reorganization, as contemplated
by Section 2.1, and the Delta Apparel Financing, as contemplated by Section 2.2.
11.7 AMEX Listing. As promptly as practicable, Delta Apparel shall prepare,
-------------
file and pursue an application to permit the listing of the Delta Apparel Common
Stock on the AMEX, and such listing shall be completed by the Effective Time.
11.8 Other Securities Law Actions. Delta Apparel shall prepare and file
-------------------------------
with the SEC and cause to become effective any registration statements or
amendments thereto that are necessary or appropriate to reflect the
establishment of or amendments to any employee benefit and other plans of the
Delta Apparel Group contemplated by this Distribution Agreement. Delta Apparel
shall take all actions as may be necessary or appropriate under the securities
or blue sky laws of states or other political subdivisions of the United States
in connection with the transactions contemplated by this Distribution Agreement.
11.9 Delta Apparel Common Stock. Delta Apparel agrees to provide to the
-----------------------------
Distribution Agent all certificates for shares of Delta Apparel Common Stock
that shall be required in order to consummate the transactions contemplated by
this Distribution Agreement.
11.10 Delta Apparel Group Liabilities. Except as specifically set forth in
--------------------------------
any of the Distribution Documents, from and after the Effective Time, Delta
Apparel shall, and shall use its reasonable best efforts to cause its
Subsidiaries to, pay, perform and discharge in due course all of the Delta
Apparel Group Liabilities for which such entity is liable
49
<PAGE>
ARTICLE 12
ACCESS TO INFORMATION
12.1 Provision of Corporate Records. Immediately before or as soon as
----------------------------------
practicable after the Effective Time, each Group shall provide to the applicable
other Group all documents, contracts, books, records and data (including, but
not limited to, minute books, stock registers, stock certificates, documents of
title and documents in electronic format) in its possession relating primarily
to the other Group or its business and affairs; provided that if any of those
documents, contracts, books, records or data relate to more than one Group or
the businesses and operations of more than one Group, each Group shall provide
to the other applicable Group when and if requested true and complete copies
(including, if requested, versions of these documents in electronic format) of
those documents, contracts, books, records or data.
12.2 Access to Information. After the Effective Time, each Group shall
-----------------------
promptly provide reasonable access during normal business hours to each of the
other Groups and its Representatives to all documents, contracts, books,
records, Defense Materials, computer data and other data in that Group's
possession relating to the other applicable Group or its business and affairs
(other than data and information subject to an attorney/client or other
privilege that is not subject to the provisions of any joint defense arrangement
between the relevant member or members of one Group and the relevant member or
members of another Group), to the extent that such access is reasonably
requested by the other Group, including, but not limited to, for audit,
accounting, litigation, disclosure and reporting purposes.
12.3 Future Litigation and Other Proceedings. Each Group shall use all
-------------------------------------------
commercially reasonable efforts to make its directors, officers, employees and
representatives available as witnesses to another Group and its accountants,
counsel and other designated representatives, upon reasonable written request.
Additionally, each Group shall otherwise cooperate with the other Groups, to the
extent reasonably required in connection with any Action arising out of any
Group's business and operations in which the requesting party may be involved.
12.4 Reimbursement. Except and to the extent that any member of one Group
--------------
is obligated to indemnify any member of the other Group under Article 14 for
that cost or expense, each Group providing information or witnesses to the other
Group, or otherwise incurring any expense in connection with cooperating, under
this Agreement shall be entitled to receive from the recipient thereof, upon the
presentation of invoices therefor, payment for all reasonable out-of-pocket
costs and expenses as may reasonably be incurred in providing such information,
witnesses or cooperation.
12.5 Retention of Records. Except as otherwise required by law or agreed to
---------------------
in writing, each party shall retain, and shall cause the members of its Group to
retain, all information relating to any other Group's business and operations in
accordance with the past practice of that party. Notwithstanding the foregoing,
any party may destroy or otherwise dispose of any of that information at any
time, provided that, for a period of six years after the Effective Time, before
destruction or disposal of information that such party consciously knows relates
50
<PAGE>
to any other Group's business and operations, (i) that party shall use its best
efforts to provide not less than 90 days' prior written notice to the other
party, specifying the information proposed to be destroyed or disposed of, and
(ii) if the recipient of that notice shall request in writing before the
scheduled date for destruction or disposal that any of the information proposed
to be destroyed or disposed of be delivered to that requesting party, the party
proposing the destruction or disposal shall promptly deliver to that requesting
party, at the expense of the requesting party, the information that was
requested.
12.6 Confidentiality. Each party shall hold and shall cause its
----------------
Representatives to hold in strict confidence all information (other than any
information relating primarily to the business or affairs of that party)
concerning another party (or the Group of which it forms a part) unless and to
the extent that (i) that party is compelled to disclose that information by
judicial or administrative process or, in the opinion of its counsel, by other
requirements of law or (ii) that information can be shown to have been (A) in
the public domain through no fault of that party, (B) lawfully acquired after
the Effective Time on a non-confidential basis or (C) acquired or developed
independently by that party after the Effective Time without violating this
Section 12.6 or any other confidentiality agreement with the other party.
Notwithstanding the foregoing, a party may disclose that information to its
Representatives so long as those Representatives are informed by that party of
the confidential nature of that information and are directed by that party to
treat that information confidentially. Each party shall be responsible for any
breach of such direction or of this Section by any of its Representatives. If a
party or any of its Representatives becomes legally compelled to disclose any
documents or information subject to this Section 12.6, that party shall promptly
notify the other party so that the other party may seek a protective order or
other remedy or waive that party's compliance with this Section 12.6. If no such
protective order or other remedy is obtained or waiver granted, that party will
furnish only the portion of the information that it is advised by counsel is
legally required and will exercise all commercially reasonable efforts to obtain
reliable assurance that confidential treatment will be accorded that
information. Without prejudice to the rights and remedies of any party to this
Distribution Agreement, if any party breaches or threatens to breach any
provision of this Section 12.6, the affected party shall be entitled to
equitable relief by way of an injunction without the requirement for the posting
of bond.
12.7 Inapplicability of Article to Tax Matters. Notwithstanding anything to
------------------------------------------
the contrary in this Article 12, this Article 12 shall not apply to information,
records and other matters relating to Taxes, all of which shall be governed by
the Tax Sharing Agreement.
ARTICLE 13
TERMINATION, AMENDMENT AND WAIVER
13.1 Termination. This Distribution Agreement may be terminated at any time
------------
prior to the Effective Time by Delta Woodside for any reason.
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13.2 Effect of Termination. In the event of termination of this
-------------------------
Distribution Agreement by Delta Woodside, as provided in Section 13.1, this
Distribution Agreement shall forthwith become void and there shall be no
liability hereunder on the part of any of Delta Woodside, Duck Head or Delta
Apparel or their respective officers or directors; provided that Sections 13.2
and 15.11 shall survive the termination.
13.3 Amendment. This Distribution Agreement may be amended by the parties
----------
hereto at any time. This Distribution Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
13.4 Waiver. At any time prior to the Effective Time, the parties hereto
-------
may, to the extent permitted by applicable law, (i) extend the time for the
performance of any of the obligations or other acts of any other party hereto,
(ii) waive any inaccuracies in the representations and warranties by any other
party contained herein or in any documents delivered by any other party pursuant
hereto and (iii) waive compliance with any of the agreements of any other party
or with any conditions to its own obligations contained herein. Any agreement on
the part of a party hereto to any such extension or to any waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party. No
delay on the part of any party hereto in exercising any right, power or
privilege hereunder will operate as a waiver thereof, nor will any waiver on the
part of any party hereto of any right, power or privilege hereunder operate as a
waiver of any other right, power or privilege hereunder, nor will any single or
partial exercise of any right, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege hereunder. Unless otherwise provided, the rights and remedies herein
provided are cumulative and are not exclusive of any rights or remedies that the
parties may otherwise have at law or in equity.
ARTICLE 14
INDEMNIFICATION
14.1 Indemnification by Delta Woodside. From and after the Effective Time,
----------------------------------
Delta Woodside shall indemnify and hold harmless, to the full extent permitted
by law, each member of the Duck Head Group and each member of the Delta Apparel
Group, and each present and former director, officer, employee and agent of any
member of the Duck Head Group and/or the Delta Apparel Group, against any and
all liabilities and expenses, including reasonable attorneys' fees, fines,
losses, claims, damages, liabilities, costs, expenses, judgments and amounts
paid in settlement (collectively, "Damages"), incurred or suffered by such
member of the Duck Head Group or member of the Delta Apparel Group, or such
director, officer, employee or agent, as the case may be, whether or not in
connection with any threatened, pending or completed Action (and whether
asserted or commenced prior to or after the Effective Time), and Delta Woodside
shall advance expenses to each such indemnified Person, arising out of or
pertaining to:
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(a) any breach of the representations and warranties made by Delta
Woodside in Article 4 (which representations and warranties shall not
expire for purposes of this Article 14, notwithstanding any other provision
of this Distribution Agreement to the contrary);
(b) the breach by any member of the Delta Woodside Group of any
obligation under (i) this Distribution Agreement or (ii) any of the other
Distribution Documents, other than the Tax Sharing Agreement;
(c) any and all Delta Woodside Group Liabilities; or
(d) any untrue statement or alleged untrue statement of a material
fact contained in any Delta Woodside Disclosure Document, or any omission
or alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as those Damages are caused by any
such untrue statement or omission or alleged untrue statement or omission
that was based upon information furnished to Delta Woodside by any member
of the Duck Head Group or any member of the Delta Apparel Group expressly
for use therein.
14.2 Indemnification by Duck Head. From and after the Effective Time, Duck
-----------------------------
Head shall indemnify and hold harmless, to the full extent permitted by law,
each member of the Delta Woodside Group and each member of the Delta Apparel
Group, and each present and former director, officer, employee and agent of any
member of the Delta Woodside Group and/or the Delta Apparel Group, against any
and all Damages incurred or suffered by such member of the Delta Woodside Group
or member of the Delta Apparel Group, or such director, officer, employee or
agent, as the case may be, whether or not in connection with any threatened,
pending or completed Action (and whether asserted or commenced prior to or after
the Effective Time), and Duck Head shall advance expenses to each such
indemnified Person, arising out of or pertaining to:
(a) any breach of the representations and warranties made by Duck Head
in Article 5 (which representations and warranties shall not expire for
purposes of this Article 14, notwithstanding any other provision of this
Distribution Agreement to the contrary);
(b) the breach by any member of the Duck Head Group of any obligation
under (i) this Distribution Agreement or (ii) any of the other Distribution
Documents, other than the Tax Sharing Agreement;
(c) any and all Duck Head Group Liabilities; or
(d) any untrue statement or alleged untrue statement of a material
fact contained in any Duck Head Disclosure Document, or any omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as those Damages are caused by any
such untrue statement or omission or alleged untrue statement or omission
that was based upon information furnished to Duck Head by any member of the
Delta Woodside Group or any member of the Delta Apparel Group expressly for
use therein.
53
<PAGE>
14.3 Indemnification by Delta Apparel. From and after the Effective Time,
---------------------------------
Delta Apparel shall indemnify and hold harmless, to the full extent permitted by
law, each member of the Delta Woodside Group and each member of the Duck Head
Group, and each present and former director, officer, employee and agent of any
member of the Delta Woodside Group and/or the Duck Head Group, against any and
all Damages incurred or suffered by such member of the Delta Woodside Group or
member of the Duck Head Group, or such director, officer, employee or agent, as
the case may be, whether or not in connection with any threatened, pending or
completed Action (and whether asserted or commenced prior to or after the
Effective Time), and Delta Apparel shall advance expenses to each such
indemnified Person, arising out of or pertaining to:
(a) any breach of the representations and warranties made by Delta
Apparel in Article 6 (which representations and warranties shall not expire
for purposes of this Article 14, notwithstanding any other provision of
this Distribution Agreement to the contrary);
(b) the breach by any member of the Delta Apparel Group of any
obligation under (i) this Distribution Agreement or (ii) any of the other
Distribution Documents, other than the Tax Sharing Agreement;
(c) any and all Delta Apparel Group Liabilities; or
(d) any untrue statement or alleged untrue statement of a material
fact contained in any Delta Apparel Disclosure Document, or any omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as those Damages are caused by any
such untrue statement or omission or alleged untrue statement or omission
that was based upon information furnished to Delta Apparel by any member of
the Delta Woodside Group or any member of the Duck Head Group expressly for
use therein.
14.4 Third-Party Rights; Insurance Proceeds; Tax Benefits; Mitigation.
-----------------------------------------------------------------
(a) No insurer or any other third party shall be (i) entitled by reason of
this Article 14 to a benefit (as a third-party beneficiary or otherwise) that it
would not be entitled to receive in the absence of Section 14.1, 14.2 or 14.3,
(ii) relieved by reason of this Article 14 of the responsibility to pay any
claim to which it is obligated or (iii) entitled to any subrogation right with
respect to any obligation under Section 14.1, 14.2 or 14.3.
(b) The amount that any indemnifying party is or may be required to pay to
any indemnified Person pursuant to this Article 14 (i) shall be reduced
(including retroactively) by (A) any insurance proceeds or other amounts
actually recovered by or on behalf of such indemnified Person in reduction of
the related Damages and (B) any Tax benefits realized or realizable by such
54
<PAGE>
indemnified Person based on the present value thereof by reason of such loss and
(ii) shall be increased by any Tax liability incurred by such indemnified Person
based on such indemnity payment. If an indemnified Person shall have received
the payment required by this Distribution Agreement from an indemnifying party
in respect of Damages and shall subsequently actually receive insurance
proceeds, Tax benefits or other amounts in respect of such Damages as specified
above, then such indemnified Person shall pay to such indemnifying party a sum
equal to the amount of such insurance proceeds, Tax benefits or other amounts
actually received. The indemnified Person shall take all reasonable steps to
mitigate all Damages, including availing itself of any defenses, limitations,
rights of contribution, claims against third parties and other rights at law (it
being understood that any reasonable out-of-pocket costs paid to third parties
in connection with such mitigation shall constitute Damages), and shall provide
such evidence and documentation of the nature and extent of any Damages as may
be reasonably requested by the indemnifying party.
(c) In addition to any adjustments required pursuant to paragraph (b)
above, if the amount of any Damages shall, at any time subsequent to the payment
required by this Distribution Agreement, be reduced by recovery, settlement or
otherwise, the amount of such reduction, less any expenses incurred in
connection therewith, shall promptly be repaid by the indemnified Person to the
indemnifying party.
14.5 Indemnification Procedures.
---------------------------
(a) In the event of any Action (whether asserted or commenced prior to or
after the Effective Time) as to which indemnification will be sought pursuant to
Section 14.1, 14.2 or 14.3, the indemnifying party shall be entitled to
participate in and, to the extent that it may wish, to assume the defense
thereof with counsel selected by the indemnifying party and reasonably
acceptable to the indemnified Person; provided that the indemnified Person shall
have the right to participate in those proceedings and to be represented by
counsel of its own choosing at the indemnified Person's sole cost and expense;
provided, however, that, if any indemnified Person (or group of indemnified
Persons) reasonably believes that, as a result of an actual or potential
conflict of interest, it is advisable for such indemnified Person (or group of
indemnified Persons) to be represented by separate counsel or if the
indemnifying party shall fail to assume responsibility for such defense, such
indemnified Person (or group of indemnified Persons) will act in good faith with
respect to such Action and may retain counsel satisfactory to such indemnified
Person (or group of indemnified Persons) who will represent such indemnified
Person or Persons, and the indemnifying party shall pay all reasonable fees and
expenses of such counsel promptly as statements therefor are received. The
indemnified Persons and the indemnifying party shall use their respective best
efforts to assist in the vigorous defense of any such matter. The indemnifying
party shall not be liable for any settlement effected without its written
consent, which consent shall not be unreasonably withheld. The indemnifying
party may settle or compromise the Action without the prior written consent of
the indemnified Person so long as any settlement or compromise of the Action
includes an unconditional release of the indemnified Person from all claims that
are the subject of that Action, provided, however, that the indemnifying party
may not agree to any such settlement or compromise that includes any remedy or
relief (other than monetary damages for which the indemnifying party shall be
responsible under this Article) applying to or against the indemnified Person,
without the prior written consent of the indemnified Person (which consent shall
55
<PAGE>
not be unreasonably withheld). Notwithstanding the other provisions of this
Article, the indemnifying party shall have no obligation under this Article to
any indemnified Person when and if a court of competent jurisdiction shall
ultimately determine, in a decision constituting a final determination, that
such indemnified Person is not entitled to indemnification hereunder.
(b) Any indemnified Person wishing to claim indemnification under this
Article, upon learning of any such Action, shall promptly notify the
indemnifying party thereof in writing and shall deliver to the indemnifying
party an undertaking to repay any amounts advanced pursuant to this Article when
and if a court of competent jurisdiction shall ultimately determine, in a
decision constituting a final determination, that such indemnified Person is not
entitled to indemnification hereunder. The failure of the indemnified Person to
give notice as provided in this paragraph (b) or paragraph (f) below shall not
relieve the indemnifying party of its obligations under this Article, except to
the extent that the indemnifying party is prejudiced by the failure to give
notice. The indemnified Persons may as a group retain only one law firm pursuant
to the preceding paragraph (a) to represent them at the expense of the
indemnifying party with respect to any such matter unless there is, under
applicable standards of professional conduct, a conflict on any significant
issue between the positions of any two or more indemnified Persons in which case
the indemnified Persons may retain, at the expense of the indemnifying party,
such number of additional counsel as are reasonably necessary to eliminate all
such conflicts.
(c) This Article shall survive the Effective Time and the Distribution, is
intended to benefit each indemnified Person and their respective successors,
heirs, personal representatives and assigns (each of whom shall be entitled to
enforce this Article), and shall be binding on all successors and assigns of the
indemnifying party.
(d) In the event any indemnifying party or any of its successors or assigns
(i) consolidates with or merges into any other entity and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers all or substantially all of its assets to any entity, then,
and in each such case, proper provision shall be made so that the successors and
assigns of the indemnifying party assume the obligations of the indemnifying
party set forth in this Article.
(e) Each of the parties hereto agrees vigorously to defend against any
Action in which such party is named as a defendant and that seeks to enjoin,
restrain or prohibit the transactions contemplated hereby or seeks damages with
respect to such transactions.
(f) If any indemnified Person determines that it is or may be entitled to
indemnification by any party under this Article 14 (other than in connection
with any Action), the indemnified Person shall promptly deliver to the
indemnifying party a written notice specifying, to the extent reasonably
practicable, the basis for the indemnified Person's claim for indemnification
and the amount for which the indemnified Person reasonably believes it is
entitled to be indemnified.
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(g) In the event of payment by an indemnifying party to any indemnified
Person in connection with any claim, such indemnifying party shall be subrogated
to and shall stand in the place of such indemnified Person as to any events,
circumstances or Persons in respect of which such indemnified Person may have
any right or claim relating to such claim. Such indemnified Person shall
cooperate with such indemnifying party in a reasonable manner, and at the cost
and expense of such indemnifying party, in prosecuting any subrogated right or
claim.
(h) The remedies provided in this Article 14 shall be cumulative and shall
not preclude assertion by any indemnified Person of any other rights or the
seeking of any and all other remedies against any indemnifying party.
14.6 Contribution. If for any reason the indemnification provided for in
-------------
Section 14.1, 14.2 or 14.3 is unavailable to any indemnified Person, or
insufficient to hold the indemnified Person harmless, then the indemnifying
party shall contribute to the amount paid or payable by that indemnified Person
as a result of those Damages in that proportion as is appropriate to reflect the
relative fault of the indemnifying party, on the one hand, and of the
indemnified Person, on the other hand, respecting those Damages, which relative
fault shall be determined by reference to the Business and Group to which the
relevant actions, conduct, statements or omissions are primarily related, as
well as any other relevant equitable considerations.
ARTICLE 15
GENERAL PROVISIONS
15.1 Intercompany Accounts. Except for any amounts owed by Delta Apparel to
----------------------
the Delta Woodside Group for yarn sold by the Delta Woodside Group to Delta
Apparel, which amounts shall be paid in the ordinary course of business, and
except for obligations arising under this Distribution Agreement or the Tax
Sharing Agreement, each of the parties hereto represents to each of the other
parties hereto that it is not aware of any intercompany receivable, payable or
loan balance that will exist as of the Effective Time, following completion of
the Intercompany Reorganization, between any member of its Group and any member
of either of the other two Groups.
15.2 Existing Arrangements. Except for the Distribution Documents and
-----------------------
except as otherwise contemplated by any Distribution Document, all prior
executory agreements and arrangements, including those relating to goods, rights
or services provided or licensed, between any member(s) of any Group and any
member(s) of any other Group shall be terminated effective as of the Effective
Time, if not previously terminated. No such agreements or arrangements shall be
in effect after the Effective Time unless embodied in the Distribution
Documents.
15.3 Intellectual Property Rights and Licenses. No Group shall have any
--------------------------------------------
right or license in or to any technology, software, intellectual property
(including, without limitation, any trademark, service mark, patent or
copyright), know-how or other proprietary right owned, licensed or used by any
other Group.
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15.4 Further Assurances and Consents. In addition to the actions
------------------------------------
specifically provided for elsewhere in this Distribution Agreement and the other
Distribution Documents, each of the parties to this Distribution Agreement shall
use all commercially reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things, reasonably necessary,
proper or advisable under applicable laws, regulations and agreements or
otherwise to consummate and make effective the transactions contemplated by this
Distribution Agreement and the other Distribution Documents, including, but not
limited to, using all commercially reasonable efforts to obtain any Consents and
approvals and to make any filings and applications necessary or desirable in
order to consummate the transactions contemplated by this Distribution Agreement
and the other Distribution Documents; provided that no party to this
Distribution Agreement shall be obligated to pay any consideration for any
consent or approval (except for filing fees and other similar charges) to any
third party from whom a consent or approval is requested or to take any action
or omit to take any action if the taking of or the omission to take that action
would be unreasonably burdensome to that party, its Group or its Group's
business.
15.5 Notices. All notices or other communications under this Distribution
--------
Agreement shall be in writing and shall be given (and shall be deemed to have
been duly given upon receipt) by delivery in person, by telecopy (with
confirmation of receipt), or by registered or certified mail, postage prepaid,
return receipt requested, addressed as follows:
If to Delta Woodside:
Delta Woodside Industries, Inc.
233 North Main Street
Greenville, South Carolina 29601
Attention: President
Telecopy No.: (864) 232-6164
If to Duck Head:
Duck Head Apparel Company, Inc.
1020 Barrow Industrial Parkway
P.O. Box 688
Winder, Georgia 30680
Attention: President
Telecopy No.: (770) 867-3111
58
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If to Delta Apparel:
Delta Apparel, Inc.
3355 Breckinridge Blvd.
Suite 100
Duluth, Georgia 30096
Attention: President
Telecopy No.: (770) 806-6800
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section.
15.6 Specific Performance. The parties hereto agree that irreparable damage
---------------------
would occur in the event that any of the provisions of this Distribution
Agreement were not performed in accordance with its specific terms or were
otherwise breached. Accordingly, each party shall be entitled, without posting
any bond, to an injunction or injunctions to prevent breaches of this
Distribution Agreement and to enforce specifically the terms and provisions
hereof, this being in addition to any other remedy to which it is entitled under
this Distribution Agreement, at law or in equity.
15.7 Entire Agreement. This Distribution Agreement (together with the
------------------
Distribution Documents and the other documents and instruments referred to
herein) constitutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the parties, or any
of them, with respect to the subject matter hereof.
15.8 Assignments; Parties in Interest. Prior to the Effective Time, neither
---------------------------------
this Distribution Agreement nor any of the rights, interests or obligations
hereunder may be assigned by any of the parties hereto (whether by operation of
law or otherwise) without the prior written consent of the other parties.
Subject to the preceding and succeeding sentences, this Distribution Agreement
shall be binding upon and inure solely to the benefit of each of the parties
hereto and their respective successors and assigns. Nothing in this Distribution
Agreement, express or implied, is intended to or shall confer upon any Person
not a party hereto any right, benefit or remedy of any nature whatsoever under
or by reason of this Distribution Agreement, including to confer third party
beneficiary rights, except as specifically set forth in Article 14 in respect of
any indemnified Person and except for the provisions of Section 3.5.
15.9 Governing Law. This Distribution Agreement shall be governed in all
--------------
respects by the laws of the State of South Carolina (without giving effect to
the provisions thereof relating to conflicts of law).
15.10 Headings; Disclosure. The descriptive headings herein are inserted
----------------------
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Distribution Agreement. Any
disclosure by Delta Woodside, Duck Head or Delta Apparel in any portion of its
respective disclosure schedule shall be deemed disclosure in each other portion
of such disclosure schedule.
59
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15.11 Expenses. Except as specifically provided otherwise in any of the
---------
Distribution Documents, whether or not the Distribution is consummated, all
costs and expenses incurred in connection with the preparation, execution and
delivery of the Distribution Documents and the consummation of the transactions
contemplated hereby and thereby (including, without limitation, (x) the fees and
expenses of all counsel, accountants and financial and other advisors of all
Groups in connection therewith, and all expenses in connection with preparing,
filing and printing the Disclosure Documents and (y) any fees and expenses
incurred to repay any indebtedness, but not to incur any indebtedness (which
shall be paid by the party incurring such indebtedness)) 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 Distribution.
15.12 Tax Sharing Agreement; Certain Transfer Taxes.
----------------------------------------------
(a) Except to the extent that a provision of this Distribution Agreement
expressly indicates otherwise, this Distribution Agreement shall not govern any
Tax matters, and any and all Liabilities relating to Taxes shall be governed
exclusively by the Tax Sharing Agreement.
(b) Notwithstanding the Tax Sharing Agreement, all transfer, documentary,
sales, use, stamp and registration taxes and fees (including filing fees and any
penalties and interest) incurred in connection with any of the transactions
described in this Distribution Agreement (including without limitation the
Intercompany Reorganization) shall be borne and 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. The party or parties that is or are required by
applicable law to file any Return (as defined in the Tax Sharing Agreement) or
make any payment with respect to any of those taxes shall do so, and the other
party or parties shall cooperate with respect to that filing or payment as
necessary. The non-paying party or parties shall promptly reimburse the paying
party in accordance with this Section 15.12, as appropriate, after it or they
receive(s) notice of the payment of those taxes.
15.13 Jurisdiction. Any Action seeking to enforce any provision of, or
-------------
based on any matter arising out of or in connection with, any of the
Distribution Documents or any of the transactions contemplated by any of the
Distribution Documents shall be brought exclusively in the United States
District Court for the District of South Carolina or any South Carolina State
court sitting in Greenville County, and each of the parties hereby consents to
the exclusive jurisdiction of those courts (and of the appropriate appellate
courts therefrom) in any such Action and irrevocably waives, to the fullest
extent permitted by law, any objection that it may now or hereafter have to the
laying of the venue of any such Action in any of those courts or that any such
Action that is brought in any of those courts has been brought in an
inconvenient forum. Process in any such Action may be served on any party
anywhere in the world, whether within or without the jurisdiction of any such
court. Without limiting the foregoing, each party agrees that service of process
on that party as provided in Section 15.5 shall be deemed effective service of
process on that party.
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15.14 Counterparts. This Distribution Agreement may be executed in two or
-------------
more counterparts which together shall constitute a single agreement.
15.15 Severability. If any provision of this Distribution Agreement is
-------------
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other provisions of this Distribution Agreement shall nevertheless
remain in full force and effect so long as the economics or legal substance of
the transactions contemplated hereby are not affected in any manner materially
adverse to any party. Upon determination that any term or other provision hereof
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Distribution Agreement so as to effect
the original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
61
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IN WITNESS WHEREOF, Delta Woodside, Duck Head and Delta Apparel have caused
this Distribution Agreement to be signed by their respective officers thereunto
duly authorized all as of the date first written above.
DELTA WOODSIDE INDUSTRIES, INC.
By: /s/ E. Erwin Maddrey, II
--------------------------------
Title: President & CEO
DH APPAREL COMPANY, INC.
By: /s/ Robert D. Rockey, Jr.
--------------------------------
Title: Chairman, President & CEO
DELTA APPAREL, INC.
By: /s/ Robert W. Humphreys
--------------------------------
Title: President & CEO
COLLATERAL ASSIGNMENT OF ACQUISITION AGREEMENTS
-----------------------------------------------
THIS COLLATERAL ASSIGNMENT OF ACQUISITION AGREEMENTS ("Assignment"), dated
May 16, 2000, is by and among DH APPAREL COMPANY, INC., a Georgia corporation
("Duck Head"), with its chief executive office at 1020-A Barrow Industrial
Parkway, Winter, Georgia 30680, and DELTA APPAREL, INC., a Georgia corporation
("Delta", and together with Duck Head, each individually, an "Assignor" and
collectively, "Assignors"), with its chief execute office at 3355 Breckinridge
Boulevard, Suite 100, Duluth, Georgia 30096, in favor of CONGRESS FINANCIAL
CORPORATION (SOUTHERN), a Georgia corporation ("Assignee"), having an office at
200 Galleria Parkway, Suite 1500, Atlanta, Georgia 30339.
W I T N E S S E T H:
--------------------
WHEREAS, each of Assignors has acquired certain assets of Delta Woodside
Industries, Inc. ("Seller"), as set forth in the Distribution Agreement, dated
March 15, 2000, by and among Seller and Assignors (as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, the "Distribution Agreement", together with the other agreements,
documents and instruments referred to therein in Section 2.1 thereof or at any
time executed and/or delivered in connection with the transactions contemplated
by such Section 2.1, collectively, the "Acquisition Agreements");
WHEREAS, Duck Head and Assignee have entered or are about to enter into
financing arrangements pursuant to which Assignee may make loans and advances
and provide other financial accommodations to Duck Head as set forth in the Loan
and Security Agreement, dated of even date herewith, among Duck Head, Delta
Merchandising, Inc. and Assignee (as the same now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced, the
"Duck Head Loan Agreement") and other agreements, documents and instruments
referred to therein or at any time executed and/or delivered in connection
therewith or related thereto, including, but not limited to, this Assignment
(all of the foregoing, together with the Loan Agreement, as the same now exist
or may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced, being collectively referred to herein as the "Duck Head Financing
Agreements");
WHEREAS, Delta and Assignee have entered or are about to enter into
financing arrangements pursuant to which Assignee may make loans and advances
and provide other financial accommodations to Delta as set forth in the Loan and
Security Agreement, dated of even date herewith, between Delta and Assignee (as
the same now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced, the "Delta Loan Agreement") and other
agreements, documents and instruments referred to therein or at any time
executed and/or delivered in connection therewith or related thereto, including,
but not limited to, this Assignment (all of the foregoing, together with the
Loan Agreement, as the same now exist
- 1 -
<PAGE>
or may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced, being collectively referred to herein as the "Delta Financing
Agreements" and together with the Duck Head Financing Agreements, collectively,
the "Financing Agreements");
WHEREAS, in order to induce Assignee to make loans and advances and provide
other financial accommodations to each Assignor pursuant to each of the Duck
Head Loan Agreement and the Delta Loan Agreement and the other Financing
Agreements, each Assignor has agreed to grant to Assignee certain collateral
security as set forth herein;
NOW, THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. GRANT OF SECURITY INTEREST AND ASSIGNMENT
-----------------------------------------
As collateral security for the prompt performance, observance and
indefeasible payment in full of all of the Obligations (as hereinafter defined),
each Assignor hereby assigns, pledges, transfers and sets over to Assignee, and
grants to Assignee a continuing security interest in and a general lien upon,
all of each of Assignor's now existing or hereafter arising right, title and
interest in and to each of the Acquisition Agreements and all proceeds
thereunder, including, but not limited to, (a) all rights of each Assignor to
receive monies due to become due to it thereunder or in connection therewith;
(b) all rights of each Assignor to indemnification and claims for damages or
other relief pursuant to such Acquisition Agreements; (c) all rights of each
Assignor to perform and exercise all remedies thereunder and to require
performance by the other parties thereto; and (d) all proceeds, collections,
recoveries and rights of subrogation with respect to the foregoing (all of the
foregoing being collectively referred to herein as the "Collateral").
2. OBLIGATIONS SECURED
-------------------
The assignment, security interest and lien granted to Assignee pursuant to
this Assignment shall secure the prompt performance, observance and payment in
full of any and all obligations, liabilities and indebtedness of every kind,
nature and description owing by each of Assignors to Assignee and/or its
affiliates, including principal, interest, charges, fees, premiums, indemnities,
and expenses, however evidenced, whether as principal, surety, endorser,
guarantor or otherwise, arising under this Assignment, the Duck Head Loan
Agreement, the Delta Loan Agreement and the other Financing Agreements, whether
now existing or hereafter arising, whether arising before, during or after the
initial or any renewal term of the Duck Head Loan Agreement or the Delta Loan
Agreement or after the commencement of any case with respect to any Assignor
under the United States Bankruptcy Code or any similar statute (including,
without limitation, the payment of interest and other amounts which would accrue
and become due but for the commencement of such case), whether direct or
indirect, absolute or contingent, joint or several, due or not due, primary or
secondary, liquidated or unliquidated, secured or unsecured (all of the
foregoing being collectively referred to herein as the "Obligations").
-2-
<PAGE>
3. NO ASSUMPTION OF DUTIES
-----------------------
This Assignment is executed only as security for the Obligations and,
therefore, the execution and delivery of this Assignment shall not subject
Assignee to, or transfer or pass to Assignee, or in any way affect or modify,
the liability of Assignors under the Acquisition Agreements. In no event shall
the acceptance of this Assignment by Assignee or the exercise by Assignee of any
rights hereunder or assigned hereby, constitute an assumption of any liability
or obligation of Assignors to any of the other parties to the Acquisition
Agreements or any other persons.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
Each Assignor hereby represents, warrants and covenants with and to
Assignee the following (all of such representations, warranties and covenants
being continuing as long as any of the Obligations are outstanding):
(a) Each of the Acquisition Agreements is and shall be a legal, valid and
binding obligation of each Assignor.
(b) As of the date hereof, no default or event of default under or with
respect to the Acquisition Agreements exists or has occurred.
(c) Each Assignor has obtained all consents required for the valid and
binding assignment of the Acquisition Agreements.
(d) Each Assignor shall promptly and faithfully abide by, perform and
discharge in all material respects the obligations, covenants, conditions and
duties which the Acquisition Agreements provide are to be performed by each
Assignor.
(e) Each of the Acquisition Agreements is in full force and effect and,
without the prior written consent of Assignee, Assignors will not amend,
supplement or otherwise modify or terminate any of the terms or provisions of
any of the Acquisition Agreements, in any manner that would materially,
adversely affect the rights or claims of Assignors or materially, adversely
affect any of the Collateral or the rights of Assignors or Assignee with respect
thereto; provided, that, unless and until an Event of Default exists or has
occurred and is continuing, Assignors may, upon notice thereof to Lender, amend,
supplement or otherwise modify or terminate any of the terms or provisions of
the Acquisition Agreements so long as either (i) such amendment, supplement,
modification or termination does not waive, release or limit any rights or
claims of Assignors or increase the obligations of Assignors or make any terms
thereof more restrictive or burdensome to Assignors or in any manner adversely
affect Assignee or any rights of Assignee as determined in good faith by
Assignee and confirmed by Assignee to Assignors in writing or (ii) Assignee has
consented in writing to such amendment, supplement, modification or termination.
-3-
<PAGE>
(f) At Assignors' sole cost and expense, Assignors shall appear in and
defend any action or proceedings affecting Assignee and arising under, growing
out of or in any manner connected with the obligations, covenants, conditions,
duties, agreements or liabilities of Assignors under the Acquisition Agreements.
(g) Each Assignor shall: (i) promptly notify Assignee of each and every
dispute with, proceeding or claim against, cause of action or litigation
involving any person for which any Assignor has or may have any right to
indemnification or claim for damages or other relief or remedies, whether at law
or in equity, arising under or in connection with the Acquisition Agreements,
(ii) diligently enforce all rights to indemnification or claim for damages or
other relief or remedies, whether at law or in equity, arising under or in
connection with the Acquisition Agreements and (iii) not take or permit, and has
not taken or permitted since the execution of the Acquisition Agreements, any
action that adversely affects, in the good faith judgment of Assignee, the
Obligations or the Collateral.
(h) Each Assignor shall promptly deliver or cause to be delivered a copy of
every written notice or communication received by such Assignor pursuant to any
of the Acquisition Agreements to Assignee in the manner and at the place
provided for notices contained herein.
(i) In no event shall any Assignor without the prior written consent of
Assignee, waive in any material respect, or release or discharge any of its
rights or any of the obligations, duties or liabilities of any other party to
the Acquisition Agreements, or compromise or settle any right or any claim or
dispute with respect to any of its rights or any of the obligations, duties or
liabilities of any other party to the Acquisition Agreements. No such waiver,
release, discharge, compromise or settlement shall be effective without the
prior written consent of Assignee.
5. EVENTS OF DEFAULT
-----------------
All Obligations shall become immediately due and payable, without notice or
demand, at the option of Assignee, upon the occurrence of any Event of Default,
as such term is defined in the Duck Head Loan Agreement or the Delta Loan
Agreement (each an "Event of Default" hereunder).
6. RIGHTS AND REMEDIES
-------------------
(a) At any time an Event of Default exists or has occurred and is
continuing, Assignee shall have the absolute right to enforce, in its name, any
and all rights to indemnification or claim for damages or other relief or
remedies, whether at law or in equity, arising under or in connection with the
Acquisition Agreements, or otherwise and apply the proceeds thereof to the
Obligations in such order or manner as Assignee shall determine.
-4-
<PAGE>
(b) In order to effectuate the foregoing, each Assignor, for itself and its
respective successors and assigns, hereby constitutes and appoints Assignee and
each officer and employee thereof as its attorney-in-fact with power to assert
claims and commence and prosecute suit against any Person or to settle or
compromise any such claim or suit relating to any such right, claim, relief or
remedy, and to sign and file any and all papers required in connection therewith
and to take any and all other action which Assignee may, in its good faith
discretion, deem appropriate. Each Assignor hereby ratifies and approves all
acts which Assignee or any officer or employee thereof as attorney may do and
this power of attorney, being coupled with an interest, is irrevocable as long
as any of the Obligations remain outstanding.
(c) No failure to exercise, and no delay in exercising on the part of
Assignee any right, power or privilege under this Assignment, the Loan Agreement
or under any of the other Financing Agreements or other documents referred to
herein or therein shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder or thereunder
preclude any other or further exercise thereof or the exercise of any other
right, power and privilege. The rights and remedies of Assignee under this
Assignment, the other Financing Agreements or applicable law, are cumulative and
not exclusive and all such rights and remedies may be exercised alternatively,
successively or concurrently.
7. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW
------------------------------------------------------------
(a) The validity, interpretation and enforcement of this Assignment and the
other Financing Agreements and any dispute arising out of the relationship
between the parties hereto, whether in contract, tort, equity or otherwise,
shall be governed by the internal laws of the State of Georgia (without giving
effect to principles of conflicts of law).
(b) Assignor and Assignee irrevocably consent and submit to the
non-exclusive jurisdiction of the Superior Court of Fulton County, Georgia and
the United States District for the Northern District of Georgia and waive any
objection based on venue or forum non conveniens with respect to any action
instituted therein arising under this Assignment or any of the other Financing
Agreements or in any way connected or related or incidental to the dealings of
each Assignor and Assignee in respect of this Assignment or the other Financing
Agreements or the transactions related hereto or thereto, in each case whether
now existing or thereafter arising, and whether in contract, tort, equity or
otherwise, and agree that any dispute with respect to any such matters shall be
heard only in the courts described above (except that Assignee shall have the
right to bring any action or proceeding against any Assignor or its property in
the courts of any other jurisdiction which Assignee deems necessary or
appropriate in order to realize on any collateral granted to Assignee or to
otherwise enforce its rights against each Assignor or its property).
-5-
<PAGE>
(c) Each Assignor hereby waives personal service of any and all process
upon it and consents that all such service of process may be made by certified
mail (return receipt requested) directed to its address set forth herein and
service so made shall be deemed to be completed ten (10) days after the same
shall have been so deposited in the U.S. mails, or, at Assignee's option, by
service upon Assignor in any other manner provided under the rules of any such
courts. Within thirty (30) days after such service, such Assignor shall appear
in answer to such process, failing which such Assignor shall be deemed in
default and judgment may be entered by Assignee against such Assignor for the
amount of the claim and other relief requested.
(d) EACH ASSIGNOR AND ASSIGNEE HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF
ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS ASSIGNMENT
OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT TO THIS
ASSIGNMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED
HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. EACH ASSIGNOR AND ASSIGNEE
HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT EACH ASSIGNOR OR
ASSIGNEE MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS ASSIGNMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF SUCH ASSIGNOR AND ASSIGNEE TO THE
WAIVER OF THEIR RIGHTS TO TRIAL BY JURY.
8. MISCELLANEOUS
-------------
(a) All notices, requests and demands hereunder shall be in writing and
shall be deemed to have been duly given or made: if delivered in person,
immediately upon delivery; if by telex, telegram, or facsimile transmission,
immediately upon sending and upon confirmation of receipt; if by nationally
recognized overnight courier service with instructions to deliver the next
business day, one (1) business day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing. All notices, requests and
demands upon the parties are to be given to the following addresses (or to such
other address as any party may designate by notice in accordance with this
Section):
If to Assignors: DH Apparel Company, Inc.
1020-A Barrow Industrial Parkway
Winter, Georgia 30680
Attention: Chief Financial Officer
Delta Apparel, Inc.
3355 Breckinridge Boulevard
Suite 100
Duluth, Georgia 30096
Attention: Chief Financial Officer
-6-
<PAGE>
If to Assignee: Congress Financial Corporation
(Southern)
200 Galleria Parkway, Suite 1500
Atlanta, Georgia 30339
Attention: Portfolio Manger
(b) All references to the plural herein shall also mean the singular and to
the singular shall also mean the plural. All references to Assignor and Assignee
herein shall include their respective successors and assigns. All references to
the term "Person" or "person" herein shall mean any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code of
1986, as amended), limited liability company, limited liability corporation,
limited liability partnership, business trust, unincorporated association, joint
stock company, trust, joint venture or other entity or any government or any
agency instrumentality or political subdivision thereof.
(c) No provision hereof may be changed, waived, discharged or terminated
except by an instrument in writing signed by the party against whom enforcement
of the change, waiver, discharge or termination is sought.
(d) This Assignment shall be binding upon each Assignor and its successors
and assigns and inure to the benefit of and be enforceable by Assignee and its
successors and assigns.
(e) If any provision of this Assignment is held to be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate this
Assignment as a whole but this Assignment shall be construed as though it did
not contain the particular provision or provisions held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by law.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
-7-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this instrument to be executed
by persons duly authorized, as of the date first above written.
ASSIGNORS:
DH APPAREL COMPANY, INC.
By: /s/ K. Scott Grassmyer
-------------------------------
Title: Sr. Vice President & CFO
DELTA APPAREL, INC.
By: /s/ Herbert M. Mueller
-----------------------------
Title: Vice President & CFO
ASSIGNEE:
CONGRESS FINANCIAL CORPORATION
(SOUTHERN)
By: /s/ Daniel Cott
------------------------------
Title: Executive Vice President
- 8 -
LOAN AND SECURITY AGREEMENT
by and between
CONGRESS FINANCIAL CORPORATION (SOUTHERN)
as Lender
and
DH APPAREL COMPANY, INC.
DELTA MERCHANDISING, INC.
as Borrowers
Dated: May 16, 2000
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
<S> <C> <C>
SECTION 1. DEFINITIONS.....................................................................................1
SECTION 2. CREDIT FACILITIES..............................................................................20
2.1 Revolving Loans................................................................................20
2.2 Letter of Credit Accommodations................................................................21
2.3 Term Loan......................................................................................24
2.4 Joint and Several Liability....................................................................25
SECTION 3. INTEREST AND FEES..............................................................................26
3.1 Interest.......................................................................................26
3.2 Closing Fee....................................................................................28
3.3 Servicing Fee..................................................................................28
3.4 Unused Line Fee................................................................................28
3.5 Changes in Laws and Increased Costs of Loans...................................................28
SECTION 4. CONDITIONS PRECEDENT...........................................................................30
4.1 Conditions Precedent to Initial Loans and Letter of Credit Accommodations......................30
4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations..........................33
SECTION 5. GRANT OF SECURITY INTEREST.....................................................................34
SECTION 6. COLLECTION AND ADMINISTRATION..................................................................35
6.1 Borrowers' Loan Account........................................................................35
6.2 Statements.....................................................................................35
6.3 Collection of Accounts.........................................................................36
6.4 Payments.......................................................................................38
6.5 Authorization to Make Loans....................................................................38
6.6 Use of Proceeds................................................................................39
6.7 Appointment of Agent for Requesting Loans and Receipts of Loans and
Statements.....................................................................................39
SECTION 7. COLLATERAL REPORTING AND COVENANTS.............................................................40
7.1 Collateral Reporting...........................................................................40
7.2 Accounts Covenants.............................................................................41
7.3 Inventory Covenants............................................................................42
7.4 Equipment and Real Property Covenants..........................................................43
7.5 Power of Attorney..............................................................................44
7.6 Right to Cure..................................................................................45
7.7 Access to Premises.............................................................................45
(i)
<PAGE>
7.8 Bills of Lading and Other Documents of Title..................................................45
SECTION 8. REPRESENTATIONS AND WARRANTIES.................................................................46
8.1 Corporate Existence, Power and Authority; Subsidiaries.........................................46
8.2 Financial Statements; No Material Adverse Change...............................................46
8.3 Chief Executive Office; Collateral Locations...................................................47
8.4 Priority of Liens; Title to Properties.........................................................47
8.5 Tax Returns....................................................................................47
8.6 Litigation.....................................................................................48
8.7 Compliance with Other Agreements and Applicable Laws...........................................48
8.8 Environmental Compliance.......................................................................49
8.9 Employee Benefits..............................................................................49
8.10 Bank Accounts..................................................................................50
8.11 Intellectual Property..........................................................................50
8.12 Acquisition of Assets..........................................................................51
8.13 Capitalization.................................................................................51
8.14 Labor Disputes.................................................................................52
8.15 Corporate Name; Prior Transactions.............................................................52
8.16 Restrictions on Subsidiaries...................................................................52
8.17 Material Contracts.............................................................................52
8.18 Accuracy and Completeness of Information.......................................................53
8.19 Survival of Warranties; Cumulative.............................................................53
8.20 Credit Card Agreements.........................................................................53
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS.............................................................54
9.1 Maintenance of Existence.......................................................................54
9.2 New Collateral Locations.......................................................................54
9.3 Compliance with Laws, Regulations, Etc.........................................................54
9.4 Payment of Taxes and Claims....................................................................55
9.5 Insurance......................................................................................56
9.6 Financial Statements and Other Information.....................................................56
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc........................................58
9.8 Encumbrances...................................................................................59
9.9 Indebtedness...................................................................................61
9.10 Loans, Investments, Guarantees, Etc............................................................62
9.11 Dividends and Redemptions......................................................................64
9.12 Transactions with Affiliates...................................................................64
9.13 Additional Bank Accounts.......................................................................65
9.14 Compliance with ERISA. .......................................................................65
9.15 End of Fiscal Years: Fiscal Quarters...........................................................66
9.16 Change in Business.............................................................................66
9.17 Limitation of Restrictions Affecting Subsidiaries..............................................66
(ii)
<PAGE>
9.18 After Acquired Real Property...................................................................66
9.19 Costs and Expenses.............................................................................67
9.20 Further Assurances.............................................................................67
9.21 Credit Card Agreements.........................................................................68
9.22 Year 2000 Compliance...........................................................................68
SECTION 10. EVENTS OF DEFAULT AND REMEDIES.................................................................69
10.1 Events of Default..............................................................................69
10.2 Remedies.......................................................................................71
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW ........................................... .................73
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver..........................73
11.2 Waiver of Notices..............................................................................74
11.3 Amendments and Waivers.........................................................................74
11.4 Waiver of Counterclaims........................................................................74
11.5 Indemnification................................................................................74
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS...............................................................75
12.1 Term...........................................................................................75
12.2 Interpretative Provisions......................................................................76
12.3 Notices........................................................................................78
12.4 Partial Invalidity.............................................................................78
12.5 Successors.....................................................................................78
12.6 Entire Agreement...............................................................................78
</TABLE>
(iii)
<PAGE>
INDEX TO
EXHIBITS AND SCHEDULES
----------------------
Exhibit A Information Certificate
Schedule 1.20 Customs Brokers
Schedule 1.36 Excluded Property
Schedule 1.37 Existing Letters of Credit
Schedule 1.65 Permitted Holders
Schedule 1.83 Warehouse Equipment
Schedule 8.2 Pro Forma Balance Sheet and Cash Flow Projections
Schedule 8.4 Existing Liens
Schedule 8.7 Permits
Schedule 8.8 Environmental Matters
Schedule 8.10 Bank Accounts
Schedule 8.11 Licensed Intellectual Property
Schedule 8.14 Labor Matters
Schedule 8.17 Material Contracts
Schedule 8.20 Credit Card Agreements
Schedule 9.9 Existing Indebtedness
Schedule 9.10 Existing Loans, Advances and Guarantees
(i)
<PAGE>
LOAN AND SECURITY AGREEMENT
---------------------------
This Loan and Security Agreement dated May 16, 2000 is entered into by and
between Congress Financial Corporation (Southern), a Georgia corporation
("Lender") and DH Apparel Company, Inc., a Georgia corporation ("Duck Head") and
Delta Merchandising, Inc., a South Carolina corporation ("Merchandising" and
together with Duck Head, each individually, a "Borrower" and collectively,
"Borrowers").
W I T N E S S E T H:
--------------------
WHEREAS, Borrowers have requested that Lender enter into certain financing
arrangements with Borrowers pursuant to which Lender may make loans and provide
other financial accommodations to Borrowers; and
WHEREAS, Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS
-----------
For purposes of this Agreement, the following terms shall have the
respective meanings given to them below:
1.1 "Accounts" shall mean all present and future rights of Borrowers to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance, and including, without limitation, Credit Card Receivables.
1.2 "Adjusted Eurodollar Rate" shall mean, with respect to each Interest
Period for any Eurodollar Rate Loan, the rate per annum (rounded upwards, if
necessary, to the next one- sixteenth (1/16) of one (1%) percent) determined by
dividing (a) the Eurodollar Rate for such Interest Period by (b) a percentage
equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes hereof,
"Reserve Percentage" shall mean the reserve percentage, expressed as a decimal,
prescribed by any United States or foreign banking authority for determining the
reserve requirement which is or would be applicable to deposits of United States
dollars in a non-United States or an international banking office of Reference
Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate Loan made with
the proceeds of such deposit, whether or not the
1
<PAGE>
Reference Bank actually holds or has made any such deposits or loans. The
Adjusted Eurodollar Rate shall be adjusted on and as of the effective day of any
change in the Reserve Percentage.
1.3 "Affiliate" shall mean, with respect to a specified Person, any other
Person (a) which directly or indirectly through one or more intermediaries
controls, or is controlled by, or is under common control with, such specified
person; (b) which beneficially owns or holds five (5%) percent or more of any
class of the Voting Stock or other equity interest of such specified person; or
(c) of which five (5%) percent or more of the Voting Stock or other equity
interest is beneficially owned or held by such specified person or a Subsidiary
of such specified person. For purposes of this definition, "control" (including,
with correlative meanings, the terms "controlling", "controlled by" and "under
common control with") when used with respect to any specified person shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through the
ownership of Voting Stock, by agreement or otherwise.
1.4 "Blocked Accounts" shall have the meaning set forth in Section 6.3
hereof.
1.5 "Borrowing Base" shall mean, at any time, as to Borrowers, the amount
equal to: (a) eighty-five (85%) percent of the Net Amount of Eligible Accounts
of Borrowers, plus (b) the lesser of: (i) sixty (60%) percent of the Value of
Eligible Inventory of Borrowers consisting of finished goods and raw materials
consisting of uncut finished fabric, or (ii) $12,000,000, less (c) any Reserves.
For purposes only of applying the sublimit on Revolving Loans based on Eligible
Inventory set forth in clause (b)(ii) above, Lender may treat the then undrawn
amounts of outstanding Letter of Credit Accommodations for the purpose of
purchasing Eligible Inventory as Revolving Loans to the extent Lender is in
effect basing the issuance of the Letter of Credit Accommodations on the Value
of the Eligible Inventory being purchased with such Letter of Credit
Accommodations. In determining the actual amounts of such Letter of Credit
Accommodations to be so treated for purposes of the sublimit, the outstanding
Revolving Loans and Reserves shall be attributed first to any components of the
lending formulas set forth above that are not subject to such sublimit, before
being attributed to the components of the lending formulas subject to such
sublimit.
1.6 "Business Day" shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks are authorized or required to close under
the laws of the State of New York, State of Georgia or the State of North
Carolina, and a day on which the Reference Bank and Lender are open for the
transaction of business, except that if a determination of a Business Day shall
relate to any Eurodollar Rate Loans, the term Business Day shall also exclude
any day on which banks are closed for dealings in dollar deposits in the London
interbank market or other applicable Eurodollar Rate market.
1.7 "Capital Leases" shall mean, as applied to any Person, any lease of (or
any agreement conveying the right to use) any property (whether real, personal
or mixed) by such Person as lessee which in accordance with GAAP, is required to
be reflected as a liability on the balance sheet of such Person.
2
<PAGE>
1.8 "Capital Stock" shall mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's capital stock, partnership interests or limited liability company
interests at any time outstanding, and any and all rights, warrants or options
exchangeable for or convertible into such capital stock or other interests (but
excluding any debt security that is exchangeable for or convertible into such
capital stock).
1.9 "Cash Equivalents" shall mean, at any time, (a) any evidence of
Indebtedness with a maturity date of one hundred eighty (180) days or less
issued or directly and fully guaranteed or insured by the United States of
America of any agency or instrumentality thereof; provided, that, the full faith
and credit of the United States of America is pledged in support thereof; (b)
certificates of deposit or bankers' acceptances with a maturity of one hundred
eighty (180) days or less of any financial institution that is a member of the
Federal Reserve System having combined capital and surplus and undivided profits
of not less than $250,000,000; (c) commercial paper (including variable rate
demand notes) with a maturity of one hundred eighty (180) days or less issued by
a corporation (except an Affiliate of any Borrower) organized under the laws of
any State of the United States of America or the District of Columbia and rated
at least A-1 by Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc. or at least P-1 by Moody's Investors Service, Inc.; (d)
repurchase obligations with a term of not more than thirty (30) days for
underlying securities of the types described in clause (a) above entered into
with any financial institution having combined capital and surplus and undivided
profits of not less than $250,000,000; (e) repurchase agreements and reverse
repurchase agreements relating to marketable direct obligations issued or
unconditionally guaranteed by the United States of America or issued by any
governmental agency thereof and backed by the full faith and credit to the
United States of America, in each case maturing within one hundred eighty (180)
days or less from the date of acquisition; provided, that, the terms of such
agreements comply with the guidelines set forth in the Federal Financial
Agreements of Depository Institutions with Securities Dealers and Others, as
adopted by the Comptroller of the Currency on October 31, 1985; and (f)
investments in money market funds and mutual funds which invest substantially
all of their assets in securities of the types described in clauses (a) through
(e) above.
1.10 "Change of Control" shall mean (a) the transfer (in one transaction or
a series of transactions) of all or substantially all of the assets of any
Borrower to any Person or group (as such term is used in Section 13(d)(3) of the
Exchange Act); (b) the liquidation or dissolution of any Borrower or the
adoption of a plan by the stockholders of any Borrower relating to the
dissolution or liquidation of Borrower; (c) the acquisition by any Person or
group (as such term is used in Section 13(d)(3) of the Exchange Act), except for
one or more Permitted Holders, of beneficial ownership, directly or indirectly,
of fifty (50%) percent or more of the voting power of the total outstanding
Voting Stock of Borrower or the Board of Directors of Borrower; (d) during any
period of two (2) consecutive years, individuals who at the beginning of such
period constituted the Board of Directors of Borrower (together with any new
directors who have been appointed by any Permitted Holder, or whose nomination
for election by the stockholders of Borrower, as the case may be, was approved
by a vote of at least sixty-six and two-thirds (66 2/3%) percent of the
directors then still in office who were either directors at the beginning of
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such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of Borrower then still in office; or (e) the failure of Duck Head to
own one hundred (100%) percent of the voting power of the total outstanding
Voting Stock of Merchandising.
1.11 "Code" shall mean the Internal Revenue Code of 1986, together with all
rules, regulations and interpretations thereunder or related thereto.
1.12 "Collateral" shall have the meaning set forth in Section 5 hereof.
1.13 "Collateral Access Agreement" shall mean an agreement in writing, in
form and substance satisfactory to Lender, from any lessor of premises to any
Borrower, or any other person to whom any Collateral (including Inventory,
Equipment, bills of lading or other documents of title) is consigned or who has
custody, control or possession of any such Collateral or is otherwise the owner
or operator of any premises on which any of such Collateral is located, pursuant
to which such lessor, consignee or other person, inter alia, acknowledges the
first priority security interest of Lender in such Collateral, agrees to waive
any and all claims such lessor, consignee or other person may, at any time, have
against such Collateral, whether for processing, storage or otherwise, and
agrees to permit Lender access to, and the right to remain on, the premises of
such lessor, consignee or other person so as to exercise Lender's rights and
remedies and otherwise deal with such Collateral and in the case of any person
who at any time has custody, control or possession of any bills of lading or
other documents of title, agrees to hold such bills of lading or other documents
as bailee for Lender and to follow all instructions of Lender with respect
thereto.
1.14 "Cost" shall mean, as to Inventory as of any date, the cost of such
Inventory on such date, determined on a first-in-first-out basis principally on
the weighted average cost basis in accordance with GAAP.
1.15 "Credit Card Acknowledgments" shall mean, individually and
collectively, the agreements by Credit Card Issuers or Credit Card Processors
who are parties to Credit Card Agreements in favor of Lender acknowledging
Lender's first priority security interest in the monies due and to become due to
any Borrower (including, without limitation, credits and reserves) under the
Credit Card Agreements, and agreeing to transfer all such amounts to the Blocked
Accounts, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.16 "Credit Card Agreements" shall mean all agreements now or hereafter
entered into by any Borrower with any Credit Card Issuer or any Credit Card
Processor, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced, including, but not
limited to, the agreements set forth on Schedule 8.20 hereto.
1.17 "Credit Card Issuer" shall mean any person (other than any Borrower)
who issues or whose members issue credit cards, including, without limitation,
MasterCard or VISA bank credit or debit cards or other bank credit or debit
cards issued through MasterCard International,
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Inc., Visa, U.S.A., Inc. or Visa International and American Express, Discover,
Diners Club, Carte Blanche and other non-bank credit or debit cards, including,
without limitation, credit or debit cards issued by or through American Express
Travel Related Services Company, Inc. and Novus Services, Inc.
1.18 "Credit Card Processor" shall mean any servicing or processing agent
or any factor or financial intermediary who facilitates, services, processes or
manages the credit authorization, billing transfer and/or payment procedures
with respect to any of any Borrower's sales transactions involving credit card
or debit card purchases by customers using credit cards or debit cards issued by
any Credit Card Issuer.
1.19 "Credit Card Receivables" shall mean collectively, (a) all present and
future rights of any Borrower to payment from any Credit Card Issuer, Credit
Card Processor or other third party arising from sales of goods or rendition of
services to customers who have purchased such goods or services using a credit
or debit card and (b) all present and future rights of any Borrower to payment
from any Credit Card Issuer, Credit Card Processor or other third party in
connection with the sale or transfer of Accounts arising pursuant to the sale of
goods or rendition of services to customers who have purchased such goods or
services using a credit card or a debit card, including, but not limited to, all
amounts at any time due or to become due from any Credit Card Issuer or Credit
Card Processor under the Credit Card Agreements or otherwise.
1.20 "Customs Brokers" shall mean the persons listed on Schedule 1.20
hereto or such other person as may be selected by Borrowers after the date
hereof and after written notice by Borrower to Lender who is reasonably
acceptable to Lender, provided, that, as to each such person (including those
listed on such Schedule), Borrowers have used their reasonable efforts to obtain
a Collateral Access Agreement duly authorized, executed and delivered by such
person, such agreement is in full force and effect and such person has complied
with the terms thereof.
1.21 "Distribution Agreements" shall mean, individually and collectively,
the Distribution Agreement, dated as of March 15, 2000 by and among Woodside, DH
Apparel Company, Inc. and Delta Apparel, Inc. (the "DWI Distribution
Agreement"), bills of sale, quitclaim deeds, assignment and assumption
agreements and such other instruments of transfer as are referred to therein and
all side letters with respect thereto, and all agreements, documents and
instruments executed and/or delivered in connection therewith, as all of the
foregoing now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced; provided, that, the term "Distribution
Agreements" as used herein shall not include any of the "Financing Agreements"
as such term is defined herein.
1.22 "Distribution and Office Facility" shall mean the Real Property and
related assets of Duck Head located in Winder, Georgia, as more particularly
described in the Mortgage covering such Real Property and related assets.
1.23 "EBITDA" shall mean, as to any Person, with respect to any period, an
amount equal to: (a) the Net Income of such Person and its Subsidiaries for such
period on a consolidated basis determined in accordance with GAAP, plus
depreciation, amortization and other non-cash
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charges (including, but not limited to, imputed interest and deferred
compensation) for such period (to the extent deducted in the computation of Net
Income), all in accordance with GAAP, plus the Interest Expense for such period
(to the extent deducted in the computation of Net Income), plus charges for
Federal, Provincial, State, district, municipal, local and foreign income taxes.
1.24 "Eligible Accounts" shall mean Accounts created by Borrowers which are
and continue to be acceptable to Lender based on the criteria set forth below.
In general, Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and bona fide sale and delivery of
goods by any Borrower or rendition of services by any Borrower in the ordinary
course of its business which transactions are completed in accordance with the
terms and provisions contained in any documents related thereto;
(b) such Accounts are not unpaid more than ninety (90) days after the date
of the original invoice for them;
(c) such Accounts comply with the terms and conditions contained in Section
7.2(c) of this Agreement;
(d) such Accounts do not arise from sales on consignment, guaranteed sale,
sale and return, sale on approval, or other terms under which payment by the
account debtor may be conditional or contingent;
(e) the chief executive office of the account debtor with respect to such
Accounts is located in the United States of America or Canada (provided, that,
at any time promptly upon Lender's request, Borrowers shall execute and deliver,
or cause to be executed and delivered, such other agreements, documents and
instruments as may be required by Lender to perfect the security interests of
Lender in those Accounts of an account debtor with its chief executive office or
principal place of business in Canada in accordance with the applicable laws of
the Province of Canada in which such chief executive office or principal place
of business is located and take or cause to be taken such other and further
actions as Lender may request to enable Lender as secured party with respect
thereto to collect such Accounts under the applicable Federal or Provincial laws
of Canada) or, at Lender's option, if the chief executive office and principal
place of business of the account debtor with respect to such Accounts is located
other than in the United States of America or Canada, then if either: (i) the
account debtor has delivered to the applicable Borrower an irrevocable letter of
credit issued or confirmed by a bank satisfactory to Lender and payable only in
the United States of America and in U.S. dollars, sufficient to cover such
Account, in form and substance satisfactory to Lender and if required by Lender,
the original of such letter of credit has been delivered to Lender or Lender's
agent and the issuer thereof notified of the assignment of the proceeds of such
letter of credit to Lender, or (ii) such Account is subject to credit insurance
payable to Lender issued by an insurer and on terms and in an amount acceptable
to Lender, or (iii) such Account is otherwise acceptable in all respects to
Lender (subject to such lending formula with respect thereto as Lender may
determine);
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(f) such Accounts do not consist of progress billings (such that the
obligation of the account debtors with respect to such Accounts is conditioned
upon any Borrower's satisfactory completion of any further performance under the
agreement giving rise thereto), bill and hold invoices or retainage invoices,
except as to bill and hold invoices, if Lender shall have received an agreement
in writing from the account debtor, in form and substance satisfactory to
Lender, confirming the unconditional obligation of the account debtor to take
the goods related thereto and pay such invoice;
(g) the account debtor with respect to such Accounts has not asserted a
counterclaim, defense or dispute and does not have, and does not engage in
transactions which may give rise to any right of setoff or recoupment against
such Accounts (but the portion of the Accounts of such account debtor in excess
of the amount at any time and from time to time owed by any Borrower to such
account debtor or claimed owed by such account debtor may be deemed Eligible
Accounts);
(h) there are no facts, events or occurrences which would impair the
validity, enforceability or collectability of such Accounts or reduce the amount
payable or delay payment thereunder;
(i) such Accounts are subject to the first priority, valid and perfected
security interest of Lender and any goods giving rise thereto are not, and were
not at the time of the sale thereof, subject to any liens except those permitted
in this Agreement;
(j) neither the account debtor nor any officer or employee of the account
debtor with respect to such Accounts is an officer, employee, agent or other
Affiliate of any Borrower;
(k) the account debtors with respect to such Accounts are not any foreign
government, the United States of America, any State, political subdivision,
department, agency or instrumentality thereof, unless, if the account debtor is
the United States of America, any State, political subdivision, department,
agency or instrumentality thereof, upon Lender's request, the Federal Assignment
of Claims Act of 1940, as amended or any similar State or local law, if
applicable, has been complied with in a manner satisfactory to Lender;
(l) there are no proceedings or actions which are threatened or pending
against the account debtors with respect to such Accounts which might result in
any material adverse change in any such account debtor's financial condition;
(m) such Accounts of a single account debtor or its affiliates do not
constitute more than fifteen (15%) percent (the "Percentage Limitation") of all
otherwise Eligible Accounts (but the portion of the Accounts not in excess of
such Percentage Limitation may be deemed Eligible Accounts), provided, that, the
Percentage Limitation in respect of (i) J.C. Penny, Inc. shall be fifty (50%)
percent, (ii) Saks, Inc., shall be twenty (20%) percent and (iii) Goodys, Inc.
shall be twenty (20%) percent subject to increase or decrease as Lender may
determine from time to time in its sole discretion;
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(n) such Accounts are not owed by an account debtor who has Accounts unpaid
more ninety (90) days after the original invoice date for them which constitute
more than fifty (50%) percent of the total Accounts of such account debtor;
(o) the account debtor is not located in a state requiring the filing of a
Notice of Business Activities Report or similar report in order to permit any
Borrower to seek judicial enforcement in such State of payment of such Account,
unless such Borrower has qualified to do business in such state or has filed a
Notice of Business Activities Report or equivalent report for the then current
year or such failure to file and inability to seek judicial enforcement is
capable of being remedied without any material delay or material cost;
(p) such Accounts do not constitute Credit Card Receivables;
(q) such Accounts are owed by account debtors whose total indebtedness to
such Borrower does not exceed the credit limit with respect to such account
debtors as determined by Borrowers substantially consistent with its current
practices as of the date hereof by more than twenty (20%) percent and as is
reasonably acceptable to Lender (but the portion of the Accounts not in excess
of such credit limit may be deemed Eligible Accounts); and
(r) such Accounts are owed by account debtors deemed creditworthy at all
times by Borrowers consistent with its current practice and who are reasonably
acceptable to Lender.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith based on an event, condition or other
circumstance arising after the date hereof, or existing on the date hereof to
the extent Lender has no written notice thereof from Borrowers, which adversely
affects or could reasonably be expected to adversely affect the Accounts in the
good faith determination of Lender. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.25 "Eligible Inventory" shall mean Inventory consisting of finished goods
held for resale in the ordinary course of the business of Borrowers and raw
materials of Duck Head consisting of uncut finished fabric, which are acceptable
to Lender based on the criteria set forth below. In general, Eligible Inventory
shall not include (a) work-in-process; (b) raw materials other than raw
materials consisting of uncut finished fabric; (c) spare parts for equipment;
(d) packaging and shipping materials; (e) supplies used or consumed in each
Borrower's business; (f) Inventory at premises other than those owned and
controlled by a Borrower, except any Inventory which would otherwise be deemed
Eligible Inventory at locations in the United States of America which are not
owned and operated by a Borrower may nevertheless be considered Eligible
Inventory: (i) as to locations which are leased by Borrower if Lender shall have
received a Collateral Access Agreement from the owner and lessor of such
location, duly authorized, executed and delivered by such owner and lessor,
except that notwithstanding that Lender shall not have received such an
agreement for a particular leased location, Lender may consider Inventory at
such leased location which would otherwise be Eligible Inventory to be Eligible
Inventory and in such event, Lender may at any time establish such Reserves as
Lender may determine in respect of amounts at any time payable by Borrower to
the owner or lessor of such
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location, without limiting any other rights and remedies of Lender under this
Agreement or under the other Financing Agreements with respect to the
establishment of Reserves or otherwise and (ii) as to premises of third parties
(including consignees and processors), Lender shall have received a Collateral
Access Agreement duly authorized, executed and delivered by the owner and
operator of such premises (except that notwithstanding that Lender shall not
have received such an agreement as to a particular third party location, Lender
may consider Inventory at such location which would otherwise be Eligible
Inventory to be Eligible Inventory and in such event, Lender may at any time
establish such Reserves as Lender may determine in respect of amounts at any
time payable by Borrower to such third party, without limiting any other rights
or remedies of Lender under this Agreement or under the other Financing
Agreements with respect to the establishment of Reserves or otherwise), and in
addition, if required by Lender, as to premises of third parties where assets of
Borrower are located: (A) the owner and operator executes appropriate UCC-1
financing statements in favor of Borrower, which are duly assigned to Lender and
(B) any secured lender to the owner and operator is properly notified of the
first priority lien on such Inventory of Lender; (g) Inventory located outside
the United States of America shall only be Eligible Inventory if (i) it is in
transit to either the premises of a Customs Broker in the United States or
premises of Borrower in the United States and as to premises of a Customs Broker
or premises which are not owned and controlled by Borrower only if Lender has
received a Collateral Access Agreement duly authorized, executed and delivered
by such Customs Broker or the owner, lessor and operator of such other premises,
as the case may be, (ii) Lender has a first priority perfected security interest
in and control and possession of all originals of documents of title with
respect to such Inventory, (iii) Lender has received a Collateral Access
Agreement from the Customs Broker dealing with such Inventory, duly authorized,
executed and delivered by such person, and such agreement is in full force and
effect, binding upon such person and such person has complied with the terms
thereof, (iv) Lender has received (A) a copy of the certificate of marine cargo
insurance in connection therewith in which it has been named as an additional
insured and loss payee in a manner acceptable to Lender and (B) a copy of the
invoice and manifest with respect thereto, and (v) such Inventory is not subject
to any Letter of Credit Accommodation; (h) Inventory subject to a security
interest or lien in favor of any person other than Lender except those permitted
in this Agreement; (i) bill and hold goods; (j) Inventory which is not subject
to the first priority, valid and perfected security interest of Lender; (k)
damaged and/or defective Inventory which is unsaleable or which any Borrower has
not marked down to its realizable value; (l) samples; (m) Inventory to be
returned to vendors; and (n) Inventory purchased or sold on consignment. General
criteria for Eligible Inventory may be established and revised from time to time
by Lender in good faith based on an event, condition or other circumstance
arising after the date hereof, or existing on the date hereof to the extent
Lender has no written notice thereof from Borrowers, which adversely affects or
could reasonably be expected to adversely affect the Inventory in the good faith
determination of Lender. Any Inventory which is not Eligible Inventory shall
nevertheless be part of the Collateral.
1.26 "Environmental Laws" shall mean all foreign, Federal, State and local
laws (including common law), legislation, rules, codes, licenses, permits
(including any conditions imposed therein), authorizations, judicial or
administrative decisions, injunctions or agreements between any Borrower and any
Governmental Authority, (a) relating to pollution and the
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protection, preservation or restoration of the environment (including air, water
vapor, surface water, ground water, drinking water, drinking water supply,
surface land, subsurface land, plant and animal life or any other natural
resource), or to human health or safety, (b) relating to the exposure to, or the
use, storage, recycling, treatment, generation, manufacture, processing,
distribution, transportation, handling, labeling, production, release or
disposal, or threatened release, of Hazardous Materials, or (c) relating to all
laws with regard to recordkeeping, notification, disclosure and reporting
requirements respecting Hazardous Materials. The term "Environmental Laws"
includes (i) the Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Federal Superfund Amendments and Reauthorization Act,
the Federal Water Pollution Control Act of 1972, the Federal Clean Water Act,
the Federal Clean Air Act, the Federal Resource Conservation and Recovery Act of
1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal
Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal
Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water
Act of 1974, (ii) applicable state counterparts to such laws, and (iii) any
common law or equitable doctrine that may impose liability or obligations for
injuries or damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Materials.
1.27 "Equipment" shall mean all of each Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.28 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, together with all rules, regulations and interpretations
thereunder or related thereto.
1.29 "ERISA Affiliate" shall mean any person required to be aggregated with
Borrowers or any of their respective Subsidiaries under Sections 414(b), 414(c),
414(m) or 414(o) of the Code.
1.30 "ERISA Event" shall mean (a) any "reportable event", as defined in
Section 4043 of ERISA or the regulations issued thereunder, with respect to a
Plan; (b) the adoption of any amendment to a Plan that would require the
provision of security pursuant to Section 401(a)(29) of the Code or Section 307
of ERISA; (c) the existence with respect to any Plan of an "accumulated funding
deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA),
whether or not waived; (d) the filing pursuant to Section 412 of the Code or
Section 303(d) of ERISA of an application for a waiver of the minimum funding
standard with respect to any Plan; (e) the occurrence of a "prohibited
transaction" with respect to which any Borrower or any of its Subsidiaries is a
"disqualified person" (within the meaning of Section 4975 of the Code) or with
respect to which any Borrower or any of its Subsidiaries could otherwise be
liable; (f) a complete or partial withdrawal by any Borrower or any ERISA
Affiliate from a Multiemployer Plan or a cessation of operations which is
treated as such a withdrawal or notification that a Multiemployer Plan is in
reorganization; (g) the filing of a notice of intent to terminate, the treatment
of a Plan amendment as a termination under Section 4041 or 4041A of
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ERISA, or the commencement of proceedings by the Pension Benefit Guaranty
Corporation to terminate a Plan or Multiemployer Plan; (h) an event or condition
which might reasonably be expected to constitute grounds under Section 4042 of
ERISA for the termination of, or the appointment of a trustee to administer, any
Plan or Multiemployer Plan; (i) the imposition of any liability under Title IV
of ERISA, other than the Pension Benefit Guaranty Corporation premiums due but
not delinquent under Section 4007 of ERISA, upon Borrower or any ERISA
Affiliate; and (j) any other event or condition with respect to a Plan or
Multiemployer Plan or any Plan subject to Title IV of ERISA maintained, or
contributed to, by any ERISA Affiliate that could reasonably be expected to
result in liability of any Borrower.
1.31 "Eurodollar Rate" shall mean with respect to the Interest Period for a
Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic
average of the rates of interest per annum (rounded upwards, if necessary, to
the next one-sixteenth (1/16) of one (1%) percent) at which Reference Bank is
offered deposits of United States dollars in the London interbank market (or
other Eurodollar Rate market selected by Borrower and approved by Lender) on or
about 9:00 a.m. (New York time) two (2) Business Days prior to the commencement
of such Interest Period in amounts substantially equal to the principal amount
of the Eurodollar Rate Loans requested by and available to Borrower in
accordance with this Agreement, with a maturity of comparable duration to the
Interest Period selected by Borrower.
1.32 "Eurodollar Rate Loans" shall mean any Loans or portion thereof on
which interest is payable based on the Adjusted Eurodollar Rate in accordance
with the terms hereof.
1.33 "Event of Default" shall mean the occurrence or existence of any event
or condition described in Section 10.1 hereof.
1.34 "Excess Availability" shall mean the amount, as determined by Lender,
calculated at any time, equal to: (a) the lesser of: (i) the Borrowing Base and
(ii) the Revolving Loan Limit, minus (b) the sum of: (i) the amount of all then
outstanding and unpaid Obligations (but not including for this purpose the then
outstanding principal amount of the Term Loan), plus (ii) the aggregate amount
of all then outstanding and unpaid trade payables and other obligations of
Borrowers which are more than sixty (60) days past due as of such time, plus
(iii) the amount of checks issued by Borrowers to pay trade payables and other
obligations which are more than sixty (60) days past due as of such time, but
not yet sent.
1.35 "Exchange Act" shall mean the Securities Exchange Act of 1934,
together with all rules, regulations and interpretations thereunder or related
thereto.
1.36 "Excluded Property" shall mean the (a) embroidery equipment listed on
Schedule 1.36 annexed hereto and made a part hereof, and (b) assets of Borrowers
and their Subsidiaries located in Costa Rica on the date hereof. The foregoing
shall not be construed as a waiver of any claims or rights of Lender with
respect to any of the assets described in this definition or to limit or affect
the rights of Lender to at any time take such action as Lender may require, or
to require Borrowers to take such action, so as to preserve, protect or
establish the security interest, lien,
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claim or other interest of Lender in such assets (whether pursuant to this
Section, Section 9.20 hereof or otherwise) in accordance with the terms of this
Agreement.
1.37 "Existing Letters of Credit" shall mean the letters of credit issued
for the account of Borrowers by Carolina First Bank listed on Schedule 1.37
hereto.
1.38 "Financing Agreements" shall mean, collectively, this Agreement and
all notes, guarantees, security agreements and other agreements, documents and
instruments now or at any time hereafter executed and/or delivered by Borrowers
or any Obligor in connection with this Agreement.
1.39 "GECC" shall mean General Electric Capital Corporation.
1.40 "GECC Warehouse Equipment Lease" shall mean the Master Lease Agreement
dated June 21, 1996 (the "Warehouse Equipment Lease") as amended on May __, 2000
by and between Borrower, as lessee and GECC, as lessor, as the same now exists
or may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced in accordance with the terms of this Agreement.
1.41 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Section 9.11 hereof, GAAP shall be determined on the basis of
such principles in effect on the date hereof and consistent with those used in
the preparation of the most recent audited financial statements delivered to
Lender prior to the date hereof.
1.42 "Governmental Authority" shall mean any nation or government, any
state, province, or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled, through stock or capital ownership or otherwise, by any of the
foregoing.
1.43 "Hazardous Materials" shall mean any hazardous, toxic or dangerous
substances, materials and wastes, including hydrocarbons (including naturally
occurring or man-made petroleum and hydrocarbons), flammable explosives,
asbestos, urea formaldehyde insulation, radioactive materials, biological
substances, polychlorinated biphenyls, pesticides, herbicides and any other kind
and/or type of pollutants or contaminants (including materials which include
hazardous constituents), sewage, sludge, industrial slag, solvents and/or any
other similar substances, materials, or wastes and including any other
substances, materials or wastes that are or become regulated under any
Environmental Law (including any that are or become classified as hazardous or
toxic under any Environmental Law).
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1.44 "Indebtedness" shall mean, with respect to any Person, any liability,
whether or not contingent, (a) in respect of borrowed money (whether or not the
recourse of the lender is to the whole of the assets of such Person or only to a
portion thereof) or evidenced by bonds, notes, debentures or similar
instruments; (b) representing the balance deferred and unpaid of the purchase
price of any property or services (except any such balance that constitutes an
account payable to a trade creditor (whether or not an Affiliate) created,
incurred, assumed or guaranteed by such Person in the ordinary course of
business of such Person in connection with obtaining goods, materials or
services that is not overdue by more than ninety (90) days, unless the trade
payable is being contested in good faith); (c) all obligations as lessee under
leases which have been, or should be, in accordance with GAAP recorded as
Capital Leases; (d) any contractual obligation, contingent or otherwise, of such
Person to pay or be liable for the payment of any indebtedness described in this
definition of another Person, including, without limitation, any such
indebtedness, directly or indirectly guaranteed, or any agreement to purchase,
repurchase, or otherwise acquire such indebtedness, obligation or liability or
any security therefor, or to provide funds for the payment or discharge thereof,
or to maintain solvency, assets, level of income, or other financial condition;
(e) all obligations with respect to redeemable stock and redemption or
repurchase obligations under any Capital Stock or other equity securities issued
by such Person; (f) all reimbursement obligations and other liabilities of such
Person with respect to surety bonds (whether bid, performance or otherwise),
letters of credit, banker's acceptances or similar documents or instruments
issued for such Person's account; and (g) all indebtedness of such Person in
respect of indebtedness of another Person for borrowed money or indebtedness of
another Person otherwise described in this definition which is secured by any
consensual lien, security interest, collateral assignment, conditional sale,
mortgage, deed of trust, or other encumbrance on any asset of such Person,
whether or not such obligations, liabilities or indebtedness are assumed by or
are a personal liability of such Person, all as of such time.
1.45 "Information Certificate" shall mean the Information Certificate of
each Borrower constituting Exhibit A hereto containing material information with
respect to such Borrower, its business and assets provided by or on behalf of
such Borrower to Lender in connection with the preparation of this Agreement and
the other Financing Agreements and the financing arrangements provided for
herein.
1.46 "Intellectual Property" shall mean each Borrower's now owned and
hereafter arising or acquired: patents, patent rights, patent applications,
copyrights, works which are the subject matter of copyrights, copyright
registrations, trademarks, trade names, trade styles, trademark and service mark
applications, and licenses and rights to use any of the foregoing; all
extensions, renewals, reissues, divisions, continuations, and
continuations-in-part of any of the foregoing; all rights to sue for past,
present and future infringement of any of the foregoing; inventions, trade
secrets, formulae, processes, compounds, drawings, designs, blueprints, surveys,
reports, manuals, and operating standards; goodwill; customer and other lists in
whatever form maintained; and trade secret rights, copyright rights, rights in
works of authorship, and contract rights relating to computer software programs,
in whatever form created or maintained.
1.47 "Interest Expense" shall mean, for any period, as to any Person, all
of the following as determined in accordance with GAAP: (a) total interest
expense, whether paid or accrued
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during such period (including the interest component of Capital Leases for such
period), including, without limitation, all bank fees, commissions, discounts
and other fees and charges owed with respect to letters of credit (but excluding
amortization of discount and amortization of deferred financing fees paid in
cash in connection with the transactions contemplated hereby, interest paid in
property other than cash and any other interest expense not payable in cash),
minus (b) any net payments received during such period as interest income
received in respect of its investments in cash.
1.48 "Interest Period" shall mean for any Eurodollar Rate Loan, a period of
approximately one (1), two (2), or three (3) months duration as Borrowers may
elect, the exact duration to be determined in accordance with the customary
practice in the applicable Eurodollar Rate market; provided, that, Borrowers may
not elect an Interest Period which will end after the last day of the
then-current term of this Agreement.
1.49 "Interest Rate" shall mean,
(a) as to Prime Rate Loans, a rate equal to one-half of one (1/2%) percent
per annum in excess of the Prime Rate and, as to Eurodollar Rate Loans, a rate
of two and one-half (2 1/2%) percent per annum in excess of the Adjusted
Eurodollar Rate (based on the Eurodollar Rate applicable for the Interest Period
selected by Borrowers as in effect two (2) Business Days after the date of
receipt by Lender of the request of Borrowers for such Eurodollar Rate Loans in
accordance with the terms hereof, whether such rate is higher or lower than any
rate previously quoted to Borrowers);
(b) notwithstanding anything to the contrary set forth in clause (a) above,
the Interest Rate shall mean as to Prime Rate Loans, a rate equal to one-quarter
(1/4%) percent per annum in excess of the Prime Rate, as to Eurodollar Rate
Loans, a rate equal to two and one- quarter (2 1/4%) percent per annum in excess
of the Adjusted Eurodollar Rate (calculated as described in clause (a) above),
effective as of the first day of the month after each of the following
conditions is satisfied as determined by Lender in good faith: (i) the EBITDA of
Duck Head and its Subsidiaries for the immediately preceding fiscal year
(commencing with the fiscal year ending on June 30, 2000) calculated based on
the audited financial statements of Duck Head and its Subsidiaries for such
fiscal year delivered to Lender, together with the unqualified opinion of the
independent certified accountants, in accordance with Section 9.6 hereof, shall
equal or exceed $5,000,000, and (ii) no Event of Default or any act, condition
or event which, with notice or passage of time or both would constitute an Event
of Default shall exist or have occurred and be continuing; provided, that, in
the event that the Interest Rate is reduced as provided in this clause (b), if
in any subsequent fiscal year thereafter the condition set forth in clause
(b)(i) is not satisfied, effective as of the first day of the month after the
receipt by Lender of the audited financial statements of Duck Head and its
Subsidiaries for such fiscal year, the Interest Rate shall increase to those
rates set forth in clause (a) above; and
(c) notwithstanding anything to the contrary contained in clauses (a) and
(b) above, the Interest Rate shall mean the rate of two and one-half (2 1/2%)
percent per annum in excess of the Prime Rate as to Prime Rate Loans and the
rate of four and one-half (4 1/2%) percent per
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annum in excess of the Adjusted Eurodollar Rate as to Eurodollar Rate Loans, at
Lender's option, without notice, (d) either (i) for the period on and after the
date of termination or non-renewal hereof until such time as all Obligations are
indefeasibly paid and satisfied in full, or (ii) for the period from and after
the date of the occurrence of any Event of Default, and for so long as such
Event of Default is continuing as determined by Lender and (e) on the Revolving
Loans at any time outstanding in excess of the amounts available to Borrowers
under Section 2 (whether or not such excess(es) arise or are made with or
without Lender's knowledge or consent and whether made before or after an Event
of Default).
1.50 "Inventory" shall mean all of each Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.51 "Letter of Credit Accommodations" shall mean the letters of credit,
merchandise purchase or other guaranties which are from time to time either (a)
issued or opened by Lender for the account of any Borrower or any Obligor or (b)
with respect to which Lender has agreed to indemnify the issuer or guaranteed to
the issuer the performance by any Borrower of its obligations to such issuer
(including without limitation, the Existing Letters of Credit).
1.52 "Loans" shall mean the Revolving Loans and the Term Loan.
1.53 "Material Contract" shall mean (a) any contract or other agreement
(other than the Financing Agreements), written or oral, of any Borrower
involving monetary liability of or to any Person in an amount in excess of
$1,000,000 in any fiscal year and (b) any other contract or other agreement
(other than the Financing Agreements), whether written or oral, to which any
Borrower is a party as to which the breach, nonperformance, cancellation or
failure to renew by any party thereto would have a material adverse effect on
the business, assets, condition (financial or otherwise) or results of
operations or prospects of such Borrower or the validity or enforceability of
this Agreement, any of the other Financing Agreements, or any of the rights and
remedies of Lender hereunder or thereunder.
1.54 "Maximum Credit" shall mean the amount of $20,760,000 as the same may
be increased pursuant to Section 2.3(b) hereof.
1.55 "Maximum Interest Rate" shall mean the maximum non-usurious rate of
interest under applicable Federal or State law as in effect from time to time
that may be contracted for, taken, reserved, charged or received in respect of
the indebtedness of Borrowers to Lender, or to the extent that at any time such
applicable law may thereafter permit a higher maximum non- usurious rate of
interest, then such higher rate. Notwithstanding any other provision hereof, the
Maximum Interest Rate shall be calculated on a daily basis (computed on the
actual number of days elapsed over a year of three hundred sixty-five (365) or
three hundred sixty-six (366) days, as the case may be).
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1.56 "Mortgages" shall mean, the Deed to Secure Debt and Security
Agreement, dated of even date herewith, by Duck Head in favor of Lender with
respect to the Real Property and related assets of Duck Head located in Winder,
Georgia.
1.57 "Multiemployer Plan" shall mean a "multi-employer plan" as defined in
Section 4001(a)(3) of ERISA which is or was at any time during the current year
or the immediately preceding six (6) years contributed to by any Borrower or any
ERISA Affiliate.
1.58 "Net Amount of Eligible Accounts" shall mean the gross amount of
Eligible Accounts less (a) sales, excise or similar taxes included in the amount
thereof and (b) returns, discounts, claims, credits and allowances of any nature
at any time issued, owing, granted, outstanding, available or claimed with
respect thereto.
1.59 "Net Income" shall mean, with respect to any Person, for any period,
the aggregate of the net income (loss) of such Person and its Subsidiaries, on a
consolidated basis, for such period (excluding to the extent included therein
any extraordinary, one-time or non-recurring gains) after deducting all charges
which should be deducted before arriving at the net income (loss) for such
period and after deducting the Provision for Taxes for such period, all as
determined in accordance with GAAP; provided, that, (a) the net income of any
Person that is not a wholly-owned Subsidiary or that is accounted for by the
equity method of accounting shall be included only to the extent of the amount
of dividends or distributions paid or payable to such Person or a wholly-owned
Subsidiary of such Person; (b) the effect of any change in accounting principles
adopted by such Person or its Subsidiaries after the date hereof shall be
excluded; and (c) the net income (if positive) of any wholly-owned Subsidiary to
the extent that the declaration or payment of dividends or similar distributions
by such wholly-owned Subsidiary to such Person or to any other wholly-owned
subsidiary of such Person is not at the time permitted by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to such wholly-owned Subsidiary shall
be excluded. For the purpose of this definition, net income excludes any gain
(but not loss) together with any related Provision for Taxes for such gain (but
not loss) realized upon the sale or other disposition of any assets that are not
sold in the ordinary course of business (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or of any Capital
Stock of such Person or a Subsidiary of such Person and any net income realized
as a result of changes in accounting principles or the application thereof to
such Person.
1.60 "Net Recovery Percentage" shall mean the fraction, expressed as a
percentage, (a) the numerator of which is the amount equal to the orderly
liquidation value of the Inventory as set forth in the most recent acceptable
appraisal of Inventory received by Lender in accordance with Section 7.3, net of
operating expenses, liquidation expenses and commissions, and (b) the
denominator of which is the original cost of the aggregate amount of the
Inventory subject to such appraisal.
1.61 "Obligations" shall mean any and all Revolving Loans, the Term Loan,
Letter of Credit Accommodations and all other obligations, liabilities and
indebtedness of every kind, nature and description owing by any Borrower to
Lender and/or its affiliates, including principal,
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interest, charges, fees, costs and expenses, however evidenced, whether as
principal, surety, endorser, guarantor or otherwise, whether arising under this
Agreement or otherwise, whether now existing or hereafter arising, whether
arising before, during or after the initial or any renewal term of this
Agreement or after the commencement of any case with respect to any Borrower
under the United States Bankruptcy Code or any similar statute (including the
payment of interest and other amounts which would accrue and become due but for
the commencement of such case, whether or not such amounts are allowed or
allowable in whole or in part in such case), whether direct or indirect,
absolute or contingent, joint or several, due or not due, primary or secondary,
liquidated or unliquidated, secured or unsecured, and however acquired by
Lender.
1.62 "Obligor" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than any Borrower.
1.63 "Payment Account" shall have the meaning set forth in Section 6.3
hereof.
1.64 "Permits" shall have the meaning set forth in Section 8.7 hereof.
1.65 "Permitted Holders" shall mean the persons listed on Schedule 1.65
hereto and their respective successors and assigns.
1.66 "Person" or "person" shall mean any individual, sole proprietorship,
partnership, corporation (including any corporation which elects subchapter S
status under the Code), limited liability company, limited liability
partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.
1.67 "Plan" means an employee benefit plan (as defined in Section 3(3) of
ERISA) which any Borrower sponsors, maintains, or to which it makes, is making,
or is obligated to make contributions, or in the case of a Multiemployer Plan
has made contributions at any time during the immediately preceding six (6) plan
years.
1.68 "Prime Rate" shall mean the rate from time to time publicly announced
by First Union National Bank, or its successors, as its prime rate, whether or
not such announced rate is the best rate available at such bank.
1.69 "Prime Rate Loans" shall mean any Loans or portion thereof on which
interest is payable based on the Prime Rate in accordance with the terms
thereof.
1.70 "Provision for Taxes" shall mean an amount equal to all taxes imposed
on or measured by net income, whether Federal, State, Provincial, municipal or
local, and whether foreign or domestic, that are paid or payable by any Person
in respect of any period in accordance with GAAP.
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1.71 "Real Property" shall mean all now owned and hereafter acquired real
property of any Borrower, including leasehold interests, together with all
buildings, structures, and other improvements located thereon and all licenses,
easements and appurtenances relating thereto, wherever located, including the
real property and related assets more particularly described in the Mortgages.
1.72 "Receivables" shall mean: (a) all Accounts; (b) all amounts at any
time payable to any Borrower in respect of the sale or other disposition by such
Borrower of any Account or other obligation for the payment of money; (c) all
interest, fees, late charges, penalties, collection fees and other amounts due
or to become due or otherwise payable in connection with any Account; (d) all
letters of credit, indemnities, guarantees, security or other deposits and
proceeds thereof issued payable to any Borrower or otherwise in favor of or
delivered to any Borrower in connection with any Account; or (e) all other
contract rights, chattel paper, instruments, notes, general intangibles and
other forms of obligations owing to any Borrower, whether from the sale and
lease of goods or other property, licensing of any property (including
Intellectual Property or other general intangibles), rendition of services or
from loans or advances by any Borrower or to or for the benefit of any third
person (including loans or advances to any Affiliates or Subsidiaries) or
otherwise associated with any Accounts, Inventory or general intangibles of any
Borrower (including, without limitation, choses in action, causes of action, tax
refunds, tax refund claims, any funds which may become payable to any Borrower
in connection with the termination of any Plan or other employee benefit plan
and any other amounts payable to any Borrower from any Plan or other employee
benefit plan, rights and claims against carriers and shippers, rights to
indemnification, business interruption insurance and proceeds thereof, casualty
or any similar types of insurance and any proceeds thereof and proceeds of
insurance covering the liens of employees on which any Borrower is beneficiary.
1.73 "Records" shall mean all of each Borrower's present and future books
of account of every kind or nature, purchase and sale agreements, invoices,
ledger cards, bills of lading and other shipping evidence, statements,
correspondence, memoranda, credit files and other data relating to the
Collateral or any account debtor, together with the tapes, disks, diskettes and
other data and software storage media and devices, file cabinets or containers
in or on which the foregoing are stored (including any rights of any Borrower
with respect to the foregoing maintained with or by any other person).
1.74 "Reference Bank" shall mean First Union National Bank, or such other
bank as Lender may from time to time designate.
1.75 "Renewal Date" shall the meaning set forth in Section 12.1 hereof.
1.76 "Reserves" shall mean as of any date of determination, such amounts as
Lender may from time to time establish and revise in good faith reducing the
amount of Revolving Loans and Letter of Credit Accommodations which would
otherwise be available to Borrowers under the lending formula(s) provided for
herein: (a) to reflect events, conditions, contingencies or risks arising after
the date of this Agreement or of which Lender had no actual knowledge as of such
date, which, as determined by Lender in good faith, adversely affect, or would
have a reasonable
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likelihood of adversely affecting, either (i) the Collateral or any other
property which is security for the Obligations or its value, (ii) the assets,
business or financial condition of Borrowers or any Obligor or (iii) the
security interests and other rights of Lender in the Collateral (including the
enforceability, perfection and priority thereof); or (b) to reflect Lender's
good faith belief that any collateral report or financial information furnished
by or on behalf of Borrowers or any Obligor to Lender is or may have been
incomplete, inaccurate or misleading in any material respect; or (c) to reflect
outstanding Letter of Credit Accommodations as provided in Section 2.2 hereof;
or (d) to reflect inventory shrinkage; (e) $375,000 in respect of deferred
compensation liabilities of Borrowers for their employees and those of any
member of the Duck Head Employee Group (as such term is defined in the DWI
Distribution Agreement)such reserve to terminate upon Lender's receipt of
evidence, in form and substance satisfactory to it that the option provided to
members of the Duck Head Employee Group to receive a distribution of deferred
compensation benefits in connection with the transactions contemplated by the
Distribution Agreement has expired; or (f) to reflect amounts owing by Borrowers
to Credit Card Issuers or Credit Card Processors in connection with the Credit
Card Agreements; or (g) in respect of any state of facts which Lender determines
in good faith constitutes an Event of Default or may, with notice or passage of
time or both, constitute an Event of Default. To the extent Lender may revise
the lending formulas used to determine the Borrowing Base or establish new
criteria or revise existing criteria for Eligible Accounts or Eligible Inventory
so as to address any circumstances, condition, event or contingency in an manner
satisfactory to Lender, Lender shall not establish a Reserve for the same
purpose. The amount of any Reserve established by Lender shall have a reasonable
relationship to the event, condition or other matter which is the basis for such
reserve as determined by Lender in good faith.
1.77 "Revolving Loan Limit" shall mean $15,000,000.
1.78 "Revolving Loans" shall mean the loans now or hereafter made by Lender
to or for the benefit of Borrowers on a revolving basis (involving advances,
repayments and readvances) as set forth in Section 2.1 hereof.
1.79 "Subsidiary" or "subsidiary" shall mean, with respect to any Person,
any corporation, limited liability company, limited liability partnership or
other limited or general partnership, trust, association or other business
entity of which an aggregate of at least a majority of the outstanding Capital
Stock or other interests entitled to vote in the election of the board of
directors of such corporation (irrespective of whether, at the time, Capital
Stock of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency), managers, trustees
or other controlling persons, or an equivalent controlling interest therein, of
such Person is, at the time, directly or indirectly, owned by such Person and/or
one or more subsidiaries of such Person.
1.80 "Term Loan" shall mean the term loan made by Lender to Borrowers as
provided for in Section 2.3 hereof.
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1.81 "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost computed on a first-in first-out
basis in accordance with GAAP or (b) market value.
1.82 "Voting Stock" shall mean with respect to any Person, (a) one (1) or
more classes of Capital Stock of such Person having general voting powers to
elect at least a majority of the board of directors, managers or trustees of
such Person, irrespective of whether at the time Capital Stock of any other
class or classes have or might have voting power by reason of the happening of
any contingency, and (b) any Capital Stock of such Person convertible or
exchangeable without restriction at the option of the holder thereof into
Capital Stock of such Person described in clause (a) of this definition.
1.83 "Warehouse Equipment" shall mean the leased equipment of Duck Head as
described in Schedule Nos. 001 and 002 to the GECC Warehouse Equipment Lease,
whether or not the GECC Warehouse Equipment Lease is in full force and effect,
such schedules being annexed hereto as Exhibit 1.83.
1.84 "Woodside" shall mean Delta Woodside Industries, Inc., a South
Carolina corporation, and its successors and assigns.
SECTION 2. CREDIT FACILITIES
-----------------
2.1 Revolving Loans.
----------------
(a) Subject to and upon the terms and conditions contained herein, Lender
agrees to make Revolving Loans to Borrowers from time to time in amounts
requested by Borrowers up to the amount equal to the lesser of: (i) the
Borrowing Base or (ii) the Revolving Loan Limit.
(b) Lender may, in its discretion, from time to time, upon not less than
five (5) days prior notice to Borrower, (i) reduce the lending formula with
respect to Eligible Accounts to the extent that Lender determines in good faith
that (A) the dilution with respect to the Accounts for any period (based on the
ratio of (1) the aggregate amount of reductions in Accounts other than as a
result of payments in cash to (2) the aggregate amount of total sales) has
increased in any material respect or may be reasonably anticipated to increase
in any material respect above historical levels, or (B) the general
creditworthiness of account debtors has materially declined or (ii) reduce the
lending formula(s) with respect to Eligible Inventory to the extent that Lender
determines that: (A) the number of days of the turnover of the Inventory for any
period has changed or (B) the advance percentage in the lending formula is more
than eighty-five (85%) percent of the Net Recovery Percentage with respect to
Eligible Inventory as set forth in the most recent appraisal thereof received by
Lender, or (C) the nature, quality or mix of the Inventory has materially
deteriorated. The amount of any decrease in the lending formulas shall have a
reasonable relationship to the event, condition or circumstance which is the
basis for such decrease as determined by Lender in good faith. In determining
whether to reduce the lending formula(s), Lender may consider events,
conditions, contingencies or risks which are also considered in determining
Eligible Accounts, Eligible Inventory or in establishing Reserves.
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(c) Except in Lender's discretion, (i) the aggregate amount of the
Revolving Loans outstanding at any time shall not exceed the Revolving Loan
Limit, (ii) the aggregate amount of the Loans and the Letter of Credit
Accommodations outstanding at any time shall not exceed the Maximum Credit,
(iii) the aggregate amount of Revolving Loans and Letter of Credit
Accommodations based on Eligible Inventory consisting of uncut finished fabric
of Borrowers shall not exceed $750,000, and (iv) the aggregate amount of
Revolving Loans and Letter of Credit Accommodations based on Eligible Inventory
consisting of Eligible Inventory of Merchandising outstanding at any time shall
not exceed twenty (20%) percent of the aggregate amount of all outstanding
Revolving Loans and Letter of Credit Accommodations based on Eligible Inventory
to all Borrowers. In the event that the outstanding amount of any component of
the Loans, or the aggregate amount of the outstanding Loans and Letter of Credit
Accommodations, exceed the amounts available under the lending formulas, the
Revolving Loan Limit, the sublimits for Letter of Credit Accommodations set
forth in Section 2.2(e) or the Maximum Credit, as applicable, such event shall
not limit, waive or otherwise affect any rights of Lender in that circumstance
or on any future occasions and Borrower shall, upon demand by Lender, which may
be made at any time or from time to time, immediately repay to Lender the entire
amount of any such excess(es) for which payment is demanded.
2.2 Letter of Credit Accommodations.
--------------------------------
(a) Subject to and upon the terms and conditions contained herein, at the
request of a Borrower, Lender agrees to provide or arrange for Letter of Credit
Accommodations for the account of such Borrower containing terms and conditions
acceptable to Lender and the issuer thereof. Any payments made by Lender to any
issuer thereof and/or related parties in connection with the Letter of Credit
Accommodations shall constitute additional Revolving Loans to such Borrower
pursuant to this Section 2.
(b) In addition to any charges, fees or expenses charged by any bank or
issuer in connection with the Letter of Credit Accommodations, Borrowers shall
pay to Lender a letter of credit fee at a rate equal to one and one-half (1
1/2%) percent per annum on the daily outstanding balance of the Letter of Credit
Accommodations for the immediately preceding month (or part thereof), payable in
arrears as of the first day of each succeeding month, except that Borrowers
shall pay to Lender such letter of credit fee, at Lender's option, without
notice, at a rate equal to three and one-half (3 1/2%) percent per annum on such
daily outstanding balance for: (i) the period from and after the date of
termination or non-renewal hereof until Lender has received full and final
payment of all Obligations (notwithstanding entry of a judgment against any
Borrower) and (ii) the period from and after the date of the occurrence of an
Event of Default for so long as such Event of Default is continuing as
determined by Lender. Such letter of credit fee shall be calculated on the basis
of a three hundred sixty (360) day year and actual days elapsed and the
obligation of Borrower to pay such fee shall survive the termination or
non-renewal of this Agreement.
(c) Borrowers shall give Lender two (2) Business Days' prior written of any
Borrower's request for the issuance of a Letter of Credit Accommodation. Such
notice shall be irrevocable and shall specify the original face amount of the
Letter of Credit Accommodation
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requested, the effective date (which date shall be a Business Day) of issuance
of such requested Letter of Credit Accommodation, whether such Letter of Credit
Accommodations may be drawn in a single or in partial draws, the date on which
such requested Letter of Credit Accommodation is to expire (which date shall be
a Business Day), the purpose for which such Letter of Credit Accommodation is to
be issued, and the beneficiary of the requested Letter of Credit Accommodation.
Borrowers shall attach to such notice the proposed form of the Letter of Credit
Accommodation.
(d) In addition to being subject to the satisfaction of the applicable
conditions precedent contained in Section 4 hereof and the other terms and
conditions contained herein, no Letter of Credit Accommodations shall be
available unless each of the following conditions precedent have been satisfied
in a manner satisfactory to Lender: (i) Borrowers shall have delivered to the
proposed issuer of such Letter of Credit Accommodation at such times and in such
manner as such proposed issuer may require, an application in form and substance
satisfactory to such proposed issuer and Lender for the issuance of the Letter
of Credit Accommodation and such other documents as may be required pursuant to
the terms thereof, and the form and terms of the proposed Letter of Credit
Accommodation shall be satisfactory to Lender and such proposed issuer, (ii) as
of the date of issuance, no order of any court, arbitrator or other Governmental
Authority shall purport by its terms to enjoin or restrain money center banks
generally from issuing letters of credit of the type and in the amount of the
proposed Letter of Credit Accommodation, and no law, rule or regulation
applicable to money center banks generally and no request or directive (whether
or not having the force of law) from any Governmental Authority with
jurisdiction over money center banks generally shall prohibit, or request that
the proposed issuer of such Letter of Credit Accommodation refrain from, the
issuance of letters of credit generally or the issuance of such Letters of
Credit Accommodation; and (iii) the Excess Availability, prior to giving effect
to any Reserves with respect to such Letter of Credit Accommodations, on the
date of the proposed issuance of any Letter of Credit Accommodations, shall be
equal to or greater than: (A) if the proposed Letter of Credit Accommodation is
for the purpose of purchasing Eligible Inventory, the sum of (1) forty (40%)
percent multiplied by the Value of such Eligible Inventory, plus (2) freight,
taxes, duty and other amounts which Lender estimates must be paid by a Borrower
in connection with such Inventory upon arrival and for delivery to one of such
Borrower's locations for Eligible Inventory within the United States of America
and (iv) if the proposed Letter of Credit Accommodation is for any other
purpose, an amount equal to one hundred (100%) percent of the face amount
thereof and all other commitments and obligations made or incurred by Lender
with respect thereto. Effective on the issuance of each Letter of Credit
Accommodation, a Reserve shall be established in the applicable amount set forth
in Section 2.2(d)(iii)(A) or Section 2.2(d)(iii)(B).
(e) Except in Lender's discretion, the amount of all outstanding Letter of
Credit Accommodations and all other commitments and obligations made or incurred
by Lender in connection therewith shall not at any time exceed $10,000,000. At
any time an Event of Default exists or has occurred and is continuing, upon
Lender's request, Borrowers will either furnish cash collateral to secure the
reimbursement obligations to the issuer in connection with any Letter of Credit
Accommodations or furnish cash collateral to Lender for the Letter of Credit
Accommodations.
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(f) Each Borrower shall indemnify and hold Lender harmless from and against
any and all losses, claims, damages, liabilities, costs and expenses which
Lender may suffer or incur in connection with any Letter of Credit
Accommodations and any documents, drafts or acceptances relating thereto,
including any losses, claims, damages, liabilities, costs and expenses due to
any action taken by any issuer or correspondent with respect to any Letter of
Credit Accommodation. Each Borrower assumes all risks with respect to the acts
or omissions of the drawer under or beneficiary of any Letter of Credit
Accommodation and for such purposes the drawer or beneficiary shall be deemed
Borrower's agent. Each Borrower assumes all risks for, and agrees to pay, all
foreign, Federal, State and local taxes, duties and levies relating to any goods
subject to any Letter of Credit Accommodations or any documents, drafts or
acceptances thereunder. Each Borrower hereby releases and holds Lender harmless
from and against any acts, waivers, errors, delays or omissions, whether caused
by any Borrower, by any issuer or correspondent or otherwise with respect to or
relating to any Letter of Credit Accommodation, except for the gross negligence
or wilful misconduct of Lender as determined pursuant to a final, non-appealable
order of a court of competent jurisdiction. The provisions of this Section
2.2(e) shall survive the payment of Obligations and the termination or
non-renewal of this Agreement.
(g) In connection with Inventory purchased pursuant to Letter of Credit
Accommodations, Borrowers will, at Lender's request, instruct all suppliers,
carriers, forwarders, customs brokers, warehouses or others receiving or holding
cash, checks, Inventory, documents or instruments in which Lender holds a
security interest to deliver them to Lender and/or subject to Lender's order,
and if they shall come into any Borrower's possession, to deliver them, upon
Lender's request, to Lender in their original form. Each Borrower shall also, at
Lender's request, designate Lender as the consignee on all bills of lading and
other negotiable and non-negotiable documents.
(h) Each Borrower hereby irrevocably authorizes and directs any issuer of a
Letter of Credit Accommodation to name such Borrower as the account party
therein and to deliver to Lender all instruments, documents and other writings
and property received by issuer pursuant to the Letter of Credit Accommodations
and to accept and rely upon Lender's instructions and agreements with respect to
all matters arising in connection with the Letter of Credit Accommodations or
the applications therefor. Nothing contained herein shall be deemed or construed
to grant any Borrower any right or authority to pledge the credit of Lender in
any manner. Lender shall have no liability of any kind with respect to any
Letter of Credit Accommodation provided by an issuer other than Lender unless
Lender has duly executed and delivered to such issuer the application or a
guarantee or indemnification in writing with respect to such Letter of Credit
Accommodation. Each Borrower shall be bound by any interpretation made in good
faith by Lender, or any other issuer or correspondent under or in connection
with any Letter of Credit Accommodation or any documents, drafts or acceptances
thereunder, notwithstanding that such interpretation may be inconsistent with
any instructions of such Borrower. Lender shall have the sole and exclusive
right and authority to, and no Borrower shall: (i) at any time an Event of
Default exists or has occurred and is continuing, (A) approve or resolve any
questions of non-compliance of documents, (B) give any instructions as to
acceptance or rejection of any documents or goods or (C) execute any and all
applications for steamship or airway guaranties, indemnities or delivery orders,
and (ii) at all times, (A) grant any
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extensions of the maturity of, time of payment for, or time of presentation of,
any drafts, acceptances, or documents, and (B) agree to any amendments,
renewals, extensions, modifications, changes or cancellations of any of the
terms or conditions of any of the applications, Letter of Credit Accommodations,
or documents, drafts or acceptances thereunder or any letters of credit included
in the Collateral. Lender may take such actions either in its own name or in any
Borrower's name.
(i) Any rights, remedies, duties or obligations granted or undertaken by
any Borrower to any issuer or correspondent in any application for any Letter of
Credit Accommoda tion, or any other agreement in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed to
have been granted or undertaken by such Borrower to Lender. Any duties or
obligations undertaken by Lender to any issuer or correspondent in any
application for any Letter of Credit Accommodation, or any other agreement by
Lender in favor of any issuer or correspondent relating to any Letter of Credit
Accommodation, shall be deemed to have been undertaken by such Borrower to
Lender and to apply in all respects to such Borrower.
2.3 Term Loan. (a) Lender is making a Term Loan to Borrowers in the
-----------
original principal amount of $5,760,000. The Term Loan is (i) evidenced by a
Term Promissory Note in such original principal amount duly executed and
delivered by Borrowers to Lender concurrently herewith; (ii) to be repaid,
together with interest and other amounts, in accordance with this Agreement, the
Term Promissory Note, and the other Financing Agreements and (iii) secured by
all of the Collateral. Borrowers may not reborrow any principal amounts paid
pursuant to the Term Promissory Note except as provided for in Section 2.3(b)
below.
(b) At any time on or after the second anniversary of the date of this
Agreement, upon the written request of Borrowers, which shall be irrevocable
(and which shall only be made once), the outstanding principal amount of the
Term Loan may be increased by an amount equal to the difference between the (i)
then outstanding principal amount of the Term Loan and (ii) sixty (60%) percent
of the fair market value of the Distribution and Office Facility (calculated
based on the updated appraisal as described below); provided, that, any such
increase in the outstanding principal amount of the Term Loan shall only be
effective if each of the following conditions is satisfied as determined by
Lender: (A) Lender shall have received the written request of Borrowers for such
increase after the second anniversary of the date hereof, (B) no Event of
Default, or act, condition or event which with notice or passage of time or both
would constitute an Event of Default shall exist or have occurred and be
continuing on the proposed date of any such increase of the Term Loan, (C)
Lender shall have received an updated appraisal in respect of the Distribution
and Office Facility by an independent appraiser acceptable to Lender and in
form, scope and methodology acceptable to Lender and addressed to Lender and on
which Lender is expressly permitted to rely, which appraisal is conducted no
earlier than forty-five (45) days prior to the effective date of such increase,
(D) Lender shall have received such appraisal not less than twenty (20) days
prior to the applicable effective date and (E) Lender shall have received (1) an
Amended and Restated Term Promissory Note (the "Amended Term Note"), (2)
Amendments to the Mortgages (the "Mortgage Amendments"), (3) an endorsement to
the existing title policy issued for the benefit of Lender, in form and
substance, acceptable to Lender,
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each in form and substance satisfactory to Lender, duly executed and delivered
by Borrower, and in the case of the Mortgage Amendments, recorded in the
applicable real estate records. Upon the satisfaction of all of the conditions
set forth in the immediately preceding sentence, the indebtedness of Borrowers
to Lender arising pursuant to the Term Loan and including the additional advance
provided for in this Section 2.3(b) herein shall (a) be deemed amended and
restated as set forth in the Amended Term Note and evidenced thereby and herein
and in the other Financing Agreements, and (b) be deemed secured by all of the
Collateral . Borrower may not reborrow any principal amounts paid pursuant to
the Amended Term Note.
2.4 Joint and Several Liability. Borrowers shall be liable for all amounts
----------------------------
due to Lender under this Agreement, regardless of which Borrower actually
receives the Loans or other extensions of credit hereunder or the amount of such
Loans received or the manner in which Lender accounts for such Loans, Letter of
Credit Accommodations or other extensions of credit on its books and records.
The Obligations with respect to Loans made to a Borrower, and the Obligations
arising as a result of the joint and several liability of a Borrower hereunder,
with respect to Loans made to the other Borrower hereunder, shall be separate
and distinct obligations, but all such other Obligations shall be primary
obligations of all Borrowers. The Obligations arising as a result of the joint
and several liability of a Borrower hereunder with respect to Loans, Letter of
Credit Accommodations or other extensions of credit made to the other Borrower
hereunder shall, to the fullest extent permitted by law, be unconditional
irrespective of (a) the validity or enforceability, avoidance or subordination
of the Obligations of the other Borrower or of any promissory note or other
document evidencing all or any part of the Obligations of the other Borrowers,
(b) the absence of any attempt to collect the Obligations from the other
Borrower, any Obligor or any other security therefor, or the absence of any
other action to enforce the same, (c) the waiver, consent, extension,
forbearance or granting of any indulgence by Lender with respect to any
provisions of any instrument evidencing the Obligations of the other Borrower,
or any part thereof, or any other agreement now or hereafter executed by the
other Borrower and delivered to Lender, (d) the failure by Lender to take any
steps to perfect and maintain its security interest in, or to preserve its
rights and maintain its security or collateral for the Obligations of the other
Borrower, (e) the election of Lender in any proceeding instituted under the
Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy
Code, (f) the disallowance of all or any portion of the claim(s) of Lender for
the repayment of the Obligations of the other Borrower under Section 502 of the
Bankruptcy Code, or (g) any other circumstances which might constitute a legal
or equitable discharge or defense of any Obligor or of the other Borrower, other
than the wilful misconduct, gross negligence or bad faith of Lender as
determined pursuant to a final, non-appealable order of a court of competent
jurisdiction. With respect to the Obligations arising as a result of the joint
and several liability of a Borrower hereunder with respect to Loans, Letter of
Credit Accommodations or other extensions of credit made to the other Borrower
hereunder, each Borrower waives, until the Obligations shall have been paid in
full and this Agreement shall have been terminated, any right to enforce any
right of subrogation or any remedy which Lender now has or may hereafter have
against Borrowers, any endorser or any guarantor of all or any part of the
Obligations, and any benefit of, and any right to participate in, any security
or collateral given to Lender. Upon any Event of Default and for so long as the
same is continuing, Lender may proceed directly and at once, without notice,
against any Borrower to collect and recover the full amount, or any portion of
the Obligations, without
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first proceeding against the other Borrower or any other Person, or against any
security or collateral for the Obligations. Each Borrower consents and agrees
that Lender shall be under no obligation to marshall any assets in favor of
Borrower(s) or against or in payment of any or all of the Obligations.
SECTION 3. INTEREST AND FEES
-----------------
3.1 Interest.
---------
(a) Borrowers shall pay to Lender interest on the outstanding principal
amount of the Loans at the Interest Rate. All interest accruing hereunder on and
after the date of any Event of Default or termination or non-renewal hereof or
on the principal amount of the Revolving Loans at any time outstanding in excess
of the amounts available to Borrowers under Section 2 (whether or not such
excess(es), arise or are made with or without Lender's knowledge or consent and
whether made before or after an Event of Default) shall be payable ON DEMAND.
(b) Borrowers may from time to time request that Prime Rate Loans be
converted to Eurodollar Rate Loans or that any existing Eurodollar Rate Loans
continue for an additional Interest Period. Such request from Borrowers shall
specify the amount of the Prime Rate Loans which will constitute Eurodollar Rate
Loans (subject to the limits set forth below) and the Interest Period to be
applicable to such Eurodollar Rate Loans. Subject to the terms and conditions
contained herein, two (2) Business Days after receipt by Lender of such a
request from Borrowers, such Prime Rate Loans shall be converted to Eurodollar
Rate Loans or such Eurodollar Rate Loans shall continue, as the case may be,
provided, that, (i) no Event of Default, or act, condition or event which with
notice or passage of time or both would constitute an Event of Default shall
exist or have occurred and be continuing, (ii) no party hereto shall have sent
any notice of termination or non-renewal of this Agreement, (iii) Borrowers
shall have complied with such customary procedures as are established by Lender
and specified by Lender to Borrower from time to time for requests by Borrower
for Eurodollar Rate Loans, (iv) no more than four (4) Interest Periods may be in
effect at any one time, (v) the aggregate amount of the Eurodollar Rate Loans
must be in an amount not less than $3,000,000 or an integral multiple of
$1,000,000 in excess thereof, and (vi) Lender shall have determined that the
Interest Period or Adjusted Eurodollar Rate is available to Lender through the
Reference Bank and can be readily determined as of the date of the request for
such Eurodollar Rate Loan by Borrowers. Any request by Borrower to convert Prime
Rate Loans to Eurodollar Rate Loans or to continue any existing Eurodollar Rate
Loans shall be irrevocable. Notwithstanding anything to the contrary contained
herein, Lender and Reference Bank shall not be required to purchase United
States Dollar deposits in the London interbank market or other applicable
Eurodollar Rate market to fund any Eurodollar Rate Loans, but the provisions
hereof shall be deemed to apply as if Lender and Reference Bank had purchased
such deposits to fund the Eurodollar Rate Loans.
(c) Any Eurodollar Rate Loans shall automatically convert to Prime Rate
Loans upon the last day of the applicable Interest Period, unless Lender has
received and approved a request to continue such Eurodollar Rate Loan at least
two (2) Business Days prior to such last
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<PAGE>
day in accordance with the terms hereof. Any Eurodollar Rate Loans shall, at
Lender's option, upon notice by Lender to Borrower, convert to Prime Rate Loans
in the event that this Agreement shall terminate or not be renewed. Borrower
shall pay to Lender, upon demand by Lender (or Lender may, at its option, charge
any loan account of Borrowers) any amounts required to compensate Lender, the
Reference Bank or any participant with Lender for any loss (including loss of
anticipated profits), cost or expense incurred by such person, as a result of
the conversion of Eurodollar Rate Loans to Prime Rate Loans pursuant to any of
the foregoing.
(d) Interest shall be payable by Borrowers to Lender monthly in arrears not
later than the first day of each calendar month and shall be calculated on the
basis of a three hundred sixty (360) day year and actual days elapsed. Each
Borrower acknowledges and understands that the calculation of interest on the
basis of the actual days elapsed over the period of a three hundred sixty (360)
day year as opposed to a year of three hundred sixty-five (365) or three hundred
sixty-six (366) days results in a higher effective rate of interest. The
interest rate on non-contingent obligations (other than Eurodollar Rate Loans)
shall increase or decrease by an amount equal to each increase or decrease in
the Prime Rate effective on the first day of the month after any change in such
Prime Rate is announced based on the Prime Rate in effect on the last day of the
month in which any such change occurs.
(e) On the date hereof, the Prime Rate is nine (9 %) percent and therefore
the rate of interest in effect hereunder for Prime Rate Loans outstanding on the
date of this Agreement, expressed in simple interest terms, is nine and one-half
(9 1/2%) percent per annum.
3.2 Closing Fee. Borrowers shall pay to Lender as a closing fee the amount
------------
of $103,800 which shall be fully earned and payable as of the date hereof. Such
closing fee shall not be subject to rebate upon any prepayment of the
Obligations except to the extent required by Section 3.6 of this Agreement or
applicable law. Such closing fee shall compensate Lender for the costs
associated with the origination, structuring, processing, approving and closing
of the transactions contemplated by this Agreement, exclusive of any expenses
for which Borrowers have agreed to reimburse Lender pursuant to any other
provision of this Agreement or the other Financing Agreements (such as
attorneys' fees).
3.3 Servicing Fee. Borrowers shall pay to Lender monthly a servicing fee in
--------------
an amount equal to $2,000 in respect of Lender's services for each month (or
part thereof) while this Agreement remains in effect and for so long thereafter
as any of the Obligations are outstanding, which fee shall be fully earned as of
and payable in advance on the date hereof and on the first day of each month
hereafter.
3.4 Unused Line Fee. Borrowers shall pay to Lender monthly an unused line
----------------
fee at a rate equal to one-quarter of one (1/4%) percent per annum calculated
upon the amount by which $15,000,000 exceeds the average daily principal balance
of the outstanding Revolving Loans and Letter of Credit Accommodations during
the immediately preceding month (or part thereof) while this Agreement is in
effect and for so long thereafter as any of the Obligations are outstanding,
which fee shall be payable on the first day of each month in arrears.
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3.5 Changes in Laws and Increased Costs of Loans.
---------------------------------------------
(a) Notwithstanding anything to the contrary contained herein, all
Eurodollar Rate Loans shall, upon notice by Lender to Borrowers, convert to
Prime Rate Loans in the event that (i) any change in applicable law or
regulation (or the interpretation or administration thereof) shall either (A)
make it unlawful for Lender, Reference Bank or any participant with Lender to
make or maintain Eurodollar Rate Loans or to comply with the terms hereof in
connection with the Eurodollar Rate Loans, or (B) shall result in the increase
in the costs to Lender, Reference Bank or any participant of making or
maintaining any Eurodollar Rate Loans by an amount deemed by Lender to be
material, or (C) reduce the amounts received or receivable by Lender in respect
thereof, by an amount deemed by Lender to be material or (ii) the cost to
Lender, Reference Bank or any participant of making or maintaining any
Eurodollar Rate Loans shall otherwise increase by an amount deemed by Lender to
be material. Borrower shall pay to Lender, upon demand by Lender (or Lender may,
at its option, charge any loan account of Borrower) any amounts required to
compensate Lender, the Reference Bank or any participant with Lender for any
loss (including loss of anticipated profits), cost or expense incurred by such
person as a result of the foregoing, including, without limitation, any such
loss, cost or expense incurred by reason of the liquidation or reemployment of
deposits or other funds acquired by such person to make or maintain the
Eurodollar Rate Loans or any portion thereof. A certificate of Lender setting
forth the basis for the determination of such amount necessary to compensate
Lender as aforesaid shall be delivered to Borrower and shall be conclusive,
absent manifest error.
(b) If any payments or prepayments in respect of the Eurodollar Rate Loans
are received by Lender other than on the last day of the applicable Interest
Period (whether pursuant to acceleration, upon maturity or otherwise), including
any payments pursuant to the application of collections under Section 6.3 or any
other payments made with the proceeds of Collateral, Borrowers shall pay to
Lender upon demand by Lender (or Lender may, at its option, charge any loan
account of Borrowers) any amounts required to compensate Lender, the Reference
Bank or any participant with Lender for any additional loss (including loss of
anticipated profits), cost or expense incurred by such person as a result of
such prepayment or payment, including, without limitation, any loss, cost or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by such person to make or maintain such Eurodollar Rate
Loans or any portion thereof.
3.6 Maximum Interest.
-----------------
(a) Notwithstanding anything to the contrary contained in this Agreement or
any of the other Financing Agreements, in no event whatsoever shall the
aggregate of all amounts that are contracted for, charged or received by Lender
pursuant to the terms of this Agreement or any of the other Financing Agreements
and that are deemed interest under applicable law exceed the Maximum Interest
Rate (including, to the extent applicable, the provisions of Section 5197 of the
Revised Statutes of the United States of America as amended, 12 U.S.C.
Section 85, as amended). No agreements, conditions, provisions or stipulations
contained in this Agreement or any of the other Financing Agreements, or any
Event of Default, or the exercise by Lender of the right to accelerate the
payment or the maturity of all or any portion of the Obligations, or the
28
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exercise of any option whatsoever contained in this Agreement or any of the
other Financing Agreements, or the prepayment by Borrowers of any of the
Obligations, or the occurrence of any event or contingency whatsoever, shall
entitle Lender to contract for, charge or receive in any event, interest or any
charges, amounts, premiums or fees deemed interest by applicable law in excess
of the Maximum Interest Rate. In no event shall any Borrower be obligated to pay
interest or such amounts as may be deemed interest under applicable law in
amounts which exceed the Maximum Interest Rate. All agreements, conditions or
stipulations, if any, which may in any event or contingency whatsoever operate
to bind, obligate or compel any Borrower to pay interest or such amounts which
are deemed to constitute interest in amounts which exceed the Maximum Interest
Rate shall be without binding force or effect, at law or in equity, to the
extent of the excess of interest or such amounts which are deemed to constitute
interest over such Maximum Interest Rate.
(b) In the event any Interest is charged or received in excess of the
Maximum Interest Rate ("Excess"), each Borrower acknowledges and stipulates that
any such charge or receipt shall be the result of an accident and bona fide
error, and that any Excess received by Lender shall be applied, first, to the
payment of the then outstanding and unpaid principal hereunder; second to the
payment of the other Obligations then outstanding and unpaid; and third,
returned to such Borrower, it being the intent of the parties hereto not to
enter into a usurious or otherwise illegal relationship. The right to accelerate
the maturity of any of the Obligations does not include the right to accelerate
any interest that has not otherwise accrued on the date of such acceleration,
and Lender does not intend to collect any unearned interest in the event of any
such acceleration. Each Borrower recognizes that, with fluctuations in the rates
of interest set forth in Section 3.1 of this Agreement and the Maximum Interest
Rate, such an unintentional result could inadvertently occur. All monies paid to
Lender hereunder or under any of the other Financing Agreements, whether at
maturity or by prepayment, shall be subject to any rebate of unearned interest
as and to the extent required by applicable law.
(c) By the execution of this Agreement, each Borrower agrees that (A) the
credit or return of any Excess shall constitute the acceptance by Borrower of
such Excess, and (B) Borrower shall not seek or pursue any other remedy, legal
or equitable, against Lender, based in whole or in part upon contracting for,
charging or receiving any interest or such amounts which are deemed to
constitute interest in excess of the Maximum Interest Rate. For the purpose of
determining whether or not any Excess has been contracted for, charged or
received by Lender, all interest at any time contracted for, charged or received
from Borrowers in connection with this Agreement or any of the other Financing
Agreements shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread during the entire term of this Agreement in
accordance with the amounts outstanding from time to time hereunder and the
Maximum Interest Rate from time to time in effect in order to lawfully charge
the maximum amount of interest permitted under applicable laws.
(d) Each Borrower and Lender shall, to the maximum extent permitted under
applicable law, (i) characterize any non-principal payment as an expense, fee or
premium rather than as interest and (ii) exclude voluntary prepayments and the
effects thereof.
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(e) The provisions of this Section 3.6 shall be deemed to be incorporated
into each of the other Financing Agreements (whether or not any provision of
this Section is referred to therein). Each of the Financing Agreements and
communications relating to any interest owed by Borrowers and all figures set
forth therein shall, for the sole purpose of computing the extent of the
Obligations, be automatically recomputed by Borrower, and by any court
considering the same, to give effect to the adjustments or credits required by
this Section.
SECTION 4. CONDITIONS PRECEDENT
--------------------
4.1 Conditions Precedent to Initial Loans and Letter of Credit
---------------------------------------------------------------------
Accommodations. Each of the following is a condition precedent to Lender making
- --------------
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(a) Lender shall have received, in form and substance satisfactory to
Lender, evidence that the Distribution Agreements have been duly executed and
delivered by and to the appropriate parties thereto and all of the transactions
contemplated under the terms of the Distribution Agreements, including, without
limitation, all of the reorganization events described in Section 2.1 of the DWI
Distribution Agreement have been consummated prior to or contemporaneously with
the execution of this Agreement and that each Borrower has good and marketable
title to all of the assets used in the operations and business of the Duck Head
Apparel Company division of Woodside;
(b) Lender shall have received a summary of the opinion, in form and
substance satisfactory to Lender, addressed and delivered to the Board of
Directors of Woodside as to the solvency of Duck Head and its Subsidiaries at
the time of the distribution contemplated by the Distribution Agreements;
(c) Lender shall have received, in form and substance satisfactory to
Lender, all releases, terminations and such other documents as Lender may
request to evidence and effectuate the termination by the existing lenders to
Borrowers of their respective financing arrangements with Borrowers and the
termination and release by it or them, as the case may be, of any interest in
and to any assets and properties of each Borrower and each Obligor, duly
authorized, executed and delivered by it or each of them, including, but not
limited to, (i) UCC termination statements for all UCC financing statements
previously filed by it or any of them or their predecessors, as secured party
and any Borrower or any Obligor, as debtor and (ii) satisfactions and discharges
of any mortgages, deeds of trust or deeds to secure debt by Borrower or any
Obligor in favor of such existing lender or lenders, in form acceptable for
recording with the appropriate Governmental Authority;
(d) all requisite corporate action and proceedings in connection with the
transactions contemplated by the Distribution Agreements, this Agreement and the
other Financing Agreements shall be satisfactory in form and substance to
Lender, and Lender shall have received all information and copies of all
documents, including records of requisite corporate action and proceedings which
Lender may have requested in connection therewith,
30
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such documents where requested by Lender or its counsel to be certified by
appropriate corporate officers or Governmental Authorities;
(e) no material adverse change shall have occurred in the assets, business
or financial condition of Borrower since the date of Lender's latest field
examination and no change or event shall have occurred which would impair the
ability of any Borrower or any Obligor to perform its obligations hereunder or
under any of the other Financing Agreements to which it is a party or of Lender
to enforce the Obligations or realize upon the Collateral;
(f) Lender shall have completed a field review of the Records and such
other information with respect to the Collateral as Lender may require to
determine the amount of Revolving Loans available to Borrowers (including,
without limitation, current perpetual inventory records and/or roll-forwards of
Accounts and Inventory through the date of closing and test counts of the
Inventory in a manner satisfactory to Lender, together with such supporting
documentation as may be necessary or appropriate, and other documents and
information that will enable Lender to accurately identify and verify the
Collateral), the results of which each case shall be satisfactory to Lender, not
more than three (3) Business Days prior to the date hereof;
(g) Lender shall have received, in form and substance satisfactory to
Lender, all consents, waivers, acknowledgments and other agreements from third
persons which Lender may deem necessary or desirable in order to permit, protect
and perfect its security interests in and liens upon the Collateral or to
effectuate the provisions or purposes of this Agreement and the other Financing
Agreements, including, without limitation, Collateral Access Agreements by
owners and lessors of leased premises of any Borrower and by warehouses at which
Collateral is located;
(h) the Excess Availability as determined by Lender, as of the date hereof,
shall be not less than $8,000,000 after giving effect to the initial Loans made
or to be made and Letter of Credit Accommodations issued or to be issued in
connection with the initial transactions hereunder;
(i) Lender shall have received, in form and substance satisfactory to
Lender, all agreements with the depository banks and Borrowers with respect to
the Blocked Accounts as Lender may require pursuant to Section 6.3 hereof, duly
authorized, executed and delivered by such depository banks and Borrowers and
(i) evidence that all local banks used by Borrowers for collections from retail
store locations have been irrevocably authorized and directed in writing to
remit such amounts to the Blocked Accounts;
(j) Lender shall have received evidence, in form and substance satisfactory
to Lender, that Lender has a valid perfected first priority security interest in
all of the Collateral other than the Excluded Property;
(k) Lender shall have received and reviewed UCC search results for all
jurisdictions in the United States and Canada which assets of any Borrower are
located, which search results shall be in form and substance satisfactory to
Lender;
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(l) Lender shall have received an environmental audit of Duck Head's Real
Property and related assets located in Winder, Georgia conducted by an
independent environmental engineering firm acceptable to Lender, and in form,
scope and methodology satisfactory to Lender, confirming (i) Duck Head is in
compliance with all material applicable Environmental Laws and (ii) the absence
of any material potential or actual liability of Duck Head for any remedial
action with respect to any environmental condition or any other material
environmental problems;
(m) Lender shall have received, in form and substance satisfactory to
Lender, a valid and effective title insurance policy issued by a company and
agent acceptable to Lender (i) insuring the priority, amount and sufficiency of
the Mortgages, (ii) insuring against matters that would be disclosed by surveys
and (iii) containing any legally available endorsements, assurances or
affirmative coverage requested by Lender for protection of its interests;
(n) Lender shall have received evidence of insurance and loss payee
endorsements required hereunder and under the other Financing Agreements, in
form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(o) Lender shall have received, in form and substance satisfactory to
Lender, duly authorized, executed and delivered by Woodside and Duck Head the
agreement of Woodside consenting to the collateral assignment by Duck Head to
Lender of all of its rights and remedies and claims for damages and other relief
under the Distribution Agreements and granting Lender such other rights as
Lender may require, duly authorized, executed and delivered by Woodside;
(p) Lender shall have received, in form and substance satisfactory to
Lender, a pro-forma consolidated balance sheet of Duck Head and its Subsidiaries
reflecting the initial transactions contemplated under the Distribution
Agreements and hereunder, including, but not limited to, (i) the consummation of
the transfer of the assets by Woodside to Duck Head and the other transactions
contemplated by the Distribution Agreements and (ii) the Loans and Letter of
Credit Accommodations provided by Lender to Borrowers on the date hereof and the
use of the proceeds of the initial Loans as provided herein, accompanied by a
certificate, dated of even date herewith, of the chief financial officer of Duck
Head stating that such pro-forma balance sheet annexed thereto represents the
reasonable, good faith opinion of such officer as to the subject matter thereof
as of the date of such certificate;
(q) Lender shall have received Credit Card Acknowledgments in each case,
duly authorized, executed and delivered by the Credit Card Issuers and Credit
Card Processors;
(r) Lender shall have received, in form and substance satisfactory to
Lender, such opinion letters of counsel to Borrowers with respect to the
Distribution Agreements, the Financing Agreements and such other matters as
Lender may request; and
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(s) the other Financing Agreements and all instruments and documents
hereunder and thereunder shall have been duly executed and delivered to Lender,
in form and substance satisfactory to Lender.
4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations.
-----------------------------------------------------------------------
Each of the following is an additional condition precedent to Lender making
Loans and/or providing Letter of Credit Accommodations to Borrowers, including
the initial Loans and Letter of Credit Accommodations and any future Loans and
Letter of Credit Accommodations:
(a) all representations and warranties contained herein and in the other
Financing Agreements shall be true and correct in all material respects with the
same effect as though such representations and warranties had been made on and
as of the date of the making of each such Loan or providing each such Letter of
Credit Accommodation and after giving effect thereto, except to the extent that
such representations and warranties expressly relate solely to an earlier date
(in which case such representations and warranties shall have been true and
accurate on and as of such earlier date);
(b) no law, regulation, order, judgment or decree of any Governmental
Authority shall exist, and no action, suit, investigation, litigation or
proceeding shall be pending or threatened in any court or before any arbitrator
or Governmental Authority, which (i) purports to enjoin, prohibit, restrain or
otherwise affect (A) the making of the Loans or providing the Letter of Credit
Accommodations, or (B) the consummation of the transactions contemplated
pursuant to the terms hereof or the other Financing Agreements or (ii) has or
could reasonably be expected to have a material adverse effect on the assets,
business or prospects of any Borrower or would impair the ability of any
Borrower to perform its obligations hereunder or under any of the other
Financing Agreements or of Lender to enforce any Obligations or realize upon any
of the Collateral; and
(c) no Event of Default and no act, condition or event which, with notice
or passage of time or both, would constitute an Event of Default, shall exist or
have occurred and be continuing on and as of the date of the making of such Loan
or providing each such Letter of Credit Accommodation and after giving effect
thereto.
SECTION 5. GRANT OF SECURITY INTEREST
--------------------------
To secure payment and performance of all Obligations, each Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and hereby assigns to Lender as security, the following
property and interests in property of such Borrower, whether now owned or
hereafter acquired or existing, and wherever located (together with all other
collateral security for the Obligations at any time granted to or held or
acquired by Lender, collectively, the "Collateral"):
5.1 Receivables;
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5.2 all other present and future general intangibles (including
Intellectual Property and existing and future leasehold interests in equipment,
real estate and fixtures), chattel paper, documents, instruments, investment
property (including securities, whether certificated or uncertificated,
securities accounts, security entitlements, commodity contracts or commodity
accounts), letters of credit, bankers' acceptances and guaranties;
5.3 all present and future monies, securities and other investment
property, credit balances, deposits, deposit accounts and other property of
Borrower now or hereafter held or received by or in transit to Lender or its
Affiliates or at any other depository or other institution from or for the
account of Borrower, whether for safekeeping, pledge, custody, transmission,
collection or otherwise, and all present and future liens, security interests,
rights, remedies, title and interest in, to and in respect of Receivables and
other Collateral, including (a) rights and remedies under or relating to
guaranties, contracts of suretyship, letters of credit and credit and other
insurance related to the Collateral, (b) rights of stoppage in transit,
replevin, repossession, reclamation and other rights and remedies of an unpaid
vendor, lienor or secured party, (c) goods described in invoices, documents,
credit card sales drafts, credit card sale slips or charge slips or receipts and
other forms of store receipts, contracts or instruments with respect to, or
otherwise representing or evidencing, Receivables or other Collateral, including
returned, repossessed and reclaimed goods, and (d) deposits by and property of
account debtors or other persons securing the obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
5.6 Real Property;
5.7 Records; and
5.8 all products and proceeds of the foregoing, in any form, including
insurance proceeds and all claims against third parties for loss or damage to or
destruction of any or all of the foregoing.
5.9 Notwithstanding anything to the contrary contained in Section 5.1
through 5.8 above, the types or items of Collateral described in such Section
shall not include any Equipment which is, or at the time of Borrower's
acquisition thereof shall be, subject to a purchase money mortgage or other
purchase money lien or security interest (including capitalized or finance
leases) permitted under Section 9.8 hereof if: (a) the valid grant of a security
interest or lien to Lender in such item of Equipment is prohibited by the terms
of the agreement between Borrower and the holder of such purchase money mortgage
or other purchase money lien or security interest or under applicable law and
such prohibition has not been or is not waived, or the consent of the holder of
the purchase money mortgage or other purchase money lien or security interest
has not been or is not otherwise obtained, or under applicable law such
prohibition cannot be waived and (b) the purchase money mortgage or other
purchase money lien or security interest on such item of Equipment is or shall
become valid and perfected .
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SECTION 6. COLLECTION AND ADMINISTRATION
-----------------------------
6.1 Borrowers' Loan Account. Lender shall maintain one or more loan
--------------------------
account(s) on its books in which shall be recorded (a) all Loans, Letter of
Credit Accommodations and other Obligations and the Collateral, (b) all payments
made by or on behalf of Borrowers and (c) all other appropriate debits and
credits as provided in this Agreement, including fees, charges, costs, expenses
and interest. All entries in the loan account(s) shall be made in accordance
with Lender's customary practices as in effect from time to time.
6.2 Statements. Lender shall render to Duck Head, as agent for Borrowers,
-----------
each month a statement setting forth the balance in the Borrowers' loan
account(s) maintained by Lender for Borrower pursuant to the provisions of this
Agreement, including principal, interest, fees, costs and expenses. Each such
statement shall be subject to subsequent adjustment by Lender but shall, absent
manifest errors or omissions, be considered correct and deemed accepted by
Borrowers and conclusively binding upon Borrower as an account stated except to
the extent that Lender receives a written notice from Borrowers of any specific
exceptions of Borrower thereto within thirty (30) days after the date such
statement has been mailed by Lender. Until such time as Lender shall have
rendered to Borrower a written statement as provided above, the balance in
Borrowers' loan account(s) shall be presumptive evidence of the amounts due and
owing to Lender by Borrowers.
6.3 Collection of Accounts.
-----------------------
(a) Each Borrower shall establish and maintain, at its expense, deposit
account arrangements and merchant payment arrangements with the banks set forth
on Schedule 6.3 hereto and after prior written notice to Lender, subject to
Section 9.13, such other banks as each Borrower may hereafter select as are
acceptable to Lender. The banks set forth on Schedule 6.3 constitute all of the
banks with whom each Borrower has deposit account arrangements and merchant
payment arrangements as of the date hereof and identifies each of the deposit
accounts at such banks to a retail store location of such Borrower or otherwise
describes the nature of the use of such deposit account by such Borrower.
(i) Each Borrower shall deposit all proceeds from sales of Inventory in
every form, including, without limitation, cash, checks, credit card sales
drafts, credit card sales or charge slips or receipts and other forms of daily
store receipts, from each retail store location of such Borrower on each
Business Day into the deposit accounts of such Borrower used solely for such
purpose and identified to each retail store location as set forth on Schedule
6.3 (together with any other deposit accounts at any time established or used by
Borrower for receiving such store receipts from any retail store location,
collectively, the "Store Bank Accounts") or as otherwise provided in Section
6.3(a)(ii) below. Each Borrower shall, authorize and direct, and shall use its
best efforts to cause, all available funds deposited into the Store Bank
Accounts to be sent by wire transfer or by transfer using the automated
clearinghouse network ("ACH transfer") not less frequently than once each
calendar week, and all other proceeds of Collateral to be sent by wire transfer
or by ACH transfer, to the Blocked Account as provided in Section 6.3(a)(ii)
below. Each Borrower shall irrevocably authorize and direct in writing, in form
and substance
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satisfactory to Lender, each of the banks into which proceeds from sales of
Inventory from each retail store location of such Borrower are at any time
deposited as provided above to (a) honor all wire or ACH transfer requests,
provided that any and all amounts released and/or transferred by such bank
pursuant to such requests are sent to the Blocked Account and (b) follow any
contrary instructions sent to such banks by Lender. Such authorization and
direction shall not be rescinded, revoked or modified without the prior written
consent of Lender. In the event any of such banks fails to send such funds to
the Blocked Account as provided herein, such Borrower shall pursue all of its
rights and remedies, as requested by Lender, as a result of such failure.
Notwithstanding the foregoing, for those Store Bank Accounts that transfer funds
weekly by ACH transfer initiated by Borrower's store management notifying a
third party processor, Borrower shall irrevocably authorize and direct in
writing, in form and substance satisfactory to Lender, the third party processor
that establishes the routing and executes the ACH transfer to send funds only to
the Blocked Accounts and to agree to do so at any time upon Lender's request and
Lender shall receive an agreement from such third party processor confirming its
agreement to do so. Such authorization and direction shall not be rescinded,
revoked or modified without the prior written consent of Lender.
(ii) Each Borrower shall establish and maintain, at its expense, deposit
accounts with such banks as are acceptable to Lender (the "Blocked Accounts")
into which Borrower shall promptly either cause all amounts on deposit in its
Store Bank Accounts to be sent as provided in Section 6.3(a)(i) above or shall
itself deposit or cause to be deposited all proceeds from sales of Inventory,
all amounts payable to such Borrower from Credit Card Issuers and Credit Card
Processors and all other proceeds of Collateral. The banks at which the Blocked
Accounts are established shall enter into an agreement, in form and substance
satisfactory to Lender, providing that all items received or deposited in the
Blocked Accounts are the property of Lender, that the depository bank has no
lien upon, or right of setoff against, the Blocked Accounts, the items received
for deposit therein, or the funds from time to time on deposit therein and that
the depository bank will wire, or otherwise transfer, in immediately available
funds, on a daily basis, all funds received or deposited into the Blocked
Accounts to such bank account of Lender as Lender may from time to time
designate for such purpose ("Payment Account"). Borrower agrees that all amounts
deposited in such Blocked Accounts or in the Store Bank Accounts or other funds
received and collected by Lender, whether as proceeds of Inventory or other
Collateral or otherwise shall be treated as payments to Lender in respect of the
Obligations and therefore shall constitute property of Lender to the extent of
the then outstanding Obligations.
(b) For the purposes of calculating interest on the Obligations, such
payments or other funds received will be applied (conditional upon final
collection) to the Obligations one (1) Business Day following the date of
receipt of immediately available funds by Lender in the Payment Account. For
purposes of calculating the amount of the Revolving Loans available to Borrower,
such payments will be applied (conditional upon final collection) to the
Obligations on the Business Day of receipt by Lender of immediately available
funds in the Payment Account, if such payments are received in sufficient time
(in accordance with Lender's usual and customary practices as in effect from
time to time) to credit Borrower's loan account on such day, and if not, then on
the next Business Day.
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(c) Each Borrower and all of its shareholders, directors, employees,
agents, Subsidiaries or other Affiliates shall, acting as trustee for Lender,
receive, as the property of Lender, any cash, checks, credit card sales drafts,
credit card sales slips or receipts, notes, drafts, all forms of store receipts,
monies, checks, notes, drafts or any other payment relating to and/or proceeds
of Accounts or other Collateral which come into their possession or under their
control and immediately upon receipt thereof, shall deposit or cause the same to
be deposited in the Blocked Accounts, or remit the same or cause the same to be
remitted, in kind, to Lender. In no event shall the same be commingled with such
Borrower's own funds. Each Borrower agrees to reimburse Lender on demand for any
amounts owed or paid to any bank at which a Blocked Account is established or
any other bank or person involved in the transfer of funds to or from the
Blocked Accounts arising out of Lender's payments to or indemnification of such
bank or person. The obligation of each Borrower to reimburse Lender for such
amounts pursuant to this Section 6.3 shall survive the termination or
non-renewal of this Agreement.
6.4 Payments. All Obligations shall be payable to the Payment Account as
---------
provided in Section 6.3 or such other place as Lender may designate from time to
time. Lender shall apply payments received or collected from Borrowers or for
the account of Borrowers (including the monetary proceeds of collections or of
realization upon any Collateral) as follows: first, to pay any fees, indemnities
or expense reimbursements then due to Lender from Borrowers; second, to pay
interest due in respect of any Loans; third, to pay principal due in respect of
the Loans; fourth, to pay or prepay any other Obligations whether or not then
due, in such order and manner as Lender determines. Notwithstanding anything to
the contrary contained in this Agreement, unless so directed by Borrowers, or
unless an Event of Default shall exist or have occurred and be continuing,
Lender shall not apply any payments which it receives to any Eurodollar Rate
Loans, except (a) on the expiration date of the Interest Period applicable to
any such Eurodollar Rate Loans, or (b) in the event that there are no
outstanding Prime Rate Loans. At Lender's option, all principal, interest, fees,
costs, expenses and other charges provided for in this Agreement or the other
Financing Agreements may be charged directly to the loan account(s) of
Borrowers. Borrowers shall make all payments to Lender on the Obligations free
and clear of, and without deduction or withholding for or on account of, any
setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions,
withholding, restrictions or conditions of any kind. If after receipt of any
payment of, or proceeds of Collateral applied to the payment of, any of the
Obligations, Lender is required to surrender or return such payment or proceeds
to any Person for any reason, then the Obligations intended to be satisfied by
such payment or proceeds shall be reinstated and continue and this Agreement
shall continue in full force and effect as if such payment or proceeds had not
been received by Lender. Borrowers shall be liable to pay to Lender, and does
hereby indemnify and hold Lender harmless for the amount of any payments or
proceeds surrendered or returned. This Section 6.4 shall remain effective
notwithstanding any contrary action which may be taken by Lender in reliance
upon such payment or proceeds. This Section 6.4 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
6.5 Authorization to Make Loans. Lender is authorized to make the Loans and
----------------------------
provide the Letter of Credit Accommodations based upon telephonic or other
instructions received from anyone purporting to be an officer of any Borrower or
other authorized person or, at the
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discretion of Lender, if such Loans are necessary to satisfy any Obligations.
All requests for Loans or Letter of Credit Accommodations hereunder shall
specify the date on which the requested advance is to be made or Letter of
Credit Accommodations established (which day shall be a Business Day) and the
amount of the requested Loan. Requests received after 11:00 a.m. Atlanta,
Georgia time on any day shall be deemed to have been made as of the opening of
business on the immediately following Business Day. All Loans and Letter of
Credit Accommodations under this Agreement shall be conclusively presumed to
have been made to, and at the request of and for the benefit of, Borrowers when
deposited to the credit of any Borrower or otherwise disbursed or established in
accordance with the instructions of any Borrower or in accordance with the terms
and conditions of this Agreement.
6.6 Use of Proceeds. The initial Revolving Loan under this Agreement shall
----------------
be in an amount that is not less than $250,000. Borrowers shall use the initial
proceeds of the Loans provided by Lender to Borrowers hereunder only for: (a)
payments to each of the persons listed in the disbursement direction letter
furnished by Borrowers to Lender on or about the date hereof and (b) costs,
expenses and fees in connection with the preparation, negotiation, execution and
delivery of this Agreement and the other Financing Agreements. All other Loans
made or Letter of Credit Accommodations provided by Lender to Borrowers pursuant
to the provisions hereof shall be used by Borrowers only for general operating,
working capital and other proper corporate purposes of Borrowers not otherwise
prohibited by the terms hereof. None of the proceeds will be used, directly or
indirectly, for the purpose of purchasing or carrying any margin security or for
the purposes of reducing or retiring any indebtedness which was originally
incurred to purchase or carry any margin security or for any other purpose which
might cause any of the Loans to be considered a "purpose credit" within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System,
as amended.
6.7 Appointment of Agent for Requesting Loans and Receipts of Loans and
----------------------------------------------------------------------
Statements.
- -----------
(a) Each Borrower hereby irrevocably appoints and constitutes Duck Head as
its agent to request and receive Loans and Letter of Credit Accommodations
pursuant to this Agreement and the other Financing Agreements from Lender in the
name or on behalf of such Borrower. Lender may disburse the Loans to such bank
account of a Borrower or Duck Head or otherwise make such Loans to a Borrower
and provide such Letter of Credit Accommodations to a Borrower as Duck Head may
designate or direct, without notice to any other Borrower or Obligor.
(b) Duck Head hereby accepts the appointment by Borrowers to act as the
agent of Borrowers pursuant to this Section 6.7. Duck Head shall ensure that the
disbursement of any Loans to each Borrower requested by or paid to Duck Head or
the issuance of any Letter of Credit Accommodations for a Borrower hereunder
shall be paid to or for the account of such Borrower.
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(c) Each Borrower hereby irrevocably appoints and constitutes Duck Head as
its agent to receive statements on account and all other notices from Lender
with respect to the Obligations or otherwise under or in connection with this
Agreement and the other Financing Agreements.
(d) No purported termination of the appointment of Duck Head as agent as
aforesaid shall be effective, except after ten (10) days' prior written notice
to Lender.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
----------------------------------
7.1 Collateral Reporting.
---------------------
(a) Borrowers shall provide Lender with the following documents in a form
satisfactory to Lender:
(i) on a weekly basis, or more frequently as required by Lender, a
schedule of sales made, credits issued and cash received;
(ii) on a monthly basis or more frequently as Lender may request, (A)
perpetual inventory reports, (B) inventory reports by location and
category, (C) agings of accounts payable (and including information
indicating the status of payments to owners and lessors of the leased
premises of Borrowers) and (D) agings of accounts receivable (together with
a reconciliation to the previous month's aging and general ledger);
(iii) upon Lender's request, (A) copies of customer statements and
credit memos, remittance advices and reports, and copies of deposit slips
and bank statements, (B) copies of shipping and delivery documents,
(C) copies of purchase orders, invoices and delivery documents for
Inventory and Equipment acquired by each Borrower; (D) reports on sales and
use tax collections, deposits and payments, including monthly sales and use
tax accruals, and (E) reports by retail store location of sales and
operating profits for each such retail store location;
(iv) as soon as available, but in any event not later than five (5)
days after receipt by any Borrower, the monthly statements received by any
Borrower from any Credit Card Issuers or Credit Card Processors, together
with such additional information with respect thereto as shall be
sufficient to enable Lender to monitor the transactions pursuant to the
Credit Card Agreements;
(v) as soon as possible, but in any event not later than two (2) days
prior to the removal of any Equipment currently located in the United
States to a location of Borrower outside of the United States, in
accordance with Section 7.4(e), a description of such item of moved
Equipment together with the net book value of such item of Equipment; and
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(vi) such other reports as to the Collateral as Lender shall request
from time to time; and
(b) If any of any Borrower's records or reports of the Collateral are
prepared or maintained by an accounting service, contractor, shipper or other
agent, each Borrower hereby irrevocably authorizes such service, contractor,
shipper or agent to deliver such records, reports, and related documents to
Lender and to follow Lender's instructions with respect to further services at
any time that an Event of Default exists or has occurred and is continuing.
7.2 Accounts Covenants.
-------------------
(a) Borrowers shall notify Lender promptly of: (i) any material delay in
any Borrower's performance of any of its obligations to any account debtor
involving an Account exceeding $100,000 or the assertion of any claims, offsets,
defenses or counterclaims by any account debtor involving an amount exceeding
$100,000 or any disputes with account debtors, or any settlement, adjustment or
compromise thereof involving an amount exceeding $100,000, (ii) all material
adverse information relating to the financial condition of any account debtor
and (iii) any event or circumstance which, to Borrower's knowledge would cause
Lender to consider any then existing Accounts as no longer constituting Eligible
Accounts, (iv) any notice of a material default by Borrower under any of the
Credit Card Agreements or of any default which might result in the Credit Card
Issuer or Credit Card Processor ceasing to make payments or suspending payments
to any Borrower, (v) any notice from any Credit Card Issuer or Credit Card
Processor that such person is ceasing or suspending, or will cease or suspend,
any present or future payments due or to become due to Borrower from such
person, or that such person is terminating or will terminate any of the Credit
Card Agreements, and (vi) the failure of any Borrower to comply with any
material terms of the Credit Card Agreements or any terms thereof which might
result in the Credit Card Issuer or Credit Card Processor ceasing or suspending
payments to any Borrower. No credit, discount, allowance or extension or
agreement for any of the foregoing shall be granted to any account debtor
without Lender's consent, except in the ordinary course of any Borrower's
business in accordance with practices and policies previously disclosed in
writing to Lender. So long as no Event of Default exists or has occurred and is
continuing, Borrowers shall settle, adjust or compromise any claim, offset,
counterclaim or dispute with any account debtor. At any time that an Event of
Default exists or has occurred and is continuing, Lender shall, at its option,
have the exclusive right to settle, adjust or compromise any claim, offset,
counterclaim or dispute with account debtors or grant any credits, discounts or
allowances.
(b) Without limiting the obligation of Borrowers to deliver any other
information to Lender, each Borrower shall promptly report to Lender any return
of Inventory by any one account debtor if the Inventory so returned in such case
has a value in excess of $50,000. At any time that Inventory is returned,
reclaimed or repossessed, the Account (or portion thereof) which arose from the
sale of such returned, reclaimed or repossessed Inventory shall not be deemed an
Eligible Account. In the event any account debtor returns Inventory when an
Event of Default exists or has occurred and is continuing, each Borrower shall,
upon Lender's request, (i) hold the returned Inventory in trust for Lender, (ii)
segregate all returned Inventory from all of its other property, (iii) dispose
of the returned Inventory solely according to Lender's instructions, and
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(iv) not issue any credits, discounts or allowances with respect thereto without
Lender's prior written consent.
(c) With respect to each Account: (i) the amounts shown on any invoice
delivered to Lender or schedule thereof delivered to Lender shall be true and
complete, (ii) no payments shall be made thereon except payments immediately
delivered to Lender pursuant to the terms of this Agreement, (iii) no credit,
discount, allowance or extension or agreement for any of the foregoing shall be
granted to any account debtor except as reported to Lender in accordance with
this Agreement and except for credits, discounts, allowances or extensions made
or given in the ordinary course of each Borrower's business in accordance with
practices and policies previously disclosed to Lender, (iv) there shall be no
setoffs, deductions, contras, defenses, counterclaims or disputes existing or
asserted with respect thereto except as reported to Lender in accordance with
the terms of this Agreement, (v) none of the transactions giving rise thereto
will violate any applicable State or Federal laws or regulations, all
documentation relating thereto will be legally sufficient under such laws and
regulations and all such documentation will be legally enforceable in accordance
with its terms.
(d) Lender shall have the right at any time or times, in Lender's name or
in the name of a nominee of Lender, to verify the validity, amount or any other
matter relating to any Account or other Collateral, by mail, telephone,
facsimile transmission or otherwise.
(e) Each Borrower shall deliver or cause to be delivered to Lender, with
appropriate endorsement and assignment, with full recourse to such Borrower, all
chattel paper and instruments which such Borrower now owns or may at any time
acquire immediately upon Borrower's receipt thereof, except as Lender may
otherwise agree.
(f) Lender may, at any time or times that an Event of Default exists or has
occurred and is continuing, (i) notify any or all account debtors that the
Accounts have been assigned to Lender and that Lender has a security interest
therein and Lender may direct any or all accounts debtors, Credit Card Issuers
and Credit Card Processors to make payment of Accounts directly to Lender, (ii)
extend the time of payment of, compromise, settle or adjust for cash, credit,
return of merchandise or otherwise, and upon any terms or conditions, any and
all Accounts or other obligations included in the Collateral and thereby
discharge or release the account debtor or any other party or parties in any way
liable for payment thereof without affecting any of the Obligations, (iii)
demand, collect or enforce payment of any Accounts or such other obligations,
but without any duty to do so, and Lender shall not be liable for its failure to
collect or enforce the payment thereof nor for the negligence of its agents or
attorneys with respect thereto and (iv) take whatever other action Lender may
deem necessary or desirable for the protection of its interests. At any time
that an Event of Default exists or has occurred and is continuing, at Lender's
request, all invoices and statements sent to any account debtor, Credit Card
Issuer and Credit Card Processor shall state that the Accounts and such other
obligations have been assigned to Lender and are payable directly and only to
Lender and each Borrower shall deliver to Lender such originals of documents
evidencing the sale and delivery of goods or the performance of services giving
rise to any Accounts as Lender may require.
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7.3 Inventory Covenants. With respect to the Inventory: (a) each Borrower
--------------------
shall at all times maintain inventory records reasonably satisfactory to Lender,
keeping correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, Borrower's cost therefor and daily
withdrawals therefrom and additions thereto; (b) each Borrower shall conduct a
physical count of the Inventory at least once each year, but at any time or
times as Lender may request on or after an Event of Default, and promptly
following such physical inventory shall supply Lender with a report in the form
and with such specificity as may be reasonably satisfactory to Lender concerning
such physical count; (c) each Borrower shall not remove any Inventory from the
locations set forth or permitted herein, without the prior written consent of
Lender, except for sales of Inventory in the ordinary course of such Borrower's
business and except to move Inventory directly from one location set forth or
permitted herein to another such location and except for Inventory shipped from
the manufacturer thereof to such Borrower which is in transit to the locations
set forth or permitted herein; (d) upon Lender's request, each Borrower shall,
at its expense, twice in any twelve (12) month period, but at any time or times
as Lender may request on or after an Event of Default, deliver or cause to be
delivered to Lender written reports or appraisals as to the Inventory in form,
scope and methodology acceptable to Lender and by an appraiser acceptable to
Lender, addressed to Lender and upon which Lender is expressly permitted to
rely; (e) each Borrower shall produce, use, store and maintain the Inventory
with all reasonable care and caution and in accordance with applicable standards
of any insurance and in conformity with applicable laws (including the
requirements of the Federal Fair Labor Standards Act of 1938, as amended and all
rules, regulations and orders related thereto); (f) each Borrower assumes all
responsibility and liability arising from or relating to the production, use,
sale or other disposition of the Inventory; (g) each Borrower shall not sell
Inventory to any customer on approval, or any other basis which entitles the
customer to return or may obligate such Borrower to repurchase such Inventory
except for the right of return given to customers of such Borrower consistent
with its current policies as of the date hereof; (h) each Borrower shall keep
the Inventory in good and marketable condition; and (i) Borrower shall not,
acquire or accept any Inventory on consignment or approval.
7.4 Equipment and Real Property Covenants. With respect to the Equipment
----------------------------------------
and Real Property: (a) upon Lender's request, Borrowers shall, at their expense,
no more than once in any twelve (12) month period, but at any time or times as
Lender may request on or after an Event of Default, deliver or cause to be
delivered to Lender written reports or appraisals as to the Equipment and/or the
Real Property in form, scope and methodology acceptable to Lender and by an
appraiser acceptable to Lender, addressed to Lender and upon which Lender is
expressly permitted to rely; (b) each Borrower shall keep the Equipment in good
order, repair, running and marketable condition (ordinary wear and tear
excepted); (c) each Borrower shall use the Equipment and Real Property with all
reasonable care and caution and in accordance with applicable standards of any
insurance and in conformity with all applicable laws; (d) the Equipment is and
shall be used in each Borrower's business and not for personal, family,
household or farming use; (e) each Borrower shall not remove any Equipment from
the locations set forth or permitted herein, except to the extent necessary to
have any Equipment repaired or maintained in the ordinary course of the business
of such Borrower or to move Equipment directly from one location set forth or
permitted herein to another such location and except for the movement of motor
vehicles used by or for the benefit of each Borrower in the ordinary
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course of business and no Borrower shall remove any Equipment currently located
in the United States to any location outside of the United States, except, that,
Borrower may remove Equipment currently located in the United States to any
location outside of the United States so long as at the time of such movement of
Equipment each of the following conditions is satisfied: (i) Borrower notifies
Lender of its intention to move such Equipment, (ii) the net book value of all
such item of Equipment when aggregated with the net book value of all other
Equipment moved out of the United States pursuant to this Section does not
exceed $500,000, and (iii) as of the date of any such movement of Equipment and
after giving effect thereto, no Event of Default or act, condition or event
which with notice or passage of time or both would constitute an Event of
Default exists or has occurred and is continuing; (f) the Equipment is now and
shall remain personal property and each Borrower shall not permit any of the
Equipment to be or become a part of or affixed to real property so as to become
a fixture or an accession to real property unless it is attached to the Real
Property subject to a Mortgage; and (g) each Borrower assumes all responsibility
and liability arising from the use of the Equipment and Real Property.
7.5 Power of Attorney. Each Borrower hereby irrevocably designates and
------------------
appoints Lender (and all persons designated by Lender) as such Borrower's true
and lawful attorney-in- fact, and authorizes Lender, in such Borrower's or
Lender's name, to: (a) at any time an Event of Default or act, condition or
event which with notice or passage of time or both would constitute an Event of
Default exists or has occurred and is continuing (i) demand payment on
Receivables or other Collateral, (ii) enforce payment of Receivables by legal
proceedings or otherwise, (iii) exercise all of such Borrower's rights and
remedies to collect any Receivable or other Collateral, (iv) sell or assign any
Receivable upon such terms, for such amount and at such time or times as the
Lender deems advisable, (v) settle, adjust, compromise, extend or renew an
Account, (vi) discharge and release any Receivable, (vii) prepare, file and sign
such Borrower's name on any proof of claim in bankruptcy or other similar
document against an account debtor other obligor in respect of any Receivables
or other Collateral, (viii) notify the post office authorities to change the
address for delivery of remittances from account debtors or other obligors in
respect of Receivables or other proceeds of Collateral to an address designated
by Lender, and open and dispose of all mail addressed to such Borrower and
handle and store all mail relating to the Collateral; and (ix) do all acts and
things which are necessary, in Lender's determination, to fulfill such
Borrower's obligations under this Agreement and the other Financing Agreements
and (b) at any time to (i) take control in any manner of any item of payment in
respect of Receivables or constituting Collateral or otherwise received in or
for deposit in the Blocked Accounts or otherwise received by Lender, (ii) have
access to any lockbox or postal box into which remittances from account debtors
or other obligors in respect of Receivables or other proceeds of Collateral are
sent or received, (iii) endorse such Borrower's name upon any items of payment
in respect of Receivables or constituting Collateral or otherwise received by
Lender and deposit the same in Lender's account for application to the
Obligations, (iv) endorse such Borrower's name upon any chattel paper, document,
instrument, invoice, or similar document or agreement relating to any Receivable
or any goods pertaining thereto or any other Collateral, including any warehouse
or other receipts, or bills of lading and other negotiable or non-negotiable
documents, (v) clear Inventory the purchase of which was financed with Letter of
Credit Accommodations through U.S. Customs in Borrower's name, Lender's name or
the name of Lender's designee, and to sign and deliver to customs officials
powers of attorney in such Borrower's name for such
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purpose, and to complete in Borrower's or Lender s name, any order, sale or
transaction, obtain the necessary documents in connection therewith and collect
the proceeds thereof, (vi) sign such Borrower's name on any verification of
Receivables and notices thereof to account debtors or other obligors in respect
thereof and (vii) execute in such Borrower's name and file any UCC financing
statements or amendments thereto. Each Borrower hereby releases Lender and its
officers, employees and designees from any liabilities arising from any act or
acts under this power of attorney and in furtherance thereof, whether of
omission or commission, except as a result of Lender's own gross negligence or
wilful misconduct as determined pursuant to a final non-appealable order of a
court of competent jurisdiction.
7.6 Right to Cure. Lender may, at its option, (a) upon notice to Borrowers,
--------------
cure any default by any Borrower under any material agreement with a third party
which affects the Collateral, its value or the ability of Lender to collect,
sell or otherwise dispose of the Collateral or the rights and remedies of Lender
therein or the ability of any Borrower to perform its obligations under the
other Financing Agreements, (b) pay or bond on appeal any judgment entered
against Borrower, (c) discharge taxes, liens, security interests or other
encumbrances at any time levied on or existing with respect to the Collateral
and (d) pay any amount, incur any expense or perform any act which, in Lender's
judgment, is necessary or appropriate to preserve, protect, insure or maintain
the Collateral and the rights of Lender with respect thereto. Lender may add any
amounts so expended to the Obligations and charge any Borrower's account
therefor, such amounts to be repayable by Borrowers on demand. Lender shall be
under no obligation to effect such cure, payment or bonding and shall not, by
doing so, be deemed to have assumed any obligation or liability of Borrowers.
Any payment made or other action taken by Lender under this Section shall be
without prejudice to any right to assert an Event of Default hereunder and to
proceed accordingly.
7.7 Access to Premises. From time to time as requested by Lender, at the
-------------------
cost and expense of Borrowers (a) Lender or its designee shall have complete
access to all of Borrower' premises during normal business hours and after
notice to Borrower, or at any time and without notice to Borrowers if an Event
of Default exists or has occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and all of Borrowers' books
and records, including the Records, and (b) each Borrower shall promptly furnish
to Lender such copies of such books and records or extracts therefrom as Lender
may request, and (c) Lender or its designee may use during normal business hours
such of each Borrower's personnel, equipment, supplies and premises as may be
reasonably necessary for the foregoing (provided, that, Borrowers shall make
such personnel, equipment, supplies and premises available to Lender or its
designee in such manner so as to minimize any interference with the operations
of Borrowers and so as to enable Lender or its designee to comply with
applicable health and safety procedures and regulations) and if an Event of
Default exists or has occurred and is continuing for the collection of Accounts
and realization of other Collateral.
7.8 Bills of Lading and Other Documents of Title. In the event that any
------------------------------------------------
Inventory which would otherwise be Eligible Inventory located outside the United
States of America which is in transit to premises of a Customs Broker in the
United States or premises of a Borrower as described in the definition of
Eligible Inventory, constitutes Eligible Inventory then (a) each
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Borrower shall cause all bills of lading and other documents of title relating
to goods being purchased by such Borrower which are outside the United States
and in transit to the premises of such Borrower or the premises of a Customs
Broker in the United States to name such Borrower as consignee, unless and until
Lender may direct otherwise; (b) at such time and from time to time as Lender
may direct, each Borrower shall cause Lender or such financial institution or
other person as Lender may specify to be named as consignee; (c) without
limiting any other rights of Lender hereunder, Lender shall have the right to
endorse and negotiate on behalf of, and as attorney-in-fact for, each Borrower
any bill of lading or other document of title with respect to such goods naming
such Borrower as consignee to Lender; (d) there shall be three (3) originals of
each of such bill of lading or other document of title which unless and until
Lender shall direct otherwise shall be delivered as follows: (i) one (1)
original to such Customs Broker as each Borrower may specify (so long as Lender
has received a Collateral Access Agreement duly authorized, executed and
delivered by such Customs Broker), and (ii) two (2) originals to Lender or to
such other person as Lender may designate for such purpose; (e) such Borrower
shall obtain a copy (but not the originals) of such bill of lading or other
documents from the Customs Broker; and (f)such Borrower shall cause all bills of
lading or other documents of title relating to goods purchased by such Borrower
which are outside the United States and in transit to the premises of such
Borrower or the premises of a Customs Broker in the United States to be issued
in a form so as to constitute negotiable documents as such term is defined in
the Uniform Commercial Code.
SECTION 8. REPRESENTATIONS AND WARRANTIES
------------------------------
Each Borrower hereby, jointly and severally, represents and warrants to
Lender the following (which shall survive the execution and delivery of this
Agreement), the truth and accuracy of which are a continuing condition of the
making of Loans and providing Letter of Credit Accommodations by Lender to
Borrowers.
8.1 Corporate Existence, Power and Authority; Subsidiaries. Each Borrower
--------------------------------------------------------
is a corporation duly organized and in good standing under the laws of its state
of incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on such Borrower's financial condition,
results of operation or business or the rights of Lender in or to any of the
Collateral. The execution, delivery and performance of this Agreement, the other
Financing Agreements and the transactions contemplated hereunder and thereunder
are all within each Borrower's corporate powers, have been duly authorized and
are not in contravention of law or the terms of such Borrower's certificate of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which such Borrower is a party or by which such
Borrower or its property are bound. This Agreement and the other Financing
Agreements constitute legal, valid and binding obligations of each Borrower
enforceable against it in accordance with their respective terms. Borrowers do
not have any Subsidiaries except as set forth on the Information Certificate.
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8.2 Financial Statements; No Material Adverse Change. (a) All financial
----------------------------------------------------
statements relating to Borrowers which have been or may hereafter be delivered
by Borrowers to Lender have been prepared in accordance with GAAP and fairly
present the financial condition and the results of operation of Borrowers as at
the dates and for the periods set forth therein. Except as disclosed in any
interim financial statements furnished by Borrowers to Lender prior to the date
of this Agreement, there has been no material adverse change in the assets,
liabilities, properties and condition, financial or otherwise, of Borrowers,
since the date of the most recent audited financial statements furnished by
Borrowers to Lender prior to the date of this Agreement.
(b) The pro forma balance sheets and future cash flow projections attached
as Schedule 8.2 for Duck Head and its Subsidiaries (together with the summaries
of assumptions and projected assumptions, based on historical performance with
respect thereto) furnished by Duck Head to Lender prior to the date of this
Agreement represent the reasonable, good faith opinion of Duck Head and its
management as to the subject matter thereof.
8.3 Chief Executive Office; Collateral Locations. The chief executive
-------------------------------------------------
office of each Borrower and such Borrower's Records concerning Accounts are
located only at the addresses set forth on the signature page hereto and its
only other places of business and the only other locations of Collateral, if
any, are the addresses set forth in the Information Certificate, subject to the
right of each Borrower to establish new locations in accordance with Section 9.2
below. The Information Certificates correctly identifies any of such locations
which are not owned by Borrowers and sets forth the owners and/or operators
thereof and to the best of each Borrower's knowledge, the holders of any
mortgages on such locations.
8.4 Priority of Liens; Title to Properties. The security interests and
-----------------------------------------
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 8.4
hereto and the other liens permitted under Section 9.8 hereof (other than as to
specific items of Collateral as to which the security interest of Lender is not
required as of the date hereof to be perfected consisting of the Excluded
Property). Each Borrower has good and marketable title to all of its properties
and assets subject to no liens, mortgages, pledges, security interests,
encumbrances or charges of any kind, except those granted to Lender and such
others as are specifically listed on Schedule 8.4 hereto or permitted under
Section 9.8 hereof.
8.5 Tax Returns. Each Borrower has filed, or caused to be filed, in a
-------------
timely manner all tax returns, reports and declarations which are required to be
filed by it. All information in such tax returns, reports and declarations is
complete and accurate in all material respects. Each Borrower has paid or caused
to be paid all taxes due and payable or claimed due and payable in any
assessment received by it, and has collected, deposited and remitted in
accordance with all applicable laws all sales and/or use taxes applicable to the
conduct of its business, except taxes the validity of which are being contested
in good faith by appropriate proceedings diligently pursued and available to
each Borrower and with respect to which adequate reserves have been set aside on
its books. Adequate provision has been made for the payment of all accrued and
unpaid Federal, State, county, local, foreign and other taxes whether or not yet
due and payable and whether or not disputed. Each Borrower has collected and
deposited in a separate bank
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account or remitted to the appropriate tax authority all sales and/or use taxes
applicable to its business required to be collected under the laws of the United
States and each possession or territory thereof, and each State or political
subdivision thereof, including any State in which each Borrower owns any
Inventory or owns or leases any other property.
8.6 Litigation. Except as set forth on the Information Certificate, there
-----------
is no present investigation by any Governmental Authority pending, or to the
best of any Borrower's knowledge threatened, against or affecting Borrower, its
assets or business and there is no action, suit, proceeding or claim by any
Person pending, or to the best of any Borrower's knowledge threatened, against
such Borrower or its assets or goodwill, or against or affecting any
transactions contemplated by this Agreement, which if adversely determined
against such Borrower would result in any material adverse change in the assets,
business or prospects of such Borrower or would impair the ability of such
Borrower to perform its obligations hereunder or under any of the other
Financing Agreements to which it is a party or of Lender to enforce any
Obligations or realize upon any Collateral.
8.7 Compliance with Other Agreements and Applicable Laws.
-----------------------------------------------------
(a) Each Borrower is not in default in any material respect under, or in
violation in any respect of any of the terms of, any agreement, contract,
instrument, lease or other commitment to which it is a party or by which it or
any of its assets are bound. Each Borrower is in compliance in all material
respects with the requirements of all applicable laws, rules, regulations and
orders of any Governmental Authority relating to its business, including,
without limitation, those set forth in or promulgated pursuant to the
Occupational Safety and Health Act of 1970, as amended, the Fair Labor Standards
Act of 1938, as amended, ERISA, the Code, as amended, and the rules and
regulations thereunder, all Federal, State and local statutes, regulations,
rules and orders relating to consumer credit (including, without limitation, as
each has been amended, the Truth-in-Lending Act, the Fair Credit Billing Act,
the Equal Credit Opportunity Act and the Fair Credit Reporting Act, and
regulations, rules and orders promulgated thereunder), all Federal, State and
local states, regulations, rules and orders pertaining to sales of consumer
goods (including, without limitation, the Consumer Products Safety Act of 1972,
as amended, and the Federal Trade Commission Act of 1914, as amended, and all
regulations, rules and orders promulgated thereunder).
(b) Each Borrower has obtained all material permits, licenses, approvals,
consents, certificates, orders or authorizations of any governmental agency
required for the lawful conduct of its business. Schedule 8.7 hereto sets forth
all material permits, licenses, approvals, consents, certificates, orders or
authorizations (the "Permits") issued to or held by Borrowers as of the date
hereof by any Federal, State or local governmental agency and any applications
pending by Borrowers with such federal, state or local governmental agency. The
Permits constitute all permits, licenses, approvals, consents, certificates,
orders or authorizations necessary for each Borrower to own and operate its
business as presently conducted or proposed to be conducted where the failure to
have such Permits would have a material adverse effect on the business,
performance, operations or properties of such Borrower or the legality, validity
or enforceability of this Agreement or the other Financing Agreements or the
ability of Borrower to perform its
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obligations under the Agreement or any of the other Financing Agreements or the
rights and remedies of Lender under this Agreement or any of the other Financing
Agreements. All of the Permits are valid and subsisting and in full force and
effect. There are no actions, claims or proceedings pending or threatened that
seek the revocation, cancellation, suspension or modification of any of the
Permits.
8.8 Environmental Compliance.
-------------------------
(a) Except as set forth on Schedule 8.8 hereto, each Borrower and any
Subsidiary have not generated, used, stored, treated, transported, manufactured,
handled, produced or disposed of any Hazardous Materials, on or off its premises
(whether or not owned by it) in any manner which at any time violates any
applicable Environmental Law or any license, permit, certificate, approval or
similar authorization thereunder and the operations of such Borrower and any
Subsidiary complies in all material respects with all Environmental Laws and all
licenses, permits, certificates, approvals and similar authorizations
thereunder.
(b) Except as set forth on Schedule 8.8 hereto, there has been no
investigation, proceeding, complaint, order, directive, claim, citation or
notice by any Governmental Authority or any other person nor is any pending or
to the best of each Borrower's knowledge threatened, with respect to any
non-compliance with or violation of the requirements of any Environmental Law by
any Borrower and any Subsidiary or the release, spill or discharge, threatened
or actual, of any Hazardous Material or the generation, use, storage, treatment,
transportation, manufacture, handling, production or disposal of any Hazardous
Materials or any other environmental, health or safety matter, which affects
such Borrower or its business, operations or assets or any properties at which
such Borrower has transported, stored or disposed of any Hazardous Materials.
(c) Each Borrower and its Subsidiaries have no material liability
(contingent or otherwise) in connection with a release, spill or discharge,
threatened or actual, of any Hazardous Materials or the generation, use,
storage, treatment, transportation, manufacture, handling, production or
disposal of any Hazardous Materials.
(d) Each Borrower and its Subsidiaries have all licenses, permits,
certificates, approvals or similar authorizations required to be obtained or
filed in connection with the operations of such Borrower under any Environmental
Law and all of such licenses, permits, certificates, approvals or similar
authorizations are valid and in full force and effect.
8.9 Employee Benefits.
------------------
(a) Each Plan is in material compliance with the applicable provisions of
ERISA, the Code and other federal or state law. Each Plan which is intended to
qualify under Section 401(a) of the Code has received a favorable determination
letter from the Internal Revenue Service and to the best knowledge of each
Borrower, nothing has occurred which would cause the loss of such qualification.
Each Borrower and its ERISA Affiliates have made all required contributions to
any Plan subject to Section 412 of the Code, and no application for a funding
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waiver or an extension of any amortization period pursuant to Section 412 of the
Code has been made with respect to any Plan.
(b) There are no pending or to the best knowledge of any Borrower,
threatened claims, actions or lawsuits, or action by any Governmental Authority,
with respect to any Plan. There has been no prohibited transaction or violation
of the fiduciary responsibility rules with respect to any Plan that has not been
fully cured by reversal of the transaction or otherwise, including payment in
full of any applicable fees or penalties.
(c) (i) No ERISA Event has occurred or is reasonably expected to occur;
(ii) the current value of each Plan's assets (determined in accordance with the
assumptions used for funding such Plan pursuant to Section 412 of the Code) do
not exceed such Plan's liabilities under Section 4001(a)(16) of ERISA;
(iii) each Borrower and its ERISA Affiliate have not incurred and do not
reasonably expect to incur, any liability under Title IV of ERISA with respect
to any Plan (other than premiums due and not delinquent under Section 4007 of
ERISA); (iv) each Borrower and its ERISA Affiliates have not incurred and do not
reasonably expect to incur, any liability (and no event has occurred which, with
the giving of notice under Section 4219 of ERISA, would result in such
liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer
Plan; and (v) each Borrower and its ERISA Affiliates have not engaged in a
transaction that could be subject to Section 4069 or 4212(c) of ERISA.
8.10 Bank Accounts. All of the deposit accounts, investment accounts or
--------------
other accounts in the name of or used by each Borrower maintained at any bank or
other financial institution are set forth on Schedule 8.10 hereto, subject to
the right of each Borrower to establish new accounts in accordance with Section
9.13 below.
8.11 Intellectual Property. Borrower owns or licenses or otherwise has the
----------------------
right to use all Intellectual Property necessary for the operation of its
business as presently conducted or proposed to be conducted. As of the date
hereof, Borrower does not have any Intellectual Property registered, or subject
to pending applications, in the United States Patent and Trademark Office or any
similar office or agency in the United States, any State thereof, any political
subdivision thereof or in any other country, other than those described in
Schedule 8.11 hereto and has not granted any licenses with respect thereto other
than as set forth in Schedule 8.11 hereto. No event has occurred which permits
or would permit after notice or passage of time or both, the revocation,
suspension or termination of such rights. To the best of the knowledge of
Borrower, no slogan or other advertising device, product, process, method,
substance or other Intellectual Property or goods bearing or using any
Intellectual Property presently contemplated to be sold by or employed by
Borrower infringes any patent, trademark, servicemark, tradename, copyright,
license or other Intellectual Property owned by any other Person presently and
no claim or litigation is pending or threatened against or affecting Borrower
contesting its right to sell or use any such Intellectual Property. Schedule
8.11 sets forth all of the agreements or other arrangements of Borrower pursuant
to which Borrower has a license or other right to use any trademarks, logos,
designs, representations or other Intellectual Property owned by another person
as in effect on the date hereof and the dates of the expiration of such
agreements or other arrangements of Borrower as in effect on the date hereof. No
trademark, servicemark or other
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Intellectual Property at any time used by Borrower which is owned by another
person, or owned by Borrower subject to any security interest, lien, collateral
assignment, pledge or other encumbrance in favor of any person other than
Lender, is affixed to any Eligible Inventory, except to the extent permitted
under the term of the license agreements listed on Schedule 8.11 hereto.
8.12 Acquisition of Assets.
----------------------
(a) The Distribution Agreements and the transactions contemplated
thereunder have been duly executed, delivered and performed (except to the
extent that the Distribution Agreements as in effect on the date hereof
expressly contemplate performance after the date hereof) in accordance with
their terms by the respective parties thereto in all material respects,
including the fulfillment of all conditions precedent set forth therein and
giving effect to the terms of the Distribution Agreements and the assignments to
be executed and delivered by Woodside (or any of its affiliates or subsidiaries)
thereunder, each Borrower has acquired and has good and marketable title to the
assets, free and clear of all claims, liens, pledges and encumbrances of any
kind, except as permitted hereunder. Duck Head has acquired all of the assets
consisting of the Duck Head Apparel Company division of all of the various
subsidiaries of Woodside.
(b) All actions and proceedings, required by the Distribution Agreements in
respect of the Intercompany Reorganization (as such term is defined in the DWI
Distribution Agreement), applicable law or regulation (including, but not
limited to, compliance with the Hart-Scott-Rodino Anti-Trust Improvements Act of
1976, as amended if applicable) to be taken or have been taken and the
transactions required thereunder have been duly and validly taken and
consummated hereof (except for those provisions thereof that are solely for the
benefit of Woodside and not for Duck Head and do not otherwise affect or relate
to Duck Head).
(c) No court of competent jurisdiction has issued any injunction,
restraining order or other order which prohibits consummation of the
transactions described in the Distribution Agreements and no governmental or
other action or proceeding has been threatened or commenced, seeking any
injunction, restraining order or other order which seeks to void or otherwise
modify the transactions described in the Distribution Agreements.
(d) Borrowers has delivered, or caused to be delivered, to Lender, true,
correct and complete copies of the Distribution Agreements.
8.13 Capitalization.
---------------
(a) All of the issued and outstanding shares of Capital Stock of
Merchandising are directly and beneficially owned and held by Duck Head.
(b) Each Borrower is solvent and will continue to be solvent after the
creation of the Obligations, the security interests of Lender and the other
transaction contemplated hereunder, is able to pay its debts as they mature and
has (and has reason to believe it will
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continue to have) sufficient capital (and not unreasonably small capital) to
carry on its business and all businesses in which it is about to engage. The
assets and properties of each Borrower at a fair valuation and at their present
salable value are, and will be, greater than the Indebtedness of such Borrower,
and including subordinated and contingent liabilities computed at the amount
which, to the best of each Borrower's knowledge, represents an amount which can
reasonably be expected to become an actual or mature liability.
8.14 Labor Disputes.
---------------
(a) Set forth on Schedule 8.14 hereto is a list (including dates of
termination) of all collective bargaining or similar agreements between or
applicable to each Borrower and any union, labor organization or other
bargaining agent in respect of the employees of each Borrower on the date
hereof.
(b) There is (i) no significant unfair labor practice complaint pending
against any Borrower or, to the best of the knowledge of Borrowers, threatened
against it, before the National Labor Relations Board, and no significant
grievance or significant arbitration proceeding arising out of or under any
collective bargaining agreement is pending on the date hereof against any
Borrower or, to best of the knowledge of each Borrower, threatened against it,
and (ii) no significant strike, labor dispute, slowdown or stoppage is pending
against any Borrower or, to the best of the knowledge of Borrowers, threatened
against any Borrower.
8.15 Corporate Name; Prior Transactions. Each Borrower has not, during
-------------------------------------
the past five years, been known by or used by any other corporate or fictitious
name or been a party to any merger or consolidation, or acquired all or
substantially all of the assets of any Person, or acquired any of its property
or assets out of the ordinary course of business, except as set forth in the
Information Certificate.
8.16 Restrictions on Subsidiaries. Except for restrictions contained in
------------------------------
this Agreement or any other agreement with respect to Indebtedness of Borrowers
permitted hereunder as in effect on the date hereof, there are no contractual or
consensual restrictions on any Borrower or any of its Subsidiaries which
prohibit or otherwise restrict (a) the transfer of cash or other assets
(i) between Borrower and any of its Subsidiaries or (ii) between any
Subsidiaries of Borrowers or (b) the ability of any Borrower or any of its
Subsidiaries to incur Indebtedness or grant security interests to Lender in the
Collateral.
8.17 Material Contracts. Schedule 8.17 hereto sets forth all Material
--------------------
Contracts to which any Borrower is a party or is bound as of the date hereof.
Each Borrower has delivered true, correct and complete copies of such Material
Contracts to Lender on or before the date hereof. Each Borrower is not in breach
of or in default under any Material Contract and has not received any notice of
the intention of any other party thereto to terminate any Material Contract.
8.18 Accuracy and Completeness of Information. All information furnished by
-----------------------------------------
or on behalf of Borrowers in writing to Lender in connection with this Agreement
or any of the other Financing Agreements or any transaction contemplated hereby
or thereby, including all
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information on the Information Certificate is true and correct in all material
respects on the date as of which such information is dated or certified and does
not omit any material fact necessary in order to make such information not
misleading. No event or circumstance has occurred which has had or could
reasonably be expected to have a material adverse affect on the business, assets
or prospects of any Borrower, which has not been fully and accurately disclosed
to Lender in writing.
8.19 Survival of Warranties; Cumulative. All representations and warranties
-----------------------------------
contained in this Agreement or any of the other Financing Agreements shall
survive the execution and delivery of this Agreement and shall be deemed to have
been made again to Lender on the date of each additional borrowing or other
credit accommodation hereunder and shall be conclusively presumed to have been
relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
each Borrower shall now or hereafter give, or cause to be given, to Lender.
8.20 Credit Card Agreements. Set forth in Schedule 8.20 hereto is a correct
-----------------------
and complete list of (a) all of the Credit Card Agreements and all other
agreements, documents and instruments existing as of the date hereof between or
among any Borrower, any of its affiliates, the Credit Card Issuers, the Credit
Card Processors and any of their affiliates, (b) the percentage of each sale
payable to the Credit Card Issuer or Credit Card Processor under the terms of
the Credit Card Agreements, (c) all other fees and charges payable by each
Borrower under or in connection with the Credit Card Agreements and (d) the term
of such Credit Card Agreements. The Credit Card Agreements constitute all of
such agreements necessary for each Borrower to operate its business as presently
conducted with respect to credit cards and debit cards and no Accounts of
Borrower arise from purchases by customers of Inventory with credit cards or
debit cards, other than those which are issued by Credit Card Issuers with whom
any Borrower has entered into one of the Credit Card Agreements set forth on
Schedule 8.20 hereto or with whom each Borrower has entered into a Credit Card
Agreement in accordance with Section 9.21 hereof. Each of the Credit Card
Agreements constitutes the legal, valid and binding obligations of such Borrower
and to the best of Borrower's knowledge, the other parties thereto, enforceable
in accordance with their respective terms and are in full force and effect. No
default or event of default, or act, condition or event which after notice or
passage of time or both, would constitute a default or an event of default under
any of the Credit Card Agreements exists or has occurred. Each Borrower and the
other parties thereto have complied with all of the terms and conditions of the
Credit Card Agreements to the extent necessary for such Borrower to be entitled
to receive all payments thereunder. Each Borrower has delivered, or caused to be
delivered to Lender, true, correct and complete copies of all of the Credit Card
Agreements.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
----------------------------------
9.1 Maintenance of Existence. Each Borrower shall at all times preserve,
-------------------------
renew and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, tradenames, approvals, authorizations, leases and
contracts necessary to carry on the business as presently or proposed to
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be conducted. Each Borrower shall give Lender thirty (30) days prior written
notice of any proposed change in its corporate name, which notice shall set
forth the new name and such Borrower shall deliver to Lender a copy of the
amendment to the Certificate of Incorporation of such Borrower providing for the
name change certified by the Secretary of State of the jurisdiction of
incorporation of such Borrower as soon as it is available.
9.2 New Collateral Locations. Each Borrower may open any new location
---------------------------
within the continental United States provided such Borrower (a) gives Lender
fifteen (15) days prior written notice of the intended opening of any such new
location and (b) executes and delivers, or causes to be executed and delivered,
to Lender such agreements, documents, and instruments as Lender may deem
reasonably necessary or desirable to protect its interests in the Collateral at
such location, including UCC financing statements.
9.3 Compliance with Laws, Regulations, Etc.
---------------------------------------
(a) Each Borrower shall, and shall cause any Subsidiary to, at all times,
comply in all material respects with all laws, rules, regulations, licenses,
permits, approvals and orders applicable to it and duly observe all requirements
of any Federal, State or local Governmental Authority, including ERISA, the
Code, the Occupational Safety and Health Act of 1970, as amended, the Fair Labor
Standards Act of 1938, as amended, and all statutes, rules, regulations, orders,
permits and stipulations relating to environmental pollution and employee health
and safety, including all of the Environmental Laws.
(b) At the reasonable request of Lender and in any event, to the extent
required by applicable law, each Borrower shall establish and maintain, at its
expense, a system to assure and monitor its continued compliance with all
Environmental Laws in all of its operations, which system shall include annual
reviews of such compliance by employees or agents of such Borrower who are
familiar with the requirements of the Environmental Laws. Copies of all
environmental surveys, audits, assessments, feasibility studies and results of
remedial investigations shall be promptly furnished, or caused to be furnished,
by such Borrower to Lender. Each Borrower shall take prompt and appropriate
action to respond to any non- compliance with any of the Environmental Laws and
shall regularly report to Lender on such response.
(c) Each Borrower shall give both oral and written notice to Lender
immediately upon such Borrower's receipt of any notice of, or such Borrower's
otherwise obtaining knowledge of, (i) the occurrence of any event involving the
release, spill or discharge, threatened or actual, of any Hazardous Material or
(ii) any investigation, proceeding, complaint, order, directive, claims,
citation or notice with respect to: (A) any non-compliance with or violation of
any Environmental Law by such Borrower or (B) the release, spill or discharge,
threatened or actual, of any Hazardous Material or (C) the generation, use,
storage, treatment, transportation, manufacture, handling, production or
disposal of any Hazardous Materials or (D) any other environmental, health or
safety matter, which affects Borrower or its business, operations or assets or
any properties at which Borrower transported, stored or disposed of any
Hazardous Materials.
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(d) Without limiting the generality of the foregoing, whenever Lender
reasonably determines that there is non-compliance, or any condition which
requires any action by or on behalf of any Borrower in order to avoid any
material non-compliance, with any Environmental Law, Borrower shall, at Lender's
request and Borrowers' expense: (i) cause an independent environmental engineer
acceptable to Lender to conduct such tests of the site where such Borrower's
non-compliance or alleged non-compliance with such Environmental Laws has
occurred as to such non-compliance and prepare and deliver to Lender a report as
to such non- compliance setting forth the results of such tests, a proposed plan
for responding to any environmental problems described therein, and an estimate
of the costs thereof and (ii) provide to Lender a supplemental report of such
engineer whenever the scope of such non-compliance, or Borrower's response
thereto or the estimated costs thereof, shall change in any material respect.
(e) Each Borrower shall indemnify and hold harmless Lender, its directors,
officers, employees, agents, invitees, representatives, successors and assigns,
from and against any and all losses, claims, damages, liabilities, costs, and
expenses (including attorneys' fees and legal expenses) directly or indirectly
arising out of or attributable to the use, generation, manufacture,
reproduction, storage, release, threatened release, spill, discharge, disposal
or presence of a Hazardous Material, including the costs of any required or
necessary repair, cleanup or other remedial work with respect to any property of
any Borrower and the preparation and implementation of any closure, remedial or
other required plans. All representations, warranties, covenants and
indemnifications in this Section 9.3 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
9.4 Payment of Taxes and Claims. Each Borrower shall, and shall cause any
----------------------------
Subsidiary to, duly pay and discharge all taxes, assessments, contributions and
governmental charges upon or against it or its properties or assets, except for
taxes the validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to such Borrower or such
Subsidiary, as the case may be, and with respect to which adequate reserves have
been set aside on its books. Each Borrower shall be liable for any tax or
penalties imposed on Lender as a result of the financing arrangements provided
for herein and each Borrower agrees to indemnify and hold Lender harmless with
respect to the foregoing, and to repay to Lender on demand the amount thereof,
and until paid by Borrowers such amount shall be added and deemed part of the
Loans, provided, that, nothing contained herein shall be construed to require
Borrower to pay any income or franchise taxes attributable to the income of
Lender from any amounts charged or paid hereunder to Lender. The foregoing
indemnity shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
9.5 Insurance. Each Borrower shall, and shall cause any Subsidiary to, at
----------
all times, maintain with financially sound and reputable insurers insurance with
respect to the Collateral against loss or damage and all other insurance of the
kinds and in the amounts customarily insured against or carried by corporations
of established reputation engaged in the same or similar businesses and
similarly situated. Said policies of insurance shall be satisfactory to Lender
as to form, amount and insurer. Each Borrower shall furnish certificates,
policies or endorsements to Lender as Lender shall require as proof of such
insurance, and, if such Borrower fails to do so, Lender is authorized, but not
required, to obtain such insurance at the expense of
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Borrowers. All policies shall provide for at least thirty (30) days prior
written notice to Lender of any cancellation or reduction of coverage and that
Lender may act as attorney for any Borrower in obtaining, and at any time an
Event of Default exists or has occurred and is continuing, adjusting, settling,
amending and canceling such insurance. Each Borrower shall cause Lender to be
named as a loss payee and an additional insured (but without any liability for
any premiums) under such insurance policies and such Borrower shall obtain
non-contributory lender's loss payable endorsements to all insurance policies in
form and substance satisfactory to Lender. Such lender's loss payable
endorsements shall specify that the proceeds of such insurance shall be payable
to Lender as its interests may appear and further specify that Lender shall be
paid regardless of any act or omission by Borrower or any of its Affiliates. At
its option, Lender may apply any insurance proceeds received by Lender at any
time to the cost of repairs or replacement of Collateral and/or to payment of
the Obligations, whether or not then due, in any order and in such manner as
Lender may determine or hold such proceeds as cash collateral for the
Obligations.
9.6 Financial Statements and Other Information.
-------------------------------------------
(a) Each Borrower shall, and shall cause any Subsidiary to, keep proper
books and records in which true and complete entries shall be made of all
dealings or transactions of or in relation to the Collateral and the business of
Borrower and its Subsidiaries in accordance with GAAP. Borrower shall promptly
furnish to Lender all such financial and other information as Lender shall
reasonably request relating to the Collateral and the assets, business and
operations of each Borrower, and to notify the auditors and accountants of each
Borrower that Lender is authorized to obtain such information directly from
them. Without limiting the foregoing, Borrowers shall furnish or cause to be
furnished to Lender, the following: (i) within thirty (30) days after the end of
each fiscal month (other than the end of a fiscal quarter), monthly unaudited
consolidated financial statements (including in each case balance sheets,
statements of income and loss, statements of cash flow, and statements of
shareholders' equity), all in reasonable detail, fairly presenting the financial
position and the results of the operations of Duck Head and its Subsidiaries as
of the end of and through such fiscal month, certified to be correct by the
chief financial officer of Duck Head, subject to normal year-end adjustments,
(ii) within forty-five (45) days after the end of each fiscal quarter (other
than at the end of the fiscal year), unaudited consolidated financial statements
(including in each case balance sheets, statements of income and loss,
statements of cash flow, and statements of shareholders' equity) and (iii)
within ninety (90) days after the end of each fiscal year, audited consolidated
financial statements of Duck Head and its Subsidiaries (including in each case
balance sheets, statements of income and loss, statements of cash flow and
statements of shareholders' equity), and the accompanying notes thereto, all in
reasonable detail, fairly presenting the financial position and the results of
the operations of Duck Head and its Subsidiaries as of the end of and for such
fiscal year, together with the unqualified opinion of independent certified
public accountants, which accountants shall be an independent accounting firm
selected by Duck Head and reasonably acceptable to Lender, that such financial
statements have been prepared in accordance with GAAP, and present fairly the
results of operations and financial condition of Borrower and its Subsidiaries
as of the end of and for the fiscal year then ended.
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(b) Each Borrower shall promptly notify Lender in writing of the details of
(i) any loss, damage, investigation, action, suit, proceeding or claim relating
to the Collateral or any other property which is security for the Obligations or
which would result in any material adverse change in such Borrower's business,
properties, assets, goodwill or condition, financial or otherwise, (ii) any
Material Contract of any Borrower being terminated or amended or any new
Material Contract entered into (in which event such Borrower shall provide
Lender with a copy of such Material Contract), (iii) any order, judgment or
decree in excess of $500,000 shall have been entered against any Borrower or any
of its properties or assets, (iv) any notification of violation of laws or
regulations received by any Borrower, (v) any ERISA Event, and (vi) the
occurrence of any Event of Default or act, condition or event which, with notice
or the passage of time or giving of notice or both, would constitute an Event of
Default.
(c) Borrowers shall promptly after the sending or filing thereof furnish or
cause to be furnished to Lender copies of all reports which any Borrower sends
to its stockholders generally and copies of all reports and registration
statements which Borrower files with the Securities and Exchange Commission, any
national securities exchange or the National Association of Securities Dealers,
Inc.
(d) Without limiting the rights of Lender under any other provision of this
Agreement, as soon as available, but in any event not later than three (3) days
after the end of each calendar month, each Borrower shall deliver to Lender, in
form and substance satisfactory to Lender, in each case certified by the chief
financial officer of such Borrower as true and correct: (i) a statement
confirming the payment of rent and other amounts due to owners and lessors of
real property used by such Borrower in the immediately preceding month (subject
to year-end or periodic adjustments) which have not executed Collateral Access
Agreements, and (ii) the addresses of existing retail store locations closed, in
each case since the date of the most recent certificate delivered to Lender
containing the information required under this clause.
(e) Borrowers shall deliver, or cause to be delivered, to Lender, within
ninety (90) days from the date hereof, an opening unaudited consolidated balance
sheet of Duck Head and its Subsidiaries after giving effect to the transactions
contemplated by this Agreement and the Distribution Agreements which present
fairly the financial condition of Borrower as of such date.
(f) Each Borrower shall furnish or cause to be furnished to Lender such
budgets, forecasts, projections and other information respecting the Collateral
and the business of such Borrower, as Lender may, from time to time, reasonably
request. Lender is hereby authorized to deliver a copy of any financial
statement or any other information relating to the business of any Borrower to
any court or other Governmental Authority to the extent required by statute,
rule, regulation, subpoena or court order or to any participant or assignee or
prospective participant or assignee. Each Borrower hereby irrevocably authorizes
and directs all accountants or auditors to deliver to Lender, at Borrowers'
expense, copies of the financial statements of Borrowers and any reports or
management letters prepared by such accountants or auditors on behalf of
Borrowers and to disclose to Lender such information as they may have regarding
the business of Borrowers. Any documents, schedules, invoices or other papers
delivered to Lender may be
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destroyed or otherwise disposed of by Lender one (1) year after the same are
delivered to Lender, except as otherwise designated by Borrower to Lender in
writing.
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Each Borrower
---------------------------------------------------------
shall not, and shall not permit any Subsidiary to, directly or indirectly,
(a) merge into or with or consolidate with any other Person or permit any
other Person to merge into or with or consolidate with it except that any
Borrower may merge with and into or consolidate with the other Borrower,
provided, that, each of the following conditions is satisfied as determined by
Lender: (i) Lender shall have received not less than ten (10) days prior written
notice of the intention of such Borrower to so merge or consolidate and such
information with respect thereto as Lender may request, (ii) as of the effective
date of the merger or consolidation and after giving effect thereto, no Event of
Default or act, condition or event which with notice or passage of time or both
would constitute an Event of Default, shall exist or have occurred and be
continuing, (iii) Lender shall have received true, correct and complete copies
of all agreements, documents and instruments relating to such merger or
consolidation, including, but not limited to, the certificate or certificates of
merger or consolidation to be filed with each appropriate Secretary of State or
other Governmental Authority (and promptly after such merger or consolidation is
effective, as such certificate or certificates of merger or consolidation have
been filed with each appropriate Secretary of State or other Governmental
Authority), and (iv) each Obligor shall ratify and confirm that its guarantees
of the Obligations shall apply to the Obligations as assumed by such surviving
entity; or
(b) sell, assign, lease, transfer, abandon or otherwise dispose of any
Capital Stock or Indebtedness to any other Person or any of its assets to any
other Person, except for
(i) sales of Inventory in the ordinary course of business,
(ii) the disposition of any of the embroidery equipment listed on
Schedule 1.36 hereto and the Real Property of Borrower located at Planta
Jupiter, Contigua al Motel Amar, San Francisco de Dos Rios, San Jose, Costa
Rica,
(iii) the disposition of worn-out or obsolete Equipment so long as
such disposition shall not, in the good faith determination of Lender, have
a material adverse effect on the condition (financial or otherwise),
business, performance, operations or properties of such Borrower; the
ability of Borrower to repay the Obligations or of such Borrower to perform
its obligations under this Agreement or any of the other Financing
Agreements,
(iv) the issuance and sale by Duck Head of Capital Stock of Duck Head
after the date hereof; provided, that, (A) Lender shall have received not
less than ten (10) Business Days prior written notice of such issuance and
sale by Duck Head, which notice shall specify the parties to whom such
shares are to be sold, the terms of such sale, the total amount which it is
anticipated will be realized from the issuance and sale of such stock and
the net cash proceeds which it is anticipated will be received by Borrower
from such sale, (B) Borrower shall not be required to pay any cash
dividends or repurchase or redeem such Capital Stock or make any other
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payments in respect thereof except as permitted in Section 9.11 hereof, (C)
the terms of such Capital Stock, and the terms and conditions of the
purchase and sale thereof, shall not include any terms that include any
limitation on the right of Duck Head to request or receive Loans or Letter
of Credit Accommodations or the right of Duck Head to amend or modify any
of the terms and conditions of this Agreement or any of the other Financing
Agreements or otherwise in any way relate to or affect the arrangements of
Duck Head with Lender are more restrictive or burdensome to Duck Head than
the terms of any Capital Stock in effect on the date hereof, and (D) as of
the date of such issuance and sale and after giving effect thereto, no
Event of Default or act, condition or event which with notice or passage of
time or both would constitute an Event of Default shall exist or have
occurred;
(v) the issuance of Capital Stock of Duck Head consisting of common
stock pursuant to (A) a stock option plan, 401(k) plan or incentive stock
award plan of Duck Head for the benefit of its employees, directors and
consultants, provided, that, in no event shall Duck Head be required to
issue, or shall Duck Head issue, Capital Stock pursuant to such stock
option plan, 401(k) plan or incentive stock award plan which would result
in an Event of Default, (B) the option granted to Robert D. Rockey to
purchase up to 1,000,000 shares of DH Apparel Company, Inc. common stock on
the date six (6) months after the distribution of DH Apparel Company's
stock to the shareholder's of Woodside at a purchase price equal to the
average daily closing stock price for DH Apparel Company, Inc. common stock
for the six (6) month period following the distribution;
(c) form or acquire any Subsidiaries other than those listed on the
Information Certificate;
(d) wind up, liquidate or dissolve; or
(e) agree to do any of the foregoing.
9.8 Encumbrances. Each Borrower shall not, and shall permit any Subsidiary
-------------
to, create, incur, assume or suffer to exist any security interest, mortgage,
pledge, lien, charge or other encumbrance of any nature whatsoever on any of its
assets or properties, including the Collateral, except:
(a) the security interests and liens of Lender;
(b) liens securing the payment of taxes, either not yet overdue or the
validity of which are being contested in good faith by appropriate proceedings
diligently pursued and available to such Borrower or such Subsidiary, as the
case may be and with respect to which adequate reserves have been set aside on
its books;
(c) non-consensual statutory liens (other than liens securing the payment
of taxes) arising in the ordinary course of such Borrower's or such Subsidiary's
business to the extent: (i) such liens secure Indebtedness which is not overdue
or (ii) such liens secure Indebtedness relating to claims or liabilities which
are fully insured and being defended at the sole cost and
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expense and at the sole risk of the insurer or being contested in good faith by
appropriate proceedings diligently pursued and available to such Borrower or
such Subsidiary, in each case prior to the commencement of foreclosure or other
similar proceedings and with respect to which adequate reserves have been set
aside on its books;
(d) zoning restrictions, easements, licenses, covenants and other
restrictions affecting the use of Real Property which do not interfere in any
material respect with the use of such Real Property or ordinary conduct of the
business of such Borrower or such Subsidiary as presently conducted thereon or
materially impair the value of the Real Property which may be subject thereto;
(e) purchase money security interests in Equipment (including Capital
Leases) and purchase money mortgages on Real Property to secure Indebtedness
permitted under Section 9.9(b) hereof;
(f) a first and only deed to secure debt (a "Security Deed") on the
Distribution and Office Facility arising after the second anniversary of this
Agreement so long as each of the following conditions is satisfied in the
determination of Lender: (i) Lender shall have received not less than forty-five
(45) days prior written notice of the intention of Duck Head to grant such
security interest and incur such Indebtedness, (ii) the Indebtedness secured by
such Real Property, arises from loans in cash or other immediately available
funds provided to Duck Head, the proceeds of which are used, first, to pay, the
entire outstanding amount of all principal and all accrued interest on the Term
Loan, and second, to repay the outstanding principal amount of Revolving Loans
which amounts may be reborrowed, (iii) such Security Deed and does not apply to
any property of Duck Head other than the Distribution and Office Facility, (iv)
as of the date of the incurrence of such Indebtedness and the creation of such
Security Deed and after giving effect thereto, the Excess Availability shall be
not less than $4,000,000, (v) such Security Deed shall be in form and substance
satisfactory to Lender, (vi) Lender shall have received a Collateral Access
Agreement, duly executed by such new lender, in form and substance satisfactory
to Lender, and (vii) as of the date of the granting of any such Security Deed
and incurrence of such Indebtedness and after giving effect thereto, no Event of
Default or act, condition or event which with notice, lapse of time or both
would constitute an Event of Default shall exist or have occurred; to the extent
that each of the foregoing conditions has been satisfied in the determination of
Lender, Lender shall, at the request of Duck Head, at Borrowers' expense,
execute and deliver a release of Deed to Secure Debt and such other release of
lien as requested by the new lender, provided, that, such releases shall each be
in form and substance satisfactory to Lender;
(g) setoff or credit balances of any Borrower with Credit Card Issuers, but
not liens on or rights of setoff against any other property or assets of such
Borrower pursuant to the Credit Card Agreements (as in effect on the date
hereof) to secure the obligations of such Borrower to the Credit Card Issuers as
a result of fees and chargebacks; or
(h) the security interests and liens set forth on Schedule 8.4 hereto.
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9.9 Indebtedness. Each Borrower shall not, and shall not permit any
-------------
Subsidiary to, incur, create, assume, become or be liable in any manner with
respect to, or permit to exist, any Indebtedness, except:
(a) the Obligations;
(b) purchase money Indebtedness (including Capital Leases) to the extent
secured by purchase money security interests in Equipment (including Capital
Leases) so long as such security interests do not apply to any property of such
Borrower other than the Equipment so acquired, and the Indebtedness secured
thereby does not exceed the cost of the Equipment so acquired; except, that,
with respect to the Warehouse Equipment, Duck Head may refinance the Warehouse
Equipment which was previously financed under the GECC Warehouse Equipment Lease
(the "Refinancing Indebtedness") so long as each of the following conditions is
satisfied in the determination of Lender: (A) the principal amount of such
Refinancing Indebtedness shall not exceed the lesser of (1) $1,550,000 or (2)
the fair market value of the Warehouse Equipment (plus the amount of reasonable
refinancing fees and expenses incurred in connection therewith on the date of
such refinancing), (B) as of the date of any such refinancing and after giving
effect thereto, the Excess Availability of Duck Head shall not be less than
$8,000,000, (C) the Refinancing Indebtedness shall only be secured by the
Warehouse Equipment, (D) Lender shall have received true, correct and complete
copies of all agreements, documents and instruments evidencing or otherwise
related to such Refinancing Indebtedness, each in form and substance
satisfactory to Lender and as duly authorized, executed and delivered by the
parties thereto, and (E) as of the date of incurring such Indebtedness and after
giving effect thereto, no Event of Default, or act, condition or event which
with notice or passage of time or both would constitute an Event of Default,
shall exist or have occurred and be continuing; to the extent that each of the
foregoing conditions has been satisfied in the determination of Lender, Lender
shall, at the request of Duck Head, at Borrowers' expense, execute and deliver a
UCC-3 Partial Release with respect to the Warehouse Equipment subject to such
refinancing and such other release of lien as shall be reasonably requested by
the new lender, provided, that, such releases shall each be in form and
substance satisfactory to Lender;
(c) Indebtedness of Duck Head arising after the second anniversary of the
date of this Agreement to the extent secured by a Security Deed on the
Distribution and Office Facility permitted under Section 9.8 (f) above;
(d) Indebtedness of any Borrower under interest swap agreements, interest
rate cap agreements, interest rate collar agreements, interest rate exchange
agreements and similar contractual agreements entered into for the purpose of
protecting a Person against fluctuations in interest rates; provided, that, such
arrangements are with banks or other financial institutions that have combined
capital and surplus and undivided profits of not less than $100,000,000 and are
not for speculative purposes and such Indebtedness shall be unsecured;
(e) the Indebtedness set forth on Schedule 9.9 hereto; provided, that, (i)
Borrower may only make regularly scheduled payments of principal and interest in
respect of such Indebtedness in accordance with the terms of the agreement or
instrument evidencing or giving
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rise to such Indebtedness as in effect on the date hereof, (ii) such Borrower
shall not, directly or indirectly, (A) amend, modify, alter or change the terms
of such Indebtedness or any agreement, document or instrument related thereto as
in effect on the date hereof except, that, such Borrower may, after prior
written notice to Lender, amend, modify, alter or change the terms thereof so as
to extend the maturity thereof, or defer the timing of any payments in respect
thereof, or to forgive or cancel any portion of such Indebtedness (other than
pursuant to payments thereof), or to reduce the interest rate or any fees in
connection therewith, or (B) redeem, retire, defease, purchase or otherwise
acquire such Indebtedness, or set aside or otherwise deposit or invest any sums
for such purpose, and (iii) such Borrower shall furnish to Lender all notices or
demands in connection with such Indebtedness either received by Borrower or on
its behalf, promptly after the receipt thereof, or sent by Borrower or on its
behalf, concurrently with the sending thereof, as the case may be.
9.10 Loans, Investments, Guarantees, Etc. Each Borrower shall not, and
---------------------------------------
shall not permit any Subsidiary to, directly or indirectly, make any loans or
advance money or property to any person, or invest in (by capital contribution,
dividend or otherwise) or purchase or repurchase the Capital Stock or
Indebtedness or all or a substantial part of the assets or property of any
person, or guarantee, assume, endorse, or otherwise become responsible for
(directly or indirectly) the Indebtedness, performance, obligations or dividends
of any Person, or form or acquire any Subsidiaries, or agree to do any of the
foregoing, except:
(a) the endorsement of instruments for collection or deposit in the
ordinary course of business;
(b) investments in cash or Cash Equivalents, provided, that, (i) no
Revolving Loans are then outstanding and (ii) as to any of the foregoing, unless
waived in writing by Lender, each Borrower shall take such actions as are deemed
necessary by Lender to perfect the security interest of Lender in such
investments;
(c) the existing equity investments of each Borrower as of the date hereof
in its Subsidiaries, provided, that, Borrower shall have any obligation to make
any other investment in, or loans to, or other payments in respect of, any such
Subsidiaries;
(d) guarantees by any Subsidiaries of any Borrower of the Obligations in
favor of Lender;
(e) stock or obligations issued to a Borrower by any Person (or the
representative of such Person) in respect of Indebtedness of such Person owing
to such Borrower in connection with the insolvency, bankruptcy, receivership or
reorganization of such Person or a composition or readjustment of the debts of
such Person; provided, that, the original of any such stock or instrument
evidencing such obligations shall be promptly delivered to Lender, upon Lender's
request, together with such stock power, assignment or endorsement by such
Borrower as Lender may request;
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(f) obligations or account debtors to a Borrower arising from Accounts
which are past due evidenced by a promissory note made by such account debtor
payable to such Borrower; provided, that, promptly upon the receipt of the
original of any such promissory note by any Borrower, such promissory note shall
be endorsed to the order of Lender by such Borrower and promptly delivered to
Lender as so endorsed;
(g) the loans, advances and guarantees set forth on Schedule 9.10 hereto;
provided, that, as to such loans, advances and guarantees, (i) each Borrower
shall not, directly or indirectly, (A) amend, modify, alter or change the terms
of such loans, advances or guarantees or any agreement, document or instrument
related thereto, or (B) as to such guarantees, redeem, retire, defease, purchase
or otherwise acquire the obligations arising pursuant to such guarantees, or set
aside or otherwise deposit or invest any sums for such purpose, and (ii) each
Borrower shall furnish to Lender all notices or demands in connection with such
loans, advances or guarantees or other Indebtedness subject to such guarantees
either received by such Borrower or on its behalf, promptly after the receipt
thereof, or sent by such Borrower or on its behalf, concurrently with the
sending thereof, as the case may be; and
(h) unsecured loans by any Borrower to any other Borrower to the extent
permitted under Section 9.12 hereof; provided, that, as to any such loan, (i)
each month Borrowers shall provide to Lender a report in form and substance
reasonably satisfactory to Lender of the amount of such loans made in the
immediately preceding month and any repayments in connection therewith, and (ii)
the Indebtedness arising pursuant to any such loan shall not be evidenced by a
promissory note or other instrument, unless the single original of such note or
other instrument is delivered to Lender to hold as part of the Collateral, with
such endorsement and/or assignment by the payee of such note or other instrument
as Lender may reasonably require.
9.11 Dividends and Redemptions. Each Borrower shall not, directly or
----------------------------
indirectly, declare or pay any dividends on account of any shares of class of
Capital Stock of such Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of Capital Stock
(or set aside or otherwise deposit or invest any sums for such purpose) for any
consideration other than common stock or apply or set apart any sum, or make any
other distribution (by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing except
(a) any Subsidiary of a Borrower may pay dividends to such Borrower;
(b) Duck Head may pay cash dividends or distributions from legally
available funds therefor, to its shareholders from time to time in amounts such
that the aggregate amount paid to shareholders does not exceed twenty-five (25%)
percent of its cumulative Net Income (calculated from the date of this Agreement
to date of determination), provided, that, (i) Lender shall have received ten
(10) days prior to any payment thereof, a certificate signed by Borrower's chief
financial officer (A) setting forth Duck Head's cumulative Net Income with
respect to which the dividend or distribution is to be made and providing full
information and computations with respect thereto and (B) such dividend or
distribution is not in violation of applicable law or any other agreement to
which Duck Head is a party or by which it is bound, (ii) as of the date of any
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such payment and after giving effect thereto, the Excess Availability shall be
not less than $6,000,000, and (iii) as of the date of any such payment and after
giving effect thereto, no Event of Default or any act, condition or event which,
with notice or passage of time or both, would constitute an Event of Default,
shall exist or have occurred;
(c) Duck Head may repurchase its Capital Stock consisting of common stock,
provided, that, as to (i) any such repurchase, each of the following conditions
is satisfied: (A) as of the date of the payment for such repurchase and after
giving effect thereto, no Event of Default or any act, condition or event which,
with notice or passage of time or both, would constitute an Event of Default,
shall exist or have occurred and be continuing, (B) such repurchase shall be
paid with funds legally available therefor, (C)such repurchase shall not violate
any law or regulation or the terms of any indenture, agreement or undertaking to
which such Borrower is a party or by which such Borrower or its property is
bound, (D) as of the date of any such payment for such repurchase and after
giving effect thereto, the Excess Availability shall be not less than
$6,000,000, and (E) the aggregate amount of all payments for such repurchases
during the term of this Agreement shall not exceed $3,000,000.
9.12 Transactions with Affiliates. Each Borrower shall not, and shall not
------------------------------
permit any Subsidiary to, directly or indirectly,
(a) purchase, acquire or lease any property from, or sell, transfer or
lease any property to, any officer, director, agent or other person affiliated
with such Borrower, except in the ordinary course of and pursuant to the
reasonable requirements of such Borrower's business and upon fair and reasonable
terms no less favorable to such Borrower than such Borrower would obtain in a
comparable arm's length transaction with an unaffiliated person; or
(b) make any payments of management, consulting or other fees for
management or similar services, or of any Indebtedness owing to any officer,
employee, shareholder, director or other Affiliate of such Borrower except:
(i) reasonable compensation to officers, employees and directors for
services rendered to Borrower in the ordinary course of business;
(ii) dividends permitted under Section 9.11 (b) above; and
(iii) payments by any Borrower to Cargud, S.A. for (A) actual and
necessary reasonable out-of-pocket administrative, operating and capital
expenditures of Cargud, S.A. for the business of Borrower as presently
conducted in the ordinary course of business (including lease payments,
payroll, insurance, franchise taxes and similar items), provided, that, the
amount of all such payments permitted under Section 9.12 (iii)(A) in
respect of capital expenditures shall not exceed $100,000 in the aggregate
for all Borrowers in any fiscal year of Borrowers, and (B) actual and
necessary reasonable out-of-pocket legal, accounting, insurance (including
premiums for such insurance), marketing, payroll and similar types of
services paid for by Cargud, S.A. in the ordinary course of its business as
conducted as of the date hereof or as the same may be directly attributable
to such Borrower; provided, that, (1) such expenses are in the ordinary
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course of and pursuant to the reasonable requirements of such Borrower's
business as conducted on the date hereof, and (2) to the extent such
expenses are payable to Cargud, S.A., such expenses shall be payable upon
terms no less favorable to such Borrower, than such Borrower, could obtain
in a comparable arm's length transaction with a person who is not an
Affiliate.
9.13 Additional Bank Accounts. Each Borrower shall not, directly or
---------------------------
indirectly, open, establish or maintain any deposit account, investment account
or any other account with any bank or other financial institution, other than
the Blocked Accounts and the accounts set forth in Schedule 8.10 hereto, except:
(a) as to any new or additional Blocked Accounts and other such new or
additional accounts which contain any Collateral or proceeds thereof, with the
prior written consent of Lender and subject to such conditions thereto as Lender
may establish and (b) as to any accounts used by any Borrower to make payments
of payroll, taxes or other obligations to third parties, after prior written
notice to Lender.
9.14 Compliance with ERISA. Each Borrower shall and shall cause each of its
----------------------
ERISA Affiliates to: (a) maintain each Plan in compliance in all material
respects with the applicable provisions of ERISA, the Code and other Federal and
State law; (b) cause each Plan which is qualified under Section 401(a) of the
Code to maintain such qualification; (c) not terminate any of such Plans so as
to incur any liability to the Pension Benefit Guaranty Corporation; (d) not
allow or suffer to exist any prohibited transaction involving any of such Plans
or any trust created thereunder which would subject any Borrower or such ERISA
Affiliate to a tax or penalty or other liability on prohibited transactions
imposed under Section 4975 of the Code or ERISA; (e) make all required
contributions to any Plan which it is obligated to pay under Section 302 of
ERISA, Section 412 of the Code or the terms of such Plan; (f) not allow or
suffer to exist any accumulated funding deficiency, whether or not waived, with
respect to any such Plan; or (g) allow or suffer to exist any occurrence of a
reportable event or any other event or condition which presents a material risk
of termination by the Pension Benefit Guaranty Corporation of any such Plan that
is a single employer plan, which termination could result in any liability to
the Pension Benefit Guaranty Corporation.
9.15 End of Fiscal Years: Fiscal Quarters. Each Borrower shall, for
----------------------------------------
financial reporting purposes, cause its, and each of its Subsidiaries'(a) fiscal
years to end the Saturday closest to June 30 of each year and (b) fiscal
quarters to end on the last day of the thirteenth (13th) week following the end
of the immediately preceding fiscal quarter, provided, that, the end of the
fourth fiscal quarter shall be on the last day of the fourteenth (14th) week
following the end of the third fiscal quarter whenever necessary to have the
fourth fiscal quarter end on the Saturday closest to June 30.
9.16 Change in Business. Each Borrower shall not engage in any business
--------------------
other than the business of such Borrower on the date hereof and any business
reasonably related, ancillary or complimentary to the business in which such
Borrower is engaged on the date hereof.
9.17 Limitation of Restrictions Affecting Subsidiaries. Each Borrower
-----------------------------------------------------
shall not, directly, or indirectly, create or otherwise cause or suffer to exist
any encumbrance or restriction which prohibits or limits the ability of any
Subsidiary of such Borrower to (a) pay dividends or
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make other distributions or pay any Indebtedness owed to any Borrower or any
Subsidiary of any Borrower; (b) make loans or advances to any Borrower or any
Subsidiary of any Borrower, (c) transfer any of its properties or assets to any
Borrower or any Subsidiary of any Borrower; or (d) create, incur, assume or
suffer to exist any lien upon any of its property, assets or revenues, whether
now owned or hereafter acquired, other than encumbrances and restrictions
arising under (i) applicable law, (ii) this Agreement, (iii) customary
provisions restricting subletting or assignment of any lease governing a
leasehold interest of any Borrower or any of its Subsidiaries, (iv) customary
restrictions on dispositions of real property interests found in reciprocal
easement agreements of each Borrower or its Subsidiary, (v) any agreement
relating to permitted Indebtedness incurred by a Subsidiary of any Borrower
prior to the date on which such Subsidiary was acquired by any Borrower and
outstanding on such acquisition date, and (vi) the extension or continuation of
contractual obligations in existence on the date hereof; provided, that, any
such encumbrances or restrictions contained in such extension or continuation
are no less favorable to Lender than those encumbrances and restrictions under
or pursuant to the contractual obligations so extended or continued.
9.18 After Acquired Real Property. If any Borrower hereafter acquires any
-----------------------------
Real Property, fixtures or any other property that is of the kind or nature
described in the Mortgage and such Real Property, fixtures or other property at
any one location has a fair market value in an amount equal to or greater than
$500,000 (or if an Event of Default, or act, condition or event which with
notice or passage of time or both would constitute an Event of Default exists,
then regardless of the fair market value of such assets), without limiting any
other rights of Lender, or duties or obligations of any Borrower, upon Lender's
request, such Borrower shall execute and deliver to Lender a mortgage, deed of
trust or deed to secure debt, as Lender may determine, in form and substance
substantially similar to the Mortgages and as to any provisions relating to
specific state laws satisfactory to Lender and in form appropriate for recording
in the real estate records of the jurisdiction in which such Real Property or
other property is located granting to Lender a first and only lien and mortgage
on and security interest in such Real Property, fixtures or other property
(except as such Borrower would otherwise be permitted to incur hereunder or
under the Mortgages or as otherwise consented to in writing by Lender) and such
other agreements, documents and instruments as Lender may require in connection
therewith.
9.19 Costs and Expenses. Borrowers shall pay to Lender on demand all costs,
-------------------
expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents which may hereafter be contemplated (whether or not executed) or
entered into in respect hereof and thereof, including: (a) all costs and
expenses of filing or recording (including Uniform Commercial Code financing
statement filing taxes and fees, documentary taxes, intangibles taxes and
mortgage recording taxes and fees, if applicable); (b) costs and expenses and
fees for insurance premiums, environmental audits, surveys, assessments,
engineering reports and inspections, appraisal fees and search fees, costs and
expenses of remitting loan proceeds, collecting checks and other items of
payment, and establishing and maintaining the Blocked Accounts, together with
Lender's customary charges and fees with respect thereto; (c) charges,
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fees or expenses charged by any bank or issuer in connection with the Letter of
Credit Accommodations; (d) costs and expenses of preserving and protecting the
Collateral; (e) costs and expenses paid or incurred in connection with obtaining
payment of the Obligations, enforcing the security interests and liens of
Lender, selling or otherwise realizing upon the Collateral, and otherwise
enforcing the provisions of this Agreement and the other Financing Agreements or
defending any claims made or threatened against Lender arising out of the
transactions contemplated hereby and thereby (including preparations for and
consultations concerning any such matters); (f) all out-of-pocket expenses and
costs heretofore and from time to time hereafter incurred by Lender during the
course of periodic field examinations of the Collateral and Borrowers'
operations, plus a per diem charge at the rate of $650 per person per day for
Lender's examiners in the field and office; and (g) the fees and disbursements
of counsel (including legal assistants) to Lender in connection with any of the
foregoing.
9.20 Further Assurances. At the request of Lender at any time and from time
-------------------
to time, Borrowers shall, at their expense, duly execute and deliver, or cause
to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Lender may
at any time and from time to time request a certificate from an officer of any
Borrower representing that all conditions precedent to the making of Loans and
providing Letter of Credit Accommodations contained herein are satisfied. In the
event of such request by Lender, Lender may, at its option, cease to make any
further Loans or provide any further Letter of Credit Accommodations until
Lender has received such certificate and, in addition, Lender has determined
that such conditions are satisfied. Where permitted by law, each Borrower hereby
authorizes Lender to execute and file one or more UCC financing statements
signed only by Lender.
9.21 Credit Card Agreements. Each Borrower shall (a) observe and perform
------------------------
all material terms, covenants, conditions and provisions of the Credit Card
Agreements to be observed and performed by it at the times set forth therein;
(b) not do, permit, suffer or refrain from doing anything, as a result of which
there could be a default under or breach of any of the terms of any of the
Credit Card Agreements and (c) at all times maintain in full force and effect
the Credit Card Agreements and not terminate, cancel, surrender, modify, amend,
waive or release any of the Credit Card Agreements, or consent to or permit to
occur any of the foregoing; except, that, (i) any such Borrower may terminate or
cancel any of the Credit Card Agreements in the ordinary course of the business
of such Borrower; provided, that, such Borrower shall give Lender not less than
fifteen (15) days prior written notice of its intention to so terminate or
cancel any of the Credit Card Agreements; (d) not enter into any new Credit Card
Agreements with any new Credit Card Issuer unless (i) Lender shall have received
not less than thirty (30) days prior written notice of the intention of such
Borrower to enter into such agreement (together with such other information with
respect thereto as Lender may request) and (ii) such Borrower delivers, or
causes to be delivered to Lender, a Credit Card Acknowledgment in favor of
Lender; (e) give Lender immediate written notice of any Credit Card Agreement
entered into by such Borrower after the date hereof, together with a true,
correct and complete copy thereof and such other information with respect
thereto as Lender may request; and (f) furnish to Lender, promptly upon
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the request of Lender, such information and evidence as Lender may require from
time to time concerning the observance, performance and compliance by such
Borrower or the other party or parties thereto with the terms, covenants or
provisions of the Credit Card Agreements.
9.22 Year 2000 Compliance. Each Borrower shall take all action which may be
---------------------
required so that its computer-based information systems, including, without
limitation, all of its proprietary computer hardware and software (and whether
supplied by others or with which Borrower's systems interface) are able to
operate effectively and correctly process data using dates on or after January
1, 2000. Compliance with the foregoing shall mean that the systems will operate
and correctly process data without human intervention such that (a) there is
correct century recognition, (b) calculations properly accommodate same century
and multi-century formulas and date values, and (c) all leap years shall be
calculated correctly. Upon Lender's request, Borrowers shall certify to Lender
in writing that its information systems have been modified, updated and
programmed as required by this Section. On and after January 1, 2000, the
computer-based information systems of each Borrower shall be, and with ordinary
course upgrading and maintenance, will continue to be sufficient to permit
Borrower to conduct its business without any adverse effect as a result of the
year 2000.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
------------------------------
10.1 Events of Default. The occurrence or existence of any one or more of
------------------
the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(a) (i) any Borrower fails to pay any of the Obligations within three (3)
Business Days after the same becomes due and payable or (ii) any Borrower or any
Obligor fails to perform any of the covenants contained in Sections 9.3, 9.4,
9.6, 9.13, 9.14, 9.16, or 9.22 or of this Agreement and such failure shall
continue for ten (10) days; provided, that, such ten (10) day period shall not
apply in the case of: (A) any failure to observe any such covenant which is not
capable of being cured at all or within such ten (10) day period or which has
been the subject of a prior failure within a six (6) month period or (B) an
intentional breach of any Borrower or any Obligor of any such covenant or (iii)
any Borrower fails to perform any of the terms, covenants, conditions or
provisions contained in this Agreement or any of the other Financing Agreements
other than those described in Sections 10.1(a)(i) and 10.1(a)(ii) above;
(b) any representation, warranty or statement of fact made by any Borrower
to Lender in this Agreement, the other Financing Agreements or any other
agreement, schedule, confirmatory assignment or otherwise shall when made or
deemed made be false or misleading in any material respect;
(c) any Obligor revokes, terminates or fails to perform any of the terms,
covenants, conditions or provisions of any guarantee, endorsement or other
agreement of such party in favor of Lender;
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(d) any judgment for the payment of money is rendered against any Borrower
or any Obligor in excess of $500,000 in any one case or in excess of $2,000,000
in the aggregate and shall remain undischarged or unvacated for a period in
excess of thirty (30) days or execution shall at any time not be effectively
stayed, or any judgment other than for the payment of money, or injunction,
attachment, garnishment or execution is rendered against any Borrower or any
Obligor or any of their assets having a value in excess of $500,000 in the
aggregate;
(e) any Obligor (being a natural person or a general partner of an Obligor
which is a partnership) dies or any Borrower or any Obligor, which is a
partnership, limited liability company, limited liability partnership or a
corporation, dissolves or suspends or discontinues doing business;
(f) Any Borrower or any Obligor becomes insolvent (however defined or
evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its creditors or principal
creditors;
(g) a case or proceeding under the bankruptcy laws of the United States of
America now or hereafter in effect or under any insolvency, reorganization,
receivership, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction now or hereafter in effect (whether at law or in equity) is
filed against any Borrower or any Obligor or all or any part of its properties
and such petition or application is not dismissed within forty-five (45) days
after the date of its filing or any Borrower or any Obligor shall file any
answer admitting or not contesting such petition or application or indicates its
consent to, acquiescence in or approval of, any such action or proceeding or the
relief requested is granted sooner;
(h) a case or proceeding under the bankruptcy laws of the United States of
America now or hereafter in effect or under any insolvency, reorganization,
receivership, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction now or hereafter in effect (whether at a law or equity) is
filed by any Borrower or any Obligor or for all or any part of its property; or
(i) any default by any Borrower or any Obligor under any agreement,
document or instrument relating to any Indebtedness for borrowed money owing to
any person other than Lender, or any capitalized lease obligations, contingent
Indebtedness in connection with any guarantee, letter of credit, indemnity or
similar type of instrument in favor of any person other than Lender, in any case
in an amount in excess of $500,000, which default continues for more than the
applicable cure period, if any, with respect thereto, or any material default
under any of the Distribution Agreements by any Borrower, Woodside, Delta
Apparel, Inc. or any other party thereto or under any other material contract,
lease, license or other obligation to any person other than Lender, which
default continues for more than the applicable cure period, if any, with respect
thereto or any Credit Card Issuer or Credit Card Processor withholds payment of
amounts otherwise payable to any Borrower to fund a reserve account or otherwise
hold as collateral, or shall require any Borrower to pay funds into a reserve
account or for such Credit Card Issuer or Credit Card Processor to otherwise
hold as collateral, or any Borrower shall provide a letter of credit, guarantee,
indemnity or similar instrument to or in favor of such Credit Card Issuer or
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Credit Card Processor such that in the aggregate all of such funds in the
reserve account, other amounts held as collateral and the amount of such letters
of credit, guarantees, indemnities or similar instruments shall exceed $500,000
or any Credit Card Issuer or Credit Card Processor shall debit or deduct any
amounts from any deposit account of any Borrower;
(j) any Credit Card Issuer or Credit Card Processor shall send notice to
any Borrower that it is ceasing to make or suspending payments to such Borrower
of amounts due or to become due to Borrower or shall cease or suspend such
payments, or shall send notice to any Borrower that it is terminating its
arrangements with such Borrower or such arrangements shall terminate as a result
of any event of default under such arrangements, which continues for more than
the applicable cure period, if any, with respect thereto, unless such Borrower
shall have entered into arrangements with another Credit Card Issuer or Credit
Card Processor, as the case may be, within thirty (30) days after the date of
any such notice;
(k) an ERISA Event shall occur which results in or could reasonably be
expected to result in liability of any Borrower in an aggregate amount in excess
of $500,000;
(l) any Change of Control;
(m) the indictment by any Governmental Authority, or as Lender may
reasonably and in good faith determine, the threatened indictment by any
Governmental Authority of any Borrower of which such Borrower or Lender receives
notice, in either case, as to which there is a reasonable possibility of an
adverse determination, in the good faith determination of Lender, under any
criminal statute, or commencement or threatened commencement of criminal or
civil proceedings against any Borrower, pursuant to which statute or proceedings
the penalties or remedies sought or available include forfeiture of (i) any of
the Collateral with an aggregate value of $500,000 or (ii) any other property of
such Borrower which is necessary or material to the conduct of its business;
(n) there shall be a material adverse change in the business, assets or
prospects of any Borrower or any Obligor after the date hereof; or
(o) there shall be an event of default under any of the other Financing
Agreements.
10.2 Remedies.
---------
(a) At any time an Event of Default exists or has occurred and is
continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by any Borrower or any Obligor, except as such notice or consent
is expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or other applicable law, are
cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of
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equity for an injunction to restrain a breach or threatened breach by any
Borrower of this Agreement or any of the other Financing Agreements. Lender may,
at any time or times, proceed directly against any Borrower or any Obligor to
collect the principal balance of the Obligations and all interest accrued
thereon without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of Default exists
or has occurred and is continuing, Lender may, in its discretion and without
limitation, (i) accelerate the payment of the principal balance of the
Obligations and all interest accrued thereon and demand immediate payment
thereof to Lender (provided, that, upon the occurrence of any Event of Default
described in Sections 10.1(g) and 10.1(h), the principal balance of the
Obligations and all interest accrued thereon shall automatically become
immediately due and payable), (ii) with or without judicial process or the aid
or assistance of others, enter upon any premises on or in which any of the
Collateral may be located and take possession of the Collateral or complete
processing, manufacturing and repair of all or any portion of the Collateral,
(iii) require any Borrower, at Borrowers' expense, to assemble and make
available to Lender any part or all of the Collateral at any place and time
designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and
realize upon any and all Collateral, (v) remove any or all of the Collateral
from any premises on or in which the same may be located for the purpose of
effecting the sale, foreclosure or other disposition thereof or for any other
purpose, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of
any and all Collateral (including, without limitation, entering into contracts
with respect thereto, public or private sales at any exchange, broker's board,
at any office of Lender or elsewhere) at such prices or terms as Lender may deem
reasonable, for cash, upon credit or for future delivery, with the Lender having
the right to purchase the whole or any part of the Collateral at any such public
sale, all of the foregoing being free from any right or equity of redemption of
any Borrower, which right or equity of redemption is hereby expressly waived and
released by each Borrower and/or (vii) terminate this Agreement. If any of the
Collateral is sold or leased by Lender upon credit terms or for future delivery,
the Obligations shall not be reduced as a result thereof until payment therefor
is finally collected by Lender. If notice of disposition of Collateral is
required by law, five (5) days prior notice by Lender to Borrowers designating
the time and place of any public sale or the time after which any private sale
or other intended disposition of Collateral is to be made, shall be deemed to be
reasonable notice thereof and each Borrower waives any other notice. In the
event Lender institutes an action to recover any Collateral or seeks recovery of
any Collateral by way of prejudgment remedy, each Borrower waives the posting of
any bond which might otherwise be required.
(c) For the purpose of enabling Lender to exercise the rights and remedies
hereunder, each Borrower hereby grants to Lender, to the extent assignable, an
irrevocable, non- exclusive license (exercisable without payment of royalty or
other compensation to any Borrower) to use, assign, license or sublicense any of
the trademarks, service-marks, trade names, business names, trade styles,
designs, logos and other source of business identifiers and other Intellectual
Property and general intangibles now owned or hereafter acquired by such
Borrower, wherever the same maybe located, including in such license reasonable
access to all media in which any of the licensed items may be recorded or stored
and to all computer programs used for the compilation or printout thereof.
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(d) Lender may apply the cash proceeds of Collateral actually received by
Lender from any sale, lease, foreclosure or other disposition of the Collateral
to payment of the Obligations, in whole or in part and in such order as Lender
may elect, whether or not then due. Each Borrower shall remain liable to Lender
for the payment of any deficiency with interest at the highest rate provided for
herein and all costs and expenses of collection or enforcement, including
attorneys' fees and legal expenses.
(e) Without limiting the foregoing, upon the occurrence of an Event of
Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice, (i)
cease making Loans or arranging for Letter of Credit Accommodations or reduce
the lending formulas or amounts of Revolving Loans and Letter of Credit
Accommodations available to Borrowers and/or (ii) terminate any provision of
this Agreement providing for any future Loans or Letter of Credit Accommodations
to be made by Lender to Borrowers.
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW
------------------------------------------------------------
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.
----------------------------------------------------------------------
(a) The validity, interpretation and enforcement of this Agreement and the
other Financing Agreements and any dispute arising out of the relationship
between the parties hereto, whether in contract, tort, equity or otherwise,
shall be governed by the internal laws of the State of Georgia (without giving
effect to principles of conflicts of law).
(b) Each Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the Superior Court of Fulton County, Georgia and
the United States District Court for the Northern District of Georgia and waive
any objection based on venue or forum non conveniens with respect to any action
instituted therein arising under this Agreement or any of the other Financing
Agreements or in any way connected with or related or incidental to the dealings
of the parties hereto in respect of this Agreement or any of the other Financing
Agreements or the transactions related hereto or thereto, in each case whether
now existing or hereafter arising, and whether in contract, tort, equity or
otherwise, and agree that any dispute with respect to any such matters shall be
heard only in the courts described above (except that Lender shall have the
right to bring any action or proceeding against any Borrower or its property in
the courts of any other jurisdiction which Lender deems necessary or appropriate
in order to realize on the Collateral or to otherwise enforce its rights against
any Borrower or its property).
(c) Each Borrower hereby waives personal service of any and all process
upon it and consents that all such service of process may be made by certified
mail (return receipt requested) directed to its address set forth on the
signature pages hereof and service so made shall be deemed to be completed five
(5) days after the same shall have been so deposited in the U.S. mails, or, at
Lender's option, by service upon Borrower in any other manner provided under the
rules of any such courts. Within thirty (30) days after such service, each
Borrower shall appear
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in answer to such process, failing which such Borrower shall be deemed in
default and judgment may be entered by Lender against such Borrower for the
amount of the claim and other relief requested.
(d) EACH BORROWER AND LENDER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF
ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT OR
ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED
HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. EACH BORROWER AND LENDER HEREBY
AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL
BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR LENDER MAY FILE AN
ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY.
(e) Lender shall not have any liability to Borrowers (whether in tort,
contract, equity or otherwise) for losses suffered by any Borrower in connection
with, arising out of, or in any way related to the transactions or relationships
contemplated by this Agreement, or any act, omission or event occurring in
connection herewith, unless it is determined by a final and non- appealable
judgment or court order binding on Lender, that the losses were the result of
acts or omissions constituting gross negligence or willful misconduct. In any
such litigation, Lender shall be entitled to the benefit of the rebuttable
presumption that it acted in good faith and with the exercise of ordinary care
in the performance by it of the terms of this Agreement.
11.2 Waiver of Notices. Each Borrower hereby expressly waives demand,
------------------
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on any Borrower which Lender may elect to give shall entitle such
Borrower to any other or further notice or demand in the same, similar or other
circumstances. Without limiting the generality of the foregoing, each Borrower
waives (i) notice prior to Lender's taking possession or control of any of the
Collateral or any bond or security which might be required by any court prior to
allowing Lender to exercise any of Lender's remedies, including the issuance of
an immediate writ of possession and (ii) the benefit of all valuation,
appraisement and exemption laws.
11.3 Amendments and Waivers. Neither this Agreement nor any provision
------------------------
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender, and as to amendments, as also signed by an authorized officer of each
Borrower. Lender shall not, by any act, delay, omission or otherwise
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be deemed to have expressly or impliedly waived any of its rights, powers and/or
remedies unless such waiver shall be in writing and signed by an authorized
officer of Lender. Any such waiver shall be enforceable only to the extent
specifically set forth therein. A waiver by Lender of any right, power and/or
remedy on any one occasion shall not be construed as a bar to or waiver of any
such right, power and/or remedy which Lender would otherwise have on any future
occasion, whether similar in kind or otherwise.
11.4 Waiver of Counterclaims. Each Borrower waives all rights to interpose
------------------------
any claims, deductions, setoffs or counterclaims of any nature (other then
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
11.5 Indemnification. Each Borrower shall indemnify and hold Lender, and
----------------
its directors, agents, employees and counsel, harmless from and against any and
all losses, claims, damages, liabilities, costs or expenses imposed on, incurred
by or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including amounts paid in settlement, court costs, and the fees and expenses of
counsel, except for such losses, claims, damages, liabilities, costs or expenses
resulting from the gross negligence or wilful misconduct of Lender, its
directors, agents, employees or counsel as determined pursuant to a final,
non-appealable order of a court of competent jurisdiction. To the extent that
the undertaking to indemnify, pay and hold harmless set forth in this Section
may be unenforceable because it violates any law or public policy, each Borrower
shall pay the maximum portion which it is permitted to pay under applicable law
to Lender in satisfaction of indemnified matters under this Section. The
foregoing indemnity shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
--------------------------------
12.1 Term.
----
(a) This Agreement and the other Financing Agreements shall become
effective as of the date set forth on the first page hereof and shall continue
in full force and effect for a term ending on the date three (3) years from the
date hereof (the "Renewal Date"), and from year to year thereafter, unless
sooner terminated pursuant to the terms hereof. Lender or Borrowers may
terminate this Agreement and the other Financing Agreements effective on the
Renewal Date or on the anniversary of the Renewal Date in any year by giving to
the other party at least sixty (60) days prior written notice; provided, that,
this Agreement and all other Financing Agreements must be terminated
simultaneously. Upon the effective date of termination or non-renewal of the
Financing Agreements, Borrowers shall pay to Lender, in full, all outstanding
and unpaid Obligations and shall furnish cash collateral to Lender in such
amounts as Lender determines are reasonably necessary to secure Lender from
loss, cost, damage or expense, including attorneys'
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fees and legal expenses, in connection with any contingent Obligations,
including issued and outstanding Letter of Credit Accommodations and checks or
other payments provisionally credited to the Obligations and/or as to which
Lender has not yet received final and indefeasible payment. Such payments in
respect of the Obligations and cash collateral shall be remitted by wire
transfer in Federal funds to such bank account of Lender, as Lender may, in its
discretion, designate in writing to Borrowers for such purpose. Interest shall
be due until and including the next Business Day, if the amounts so paid by
Borrower to the bank account designated by Lender are received in such bank
account later than 12:00 noon, Atlanta, Georgia time.
(b) No termination of this Agreement or the other Financing Agreements
shall relieve or discharge Borrowers of their respective duties, obligations and
covenants under this Agreement or the other Financing Agreements until all
Obligations have been fully and finally discharged and paid, and Lender's
continuing security interest in the Collateral and the rights and remedies of
Lender hereunder, under the other Financing Agreements and applicable law, shall
remain in effect until all such Obligations have been fully and finally
discharged and paid.
(c) If for any reason this Agreement is terminated prior to the end of the
then current term or renewal term of this Agreement, in view of the
impracticality and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Lender's lost
profits as a result thereof, Borrowers agree to pay to Lender, upon the
effective date of such termination, an early termination fee in the amount equal
to one (1%) percent of the Maximum Credit. For purposes of calculating the
foregoing early termination fee, the term "Maximum Credit" shall be deemed to
be, on such date of determination, the sum of (i) the Revolving Loan Limit and
(ii) the original principal amount of the Term Loan but only in the event that
such Term Loan has not been paid out in accordance with the provisions of
Section 9.9 (c) hereof. Such early termination fee shall be presumed to be the
amount of damages sustained by Lender as a result of such early termination and
each Borrower agrees that it is reasonable under the circumstances currently
existing. In addition, Lender shall be entitled to such early termination fee
upon the occurrence of any Event of Default described in Sections 10.1(g) and
10.1(h) hereof, even if Lender does not exercise its right to terminate this
Agreement, but elects, at its option, to provide financing to Borrowers or
permit the use of cash collateral under the United States Bankruptcy Code. The
early termination fee provided for in this Section 12.1 shall be deemed included
in the Obligations.
(d) Notwithstanding anything to the contrary contained in Section 12.1(c)
above, in the event of the termination of this Agreement at the request of
Borrower prior to the end of the term of this Agreement and the full and final
repayment of all Obligations and the receipt by Lender of cash collateral all as
provided in Section 12.1(a) above, Borrower shall not be required to pay to
Lender an early termination fee if such payments are made to Lender with the
initial proceeds of a financing transaction provided or underwritten by First
Union National Bank to Borrower.
12.2 Interpretative Provisions.
--------------------------
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(a) All terms used herein which are defined in Article 1 or Article 9 of
the Uniform Commercial Code shall have the meanings given therein unless
otherwise defined in this Agreement.
(b) All references to the plural herein shall also mean the singular and to
the singular shall also mean the plural unless the context otherwise requires.
(c) All references to Borrower and Lender pursuant to the definitions set
forth in the recitals hereto, or to any other person herein, shall include their
respective successors and assigns.
(d) The words "hereof", "herein", "hereunder", "this Agreement" and words
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not any particular provision of this Agreement and as this Agreement
now exists or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced.
(e) The word "including" when used in this Agreement shall mean "including,
without limitation".
(f) An Event of Default shall exist or continue or be continuing until such
Event of Default is waived in accordance with Section 11.3 or is cured in a
manner satisfactory to Lender, if such Event of Default is capable of being
cured as determined by Lender.
(g) Any accounting term used in this Agreement shall have, unless otherwise
specifically provided herein, the meaning customarily given in accordance with
GAAP, and all financial computations hereunder shall be computed unless
otherwise specifically provided herein, in accordance with GAAP as consistently
applied and using the same method for inventory valuation as used in the
preparation of the financial statements of Borrower most recently received by
Lender prior to the date hereof.
(h) In the computation of periods of time from a specified date to a later
specified date, the word "from" means "from and including", the words "to" and
"until" each mean "to but excluding" and the word "through" means "to and
including".
(i) Unless otherwise expressly provided herein, (i) references herein to
any agreement, document or instrument shall be deemed to include all subsequent
amendments, modifications, supplements, extensions, renewals, restatements or
replacements with respect thereto, but only to the extent the same are not
prohibited by the terms hereof or of any other Financing Agreement, and
(ii) references to any statute or regulation are to be construed as including
all statutory and regulatory provisions consolidating, amending, replacing,
recodifying, supplementing or interpreting the statute or regulation.
(j) The captions and headings of this Agreement are for convenience of
reference only and shall not affect the interpretation of this Agreement.
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(k) This Agreement and other Financing Agreements may use several different
limitations, tests or measurements to regulate the same or similar matters. All
such limitations, tests and measurements are cumulative and shall each be
performed in accordance with their terms.
(l) This Agreement and the other Financing Agreements are the result of
negotiations among and have been reviewed by counsel to Lender and the other
parties, and are the products of all parties. Accordingly, this Agreement and
the other Financing Agreements shall not be construed against Lender merely
because of Lender's involvement in their preparation.
12.3 Notices. All notices, requests and demands hereunder shall be in
--------
writing and (a) made to Lender at its address set forth below and to each
Borrower at its chief executive office set forth below, or to such other address
as either party may designate by written notice to the other in accordance with
this provision, and (b) deemed to have been given or made: if delivered in
person, immediately upon delivery; if by telex, telegram or facsimile
transmission, immediately upon sending and upon confirmation of receipt; if by
nationally recognized overnight courier service with instructions to deliver the
next Business Day, one (1) Business Day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.
12.4 Partial Invalidity. If any provision of this Agreement is held to be
--------------------
invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
12.5 Successors. This Agreement, the other Financing Agreements and any
-----------
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrowers and their respective
successors and assigns, except that no Borrower may assign its rights under this
Agreement, the other Financing Agreements and any other document referred to
herein or therein without the prior written consent of Lender. Lender may, after
notice to Borrowers, assign its rights and delegate its obligations under this
Agreement and the other Financing Agreements and further may assign, or sell
participations in, all or any part of the Loans, the Letter of Credit
Accommodations or any other interest herein to another financial institution or
other person, in which event, the assignee or participant shall have, to the
extent of such assignment or participation, the same rights and benefits as it
would have if it were the Lender hereunder, except as otherwise provided by the
terms of such assignment or participation.
12.6 Entire Agreement. This Agreement, the other Financing Agreements, any
-----------------
supplements hereto or thereto, and any instruments or documents delivered or to
be delivered in connection herewith or therewith represents the entire agreement
and understanding concerning the subject matter hereof and thereof between the
parties hereto, and supersede all other prior agreements, understandings,
negotiations and discussions, representations, warranties, commitments,
proposals, offers and contracts concerning the subject matter hereof, whether
oral
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or written. In the event of any inconsistency between the terms of this
Agreement and any schedule or exhibit hereto, the terms of this Agreement shall
govern.
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IN WITNESS WHEREOF, Lender and Borrowers have caused these presents to be
duly executed as of the day and year first above written.
LENDER BORROWER
CONGRESS FINANCIAL CORPORATION DH APPAREL COMPANY, INC.
(SOUTHERN)
By: Daniel Cott By: K. Scott Grassmyer
------------------------- ------------------------
Title: Executive Vice President Title: Sr. Vice President & CFO
Address: Chief Executive Office:
200 Galleria Parkway 1020-A Barrow Industrial Parkway
Suite 1500 Winder, Georgia 30680
Atlanta, Georgia 30339
DELTA MERCHANDISING, INC.
By: K. Scott Grassmyer
---------------------------
Title: Sr. Vice President & CFO
Chief Executive Office:
1020-A Barrow Industrial Parkway
Winder, Georgia 30680
78
TERM PROMISSORY NOTE
--------------------
$5,760,000 New York, New York
May 16, 2000
FOR VALUE RECEIVED, DH APPAREL COMPANY, INC., a Georgia corporation ("DH")
and DELTA MERCHANDISING, INC., a South Carolina corporation ("DMI" and, together
with DH, (each individually, a "Debtor" and collectively, "Debtors"), hereby,
jointly and severally, unconditionally promise to pay to the order of CONGRESS
FINANCIAL CORPORATION (SOUTHERN), a Georgia corporation ("Payee"), at the
offices of Payee at 200 Galleria Parkway, Suite 1500, Atlanta, Georgia 30339, or
at such other place as Payee or any holder hereof may from time to time
designate, the principal sum of FIVE MILLION SEVEN HUNDRED SIXTY THOUSAND
DOLLARS ($5,760,000) in lawful money of the United States of America and in
immediately available funds, in seventy-two (72) consecutive monthly
installments (or earlier as hereinafter provided) on the first day of each month
commencing June 1, 2000 of which the first seventy-one (71) installments shall
each be in the amount of EIGHTY THOUSAND DOLLARS ($80,000), and the last
installment shall be in the amount of the entire unpaid balance of this Note.
Debtors hereby further promise to pay interest to the order of Payee on the
unpaid principal balance hereof at the Interest Rate. Such interest shall be
paid in like money at said office or place from the date hereof, commencing June
1, 2000 and on the first day of each month thereafter until the indebtedness
evidenced by this Note is paid in full. Interest payable upon and after an Event
of Default or termination or non-renewal of the Loan Agreement (as hereinafter
defined) shall be payable upon demand.
For purposes hereof, (a) subject to clauses (b) and (c) below, "Interest
Rate" shall mean a rate equal to one-half of one (1/2%) percent per annum in
excess of the Prime Rate and, as to Eurodollar Rate Loans, a rate of two and
one-half (2 1/2%) percent per annum in excess of the Adjusted Eurodollar Rate
(based on the Eurodollar Rate applicable for the Interest Period selected by
Debtors as in effect two (2) Business Days after the date of receipt by Payee of
the request of Debtors for such Eurodollar Rate Loans in accordance with the
terms hereof, whether such rate is higher or lower than any rate previously
quoted to Debtors); (b) notwithstanding anything to the contrary set forth in
clause (a) above, the Interest Rate shall mean as to Prime Rate Loans, a rate
equal to one-quarter (1/4%) percent per annum in excess of the Prime Rate, as to
Eurodollar Rate Loans, a rate equal to two and one-quarter (2 1/4%) percent per
annum in excess of the Adjusted Eurodollar Rate (calculated as described in
clause (a) above), effective as of the first day of the month after each of the
following conditions is satisfied as determined by Payee in good faith: (ii) the
EBITDA of DH and its Subsidiaries for the immediately preceding fiscal year
(commencing with the fiscal year ending on June 30, 2000) calculated based on
the audited financial statements of DH and its Subsidiaries for such fiscal year
delivered to Payee, together with the unqualified opinion of their independent
certified accountants, in accordance
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<PAGE>
with Section 9.6 or the Loan Agreement, shall equal or exceed $5,000,000, and
(iii) no Event of Default or any act, condition or event which, with notice or
passage of time or both would constitute an Event of Default shall exist or have
occurred and be continuing; provided, that, in the event that the Interest Rate
is reduced as provided in this clause (b), if in any subsequent fiscal year
thereafter the condition set forth in clause (b)(i) is not satisfied, effective
as of the first day of the month after the receipt by Payee of the audited
financial statements of DH and its Subsidiaries for such fiscal year, the
Interest Rate shall increase to those rates set forth in clause (a) above; (c)
notwithstanding anything to the contrary contained in clauses (a) and (b) above,
the Interest Rate shall mean the rate of two and one-half (2 1/2%) percent per
annum in excess of the Prime Rate as to Prime Rate Loans and the rate of four
and one-half (4 1/2%) percent per annum in excess of the Adjusted Eurodollar
Rate as to Eurodollar Rate Loans, at Payee's option, without notice, (i) either
(A) for the period on and after the date of termination or non-renewal of the
Loan Agreement until such time as all Obligations are indefeasibly paid and
satisfied in full, or (B) for the period from and after the date of the
occurrence of any Event of Default, and for so long as such Event of Default is
continuing as determined by Payee; (d) the term "Prime Rate" shall mean the rate
from time to time publicly announced by First Union National Bank, or its
successors, from time to time, as its prime rate, whether or not such announced
rate is the best rate available at such bank; (e) the term "Event of Default"
shall mean an Event of Default as such term is defined in the Loan Agreement;
and (f) the term "Loan Agreement" shall mean the Loan and Security Agreement,
dated of even date herewith, by and among Debtors and Payee, as the same now
exists or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced. Unless otherwise defined herein, all capitalized terms
used herein shall have the meaning assigned thereto in the Loan Agreement.
The Interest Rate applicable to Prime Rate Loans payable hereunder shall
increase or decrease by an amount equal to each increase or decrease,
respectively, in the Prime Rate, effective on the first day of the month after
any change in the Prime Rate is announced. The increase or decrease shall be
based on the Prime Rate in effect on the last day of the month in which any such
change occurs. Interest shall be calculated on the basis of a three hundred
sixty (360) day year and actual days elapsed. In no event shall the interest
charged hereunder exceed the maximum permitted under the laws of the State of
Georgia or other applicable law.
This Note is issued pursuant to the terms and provisions of the Loan
Agreement to evidence the Term Loan by Payee to Debtors. This Note is secured by
the Collateral described in the Loan Agreement and all notes, guarantees,
security agreements and other agreements, documents and instrument now or at any
time hereafter executed and/or delivered by any Debtor or any other party in
connection therewith (all of the foregoing, together with the Loan Agreement, as
the same now exist or may hereafter be amended, modified, supplemented, renewed,
extended, restated or replaced, being collectively referred to herein as the
"Financing Agreements"), and is entitled to all of the benefits and rights
thereof and of the other Financing Agreements. At the time any payment is due
hereunder, at its option, Payee may charge the amount thereof to any accounts of
Debtors maintained by Payee.
If any payment of principal or interest is not made within three (3)
business days after the same becomes due hereunder, or if any other Event of
Default shall occur for any reason, or if the
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<PAGE>
Loan Agreement shall be terminated or not renewed for any reason whatsoever,
then and in any such event, in addition to all rights and remedies of Payee
under the Financing Agreements, applicable law or otherwise, all such rights and
remedies being cumulative, not exclusive and enforceable alternatively,
successively and concurrently, Payee may, at its option, declare any or all of
Debtors' obligations, liabilities and indebtedness owing to Payee under the Loan
Agreement and the other Financing Agreements (the "Obligations"), including,
without limitation, all amounts owing under this Note, to be due and payable,
whereupon the then unpaid balance hereof, together with all interest accrued
thereon, shall forthwith become due and payable, together with interest accruing
thereafter at the then applicable Interest Rate stated above until the
indebtedness evidenced by this Note is paid in full, plus the costs and expenses
of collection hereof, including, but not limited to, attorneys' fees and legal
expenses.
Each Debtor (i) waives diligence, demand, presentment, protest and notice
of any kind, (ii) agrees that it will not be necessary for Payee to first
institute suit in order to enforce payment of this Note and (iii) consents to
any one or more extensions or postponements of time of payment, release,
surrender or substitution of collateral security, or forbearance or other
indulgence, without notice or consent. The pleading of any statute of
limitations as a defense to any demand against any Debtor is expressly hereby
waived by each Debtor. Upon any Event of Default or termination or non-renewal
of the Loan Agreement, Payee shall have the right, but not the obligation to
setoff against this Note all money owed by Payee to any Debtor.
Payee shall not be required to resort to any Collateral for payment, but
may proceed against one or both Debtors and any guarantors or endorsers hereof
in such order and manner as Payee may choose. None of the rights of Payee shall
be waived or diminished by any failure or delay in the exercise thereof.
The validity, interpretation and enforcement of this Note and the other
Financing Agreements and any dispute arising in connection herewith or therewith
shall be governed by the internal laws of the State of Georgia (without giving
effect to principles of conflicts of law).
Each Debtor irrevocably consents and submits to the non-exclusive
jurisdiction of the Superior Court of Fulton County, Georgia and the United
States District Court for the Northern District of Georgia and waives any
objection based on venue or forum non conveniens with respect to any action
instituted therein arising under this Note or any of the other Financing
Agreements or in any way connection with or related or incidental to the
dealings of such Debtor and Payee in respect of this Note or any of the other
Financing Agreements or the transactions related hereto or thereto, in each case
whether now existing or hereafter arising, and whether in contract, tort, equity
or otherwise, and agrees that any dispute arising out of the relationship among
Debtors and Payee or the conduct of such persons in connection with this Note or
otherwise shall be heard only in the courts described above (except that Payee
shall have the right to bring any action or proceeding against any Debtor or its
property in the courts of any other jurisdiction which Payee deems necessary or
appropriate in order to realize on the Collateral or to otherwise enforce its
rights against any Debtor or its property).
-3-
<PAGE>
Each Debtor hereby waives personal service of any and all process upon it
and consents that all such service of process may be made by certified mail
(return receipt requested) directed to it and service so made shall be deemed to
be completed five (5) days after the same shall have been so deposited in the
U.S. mails, or, at Payee's option, by service upon such Debtor in any other
manner provided under the rules of any such courts. Within thirty (30) days
after such service, such Debtor shall appear in answer to such process, failing
which such Debtor shall be deemed in default and judgment may be entered by
Payee against such Debtor for the amount of the claim and other relief
requested.
EACH DEBTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION (iv) ARISING UNDER THIS NOTE OR (v) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS AMONG DEBTORS AND PAYEE
IN RESPECT OF THIS NOTE OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE
TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. EACH
DEBTOR AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY.
The execution and delivery of this Note has been authorized by the Board of
Directors and by any necessary vote or consent of the stockholders of each
Debtor. Each Debtor hereby authorizes Payee to complete this Note in any
particulars according to the terms of the loan evidenced hereby.
-4-
<PAGE>
This Note shall be binding upon the successors and assigns of Debtors and
inure to the benefit of Payee and its successors, endorsees and assigns.
Whenever used herein, the term "Debtor" or "Debtors" shall be deemed to include
each Debtor's respective successors and assigns and the term "Payee" shall be
deemed to include its successors, endorsees and assigns. If any term or
provision of this Note shall be held invalid, illegal or unenforceable, the
validity of all other terms and provisions hereof shall in no way be affected
thereby.
DH APPAREL COMPANY, INC.
By: /s/ K. Scott Grassmyer
--------------------------------
Title: Sr. Vice President & CFO
DELTA MERCHANDISING, INC.
By: /s/ K. Scott Grassmyer
--------------------------------
Title: Sr. Vice President & CFO
-5-
PLEDGE AND SECURITY AGREEMENT
-----------------------------
THIS PLEDGE AND SECURITY AGREEMENT ("Pledge Agreement"), dated May 16,
2000, is by DH APPAREL COMPANY, INC., a Georgia corporation ("Pledgor"), with
its chief executive office at 1020-A Barrow Industrial Parkway, Winder, Georgia
30680 to and in favor of CONGRESS FINANCIAL CORPORATION (SOUTHERN), a Georgia
corporation ("Pledgee"), having an office at 200 Galleria Parkway, Suite 1500,
Atlanta, Georgia 30339.
W I T N E S S E T H:
--------------------
WHEREAS, Pledgor is now the direct and beneficial owner of all of the
issued and outstanding shares of capital stock of Cargud, S.A., a Costa Rican
corporation ("Issuer"), 29,360 of which shares of capital stock are being
delivered by Pledgor to Pledgee pursuant to the terms hereof and which are as
described on Exhibit A annexed hereto and made a part hereof (the "Pledged
Securities");
WHEREAS, Pledgee and Pledgor have entered into or are about to enter into
financing arrangements pursuant to which Pledgee may make loans and advances and
provide other financial accommodations to Pledgor as set forth in the Loan and
Security Agreement, dated of even date herewith, by and between Pledgee and
Pledgor (as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced, the "Loan Agreement") and
other agreements, documents and instruments referred to therein or at any time
executed and/or delivered in connection therewith or related thereto, including,
but not limited to, this Pledge Agreement (all of the foregoing, together with
the Loan Agreement, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced, being collectively
referred to herein as the "Financing Agreements"); and
WHEREAS, in order to induce Pledgee to enter into the Loan Agreement and
the other Financing Agreements and to make loans and advances and provide other
financial accommodations to Pledgor pursuant thereto, Pledgor has agreed to
secure the payment and performance of the Obligations (as hereinafter defined)
to Pledgee and to accomplish same by (i) executing and delivering to Pledgee
this Pledge Agreement, (ii) delivering to Pledgee the Pledged Securities which
are registered in the name of Pledgor, together with appropriate powers duly
executed in blank by Pledgor, and (iii) delivering to Pledgee any and all other
documents which Pledgee deems necessary to protect Pledgee's interests
hereunder;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Pledgor hereby agrees as follows:
- 1 -
<PAGE>
1. GRANT OF SECURITY INTEREST
--------------------------
As collateral security for the prompt performance, observance and
indefeasible payment in full of all of the Obligations (as hereinafter defined),
Pledgor hereby assigns, pledges, hypothecates, transfers and sets over to
Pledgee and grants to Pledgee a security interest in and lien upon (a) the
Pledged Securities, together with all cash dividends, stock dividends,
interests, profits, redemptions, warrants, subscription rights, stock,
securities options, substitutions, exchanges and other distributions now or
hereafter distributed by Issuer or which may hereafter be delivered to the
possession of Pledgor or Pledgee with respect thereto, (b) Pledgor's records
with respect to the foregoing, and (c) the proceeds of all of the foregoing (all
of the foregoing being collectively referred to herein as the "Pledged
Property").
2. OBLIGATIONS SECURED
-------------------
The security interest, lien and other interests granted to Pledgee pursuant
to this Pledge Agreement shall secure the prompt performance and payment in full
of any and all obligations, liabilities and indebtedness of every kind, nature
and description owing by Pledgor to Pledgee and/or its affiliates, including
principal, interest, charges, fees, costs and expenses, however evidenced,
whether as principal, surety, endorser, guarantor or otherwise, whether arising
under this Pledge Agreement, the Loan Agreement, the other Financing Agreements
or otherwise, whether now existing or hereafter arising, whether arising before,
during or after the initial or any renewal term of the Loan Agreement or after
the commencement of any case with respect to Pledgor under the United States
Bankruptcy Code or any similar statute (including, without limitation, the
payment of interest and other amounts which would accrue and become due but for
the commencement of such case), whether direct or indirect, absolute or
contingent, joint or several, due or not due, primary or secondary, liquidated
or unliquidated, secured or unsecured, and however acquired by Pledgee (all of
the foregoing being collectively referred to herein as the "Obligations").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
Pledgor hereby represents, warrants and covenants with and to Pledgee the
following (all of such representations, warranties and covenants being
continuing so long as any of the Obligations are outstanding):
(a) The Pledged Securities are duly authorized, validly issued, fully paid
and non-assessable capital stock of Issuer and constitute approximately
sixty-five (65%) percent of Pledgor's entire interest in Issuer and are not
registered, nor has Pledgor authorized the registration thereof, in the name of
any person or entity other than Pledgor or Pledgee.
(b) The Pledged Property is directly, legally and beneficially owned by
Pledgor, free and clear of all claims, liens, pledges and encumbrances of any
kind, nature or description, except for the pledge and security interest in
favor of Pledgee and the pledges and security interests permitted under the Loan
Agreement.
- 2 -
<PAGE>
(c) The Pledged Property is not subject to any restrictions relative to the
transfer thereof and Pledgor has the right to transfer and hypothecate the
Pledged Property free and clear of any liens, encumbrances or restrictions.
(d) The Pledged Property is duly and validly pledged to Pledgee and no
consent or approval of any governmental or regulatory authority or of any
securities exchange or the like, nor any consent or approval of any other third
party, was or is necessary to the validity and enforceability of this Pledge
Agreement.
(e) Pledgor authorizes Pledgee to: (i) store, deposit and safeguard the
Pledged Property, (ii) perform any and all other acts which Pledgee in good
faith deems reasonable and/or necessary for the protection and preservation of
the Pledged Property or its value or Pledgee's security interest therein,
including, without limitation, transferring, registering or arranging for the
transfer or registration of the Pledged Property to or in Pledgee's own name and
receiving the income therefrom as additional security for the Obligations and
(iii) pay any charges or expenses which Pledgee deems necessary for the
foregoing purpose, but without any obligation to do so. Any obligation of
Pledgee for reasonable care for the Pledged Property in Pledgee's possession
shall be limited to the same degree of care which Pledgee uses for similar
property pledged to Pledgee by other persons.
(f) If Pledgor shall become entitled to receive or acquire, or shall
receive any stock certificate, or option or right with respect to the stock of
Issuer (including without limitation, any certificate representing a dividend or
a distribution or exchange of or in connection with reclassification of the
Pledged Securities) whether as an addition to, in substitution of, or in
exchange for any of the Pledged Property or otherwise, Pledgor agrees to accept
same as Pledgee's agent, to hold same in trust for Pledgee and to deliver same
forthwith to Pledgee or Pledgee's agent or bailee in the form received, with the
endorsement(s) of Pledgor where necessary and/or appropriate powers and/or
assignments duly executed to be held by Pledgee or Pledgee's agent or bailee
subject to the terms hereof, as further security for the Obligations.
(g) Pledgor shall not, without the prior consent of Pledgee, directly or
indirectly, sell, assign, transfer, or otherwise dispose of, or grant any option
with respect to the Pledged Property, nor shall Pledgor create, incur or permit
any further pledge, hypothecation, encumbrance, lien, mortgage or security
interest with respect to the Pledged Property.
(h) So long as no Event of Default (as hereinafter defined) has occurred
and is continuing, Pledgor shall have the right to vote and exercise all
corporate rights with respect to the Pledged Securities, except as expressly
prohibited herein, and to receive any cash dividends payable in respect of the
Pledged Securities.
(i) Pledgor shall not permit Issuer, directly or indirectly, to issue,
sell, grant, assign, transfer or otherwise dispose of, any additional shares of
capital stock of Issuer or any option or warrant with respect to, or other right
or security convertible into, any additional shares of capital stock of Issuer,
now or hereafter authorized, unless all such additional shares, options,
warrants, rights or other such securities are made and shall remain part of the
Pledged Property subject to the pledge and security interest granted herein.
- 3 -
<PAGE>
(j) Pledgor shall pay all charges and assessments of any nature against the
Pledged Property or with respect thereto prior to said charges and/or
assessments being delinquent.
(k) Pledgor shall promptly reimburse Pledgee on demand, together with
interest at the rate then applicable to the Obligations set forth in the Loan
Agreement, for any charges, assessments or expenses paid or incurred by Pledgee
in its discretion for the protection, preservation and maintenance of the
Pledged Property and the enforcement of Pledgee's rights hereunder, including,
without limitation, attorneys' fees and legal expenses incurred by Pledgee in
seeking to protect, collect or enforce its rights in the Pledged Property or
otherwise hereunder.
(l) Pledgor shall furnish, or cause to be furnished, to Pledgee such
information concerning Issuer and the Pledged Property as Pledgee may from time
to time reasonably request in good faith, including, without limitation, current
financial statements.
(m) Pledgee may notify Issuer or the appropriate transfer agent of the
Pledged Securities to register the security interest and pledge granted herein
and honor the rights of Pledgee with respect thereto.
(n) Pledgor waives: (i) all rights to require Pledgee to proceed against
any other person, entity or collateral or to exercise any remedy, (ii) the
defense of the statute of limitations in any action upon any of the Obligations,
(iii) any right of subrogation or interest in the Obligations or Pledged
Property until all Obligations have been paid in full, (iv) any rights to notice
of any kind or nature whatsoever, unless specifically required in this Pledge
Agreement or non-waivable under any applicable law, and (v) to the extent
permissible, its rights under Section 9-112 and 9-207 of the Uniform Commercial
Code. Pledgor agrees that the Pledged Property, other collateral, or any other
guarantor or endorser may be released, substituted or added with respect to the
Obligations, in whole or in part, without releasing or otherwise affecting the
liability of Pledgor, the pledge and security interests granted hereunder, or
this Pledge Agreement. Pledgee is entitled to all of the benefits of a secured
party set forth in Section 9-207 of the New York Uniform Commercial Code.
4. EVENTS OF DEFAULT
-----------------
All Obligations shall become immediately due and payable, without notice or
demand, at the option of Pledgee, upon the occurrence of any Event of Default,
as such term is defined in the Loan Agreement (each an "Event of Default"
hereunder).
5. RIGHTS AND REMEDIES
-------------------
At any time an Event of Default exists or has occurred and is continuing,
in addition to all other rights and remedies of Pledgee, whether provided under
this Pledge Agreement, the Loan Agreement, the other Financing Agreements,
applicable law or otherwise, Pledgee shall have the following rights and
remedies which may be exercised without notice to, or consent by, Pledgor except
as such notice or consent is expressly provided for hereunder:
- 4 -
<PAGE>
(a) Pledgee, at its option, shall be empowered to exercise its continuing
right to instruct the Issuer (or the appropriate transfer agent of the Pledged
Securities) to register any or all of the Pledged Securities in the name of
Pledgee or in the name of Pledgee's nominee and Pledgee may complete, in any
manner Pledgee may deem expedient, any and all stock powers, assignments or
other documents heretofore or hereafter executed in blank by Pledgor and
delivered to Pledgee. After said instruction, and without further notice,
Pledgee shall have the exclusive right to exercise all voting and corporate
rights with respect to the Pledged Securities and other Pledged Property, and
exercise any and all rights of conversion, redemption, exchange, subscription or
any other rights, privileges, or options pertaining to any shares of the Pledged
Securities or other Pledged Property as if Pledgee were the absolute owner
thereof, including, without limitation, the right to exchange, in its
discretion, any and all of the Pledged Securities and other Pledged Property
upon any merger, consolidation, reorganization, recapitalization or other
readjustment with respect thereto. Upon the exercise of any such rights,
privileges or options by Pledgee, Pledgee shall have the right to deposit and
deliver any and all of the Pledged Securities and other Pledged Property to any
committee, depository, transfer agent, registrar or other designated agency upon
such terms and conditions as Pledgee may determine, all without liability,
except to account for property actually received by Pledgee. However, Pledgee
shall have no duty to exercise any of the aforesaid rights, privileges or
options (all of which are exercisable in the sole discretion of Pledgee) and
shall not be responsible for any failure to do so or delay in doing so.
(b) In addition to all the rights and remedies of a secured party under the
Uniform Commercial Code or other applicable law, Pledgee shall have the right,
at any time and without demand of performance or other demand, advertisement or
notice of any kind (except the notice specified below of time and place of
public or private sale) to or upon Pledgor or any other person (all and each of
which demands, advertisements and/or notices are hereby expressly waived to the
extent permitted by applicable law), to proceed forthwith to collect, redeem,
recover, receive, appropriate, realize, sell, or otherwise dispose of and
deliver said Pledged Property or any part thereof in one or more lots at public
or private sale or sales at any exchange, broker's board or at any of Pledgee's
offices or elsewhere at such prices and on such terms as Pledgee may deem best.
The foregoing disposition(s) may be for cash or on credit or for future delivery
without assumption of any credit risk, with Pledgee having the right to purchase
all or any part of said Pledged Property so sold at any such sale or sales,
public or private, free of any right or equity of redemption in Pledgor, which
right or equity is hereby expressly waived or released by Pledgor. The proceeds
of any such collection, redemption, recovery, receipt, appropriation,
realization, sale or other disposition, after deducting all costs and expenses
of every kind incurred relative thereto or incidental to the care, safekeeping
or otherwise of any and all Pledged Property or in any way relating to the
rights of Pledgee hereunder, including attorneys' fees and legal expenses, shall
be applied first to the satisfaction of the Obligations (in such order as
Pledgee may elect and whether or not due) and then to the payment of any other
amounts required by applicable law, including Section 9-504(1)(c) of the Uniform
Commercial Code, with Pledgor to be and remain liable for any deficiency.
Pledgor shall be liable to Pledgee for the payment on demand of all such costs
and expenses, together with interest at the then applicable rate set forth in
the Loan Agreement, and any attorneys' fees and legal expenses. Pledgor agrees
that five (5) days prior written notice by Pledgee designating the place and
time of any public sale or of the time after which any private sale or other
intended disposition of any or all of the Pledged Property is to be made, is
reasonable notification of such matters.
- 5 -
<PAGE>
(c) Pledgor recognizes that Pledgee may be unable to effect a public sale
of all or part of the Pledged Property by reason of certain prohibitions
contained in the Securities Act of 1933, as amended, as now or hereafter in
effect or in applicable Blue Sky or other state securities law, as now or
hereafter in effect, but may be compelled to resort to one or more private sales
to a restricted group of purchasers who will be obliged to agree, among other
things, to acquire such Pledged Property for their own account for investment
and not with a view to the distribution or resale thereof. If at the time of any
sale of the Pledged Property or any part thereof, the same shall not, for any
reason whatsoever, be effectively registered (if required) under the Securities
Act of 1933 (or other applicable state securities law), as then in effect,
Pledgee in its sole and absolute discretion is authorized to sell such Pledged
Property or such part thereof by private sale in such manner and under such
circumstances as Pledgee or its counsel may deem necessary or advisable in order
that such sale may legally be effected without registration. Pledgor agrees that
private sales so made may be at prices and other terms less favorable to the
seller than if such Pledged Property were sold at public sale, and that Pledgee
has no obligation to delay the sale of any such Pledged Property for the period
of time necessary to permit Issuer, even if Issuer would agree, to register such
Pledged Property for public sale under such applicable securities laws. Pledgor
agrees that any private sales made under the foregoing circumstances shall be
deemed to have been in a commercially reasonable manner.
(d) All of the Pledgee's rights and remedies, including, but not limited
to, the foregoing and those otherwise arising under this Pledge Agreement, the
Loan Agreement and the other Financing Agreements, the instruments comprising
the Pledged Property, applicable law or otherwise, shall be cumulative and not
exclusive and shall be enforceable alternatively, successively or concurrently
as Pledgee may deem expedient. No failure or delay on the part of Pledgee in
exercising any of its options, powers or rights or partial or single exercise
thereof, shall constitute a waiver of such option, power or right.
6. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW
------------------------------------------------------------
(a) The validity, interpretation and enforcement of this Pledge Agreement
and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of Georgia
(without giving effect to principles of conflicts of law).
(b) Pledgor irrevocably consents and submits to the non-exclusive
jurisdiction of the Superior Court of Fulton County, Georgia and the United
States District Court for the Northern District of Georgia and waives any
objection based on venue or forum non conveniens with respect to any action
instituted therein arising under this Pledge Agreement or any of the other
Financing Agreements or in any way connected with or related or incidental to
the dealings of the parties hereto in respect of this Pledge Agreement or any of
the other Financing Agreements or the transactions related hereto or thereto, in
each case whether now existing or hereafter arising, and whether in contract,
tort, equity or otherwise, and agrees that any dispute with respect to any such
matters shall be heard only in the courts described above (except that Pledgee
shall have the right to bring any action or proceeding against Pledgor or its
property in the courts
- 6 -
<PAGE>
of any other jurisdiction which Pledgee deems necessary or appropriate in order
to realize on the Pledged Property or to otherwise enforce its rights against
Pledgor or its property).
(c) Pledgor hereby waives personal service of any and all process upon it
and consents that all such service of process may be made by certified mail
(return receipt requested) directed to its address set forth herein and service
so made shall be deemed to be completed five (5) days after the same shall have
been so deposited in the U.S. mails, or, at Pledgee's option, by service upon
Pledgor in any other manner provided under the rules of any such courts. Within
thirty (30) days after such service, Pledgor shall appear in answer to such
process, failing which Pledgor shall be deemed in default and judgment may be
entered by Pledgee against Pledgor for the amount of the claim and other relief
requested.
(d) PLEDGOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS PLEDGE AGREEMENT OR ANY OF THE
OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF PLEDGOR AND PLEDGEE IN RESPECT OF THIS PLEDGE
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED
HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. PLEDGOR HEREBY AGREES AND
CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED
BY COURT TRIAL WITHOUT A JURY AND THAT PLEDGOR OR PLEDGEE MAY FILE AN ORIGINAL
COUNTERPART OF A COPY OF THIS PLEDGE AGREEMENT WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY.
(e) Pledgee shall not have any liability to Pledgor (whether in tort,
contract, equity or otherwise) for losses suffered by Pledgor in connection
with, arising out of, or in any way related to the transactions or relationships
contemplated by this Pledge Agreement, or any act, omission or event occurring
in connection herewith, unless it is determined by a final and non-appealable
judgment or court order binding on Pledgee, that the losses were the result of
acts or omissions constituting gross negligence or willful misconduct. In any
such litigation, Pledgee shall be entitled to the benefit of the rebuttable
presumption that it acted in good faith and with the exercise of ordinary care
in the performance by it of the terms of this Pledge Agreement.
7. MISCELLANEOUS
-------------
(a) Pledgor agrees that at any time and from time to time upon the written
request of Pledgee, Pledgor shall execute and deliver such further documents,
including, but not limited to, irrevocable proxies or stock powers, in form
satisfactory to counsel for Pledgee, and will take or cause to be taken such
further acts as Pledgee may request in order to effect the purposes of this
Pledge Agreement and perfect or continue the perfection of the security interest
in the Pledged Property granted to Pledgee hereunder. Without limiting the
foregoing, and without demand by Pledgee, Pledgor agrees promptly to deliver to
Pledgee any replacement certificates necessary or appropriate in the discretion
of Pledgee, with respect to the Pledged Securities.
- 7 -
<PAGE>
(b) Beyond the exercise of reasonable care to assure the safe custody of
the Pledged Property (whether such custody is exercised by Pledgee, or Pledgee's
nominee, agent or bailee) Pledgee or Pledgee's nominee agent or bailee shall
have no duty or liability to protect or preserve any rights pertaining thereto
and shall be relieved of all responsibility for the Pledged Property upon
surrendering it to Pledgor or foreclosure with respect thereto.
(c) All notices, requests and demands to or upon the respective parties
hereto shall be in writing and shall be deemed to have been duly given or made:
if delivered in person, immediately upon delivery; if by telex, telegram or
facsimile transmission, immediately upon sending and upon confirmation of
receipt; if by nationally recognized overnight courier service with instructions
to deliver the next business day, one (1) business day after sending; and if by
registered or certified mail, return receipt requested, five (5) days after
mailing. All notices, requests and demands upon the parties are to be given to
the following addresses (or to such other address as any party may designate by
notice in accordance with this Section):
If to Pledgor: DH Apparel Company, Inc.
1020-A Barrow Industrial Parkway
Winder, Georgia 30680
Attention: Chief Financial Officer
If to Pledgee: Congress Financial Corporation (Southern)
200 Galleria Parkway, Suite 1500
Atlanta, Georgia 30339
Attention: Portfolio Manager
(d) All references to the plural herein shall also mean the singular and to
the singular shall also mean the plural. All references to Pledgor, Pledgee and
Issuer pursuant to the definitions set forth in the recitals hereto, or to any
other person herein, shall include their respective successors and assigns. The
words "hereof," "herein," "hereunder," "this Pledge Agreement" and words of
similar import when used in this Pledge Agreement shall refer to this Pledge
Agreement as a whole and not any particular provision of this Pledge Agreement
and as this Pledge Agreement now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced. An Event of Default shall
exist or continue or be continuing until such Event of Default is waived in
accordance with Section 7(g) hereof. All references to the term "Person" or
"Persons" herein shall mean any individual, sole proprietorship, partnership,
corporation (including, without limitation, any corporation which elects
subchapter S status under the Internal Revenue Code of 1986, as amended),
limited liability corporation, limited liability participation, business trust,
unincorporated association, joint stock company, trust, joint venture or other
entity or any government or any agency, instrumentality or political subdivision
thereof.
(e) This Pledge Agreement, the other Financing Agreements and any other
document referred to herein or therein shall be binding upon Pledgor and its
successors and assigns and inure to the benefit of and be enforceable by Pledgee
and its successors and assigns.
- 8 -
<PAGE>
(f) If any provision of this Pledge Agreement is held to be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate this
Pledge Agreement as a whole, but this Pledge Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
(g) Neither this Pledge Agreement nor any provision hereof shall be
amended, modified, waived or discharged orally or by course of conduct, but only
by a written agreement signed by an authorized officer of Pledgee. Pledgee shall
not, by any act, delay, omission or otherwise be deemed to have expressly or
impliedly waived any of its rights, powers and/or remedies unless such waiver
shall be in writing and signed by an authorized officer of Pledgee. Any such
waiver shall be enforceable only to the extent specifically set forth therein. A
waiver by Pledgee of any right, power and/or remedy on any one occasion shall
not be construed as a bar to or waiver of any such right, power and/or remedy
which Pledgee would otherwise have on any future occasion, whether similar in
kind or otherwise.
- 9 -
<PAGE>
IN WITNESS WHEREOF, Pledgor has executed this Pledge Agreement as of the
day and year first above written.
DH APPAREL COMPANY, INC.
By: /s/ K. Scott Grassmyer
-----------------------------
Title: Sr. Vice President & CFO
- 10 -
<PAGE>
EXHIBIT A
TO
PLEDGE AND SECURITY AGREEMENT
-----------------------------
Issuer Certificate No. Shares
------ --------------- ------
Cargud, S.A. 29,360
- 11 -
TRADEMARK SECURITY AGREEMENT
----------------------------
THIS AGREEMENT ("Agreement"), dated May 16, 2000, is by and between DH
APPAREL COMPANY, INC., a Georgia corporation ("Debtor"), with its chief
executive office at 1020-A Barrow Industrial Parkway 30680 and CONGRESS
FINANCIAL CORPORATION (Southern), a Georgia corporation ("Secured Party"),
having an office at 200 Galleria Parkway, Suite 1500, Atlanta, Georgia 30339.
W I T N E S S E T H :
---------------------
WHEREAS, Debtor has adopted, used and is using, and is the owner of the
entire right, title, and interest in and to the trademarks, trade names, terms,
designs and applications therefor described in Exhibit A hereto and made a part
hereof;
WHEREAS, Secured Party and Debtor have entered or are about to enter into
financing arrangements pursuant to which Secured Party may make loans and
advances and provide other financial accommodations to Debtor as set forth in
the Loan and Security Agreement, dated of even date herewith, by and among
Secured Party, Debtor and Delta Merchandising, Inc. (as the same now exists or
may hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, the "Loan Agreement") and other agreements, documents and instruments
referred to therein or at any time executed and/or delivered in connection
therewith or related thereto, including, but not limited to, this Agreement (all
of the foregoing, together with the Loan Agreement, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, being collectively referred to herein as the "Financing Agreements");
and
WHEREAS, in order to induce Secured Party to enter into the Loan Agreement
and the other Financing Agreements and to make loans and advances and provide
other financial accommodations to Debtor pursuant thereto, Debtor has agreed to
grant to Secured Party certain collateral security as set forth herein;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Debtor hereby agrees as follows:
1. GRANT OF SECURITY INTEREST
--------------------------
As collateral security for the prompt performance, observance and
indefeasible payment in full of all of the Obligations (as hereinafter defined),
Debtor hereby grants to Secured Party a continuing security interest in and a
general lien upon the following (being collectively referred to herein as the
"Collateral"): (a) all of Debtor's now existing or hereafter acquired right,
title, and interest in and to: (i) all of Debtor's trademarks, tradenames, trade
styles and service marks
- 1 -
<PAGE>
and all applications, registrations and recordings relating to the foregoing as
may at any time be filed in the United States Patent and Trademark Office or in
any similar office or agency of the United States, any State thereof, any
political subdivision thereof or in any other country, including, without
limitation, the trademarks, terms, designs and applications described in Exhibit
A hereto, together with all rights and privileges arising under applicable law
with respect to Debtor's use of any trademarks, tradenames, trade styles and
service marks, and all reissues, extensions, continuation and renewals thereof
(all of the foregoing being collectively referred to herein as the
"Trademarks"); and (ii) all prints and labels on which such trademarks,
tradenames, tradestyles and service marks appear, have appeared or will appear,
and all designs and general intangibles of a like nature; (b) the goodwill of
the business symbolized by each of the Trademarks, including, without
limitation, all customer lists and other records relating to the distribution of
products or services bearing the Trademarks; (c) all income, fees, royalties and
other payments at any time due or payable with respect thereto, including,
without limitation, payments under all licenses at any time entered into in
connection therewith; (d) the right to sue for past, present and future
infringements thereof; (e) all rights corresponding thereto throughout the
world; and (f) any and all other proceeds of any of the foregoing, including,
without limitation, damages and payments or claims by Debtor against third
parties for past or future infringement of the Trademarks.
2. OBLIGATIONS SECURED
-------------------
The security interest, lien and other interests granted to Secured Party
pursuant to this Agreement shall secure the prompt performance, observance and
payment in full of any and all obligations, liabilities and indebtedness of
every kind, nature and description owing by Debtor to Secured Party and/or its
affiliates, including principal, interest, charges, fees, costs and expenses,
however evidenced, whether as principal, surety, endorser, guarantor or
otherwise, whether arising under this Agreement, the Loan Agreement, the other
Financing Agreements or otherwise, whether now existing or hereafter arising,
whether arising before, during or after the initial or any renewal term of the
Loan Agreement or after the commencement of any case with respect to Debtor
under the United States Bankruptcy Code or any similar statute (including,
without limitation, the payment of interest and other amounts which would accrue
and become due but for the commencement of such case), whether direct or
indirect, absolute or contingent, joint or several, due or not due, primary or
secondary, liquidated or unliquidated, secured or unsecured, and however
acquired by Secured Party (all of the foregoing being collectively referred to
herein as the "Obligations").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
Debtor hereby represents, warrants and covenants with and to Secured Party
the following (all of such representations, warranties and covenants being
continuing so long as any of the Obligations are outstanding):
(a) Debtor shall pay and perform all of the Obligations according to their
terms.
- 2 -
<PAGE>
(b) All of the existing Collateral is valid and subsisting in full force
and effect, and Debtor owns the sole, full and clear title thereto, and the
right and power to grant the security interest granted hereunder. Debtor shall,
at Debtor's expense, perform all acts and execute all documents necessary to
maintain the existence of the Collateral consisting of registered Trademarks as
registered trademarks and to maintain the existence of all of the Collateral as
valid and subsisting, including, without limitation, the filing of any renewal
affidavits and applications. The Collateral is not subject to any liens, claims,
mortgages, assignments, licenses, security interests or encumbrances of any
nature whatsoever, except: (i) the security interests granted hereunder and
pursuant to the Loan Agreement, (ii) the security interests permitted under the
Loan Agreement, and (iii) the licenses permitted under Section 3(e) below.
(c) Debtor shall not assign, sell, mortgage, lease, transfer, pledge,
hypothecate, grant a security interest in or lien upon, encumber, grant an
exclusive or non-exclusive license relating to the Collateral, or otherwise
dispose of any of the Collateral, in each case without the prior written consent
of Secured Party, except as otherwise permitted herein or in the Loan Agreement.
Nothing in this Agreement shall be deemed a consent by Secured Party to any such
action, except as such action is expressly permitted hereunder.
(d) Debtor shall, at Debtor's expense, promptly perform all acts and
execute all documents requested at any time by Secured Party to evidence,
perfect, maintain, record or enforce the security interest in the Collateral
granted hereunder or to otherwise further the provisions of this Agreement.
Debtor hereby authorizes Secured Party to execute and file one or more financing
statements (or similar documents) with respect to the Collateral, signed only by
Secured Party or as otherwise determined by Secured Party. Debtor further
authorizes Secured Party to have this Agreement or any other similar security
agreement filed with the Commissioner of Patents and Trademarks or any other
appropriate federal, state or government office.
(e) As of the date hereof, Debtor does not have any Trademarks registered,
or subject to pending applications, in the United States Patent and Trademark
Office or any similar office or agency in the United States, any State thereof,
any political subdivision thereof or in any other country, other than those
described in Exhibit A hereto and has not granted any licenses with respect
thereto other than as set forth in Exhibit B hereto.
(f) Debtor shall, concurrently with the execution and delivery of this
Agreement, execute and deliver to Secured Party five (5) originals of a Special
Power of Attorney in the form of Exhibit C annexed hereto for the implementation
of the assignment, sale or other disposition of the Collateral pursuant to
Secured Party's exercise of the rights and remedies granted to Secured Party
hereunder.
(g) Secured Party may, in its discretion, pay any amount or do any act
which Debtor fails to pay or do as required hereunder or as requested by Secured
Party to preserve, defend, protect, maintain, record or enforce the Obligations,
the Collateral, or the security interest granted hereunder including, but not
limited to, all filing or recording fees, court costs, collection charges,
attorneys' fees and legal expenses. Debtor shall be liable to Secured Party for
any such
- 3 -
<PAGE>
payment, which payment shall be deemed an advance by Secured Party to Debtor,
shall be payable on demand together with interest at the rate then applicable to
the Obligations set forth in the Loan Agreement and shall be part of the
Obligations secured hereby.
(h) Debtor shall not file any application for the registration of a
Trademark with the United States Patent and Trademark Office or any similar
office or agency in the United States, unless Debtor has given Secured Party
thirty (30) days prior written notice of such action. If, after the date hereof,
Debtor shall (i) obtain any registered trademark or tradename, or apply for any
such registration in the United States Patent and Trademark Office or in any
similar office or agency in the United States, any State thereof, any political
subdivision thereof or in any other country, or (ii) become the owner of any
trademark registrations or applications for trademark registration used in the
United States or any State thereof, political subdivision thereof or in any
other country, the provisions of Section 1 hereof shall automatically apply
thereto. Upon the request of Secured Party, Debtor shall promptly execute and
deliver to Secured Party any and all assignments, agreements, instruments,
documents and such other papers as may be requested by Secured Party to evidence
the security interest in such Trademark in favor of Secured Party.
(i) Debtor has not abandoned any of the Trademarks and Debtor will not do
any act, nor omit to do any act, whereby the Trademarks may become abandoned,
invalidated, unenforceable, avoided, or avoidable. Debtor shall notify Secured
Party immediately if it knows or has reason to know of any reason why any
application, registration, or recording with respect to the Trademarks may
become abandoned, canceled, invalidated, avoided, or avoidable.
(j) Debtor shall render any assistance, as Secured Party shall determine is
necessary, to Secured Party in any proceeding before the United States Patent
and Trademark Office, any federal or state court, or any similar office or
agency in the United States, any State thereof, any political subdivision
thereof or in any other country, to maintain such application and registration
of the Trademarks as Debtor's exclusive property and to protect Secured Party's
interest therein, including, without limitation, filing of renewals, affidavits
of use, affidavits of incontestability and opposition, interference, and
cancellation proceedings.
(k) To the best of Debtor's knowledge, no material infringement or
unauthorized use presently is being made of any of the Trademarks that would
adversely affect in any material respect the fair market value of the Collateral
or the benefits of this Agreement granted to Secured Party, including, without
limitation, the validity, priority or perfection of the security interest
granted herein or the remedies of Secured Party hereunder. Debtor shall promptly
notify Secured Party if Debtor (or any affiliate or subsidiary thereof) learns
of any use by any person of any term or design which infringes on any Trademark
or is likely to cause confusion with any Trademark. If requested by Secured
Party, Debtor, at Debtor's expense, shall join with Secured Party in such action
as Secured Party, in Secured Party's discretion, may deem advisable for the
protection of Secured Party's interest in and to the Trademarks.
(l) Debtor assumes all responsibility and liability arising from the use of
the Trademarks and Debtor hereby indemnifies and holds Secured Party harmless
from and against any claim,
- 4 -
<PAGE>
suit, loss, damage, or expense (including attorneys' fees and legal expenses)
arising out of any alleged defect in any product manufactured, promoted, or sold
by Debtor (or any affiliate or subsidiary thereof) in connection with any
Trademark or out of the manufacture, promotion, labelling, sale or advertisement
of any such product by Debtor (or any affiliate or subsidiary thereof). The
foregoing indemnity shall survive the payment of the Obligations, the
termination of this Agreement and the termination or non-renewal of the Loan
Agreement.
(m) Debtor shall promptly pay Secured Party for any and all expenditures
made by Secured Party pursuant to the provisions of this Agreement or for the
defense, protection or enforcement of the Obligations, the Collateral, or the
security interests granted hereunder, including, but not limited to, all filing
or recording fees, court costs, collection charges, travel expenses, and
attorneys' fees and legal expenses. Such expenditures shall be payable on
demand, together with interest at the rate then applicable to the Obligations
set forth in the Loan Agreements and shall be part of the Obligations secured
hereby.
4. EVENTS OF DEFAULT
-----------------
All Obligations shall become immediately due and payable, without notice or
demand, at the option of Secured Party, upon the occurrence of any Event of
Default, as such term is defined in the Loan Agreement (each an "Event of
Default" hereunder).
5. RIGHTS AND REMEDIES
-------------------
At any time an Event of Default exists or has occurred and is continuing,
in addition to all other rights and remedies of Secured Party, whether provided
under this Agreement, the Loan Agreement, the other Financing Agreements,
applicable law or otherwise, Secured Party shall have the following rights and
remedies which may be exercised without notice to, or consent by, Debtor except
as such notice or consent is expressly provided for hereunder:
(a) Secured Party may require that neither Debtor nor any affiliate or
subsidiary of Debtor make any use of the Trademarks or any marks similar thereto
for any purpose whatsoever. Secured Party may make use of any Trademarks for the
sale of goods, completion of work-in-process or rendering of services in
connection with enforcing any other security interest granted to Secured Party
by Debtor or any subsidiary or affiliate of Debtor or for such other reason as
Secured Party may determine.
(b) Secured Party may grant such license or licenses relating to the
Collateral for such term or terms, on such conditions, and in such manner, as
Secured Party shall in its discretion deem appropriate. Such license or licenses
may be general, special or otherwise, and may be granted on an exclusive or
non-exclusive basis throughout all or any part of the United States of America,
its territories and possessions, and all foreign countries.
(c) Secured Party may assign, sell or otherwise dispose of the Collateral
or any part thereof, either with or without special conditions or stipulations
except that if notice to Debtor of
- 5 -
<PAGE>
intended disposition of Collateral is required by law, the giving of five (5)
days prior written notice to Debtor of any proposed disposition shall be deemed
reasonable notice thereof and Debtor waives any other notice with respect
thereto. Secured Party shall have the power to buy the Collateral or any part
thereof, and Secured Party shall also have the power to execute assurances and
perform all other acts which Secured Party may, in its discretion, deem
appropriate or proper to complete such assignment, sale, or disposition. In any
such event, Debtor shall be liable for any deficiency.
(d) In addition to the foregoing, in order to implement the assignment,
sale, or other disposition of any of the Collateral pursuant to the terms
hereof, Secured Party may at any time execute and deliver on behalf of Debtor,
pursuant to the authority granted in the Powers of Attorney described in Section
3(f) hereof, one or more instruments of assignment of the Trademarks (or any
application, registration, or recording relating thereto), in form suitable for
filing, recording, or registration. Debtor agrees to pay Secured Party on demand
all costs incurred in any such transfer of the Collateral, including, but not
limited to, any taxes, fees, and attorneys' fees and legal expenses. Debtor
agrees that Secured Party has no obligation to preserve rights to the Trademarks
against any other parties.
(e) Secured Party may first apply the proceeds actually received from any
such license, assignment, sale or other disposition of any of the Collateral to
the costs and expenses thereof, including, without limitation, attorneys' fees
and all legal, travel and other expenses which may be incurred by Secured Party.
Thereafter, Secured Party may apply any remaining proceeds to such of the
Obligations as Secured Party may in its discretion determine. Debtor shall
remain liable to Secured Party for any of the Obligations remaining unpaid after
the application of such proceeds, and Debtor shall pay Secured Party on demand
any such unpaid amount, together with interest at the rate then applicable to
the Obligations set forth in the Loan Agreement.
(f) Debtor shall supply to Secured Party or to Secured Party's designee,
Debtor's knowledge and expertise relating to the manufacture and sale of the
products and services bearing the Trademarks and Debtor's customer lists and
other records relating to the Trademarks and the distribution thereof.
(g) Nothing contained herein shall be construed as requiring Secured Party
to take any such action at any time. All of Secured Party's rights and remedies,
whether provided under this Agreement, the other Financing Agreements,
applicable law, or otherwise, shall be cumulative and none is exclusive. Such
rights and remedies may be enforced alternatively, successively, or
concurrently.
6. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW
------------------------------------------------------------
(a) The validity, interpretation and enforcement of this Agreement and the
other Financing Agreements and any dispute arising out of the relationship
between the parties hereto, whether in
- 6 -
<PAGE>
contract, tort, equity or otherwise, shall be governed by the internal laws of
the State of Georgia (without giving effect to principles of conflicts of law).
(b) Debtor and Secured Party irrevocably consent and submit to the
non-exclusive jurisdiction of the Superior Court of Fulton County, Georgia and
the United States District Court for the Northern District of Georgia and waive
any objection based on venue or forum non conveniens with respect to any action
instituted therein arising under this Agreement or any of the other Financing
Agreements or in any way connected or related or incidental to the dealings of
Debtor and Secured Party in respect of this Agreement or the other Financing
Agreements or the transactions related hereto or thereto, in each case whether
now existing or thereafter arising, and whether in contract, tort, equity or
otherwise, and agree that any dispute with respect to any such matters shall be
heard only in the courts described above (except that Secured Party shall have
the right to bring any action or proceeding against Debtor or its property in
the courts of any other jurisdiction which Secured Party deems necessary or
appropriate in order to realize on the Collateral or to otherwise enforce its
rights against Debtor or its property).
(c) Debtor hereby waives personal service of any and all process upon it
and consents that all such service of process may be made by certified mail
(return receipt requested) directed to its address set forth herein and service
so made shall be deemed to be completed five (5) days after the same shall have
been so deposited in the U.S. mails, or, at Secured Party's option, by service
upon Debtor in any other manner provided under the rules of any such courts.
Within thirty (30) days after such service, Debtor shall appear in answer to
such process, failing which Debtor shall be deemed in default and judgment may
be entered by Secured Party against Debtor for the amount of the claim and other
relief requested.
(d) DEBTOR AND SECURED PARTY EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY
OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT
OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF DEBTOR AND SECURED PARTY IN RESPECT OF
THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NO EXISTING OR HEREAFTER ARISING,
AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. DEBTOR AND SECURED PARTY
EACH HEREBY AGREES AN CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT DEBTOR OR SECURED
PARTY MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF DEBTOR AND SECURED PARTY TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Secured Party shall not have any liability to Debtor (whether in tort,
contract, equity or otherwise) for losses suffered by Debtor in connection with,
arising out of, or in any way related to the transactions or relationships
contemplated by this Agreement, or any act, omission or event
- 7 -
<PAGE>
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Secured Party that the losses
were the result of acts or omissions constituting gross negligence or willful
misconduct. In any such litigation, Secured Party shall be entitled to the
benefit of the rebuttable presumption that it acted in good faith and with the
exercise of ordinary care in the performance by it of the terms of this
Agreement and the other Financing Agreements.
7. MISCELLANEOUS
-------------
(a) All notices, requests and demands hereunder shall be in writing and
deemed to have been given or made: if delivered in person, immediately upon
delivery; if by telex, telegram or facsimile transmission, immediately upon
sending and upon confirmation of receipt; if by nationally recognized overnight
courier service with instructions to deliver the next business day, one (1)
business day after sending; and if by certified mail, return receipt requested,
five (5) days after mailing. All notices, requests and demands upon the parties
are to be given to the following addresses (or to such other address as any
party may designate by notice in accordance with this Section):
If to Debtor: DH Apparel Company, Inc.
1020-A Barrow Industrial Parkway
Winder, Georgia 30680
Attention: Chief Financial Officer
If to Secured Congress Financial Corporation (Southern)
Party: 200 Galleria Parkway
Suite 1500
Atlanta, Georgia 30339
Attention: Portfolio Manager
(b) All references to the plural herein shall also mean the singular and to
the singular shall also mean the plural. All references to Debtor and Secured
Party pursuant to the definitions set forth in the recitals hereto, or to any
other person herein, shall include their respective successors and assigns. The
words "hereof," "herein," "hereunder," "this Agreement" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not any particular provision of this Agreement and as this Agreement now exists
or may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced. An Event of Default shall exist or continue or be continuing until
such Event of Default is waived in accordance with Section 7(e) hereof. All
references to the term "Person" or "person" herein shall mean any individual,
sole proprietorship, partnership, corporation (including, without limitation,
any corporation which elects subchapter S status under the Internal Revenue Code
of 1986, as amended), limited liability company, limited liability partnership,
business trust, unincorporated association, joint stock company, trust, joint
venture or other entity or any government or any agency or instrumentality or
political subdivision thereof.
- 8 -
<PAGE>
(c) This Agreement, the other Financing Agreements and any other document
referred to herein or therein shall be binding upon Debtor and its successors
and assigns and inure to the benefit of and be enforceable by Secured Party and
its successors and assigns.
(d) If any provision of this Agreement is held to be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate this
Agreement as a whole, but this Agreement shall be construed as though it did not
contain the particular provision held to be invalid or unenforceable and the
rights and obligations of the parties shall be construed and enforced only to
such extent as shall be permitted by applicable law.
(e) Neither this Agreement nor any provision hereof shall be amended,
modified, waived or discharged orally or by course of conduct, but only by a
written agreement signed by an authorized officer of Secured Party. Secured
Party shall not, by any act, delay, omission or otherwise be deemed to have
expressly or impliedly waived any of its rights, powers and/or remedies unless
such waiver shall be in writing and signed by an authorized officer of Secured
Party. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Secured Party of any right, power and/or remedy on
any one occasion shall not be construed as a bar to or waiver of any such right,
power and/or remedy which Secured Party would otherwise have on any future
occasion, whether similar in kind or otherwise.
- 9 -
<PAGE>
IN WITNESS WHEREOF, Debtor and Secured Party have executed this Agreement
as of the day and year first above written.
DH APPAREL COMPANY, INC.
By: /s/ K. Scott Grassmyer
-------------------------------
Title: Sr. Vice President and CFO
CONGRESS FINANCIAL CORPORATION
(SOUTHERN)
By: /s/ Daniel Cott
--------------------------------
Title: Executive Vice President
- 10 -
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 16th day of May, 2000, before me personally came K. Scott
Grassmyer, to me known, who being duly sworn, did depose and say, that he/she is
the Sr. Vice President and CFO of DH APPAREL COMPANY, INC., the corporation
described in and which executed the foregoing instrument; and that he/she signed
his/her name thereto by order of the Board of Directors of said corporation.
/s/ Cathleen A. Pellegrino
-----------------------------------
Notary Public
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 16th day of May, 2000, before me personally came Daniel Cott, to me
known, who, being duly sworn, did depose and say, that he/she is the Executive
Vice President of CONGRESS FINANCIAL CORPORATION (SOUTHERN), the corporation
described in and which executed the foregoing instrument; and that he/she signed
his/her name thereto by order of the Board of Directors of said corporation.
/s/ Cathleen A. Pellegrino
--------------------------------
Notary Public
- 11 -
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A
TO
TRADEMARK SECURITY AGREEMENT
----------------------------
Registration Registration Expiration
Trademark Number Date Date
--------- ------ ----
<S> <C> <C>
- ------------------------------ ---------------------------- --------------------------- ----------------------------
- ------------------------------ ---------------------------- --------------------------- ----------------------------
- ------------------------------ ---------------------------- --------------------------- ----------------------------
- ------------------------------ ---------------------------- --------------------------- ----------------------------
</TABLE>
<TABLE>
<CAPTION>
LIST OF TRADEMARKS AND TRADEMARK APPLICATIONS
---------------------------------------------
Trademark Application/Serial Application
Application Number Date
----------- ------ ----
<S> <C> <C>
- ---------------------------------------- ------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
<PAGE>
EXHIBIT B
TO
TRADEMARK SECURITY AGREEMENT
----------------------------
LIST OF LICENSES
----------------
B- 1
<PAGE>
EXHIBIT C
TO
TRADEMARK SECURITY AGREEMENT
----------------------------
SPECIAL POWER OF ATTORNEY
-------------------------
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
KNOW ALL MEN BY THESE PRESENTS, that DH APPAREL COMPANY, INC. ("Debtor"),
having an office at 1020-A Barrow Industrial Parkway Winder, Georgia 30680
hereby appoints and constitutes, severally, CONGRESS FINANCIAL CORPORATION
(SOUTHERN) ("Secured Party"), and each of its officers, its true and lawful
attorney, with full power of substitution and with full power and authority to
perform the following acts on behalf of Debtor:
1. Execution and delivery of any and all agreements, documents, instrument
of assignment, or other papers which Secured Party, in its discretion, deems
necessary or advisable for the purpose of assigning, selling, or otherwise
disposing of all right, title, and interest of Debtor in and to any trademarks
and all registrations, recordings, reissues, extensions, and renewals thereof,
or for the purpose of recording, registering and filing of, or accomplishing any
other formality with respect to the foregoing.
2. Execution and delivery of any and all documents, statements,
certificates or other papers which Secured Party, in its discretion, deems
necessary or advisable to further the purposes described in Subparagraph 1
hereof.
This Power of Attorney is made pursuant to a Trademark Security Agreement,
dated of even date herewith, between Debtor and Secured Party (the "Security
Agreement") and is subject to the terms and provisions thereof. This Power of
Attorney, being coupled with an interest, is irrevocable until all
"Obligations", as such term is defined in the Security Agreement, are paid in
full and the Security Agreement is terminated in writing by Secured Party.
Dated: May 16, 2000
DH APPAREL COMPANY, INC.
By: /s/ K. Scott Grassmyer
-----------------------------
Title: Sr. Vice President & CFO
C- 1
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 16th day of May 2000, before me personally came K. Scott Grassmyer,
to me known, who being duly sworn, did depose and say, that he/she is the Sr.
Vice President & CFO of DH APPAREL COMPANY, INC., the corporation described in
and which executed the foregoing instrument; and that he/she signed his/her name
thereto by order of the Board of Directors of said corporation.
/s/ Cathleen A. Pellegrino
-----------------------------------
Notary Public
C- 2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-05-1999
<PERIOD-END> APR-01-2000
<CASH> 437
<SECURITIES> 0
<RECEIVABLES> 7337
<ALLOWANCES> (1016)
<INVENTORY> 17207
<CURRENT-ASSETS> 25174
<PP&E> 28180
<DEPRECIATION> (18520)
<TOTAL-ASSETS> 34834
<CURRENT-LIABILITIES> 109782
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (98898)
<TOTAL-LIABILITY-AND-EQUITY> 34834
<SALES> 42611
<TOTAL-REVENUES> 42611
<CGS> 29026
<TOTAL-COSTS> 29026
<OTHER-EXPENSES> 14200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6279
<INCOME-PRETAX> (6894)
<INCOME-TAX> 57
<INCOME-CONTINUING> (6951)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6951)
<EPS-BASIC> (2.90)
<EPS-DILUTED> (2.90)
</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 June
16, 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 June 16, 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 30, 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 June 1, 2000, and Duck Head first mailed this
document to stockholders on June 5, 2000.
<PAGE>
<TABLE>
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............................................................................................71
MANAGEMENT OF DUCK HEAD .........................................................................................77
SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS AND
MANAGEMENT .....................................................................................................89
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE
DUCK HEAD DISTRIBUTION..........................................................................................95
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 THE FIRST NINE MONTHS OF DUCK HEAD'S 2000 FISCAL YEAR ...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)
currently conducted by its wholly-owned subsidiaries, Duck Head
Apparel Company, Inc. and Delta Apparel, Inc., respectively, 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 is accomplishing 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, have been transferred to Duck Head, and the Delta
Apparel Company business, and associated assets and liabilities,
have been 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 June 16, 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 June
16, 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 June 16, 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 Section 355 of the
US Internal Revenue Code of 1986, as amended ("Code"). If the Duck
Head distribution and the Delta Apparel distribution qualify as
tax-free under Section 355 of the Internal Revenue Code, your receipt
of Duck Head shares in the Duck
3
<PAGE>
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.
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 30, 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
30, 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 30, 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 30, 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 June 14 and June 30, 2000)
will be accompanied by an attached "due bill" representing the right
to receive the 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. If you sell any of your shares of
Delta Woodside common stock prior to or during this period, you will
also be selling the attached due bill, and you will thereby lose the
right to receive the Duck Head common stock and Delta Apparel common
stock represented by the due bill.
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 have entered or will enter 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. Except where the context otherwise indicates, all descriptions
in this document of Duck Head's business assume that the transactions
contemplated to occur prior to 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 June
16, 2000. Based on the number of shares of Delta Woodside common
stock outstanding as of May 19, 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 June 16, 2000.
DUCK HEAD RECORD DATE
June 16, 2000 (5:00 p.m., Eastern time).
DUCK HEAD DISTRIBUTION DATE
June 30, 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 48 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 consisted 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 April 1, 2000 and
March 27, 1999 and for the nine months ended April 1, 2000 and March 27, 1999
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>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Fiscal Year Ended Nine Months Ended
--------------------------------------------------------------- ---------------------------
July 3, June 27, June 28, June 29, July 1, April 1, March 27,
-------- -------- -------- -------- ------- -------- ---------
1999 1998 1997 1996 1995 2000 1999
---- ---- ---- ---- ---- ---- ----
(In thousands) (In thousands)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 70,642 83,953 79,642 68,881 73,441 42,611 53,986
Cost of goods sold (62,468) (57,088) (53,391) (84,397) (49,822) (29,026) (40,307)
Selling, general and
administrative expenses (34,005) (28,980) (25,624) (26,778) (24,785) (15,753) (20,899)
Impairment charges (13,650) --- --- 5,312 7,000 --- ---
Other income (expense) 250 864 667 (897) (157) 1,553 1,292
----------- ----------- ----------- ----------- ---------- ------------ --------------
Operating income (loss) (39,231) (1,251) 1,294 (37,879) 5,677 (615) (5,928)
Interest expense, net (8,222) (6,951) (6,183) (5,988) (4,645) (6,279) (5,768)
----------- ----------- ----------- ----------- ---------- ------------ --------------
Income (loss) before taxes (47,453) (8,202) (4,889) (43,867) 1,032 (6,894) (11,696)
Income tax expense (benefit) 261 159 (337) 1,013 1,204 57 64
----------- ----------- ----------- ----------- ---------- ------------ --------------
Net loss $ (47,714) (8,361) (4,552) (44,880) (172) (6,951) (11,760)
=========== =========== =========== =========== ========== ============ ==============
BALANCE SHEET DATA (AT PERIOD
END):
Working capital (deficit) $ (79,898) (47,571) (17,509) (19,940) 37,541 (84,608) (61,618)
Total assets 46,394 75,383 73,836 63,122 120,150 34,834 82,323
Total long-term debt 23,236 29,701 52,277 31,917 31,809 23,178 23,178
Divisional (deficit) equity (91,947) (44,233) (35,872) (31,320) 13,560 (98,898) (55,993)
</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
nine month period ended April 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 nine
month period ended April 1, 2000, included on pages 51-56 and F-1- F-22,
respectively.
12
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
JULY 3, 1999 APRIL 1, 2000
----------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Net Sales $ 70,642 42,611
Cost of goods sold (62,468) (29,026)
Selling, general and administrative expenses (34,782) (16,012)
Impairment charges (13,650) ---
Other income 1,027 1,553
-------------- ----------------
Operating income (loss) (39,231) (874)
Interest expense, net (1,553) (1,020)
-------------- ----------------
Loss before income taxes (40,784) (1,894)
Income tax expense 262 53
-------------- ----------------
Net loss $ (41,046) (1,947)
============== ================
Basic and diluted net loss per share $ (17.10) (0.81)
============== ================
Weighted average shares outstanding used in basic
and diluted per share calculation (a) 2,400,000 2,400,000
============== ================
BALANCE SHEET DATA:
Working capital $ 15,095
Total assets 33,755
Total long-term debt 4,800
Stockholders' equity 19,183
- --------------------------------------------------------------------------------
<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 Code Section 355. 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 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 $0.6 million in the nine months ended April 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 nine
months of the 2000 fiscal year, Duck Head generated $1.8 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 nine month
period, as compared to the last few full fiscal years, have been:
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- 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 nine 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
nine months ended April 1, 2000, Duck Head generated $1.8 million of cash from
operations and increased the balance of the affiliated debt to Delta Woodside by
$5.0 million. Both the cash generated from operations and the increase in
affiliated debt were after the effect of $5.9 million in interest charges on
debt owed to Delta Woodside. The increase in affiliated debt during the nine
months ended April 1, 2000 was due to funding the repayment of a bank mortgage
loan in the amount of $6.4 million.
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.
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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.
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. 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
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 nine months ended April 1, 2000 and the fiscal years 1999, 1998
and 1997, approximately 28%, 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 nine months ended April 1, 2000 and the fiscal years 1999, 1998
and 1997, approximately 48%, 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 6% of fiscal year
2000 first nine 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.
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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 41% 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.
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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 70.6% 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 30.8% 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 April 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 $19.2
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 23.1%. In addition, at that date and after
giving effect to the Duck Head distribution, approximately $12.2 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 IMPOSES 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 contains covenants that restrict, among other
things, the ability of Duck Head and its subsidiaries to incur indebtedness,
create liens, consolidate, merge, sell assets or make investments. The credit
agreement also contains 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 lender 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
limits 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.
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
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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 provides that a "change in control", as
defined in that agreement, would be an event of default and 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 document 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.
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.
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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.
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.
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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 taken 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.
At a meeting on June 24, 1999, the Delta Woodside board of directors
decided to
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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
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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.
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
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.
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;
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(c) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a
recapitalization of the remaining company that would involve a cash
distribution to Delta Woodside's stockholders by that remaining
company;
(d) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders;
(e) A pro rata taxable spin-off of Delta Woodside's two apparel businesses
to Delta Woodside's stockholders;
(f) A disproportionate tax-free spin-off of one of Delta Woodside's
apparel businesses to one of Delta Woodside's major stockholders
accompanied by a pro rata tax-free spin-off of the other apparel
business to all the other stockholders;
(g) A potential sale of the Delta Apparel Company business or assets;
(h) A purchase by Delta Mills, Inc. of the Duck Head Apparel Company and
the Delta Apparel Company businesses; and
(i) Leaving Delta Woodside's three businesses in Delta Woodside in their
current corporate form.
During the course of this exploration, the Delta Woodside board witnessed a
deterioration of general market conditions in the textile and apparel
industries. This deterioration caused the market's perceived values of textile
and apparel businesses to decline significantly.
This decline, together with the information obtained by Delta Woodside in
the process of exploring the alternatives described above, led the Delta
Woodside board to conclude that:
(i) Any sale or liquidation at this time or in the near future of any of
Delta Woodside's businesses would, more likely than not, be at
depressed and unacceptable prices; and
(ii) Absent a change in circumstances, the interests of Delta Woodside and
its stockholders would be best served by not pursuing the sale or
liquidation of any of Delta Woodside's businesses at this time.
The Delta Woodside Board also determined that the best interests of Delta
Woodside and its stockholders would not be served by pursuing at this time any
of the additional alternatives described above other than a pro rata spin-off of
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
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(5) The Delta Woodside board's conclusion that the interests of Delta
Woodside and its stockholders would be adversely affected by any
decision of the Delta Woodside board to delay implementing the
separation of its businesses. The Board believes that continuing
uncertainty in the marketplace as to Delta Woodside's strategic plans
is likely to be damaging the relations of one or more of Delta
Woodside's businesses with certain of its respective suppliers and
customers, and that continuing uncertainty by the employees of Delta
Woodside and its subsidiaries as to Delta Woodside's strategic plans
could cause Delta Woodside or its subsidiaries to lose valuable
employees.
The Delta Woodside board, therefore, concluded that the best interests of
Delta Woodside and its stockholders would be furthered by separating into
distinct public companies Delta Woodside's three businesses (Delta Mills
Marketing Company, Delta Apparel Company and Duck Head Apparel Company), and
that the best method to accomplish this separation and thereby enhance
stockholder value that is available to Delta Woodside at this time is to effect
a pro rata spin-off to Delta Woodside's stockholders of each of Delta Woodside's
apparel businesses, whether that spin-off is tax-free or taxable for federal
income tax purposes.
In reaching this determination, the Delta Woodside Board took into account
its belief that the separation of Delta Woodside's three businesses will further
the following objectives, among others, and thereby enhance stockholder value:
(a) Permit the grant of equity incentives to the separate management of
each business, which incentives would not be affected by the results
of the other businesses and, therefore, would have excellent potential
to align closely the interests of that management with those of the
stockholders;
(b) Permit the elimination of certain existing corporate overhead expenses
that result from the current need to coordinate the operations of
three distinct businesses that have separate modes of operation and
markets;
(c) Eliminate the complaints of certain customers of Delta Mills Marketing
Company (which, as a supplier to those customers, has access to
certain of their competitive information) that a competitor of theirs
(Duck Head Apparel Company) is under common management with Delta
Mills Marketing Company;
(d) Permit each business to obtain, when needed, the best equity and debt
financing possible without being affected by the operational results
of the other businesses;
(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;
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<PAGE>
- 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;
- 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 and related services,
Houlihan Lokey will be paid a fee of $225,000 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
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Financial Condition and Results of Operations - Liquidity and Capital Resources"
has been 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" has been completed.
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:
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(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
(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 entirety 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)
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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
application of a 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 Transactions 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 were 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 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 in 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.
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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.
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 obligations 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 meet 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 June 1, 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
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<PAGE>
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.
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 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.
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DESCRIPTION OF THE DUCK HEAD DISTRIBUTION
The distribution agreement among Delta Woodside, Duck Head and Delta
Apparel sets forth the general terms and conditions relating to, and the
relationship of the three corporations after, the Duck Head distribution. For an
extensive description of the distribution agreement, see the section of this
document found under the heading "Relationship Among Duck Head, Delta Woodside
and Delta Apparel--Distribution Agreement".
Delta Woodside plans to effect the Duck Head distribution on or about June
30, 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 June 16, 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 May 19, 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
30, 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
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<PAGE>
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.
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. 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
Code Section 355. Whether the Duck Head distribution and the Delta Apparel
distribution qualify under Code Section 355 as tax-free spin-offs will depend on
whether the criteria in Code 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 Duck Head common stock
and Delta Apparel common stock in those distributions 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.
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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.
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 a 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 Do Not 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.
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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.
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 may 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
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paired with a proportionate disposition of shares in all three companies and
that such shareholder has no present 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% or greater interest
in Delta Woodside, Duck Head or Delta Apparel. See "Security Ownership of
Significant Beneficial Owner and Management."
Net Operating Loss Carry Forwards
---------------------------------
As of July 3, 1999, Delta Woodside has net operating loss carry forwards,
for US consolidated federal income tax purposes, of approximately $68 million.
KPMG LLP has provided its opinion that it is more likely than not that (a) Duck
Head will retain as its attribute its allocable share of the Delta Woodside US
consolidated federal income tax net operating loss carry forward; (b) Delta
Apparel will retain as its attribute its allocable share of the Delta Woodside
US consolidated federal income tax net operating loss carry forward; and (c) the
Delta Woodside US consolidated federal income tax group will retain as its
attribute the balance of the Delta Woodside net operating loss not allocable to
Duck Head or Delta Apparel. Delta Woodside has estimated Duck Head's and Delta
Apparel's allocable shares of the US consolidated federal income tax net
operating loss carry forward as of July 3, 1999 at $3 million and $9 million,
respectively. Delta Woodside believes that these loss carryforwards will expire
at various dates in fiscal year 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.
41
<PAGE>
TRADING MARKET
As of the Duck Head record date, all of the outstanding shares of Duck Head
will be owned by 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".
42
<PAGE>
Except as described above and except for the rights agreement which is
discussed below under the heading "Description of Duck Head Capital Stock-Rights
Plan", Duck Head will not have any other 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.
43
<PAGE>
RELATIONSHIPS AMONG DUCK HEAD,DELTA WOODSIDE AND DELTA APPAREL
This section describes the primary agreements among Duck Head, Delta
Woodside and Delta Apparel that will define the ongoing relationships among them
and their respective subsidiaries after the Duck Head distribution and the Delta
Apparel 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 and
the Delta Apparel distribution with respect to, among other things,
indemnification arrangements and employee benefit arrangements.
Intercompany reorganization
---------------------------
Pursuant to the distribution agreement, Delta Woodside, Duck Head and Delta
Apparel have caused the following to be effected:
(a) Delta Woodside and its subsidiaries (other than Delta Mills)
contributed, as contributions to capital, all net debt amounts owed to
any of them by the corporations that conducted the Duck Head Apparel
Company division's business and the Delta Apparel Company division's
business, with the exceptions of (i) the intercompany debt that was
attributable to the portion of the amounts borrowed since January 1,
2000 for use by the Duck Head Apparel Company division's business or
the Delta Apparel Company division's business from Delta Woodside's
credit agreement lender that were repaid to that lender or to Delta
Woodside with borrowings under Duck Head's and Delta Apparel's new
credit facilities (which repayments cancelled such intercompany debt)
and (ii) any amounts owed by Delta Apparel to Delta Mills for yarn
sold by Delta Mills to Delta Apparel, which amounts shall be paid in
the ordinary course of business. These intercompany contributions of
debt did not, however, affect any obligation that Delta Woodside, Duck
Head or Delta Apparel may have under the distribution agreement or the
tax sharing agreement. Prior to completion of the intercompany
reorganization, the Duck Head Apparel Company division's assets were
owned by Delta Woodside and several of its wholly-owned subsidiaries,
and the Delta Apparel Company division's assets were 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 were 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 assumed all of the liabilities of the Duck Head Apparel
Company division of Delta Woodside, and caused all holders of
indebtedness for borrowed money that were part of the assumed Duck
Head liabilities and all lessors of leases that were 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
44
<PAGE>
(except where Delta Woodside or Delta Apparel, as applicable,
consented to not being released from the obligations).
(d) All the assets used in the operations of the Delta Apparel Company
division's business were transferred to Delta Apparel or a subsidiary
of Delta Apparel to the extent not already owned by Delta Apparel or
its subsidiaries. This transfer included the sale by Delta Mills to
Delta Apparel of the Rainsford plant, located in Edgefield, SC.
(e) Delta Apparel assumed all of the liabilities of the Delta Apparel
Company division of Delta Woodside, and caused all holders of
indebtedness for borrowed money that were part of the assumed Delta
Apparel liabilities and all lessors of leases that were 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, consented to not being released from the obligations).
(f) Delta Woodside caused all holders of indebtedness for borrowed money
and all lessors of leases that were 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, consented 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 has caused the employees of the Duck Head Apparel Company
division to become employees of Duck Head, Duck Head has assumed 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, the Delta
Woodside incentive stock award plan and the Delta Woodside long term incentive
plan, if any) to be transferred to a comparable employee benefit plan of Duck
Head.
Intercompany Accounts
---------------------
Other than any obligations described in or arising under the distribution
agreement or the tax sharing agreement, each of Delta Woodside, Duck Head and
Delta Apparel has represented to each other that it is not aware of any
intercompany receivable, payable or loan balance that will exist as of the time
of the Duck Head distribution and the Delta Apparel distribution between any of
them.
45
<PAGE>
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.
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.
46
<PAGE>
(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.
(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 and the Delta Apparel 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.
47
<PAGE>
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).
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 nine months of fiscal year 2000:
<TABLE>
<CAPTION>
(in thousands of dollars)
Fiscal year First nine 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 28
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 will not be material.
48
<PAGE>
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 nine months of fiscal year 2000, Delta Woodside
charged the Duck Head Apparel Company division $0 for these services.
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 April 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 portions of this document found under the
headings "The Duck Head Distribution" and "Relationships Among Duck Head, Delta
Woodside and Delta Apparel - Distribution Agreement". 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 April 1, 2000 and for the nine
months ended April 1, 2000, included on pages 51-56 and F-18 - F-22,
respectively, of this document.
<TABLE>
<CAPTION>
AS OF
APRIL 1, 2000
----------------------------------------
Actual Pro Forma
-------------- ----------------
(Dollars in thousands)
<S> <C> <C>
Long-term debt, including current maturities
Mortgage loan payable $ --- 5,760
Due to parent and affiliates 123,837 ---
-------------- ----------------
Total long-term debt (including current maturities) 123,837 5,760
Less current maturities (100,659) (960)
-------------- ----------------
Total long-term debt (excluding current maturities) 23,178 4,800
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 --- 19,159
Divisional deficit (98,898) ---
-------------- ----------------
Total stockholders' equity (deficit) (98,898) 19,183
-------------- ----------------
Total capitalization $ (75,720) 23,983
============== ================
</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 April 1, 2000:
- The contribution to equity or repayment of the intercompany debt owed
by Duck Head to Delta Woodside and its subsidiaries and the
distribution of Duck Head common stock to the existing Delta Woodside
stockholders; and
- The incurrence of new financing.
The unaudited pro forma combined statements of operations for the year
ended July 3, 1999 and for the nine months ended April 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 or repayment of the intercompany debt and borrowings utilizing
outside financing;
- 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
APRIL 1, 2000
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
-------------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 437 437
Accounts receivable 6,321 6,321
Affiliate receivables 1,079 (1,079) (1) ---
Inventories 17,207 17,207
Prepaid expenses and other current assets 130 130
------------ -------------- ----------
Total current assets 25,174 (1,079) 24,095
Property, plant and equipment, net 9,660 9,660
------------ -------------- ----------
$ 34,834 (1,079) 33,755
============ ============== ==========
LIABILITIES AND STOCKHOLDERS'/DIVISIONAL EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,961 2,961
Accrued expenses 4,179 4,179
Current portion of long-term debt --- 960 (2) 960
Due to Parent and affiliates 101,738 (101,738) (1) ---
Income taxes payable 904 (4) (3) 900
------------ -------------- ----------
Total current liabilities 109,782 (100,782) 9,000
Long-term debt --- 4,800 (2) 4,800
Due to Parent 23,178 (23,178) (1) ---
Other liabilities 772 772
------------ -------------- ----------
Total liabilities 133,732 (119,160) 14,572
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 (1) 24
Additional paid in capital --- 19,159 (1) 19,159
Divisional deficit (98,898) 98,898 (1) ---
----------- --------------- -----------
-----------
Total stockholders'/divisional equity (deficit) (98,898) 118,081 19,183
----------- --------------- -----------
LIABILITIES AND STOCKHOLDERS'/DIVISIONAL EQUITY
(DEFICIT) $ 34,834 (1,079) 33,755
=========== =============== ===========
See notes to unaudited pro forma combined financial statements.
</TABLE>
52
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
APRIL 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 contribution to equity or other elimination of net
intercompany debt owed by Duck Head to Delta Woodside and subsidiaries
totaling $123,837 and the distribution of 2,400,000 Duck Head common shares
to Delta Woodside's existing stockholders.
2) To reflect the incurrence of the term loan of $5.8 million under Duck
Head's new credit facility.
3) To reflect estimated tax liability.
53
<PAGE>
<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 3, 1999
PRO FORMA 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) (777)
Impairment charges (13,650) (13,650)
Royalty and other income 1,027 1,027
------------ -------------
Operating loss (39,231) (39,231)
Interest income (expense):
Interest expense, net (960) (593) (1) (1,553)
Intercompany interest expense (7,262) 7,262 (1) ---
------------ ------------- -------------
(8,222) 6,669 (1,553)
------------ ------------- -------------
Loss before taxes (47,453) 6,669 (40,784)
Income tax expense 261 1 (3) 262
------------ ------------- -------------
Net loss (47,714) 6,668 (41,046)
============ ============= =============
Basic and diluted net loss per share $ (17.10)
=============
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>
<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED APRIL 1, 2000
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Net sales $ 42,611 42,611
Cost of goods sold (29,026) (29,026)
-------------- ---------------
Gross profit 13,585 13,585
Selling, general and administrative expenses (15,753) (259) (2) (16,012)
Royalty and other income 1,553 1,553
-------------- ------------ ---------------
Operating income (loss) (615) (874)
Interest income (expense):
Interest expense, net (394) (626) (1) (1,020)
Intercompany interest expense (5,885) 5,885 (1) ---
-------------- ------------ ---------------
(6,279) 5,259 (1,020)
-------------- ------------ ---------------
Loss before taxes (6,894) 5,000 (1,894)
Income tax expense (benefit) 57 (4) (3) 53
-------------- ------------ ---------------
Net (loss) $ (6,951) 5,004 (1,947)
============== ============ ===============
Basic and diluted net loss per share $ (0.81)
===============
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
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NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 3, 1999 AND THE NINE MONTHS ENDED APRIL 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
(including working capital borrowings to replace intercompany
borrowings for working capital needs) from the new credit agreement
lender of $593 and $626 for the fiscal year ended July 3, 1999 and the
nine months ended April 1, 2000, respectively, at an assumed interest
rate (including the amortization of lender fees) of 10%. Also, to
reflect the elimination of intercompany interest expense totaling
$7,262 and $5,885 on the intercompany debt owed by Duck Head to Delta
Woodside and subsidiaries for the fiscal year ended July 3, 1999 and
the nine months ended April 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 $8 variance in interest expense for the
fiscal year ended July 3, 1999 and the nine months ended April 1,
2000, respectively.
2) To reflect intercompany management fees for the nine month period
ended April 1, 2000 of $259, related to payroll and purchasing
administrative expenses, director fees, SEC reporting expenses,
software expenses and audit fees. The amount was adjusted based upon
the historical amount charged by Delta Woodside for the year ended
July 3, 1999.
3) To reflect estimated tax liability.
4) To reflect earnings per share based on the weighted-average shares
outstanding assuming a distribution of one Duck Head share for every
ten Delta Woodside shares outstanding on the record date.
56
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with Duck Head's
historical financial statements and the notes to those statements 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.
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- 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 11% of the total cost of manufacturing and third-party
assembly during the first nine 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 nine months of
fiscal 2000, approximately 52% 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 11% and 8% of total sales for the first nine
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
nine months of fiscal year 2000, the product mix consisted of 46%
core, 32% fashion basics and 22% fashion. During fiscal year 1999, the
product mix consisted of 44% core, 7% fashion basics and 49% fashion.
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<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
nine months of fiscal year 2000, the percentage of goods shipped under
margin support agreements was 41%, 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 nine 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 NINE MONTHS OF FISCAL YEAR 2000 VERSUS FIRST NINE MONTHS OF FISCAL YEAR
1999
Net Sales.
Consolidated net sales for the nine months ended April 1, 2000 totaled
$42.6 million, as compared to $54.0 million for the nine months ended March 27,
1999, a decrease of 21.1%. A summary of Duck Head's net sales for the nine
months ended April 1, 2000 and March 27, 1999 follows:
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<PAGE>
<TABLE>
<CAPTION>
Net Sales (in millions)
Wholesale Retail Total
<S> <C> <C> <C>
- ---------------------------- -------------------------- -------------------------- --------------------------
Fiscal year 2000 ($) 31.6 11.0 42.6
- ---------------------------- -------------------------- -------------------------- --------------------------
Fiscal year 1999 ($) 41.6 12.4 54.0
- ---------------------------- -------------------------- -------------------------- --------------------------
(Decrease) ($) (10.0) (1.4) (11.4)
- ---------------------------- -------------------------- -------------------------- --------------------------
Percent (decrease) (24.0%) (11.3%) (21.1%)
</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 nine months ended April 1, 2000 there were no
sales to Uptons, Inc., Mercantile Stores Company, Inc. or Dillard's, Inc., while
sales during the nine months ended March 27, 1999 to these three accounts were
$3.5 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. Private label sales
decreased by $2.4 million during the first nine 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 on average during the nine months ended April 1, 2000
as compared with the nine months ended March 27, 1999 and a comparable store
sales decrease of 4%. The comparable store sales decrease accounted for $0.6
million and lower sales due to fewer stores being open accounted for $0.8
million of the total retail store sales decrease during the nine months ended
April 1, 2000, as compared to the nine months ended March 27, 1999. During the
nine months ended April 1, 2000 Duck Head opened 1 store and did not close any
stores, and at April 1, 2000 Duck Head operated 25 retail outlet stores versus
24 stores at March 27, 1999. 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 nine months ended
April 1, 2000 were $13.6 million and 31.9%, respectively, as compared to $13.7
million and 25.3%, respectively, for the nine months ended March 27, 1999, a
decrease in consolidated gross profit of 0.7%. 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 $8.9 million and gross profit margin was 28.2% on
wholesale sales for the nine months ended April 1, 2000, as compared to $8.9
million and 21.4%, respectively, for the nine months ended March 27, 1999. The
level gross profit was primarily due to lower sales, 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 nine months ended April 1, 2000
and $2.8 million for the nine months ended March 27, 1999, respectively. The
increase in gross profit margin was primarily due to lower provisions for
potentially obsolete or slow-moving inventory taken during the nine months ended
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<PAGE>
April 1, 2000, as compared to the nine months ended March 27, 1999, due to lower
levels of unsold fashion products remaining at season end.
Gross profit was $4.7 million and gross profit margin was 43.0% on retail
sales for the nine months ended April 1, 2000 as compared to $4.8 million and
38.7%, respectively, for the nine months ended March 27, 1999. This $0.1 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 nine months ended April 1, 2000 than they
were in the nine months ended March 27, 1999 and due to the nine months ended
March 27, 1999 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 nine months ended April 1, 2000, selling, general and
administrative expenses were $15.8 million, as compared to $20.9 million during
the nine months ended March 27, 1999, a decrease of 24.4%. For the nine months
ended April 1, 2000, expenses in this category were 37.0% of net sales as
compared to 38.7% of net sales for the nine months ended March 27, 1999.
Wholesale selling, general and administrative expenses for the nine months
ended April 1, 2000 decreased by $4.4 million as compared to the nine months
ended March 27, 1999. 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 nine months
ended April 1, 2000 declined by $0.7 million as compared to the nine months
ended March 27, 1999. The decrease was primarily due to fewer stores being open
on average in the nine months ended April 1, 2000 as compared to the nine months
ended March 27, 1999 and lower home office costs. Duck Head expects this lower
selling, general and administrative expense level to continue.
Operating Losses.
Operating losses for the nine months ended April 1, 2000 were $0.6 million,
as compared to $5.9 million operating losses for the nine months ended March 27,
1999.
Wholesale operating losses for the nine months ended April 1, 2000 were
$0.8 million, as compared to operating losses of $5.5 million for the nine
months ended March 27, 1999. Included in the wholesale operating losses for the
nine months ended April 1, 2000 was $1.6 million of other income primarily
related to royalty income on license agreements and a $0.4 million gain on an
insurance settlement. Other income for the nine months ended March 27, 1999 was
$1.2 million which was primarily related to royalty income on license
agreements.
As a result of the factors described above, retail operating income for the
nine months ended April 1, 2000 was $0.2 million, as compared to $0.4 million of
operating losses for the nine months ended March 27, 1999.
Net Interest Expense. For the nine months ended April 1, 2000 net interest
expense was $6.3 million, as compared to $5.8 million for nine months ended
March 27, 1999. The increase in interest expense was primarily a result of the
higher average principal balance outstanding on affiliated debt.
Taxes. The effective tax rate was (0.8)% for the nine months ended April 1,
2000 as compared to the effective tax rate for the nine months ended March 27,
1999 of (0.5)%. Although both periods reflected a pretax loss, during the nine
months ended April 1, 2000 Duck Head incurred more state income taxes than
during the nine months ended March 27, 1999.
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<PAGE>
Net Loss. Net loss for the nine months ended April 1, 2000 was $7.0
million, as compared to $11.8 million for the nine months ended March 27, 1999.
The decreased loss was due to the factors described above.
Inventories. Inventories decreased to $17.2 million at April 1, 2000 from
$24.7 million at July 3, 1999, a decrease of $7.5 million or 30.4%. 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 $1.0 million were made in the
nine months ended April 1, 2000, as compared to $1.8 million of capital
expenditures during the first nine months of the prior year.
Order Backlog.
Duck Head's order backlog at April 1, 2000 was $8.3 million, a 25.2%
decrease from the $11.1 million order backlog at March 27, 1999. 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 March 27, 1999, 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 April 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 $84.0 million for the year ended June 27, 1998, a
decrease of 16%. A summary of Duck Head's net sales for the years ended July 3,
1999 and June 27, 1998 follows:
<TABLE>
<CAPTION>
Net Sales (in millions)
Wholesale Retail Total
<S> <C> <C> <C>
- ---------------------------- -------------------------- -------------------------- --------------------------
Fiscal year 1999 ($) 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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<PAGE>
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 $1.7
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.
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
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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. During the
second quarter of fiscal year 1999, the Duck Head Apparel Company division was
put up for sale by Delta Woodside, which in the third quarter generated offers
significantly below the net book value of the business. Due to the diminished
fair value of Duck Head and the amounts of the recent offers, during the third
fiscal quarter Delta Woodside suspended its efforts to sell the business and
hired new senior management to develop a new business plan and restructure its
operations. At the end of the fourth fiscal quarter, an additional major account
announced its decision to close all of its doors. As a result of these events,
an impairment analysis was completed during the fourth quarter of fiscal year
1999 and it was determined that an impairment loss should be recognized. Based
upon the offers received for the business and the continuing decline in sales,
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. Pursuant to the distribution
agreement, the affiliated debt has recently been contributed to equity or repaid
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 the (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 increased loss
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 $79.6 million for the year ended June 28, 1997, an
increase of 5.5%. A summary of Duck Head's net sales for the years ended July 3,
1999 and June 27, 1998 follows:
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<TABLE>
Net Sales (in millions)
Wholesale Retail Total
<S> <C> <C> <C>
- ---------------------------- -------------------------- -------------------------- --------------------------
Fiscal year 1998 ($) 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 $29.0 million, as compared to $25.6 million during the year ended
June 28, 1997, an increase of $3.4 million or 13.3%. 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 $0.5 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 $4.6 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 nine 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 $1.8 million of cash provided
in the first nine months of fiscal 2000 as compared to $14.9 million of net cash
used in the first nine 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
nine 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
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Woodside on affiliated debt of $5.9 million in the first nine months of fiscal
year 2000. The uses of cash in each of the fiscal years 1999, 1998 and 1997 and
the first nine 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
$5.1 million, respectively.
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 the
purchase of distribution equipment and fixtures previously leased under an
operating lease and for new in-store shops, to approximate $2.8 million to
support anticipated growth outside the Southeastern United States.
Pro Forma
Pursuant to the distribution agreement, all net debt amounts (other than
certain accounts payable) owed to Delta Woodside by the corporations that
previously had conducted the Duck Head Apparel Company division's business and
the Delta Apparel Company division's business have been contributed to capital
or repaid. As a result of this action, Duck Head no longer owes 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 has entered
into the following financing arrangements:
- Duck Head has entered into a credit agreement with a lending
institution, under which the lender has provided 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 has granted the lender a first mortgage lien on or
security interest in substantially all of its assets.
- The credit agreement contains 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 is 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 and intercompany debt repayments had occurred and these new debt
facilities were in place as of April 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 $9.2 million ($6.8 million less
than the actual use of cash from operations). The lower use of cash would have
been due to $6.8 million less interest expense on the institutional lender debt
as compared to the actual interest charged on the affiliated debt.
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 nine months of fiscal
year 2000 would have been approximately $7.1 million. This $5.0 million increase
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in cash provided by operations would have been due primarily to lower interest
payments on the institutional lender debt as compared to the actual interest
charged on the affiliated debt.
Typically, Duck Head's peak borrowing needs are in the third fiscal
quarter. When Duck Head entered into its new credit facility, it owed amounts to
the lender on Delta Woodside's existing credit facility or to Delta Woodside for
certain borrowings made to fund Duck Head's needs after January 1, 2000. These
borrowings were 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.
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 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 $62,000 higher in the fiscal year
ended July 3, 1999 and approximately $63,000 higher in the nine months ended
April 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 Duck Head 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.
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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 permits 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 also permits up to an aggregate of $3.0 million of purchases by
Duck Head of its own stock provided that no event of default exists or would
result from that action and after the purchase at least $6.0 million remains
available under the revolving credit facility.
Duck Head currently anticipates that it will pay no cash dividends to its
stockholders for the foreseeable future. If Duck Head's board of directors
determines at any time that the purchase of its own stock is in the best
interests of its stockholders and that the purchase complies with its loan
covenants, Duck Head may purchase its own shares in the market or in privately
negotiated transactions.
In general, any future cash dividend payments will depend upon Duck Head's
earnings, financial condition, capital requirements, compliance with loan
covenants and other relevant factors.
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BUSINESS OF DUCK HEAD
The following discussion contains various "forward-looking statements".
Please refer to "Forward-Looking Statements May Not Be Accurate" for a
description of the uncertainties and risks associated with forward-looking
statements.
Duck Head is a Georgia corporation with its principal executive offices
located at 1020 Barrow Industrial Parkway, Winder, Georgia 30680 (telephone
number: 770-867-3111). Duck Head was incorporated in 1999.
The following information under this heading, "Business of Duck Head",
describes Duck Head as if the transactions contemplated by the distribution
agreement had been consummated at the beginning of the periods described. All
references in this document to Duck Head refer to Duck Head Apparel Company,
Inc., together with its subsidiaries.
BUSINESS
Duck Head designs, 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.
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"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 nine months of fiscal year 2000 and fiscal 1999, 1998 and
1997, approximately 28%, 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 48% of Duck Head's net sales in the first nine 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, and during their six month
selling season fashion basic items, are generally required to be inventoried to
permit replenishment shipments and to level production schedules. "Duck Head"
fashion items are generally inventoried to match projected orders. 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
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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" (R)
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%.
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 first nine months of fiscal year
2000, less than 2% of Duck Head's sales were private label sales.
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- Improve the management of inventory.
Duck Head's management believes that this strategy will take advantage of
the following market trends:
- Continued implementation in the workplace of a more casual dress code.
- Growth in the 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".
74
<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.
75
<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)
</TABLE>
- ------------------------------
(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.
In addition, a sales office is leased in New York City, with the lease
expiring in December 2000.
Substantially all of Duck Head's assets are subject to liens in favor of
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.
76
<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>
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. (59) Chairman of the Board, President 1999
and Chief Executive Officer of
Duck Head (9)
</TABLE>
(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,
77
<PAGE>
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.
(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 currently has ceased business operations but is 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.
78
<PAGE>
(9) Robert D. Rockey, Jr. has served as the chief executive officer of the
Duck Head Apparel Company division 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.
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.
NAME AND AGE POSITION
Robert D. Rockey, Jr. (59) 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)
- ------------------------
(1) See information under the subheading "Directors."
(2) Mr. Prendergast was elected as Duck Head's Senior Vice President of
Sales in December 1999. He was elected in July 1997 to serve as Senior Vice
President of Sales and Marketing of the Duck Head Apparel Company division.
Prior to joining the Duck Head Apparel Company division, Mr. Prendergast was
Senior Vice President-Sales at Bugle Boy Industries (an apparel producer) from
1994 to 1997.
(3) Mr. Grassmyer was elected as Duck Head's Senior Vice President, Chief
Financial Officer, Secretary and Treasurer in December 1999. He was elected in
February 1998 to serve as Senior Vice President and Chief Financial Officer of
the Duck Head Apparel Company division. Prior to that time, he was Chief
Financial Officer of the Duck Head Apparel Company division from August 1992 to
February 1998.
(4) Mr. Mattison was elected Senior Vice President of Merchandising for
Duck Head in December 1999. He was elected in July 1999 to serve as Senior Vice
President of Merchandising of the Duck Head Apparel Company division. Prior to
joining the Duck Head Apparel Company division, Mr. Mattison was Vice President
of merchandising at Hagale Industries (an apparel producer) from 1995 to 1999.
Prior to that, Mr. Mattison served for nearly 12 years with River City Trading
Company (an apparel producer), serving as President from 1992 to 1995.
Duck Head's executive officers are appointed by Duck Head's board of
directors and serve at the pleasure of Duck Head's Board.
79
<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>
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
- --------------------------------
</TABLE>
(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.
80
<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 services
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
has assumed Delta Woodside's obligations under this agreement in connection with
the Duck Head distribution.
(f) During fiscal 1999, Mr. Grassmyer was granted an option 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 $3,050 earned on Mr. Grassmyer's
deferred compensation at a rate in excess of 120% of the federal mid-term rate.
(i) The Delta Woodside 401(k) Plan allocation shown for the fiscal year was
allocated to the participant's account during that fiscal year, although all or
part of the allocation may have been determined in whole or in part on the basis
of the participant's compensation during the prior fiscal year.
The amounts shown in the table above do not include the value of the
provision by Delta Woodside or its subsidiaries of an apartment, an automobile
or other property for the benefit of any of the Named Executives. The
non-business personal benefit to any Named Executive of these amounts does not
exceed 10% of the Named Executive's total salary and bonus.
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<PAGE>
Option Grants in the Last Fiscal Year
-------------------------------------
The following table provides information respecting the grant to a Named
Executive during fiscal 1999 of options under the Delta Woodside Stock Option
Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------------------- Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options Market of Stock Price
Underlying Granted to Exercise Price on Appreciation for Option
Options Duck Head or Base Date of Term (b)
Granted Employees in Price Grant Expiration 0% 5% 10%
Name (#) (a) Fiscal Year ($/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
</TABLE>
(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 is 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.
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<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
- ----------------------------
</TABLE>
(a) Based on the closing sales price of $5.9375 per Delta Woodside share on July
2, 1999.
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:
83
<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 has assumed 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
84
<PAGE>
potential of the executive and those other factors that the applicable committee
deems relevant to the accomplishment of the purposes of the plan. Directors who
are not also employees of Duck Head are not eligible to participate in the Duck
Head option plan. The Duck Head option plan provides that no more than 125,000
Duck Head shares may be covered by grants made under the plan in any fiscal year
to any particular employee.
In the discretion of the applicable committee, options granted under the
Duck Head option plan may be "incentive stock options" for federal income tax
purposes. Duck Head is not allowed a deduction at any time in connection with,
and the participant is not taxed upon either the grant or the exercise of, an
"incentive stock option." The difference between the exercise price of 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.
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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.
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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 or is paid
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 or is paid 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).
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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.
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SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS
AND MANAGEMENT
Based on the beneficial ownership of Delta Woodside shares as of May 19,
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 May 19, 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".
Shares
Beneficially
Beneficial Owner Owned Percentage
- ---------------- ------------ ----------
Robert D. Rockey, Jr. (1) 0 0.0%
13101 Preston Road #312
Dallas, Texas 75240
Reich & Tang Asset Management L. P. (2) 300,700 12.9%
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) 193,822 8.3%
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) 2,988 (20)
William B. Mattison, Jr. (18) 0 (20)
All current directors and executive officers
as a group (11 Persons) (19)(21) 891,511 38.2%
(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
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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."
(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 and on telephone confirmation
received from Reich & Tang on May 15, 2000. 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 and a Schedule 13F filed on May 4, 2000 that were 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
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(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.
(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 324,604 shares of Delta
Woodside's common stock (32,460 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
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Delta Woodside's common stock (274 Duck Head shares) held by her as custodian
for her children. The spouse of Charles C. Mickel owns 100 shares of Delta
Woodside's common stock (10 Duck Head shares), as to which shares Charles C.
Mickel may also be deemed a beneficial owner. Charles C. Mickel disclaims
beneficial ownership with respect to these shares and with respect to the 3,510
shares of Delta Woodside's common stock (351 Duck Head shares) held by him as
custodian for his children. Buck A. Mickel disclaims beneficial ownership with
respect to the 2,871 shares of Delta Woodside's common stock (287 Duck Head
shares) held by him as custodian for a minor.
(9) The number of shares shown as beneficially owned by Minor H. Mickel
includes 324,604 Delta Woodside shares (32,460 Duck Head shares) directly owned
by her 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 this amendment will 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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(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 this amendment will 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 2,760 Delta Woodside shares (276 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 this amendment will
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) held for the directors and executive officers on May 19, 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 will
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.
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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, on one or more dates 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
- ----------------------------------
</TABLE>
(1) The compensation grants committee of the Duck Head board of directors
anticipates that the stock options will be granted on one or more 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
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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.
(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.
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 the record date for 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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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 ($1.50 per
share).
The table below sets forth the Delta Woodside shares that will thereby be
issued and the cash that will thereby be paid to the individuals who are
directors or executive officers of Duck Head. The Delta Woodside board
anticipates that these Delta Woodside shares will be issued and this cash will
be paid prior to the record date for the Duck Head distribution and the Delta
Apparel distribution.
<TABLE>
<CAPTION>
Name Delta Woodside Shares(#) Cash ($)
---- ------------------------ --------
<S> <C> <C>
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
</TABLE>
Shares will also be issued and cash will also be paid to Minor H. Mickel, as
personal representative of the estate of Buck Mickel (father of Buck A. Mickel).
Buck Mickel was a member of the Delta Woodside board of directors until his
death in 1998 and 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 as an officer 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. See also the information
below under the subheading "Early Exercisability and Other Amendments of Delta
Woodside Stock Options and Amendments to Deferred Compensation Plan".
Jane H. Greer is the Vice President and Secretary of Delta Woodside. On or
about the time of the Duck Head distribution and the Delta Apparel distribution,
Ms. Greer will resign from her officer positions with Delta Woodside and its
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subsidiaries. In connection with this resignation, Delta Woodside will pay Ms.
Greer $53,846 of severance in accordance with the normal provisions of Delta
Woodside's severance plan and $400,000 of severance pursuant to the terms of an
employment agreement. Pursuant to amendments to Delta Woodside's stock option
plan and her stock options, all of Ms. Greer's outstanding stock options for
Delta Woodside shares (covering an aggregate of 22,500 Delta Woodside shares)
will remain exercisable until their stated expiration dates notwithstanding the
termination of Ms. Greer's employment with Delta Woodside.
David R. Palmer is the Controller of Delta Woodside. On or about the time
of the Duck Head distribution and the Delta Apparel distribution, Mr. Palmer
will resign from his officer positions with Delta Woodside and its subsidiaries.
In connection with this resignation, Delta Woodside will pay Mr. Palmer $61,250
of severance pursuant to the terms of an employment agreement. Pursuant to
amendments to Delta Woodside's stock option plan and his stock options, all of
Mr. Palmer's unexercisable stock options for Delta Woodside shares (covering an
aggregate of 1,250 Delta Woodside shares) will become exercisable in full no
later than 5 business days prior to the record date for the Duck Head and Delta
Apparel distributions, and all of Mr. Palmer's outstanding stock options for
Delta Woodside shares (covering an aggregate of 5,000 Delta Woodside shares)
will remain exercisable until their stated expiration dates notwithstanding the
termination of Mr. Palmer's employment with Delta Woodside.
Brenda L. Jones is the Assistant Secretary of Delta Woodside. On or about
the time of the Duck Head distribution and the Delta Apparel distribution, Ms.
Jones will resign from her officer positions with Delta Woodside and its
subsidiaries. In connection with this resignation, Delta Woodside will pay Ms.
Jones $37,019 of severance in accordance with the normal provisions of Delta
Woodside's severance plan and $37,019 pursuant to the terms of an employment
agreement. Pursuant to amendments to Delta Woodside's stock option plan and her
stock options, all of Ms. Jones' unexercisable stock options for Delta Woodside
shares (covering an aggregate of 375 Delta Woodside shares) will become
exercisable in full no later than 5 business days prior to the record date for
the Duck Head and Delta Apparel distributions, and all of Ms. Jones' outstanding
stock options for Delta Woodside shares (covering an aggregate of 1,375 Delta
Woodside shares) will remain exercisable until their stated expiration dates
notwithstanding the termination of Ms. Jones' employment with Delta Woodside.
EARLY EXERCISABILITY AND OTHER AMENDMENTS OF DELTA WOODSIDE STOCK OPTIONS AND
AMENDMENTS TO DEFERRED COMPENSATION PLAN
Pursuant to the distribution agreement, Delta Woodside is providing the
holders of outstanding options granted under the Delta Woodside stock option
plan, whether or not those options are currently 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 on a date that is no later than five
(5) business days prior to the Duck Head record date and the Delta Apparel
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
the Delta Apparel 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 and the Delta Apparel 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 Delta Woodside
stock options will probably enter into the proposed amendment.
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<PAGE>
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 Delta Woodside shares:
<TABLE>
<CAPTION>
Name Number of Delta Woodside shares covered by portion of stock options the exercisability of which
---- -----------------------------------------------------------------------------------------------
will be accelerated
-------------------
<S> <C>
William F. Garrett 37,500
Michael H. Prendergast 6,000
K. Scott Grassmyer 9,000
</TABLE>
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 and Delta Apparel distributions, 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.
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
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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.
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.
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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. The initial term of
the engagement will be one year. 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.
Carolina Benefits Services expects that it will provide similar payroll
processing and 401(k) plan administration services to Delta Apparel and 401(k)
plan administration services to Delta Woodside after the Duck Head distribution
and the Delta Apparel distribution.
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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.
Until the Distribution Date (described below), the number of Rights outstanding
from time to time 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 contain 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
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for breach of their fiduciary duties as directors. However, the provision does
not affect the availability of equitable remedies like an injunction or
rescission. The foregoing liability and the indemnification provisions described
below may be materially more liberal with respect to directors than available
under the corporate laws of many other states.
Indemnification of Directors
Duck Head's bylaws provide that 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
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restrictions placed on Duck Head's ability to pay dividends or make
distributions, see the portion of this document found under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Dividends and Purchases of its Own Shares by Duck Head". The
holders of Duck Head common stock are entitled to share on a pro rata basis in
any distribution to stockholders upon liquidation, dissolution or winding up of
Duck Head, subject to the provisions of any outstanding blank check preferred
stock.
Approval of and Special Rights with Respect to Mergers or Consolidations
and Other Transactions
Under Georgia law, although articles of incorporation may require a higher
stockholder vote, the holders of a majority of the outstanding voting common
shares must approve a plan adopted by the board of directors in order to
authorize mergers, consolidations, share exchanges or the transfer of all or
substantially all of the corporation's assets. Duck Head's articles of
incorporation do not require a higher vote to approve any of those transactions.
Georgia Business Combinations Statute
Duck Head is also subject to Section 14-2-1131 et seq. of the Official Code
of Georgia. In general, this section prohibits a 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;
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- 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 require 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.
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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 was
an indirect wholly-owned subsidiary of Delta Woodside. As part of the
intercompany reorganization described in "Relationships Among Duck Head, Delta
Woodside and Delta Apparel - Distribution Agreement", Duck Head's parent
corporation merged into its immediate parent corporation, which in turn merged
into Delta Woodside, and Duck Head issued an additional 50 shares of its common
stock to Delta Woodside in exchange for the transfer by Delta Woodside to Duck
Head of the Winder distribution facility. Neither of these issuances was
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 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.
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2000 ANNUAL MEETING OF DUCK HEAD STOCKHOLDERS
Duck Head plans to hold an annual meeting of its stockholders in the fall
of 2000.
Any stockholder of Duck Head who desires to present a proposal at the 2000
annual meeting of stockholders of Duck Head for inclusion in the proxy statement
and form of proxy relating to that meeting must submit the proposal to Duck Head
at its principal executive offices on or before July 31, 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 date that is
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 Securities Exchange Act of 1934 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",
"The Duck Head Distribution - Reasons for the Duck Head Distribution", "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.
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You may inspect and copy the Registration Statement and the related
exhibits filed by Duck Head with the SEC at the public reference facilities that
the SEC maintains at Room 1024, 450 Fifth Street, N.W., Washington, DC 20549, as
well as at the Regional Offices of the Commission at Northwest Atrium Center,
500 West Madison, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center,
13th floor, New York, New York 10048. You can obtain copies of that information
by mail from the Public Reference Branch of the Commission at 450 Fifth Street,
N.W., Washington, DC 20549 at prescribed rates. You may also access that
material electronically through the SEC's home page on the Internet at
http://www.sec.gov.
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<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
April 1, 2000 (unaudited) F-18
Condensed Combined Statements of Operations and
Accumulated Divisional Deficit for the Nine Months
Ended April 1, 2000 and March 27, 1999 (unaudited) F-19
Condensed Combined Statements of Cash Flows for the
Nine Months ended April 1, 2000 and
March 27, 1999 (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) (4,052) (33,303)
Net loss (316) (5,308) (5,744) (36,346)
</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>
APRIL 1,
ASSETS 2000
------------
<S> <C>
Current assets:
Cash $ 437
Accounts receivable, less allowances of $1,594 6,321
Affiliate receivables 1,079
Inventories 17,207
Prepaid expenses and other current assets 130
------------
Total current assets 25,174
Property, plant and equipment, net 9,660
------------
$ 34,834
============
LIABILITIES AND DIVISIONAL DEFICIT
Current liabilities:
Accounts payable $ 2,961
Accrued expenses 4,179
Due to Parent and affiliates 101,738
Income taxes payable 904
------------
Total current liabilities 109,782
Due to Parent 23,178
Other liabilities 772
------------
Total liabilities 133,732
Divisional deficit (98,898)
------------
$ 34,834
============
</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 NINE MONTHS ENDED
-----------------------------
APRIL 1, MARCH 27,
2000 1999
-------------- -------------
<S> <C> <C>
Net sales $ 42,611 53,986
Cost of goods sold 29,026 40,307
-------------- -------------
Gross profit 13,585 13,679
Selling, general and administrative expenses 15,753 20,330
Intercompany management fees -- - 569
Royalty and other income (1,553) (1,292)
-------------- -------------
Operating loss (615) (5,928)
-------------- -------------
Interest (income) expense:
Interest expense, net 394 696
Intercompany interest expense, net 5,885 5,072
-------------- -------------
6,279 5,768
-------------- -------------
Loss before income taxes (6,894) (11,696)
Income tax expense (benefit) 57 64
-------------- -------------
Net loss (6,951) (11,760)
Accumulated divisional deficit, beginning of period (91,947) (44,233)
-------------- -------------
Accumulated divisional deficit, end of period $ (98,898) (55,993)
============== =============
Pro forma net loss per share (Note 5):
Basic and diluted $ (2.90)
==============
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 MINE MONTHS ENDED
-----------------------------
APRIL 1, MARCH 27,
2000 1999
-------------- -------------
<S> <C> <C>
Operating activities:
Net loss $ (6,951) (11,760)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 2,472 2,853
Amortization - 687
(Gain) Loss on sale of property and equipment (64) (63)
Provision for losses on accounts receivable (602) 726
Changes in operating assets and liabilities:
Trade accounts receivable 1,061 1,202
Inventories 7,514 (6,217)
Prepaids and other current assets 44 242
Accounts payable (888) (1,529)
Accrued expenses (1,423) (1,444)
Income taxes payable 643 (77)
Other liabilities 40 500
-------------- -------------
Net cash provided by (used in) operating activities 1,846 (14,880)
-------------- -------------
Investing activities:
Purchases of property, plant and equipment (959) (1,791)
Proceeds from sale of property, plant and equipment 809 1,025
-------------- -------------
Net cash used in investing activities (150) (766)
-------------- -------------
Financing activities:
Change in obligations under capital leases, net (114) (71)
Principal payments on long-term debt (6,415) (210)
Change in due to Parent and affiliates, net 5,034 15,765
-------------- -------------
Net cash (used in) provided by financing activities (1,495) 15,484
-------------- -------------
Decrease in cash 201 (162)
Cash at beginning of period 236 274
-------------- -------------
Cash at end of period $ 437 112
============== =============
Supplemental disclosure of cash flow information - interest paid
$ 394 696
============== =============
</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
nine months ended April 1, 2000 and March 27, 1999, respectively, 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 April 1, 2000, and the results of its operations
and its cash flows for the nine months ended April 1, 2000 and March 27,
1999, respectively. The results for the nine months ended April 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:
April 1, 2000
------------------
Raw materials $ 719
Work in process 2,171
Finished goods 14,317
------------------
$ 17,207
==================
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 April 1, 2000
and March 27, 1999 and for the nine months ended April 1, 2000 and March
27, 1999 is presented below.
<TABLE>
<CAPTION>
OUTLET
WHOLESALE RETAIL TOTAL
-------------- ------------- ----------------
QUARTER ENDED APRIL 1, 2000
<S> <C> <C> <C>
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
QUARTER ENDED MARCH 27, 1999
Revenues 41,576 12,410 53,986 $
Operating income (loss) (5,522) (406) (5,928)
Total assets 75,038 4,220 79,258
Capital expenditures 1,517 274 1,791
Depreciation and amortization 3,239 301 3,540
</TABLE>
(4) CUSTOMER CONCENTRATION
During the nine months ended April 1, 2000 and March 27, 1999 approximately
28.0% and 23.7% of the Company's sales were to one customer. In addition,
during the same nine month periods 48.0% and 43.3% 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
