SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
Delta Apparel, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-2508794
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
3355 Breckenridge Blvd., Suite 100, Duluth, GA 30096
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(Address of Principal Executive Offices) (Zip Code)
(770) 806-6800
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(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
To Be So Registered Each Class Is To Be Registered
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Common Stock, par value $0.01 American Stock Exchange
Common Stock Purchase Rights American Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act:
None
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Except as otherwise indicated below, the information required to be
contained in this Registration Statement on Form 10 of Delta Apparel, Inc., a
Georgia corporation ("Delta Apparel"), is contained in the Form of Information
Statement included as Exhibit 99.1 hereto (the "Information Statement") and is
incorporated herein by reference from that document as specified below. Below
is a list of the items of information required by the instructions to Form 10
and the locations in the Information Statement where such information can be
found if not otherwise included below.
ITEM 1. BUSINESS.
See "Business of Delta Apparel"
"Management's Discussion and Analysis of Financial
Condition and Results of Operations - First Quarter of
Fiscal Year 2000 versus First Quarter of Fiscal
Year 1999 - Order Backlog"
ITEM 2. FINANCIAL INFORMATION.
See "Summary -- Selected Historical Financial Data"
"Management's Discussion and Analysis of Financial Conditions
and Results of Operations" ("MD&A") "MD&A -- Quantitative
and Qualitative Disclosures About Market Risk"
ITEM 3. PROPERTIES.
See "Business of Delta Apparel -- 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 Delta Apparel -- Directors"
"Management of Delta Apparel -- Executive Officers"
ITEM 6. EXECUTIVE COMPENSATION.
See "Management of Delta Apparel -- Management Compensation"
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See "Relationships Among Delta Apparel, Delta Woodside and
Duck Head" "Interests of Directors and Executive Officers
in the Delta Apparel Distribution"
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ITEM 8. LEGAL PROCEEDINGS.
See "Business of Delta Apparel -- 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 Delta Apparel of
its Own Shares"
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
See "Description of Delta Apparel Capital Stock - Recent
Sales of Unregistered Securities"
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
See "Description of Delta Apparel Capital Stock"
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
See "Description of Delta Apparel 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.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
See Index to Financial Statements
Exhibit 99.2
(b) Exhibits.
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2.1 Form of Distribution Agreement by and among Delta
Woodside Industries, Inc, DH Apparel Company, Inc.
(to be renamed Duck Head Apparel Company, Inc.) and
the Company.*
3.1 Articles of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1 See Exhibits 3.1 and 3.2.
4.2 Specimen certificate for common stock, par value
$0.01 per share, of the Company. *
4.3 Form of Shareholder Rights Agreement by and among
the Company and First Union National Bank. *
10.1 See Exhibits 2.1 and 4.3.
10.2 Form of Tax Sharing Agreement by and among Delta
Woodside Industries, Inc., Duck Head Apparel
Company, Inc. and the Company.*
10.3.1 Letter dated December 14, 1998, from Delta Woodside
Industries, Inc. to Robert W. Humphreys:
Incorporated by reference to the Form 10-Q/A of Delta
Woodside Industries, Inc. for the quarterly period
ended December 26, 1998 (Commission File No.
1-10095).
10.3.2 Letter dated April 22, 1999, from Delta Woodside
Industries, Inc. to Robert W. Humphreys:
Incorporated by reference to the Form 10-K of
Delta Woodside Industries, Inc. for the fiscal
year ended July 3, 1999 (Commission File
No. 1-10095).
10.4 Form of Delta Apparel, Inc. Stock Option Plan. *
10.5 Form of Delta Apparel, Inc. Incentive Stock Award
Plan. *
10.6 Form of Delta Apparel, Inc. Deferred
Compensation Plan. *
21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule for the three months ended
October 2, 1999 (electronic filing only).
27.2 Financial Data Schedule for the fiscal year ended
July 3, 1999 (electronic filing only).
99.1 Form of Information Statement of
Delta Apparel, Inc.
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99.2 Valuation and Qualifying Accounts
* To be provided by amendment.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
DELTA APPAREL, INC.
Date: December 28, 1999 By: /s/ Robert W. Humphreys
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Robert W. Humphreys
President & Chief Executive Officer
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EXHIBITS
2.1 Form of Distribution Agreement by and among Delta Woodside Industries,
Inc, DH Apparel Company, Inc. (to be renamed Duck Head Apparel
Company, Inc.) and the Company.*
3.1 Articles of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1 See Exhibits 3.1 and 3.2.
4.2 Specimen certificate for common stock, par value $0.01 per share, of the
Company. *
4.3 Form of Shareholder Rights Agreement by and among the Company and First
Union National Bank. *
10.1 See Exhibits 2.1 and 4.3.
10.2 Form of Tax Sharing Agreement by and among Delta Woodside Industries,
Inc., Duck Head Apparel Company, Inc. and the Company.*
10.3.1 Letter dated December 14, 1998, from Delta Woodside Industries, Inc.
to Robert W. Humphreys: Incorporated by reference to the Form 10-Q/A
of Delta Woodside Industries, Inc. for the quarterly period ended
December 26, 1998 (Commission File No. 1-10095).
10.3.2 Letter dated April 22, 1999, from Delta Woodside Industries, Inc. to
Robert W. Humphreys: Incorporated by reference to the Form 10-K
of Delta Woodside Industries, Inc. for the fiscal year ended July 3,
1999 (Commission File No. 1-10095).
10.4 Form of Delta Apparel, Inc. Stock Option Plan. *
10.5 Form of Delta Apparel, Inc. Incentive Stock Award Plan. *
10.6 Form of Delta Apparel, Inc. Deferred Compensation Plan. *
21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule for the three months ended October 2, 1999
(electronic filing only).
27.2 Financial Data Schedule for the fiscal year ended July 3, 1999
(electronic filing only).
99.1 Form of Information Statement of Delta Apparel, Inc.
99.2 Valuation and Qualifying Accounts.
* To be provided by amendment.
ARTICLES OF INCORPORATION
OF
DELTA APPAREL, INC.
The Articles of Incorporation of DELTA APPAREL, INC. are as follows:
ARTICLE I
CORPORATE NAME
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The name of the corporation is DELTA APPAREL, INC. (the "Corporation").
ARTICLE II
CORPORATE PURPOSE
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The purpose of the Corporation is pecuniary gain and profit, and the
general nature of the business or businesses to be transacted shall be to engage
in any form or type of business for any lawful purpose or purposes not
specifically prohibited to corporations for profit under the laws of the State
of Georgia and to have all the rights, powers, privileges and immunities which
are now or hereafter may be allowed to corporations under the laws of the State
of Georgia.
ARTICLE III
CAPITAL STOCK
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3.1 Authorized Stock. The Corporation shall have the authority to
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issue Two Million (2,000,000) shares of $0.01 par value preferred stock ("Blank
Preferred Stock") and Seven Million Five Hundred Thousand (7,500,000) shares of
$0.01 par value common stock ("Common Stock").
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3.2 Blank Preferred Stock. The Corporation may issue the Blank
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Preferred Stock in one or more classes and in one or more series within any such
class. The Board of Directors of the Corporation (the "Board of Directors")
shall determine the preferences, limitations and relative rights granted to and
imposed upon each class and series of Blank Preferred Stock in accordance with
Section 14-2-602 of the Georgia Business Corporation Code (the "Code").
3.3 Common Stock. Subject to the provisions of any issued and
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outstanding Blank Preferred Stock, any issued and outstanding shares of Common
Stock shall together have unlimited voting rights and shall together be entitled
to receive the net assets of the Corporation upon dissolution. Notwithstanding
anything else contained herein or in the provisions of any class or series of
Blank Preferred Stock to the contrary, the holders of any issued and outstanding
shares of Common Stock shall be entitled to vote as a separate class with
respect to the following actions:
(a) Consummation of a plan of merger or share exchange to which
the Corporation is a party if the approval of its shareholders is required
therefor under the Code;
(b) Consummation of a sale or exchange of all or substantially all
of the Corporation's assets if the approval of its shareholders is required
therefor under the Code;
(c) Any amendment to these Articles of Incorporation or to the
Bylaws of the Corporation if the approval of the shareholders of the Corporation
is required therefor under the Code; and
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(d) Any other action taken by the Corporation pursuant to a
shareholder vote to the extent that the Code, these Articles of Incorporation,
the Bylaws of the Corporation, or a resolution of the Board provides that voting
or non-voting shareholders are entitled to dissent and obtain payment for their
shares pursuant to Article 13 of the Code. In addition, each holder of
any issued and outstanding shares of Common Stock shall have all rights with
respect thereto which are provided in the Code.
ARTICLE IV
ACTION WITHOUT MEETING
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No action required or permitted by the Code may be taken by the
shareholders of the Corporation other than at a duly called and held meeting;
provided, however, action may be taken upon the written consent of all of the
Corporation's shareholders entitled to vote thereon.
ARTICLE V
LIMITATION ON DIRECTOR LIABILITY
--------------------------------
To the fullest extent permitted by the Code (as the same may be amended or
supplemented after the date hereof), no director of the Corporation shall be
personally liable to the Corporation or its shareholders for monetary damages
for any action or omission. No amendment, repeal or modification of this
Article shall apply to or have any effect on the liability or alleged liability
of any director of the Corporation for or with respect to any acts or omissions
of such director occurring prior to such amendment, repeal or modification.
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ARTICLE VI
INITIAL REGISTERED OFFICE AND REGISTERED AGENT
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The address of the initial registered office of the Corporation is 3355
Breckenridge Boulevard, Suite 100, Duluth, Gwinnett County, Georgia 30096, and
the registered agent at such address is Herbert M. Mueller.
ARTICLE VII
PRINCIPAL OFFICE
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The mailing address of the initial principal office of the Corporation is
3355 Breckenridge Boulevard, Suite 100, Duluth, Gwinnett County, Georgia 30096.
ARTICLE VIII
DISCHARGE OF DIRECTOR'S DUTIES
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In discharging the duties of their respective positions and in determining
what is believed to be in the best interests of the Corporation, the Board of
Directors, committees of the Board of Directors, and individual directors, in
addition to considering the effects of any action on the Corporation or its
shareholders, may consider the interests of the employees, customers, suppliers,
and creditors of the Corporation and its subsidiaries, the communities in which
offices or other establishments of the Corporation and its subsidiaries are
located, and all other factors such directors consider pertinent; provided,
however, that this provision shall be deemed solely to grant discretionary
authority to the directors and shall not be deemed to provide to any
constituency any right to be considered. Without limiting the generality of the
foregoing, when evaluating any proposed tender offer, exchange offer or plan of
merger, consolidation, sale of assets or stock exchange, the Board of Directors
shall consider not only the consideration being offered in relation to the then
current market price for the Corporation's outstanding shares of capital stock,
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but also in relation to the then current value of the Corporation in a freely
negotiated transaction and in relation to the Board of Directors' estimate of
the future value of the Corporation (including the unrealized value of its
properties and assets) as an independent going concern, as well as such other
factors as the Board of Directors deems relevant.
ARTICLE IX
INCORPORATOR
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The name and address of the Incorporator of the Corporation are Sara Ann
Vaughan, 600 Peachtree Street, N.E., Suite 5200, Atlanta, Georgia 30308-2216.
/s/ Sara Ann Vaughan
______________________________________
Sara Ann Vaughan, Incorporator
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BYLAWS
OF
DELTA APPAREL, INC.
DECEMBER 10, 1999
<PAGE>
BYLAWS
OF
DELTA APPAREL, INC.
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ARTICLE ONE
OFFICES
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1.1 Registered Office and Agent. The Corporation shall at all times
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maintain a registered office in the State of Georgia and a registered agent at
such address.
1.2 Other Offices. The Corporation may from time to time have such
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other offices within or outside the State of Georgia, as the Board of Directors
may determine or as is necessary or desirable to facilitate the business of the
Corporation.
ARTICLE TWO
SHAREHOLDERS' MEETINGS
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2.1 Annual Meetings. An annual meeting of shareholders for the
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election of directors and for such other matters as may be properly brought
before the shareholders meeting shall be held on such date and at such time and
place (within or outside the State of Georgia) as shall be designated by the
Board of Directors and as set forth in the notice thereof.
2.2 Special Meetings. Special meetings of the shareholders may be
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called at any time by the Chairman of the Board of Directors, the President, or
a committee of the Board of Directors that has been duly designated by the Board
of Directors and whose powers and authority, as provided in a resolution of the
Board of Directors or in these Bylaws, include the power to call such meetings,
and special meetings may not be called by any other person or persons. Any
special meeting of the shareholders shall be held on such date and at such time
and place (within or outside the State of Georgia) as shall be set forth in the
notice thereof.
2.3 Notice of Meetings. Unless waived as contemplated in Section 5.2
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or by attendance at the meeting (either in person or by proxy) for any purpose
other than to state at the beginning of the meeting an objection to the
transaction of business at such meeting, a written notice of each shareholders'
meeting stating the place, date and time of the meeting shall be delivered not
less than ten (10) days nor more than sixty (60) days before the date thereof,
either in person, by courier service or by mail, to each shareholder of record
entitled to vote at such meeting. Notwithstanding anything else to the contrary
in the Georgia Business Corporation Code (the "Code"), the notice of meeting
(for both annual and special meetings) shall state the purpose or purposes for
which the meeting is called and the specific business to be conducted at such
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meeting. When a meeting is adjourned to another time or place, unless after the
adjournment the Board of Directors fixes a new record date for the adjourned
meeting as may be required pursuant to Section 2.8, it shall not be necessary to
give any notice of the adjourned meeting if the date, time and place to which
the meeting is adjourned are announced at the meeting at which the adjournment
is taken.
2.4 Quorum. At any meetings of the shareholders, unless otherwise
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provided by law or by the Articles of Incorporation of the Corporation (the
"Articles of Incorporation"), the presence, in person or by proxy, of the
holders of at least two-thirds (2/3) of the shares outstanding and entitled to
vote at such meeting shall constitute a quorum. A shareholder who makes a
special appearance for purposes of objecting to lack of notice or defective
notice or objecting to holding the meeting or transacting the business at the
meeting shall not be counted for purposes of determining a quorum. If a quorum
is not present to organize a meeting, the meeting may be adjourned pursuant to
Section 2.8. The shareholders present at a meeting at which a quorum is present
may continue to transact business for the remainder of the meeting and at any
adjournment of the meeting, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, unless the meeting is adjourned under
circumstances where a new record date is or must be set pursuant to Section 2.8.
2.5 Voting of Shares. Except as otherwise provided by the Articles of
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Incorporation, each outstanding share having voting rights shall be entitled to
one vote on each matter submitted to a vote at a meeting of the shareholders of
the Corporation. If a quorum is present, all elections of Directors shall be
determined by plurality vote and, as to all other matters, action on a matter is
approved if the votes cast in favor of the action exceed the votes cast against
the action, unless and to the extent the Code, these Bylaws or the Articles of
Incorporation requires a greater number of affirmative votes. There shall be no
cumulative voting for Directors.
2.6 Proxies. A shareholder entitled to vote pursuant to Section 2.5
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may vote in person or by written proxy executed by the shareholder or by his
attorney in fact. A proxy shall not be valid after eleven (11) months from the
date of its execution, unless a longer period is expressly stated therein. A
proxy, unless it is irrevocable by its terms and it is coupled with an interest,
shall be revocable at will, but the revocation of a proxy shall not be effective
until notice thereof has been given to the Secretary of the Corporation. A
proxy shall not be revoked by the death or incapacity of the maker unless,
before the vote is counted or the authority is exercised, written notice of such
death or incapacity is given to the Secretary of the Corporation. The
Corporation is entitled to reject a vote, consent, waiver, proxy appointment or
proxy revocation if the Secretary or other officer or agent authorized to
tabulate the votes, acting in good faith, has reasonable basis for doubt about
the validity of the signature on it or about the signatory's authority to sign
for the shareholder or about the faithfulness or completeness of the
reproductions when the original has not been examined. The Corporation and its
officer or agent who accepts or rejects a vote, consent, waiver or proxy
appointment in good faith and in accordance with Sections 14-2-722(b) or
14-2-724 of the Code (or any successor provision) shall not be liable to the
shareholder for the consequences of the acceptance or rejection.
2.7 Presiding Officer; Secretary. The Chairman of the Board of
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Directors, or in his absence the Vice Chairman of the Board of Directors, or in
his absence an alternate chairman designated by a majority of the Directors
present, shall preside at all shareholders' meetings. The Secretary, or in his
absence, an Assistant Secretary, or, in the absence of the Secretary and
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Assistant Secretary, a person whom the Chairman of such meeting shall appoint,
shall act as secretary of the meeting and keep the minutes thereof.
2.8 Adjournments. Any meeting of the shareholders, whether or not a
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quorum is present, may be adjourned by the holders of a majority of the voting
shares represented at the meeting to reconvene at a specific time and place. At
any such reconvened meeting at which a quorum is represented or present, any
business may be transacted which could have been transacted at the meeting which
was adjourned. It shall not be necessary to give any notice of the reconvened
meeting, if the time and place of the reconvened meeting are announced at the
meeting which was adjourned, except that if the meeting is adjourned to a date
more than 120 days after the date of the original meeting, if additional
business shall be scheduled to be transacted at the adjourned meeting, or if
after adjournment a new record date is set, a notice of the adjourned meeting
shall be given to each shareholder.
2.9 Action by Shareholders Without a Meeting.
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(a) Any action which may be taken at a meeting of the shareholders
may be taken without a meeting if one or more written approvals and consents,
setting forth the action authorized, shall be signed and dated by all of the
shareholders entitled to vote on such matter as determined in Section 2.9(b).
(b) Unless otherwise fixed under Sections 14-2-703 or 14-2-707 of the
Code, the record date for determining shareholders entitled to take action
without a meeting shall be the date the first shareholder signs the consent. No
written consent shall be effective to take the action referred to therein unless
evidence of written consent(s) signed by all shareholders entitled to vote
thereon is delivered to the Corporation for inclusion in the minutes or filing
with the corporate records within sixty (60) days after the date the first
shareholder signed the consent. Unless the consent provides for a later
effective date, a consent delivered to the Corporation shall be effective as of
the date the last shareholder signed the consent.
(c) A shareholder may revoke his written consent by delivering a
writing to that effect to the Corporation that is received prior to receipt by
the Corporation of unrevoked written consents from all shareholders entitled to
vote thereon.
2.10 List of Shareholders. After fixing the record date for a meeting,
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the Secretary or other officer of the Corporation having charge of the stock
ledger shall prepare an alphabetical list of the names of all shareholders who
are entitled to notice of a shareholders' meeting (showing the number and class
and series, if any, of voting shares held by each), and such list shall be kept
open at the time and place of the meeting and during the whole time of said
meeting shall be open to the examination of any shareholder. If the
requirements of this section have not been substantially complied with, the
meeting shall, on the reasonable demand of any shareholder in person or by
proxy, be adjourned until the requirements are met. If no such demand is made,
failure to comply with the requirements of this section shall not affect the
validity of any action taken at such meeting.
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2.11 Shareholders' Agreements. In addition to those shareholders'
-------------------------
agreements authorized by Section 14-2-731 of the Code (or any successor
provision), the holders of any outstanding capital stock of the Corporation may
enter into an agreement or agreements among themselves (or with the Corporation)
concerning the rights and privileges of the respective classes of stock
(including, without limitation, voting rights) and the transferability of the
capital stock of the Corporation. To the extent allowed by the Code, the
provisions of the Articles of Incorporation and these Bylaws shall be
interpreted in a manner consistent with any such shareholders' agreements.
2.12 Inspectors. At any time shares of the Corporation are listed on a
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national securities exchange or regularly traded in a market maintained by one
or more members of a national or affiliated securities association, in advance
of any meeting of shareholders, the Board of Directors may appoint inspectors,
who need not be shareholders, to act at such meeting or any adjournment thereof.
If inspectors be not so appointed, the chairman of any such meeting may, and on
the request of any shareholder or his proxy shall, make such appointment at the
meeting. The number of inspectors shall be one or three as shall be determined
by the Board of Directors, except that, if appointed at the meeting on the
request of one or more shareholders or proxies, the holders of a majority of the
shares of the Corporation present and entitled to vote shall determine whether
one or three inspectors are to be appointed. No person who is a candidate for
office shall act as an inspector.
In case any person appointed as an inspector fails to appear or fails
or refuses to act, the vacancy may be filled by appointment made by the Board of
Directors in advance of the convening of the meeting, or at the meeting by the
officer or person acting as chairman.
The inspectors shall determine the number of shares outstanding and
the voting power of each, the shares represented at the meeting, the existence
of a quorum, the authenticity, validity and effect of proxies, receive votes or
ballots, hear and determine all challenges and questions in any way arising in
connection with the right to vote, count and tabulate all votes, determine the
result, and do such other acts as may be proper to conduct the election or vote
with fairness to all shareholders.
The inspectors shall perform their duties impartially, in good faith,
to the best of their ability, and as expeditiously as is practical. If there be
three inspectors of election, the decision, act or certificate of a majority
shall be effective in all respects as the decision, act or certificate of all.
On request of the chairman of the meeting, or of any shareholder or
his proxy, the inspectors shall make a report in writing of any challenge or
question or matter determined by them, and execute a certificate of any fact
found by them. Any report or certificate made by them shall be prima facie
evidence of the facts stated therein.
2.13 Notification of Nominations. Nominations for the election of
-----------------------------
directors may be made by the Board of Directors or by any shareholder entitled
to vote for the election of directors. Any shareholder entitled to vote for the
election of directors at a meeting may nominate persons for election as
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directors only if written notice of the intent of such shareholder to make such
nomination shall be given, either by personal delivery or by United States mail,
postage prepaid, to the Secretary of the Corporation not later than (i) with
respect to an election to be held at an annual meeting of shareholders, 120 days
prior to the anniversary date of the immediately preceding annual shareholder
meeting and (ii) with respect to an election to be held at a special meeting of
shareholders for the election of directors, the close of business on the seventh
day following the date on which notice of such meeting shall first be given to
shareholders. Each such notice shall set forth:
(a) the name and address of the shareholder who shall intend to
make the nomination and of the person or persons to be nominated;
(b) the class and number of shares held of record, held
beneficially and represented by proxy by such shareholder as of the record date
of the meeting (if such a date has been established) and as of the date of such
notice, the name in which those shares are registered, and a representation that
the shareholder intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice;
(c) a description of all arrangements or understandings between
the shareholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the shareholder;
(d) such other information regarding each nominee proposed by such
shareholder as would have been required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission had
each nominee been nominated, or intended to be nominated, by the Board of
Directors;
(e) the consent in writing of each nominee to serve as a director
of the Corporation if so elected; and
(f) such other information as Duck Head may reasonably request.
The officer or other person presiding over the meeting as provided in
Section 2.7 of these Bylaws may refuse to acknowledge the nomination of any
person not made in compliance with the foregoing procedure.
ARTICLE THREE
BOARD OF DIRECTORS
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3.1 General Powers. The business and affairs of the Corporation shall
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be managed by the Board of Directors. In addition to the powers and authority
expressly conferred upon it by these Bylaws, the Board of Directors may exercise
all such powers of the Corporation and do all such lawful acts and things as are
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not by the Code, the Articles of Incorporation or these Bylaws directed or
required to be exercised or done by the shareholders.
3.2 Number, Election and Term of Office. The number of Directors shall
-----------------------------------
be not less than two (2) or more than fifteen (15), the exact number to be set
by resolution of the Board of Directors from time to time. Except as provided
in Section 3.5, the Directors shall be elected by the affirmative vote of a
plurality of the votes cast by the shares represented at the annual meeting.
Each Director (except in case of death, resignation, retirement,
disqualification, or removal) shall serve for a term ending on the date of the
annual meeting following the annual meeting at which the Director was elected or
until his successor shall have been duly elected and qualified. No Director
need be a shareholder.
3.3 Increase or Decrease in Number of Directors. In the event of any
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increase or decrease in the authorized number of Directors, each Director then
serving as such shall nevertheless continue as Director until the expiration of
his current term, or his prior death, retirement, removal or resignation.
Notwithstanding any provisions to the contrary contained herein, each Director
shall serve until a successor is elected and qualified or until his earlier
death, resignation or removal.
3.4 Removal; Resignation. Any Director may be removed from office
---------------------
(with or without cause) by the affirmative vote of the holders of a majority of
the shares entitled to vote at an election of Directors. Removal action may be
taken at any shareholders' meeting with respect to which notice of such purpose
has been given, and a removed Director's successor may be elected at the same
meeting to serve the unexpired term.
Any Director may resign at any time by written notice to the Board of
Directors, the Chairman, the President or the Secretary. Such resignation shall
take effect immediately upon receipt thereof or at any later time specified
therein. Unless otherwise specified in any such notice, acceptance of such
resignation shall not be necessary to make it effective.
3.5 Vacancies. A vacancy occurring in the Board of Directors may be
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filled for the unexpired term and until the shareholders have elected a
successor by an affirmative vote of a majority of the Directors remaining in
office or by the sole remaining Director.
3.6 Compensation. Directors may receive such compensation for their
------------
services as Directors as may from time to time be fixed by vote of the Board of
Directors or the shareholders. A Director may also serve the Corporation in a
capacity other than that of Director and receive compensation, as determined by
the Board of Directors, for services rendered in that other capacity.
3.7 Presiding Officer. The Board of Directors shall appoint from among
-----------------
its members a Chairman and a Vice Chairman of the Board. The Chairman shall
preside at all meetings when present. The Vice Chairman shall perform the
duties of the Chairman in the absence of the Chairman.
6
<PAGE>
3.8 Committees. The Board of Directors shall designate a Compensation
----------
Committee, an Audit Committee and any other committees it from time to time
deems necessary or appropriate. Each such committee shall consist of at least
two (2) Directors. The Board of Directors may designate one or more Directors
as alternate members of any committee who may replace any absent or disqualified
member at any meeting of such committee. In the absence or disqualification of
any member of such committee or committees, the members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in place of such absent or disqualified member, and have such
powers as are provided in the resolution establishing such committee; provided,
however, notwithstanding anything else contained herein to the contrary, no such
committee shall have the power to: (a) approve or propose to the shareholders
any action that is required by the Code, the Articles of Incorporation or these
Bylaws to be approved by the shareholders; (b) fill vacancies on the Board of
Directors or any of its committees; (c) amend the Articles of Incorporation or
adopt, amend or repeal Bylaws; or (d) approve a plan of merger (whether or not
shareholder approval is required therefor under the Code). Unless otherwise
specifically permitted by the Board of Directors, the rules promulgated by these
Bylaws with respect to meetings of Directors, notice, quorums, voting and other
procedures at such meeting shall be applicable to meetings of any committee of
the Board of Directors. Each committee shall keep regular minutes of its
proceedings and all action by such committee shall be reported to the Board of
Directors at its meeting next succeeding such action. Each committee shall fix
its own rules of procedure, provided that such rules are consistent with these
Bylaws, and shall meet where and as provided by such rules or by resolution of
the Board of Directors. The presence of a majority of the then appointed number
of each committee shall constitute a quorum and in every case in which a quorum
is present an affirmative vote by a majority of the members of the Committee
present shall be the act of the committee.
3.9 Fees and Compensation. Directors may receive such compensation, if
---------------------
any, for their services, and such reimbursement of expenses, as may be fixed or
determined by resolution of the Board of Directors. Nothing herein contained
shall be construed to preclude any Director from serving the Corporation in any
other capacity as an officer, agent, employee or otherwise and receiving
compensation for such services.
ARTICLE FOUR
MEETINGS OF THE BOARD OF DIRECTORS
----------------------------------
4.1 Regular Meetings. Regular meetings of the Board of Directors shall
----------------
be held at such place and at such times as the Board shall from time to time
determine and, if so determined, no notice thereof need be given.
4.2 Special Meetings. Special meetings of the Board of Directors may
-----------------
be called by or at the request of the Chairman of the Board of Directors, the
President, or at least two (2) Directors.
7
<PAGE>
4.3 Date, Time and Place of Meetings. A meeting of the Board of
-------------------------------------
Directors shall be held on such date and at such time and place (within or
outside the State of Georgia) as shall be determined in accordance with Section
4.1 and 4.2 and, in the case of a special meeting, the date, time and place of
the meeting shall be set forth in the notice thereof.
4.4 Notice of Meetings. Unless waived as contemplated in Section 5.2,
-------------------
the Corporation shall give written notice to each Director of each special
meeting of the Board of Directors stating the date, time and place of the
meeting. Such notice shall be given at least forty-eight (48) hours in advance
by courier service, in person or by electronic means or at least ten (10) days
in advance by mail. Attendance by a Director at a meeting shall constitute
waiver of notice of such meeting, except where a Director attends a meeting for
the express purpose of objecting at the beginning of the meeting to the
transaction of business at the meeting.
4.5 Quorum. At meetings of the Board of Directors, the presence of at
------
least one half (1/2) of the Directors then in office (but not less than two (2)
Directors) shall be necessary to constitute a quorum for the transaction of
business at such meeting.
4.6 Vote Required for Action. Except as otherwise provided in the
---------------------------
Code, the Articles of Incorporation or these Bylaws, the act of a majority of
the Directors present at a meeting at which a quorum is present at the time
shall be the act of the Board of Directors.
4.7 Action by Directors Without a Meeting. Any action required or
------------------------------------------
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if a written consent thereto shall be signed by all of the
members of the Board of Directors and if such written consent is delivered to
the Corporation for inclusion in the minutes or filing with the corporate
records. Such consent shall have the same force and effect as a unanimous vote
of the Board of Directors and may be evidenced by one (1) or more written
consents describing the action taken.
4.8 Adjournments. A meeting of the Board of Directors (whether or not
------------
a quorum is present) may be adjourned by a majority of the Directors present to
reconvene at a specific time and place. It shall not be necessary to give
notice of the reconvened meeting, other than by announcement at the meeting
which was adjourned. At any such reconvened meeting at which a quorum is
present, any business may be transacted which could have been transacted at the
meeting which was adjourned.
4.9 Telephone Conference Calls. Members of the Board of Directors may
---------------------------
participate in a meeting thereof by conference telephone or similar
communications equipment by means of which all Directors participating in the
meeting may simultaneously hear each other during the meeting, and participation
in a meeting pursuant to this Section 4.9 shall constitute presence in person at
such meeting.
ARTICLE FIVE
NOTICE AND WAIVER
-----------------
8
<PAGE>
5.1 Procedure. Whenever the Code, the Articles of Incorporation or
---------
these Bylaws requires notice to be given to any shareholder or Director, the
notice shall be given as prescribed in Section 14-2-141 of the Code (or any
successor provision) and Sections 2.3 or 4.4 hereof for any shareholder or
Director, respectively.
5.2 Waiver. Whenever any notice is required to be given to any
------
shareholder or Director by the Code, the Articles of Incorporation or these
Bylaws, a waiver thereof in writing signed by the Director or shareholder
entitled to such notice or by the proxy of such shareholder, whether before or
after the meeting to which the waiver pertains, shall be deemed equivalent
thereto.
ARTICLE SIX
OFFICERS
--------
6.1 Number. The officers of the Corporation shall consist of the
------
Chairman of the Board of Directors, Vice Chairman of the Board of Directors (if
so designated by resolution of the Board of Directors), a President, one (1) or
more Vice Presidents, a Secretary, one (1) or more Assistant Secretaries, a
Treasurer, one (1) or more Assistant Treasurers, and such other officers as may
be as designated by the Board of Directors from time to time, but the
Corporation shall not be required to have at any time any officers other than a
President, Secretary and Treasurer. Any two (2) or more offices may be held by
the same person.
6.2 Election and Term. All officers shall be elected by the Board of
-------------------
Directors and shall serve at the will of the Board of Directors and until their
successors have been elected and have qualified or until their earlier death,
resignation, removal, retirement or disqualification. In addition, the
Corporation may enter into employment agreements with any such officer.
6.3 Compensation. The compensation of all officers of the Corporation
------------
shall be fixed by the Board of Directors.
6.4 Removal. The Board of Directors may remove any officer at any time
-------
with or without cause.
6.5 Chief Executive Officer. The Board of Directors may designate an
-------------------------
officer of the Corporation as its Chief Executive Officer. The Chief Executive
Officer shall be subject to the direction and supervision of the Board of
Directors and shall have general control and supervision over the policies of
the Corporation.
6.6 President. The President shall be subject to the direction and
---------
supervision of the Board of Directors and (if the President is not also serving
as the Chief Executive Officer) the Chief Executive Officer, have general
control and supervision over the operations of the Corporation, and shall see
that all orders and resolutions of the Board of Directors are carried into
effect. In particular he shall: (a) manage and administer the Corporation's
business and affairs and perform all duties and exercise all powers usually
pertaining to the office of President of a corporation; (b) appoint and fix the
duties of any and all employees and agents of the Corporation who are not
otherwise appointed by the Board of Directors (and he shall have the authority
9
<PAGE>
to remove or suspend any of such employees or agents not appointed by the Board
of Directors); and (c) have the general power and authority to sign and exe-cute
in the name of and on behalf of the Corporation, any and all agreements and
other documents.
6.7 Vice President. Each Vice President shall have the power to sign
---------------
and execute, in the name of and on behalf of the Corporation, any and all
agreements, instruments and other documents. In the absence of a resolution of
the Board of Directors to the contrary, the several Vice Presidents, other than
those whose authority may be expressly limited, shall act, in the order of their
appointment, in the place of the President, exercising all of his powers and
performing all of his duties, during his absence or disability. Each Vice
President shall perform whatever additional duties and have whatever additional
powers as may be assigned to him from time to time by the Board of Directors.
6.8 Secretary. The Secretary shall keep accurate records of the acts
---------
and proceedings of all meetings of shareholders, Directors and committees of
Directors. He shall have authority to give on behalf of the Corporation all
notices required by the Code, the Articles of Incorporation or these Bylaws. He
shall maintain the books, records, contracts and other documents of the
Corporation. The Secretary may affix the corporate seal to any lawfully
executed documents requiring it and shall sign such instruments as may require
his signature. The Secretary shall perform whatever additional duties and have
whatever additional powers as may be assigned to him from time to time by the
Board of Directors.
6.9 Treasurer. The Treasurer shall, subject to the direction and
---------
supervision of the Board of Directors, have custody of all funds and securities
belonging to the Corporation and shall receive, deposit or disburse the same
under the direction of the Board of Directors. The Treasurer shall keep full
and true accounts of all receipts and disbursements and shall make such reports
on the same to the Board of Directors and the President. The Treasurer shall
perform whatever additional duties and have whatever additional powers as may be
assigned to him from time to time by the Board of Directors.
6.10 Assistant Secretary and Assistant Treasurer. Any Assistant
-----------------------------------------------
Secretary and any Assistant Treasurer may, in the absence or disability of the
Secretary or the Treasurer, respectively, perform the duties and exercise the
powers of those offices. Each Assistant Secretary and each Assistant Treasurer
shall perform whatever additional duties and have whatever additional powers as
may be assigned to him from time to time by the Board of Directors.
6.11 Additional Powers and Duties. In addition to the foregoing
-------------------------------
especially enumerated powers and duties, the several officers of the Corporation
shall have such other powers and duties as the Board of Directors or any
committee of the Board of Directors may from time to time prescribe.
10
<PAGE>
ARTICLE SEVEN
SHARES
------
7.1 Issuance of Shares. The Board of Directors may increase or
--------------------
decrease the number of issued and outstanding shares of the Corporation in
accordance with the Code and within the maximum amounts authorized by the
Articles of Incorporation.
7.2 Share Certificates. The interest of each shareholder in the
-------------------
Corporation shall be evidenced by a certificate or certificates representing
shares of the capital stock of the Corporation which shall be in such form as
the Board of Directors may from time to time adopt in accordance with the Code.
Share certificates shall be consecutively numbered and shall indicate the date
of issuance thereof, and all such information shall be entered on the
Corporation's books. Each share certificate shall contain such information as
is required by the Code and such further information as may be required pursuant
to the terms of the Corporation's capital stock. Each certificate shall be
signed either manually or in facsimile by the President or a Vice President and
the Secretary or an Assistant Secretary and shall be sealed with the seal of the
Corporation or a facsimile thereof; provided, however, that if the certificate
is signed in facsimile, then it must be countersigned, either manually or by
facsimile, by a transfer agent or registered by a registrar other than the
Corporation itself or an employee of the Corporation. In the event an officer
signs a share certificate and thereafter ceases to be an officer of the
Corporation before such certificate is issued, such certificate may nonetheless
be issued by the Corporation with the same effect as if the person or persons
who signed such certificate still held such office.
7.3 Rights of Corporation with Respect to Record Owners. Prior to due
----------------------------------------------------
presentation for transfer of its shares, the Corporation may treat the record
owner of the shares as the person exclusively entitled to vote such shares, to
receive any dividend or other distribution with respect to such shares, and for
all other purposes, and the Corporation shall not be bound to recognize any
equitable or other claim to or interest in such shares on the part of any other
person, whether or not it shall have express or other notice thereof.
7.4 Transfers of Shares. The Board of Directors shall cause suitable
---------------------
records to be kept for the registry and transfer of the shares of capital stock
of the Corporation. Transfers of shares shall be made upon the stock transfer
books of the Corporation (kept at the office of the transfer agent designated to
transfer the shares) only upon direction of the person named in such
certificate, or by an attorney lawfully constituted in writing. Prior to
completing a requested transfer, pledge or release, the Corporation shall be
entitled to obtain reasonable assurances that all endorsement, instructions and
other documents are genuine and effective, that the payment of all transfer
taxes has been made, and that all provisions of law and procedures required by
the Corporation's transfer agent have been complied with. Before a new
certificate is issued, the old certificate shall be surrendered for cancellation
or, in the case of a certificate alleged to have been lost, stolen or destroyed,
the record owner shall have complied with the provisions of Section 7.5.
11
<PAGE>
7.5 Lost, Stolen or Destroyed Certificates. Any person claiming a
------------------------------------------
share certificate to be lost, stolen or destroyed shall make an affidavit or
affirmation of the fact in such manner as the Board of Directors may require and
shall, if the Board of Directors so requires, give the Corporation a bond of
indemnity in form and amount (and with one or more sureties satisfactory to the
Board of Directors) as the Board of Directors may require, whereupon an
appropriate new certificate may be issued in lieu of the one alleged to have
been lost, stolen or destroyed.
7.6 Fixing of Record Date. The Board of Directors may fix an advance
-----------------------
date as the record date in order to determine the shareholders entitled to a
distribution, to notice of a shareholders' meeting, to demand a special meeting,
to vote or to take any other action.
7.7 Record Date if None Fixed. If no record date is fixed as provided
--------------------------
in Section 7.6, then the record date for: (a) determining shareholders entitled
to notice of and to vote at an annual or special shareholders' meeting is the
close of business on the day before the first notice is delivered to
shareholders; (b) for determining shareholders entitled to a distribution (other
than one involving a purchase, redemption, or other acquisition of the
Corporation's shares) is the date the Board of Directors authorizes the
distribution; and (c) for any other action the consummation of which requires a
determination of shareholders is the date such action is to be taken.
7.8 Fractional Shares or Scrip. The Corporation shall not issue
-----------------------------
fractional shares or scrip and, in lieu thereof, shall pay in cash the fair
value of fractional interests as determined by the Board of Directors.
7.9 Restrictions on Transfer. The Board of Directors may impose
--------------------------
restrictions on the transfer of rights, to be distributed as a dividend pursuant
to a rights agreement to which the Corporation is a party, as and to the extent
required by such rights agreement as amended from time to time.
ARTICLE EIGHT
INDEMNIFICATION AND INTERESTED PARTIES
--------------------------------------
8.1 Indemnification.
---------------
(a) The Corporation shall indemnify its directors and officers (and
each person who at its request served as an officer or director of any other
entity) to the fullest extent permitted by Article 8, Part 5 of the Code (or any
successor provision); provided, however, indemnification shall only be made upon
compliance with the requirements of such statutory provisions and only in those
circumstances in which indemnification is authorized under those provisions;
provided further, however, that the shareholders may approve additional
indemnification pursuant to Code Section 14-2-856 (or any successor provision).
(b) The Corporation may purchase and maintain insurance on behalf of
those persons for whom it is entitled to purchase and maintain insurance against
any liability asserted against such persons and incurred by such persons in any
of the capacities specified in, or arising out of such persons' status as
described in Section 14-2-857 of the Code (or any successor provision), whether
12
<PAGE>
or not the Corporation would have the power to indemnify such persons against
such liability under the laws of the State of Georgia.
(c) The Corporation shall pay for or reimburse the reasonable expenses
incurred by a director or officer who is a party to a proceeding because he or
she is a director or officer of the Corporation in advance of a final
disposition of the proceeding if the director or officer submits to the
Secretary of the Corporation a written request that complies with the
requirements of Section 14-2-853 of the Code (or any successor provision). The
Secretary of the Corporation shall promptly upon receipt of such a request for
advance of expenses advise the Board of Directors in writing that such director
or officer has requested an advance of expenses.
(d) The indemnification and advancement of expenses provided by or
granted pursuant to this Section 8.1 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director
or officer of the Corporation and shall inure to the benefit of the heirs,
executors, and administrators of such a person. Such indemnification and
advancement of expenses provided by or granted pursuant to this Section 8.1
shall be a contractual right of the Corporation's directors and officers.
8.2 Interested Directors and Officers.
------------------------------------
(a) No contract or transaction between the Corporation and one or more
of its directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers or have a material
financial interest, shall be enjoined, set aside or give rise to an award of
damages or other sanctions, in an action by a shareholder or by or in the right
of the Corporation, on the grounds of an interest in the transaction of the
director or officer or any person with whom or which he has a personal,
economic, or other association, if:
(1) such transaction is approved by the directors in accordance
with Section 14-2-862 of the Code (or any successor provision);
(2) such transaction is approved by the shareholders in accordance
with Section 14-2-863 of the Code (or any successor provision); or
(3) the transaction, judged in the circumstances at the time
of the commitment, is established to have been fair to the Corporation.
(b) A majority (but not less than two) of all of the "qualified
directors" (as such term is defined in Section 14-2-862 of the Code (or any
successor provision)) on the Board of Directors shall constitute a quorum for
purposes of an action that complies with Section 8.2(a)(1) of these Bylaws. An
action of the Board of Directors that otherwise complies with the Code and these
Bylaws is not affected by the presence or vote of a Director who is not a
"qualified director."
ARTICLE NINE
MISCELLANEOUS
-------------
13
<PAGE>
9.1 Inspection of Books and Records. Except to the extent otherwise
----------------------------------
provided by the Code, the Board of Directors shall have the power to determine
which accounts, books and records of the Corporation shall be opened to the
inspection of shareholders and shall have the power to fix reasonable rules and
regulations not in conflict with the Code for the inspection thereof.
9.2 Fiscal Year. The Board of Directors is authorized to fix the
------------
fiscal year of the Corporation and to change the same from time to time as it
deems appropriate. Unless otherwise so determined, the fiscal year of the
Corporation shall begin on the Sunday following the Saturday closest to June 30
of each year and end on the Saturday closest to June 30 of the following year.
9.3 Seal. The seal of the Corporation shall consist of an impression
----
bearing the name of the Corporation around the perimeter and word "Seal" in the
center thereof. In lieu thereof, the Corporation may use an impression or
writing bearing the words "CORPORATE SEAL," which shall also be deemed to be the
seal of the Corporation.
ARTICLE TEN
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
--------------------------------------------------
10.1 Applicability of Statutes. The Corporation elects to be covered
---------------------------
by all of the requirements set forth in Sections 14-2-1131 through 14-2-1133 of
the Code with respect to business combinations with interested shareholders.
ARTICLE ELEVEN
AMENDMENT
---------
11.1 Power to Amend These Bylaws. The Board of Directors shall have
------------------------------
power to alter, amend or repeal these Bylaws or to adopt any new bylaws;
provided, however, any new bylaws adopted by the Board of Directors may be
altered, amended or repealed, and new bylaws may also be adopted, by the
shareholders. The shareholders may prescribe that any bylaw or bylaws adopted
by them shall not be altered, amended or repealed by the Board of Directors.
11.2 Requisite Vote. Action taken by the shareholders with respect to
---------------
Bylaws shall be taken by an affirmative vote of at least two-thirds (2/3) of
each class of shares entitled to vote, and action by the Board of Directors with
respect to Bylaws shall be taken by an affirmative vote of at least two-thirds
(2/3) of all Directors then in office.
These Bylaws were duly adopted by the Incorporator of the Corporation as of
December 10, 1999.
/s/ Marge Rupp
___________________________________
Marge Rupp, Secretary
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's combined financial statements for the three months ended October 2,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> OCT-02-1999
<CASH> 102
<SECURITIES> 0
<RECEIVABLES> 16268
<ALLOWANCES> 0
<INVENTORY> 25716
<CURRENT-ASSETS> 43253
<PP&E> 72154
<DEPRECIATION> 42274
<TOTAL-ASSETS> 73330
<CURRENT-LIABILITIES> 103589
<BONDS> 30457
0
0
<COMMON> 0
<OTHER-SE> (62596)
<TOTAL-LIABILITY-AND-EQUITY> 73330
<SALES> 28659
<TOTAL-REVENUES> 28659
<CGS> 24966
<TOTAL-COSTS> 24966
<OTHER-EXPENSES> 13
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2213
<INCOME-PRETAX> (438)
<INCOME-TAX> 23
<INCOME-CONTINUING> (461)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (461)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's combined financial statements for the fiscal year ended July 3, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> JUL-03-1999
<CASH> 402
<SECURITIES> 0
<RECEIVABLES> 29103
<ALLOWANCES> 5054
<INVENTORY> 27034
<CURRENT-ASSETS> 52708
<PP&E> 75234
<DEPRECIATION> 43793
<TOTAL-ASSETS> 84368
<CURRENT-LIABILITIES> 114245
<BONDS> 30517
0
0
<COMMON> 0
<OTHER-SE> (62137)
<TOTAL-LIABILITY-AND-EQUITY> 84368
<SALES> 106779
<TOTAL-REVENUES> 106779
<CGS> 101125
<TOTAL-COSTS> 101125
<OTHER-EXPENSES> 221
<LOSS-PROVISION> 1645
<INTEREST-EXPENSE> 9578
<INCOME-PRETAX> (19280)
<INCOME-TAX> (797)
<INCOME-CONTINUING> (18483)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18483)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
INFORMATION STATEMENT
DELTA APPAREL, INC.
COMMON STOCK
This document relates to the distribution (which this document refers to as
the Delta Apparel distribution) of 100% of the common stock of Delta Apparel,
Inc., a Georgia corporation (which this document refers to as Delta Apparel), by
Delta Woodside Industries, Inc., a South Carolina corporation (which this
document refers to as Delta Woodside). Delta Woodside will make the Delta
Apparel distribution to record holders of Delta Woodside common stock as of
February __, 2000 (which this document refers to as the Delta Apparel record
date). In the Delta Apparel distribution, those Delta Woodside stockholders
will receive one share of Delta Apparel common stock for every ten shares of
Delta Woodside common stock that they hold on that date. If you are a record
holder of Delta Woodside common stock on February __, 2000, you will receive
your Delta Apparel common shares automatically. You do not need to take any
further action. Currently, Delta Apparel expects the Delta Apparel distribution
to occur on or about March __, 2000.
------------------------
Before the Delta Apparel distribution, Delta Apparel will apply to The
American Stock Exchange to approve shares of Delta Apparel's common stock for
listing, subject to official notice of issuance. If this application is not
approved, Delta Apparel expects that the Delta Apparel shares will trade in the
over-the-counter market.
------------------------
YOU SHOULD CAREFULLY REVIEW THIS ENTIRE DOCUMENT. IN REVIEWING THIS
DOCUMENT, YOU SHOULD CAREFULLY CONSIDER THE MATTERS AFFECTING DELTA APPAREL'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 15.
------------------------
STOCKHOLDER APPROVAL IS NOT REQUIRED FOR THE DELTA APPAREL DISTRIBUTION OR
ANY OF THE OTHER TRANSACTIONS THAT THIS DOCUMENT DESCRIBES. DELTA APPAREL IS
NOT ASKING YOU FOR A PROXY AND REQUESTS THAT YOU NOT SEND ONE TO IT.
This document is not an offer to sell or solicitation of an offer to buy
any securities.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this document is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this document is February __,2000, and Delta Apparel first
mailed this document to stockholders on February __, 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE DELTA APPAREL DISTRIBUTION 3
SUMMARY 8
RISK FACTORS 15
THE DELTA APPAREL DISTRIBUTION 23
TRADING MARKET 34
RELATIONSHIPS AMONG DELTA APPAREL, DELTA WOODSIDE AND DUCK HEAD 35
CAPITALIZATION 41
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 48
BUSINESS OF DELTA APPAREL 55
MANAGEMENT OF DELTA APPAREL 60
SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS AND
MANAGEMENT 70
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE
DELTA APPAREL DISTRIBUTION 76
DESCRIPTION OF DELTA APPAREL CAPITAL STOCK 80
2000 ANNUAL MEETING OF DELTA APPAREL STOCKHOLDERS 89
FORWARD-LOOKING STATEMENTS MAY NOT BE ACCURATE 89
INDEPENDENT AUDITORS 90
ADDITIONAL INFORMATION 90
INDEX TO FINANCIAL STATEMENTS 91
REPORT OF INDEPENDENT AUDITORS F-1
AUDITED COMBINED FINANCIAL STATEMENTS FOR DELTA APPAREL'S THREE MOST
RECENT FISCAL YEARS F-2
UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS FOR DELTA APPAREL'S
MOST RECENTLY ENDED FISCAL QUARTER F-16
2
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE DELTA APPAREL DISTRIBUTION
The following questions and answers highlight important information about
the Delta Apparel distribution. For a more complete description of the terms of
the Delta Apparel distribution, please read this entire document and the other
materials to which it refers.
Q: WHAT WILL HAPPEN IN THE DELTA APPAREL DISTRIBUTION AND RELATED
TRANSACTIONS?
A: Delta Woodside is separating the two apparel businesses (the Delta
Apparel Company division and the Duck Head Apparel Company division)
conducted by its wholly-owned subsidiary, Duck Head Apparel Company,
Inc., a Tennessee corporation, from each other and from the textile
fabric business (which this document refers to as Delta Mills
Marketing Company) conducted by its wholly-owned subsidiary, Delta
Mills, Inc., a Delaware corporation (which this document refers to as
Delta Mills). It will accomplish this as follows:
- Delta Woodside has created two new wholly-owned
corporations, Delta Apparel, Inc., a Georgia corporation
(which this document refers to as Delta Apparel), and Duck
Head Apparel Company, Inc., a Georgia corporation (which
this document refers to as Duck Head).
- The Delta Apparel Company business, and associated assets
and liabilities, will be transferred to Delta Apparel, and
the Duck Head Apparel Company business, and associated
assets and liabilities, will be transferred to Duck Head.
- Delta Woodside will simultaneously distribute all the common
stock of Delta Apparel (which this document refers to as the
Delta Apparel distribution) and all the common stock of Duck
Head (which this document refers to as the Duck Head
distribution) to the Delta Woodside stockholders of record
as of February __, 2000. (This document refers to this
record date for the Delta Apparel distribution as the Delta
Apparel record date, and this record date for the Duck Head
distribution as the Duck Head record date).
Upon completion of these two distributions, you will own shares in
three separately traded public companies, Delta Woodside Industries,
Inc., Delta Apparel, Inc. and Duck Head Apparel Company, Inc.
Q: WHAT WILL I RECEIVE IN THE DELTA APPAREL DISTRIBUTION?
A: You will receive one share of Delta Apparel common stock for every ten
shares of Delta Woodside common stock that you own of record on
February __, 2000, the Delta Apparel record date. Simultaneously with
the Delta Apparel distribution, you will receive in the Duck Head
distribution one share of Duck Head common stock for every ten shares
of Delta Woodside common stock that you own of record on February __,
2000, the Duck Head record date. After the Delta Apparel distribution,
you will also continue to own the shares of Delta Woodside common
stock that you owned immediately before the Delta Apparel
distribution.
Q: WILL I BE TAXED AS A RESULT OF THE DELTA APPAREL DISTRIBUTION?
A: Delta Woodside is not at this time in a position to inform its
stockholders as to the federal income tax consequences of the Delta
Apparel distribution or the Duck Head distribution. Delta Woodside
will make a good faith determination, as soon as practicable and in
any event prior to January 31, 2001, on the basis of all of the facts
3
<PAGE>
then known to it, and advise all of its stockholders who receive Delta
Apparel shares in the Delta Apparel distribution and Duck Head shares
in the Duck Head distribution whether or not in Delta Woodside's
opinion the Delta Apparel distribution and the Duck Head distribution
should be treated as tax-free spin-offs under Section 355 of the
Internal Revenue Code.
Accordingly, each Delta Woodside stockholder as of the record date for
the Delta Apparel distribution and the Duck Head distribution may
recognize dividend income and possibly capital gain on the Delta
Apparel distribution and the Duck Head distribution, all to the extent
described in "The Delta Apparel Distribution - Material Federal Income
Tax Consequences".
Q: WHAT WILL DELTA APPAREL'S BUSINESS BE AFTER THE DELTA APPAREL
DISTRIBUTION?
A: After the Delta Apparel distribution, Delta Apparel will continue its
business of being a vertically integrated supplier of knit apparel,
particularly T-shirts, sportswear and fleece goods, and selling these
products to distributors, screen printers and private label accounts.
See information under the heading "Business of Delta Apparel".
Q: WHAT WILL DELTA WOODSIDE'S AND DUCK HEAD'S RESPECTIVE BUSINESSES BE
AFTER THE DELTA APPAREL DISTRIBUTION?
A: After the Delta Apparel 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 Delta Apparel distribution and the Duck Head distribution,
Delta Woodside will have no operating business other than Delta Mills
Marketing Company.
Duck Head's business is designing, sourcing, producing, marketing and
distributing boy's and men's value-oriented casual sportswear
predominantly under the 134-year-old nationally recognized "Duck Head"
(Reg. Trademark) label.
Q: WHAT DO I HAVE TO DO TO PARTICIPATE IN THE DELTA APPAREL DISTRIBUTION?
A: Nothing. No proxy or vote is necessary for the Delta Apparel
distribution, the Duck Head 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 Delta Apparel common stock in the Delta Apparel
distribution. Similarly, you will 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.
Q: HOW WILL DELTA WOODSIDE DISTRIBUTE DELTA APPAREL COMMON STOCK TO ME?
A: If you are a record holder of Delta Woodside common stock as of the
close of business on the Delta Apparel record date, Delta Woodside's
distribution agent will automatically send to you a stock certificate
for the number of whole shares of Delta Apparel common stock to which
you are entitled. This stock certificate will be mailed to you on or
around March __, 2000.
4
<PAGE>
Q: WHAT IF I HOLD MY SHARES OF DELTA WOODSIDE COMMON STOCK THROUGH MY
STOCKBROKER, BANK OR OTHER NOMINEE?
A: If you hold your shares of Delta Woodside common stock through your
stockbroker, bank or other nominee, you are probably not a registered
stockholder of record and your receipt of Delta Apparel common stock
depends on your arrangements with the stockbroker, bank or nominee
that holds your shares of Delta Woodside common stock for you. Delta
Apparel anticipates that stockbrokers and banks generally will credit
their customers' accounts with Delta Apparel common stock on or about
March __, 2000, but you should confirm that with your stockbroker,
bank or other nominee.
After the Delta Apparel distribution, you may instruct your
stockbroker, bank or other nominee to transfer your shares of
Delta Apparel 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 Delta Apparel common stock that you are
entitled to receive in the Delta Apparel distribution, and your
account with Delta Woodside's distribution agent will be credited
with any fractional share of Delta Apparel common stock that you
would otherwise be entitled to receive in the Delta Apparel
distribution. Promptly after the Delta Apparel 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 Delta
Apparel common stock. Promptly after the Delta Apparel
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, Delta Apparel or the
distribution agent guarantees any minimum sale price for the
fractional shares of Delta Apparel common stock.
Q: ON WHICH EXCHANGE WILL SHARES OF DELTA APPAREL COMMON STOCK TRADE
IMMEDIATELY AFTER THE DELTA APPAREL DISTRIBUTION?
A: Before the Delta Apparel distribution, Delta Apparel will apply
to The American Stock Exchange to approve shares of Delta
Apparel's common stock for listing, subject to official notice of
issuance. If this application is not approved, Delta Apparel
expects that the Delta Apparel shares will trade in the
over-the-counter market.
Q: WHEN WILL I BE ABLE TO BUY AND SELL DELTA APPAREL COMMON SHARES?
A: Regular trading in Delta Apparel common stock is expected to
begin on or about March, 2000. Delta Apparel expects, however,
that "when-issued" trading for Delta Apparel common stock will
develop before the Delta Apparel distribution date, which is
expected to be on or about March__, 2000.
"When-issued" trading means that you may trade shares of Delta
Apparel common stock before the Delta Apparel distribution date.
"When-issued" trading reflects the value at which the market
expects the shares of Delta Apparel common stock to trade after
the Delta Apparel distribution. If "when-issued" trading develops
5
<PAGE>
in shares of Delta Apparel common stock, you may buy and sell
those shares before the Delta Apparel distribution date. None of
these trades, however, will settle until after the Delta Apparel
distribution date, when regular trading in Delta Apparel common
stock has begun. If the Delta Apparel 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 DELTA APPAREL DISTRIBUTION?
A: Delta Woodside expects that, following the Delta Apparel
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 Delta Apparel distribution change the number
of shares of Delta Woodside common stock that you own.
Q: HOW WILL I BE ABLE TO BUY AND SELL DELTA WOODSIDE COMMON STOCK
BEFORE THE DELTA APPAREL DISTRIBUTION DATE?
A: Delta Woodside has advised Delta Apparel that it expects that its
common stock will continue to trade on the New York Stock
Exchange on a regular basis through the Delta Apparel
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 Delta Apparel record
date and the Delta Apparel distribution date (i.e., between
February __ and March __, 2000) will be accompanied by an
attached "due bill" representing Delta Apparel common stock to be
distributed in the Delta Apparel distribution.
Additionally, Delta Woodside has advised Delta Apparel that it
expects that "ex-distribution" trading for Delta Woodside common
stock will develop before the Delta Apparel distribution date and
the Duck Head distribution date. "Ex-distribution" trading means
that you may trade shares of Delta Woodside common stock before
the completion of the Delta Apparel distribution and the Duck
Head 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 Delta Apparel distribution and the Duck
Head distribution.
If "ex-distribution" trading develops in shares of Delta Woodside
common stock, you may buy and sell those shares before the Delta
Apparel distribution date and the Duck Head distribution date on
The New York Stock Exchange under the symbol "DLWwi". None of
these trades, however, will settle until after the Delta Apparel
distribution date and the Duck Head distribution date, when
regular trading in Delta Woodside common stock has begun. If the
Delta Apparel distribution does not occur or the Duck Head
distribution does not occur, all "ex-distribution" trading will
be null and void.
Q: WHAT WILL BE THE RELATIONSHIP BETWEEN DELTA APPAREL, DELTA
WOODSIDE AND DUCK HEAD AFTER THE DELTA APPAREL DISTRIBUTION?
A: Delta Apparel, Delta Woodside and Duck Head will be independent,
separate, publicly owned companies. After the Delta Apparel
distribution, Delta Woodside will not own any of Delta Apparel's
common stock. Seven of Delta Apparel's initial directors will
also be Delta Woodside directors after the Delta Apparel
6
<PAGE>
distribution. Seven of Delta Apparel's initial directors will
also be Duck Head directors after the Delta Apparel distribution.
In connection with the Delta Apparel distribution, Delta
Woodside, Delta Apparel and Duck Head are entering into
agreements to govern their relationship after the Delta Apparel
distribution and after the Duck Head distribution. This document
describes these agreements and ongoing relationships in detail on
pages 35-40.
Q: WHOM SHOULD I CALL WITH QUESTIONS ABOUT THE DELTA APPAREL
DISTRIBUTION?
A: If you have questions about the Delta Apparel distribution or the
related transactions or if you would like additional copies of
this document or any other materials to which this document
refers, you should contact:
David R. Palmer
Controller
Delta Woodside Industries, Inc.
233 N. Main Street
Greenville, SC 29601
Telephone No.: (864)232-8301
7
<PAGE>
SUMMARY
The following is a brief summary of the matters that this document
addresses. This summary does not contain all of the information that is
important to you as a recipient of Delta Apparel shares. For a more complete
description of the Delta Apparel distribution and related transactions, you
should read this entire document and the other materials to which it refers.
DELTA APPAREL
Delta Apparel is a Georgia corporation with its principal executive
offices located at 3355 Breckinridge Blvd., Suite 100, Duluth, Georgia 30680
(telephone number: 770-806-6800). Delta Apparel is a vertically integrated
supplier of knit apparel, particularly T-shirts, sportswear and fleece goods.
Approximately 95% of Delta Apparel's production is of T-shirts. Delta Apparel
specializes in selling to the imprinted knit apparel marketplace products such
as blank t-shirts, golf shirts and tank tops. Delta Apparel sells its products
to distributors, screen printers and private label accounts. Delta Apparel has
operations in 4 states and Honduras, and at November 4, 1999 had approximately
1,950 employees.
THE DELTA APPAREL DISTRIBUTION
The following is a brief summary of the principal terms of the Delta
Apparel distribution.
DISTRIBUTING COMPANY
Delta Woodside Industries, Inc. Before the Delta Apparel
distribution, the Delta Woodside common stock trades on The
New York Stock Exchange under the symbol "DLW". After the
Delta Apparel distribution, Delta Woodside's common stock
will continue to trade under the symbol "DLW" and Delta
Woodside will not own any shares of Delta Apparel common
stock.
PRIMARY PURPOSES OF
THE DELTA APPAREL DISTRIBUTION
The board of directors and management of Delta Woodside have
concluded that separating the Delta Apparel and Duck Head
businesses from the Delta Mills Marketing Company business
by means of the distribution of shares of Delta Apparel
common stock to Delta Woodside stockholders, and the
simultaneous distribution of shares of Duck Head common
stock to Delta Woodside stockholders is in the best
interests of Delta Woodside, Delta Apparel, Duck Head and
the Delta Woodside stockholders. The Delta Woodside board of
directors and management believe that this separation will
further the following objectives, among others, and thereby
enhance stockholder value:
(a) Permit the grant of equity incentives to the separate
management of each business, which incentives would not
be affected by the results of the other businesses and,
therefore, would have excellent potential to align
closely the interests of that management with those of
the stockholders;
(b) Permit the elimination of certain existing corporate
8
<PAGE>
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 Delta Apparel common stock
will be distributed to Delta Woodside stockholders of record
as of February __, 2000. Based on the number of shares of
Delta Woodside common stock outstanding as of January __
2000 and the Delta Apparel distribution ratio of one Delta
Apparel common share for every ten Delta Woodside common
shares, Delta Woodside will distribute approximately
2,386,000 shares of Delta Apparel common stock to Delta
Woodside stockholders. After the Delta Apparel distribution,
Delta Apparel will have approximately 2,500 stockholders of
record.
DELTA APPAREL DISTRIBUTION RATIO
You will receive one share of Delta Apparel common stock for
every ten shares of Delta Woodside common stock that you own
as of the close of business on February __, 2000.
DELTA APPAREL RECORD DATE
February __, 2000 (5:00 p.m., Eastern time).
9
<PAGE>
DELTA APPAREL DISTRIBUTION DATE
March __, 2000 (4:59 p.m., Eastern time). On the Delta
Apparel distribution date, Delta Woodside's distribution
agent will credit the shares of Delta Apparel common stock
that you will receive in the Delta Apparel distribution to
your account or to the account of your stockbroker, bank or
other nominee if you are not a registered stockholder of
record.
DISTRIBUTION AGENT
Before the Delta Apparel distribution date, Delta Woodside
will appoint First Union National Bank, Delta Woodside's
transfer agent, as its distribution agent for the Delta
Apparel distribution.
TRADING MARKET
Because Delta Apparel has been a wholly-owned subsidiary of
Delta Woodside, there has been no trading market for Delta
Apparel common stock. Before the Delta Apparel distribution,
Delta Apparel will apply to The American Stock Exchange to
approve shares of Delta Apparel's common stock for listing,
subject to official notice of issuance. If this application
is not approved, Delta Apparel expects that the Delta
Apparel shares will trade in the over-the-counter market.
Delta Apparel expects that a "when-issued" trading market
will develop before the Delta Apparel distribution date.
MATERIAL FEDERAL INCOME TAX
CONSEQUENCES
Delta Woodside is not at this time in a position to inform
its stockholders as to the federal income tax consequences
of the Delta Apparel distribution or the Duck Head
distribution. Delta Woodside will make a good faith
determination, as soon as practicable and in any event prior
to January 31, 2001, on the basis of all of the facts then
known to it, and advise all of its stockholders who receive
Delta Apparel shares in the Delta Apparel distribution and
Duck Head shares in the Duck Head distribution whether or
not in Delta Woodside's opinion the Delta Apparel
distribution and the Duck Head distribution should be
treated as tax-free spin-offs under Section 355 of the
Internal Revenue Code.
Accordingly, each Delta Woodside stockholder as of the
record date for the Delta Apparel distribution and the Duck
Head distribution may recognize dividend income and possibly
capital gain on the Delta Apparel distribution and the Duck
Head distribution, all to the extent described in "The Delta
Apparel Distribution - Material Federal Income Tax
Consequences".
RISK FACTORS
You should carefully consider the matters discussed under
the section of this document entitled "Risk Factors".
10
<PAGE>
FRACTIONAL SHARE TREATMENT
If you own ten or more shares of Delta Woodside common
stock, the distribution agent will send to you a stock
certificate for all of the whole shares of Delta Apparel
common stock that you are entitled to receive in the Delta
Apparel distribution, and your account with Delta Woodside's
distribution agent will be credited with any fractional
share of Delta Apparel common stock that you would otherwise
be entitled to receive in the Delta Apparel distribution.
Promptly after the Delta Apparel 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 Delta
Apparel common stock. Promptly after the Delta Apparel
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, Delta Apparel or the distribution agent guarantees
any minimum sale price for the fractional shares of Delta
Apparel common stock.
RELATIONSHIP WITH DELTA WOODSIDE
AND DUCK HEAD AFTER THE
DELTA APPAREL DISTRIBUTION
Delta Apparel has entered into a distribution agreement with
Delta Woodside and Duck Head dated as of January __, 2000.
Delta Apparel will also enter into a tax sharing agreement
with Delta Woodside and Duck Head on or before the Delta
Apparel distribution date. These are described on pages 35
to 40 of this document.
SELECTED HISTORICAL FINANCIAL DATA
The selected financial data of Delta Apparel set forth below should be read
in conjunction with Delta Apparel's combined financial statements, including the
notes to those statements, which are at pages F-1 to F-19 of this document, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which begins on page 48 of this document. The combined financial
statements of Delta Apparel include the operations and accounts of the Delta
Apparel Company division, which consists of operations and accounts included in
various subsidiaries of Delta Woodside, and from April 1998 the operations and
net assets of the Rainsford Yarn Mill, operational control of which was
transferred to the Delta Apparel Company division as of that date. 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
11
<PAGE>
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, Delta Apparel's audited combined financial
statements included elsewhere in this document. The financial information as of
October 2, 1999 and September 26, 1998 and for the three months ended October 2,
1999 and September 26, 1998 has been derived from Delta Apparel's unaudited
financial information. Delta Apparel 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.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended Three Months Ended
--------------------------------------------------------------- --------------------------
July 3, June 27, June 28, June 29, July 1, October 2, September 26,
--------------- -------------- --------- --------- -------- ----------- -------------
1999 1998 1997 1996 1995 1999 1998
--------------- -------------- --------- --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF (In thousands) (In thousands)
OPERATIONS
DATA:
Net Sales $ 106,779 107,967 112,593 124,601 104,257 28,659 25,131
Cost of goods sold (101,125) (103,867) (109,334) (108,660) (85,927) (24,966) (21,028)
Selling, general and
administrative (13,720) (13,956) (9,530) (10,945) (10,974) (1,905) (3,334)
expenses
Impairment charges (1,415) (7,459) - (2,393) - - -
Other income (loss) (221) (505) (132) 501 55 (13) (86)
--------------- -------------- --------- --------- -------- ----------- -------------
Operating income(loss) (9,702) (17,820) (6,403) 3,104 7,411 1,775 683
Interest expense, net (9,578) (6,379) (5,866) (5,736) (5,620) (2,213) (2,194)
--------------- -------------- --------- --------- -------- ----------- -------------
Income(loss) before taxes (19,280) (24,199) (12,269) (2,632) 1,791 (438) (1,511)
Income tax expense (benefit) (797) (3,208) (535) (400) 976 23 (63)
--------------- -------------- --------- --------- -------- ----------- -------------
Income (loss) before
cumulative change in
accounting principle (18,483) (20,991) (11,734) (2,232) 815 (461) (1,448)
Cumulative effect of
change in accounting
principle - - - (182) - - -
--------------- -------------- --------- --------- -------- ----------- -------------
Net income (loss) $ (18,483) (20,991) (11,734) (2,414) 815 (461) (1,448)
=============== ============== ========= ========= ======== =========== =============
BALANCE SHEET DATA (AT PERIOD END):
Working capital
(deficit) $ (61,537) 52,871 12,342 12,759 14,093 (60,606) (50,807)
Total assets 84,368 99,961 90,715 93,069 103,990 73,330 98,020
Total long-term debt 30,517 30,756 63,186 60,818 61,057 30,457 30,696
Divisional deficit (62,137) (43,654) (22,663) (10,833) (8,526) (62,596) (45,107)
</TABLE>
12
<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 Delta Apparel at and for
the three month period ended October 2, 1999 and for the year ended July 3, 1999
that are set forth under the heading "Unaudited Pro Forma Combined Financial
Statements" and give effect to the transactions described in that section of
this document as if those transactions had occurred, in the case of the pro
forma balance sheet, on the date of that balance sheet and, in the case of the
pro forma statements of operations, at the beginning of the fiscal year that
ended July 3, 1999.
Delta Apparel 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 Delta Apparel 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 Delta
Apparel and the related notes as of July 3, 1999 and June 27, 1998 and for each
of the three years in the period ended July 3, 1999, and as of and for the three
month period ended October 2, 1999, included on pages 42-47 and F-1 to F-19,
respectively.
13
<PAGE>
<TABLE>
<CAPTION>
FISCAL THREE MONTHS
YEAR ENDED ENDED
JULY 3, 1999 OCTOBER 2, 1999
-------------- ----------------
(dollars in thousands, except per share amounts)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 106,779 28,659
Cost of goods sold (101,125) (24,966)
-------------- ----------------
Gross Profit 5,654 3,693
Selling, general and administrative expenses (10,940) (1,881)
Intercompany management fees (550) (81)
Provision for bad debt (1,645) (24)
Impairment charges (1,415) ---
Other expenses (221) (11)
-------------- ----------------
Operating income (loss) (9,117) 1,696
Interest (income) expense:
Interest expense, net (2,584) (424)
Intercompany interest expense -- --
-------------- ----------------
(2,584) (424)
-------------- ----------------
Income (loss) before taxes (11,701) 1,272
Income tax expense (benefit) (797) 23
-------------- ----------------
Net income (loss) $ (10,904) 1,249
============== ================
Basic and diluted net income (loss) per share $ (4.57) 0.52
============== ================
Weighted average shares outstanding used in basic and
diluted per share calculation (a) 2,386,000 2,386,000
============== ================
Balance Sheet Data:
Working capital $ 22,523
Total assets 73,330
Total long-term debt 11,952
Stockholders' equity 39,038
<FN>
- ----------------------------------------------------------------------------------------
(a) Weighted average shares outstanding were determined assuming a distribution of
one share of Delta Apparel common stock for every ten shares of Delta Woodside common
stock owned on the record date. The proforma weighted shares outstanding do not include
securities that would be anti-dilutive for each of the periods presented.
</TABLE>
14
<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 Delta Apparel'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 DELTA APPAREL DISTRIBUTION AND THE DUCK HEAD DISTRIBUTION MAY, FOR FEDERAL
INCOME TAX PURPOSES, BE TAXABLE TO THE DELTA WOODSIDE STOCKHOLDERS.
Delta Woodside is not at this time in a position to inform its stockholders
as to the federal income tax consequences of the Delta Apparel distribution or
the Duck Head distribution. Delta Woodside will make a good faith
determination, as soon as practicable and in any event prior to January 31,
2001, on the basis of all of the facts then known to it, and advise all of its
stockholders who receive Delta Apparel shares in the Delta Apparel distribution
and Duck Head shares in the Duck Head distribution whether or not in Delta
Woodside's opinion the Delta Apparel distribution and the Duck Head distribution
should be treated as tax-free spin-offs under Section 355 of the Internal
Revenue Code.
Accordingly, each Delta Woodside stockholder as of the record date for the
Delta Apparel distribution and the Duck Head distribution may recognize dividend
income and possibly capital gain on the Delta Apparel distribution and the Duck
Head distribution, all to the extent described in "The Delta Apparel
Distribution - Material Federal Income Tax Consequences".
DELTA APPAREL HAS HAD SIGNIFICANT OPERATING LOSSES AND USED SIGNIFICANT AMOUNTS
OF CASH IN ITS OPERATIONS DURING THE LAST SEVERAL YEARS AND THESE LOSSES AND
THIS USE OF CASH MAY CONTINUE.
Delta Apparel had operating losses of $9.7 million in the fiscal year ended
July 3, 1999, $17.8 million in the fiscal year ended June 27, 1998 and $6.4
million in the fiscal year ended June 28, 1997. Delta Apparel had operating
income of $1.8 million in the three months ended October 2, 1999.
Net cash used in operating activities by Delta Apparel was $6.8 million in
the 1999 fiscal year, $12.6 million in the 1998 fiscal year and $14.4 million in
the 1997 fiscal year. During the first quarter of the 2000 fiscal year, Delta
Apparel generated $13.4 million of cash from operations.
Delta Apparel believes that it is implementing programs that will reduce
operating expenses and provide for better asset management and that its business
strategy will provide Delta Apparel with better future results, but there is no
certainty that these programs or that Delta Apparel's strategy will be
successful.
Delta Apparel's financial condition would be materially adversely affected
by significant operating losses or the significant use of cash by its
operations.
IN THE PAST, DELTA APPAREL'S NEEDS FOR CASH HAVE GENERALLY BEEN MET BY ADVANCES
FROM DELTA WOODSIDE. AFTER THE DELTA APPAREL DISTRIBUTION, DELTA APPAREL WILL
BE ENTIRELY DEPENDENT ON ITS OWN OPERATIONS AND THIRD PARTY LENDERS TO OBTAIN
NEEDED FINANCING.
After the Delta Apparel distribution, Delta Apparel will no longer have any
affiliation with the Delta Mills Marketing Company textile business of Delta
Woodside's subsidiary, Delta Mills, or the apparel business of Duck
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Head. This affiliation has historically benefited Delta Apparel by Delta Mills
Marketing Company being a source of needed funds and by Delta Woodside as a
whole providing a broader base for obtaining bank financing.
Prior to the Delta Apparel distribution, when the Delta Apparel 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, Delta Apparel used an aggregate of $42.4 million of
cash provided by Delta Woodside (of which $22.1 million was used to pay interest
to Delta Woodside on the affiliated debt owed by the Delta Apparel Company
division). During the fiscal quarter ended October 2, 1999, Delta Apparel
generated $13.4 million of cash from operations and reduced the balance of the
affiliated debt to Delta Woodside by $13.4 million. Both the cash generated
from operations and the reduction in affiliated debt was after the effect of
$2.2 million in interest charges on debt owed to Delta Woodside.
The Delta Apparel operation has also historically benefited from financing
obtained by Delta Woodside. This financing has been obtained on the basis of
more than just the operations of Delta Apparel. Lenders to Delta Apparel as a
stand alone company will not be able to take advantage of the diversification of
risk provided by lending to Delta Woodside which had more than one operation.
DELTA APPAREL'S REVOLVING CREDIT FACILITY PROVIDES BORROWING AVAILABILITY THAT
IS APPROXIMATELY 67% GREATER THAN THE AMOUNT THAT DELTA APPAREL PROJECTS WILL BE
ITS PEAK BORROWING NEEDS.
Delta Apparel expects that its peak borrowing needs will be in its third
and fourth fiscal quarters and that during those quarters it may need to draw or
set aside for letters of credit an aggregate of approximately $15 million under
its revolving credit facility for working capital purposes and letters of
credit. Forty-five percent of the face amount of outstanding documentary
letters of credit will reduce the amount available under the revolving credit
facility for working capital loans.
Based on these expectations, Delta Apparel believes that its $25 million
revolving credit facility should be sufficient to satisfy its foreseeable
working capital needs. Any material deterioration in Delta Apparel's results of
operations, however, may result in Delta Apparel losing its ability to borrow
under its revolving credit facility or may cause the borrowing availability
under that facility not to be sufficient for Delta Apparel's needs.
DEMAND FOR AND PRICING OF DELTA APPAREL'S PRODUCTS ARE LARGELY OUT OF DELTA
APPAREL'S CONTROL. EVEN THOUGH DELTA APPAREL'S STRATEGY IS TO BE A LOW COST
PRODUCER WITH A REPUTATION FOR QUALITY SERVICE, THIS STRATEGY MAY NOT BE
SUFFICIENT TO OFFSET DETRIMENTAL TRENDS IN DEMAND AND PRICING FOR DELTA
APPAREL'S PRODUCTS.
Prices for Delta Apparel's products have generally been dropping over the
last several years, even though demand for Delta Apparel's products has
increased since fiscal year 1998. The price declines have resulted from factors
largely outside Delta Apparel's control, such as excess supply capacity, the
industry's transfer of manufacturing out of the United States and declining raw
material prices. Demand for Delta Apparel's products is dependent on the
general demand for T-shirts and fleece goods.
Delta Apparel's strategy in this market environment is to be a low cost
producer and to differentiate itself by providing quality service to its
customers. Even if this strategy is successful, its results may be offset by
large demand or price declines.
DELTA APPAREL FACES INTENSE COMPETITION IN ITS MARKETS, AND DELTA APPAREL'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.
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Approximately three-quarters of the United States market sales of knit
apparel are made by three major knit apparel manufacturers that are Delta
Apparel's primary competitors. These primary competitors have brand names, such
as Fruit-of-the-Loom, Hanes and Russell that are far better known than the Delta
Apparel brand name. Based on mill dozens sold in 1998, Delta Apparel has an
approximate 5% share of the market for decorated T-shirts for wholesalers and
screen printers, which is up from 4% in 1996 and makes it a second tier supplier
to the market.
Some of Delta Apparel's competitors have substantially greater financial,
marketing, personnel and other resources than does Delta Apparel. This may
enable Delta Apparel's competitors to compete more aggressively than can Delta
Apparel in pricing, marketing and other respects, to react more quickly to
market trends and to better weather market downturns.
THE FINANCIAL DIFFICULTIES OF SOME OF DELTA APPAREL'S COMPETITORS IS CURRENTLY
CREATING CONSIDERABLE UNCERTAINTY IN DELTA APPAREL'S MARKETS.
Currently, some of Delta Apparel's competitors are undergoing significant
financial difficulties. These difficulties may lead these competitors to sell
substantial amounts of goods at prices against which Delta Apparel cannot
effectively compete. In addition, these difficulties are creating considerable
uncertainty in the marketplace for Delta Apparel's goods.
THERE MAY BE LITTLE INSTITUTIONAL INTEREST, RESEARCH COVERAGE OR TRADING VOLUME
IN THE DELTA APPAREL SHARES BECAUSE OF DELTA APPAREL'S SIZE. IN ADDITION, AT
THE TIME OF THE DELTA APPAREL DISTRIBUTION A LARGE PERCENTAGE OF THE OUTSTANDING
DELTA APPAREL SHARES WILL BE HELD BY A FEW INSTITUTIONAL INVESTORS WHO WILL BE
FREE TO SELL THEIR DELTA APPAREL SHARES AT ANY TIME. THESE FACTORS COULD HAVE A
MAJOR DEPRESSIVE EFFECT ON THE MARKET PRICE OF THE DELTA APPAREL SHARES FOR AN
INDETERMINATE PERIOD OF TIME.
Various investment banking firms have informed Delta Woodside and Delta
Apparel that public companies with relatively small market capitalizations have
difficulty generating institutional interest, research coverage or trading
volume, which illiquidity can translate into price discounts as compared to
industry peers or to the shares' true value. Delta Apparel believes that the
market will perceive it to have a relatively small market capitalization. In
addition, some of Delta Woodside's stockholders who receive Delta Apparel shares
in the Delta Apparel distribution may wish to dispose of those shares because
they do not meet the stockholders' investment objectives regardless of the
shares' value or prospects. Coupled with Delta Apparel's history of operating
losses, these factors could lead to Delta Apparel's shares trading at prices
that are significantly lower than Delta Apparel's estimate of their inherent
value.
As of the Delta Apparel distribution date, Delta Apparel will have
outstanding approximately 2,386,000 shares of common stock. Delta Apparel
believes that over 69.7% of this stock will be beneficially owned by persons who
beneficially own more than 5% of the outstanding shares of Delta Apparel common
stock and related individuals, and that of this approximately 32.5% of the
outstanding stock will be beneficially owned by institutional investors. Sales
of substantial amounts of Delta Apparel common stock in the public market after
the Delta Apparel distribution by any of these large holders could adversely
affect the market price of the common stock.
POLITICAL UNCERTAINTY IN HONDURAS COULD ADVERSELY AFFECT DELTA APPAREL.
Delta Apparel's primary sewing facility is located in Honduras. Delta
Apparel might be adversely affected if economic or legal changes occur in
Honduras that affect the way in which Delta Apparel conducts its business in
that country.
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DELTA APPAREL'S RESULTS COULD BE ADVERSELY AFFECTED BY U.S. TRADE REGULATIONS.
Delta Apparel's products are subject to foreign competition, which in the
past has been faced with significant U.S. government import restrictions.
Foreign producers of apparel often have significant labor cost advantages.
Given the number of these foreign producers, the substantial elimination of
import protections that protect domestic apparel producers could materially
adversely affect Delta Apparel's business. The extent of import protection
afforded to domestic apparel producers has been, and is likely to remain,
subject to considerable political considerations.
The North American Free Trade Agreement (which this document refers to as
"NAFTA"), became effective on January 1, 1994 and has created a free-trade zone
among Canada, Mexico and the United States. NAFTA contains a rule of origin
requirement that products be processed in one of the three countries in order to
benefit from the agreement. NAFTA has phased out all trade restrictions and
tariffs among the three countries on apparel products competitive with those of
Delta Apparel. Because most of Delta Apparel's internal production of apparel
occurs outside of the NAFTA territory, NAFTA may adversely affect Delta Apparel
so long as Delta Apparel has manufacturing facilities outside of the three NAFTA
countries.
Delta Apparel, along with all of its major competition, makes use of
Section 807 and Section 807A of the tariff code. Section 807 provides for the
duty free treatment of United States origin components used in the assembly of
imported articles. The result is that duty is assessed only on the value of any
foreign components that may be present and the labor cost incurred offshore in
the assembly of apparel using United States origin fabric components. Pursuant
to Section 807A, apparel articles assembled in a Caribbean country (such as
Honduras), in which all fabric components have been wholly formed and cut in the
United States (such as at Delta Apparel's Maiden plant in North Carolina), are
subject to preferential quotas with respect to access into the United States for
such qualifying apparel, in addition to the significant tariff reduction
pursuant to Section 807. Apparel not meeting the criteria of Section 807,
Section 807A or NAFTA is subject to quotas and/or relatively higher tariffs.
Delta Apparel believes that, if Section 807 or Section 807A or any similar
program were repealed or altered in whole or in part, Delta Apparel would be at
a serious competitive disadvantage relative to textile and apparel manufacturers
in the rest of the world seeking to enter the United States market.
The World Trade Organization (which this document refers to as the
"WTO"), a new multilateral trade organization, was formed in January 1995 and is
the successor to the General Agreement on Tariffs and Trade. This new
multilateral trade organization has set forth mechanisms by which world trade in
clothing is being progressively liberalized by phasing-out quotas and reducing
duties over a period of time that began in January of 1995. As it implements
the WTO mechanisms, the U.S. government is negotiating bilateral trade
agreements with developing countries (which are generally exporters of textile
and apparel products) that are members of the WTO to get them to reduce their
tariffs on imports of textiles and apparel. The elimination of quotas and the
reduction of tariffs under the WTO may result in increased imports of certain
apparel products into North America. These factors could make Delta Apparel's
products less competitive against low cost imports from developing countries.
DELTA APPAREL IS DEPENDENT ON ITS TRADEMARKS.
Delta Apparel relies on the strength of its trademarks. Approximately 75 %
of Delta Apparel's products are currently sold under the Delta Apparel brand.
Delta Apparel 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 Delta Apparel's
sales and results of operations.
A LOSS OF KEY MANAGEMENT PERSONNEL, PARTICULARLY ROBERT HUMPHREYS, COULD
ADVERSELY AFFECT DELTA APPAREL.
Delta Apparel's success depends upon the talents and efforts of a small
number of key management personnel, particularly Robert Humphreys (President and
Chief Executive Officer of Delta Apparel). The loss or interruption of the
services of these executives could have a material adverse effect on Delta
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Apparel. Delta Apparel 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.
DELTA APPAREL'S BUSINESS IS SEASONAL.
Historically, Delta Apparel's business has been seasonal, with peak sales
occurring in the first and fourth quarters of its fiscal year. In response to
this seasonality, Delta Apparel generally increases its inventory levels, and
thereby has higher working capital needs, during the second and third quarters
of its fiscal year to meet customer demands for the peak first and fourth fiscal
quarter seasons.
DELTA APPAREL'S RESULTS WILL LIKELY BE CYCLICAL.
Delta Apparel 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 Delta
Apparel's results of operations and these fluctuations are expected to occur in
the future. Delta Apparel may be unable to compete successfully in any industry
downturn.
DELTA APPAREL DEPENDS ON OUTSIDE PRODUCTION FOR A SIGNIFICANT PORTION OF ITS
PRODUCTION.
Delta Apparel currently sources 25% to 40% of the sewing production it
requires. Any shortage of supply or significant price increases from Delta
Apparel's suppliers could adversely affect Delta Apparel's results of
operations.
DELTA APPAREL MAY BE ADVERSELY AFFECTED BY THE AMOUNT OF ITS INDEBTEDNESS.
As of October 2, 1999, on a pro forma basis, after giving effect to the
Delta Apparel distribution, Delta Apparel's total indebtedness would have been
approximately $18.9 million, and total stockholders' equity would have been
approximately $39.0 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 33%. In addition, at that
date and after giving effect to the Delta Apparel distribution, approximately
$13.1 million of additional borrowing capacity would have been available
(pursuant to the borrowing base formula) under Delta Apparel's credit agreement.
Delta Apparel anticipates that its borrowing needs will be seasonal, with
its greatest borrowing needs to be during the third and fourth fiscal quarters.
Delta Apparel 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 Delta Apparel's indebtedness could have important
consequences, such as:
(i) a substantial portion of Delta Apparel's cash flow from operations
will be dedicated to the payment of indebtedness, which will reduce
the funds available to Delta Apparel for operations and related
purposes;
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(ii) Delta Apparel may be more highly leveraged than some of its
competitors, which may place Delta Apparel at a relative competitive
disadvantage, could limit Delta Apparel's business opportunities and
make Delta Apparel more vulnerable to changes in the industry and
economic conditions; and
(iii) Delta Apparel'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.
Delta Apparel believes, based on current circumstances, that Delta
Apparel's cash flow, together with available borrowings under its credit
agreement, will be sufficient to permit Delta Apparel to meet its operating
expenses and to service its debt requirements as they become due for the
foreseeable future. Significant assumptions underlie this belief, however,
including, among other matters, that Delta Apparel 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 Delta Apparel. Actual future results will be dependent to a large degree on
a number of factors beyond Delta Apparel's control. If Delta Apparel 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. Delta Apparel may not be able to implement
any of these strategies.
DELTA APPAREL'S CREDIT AGREEMENT WILL IMPOSE RESTRICTIONS THAT, IF BREACHED BY
DELTA APPAREL, MAY PREVENT IT FROM BORROWING UNDER ITS REVOLVING CREDIT
FACILITY.
Delta Apparel's credit agreement will contain covenants that restrict,
among other things, the ability of Delta Apparel and its subsidiaries to incur
indebtedness, create liens, consolidate, merge, sell assets or make investments.
The credit agreement will also contain customary representations and warranties,
funding conditions and events of default.
A breach of one or more covenants or any other event of default under the
Delta Apparel credit agreement could result in an acceleration of Delta
Apparel's obligations under that agreement, in the foreclosure on any assets
subject to liens in favor of the credit agreement's lenders and in the inability
of Delta Apparel to borrow additional amounts under the credit agreement.
DELTA APPAREL IS SUBJECT TO ENVIRONMENTAL RULES.
Delta Apparel's operations must meet extensive federal, state and local
regulatory standards in the areas of safety, health and environmental pollution
controls. In addition, there can be no assurance 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 Delta Apparel's
liability, if any, for past failures to comply with laws, regulations and
permits applicable to its operations cannot be determined.
DELTA APPAREL WILL PAY NO DIVIDENDS FOR THE FORESEEABLE FUTURE.
Delta Apparel anticipates that it will pay no dividends to you or its other
stockholders for the foreseeable future. Delta Apparel's credit agreement also
will limit Delta Apparel's ability to pay dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Dividends and Purchases by Delta Apparel of its Own Shares".
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AFTER THE DELTA APPAREL DISTRIBUTION, DELTA APPAREL WILL BE REQUIRED TO PERFORM
VARIOUS ADMINISTRATIVE FUNCTIONS THAT WERE PREVIOUSLY PROVIDED BY DELTA WOODSIDE
AND AS TO WHICH DELTA APPAREL DOES NOT HAVE EXTENSIVE EXPERIENCE.
Delta Apparel has historically relied upon Delta Woodside corporate
headquarters for administrative services in areas including financial planning,
SEC reporting, employee benefits, stockholder services, insurance, treasury and
tax. After the Delta Apparel distribution, Delta Apparel will be responsible
for performing these administrative functions. Delta Apparel does not have
extensive experience in performing these functions on its own.
DELTA APPAREL MAY BE RESPONSIBLE FOR ANY HISTORICAL TAX LIABILITIES OF DELTA
WOODSIDE AND DUCK HEAD THAT DELTA WOODSIDE OR DUCK HEAD IS UNABLE TO PAY.
Prior to the Delta Apparel distribution, Delta Apparel has been a member of
Delta Woodside's consolidated group for federal income tax purposes. Each
member of a consolidated group is liable for the federal income tax liability of
the other members of the group. After the Delta Apparel distribution, Delta
Apparel, along with Delta Woodside and Duck Head, will continue to be liable for
these Delta Woodside liabilities that were incurred for periods before the Delta
Apparel distribution.
Delta Apparel, Delta Woodside and Duck Head will enter into a tax sharing
agreement. This agreement generally will seek to allocate consolidated federal
income tax liabilities to Delta Woodside for all periods prior to the Delta
Apparel distribution. Under this agreement, Delta Woodside generally will
retain the authority to file returns, respond to inquiries and conduct
proceedings on Delta Apparel's behalf with respect to consolidated federal
income tax returns for years beginning before the Delta Apparel distribution.
These arrangements may result in conflicts of interest among Delta Apparel,
Delta Woodside and Duck Head. In addition, if Delta Woodside becomes unable to
satisfy any of its liabilities respecting any period prior to the Delta Apparel
distribution, Delta Apparel could be responsible for satisfying them,
notwithstanding the tax sharing agreement.
DELTA APPAREL'S PRINCIPAL STOCKHOLDERS WILL EXERT SUBSTANTIAL INFLUENCE.
As of the Delta Apparel record date, three members of Delta Apparel's board
of directors and related individuals had the voting power in Delta Woodside
shares that, immediately after the Delta Apparel distribution, will result in
voting power with respect to approximately 37.3% of the outstanding Delta
Apparel common stock. These individuals will exert substantial influence with
respect to all matters submitted to a vote of stockholders, including election
of Delta Apparel's directors.
DELTA APPAREL IS NOT CERTAIN THAT ALL THIRD PARTIES WITH WHICH IT CONDUCTS
BUSINESS WILL SUCCESSFULLY ADDRESS THE YEAR 2000 COMPUTER PROBLEM BY THE END OF
1999.
Delta Apparel believes that it has addressed the year 2000 problem as it
affects the software and business systems that are critical to its business. If
third parties with whom Delta Apparel interfaces are unsuccessful in their
efforts to address the year 2000 problem, however, Delta Apparel could
experience business interruptions that could have a material adverse effect on
its operations. These failures could also require substantial time, effort and
expenditures on the part of Delta Apparel.
VARIOUS RESTRICTIONS AND AGREEMENTS COULD HINDER ANY ATTEMPT BY A THIRD PERSON
TO TAKEOVER DELTA APPAREL.
Prior to the Delta Apparel distribution, Delta Apparel will enter into a
rights agreement providing for the issuance of rights that will cause
substantial dilution to any person or group of persons that acquires 20% or more
of the outstanding Delta Apparel common shares without the rights having been
redeemed. In addition, Delta Apparel's articles of incorporation and bylaws and
the Official Code of Georgia contain provisions that could delay or prevent a
change in control of Delta Apparel in a transaction that is not approved by its
board of directors or that is on a leveraged basis or otherwise. These include
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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
having a significant beneficial ownership in Delta Apparel shares, and
prohibiting stockholders from calling a special meeting or taking action by
written consent in lieu of a stockholders' meeting. Moreover, Delta Apparel'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 Delta
Apparel common stock, including the loss of voting control to others.
Delta Apparel's credit agreement also includes restrictions on the ability
of Delta Apparel 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 Delta Apparel of its Own
Shares".
All of these provisions could deter or prevent an acquiror that is
interested in acquiring Delta Apparel on a leveraged basis or otherwise from
doing so. You can find more information on these provisions under the portions
of this documents found under the headings "Description of Delta Apparel Capital
Stock".
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THE DELTA APPAREL 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 Delta Apparel distribution, Delta Woodside had three operating
divisions: Delta Mills Marketing Company, Delta Apparel Company and Duck Head
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 Delta Apparel distribution and the
Duck Head distribution, Delta Mills Marketing Company will remain
the only continuing Delta Woodside operation.
- Pursuant to the Delta Apparel distribution, Delta Woodside will
distribute to its stockholders all of the outstanding common
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 under
the heading "Business of Delta Apparel".
- Simultaneously with the Delta Apparel distribution, Delta
Woodside will, pursuant to the Duck Head distribution, distribute
to its stockholders all of the outstanding stock of Duck Head,
which will continue the business formerly conducted by the Duck
Head Apparel Company division of various subsidiaries of Delta
Woodside. For a description of the business of the Duck Head
Apparel Company division, see the information below under the
subheading "Duck Head".
Delta Apparel
--------------
Delta Apparel is a Georgia corporation with its principal executive offices
located at 3355 Breckinridge Blvd., Suite 100, Duluth, Georgia 30680 (telephone
number: 770-806-6800).
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). Duck Head's business is designing, sourcing,
producing, marketing and distributing boy's and men's value-oriented casual
sportswear predominantly under the 134-year-old nationally recognized "Duck
Head" (Reg. Trademark) label.
BACKGROUND OF THE DELTA APPAREL DISTRIBUTION
Since the middle of its 1998 fiscal year, Delta Woodside's board of
directors has explored various means, in addition to effectively operating Delta
Woodside's businesses, to enhance stockholder value.
On March 9, 1998, Delta Woodside announced that it was withdrawing from the
circular knit fabrics business, which had operated under the name of Stevcoknit
Fabrics Company, and would be selling or closing and liquidating its two
knitting, dyeing and finishing plants in Wallace, North Carolina, and its yarn
spinning plant in Spartanburg, South Carolina. In the announcement, Delta
Woodside also stated that it had decided to sell its Nautilus International
fitness equipment division, and had retained an investment banking firm to
handle the sale.
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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 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 Delta Apparel Company
division and the Duck Head Apparel Company division would have been separated
into two corporations, and the stock of each of the Delta Apparel corporation
and the Duck Head corporation would have been distributed to all of the Delta
Woodside stockholders. The Delta Woodside board of directors decided that Delta
Woodside would promptly begin the process of soliciting offers for the purchase
of the post spin-off Delta Woodside common stock, and that Delta Woodside would
retain an investment banking firm to assist in the implementation of this
restructuring plan.
On March 16, 1999, Delta Woodside announced that Robert Rockey was assuming
the position of chief executive officer of the Duck Head Apparel Company
division, effective immediately. The announcement stated that, after the
planned spin-off of the Duck Head Apparel Company operation, Mr. Rockey would
serve as chairman and chief executive officer of that new separate corporation.
On March 23, 1999, Delta Woodside announced that it had engaged Prudential
Securities Incorporated (which this document refers to as "Prudential") to
advise the Delta Woodside board of directors with respect to the previously
announced plan to sell the portion of Delta Woodside remaining after the
distribution to the Delta Woodside stockholders of the shares of stock of Delta
Woodside's apparel businesses. The announcement also stated that the Duck Head
Apparel Company division was no longer for sale.
Following this announcement, Delta Woodside provided information
respecting a possible sale of the remaining Delta Woodside to nineteen
companies. None of these potential purchasers, however, made an offer for the
remaining Delta Woodside that Delta Woodside considered to be satisfactory.
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On April 21, 1999, Delta Woodside announced that Robert W. Humphreys was
assuming the position of president and chief executive officer of the Delta
Apparel Company division. The announcement stated that, after the planned
spin-off of the Delta Apparel Company operation, Mr. Humphreys would serve as
the president and chief executive officer of that new separate corporation.
At a meeting on June 24, 1999, the Delta Woodside board of directors
decided to terminate the process of attempting to sell a post-spin-off Delta
Woodside comprised solely of Delta Mills Marketing Company in line with its
previously-announced plan, because it had not received any satisfactory offer
for the business. The Board determined to continue to explore other strategies
to enhance stockholder value, including: (1) the purchase of the Duck Head
Apparel Company division and the Delta 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 would have been provided with substantial
cash to make acquisitions of Delta Woodside common stock or other businesses, or
for other purposes. Under the spin-off/recapitalization scenario, Delta
Woodside stockholders would have received, for their Delta Woodside common
shares, shares of each of the new spun-off apparel companies, cash and stock in
the remaining Delta Woodside. Also, additional shares of the remaining Delta
Woodside (representing more than 20% of the then outstanding shares of the
remaining Delta Woodside) would have been sold to members of management of Delta
Mills Marketing Company. Consummation of the spin-off/recapitalization
transaction was to be conditioned upon receiving a favorable vote of the Delta
Woodside stockholders.
Following this announcement, Delta Woodside, with the assistance of
Prudential, explored the possibility of Delta Mills, Inc. refinancing its
existing $150 million of 9 -5/8% Senior Notes with a larger issue of
indebtedness in order to effect the proposed recapitalization. During the time
frame of this examination, however, the interest rates payable by issuers of new
senior debt in the textile and apparel industries became higher than were deemed
acceptable by the Delta Woodside board of directors.
On August 20, 1999, Delta Woodside announced that, due to weakness in the
bond market, Delta Woodside believed that its previously announced
recapitalization/spin-off strategy was not feasible at that time. Delta
Woodside further announced that, because Delta Woodside believed that its
stockholders would best be served by separating the operating companies, Delta
Woodside did not plan to pursue the acquisition of the two apparel divisions by
its textile subsidiary, Delta Mills, Inc., at that time. The announcement also
stated that Delta Woodside was continuing to explore strategic alternatives to
accomplish the separation of its operating companies, and would announce
specific plans in the upcoming months.
On October 4, 1999, Delta Woodside announced that it planned to spin off to
the Delta Woodside stockholders its two apparel businesses (Delta Apparel
Company and Duck Head 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, Delta Apparel Company and Duck Head
Apparel Company). The announcement stated that, upon the complete transfer of
these functions or at the time of the spin-offs (as appropriate), the functions
then being performed at the Delta Woodside level would no longer need to be
performed at that level, and the executive officers of Delta Woodside would
resign their positions with Delta Woodside. The announcement stated that, upon
consummation of the spin-offs, Delta Mills Marketing Company would be Delta
Woodside's sole remaining business, and William Garrett, the head of the Delta
Mills Marketing Company division, would become President and Chief Executive
Officer of the remaining Delta Woodside. The announcement stated that, in
connection with the proposed spin-offs, significant equity incentives, in the
form of stock options and incentive stock awards for the new public companies'
stock, would be granted to the managements of the new companies. The
announcement stated that Delta Woodside could not determine at that time whether
the receipt of the apparel companies' stock would, or would not, be taxable to
the Delta Woodside stockholders for Federal income tax purposes, but that, at
the time that Delta Woodside had sufficient information to determine the
appropriate Federal income tax treatment of the spin-offs, it would promptly
provide the necessary income tax information to the Delta Woodside stockholders.
The announcement stated that Delta Woodside believed that, even if the spin-offs
were determined to be taxable for Federal income tax purposes, the spin-offs
would still be in the best interests of Delta Woodside's stockholders.
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REASONS FOR THE DELTA APPAREL DISTRIBUTION
Since the summer of 1998, Delta Woodside's board of directors has been
engaged in the process of exploring various means to maximize stockholder value.
The alternatives that the Delta Woodside Board has examined have included:
(a) a potential sale of the Duck Head Apparel Company division;
(b) a pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a sale of
the remaining company;
(c) a pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a
recapitalization of the remaining company that would involve a cash
distribution to Delta Woodside's stockholders by that remaining
company;
(d) a pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders;
(e) a pro rata taxable spin-off of Delta Woodside's two apparel businesses
to Delta Woodside's stockholders;
(f) a disproportionate tax-free spin-off of one of Delta Woodside's
apparel businesses to one of Delta Woodside's major stockholders
accompanied by a pro rata tax-free spin-off of the other apparel
business to all the other stockholders;
(g) a potential sale of the Delta Apparel Company business or assets;
(h) a purchase by Delta Mills, Inc. of the Delta Apparel Company and the
Duck Head 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:
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(1) Contractual constraints, which added significantly to the costs of
those alternatives that required additional financing to be incurred
by Delta Mills;
(2) Unfavorable debt market conditions, particularly for debt issuances by
textile and apparel companies;
(3) Insufficient buyer interest in any of Delta Woodside's businesses at
prices deemed sufficient by the Delta Woodside board;
(4) The Delta Woodside board's belief in the future enhanced stockholder
value available from separating Delta Woodside's businesses into
separate companies; and
(5) The Delta Woodside board's conclusion that the interests of Delta
Woodside and its stockholders would be adversely affected by any
decision of the Delta Woodside board to delay implementing the
separation of its businesses. The Board believes that continuing
uncertainty in the marketplace as to Delta Woodside's strategic plans
is likely to be damaging the relations of one or more of Delta
Woodside's businesses with certain of its respective suppliers and
customers, and that continuing uncertainty by the employees of Delta
Woodside and its subsidiaries as to Delta Woodside's strategic plans
could cause Delta Woodside or its subsidiaries to lose valuable
employees.
The Delta Woodside board, therefore, concluded that the best interests of
Delta Woodside and its stockholders would be furthered by separating into
distinct public companies Delta Woodside's three businesses (Delta Mills
Marketing Company, Duck Head Apparel Company and Delta Apparel Company), and
that the best method to accomplish this separation and thereby enhance
stockholder value that is available to Delta Woodside at this time is to effect
a pro rata spin-off to Delta Woodside's stockholders of each of Delta Woodside's
apparel businesses, whether that spin-off is tax-free or taxable for federal
income tax purposes.
In reaching this determination, the Delta Woodside Board took into account
its belief that the separation of Delta Woodside's three businesses will further
the following objectives, among others, and thereby enhance stockholder value:
(a) Permit the grant of equity incentives to the separate management of
each business, which incentives would not be affected by the results
of the other businesses and, therefore, would have excellent potential
to align closely the interests of that management with those of the
stockholders;
(b) Permit the elimination of certain existing corporate overhead expenses
that result from the current need to coordinate the operations of
three distinct businesses that have separate modes of operation and
markets;
(c) Eliminate the complaints of certain customers of Delta Mills Marketing
Company (which, as a supplier to those customers, has access to
certain of their competitive information) that a competitor of theirs
(Duck Head Apparel Company) is under common management with Delta
Mills Marketing Company;
(d) Permit each business to obtain, when needed, the best equity and debt
financing possible without being affected by the operational results
of the other businesses;
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(e) Permit each business to establish long-range plans geared toward the
expected cyclicality, competitive conditions and market trends in its
own line of business, unaffected by the markets, needs and constraints
of the other businesses;
(f) Promote a more streamlined management structure for each of the three
businesses, better able to respond quickly to customer and market
demands; and
(g) Permit the value of each of the three divisions to be more accurately
reflected in the equity market by separating the results of each
business from the other two businesses.
In reaching its conclusion, the Board also took into account the following
additional factors:
- The conclusion to be delivered to the Delta Woodside Board by a third
party as to the solvency of Delta Apparel at the time of the Delta
Apparel distribution;
- The financial statements of Delta Apparel set forth in this document
under the heading, "Unaudited Pro Forma Combined Financial
Statements", and at pages F-1 to F-19;
- The Delta Woodside board's knowledge of the business, operations,
assets and financial condition of Delta Apparel;
- Delta Apparel management's assessment of the prospects of Delta
Apparel;
- The current and prospective economic environment in which Delta
Apparel operates; and
- The terms of the distribution agreement and the tax sharing agreement.
This discussion of the information and factors considered by the Delta
Woodside board is not meant to be exhaustive but is believed to include the
material factors considered by the Delta Woodside board in authorizing the Delta
Apparel 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 Delta Apparel distribution, the Duck Head distribution
and related transactions are advisable and in the best interests of Delta
Woodside and its stockholders. In reaching its determination, the Delta
Woodside board took the various factors into account collectively and the Delta
Woodside board did not perform a factor-by-factor analysis.
DESCRIPTION OF THE DELTA APPAREL DISTRIBUTION
The distribution agreement among Delta Woodside, Delta Apparel and Duck
Head sets forth the general terms and conditions relating to, and the
relationship of the three corporations after, the Delta Apparel distribution.
For an extensive description of the distribution agreement, see the section of
this document found under the heading "Relationship Among Delta Apparel, Delta
Woodside and Duck Head--Distribution Agreement".
Delta Woodside plans to effect the Delta Apparel distribution on or about
March __, 2000 by distributing all of the issued and outstanding shares of Delta
Apparel common stock to the record holders of Delta Woodside common stock on the
record date for this transaction, which is February __, 2000. Delta Woodside
will distribute one share of Delta Apparel 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 Delta Apparel 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
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one-for-ten Delta Apparel distribution ratio and the number of shares of Delta
Woodside common stock outstanding on January __, 2000, Delta Woodside will
distribute approximately 2,386,000 shares of Delta Apparel common stock to
holders of Delta Woodside common stock, which will then constitute all of the
outstanding shares of Delta Apparel common stock. Delta Apparel 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 Delta Apparel
common stock and the rights of its holders, see the portion of this document
located under the heading "Description of Delta Apparel 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 Delta Apparel common stock to the registered holders of record who
will make arrangements to credit their customers' accounts with Delta Apparel
common stock. Delta Woodside anticipates that stockbrokers and banks generally
will credit their customers' accounts with Delta Apparel common stock on or
about March __, 2000.
If a holder of Delta Woodside common stock owns a number of shares of Delta
Woodside common stock that is not a whole multiple of ten and therefore would be
entitled to receive a fraction of a whole share of Delta Apparel common stock,
that holder will receive cash instead of a fractional share of Delta Apparel
common stock. The distribution agent will aggregate into whole shares the
fractional shares to be cashed out and sell them as soon as practicable in the
open market at then prevailing prices on behalf of those registered holders who
would otherwise be entitled to receive less than whole shares. These registered
holders will receive instead a cash payment in the amount of their pro rata
share of the total proceeds of those sales, less any brokerage commissions. The
distribution agent will pay the net proceeds from sales of fractional shares
based upon the average selling price per share of Delta Apparel common stock of
all of those sales, less any brokerage commissions. Delta Apparel expects the
distribution agent to make sales on behalf of holders who would receive a
fraction of a whole Delta Apparel common share in the Delta Apparel distribution
as soon as practicable after the Delta Apparel distribution date. None of Delta
Woodside, Delta Apparel or the distribution agent guarantees any minimum sale
price for those fractional shares of Delta Apparel common stock, and no interest
will be paid on the sale proceeds of those shares.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Delta Woodside has attempted to structure the Delta Apparel distribution
and the Duck Head distribution to qualify as tax-free spin offs for federal
income tax purposes under Section 355 of the Internal Revenue Code. Section 355
treats a spin-off as tax free if the conditions of that statute are satisfied.
One of these conditions is that the transaction is "not used principally as a
device for the distribution of the earnings and profits" of Delta Woodside,
Delta Apparel or Duck Head.
Upon the request of a corporation that desires to effect a spin-off, the
IRS will issue a private letter ruling that the proposed spin-off will be
treated as tax-free under Section 355 so long as various conditions specified by
the IRS are satisfied. Delta Woodside believes that, with the exception of one
condition, the Delta Apparel distribution and the Duck Head distribution satisfy
all the conditions for Delta Woodside to be able to obtain a private letter
ruling from the IRS that the distributions are tax-free spin-offs under Section
355.
The one IRS private letter ruling condition that Delta Woodside is unable
to satisfy relates to the statutory requirement mentioned above that the
transaction not be used principally as a device for the distribution of earnings
and profits. The IRS private letter ruling condition is that each
non-institutional beneficial owner of at least 5% of the outstanding Delta
Woodside shares represent to the IRS that he, she or it has no plan or intention
to sell, exchange, transfer by gift or otherwise dispose of any stock in Delta
Woodside, Delta Apparel or Duck Head after the Delta Apparel distribution and
the Duck Head distribution.
Each of the non-institutional beneficial owners of at least 5% of the
outstanding Delta Woodside shares, other than Bettis C. Rainsford (a director of
Delta Woodside, Delta Apparel and Duck Head), has informed Delta Woodside that
he, she or it is willing to provide the necessary representation to the IRS.
Mr. Rainsford, however, has informed Delta Woodside that he is unwilling to
provide the required representation.
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As a result, Delta Woodside is not eligible to receive a private letter
ruling from the IRS that the Delta Apparel distribution and the Duck Head
distribution qualify as tax-free spin-offs under Section 355.
The fact that Delta Woodside is not eligible to receive a private letter
ruling from the IRS on the issue does not, however, in and of itself, mean that
the distributions do not qualify as tax-free spin-offs under Section 355.
Whether the Delta Apparel distribution and the Duck Head distribution qualify
under Section 355 as tax-free spin-offs will depend on whether the criteria in
Section 355 and the relevant rules and regulations of the IRS are satisfied.
Delta Woodside believes, based on the information currently available to
it, that the only Section 355 condition that the IRS may view as not satisfied
by the Delta Apparel distribution and the Duck Head distribution is the one
mentioned above that the distributions not be "used principally as a device for
the distribution of the earnings and profits" of Delta Woodside, Delta Apparel
or Duck Head. Whether or not the distributions satisfy this condition will
depend primarily on events and circumstances that may or may not occur after the
Delta Apparel distribution and the Duck Head distribution and over which Delta
Woodside, Delta Apparel and Duck Head will have no control. In particular, in
some circumstances one or more sales or other dispositions by any greater than
5% beneficial owner of Delta Woodside, Delta Apparel or Duck Head shares after
the distributions may indicate to the IRS that the distributions were "used
principally as a device for the distribution of the earnings and profits" of
Delta Woodside, Delta Apparel or Duck Head, whereas in other circumstances any
sales or dispositions of this nature may not. Delta Woodside cannot at this
time predict what all of its 5% or greater beneficial owners will do with
respect to their Delta Woodside shares, Delta Apparel shares or Duck Head shares
after the distributions and, therefore, is not in a position now to inform its
stockholders as to the federal income tax consequences of the Delta Apparel
distribution and the Duck Head distribution.
Notwithstanding this uncertainty, Delta Woodside will make a good faith
determination, as soon as practicable and in any event prior to January 31,
2001, on the basis of all of the facts then known to it, and advise all of its
stockholders who receive Delta Apparel shares in the Delta Apparel distribution
and Duck Head shares in the Duck Head distribution whether or not in Delta
Woodside's opinion the Delta Apparel distribution and the Duck Head distribution
should be treated as tax-free spin-offs under Section 355.
Each holder of Delta Woodside shares that receives Delta Apparel shares and
Duck Head shares in the distribution must attach a descriptive statement about
the distributions to his, her or its federal income tax return for the year in
which the distributions occur. Delta Woodside will provide the required
information to each holder of Delta Woodside shares as of the record date for
the distributions.
Material Federal Income Tax Consequences if the Delta Apparel Distribution
---------------------------------------------------------------------------
and the Duck Head Distribution Qualify as Tax-Free Spin-Offs under Section
---------------------------------------------------------------------------
355
---
If the Delta Apparel distribution and the Duck Head distribution qualify as
tax-free spin-offs under Section 355, then:
1. The Delta Woodside stockholders who receive those shares will not recognize
gain upon either of the distributions, except as described immediately
below with respect to fractional shares.
2. Cash, if any, received by a Delta Woodside stockholder instead of a
fractional share of Delta Apparel common stock or Duck Head common stock
will be treated as received in exchange for that fractional share. That
stockholder will recognize gain or loss to the extent of the difference
between his, her or its tax basis in that fractional share and the amount
received for that fractional share, and, provided that fractional share is
held as a capital asset, the gain or loss will be capital gain or loss.
3. Each Delta Woodside stockholder will be required to apportion his, her or
its tax basis in the stockholder's Delta Woodside shares between the Delta
Woodside shares retained and the Delta Apparel shares and Duck
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Head shares received, with this apportionment to be made in proportion to
the shares' relative fair market values for federal income tax purposes at
the date of the distributions.
4. The Delta Woodside stockholder's holding period for the Delta Apparel
shares and the Duck Head shares received in the distributions will be the
same as the stockholder's holding period for the Delta Woodside shares with
respect to which the Delta Apparel distribution and the Duck Head
distributions are made.
5. No gain or loss will be recognized by Delta Woodside with respect to the
Delta Apparel distribution or the Duck Head distribution, except to the
extent of any excess loss accounts or deferred intercompany gains. Delta
Woodside anticipates that in connection with the distributions Delta
Woodside will recognize gain as a result of excess loss accounts or
deferred intercompany gains, but that this gain will be offset by Delta
Woodside's net operating losses.
Material Federal Income Tax Consequences if the Delta Apparel Distribution
---------------------------------------------------------------------------
and the Duck Head Distribution Do Not Qualify as Tax-Free Spin-Offs under
---------------------------------------------------------------------------
Section 355
-----------
If the Delta Apparel distribution and the Duck Head distribution do not
qualify as tax-free spin-offs under Section 355, then the following are the
material federal income tax consequences to each participating Delta Woodside
stockholder and to Delta Woodside:
1. Each Delta Woodside stockholder will recognize dividend income to the
extent of the lesser of (a) the value of the Delta Apparel shares and the
Duck Head shares received (together with any cash received for any
fractional share) or (b) the stockholder's pro rata share of the
accumulated earnings and profits of Delta Woodside for federal income tax
purposes through the end of fiscal year 2000. This dividend income will not
reduce any Delta Woodside stockholder's basis in his, her or its Delta
Woodside shares.
a. Delta Woodside will advise each Delta Woodside stockholder, as soon as
practicable and in any event prior to January 31, 2001, of the fair
market value for federal income tax purposes of the Delta Apparel
shares and the Duck Head shares received by them in the distributions.
Because those values for federal income tax purposes will depend on
the trading prices of the Delta Apparel shares and the Duck Head
shares around the time of the distribution, Delta Woodside is not able
at this time to predict what those values will be.
b. Delta Woodside's accumulated earnings and profits through fiscal year
1999 were approximately $18.2 million (approximately $0.76 per Delta
Woodside share). The amount, if any, of Delta Woodside's earnings and
profits for fiscal year 2000 cannot be determined at this time. Delta
Woodside will advise each Delta Woodside stockholder, as soon as
practicable and in any event prior to January 31, 2001, of that
stockholder's pro rata share of Delta Woodside's accumulated earnings
and profits through fiscal year 2000.
2. Any value of the Delta Apparel shares and Duck Head 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 Delta Apparel shares and
Duck Head shares (together with any cash received for any fractional share)
in excess of the Delta Woodside stockholder's basis in his, her or its
Delta Woodside shares will be taxable to the Delta Woodside stockholder as
gain, which will be capital gain if the Delta Woodside stock is held as a
capital asset. This capital gain will be taxable as either long term or
short term capital gain, depending upon the stockholder's holding period
for those Delta Woodside shares.
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3. The Delta Woodside stockholder's tax basis in the Delta Apparel shares and
the Duck Head 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 Delta Apparel distribution and the Duck Head 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 Delta Apparel shares and the
Duck Head shares distributed over their tax bases to Delta Woodside. Delta
Woodside believes that any federal income tax liability to it resulting
from the Delta Apparel distribution and the Duck Head 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 Delta Apparel distribution or the Duck Head 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 Delta Apparel
shares or the Duck Head shares, which will be the federal income tax values
of the Delta Apparel shares and the Duck Head shares for purposes of this
calculation.
Net Operating Loss Carry Forwards
-------------------------------------
As of July 3, 1999, Delta Woodside had net operating loss carry forwards,
for federal income tax purposes, of approximately $68 million. Delta Woodside
believes that, following the Delta Apparel distribution and the Duck Head
distribution, approximately $56 million of this net operating loss carry forward
will remain as a tax attribute of Delta Woodside ($10 million of which will be
subject to limitation under the separate return limitation rules), approximately
$9 million will be a tax attribute of Delta Apparel and approximately $3 million
will be a tax attribute of Duck Head.
Prior to the Delta Apparel distribution and the Duck Head distribution, the
Delta Apparel Company division and the Duck Head 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 Delta Apparel distribution and the Duck Head
distribution each of Delta Apparel and Duck Head carries "deferred tax assets"
on its balance sheet to reflect, among other matters, the financial impact of
their respective hypothetical separate company net operating loss carry
forwards. For federal income tax purposes, tax attributes, such as net
operating loss carry forwards, remain with the corporate entity, not the
division, that generated them. Therefore, with the Delta Apparel distribution
and the Duck Head distribution, tax attributes, including the Delta Woodside
consolidated federal net operating loss carry forward, will be allocated among
Delta Woodside, Delta Apparel and Duck Head in accordance with the federal
consolidated return regulations.
The pro forma balance sheet of Delta Apparel that is included under the
heading "Unaudited Pro Forma Combined Financial Statements" reflects Delta
Apparel's expected allocable portion of the pre-distribution Delta Woodside
consolidated federal net operating loss carry forward.
THE FOREGOING IS A GENERAL DISCUSSION AND IS NOT INTENDED TO SERVE AS
SPECIFIC ADVICE FOR ANY PARTICULAR DELTA WOODSIDE STOCKHOLDER, SINCE THE TAX
CONSEQUENCES OF THE DELTA APPAREL DISTRIBUTION AND THE DUCK HEAD 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 DELTA APPAREL DISTRIBUTION AND THE DUCK HEAD DISTRIBUTION.
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ACCOUNTING TREATMENT
The Delta Apparel distribution and the Duck Head distribution will be
accounted for in accordance with United States generally accepted accounting
principles. Accordingly, the Delta Apparel distribution will be accounted for
by Delta Woodside based on the recorded amounts of the net assets being spun-off
after reduction, if appropriate, for any indicated impairment of value. Delta
Woodside will charge directly to equity as a dividend the historical cost
carrying amount of the net assets of Delta Apparel.
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TRADING MARKET
As of the Delta Apparel record date, all of the outstanding shares of Delta
Apparel were owned by an indirect wholly-owned subsidiary of Delta Woodside. As
of that date, there were approximately 2,500 record holders of the common stock
of Delta Woodside who will be entitled to participate in the Delta Apparel
distribution.
Before the Delta Apparel distribution, there has been no trading market for
Delta Apparel common stock, and there can be no assurances that an active
trading market will develop or be sustained in the future. Before the Delta
Apparel distribution, Delta Apparel will apply to The American Stock Exchange to
approve shares of Delta Apparel's common stock for listing, subject to official
notice of issuance. If this application is not approved, Delta Apparel expects
that the Delta Apparel shares will trade in the over-the-counter market. Delta
Apparel also anticipates that a "when-issued" trading market will develop in its
common stock before the Delta Apparel distribution date.
Delta Apparel cannot predict the prices at which its common stock may
trade, either before the Delta Apparel distribution on a "when-issued" basis or
after the Delta Apparel 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 Delta Apparel 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 Delta Apparel common stock. Many factors may influence
those prices. These factors may include, among others, the depth and liquidity
of the market for the Delta Apparel shares, quarter-to-quarter variations in
Delta Apparel'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 Delta
Apparel shares may trade, see the section of this document found under the
heading "Risk Factors".
The Delta Apparel shares received in the Delta Apparel distribution will be
freely transferable, except for those shares received by any person who may be
deemed to be a Delta Apparel "affiliate" within the meaning of Rule 144 under
the Securities Act of 1933. Persons who may be deemed to be Delta Apparel
affiliates after the Delta Apparel 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, Delta Apparel.
Delta Apparel affiliates may sell their Delta Apparel common stock received in
the Delta Apparel distribution only under an effective registration statement
under the Securities Act of 1933 or under an exemption from registration under
that Act.
At the time of the Delta Apparel distribution, the only outstanding equity
securities of Delta Apparel will be the approximately 2,386,000 shares being
distributed. Delta Apparel anticipates that, during the first six months after
the Delta Apparel 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. Delta Apparel may grant additional stock options and
incentive stock awards during that period to other employees of Delta Apparel
and may grant additional stock options and additional stock awards in the future
to its executive officers and other employees. Delta Apparel shares issued upon
exercise of stock options granted under the stock option plan and awards granted
under the incentive stock award plan will be registered on a Registration
Statement on Form S-8 under the Securities Act of 1933 and will therefore
generally be freely transferable under the securities laws, except by affiliates
as described above. See "Interests of Directors and Executive Officers in the
Delta Apparel Distribution - Receipt of Delta Apparel Stock Options and Delta
Apparel Incentive Stock Awards".
Except as described above and except for the rights agreement which is
discussed below under the heading "Description of Delta Apparel Capital
Stock-Rights Plan", Delta Apparel will not have any other securities outstanding
as of or immediately after the Delta Apparel distribution, and Delta Apparel has
not entered into any agreement or otherwise committed to register any Delta
Apparel shares under the Securities Act of 1933 for sale by security holders.
34
<PAGE>
RELATIONSHIPS AMONG DELTA APPAREL,
DELTA WOODSIDE AND DUCK HEAD
This section describes the primary agreements among Delta Apparel, Delta
Woodside and Duck Head that will define the ongoing relationships among them and
their subsidiaries and affiliates after 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. If there is a
discrepancy between this summary and those agreements, you should rely on the
information in those agreements. Delta Apparel 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
Delta Apparel has entered into a distribution agreement with Delta Woodside
and Duck Head as of January __, 2000. The distribution agreement provides for
the procedures for effecting the Delta Apparel distribution and the Duck Head
distribution. For this purpose, as summarized below, the distribution agreement
provides for the principal corporate transactions and procedures for separating
the Delta Apparel Company division's business and the Duck Head Apparel Company
division's business from the rest of Delta Woodside. Also, as summarized below,
the distribution agreement defines the relationships among Delta Apparel, Delta
Woodside and Duck Head after the Delta Apparel distribution with respect to,
among other things, indemnification arrangements and employee benefit
arrangements.
Intercompany reorganization
----------------------------
The distribution agreement provides, that, no later than the time the Delta
Apparel distribution occurs, Delta Woodside, Delta Apparel and Duck Head will
have caused the following to have been effected:
(a) Delta Woodside will have contributed, as contributions to capital, all
net debt amounts owed to it by the corporations that previously had
conducted the Delta Apparel Company division's business and the Duck
Head Apparel Company division's business.
(b) All the assets used in the operations of the Delta Apparel Company
division's business will have become owned by Delta Apparel or a
subsidiary of Delta Apparel, including the sale by Delta Mills to
Delta Apparel of the Rainsford Plant, located in Edgefield, SC, to
Delta Apparel as described below under the subheading "Other
Relationships".
(c) Delta Apparel will have assumed all of the liabilities of the Delta
Apparel Company division of Delta Woodside, and will have caused all
holders of indebtedness for borrowed money that are part of the
assumed Delta Apparel liabilities and all lessors of leases that are
part of the assumed Delta Apparel liabilities to release all obligors
(other than Delta Apparel or any of its subsidiaries) of that
indebtedness and under those leases.
(d) All the assets used in the operations of the Duck Head Apparel Company
division's business will have become owned by Duck Head or a
subsidiary of Duck Head.
(e) Duck Head will have assumed all of the liabilities of the Duck Head
Apparel Company division of Delta Woodside, and will have caused all
holders of indebtedness for borrowed money that are part of the
assumed Duck Head liabilities and all lessors of leases that are part
of the assumed Duck Head liabilities to release all obligors (other
than Duck Head or any of its subsidiaries) of that indebtedness and
under those leases.
35
<PAGE>
(f) Delta Woodside will have caused all holders of indebtedness for
borrowed money and all lessors of leases that are not part of the
liabilities assumed by Delta Apparel or the liabilities assumed by
Duck Head to release all obligors (other than Delta Woodside or its
remaining subsidiaries) of that indebtedness and under those leases.
Indemnification
---------------
Each of Delta Woodside, Delta Apparel and Duck Head has agreed to indemnify
each other and their respective directors, officers, employees and agents
against any and all liabilities and expenses incurred or suffered that arise out
of or pertain to:
(a) any breach of the representations and warranties made by it in the
distribution agreement;
(b) any breach by it of any obligation under the distribution agreement;
(c) the liabilities assumed or retained by it under the distribution
agreement; or
(d) any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission of a material fact contained in any of
its disclosure documents filed by it with the SEC, except insofar as
the misstatement or omission was based upon information furnished to
the indemnifying party by the indemnified party.
Employee Matters
-----------------
Delta Woodside will cause those individuals who are employed by the Delta
Apparel division to become employees of Delta Apparel, Delta Apparel will assume
the accrued employee benefits of these employees and Delta Woodside will cause
the account balance of each of these employees in any and all of Delta
Woodside's employee benefit plans (other than the Delta Woodside stock option
plan) to be transferred to a comparable employee benefit plan of Delta Apparel.
Intercompany Accounts
----------------------
Amounts owed by Delta Apparel to Delta Mills for yarn previously sold by
Delta Mills to Delta Apparel will be paid in the ordinary course of business.
As of October 2, 1999, these amounts aggregated approximately $5.5 million.
Other than any amounts owed under the tax sharing agreement, generally all
other intercompany receivable, payable and loan balances existing as of the time
of the Delta Apparel distribution between Delta Apparel, on the one hand, and
Duck Head and Delta Woodside, on the other hand, will be deemed to have been
paid in full by the party or parties owing the relevant obligation.
Transaction Expenses
---------------------
Generally, all costs and expenses incurred in connection with the Delta
Apparel distribution, the Duck Head distribution and related transactions shall
be paid by Delta Woodside; provided that the holders of the Delta Woodside
shares shall pay their own expenses, if any, incurred in connection with the
Delta Apparel distribution and the Duck Head distribution.
36
<PAGE>
TAX SHARING AGREEMENT
Delta Apparel will enter into a tax sharing agreement with Delta Woodside
and Duck Head that will describe, among other things, each company's rights and
obligations relating to tax payments and refunds for periods before and after
the Delta Apparel 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 Delta Apparel and its subsidiaries (which this document refers to
as the Delta Apparel tax group), Delta Woodside and its subsidiaries after the
Delta Apparel distribution and the Duck Head distribution (which this document
refers to as the Delta Woodside tax group) and Duck Head and its subsidiaries
(which this document refers to as the Duck Head 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 Delta Apparel
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 Delta Apparel
distribution, Delta Woodside shall be responsible for paying any
federal income taxes, and shall be entitled to any refund of or
saving in federal income taxes, with respect to the Delta
Woodside consolidated federal income tax group.
- With respect to state income, franchise or similar taxes:
(a) For each taxable year that ends prior to the Delta Apparel
distribution, each corporation that is a member of the Delta
Woodside tax group, the Duck Head tax group or the Delta Apparel
tax group shall be responsible for paying any increase in those
state taxes, and shall be entitled to receive the benefit of any
refund of or saving in those state taxes, that results from any
tax proceeding with respect to any returns relating to those
state taxes of that corporation (or any predecessor by merger of
that corporation).
(b) For the taxable period ending on the date of the Delta Apparel
distribution, each corporation that is a member of the Delta
Woodside tax group, the Duck Head tax group or the Delta Apparel
tax group shall be responsible for paying any of those state
taxes, and shall be entitled to any refund of or saving in those
state taxes, with respect to that corporation (or any predecessor
by merger of that corporation).
- With respect to federal employment taxes
(a) Delta Woodside shall be responsible for the federal employment
taxes payable with respect to the compensation paid, whether
before, on or after the date of the Delta Apparel distribution,
by any member of the Delta Woodside federal income tax
consolidated group for any part of the period ending on the date
of the Delta Apparel distribution or by any member of the Delta
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 Delta Apparel or the
business of Duck Head.
37
<PAGE>
(b) 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 Delta Apparel distribution, by any
member of the Delta Woodside federal income tax consolidated
group for any part of the period ending on the date of the Duck
Head distribution or by any member of the Duck Head tax group for
any period after that date to all individuals who are past or
present employee of the business of Duck Head.
(c) 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 part of the period ending on the date
of the Delta Apparel distribution or by any member of the Delta
Apparel tax group for any period after that date to all
individuals who are past or present employee of the business of
Delta Apparel.
- 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 Delta
Apparel or the business of Duck Head;
(b) 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; and
(c) 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.
- 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 groupthat 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. 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.
Under the tax sharing agreement, the Delta Apparel tax group and the Duck
Head tax group have irrevocably designated Delta Woodside as their agent for
purposes of taking a broad range of actions in connection with taxes for
pre-distribution periods. Those actions include the settlement of tax audits,
other tax proceedings and disputes arising out of the interpretation of the tax
sharing agreement. These arrangements may result in conflicts of interest among
Delta Apparel, Delta Woodside and Duck Head.
Under the tax sharing agreement, the Delta Apparel tax group, the Delta
Woodside tax group and the Duck Head 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.
38
<PAGE>
OTHER RELATIONSHIPS
Boards of Directors of Delta Apparel, Delta Woodside and Duck Head
---------------------------------------------------------------------------
The following directors of Delta Apparel are also directors of Delta
Woodside and Duck Head: 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 Delta Apparel, on the
one hand, and either Delta Woodside or Duck Head, on the other hand, these
directors could be deemed to have a conflict of interest with respect to that
issue. In that circumstance, Delta Apparel anticipates that it will proceed in
a manner that is determined by a majority of those members of Delta Apparel's
board of directors who are not also members of the board of directors of Delta
Woodside or the board of directors of Duck Head (as applicable).
Sales to and Purchases from Delta Woodside or Duck Head of Goods or
- -------------------------------------------------------------------------------
Manufacturing Services
- -----------------------
In the ordinary course of Delta Apparel's business, Delta Apparel has
produced T-shirts for Duck Head, purchased T-shirts from Duck Head and purchased
yarn and fabrics from Delta Mills. The following table shows these transactions
for the last three fiscal years and for the first three months of fiscal year
2000:
<TABLE>
<CAPTION>
(in thousands of dollars)
Fiscal year First quarter
------------ ----------------
Of
--
1997 1998 1999 Fiscal year 2000
------ ------ ---- ----------------
<S> <C> <C> <C> <C>
Sold to Duck Head 403 156 481 6
Purchased from Duck Head 653 132 0 0
Purchased from Delta Mills(1) 26,456 17,683 0 0
<FN>
________________________________________
(1) For purposes of this table, yarn produced by the Rainsford Plant and
used by Delta Apparel, prior to the transfer in April 1998 of
operational control of the Rainsford Plant, is treated as sold by Delta
Mills to Delta Apparel.
</TABLE>
Prior to the end of March 1997, all yarn sales between Delta Mills and
Delta Apparel were at a price equal to cost plus $0.01 per pound. Since March
1997, all of these yarn sales have been made at prices deemed by Delta Apparel
to approximate market value. In connection with these pricing policies on yarn
sales, through March 1997 Delta Apparel maintained with Delta Mills a
non-interest bearing deposit which aggregated $11.2 million at June 29, 1996.
Effective May 7, 1997, Delta Woodside adopted a written policy statement
governing the pricing of intercompany transactions. Among other things, this
policy statement provides that all intercompany sales and purchases will be
settled at market value and terms.
All of the T-shirt and fabric sales were made at prices deemed by Delta
Apparel to approximate market value.
Delta Apparel anticipates that any future sales or purchases to or from
Duck Head or Delta Woodside in the future will not be material.
39
<PAGE>
Purchase of Rainsford Plant
------------------------------
The Rainsford Plant manufactures yarn for use in knitting operations. In
April 1998, control of the operations and management of the Rainsford Plant in
Edgefield, South Carolina was transferred from Delta Mills to Delta Apparel,
which converted the assets to produce yarn products for use in Delta Apparel's
products. A condition to consummation of the Delta Apparel distribution is the
sale by Delta Mills to Delta Apparel of the Rainsford Plant and related
inventory. Delta Apparel anticipates that the purchase price for these assets
will be cash equal to the assets' net book value. As required by the terms of
the 9 5/8% Senior Notes of Delta Mills, Delta Mills will provide to the holders
of those Senior Notes an opinion of an investment banking firm as to the
fairness from a financial point of view to those holders of the terms of this
sale.
Management Services
--------------------
Delta Woodside has provided various services to the operating divisions of
its subsidiaries, including the Delta Mills Marketing Company, Duck Head Apparel
Company and Delta Apparel Company divisions. These services include payroll,
accounting, internal audit, employee benefits and services, purchasing, cotton
procurement, management information services and tax accounting. These services
have been charged on the basis of Delta Woodside's cost and allocated to the
various divisions based on employee headcount, computer time, projected sales
and other criteria.
During fiscal years 1997, 1998, and 1999, Delta Woodside charged the Delta
Apparel Company division $1,138,000, $1,048,000 and $1,135,000, respectively,
for these services.
Other
-----
For further information on transactions with affiliates by Delta Apparel,
see Note 8 to the Combined Financial Statements of Delta Apparel under "Index
to Financial Statements" in this document, which information is incorporated
into this section by reference.
Except as described above with respect to yarn sales, any transaction
entered into between Delta Apparel and any officer, director, principal
stockholder or any of their affiliates has been on terms that Delta Apparel
believes are comparable to those that would be available to Delta Apparel from
non-affiliated persons.
40
<PAGE>
CAPITALIZATION
The following table sets forth at October 2, 1999: (1) the capitalization
of Delta Apparel, and (2) the pro forma capitalization of Delta Apparel to give
effect to the transactions described under the portion of this document found
under the heading "The Delta Apparel Distribution". You should read this table
in conjunction with the information located under the heading "Unaudited Pro
Forma Combined Financial Statements" and the condensed combined financial
statements of Delta Apparel and related notes as of October 2, 1999 and for the
three months ended October 2, 1999, included on pages 42-47 and F-16 to F-19,
respectively, of this document.
<TABLE>
<CAPTION>
As of
October 2, 1999
----------------------
Actual ProForma
----------- ---------
(Dollars in thousands)
<S> <C> <C>
Long-term debt; including current maturities
Industrial revenue bonds $ 279 ---
Revolver loan -- 3,952
Five year term loan -- 10,000
Due to related parties 120,307 5,000
----------- ---------
Total long-term debt (including current maturities) 120,586 18,952
Less current maturities (90,129) (7,000)
----------- ---------
Total long-term debt (excluding current maturities) 30,457 11,952
Stockholders' equity (deficit)
Preferred stock, 2,000,000 shares authorized; none
issued and outstanding -- --
Common stock, $0.01 par value; 7,500,000 shares
authorized; 2,386,000 shares issued and
outstanding -- 24
Additional paid-in capital -- 39,014
Divisional deficit (62,596) --
----------- ---------
Total stockholders' equity (deficit) (62,596) 39,038
----------- ---------
Total capitalization $ (32,139) 50,990
=========== =========
</TABLE>
41
<PAGE>
UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma combined financial information has been
prepared from and should be read in conjunction with the historical financial
statements and the notes to those statements of Delta Apparel included in this
document at pages F-1 to F-19.
The unaudited pro forma combined balance sheet has been prepared to give
effect to the following transactions as if they occurred on October 2, 1999:
- The contribution to equity of the intercompany debt owed by Delta
Apparel to Delta Woodside and the distribution of Delta Apparel's
common shares to the existing stockholders of Delta Woodside; and
- The refinancing of intercompany debt.
The unaudited pro forma combined statements of operations for the year
ended July 3, 1999 and for the three months ended October 2, 1999 give effect to
the following transactions as if they had occurred at the beginning of the
fiscal year ended July 3, 1999:
- The increased interest expense on borrowings utilizing outside
financing;
- The elimination of the intercompany management fees and the incurrence
by Delta Apparel of costs to replace services previously performed by
Delta Woodside; and
- The distribution of Delta Apparel common stock to the existing Delta
Woodside stockholders.
Delta Apparel believes that the assumptions used provide a reasonable basis
on which to present the unaudited pro forma combined financial statements.
Delta Apparel is providing the unaudited pro forma combined financial statements
to you for informational purposes only. You should not construe them to be
indicative of Delta Apparel's results of operations or financial position had
the transactions and events described above been consummated on the dates
assumed. These pro forma combined financial statements also do not project the
results of operations or financial position for any future period or date.
42
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
OCTOBER 2, 1999
PRO FORMA PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
------------ ------------ -------------
(in thousands, except for share data)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 102 102
Accounts and other receivables 16,268 16,268
Inventories 25,716 25,716
Income taxes receivable 208 208
Prepaid expenses and other current assets 959 959
------------ ------------
Total current assets 43,253 43,253
Property, plant and equipment, net 29,880 29,880
Other assets 197 197
------------ ------------
73,330 73,330
============ ============
LIABILITIES AND STOCKHOLDERS'/DIVISIONAL EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt $ 239 1,761 (2) 2,000
Accounts payable and accrued liabilities 13,214 13,214
Due to related parties 89,890 (84,890) (1) (2) 5,000
Deferred tax liabilities 516 516
------------ ------------ ------------
Total current liabilities 103,859 (83,129) 20,730
Due to related parties 30,457 (30,457) (1) --
Long-term debt -- 11,952 (2) 11,952
Other long-term liabilities 498 498
Deferred tax liabilities 1,112 1,112
------------ ------------ ------------
Total liabilities 135,926 (101,634) 34,292
STOCKHOLDERS'/DIVISIONAL EQUITY (DEFICIT)
Preferred Stock, 2,000,000 shares authorized; none issued
and outstanding -- --
Common Stock, $0.01 par value; 7,500,000 shares
authorized; 2,386,000 shares issued and outstanding -- 24 (1) 24
Additional paid-in capital -- 39,014 (1) 39,014
Divisional deficit (62,596) 62,596 (1) --
------------ ------------ ------------
Total stockholders'/divisional equity (deficit) (62,596) 101,634 39,038
------------ ------------ ------------
$ 73,330 -- 73,330
============ ============ ============
</TABLE>
See notes to unaudited pro forma combined financial statements.
43
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
OCTOBER 2, 1999
(in thousands of dollars, unless otherwise noted)
The following is a summary of the adjustments reflected in the unaudited pro
forma combined balance sheet:
1) To reflect the contribution to equity of intercompany debt owed by
Delta Apparel to Delta Woodside totaling $115,347 and the distribution
of 2,386,000 Delta Apparel common shares to existing stockholders of
Delta Woodside.
2) To reflect the replacement of the intercompany debt with outside
financing totaling $13,952.
44
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 3, 1999
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
(in thousands, except for share data)
Net sales $ 106,779 106,779
Cost of goods sold (101,125) (101,125)
------------ ------------
Gross profit 5,654 5,654
Selling, general and administrative expenses (10,940) (10,940)
Intercompany management fees (1,135) 585 (2) (550)
Provision for bad debt (1,645) (1,645)
Impairment charges (1,415) (1,415)
Other expenses (221) (221)
------------ ------------ ------------
Operating loss (9,702) 585 (9,117)
Interest (income) expense:
Interest expense, net (121) (2,463) (1) (2,584)
Intercompany interest expense (9,457) 9,457 (1) ---
------------ ------------ ------------
(9,578) 6,994 (2,584)
------------ ------------ ------------
Loss before income taxes (19,280) 7,579 (11,701)
Income tax expense (benefit) (797) (797)
------------ ------------
Net loss $ (18,483) 7,579 (10,904)
============ ============ ============
Basic and diluted net loss per share $(4.57)
============
Weighted average shares outstanding used in
basic and diluted per share calculation (3) 2,386,000
============
</TABLE>
See notes to unaudited pro forma combined financial statements.
45
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 2, 1999
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------ ------------ ------------
(in thousands, except for share data)
<S> <C> <C> <C> <C>
Net sales $ 28,659 28,659
Cost of goods sold (24,966) (24,966)
------------ ------------
Gross profit 3,693 3,693
Selling, general and administrative expenses (1,881) (1,881)
Intercompany management fees -- (81) (2) (81)
Provision for bad debts (24) (24)
Other expenses (11) (11)
------------ ------------ ------------
Operating income 1,777 (81) 1,696
Interest (income) expense:
Interest expense, net (6) (418) (1) (424)
Intercompany interest expense (2,207) 2,207 (1) --
------------ ------------ ------------
(2,213) 1,789 (424)
------------ ------------ ------------
Income (loss) before income taxes (436) 1,708 1,272
Income taxes (benefit) 23 23
------------ ------------
Net income (loss) $ (459) 1,708 1,249
============ ============ ============
Basic and diluted net income per share $ 0.52
============
Weighted average shares outstanding used in
basic and diluted per share calculation (3) 2,386,000
============
</TABLE>
See notes to unaudited pro forma combined financial statements.
46
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 3, 1999 AND THE THREE MONTHS ENDED OCTOBER 2,
1999
(in thousands of dollars, unless otherwise noted)
The following is a summary of the adjustments reflected in the unaudited pro
forma combined statements of operations:
1) To reflect interest expense on new bank borrowings of $10,000 under the
term loan and amounts outstanding under the revolver loan at an interest
rate of 10.0% and 9.5%, respectively. Also, to reflect the elimination of
intercompany interest expense for the quarter ended October 2, 1999 and the
year ended July 3, 1999 totaling $2,207 and $9,547, respectively, on the
intercompany debt owed by Delta Apparel to Delta Woodside.
2) To eliminate intercompany management fees for the three month period ended
October 2, 1999 and the year ended July 3, 1999 of $0, and $1,135,
respectively, that were charged by Delta Woodside and to replace these fees
with payroll and purchasing administrative expenses, director fees, SEC
reporting expenses, software expenses and audit fees totaling $550
annualized.
3) To reflect earnings per share based on weighted average shares outstanding
assuming a distribution of one share of Delta Apparel common stock for
every ten shares of Delta Woodside common stock owned on the record date.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with Delta
Apparel'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
Fiscal year 1995 was the last full year that Delta Apparel achieved an
operating profit. Business operations were negatively impacted over the
following several years as Delta Apparel closed its United States sewing plants
and moved its sewing operations off shore to lower wage countries.
Most competitors of Delta Apparel also moved sewing operations off-shore
during this same period. As a result, selling prices for T-shirts started a
decline that continues today. For example, the average sale price of a dozen of
Delta Apparel's basic T-shirt dropped approximately 31% from fiscal year 1996 to
the first quarter of fiscal year 2000. Sales prices have dropped in response to
actual or perceived lower sewing costs and a general decline in the cost of raw
materials, particularly cotton. Delta Apparel believes that the rate of price
declines is likely to slow as the industry completes its move of production
facilities off-shore and to the extent that raw material price declines slow or
are reversed.
Delta Apparel's shift in manufacturing locations led to losses on the
disposal of fixed assets associated with the closing of United States sewing
plants. Delta Apparel also made the decision in fiscal 1998, based on
management's assessment of expected future cash flows and economic conditions,
to take an impairment charge of $7.5 million to write-off the excess of cost
over net assets acquired.
The industry trends have required Delta Apparel to develop the
infrastructure to manage an off-shore manufacturing system and to implement new
information systems to respond to the need for additional data. Delta Apparel
has also modernized its textile manufacturing facility in Maiden, North
Carolina. During the last eighteen months, Delta Apparel believes that it
strengthened its management team as well, by bringing in a new Chief Executive
Officer and a new Chief Financial Officer.
Delta Apparel believes that its investments in off-shore sewing operations
and modernization of its domestic fabric manufacturing operations provide it
with a cost structure that will allow it to compete effectively in the
activewear T-shirt markets. Additionally, Delta Apparel believes that its
enterprise resource planning system gives it competitive advantages in
production, inventory control, invoicing, accounts receivable collection and
customer service.
Delta Apparel has developed a three-year business plan that attempts to
take advantage of the investments made and the core competencies believed to
exist in its business. This plan includes a balanced marketing approach that
targets three channels of distribution, namely sales to distributors, catalog
direct sales and private label sales. Delta Apparel has commenced
implementation of this business plan and believes that this is part of the
reason for the improvement in the results of its operations since the end of
fiscal year 1999.
Delta Apparel's operating results are dependent in large part on orders
from retailers, distributors, and screen printers that supply finished garments
to retailers. Generally, when retail sales of apparel are strong, Delta Apparel
benefits. Delta Apparel's operating results are also dependent on the
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utilization of its manufacturing facilities. Delta Apparel did not fully
utilize its facilities during fiscal 1999. Delta Apparel believes that it will
operate its facilities at or near full capacity during fiscal 2000, even though
that capacity has increased as a result of Delta Apparel's modernization of its
knit and dye operations in fiscal years 1998 and 1999. Delta Apparel invested
over $7 million in capital improvements in fiscal years 1998 and 1999, resulting
in increased capacity and lower operating costs.
FIRST QUARTER OF FISCAL YEAR 2000 VERSUS FIRST QUARTER OF FISCAL YEAR 1999
Net Sales. Net sales for the quarter ended October 2, 1999 were $28.7
million as compared to net sales of $25.1 million for the prior year quarter.
This increase was due to higher unit volume at lower average selling prices.
Gross Margin. Gross profit and gross profit margin for the first quarter of
fiscal year 2000 were $3.7 million and 13.0%, respectively, as compared to $4.1
million and 16.3%, respectively, in the prior year quarter. The lower average
selling prices were largely offset by lower manufacturing costs. In addition,
the prior year quarter included an approximately $0.9 million gain from the USDA
cotton rebate program that was not in effect during the first quarter of the
current year.
Selling General and Administrative Expense. For the quarter ended October
2, 1999, selling, general and administrative expenses were $1.9 million, or 6.6%
of sales, a decrease of $1.5 million from the prior year quarter. This decrease
was due to a number of factors, including a reduction in head count, lower
allocated corporate overhead, and a reduction in distribution expense. This
level of selling, general and administrative spending is expected to continue in
the future.
Operating Income. For the quarter ended October 2, 1999 operating income
was $1.8 million or 6.2% of sales. This $1.1 million increase from the
operating profit of $0.7 million for the prior year quarter was due to the
factors described above.
Net Interest Expense. For the quarter ended October 2, 1999, net
interest expense was $2.2 million, as compared to $2.2 million for the quarter
ended September 26, 1998.
Taxes. The effective tax expense rate was (5.3)% for the three months
ended October 2, 1999 as compared to the effective tax benefit rate of 4.2% for
the three months ended September 26, 1998. Although both quarters reflected a
pretax loss, the current quarter's tax expense results from the expected
franchise tax due.
Net Loss. The net loss for the quarter ended October 2, 1999 of $0.5
million was $0.9 million lower than the net loss of $1.4 million for the prior
year quarter. This decrease was due to the factors described above.
Inventories. Inventories at Delta Apparel at October 2, 1999 were $25.7
million as compared to $35.6 million on September 26, 1998. This reduction in
inventory was due to lower units on hand, better management of in process
inventory, and lower raw material cost in inventory.
Capital Expenditures. Capital expenditures were $0.1 million for the
quarter ended October 2, 1999 as compared to $1.4 for the prior year quarter.
This decrease was due to a reduction in spending for domestic textile
modernization.
Order Backlog. Delta Apparel's order backlog at October 2, 1999 was $20.2
million, an increase of 5.2% from the order backlog of $19.2 million at
September 26, 1998. This increase is the net result of an
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increase in backlog for private label accounts offset somewhat by lower selling
prices. Delta Apparel believes that backlog orders can give a general
indication of future sales.
FISCAL YEAR 1999 VERSUS FISCAL YEAR 1998
Net Sales. Net sales for fiscal year 1999 were $107 million, which was
consistent with net sales of $108 million in fiscal year 1998. Fiscal year 1999
net sales included $5.0 million of outside yarn sales from the Rainsford plant
versus none in fiscal year 1998. Control of operations, management and net
assets of the Rainsford plant was transferred by Delta Mills to Delta Apparel in
April 1998, and the results of operations and net assets of the Rainsford plant
have been included in Delta Apparel since that time. Lower fiscal year 1999 net
sales were the result of lower unit prices partially offset by increased unit
sales as compared to fiscal year 1998.
Gross Profit. Gross profit increased to $5.7 million in fiscal year 1999
from $4.1 million in fiscal year 1998, and gross profit margin increased to 5.3%
in fiscal year 1999 from 3.8% in fiscal year 1998, as a result of lower raw
material costs and better manufacturing efficiencies. Included in fiscal year
1999 is a charge of $1.7 million to increase reserves on certain discontinued
and slow moving inventory categories.
Selling General and Administrative Expenses. During the year ended July 3,
1999, selling, general and administrative expenses were $13.7 million, as
compared to $13.9 million during the year ended June 27, 1998, a decrease of
$0.2 million or 1.4%. For the year ended July 3, 1999, expenses in this
category were 12.8% of net sales as compared to 12.9% of net sales for the year
ended June 27, 1998.
Operating Loss. The fiscal year 1999 operating loss was $9.7 million,
compared to an operating loss of $17.8 million in fiscal 1998. Delta Apparel's
improved gross profit contributed to the reduction in operating loss for fiscal
year 1999. The fiscal 1998 operating loss included an impairment charge of $7.5
million that was recorded to write off the excess of cost over assigned value of
net assets acquired. The fiscal 1999 operating loss included a $1.4 million
impairment charge to adjust the carrying value of certain plant assets.
Net Interest Expense. For the year ended July 3, 1999, net interest expense
was $9.6 million, as compared to $6.4 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. Delta Apparel's indebtedness
will be significantly lower after the Delta Apparel distribution. See
"Capitalization".
Taxes. The effective tax rate for the year ended July 3, 1999 was 4.1% as
compared to a 13.3% effective tax rate for the year ended June 27, 1998.
Although both years reflected a pretax loss, the year ended July 3, 1999 had
less of a tax benefit due to increasing the valuation allowance for net
operating loss carryover benefits which may not be recognized in the future.
Net Loss. Net loss for the year ended July 3, 1999, was $18.5 million, as
compared to $21.0 million for the year ended June 27, 1998, due to the factors
described above.
Inventories. Inventories at Delta Apparel at July 3, 1999 totaled $27
million, compared to $32 million at June 27, 1998. The decrease resulted
primarily from a strategic focus to improve raw material and work in process
inventory management utilizing the benefits gained from the implementation of
enterprise-wide resource planning software, as well as a $1.7 million charge to
increase reserves on certain discontinued and slow moving inventory categories.
Capital Expenditures. Capital expenditures in fiscal 1999 were $3.6
million as compared to $3.7 million in fiscal 1998. These investments were
primarily for the modernization of the textile operations, which has resulted in
increased capacity and lower costs.
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FISCAL YEAR 1998 VERSUS FISCAL YEAR 1997
Net Sales. Net sales for fiscal year 1998 were $108 million, a decline of
4.4% from sales of $113 million in fiscal year 1997. The decline in sales was
due primarily to lower unit prices and a slight drop in units being shipped as
compared to fiscal year 1997.
Gross Profit. Gross profit increased from $3.3 million in fiscal year 1997
to $4.1 million in fiscal year 1998, and gross profit margin increased from 2.9%
in fiscal year 1997 to 3.8% in fiscal year 1998, as a result of lower raw
material prices and lower manufacturing cost resulting from the shift of sewing
operations offshore more than offsetting lower selling prices.
Selling General and Administrative Expenses. During the year ended June 27,
1998, selling, general and administrative expenses were $13.9 million, as
compared to $9.5 million during the year ended June 28, 1997, an increase of
$4.4 million or 46%. This increase is attributable to an increase in advertising
expense and an increase in general and administrative personnel cost.
Operating Loss. During the third quarter of fiscal 1998, Delta Apparel
determined that the excess of cost over assigned value of net assets acquired
was impaired. Accordingly, a charge of $7.5 million was taken to write-off this
excess of cost over assigned value of net assets acquired. The fiscal year 1998
operating loss, including this write-off of the excess of cost over assigned
value of net assets acquired, was $17.8 million compared to an operating loss of
$6.4 million in the fiscal year 1997. The increased operating loss was
primarily a result of the goodwill write-off, but was also due to the increase
in selling, general and administrative expenses.
Net Interest Expense. For the year ended June 27, 1998, net interest
expense was $6.4 million, as compared to $5.9 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 13.3% as
compared to a 4.4% effective tax rate for the year ended June 28, 1997.
Although both years reflected a pretax loss, in fiscal year 1998 Delta Apparel
had more tax benefit recognized due a larger current year net operating loss.
Net Loss. Net loss for the year ended June 27, 1998, was $21.0 million, as
compared to $11.7 million for the year ended June 28, 1997. The decrease was
due to the factors described above.
Inventories. Inventories at Delta Apparel at June 27, 1998 totaled $32
million, compared to $41 million at June 28, 1997. The decrease was due
primarily to a much stronger spring selling season in 1998 compared to 1997
resulting in decreased finished goods inventory.
Capital Expenditures. Capital expenditures in fiscal 1998 were $3.7
million as compared to $2.3 million in fiscal 1997. The increased spending in
1998 was a result of the textile modernization program.
LIQUIDITY AND CAPITAL RESOURCES
Historical
In each of the first quarter of fiscal year 2000 and in fiscal years 1999,
1998 and 1997, Delta Apparel's source of liquidity and capital has been the
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.
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Delta Apparel's operating activities resulted in $13.4 million of cash
provided in the first quarter of fiscal 2000 as compared to $2.3 million net
cash used in the first quarter of fiscal 1999. Delta Apparel's operating
activities resulted in uses of cash of $6.8 million in fiscal year 1999, $12.6
million in fiscal year 1998 and $14.4 million in fiscal year 1997. The cash
provided in the first quarter of fiscal year 2000 was primarily due to accounts
receivable and inventory reductions and an increase in accounts payable and
accrued expenses and was after the charge of $2.2 million of interest to Delta
Woodside on affiliated debt. The uses of cash in each of the fiscal years 1999,
1998 and 1997 were primarily associated with net losses incurred in each of
these years. These net losses included interest charges on the affiliated debt
of $9.5 million in fiscal year 1999, $6.5 million in fiscal year 1998 and $6.1
million in fiscal year 1997.
Capital expenditures were $3.6 million in the year ended July 3, 1999 and
$3.7 million in the year ended June 27, 1998. Capital expenditures in both
these years were primarily related to the modernization of knitting, dyeing and
finishing facilities, as well as the implementation of an Enterprise Wide
Resource Planning system. Delta Apparel expects fiscal 2000 capital
expenditures, primarily for a slight capacity increase and maintenance, to
approximate $2.0 million.
Pro Forma
In connection with the Delta Apparel distribution, Delta Woodside will
contribute, as contributions to capital, all net debt amounts owed to it by the
corporations that previously had conducted the Delta Apparel Company division's
business and the Duck Head Apparel Company division's business. As a result of
this action, Delta Apparel will no longer owe any amounts to Delta Woodside,
other than for yarn purchased from Delta Mills prior to the Delta Apparel
distribution and as otherwise specifically provided in the distribution
agreement or the tax sharing agreement.
Also in connection with the Delta Apparel distribution, Delta Apparel will
enter into the following financing arrangements:
- Delta Apparel will refinance its existing bank indebtedness.
- Delta Apparel will enter into a credit agreement with a lending
institution, under which the lender will provide Delta Apparel with a
5-year $10 million term loan and a 5-year $25 million revolving credit
facility. All loans under the credit agreement will bear interest at
rates based on LIBOR or an index rate plus an applicable margin. Delta
Apparel will grant the lender a first mortgage lien on or security
interest in substantially all of its assets.
- The credit agreement will contain limitations on, or prohibitions of,
cash dividends, stock purchases, related party transactions, mergers,
acquisitions, sales of assets, indebtedness and investments.
- Principal of the term loan will be repaid in monthly installments of
principal based on a 60 month amortization.
- Under the revolving credit facility, Delta Apparel will be able to
borrow up to $25 million (including a $10.0 million letter of credit
subfacility) subject to borrowing base limitations based on accounts
receivable and inventory levels.
The pro forma statements included in this document under the heading
"Unaudited Pro Forma Combined Financial Statements" assume that these capital
contributions had occurred and these new debt facilities were in place as of
October 2, 1999 (for purposes of the pro forma balance sheet) or the beginning
of the 1999 fiscal year (for purposes of the pro forma income statements).
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Using the same assumptions as are in these pro forma statements, if the Delta
Apparel distribution had taken place at the beginning of fiscal year 1999, the
cash generated by operating activities during fiscal year 1999 would have been
approximately $0.8 million ($7.5 million less than the actual use of cash from
operations). The lower use of cash would have been due to $6.9 million less
interest expense and $0.6 million net reduction in the management fee charged by
Delta Woodside as compared to the estimated cost of replacing those services.
Using the same assumptions as are in the pro forma statements, if the Delta
Apparel distribution had taken place at the beginning of fiscal year 1999, cash
provided by operating activities during the first quarter of fiscal year 2000
would have been approximately $14.9 million. This $1.7 million increase in cash
provided by operations would have been due to lower interest payments on the
institutional lender debt as compared with the actual interest charged on the
affiliated debt.
Delta Apparel expects that its peak borrowing needs will be in its third
and fourth fiscal quarters and that during those quarters it may need to draw or
set aside for letters of credit approximately $15 million under its revolving
credit facility for working capital purposes and letters of credit. Forty-five
percent of the face amount of outstanding documentary letters of credit will
reduce the amount available under the revolving credit facility for working
capital loans.
Based on these expectations, Delta Apparel believes that its $25 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 bank debt, to satisfy its day-to-day working capital needs, and to fund its
planned capital expenditures. Any material deterioration in Delta Apparel's
results of operations, however, may result in Delta Apparel losing its ability
to borrow under its revolving credit facility or may cause the borrowing
availability under that facility not to be sufficient for Delta Apparel's needs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk Sensitivity. As a part of Delta Apparel's business of
converting fiber to finished apparel, Delta Apparel makes raw cotton purchase
commitments and then fixes prices with cotton merchants who buy from producers
and sell to textile manufacturers. Delta Apparel may seek to fix prices up to
18 months in advance of delivery. Daily price fluctuations are minimal, yet
long-term trends in price movement can result in unfavorable pricing of cotton
for Delta Apparel. Before fixing prices, Delta Apparel looks at supply and
demand fundamentals, recent price trends and other factors that affect cotton
prices. Delta Apparel also reviews the backlog of orders from customers as well
as the level of fixed price cotton commitments in the industry in general. At
October 2, 1999, a 10% decline in the market price of the cotton covered by
Delta Apparel's fixed price contracts would have had a negative impact of
approximately $1.1 million on the value of the contracts.
Interest Rate Sensitivity. Delta Apparel's credit agreement will provide
that the interest rate on outstanding amounts owed shall bear interest at
variable rates. An interest rate increase would have a negative impact on Delta
Apparel 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
Delta Apparel 's outstanding indebtedness had been increased by 1% of the debt's
average outstanding principal balance, Delta Apparel's pro forma interest
expense would have been approximately $231,000 higher in the fiscal year ended
July 3, 1999 and approximately $43,000 higher in the three months ended October
2, 1999. The actual increase in interest expense resulting from a change in
interest rates would depend on the magnitude of the increase in rates and the
average principal balance outstanding.
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YEAR 2000 COMPLIANCE
The Year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, software programs that have time sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure causing disruptions to operations.
Delta Apparel's internal information technology and non-information
technology systems are generally licensed from third parties rather than being
internally developed. Delta Apparel has received written certifications from
all manufacturers of third-party systems that they are Year 2000 compliant.
Delta Apparel has completed the inventory and testing of mission critical
hardware systems.
Additionally, all mission critical operating software has been tested by
the manufacturers as well as internally tested. All of the mission critical
hardware and software passed predetermined Year 2000 criteria for compliance.
Delta Apparel's business is also dependent upon the computer-controlled
systems of third parties such as suppliers, customers and service providers. A
systemic failure outside of Delta Apparel's control, such as a prolonged loss of
telecommunications, electrical or telephone services, could interrupt the flow
of orders from customers or the flow of goods and services from vendors and
service providers and could have a material adverse effect on Delta Apparel's
business.
To date, Delta Apparel has spent approximately $381,000 on Year 2000
compliance issues, including the purchase of hardware and the cost of third
party consultants. Based on Delta Apparel's current assessment, Delta Apparel
does not anticipate that additional costs associated with the Year 2000 issue
will have a material adverse effect on its business. Delta Apparel does not
currently anticipate having to develop a contingency plan for handling a Year
2000 problem that is not detected and corrected prior to its occurrence.
There is general uncertainty inherent in the Year 2000 computer problem.
The consequences of Year 2000 failures could have a material adverse effect on
Delta Apparel's business. In particular, unforeseen Year 2000 computer problems
could require substantial time, expenditures and effort on the part of
management.
DIVIDENDS AND PURCHASES BY DELTA APPAREL OF ITS OWN SHARES
Delta Apparel'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. Delta Apparel's credit agreement will permit the
payment of cash dividends in an amount up to 25% of cumulative net income
(excluding extraordinary or unusual non-cash items), provided that no event of
default exists or would result from that payment and after the payment at least
$6.0 million remains available under the revolving credit facility. Delta
Apparel's credit agreement will also permit up to an aggregate of $3.0 million
of purchases by Delta Apparel of its own stock provided that no event of default
exists or would result from that action and after the purchase at least $3.0
million remains available under the revolving credit facility.
Delta Apparel currently anticipates that it will pay no cash dividends to
its stockholders for the foreseeable future. If Delta Apparel'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, Delta Apparel may purchase its own shares in the market or in
privately negotiated transactions.
In general, any future cash dividend payments will depend upon Delta
Apparel's earnings, financial condition, capital requirements, compliance with
loan covenants and other relevant factors.
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BUSINESS OF DELTA APPAREL
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.
Delta Apparel is a Georgia corporation with its principal executive offices
located at 3355 Breckinridge Blvd., Suite 100, Duluth, Georgia 30136 (telephone
number: 770-806-6800). Delta Apparel was incorporated in 1999.
The following information under this heading, "Business of Delta Apparel",
describes Delta Apparel 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 Delta Apparel refer to Delta Apparel, Inc.,
together with its subsidiaries.
BUSINESS
Delta Apparel is a vertically integrated supplier of knit apparel,
particularly T-shirts, sportswear and fleece goods. Approximately 95% of Delta
Apparel's production is of T-shirts. Delta Apparel specializes in selling to
the imprinted knit apparel marketplace products such as blank t-shirts, golf
shirts and tank tops. Delta Apparel sells its products to distributors, screen
printers and private label accounts.
Products, Marketing and Manufacturing
----------------------------------------
Delta Apparel markets a standard set of knit garments with standard colors
under the Delta Apparel label to distributors, who resell to printers, and
directly to large printer accounts. Delta Apparel also supplies knit apparel to
private label customers under the customers' label. Approximately 40% of Delta
Apparel's sales are to screen printers and approximately 35% to distributors,
with the balance of its sales to private label accounts. Generally, sales to
distributors and large printers are driven by availability of competitive
products and price. Margins are generally higher in the private label business,
which is also characterized by slightly higher customer loyalty.
Delta Apparel's marketing is performed primarily by employed sales
personnel located throughout the country. Delta Apparel maintains a sales
office in New York City. Sales personnel call directly on the retail trade,
contacting department stores, distributors, screen printing companies and mass
marketers such as discount houses. Delta Apparel also utilizes independent
sales representatives to sell to screen printing companies. Most knit apparel
items are inventoried based on forecasts to permit quick shipment and to level
production schedules. Special knit apparel items and customer private label
knit apparel styles generally are made only to order.
Delta Apparel's sales reflect some seasonality, with sales during the first
and fourth fiscal quarters generally being highest and sales during the second
fiscal quarter generally being the lowest.
Delta Apparel spins the majority of its yarn at its modern facility in
Edgefield, South Carolina, with the remainder being purchased from outside
vendors. The business knits, dyes, finishes and cuts virtually all its fabric
in a company owned plant in Maiden, North Carolina. Delta Apparel sews most of
its garments in two leased facilities in Honduras and a small part of its
production at a company owned plant in Georgia. Delta Apparel also uses outside
sewing contractors when demand exceeds internal production capacity or it is
cost-effective to do so. Approximately 25% of Delta Apparel's current sewing
requirements are satisfied by outside contractors. All products are distributed
from Delta Apparel's distribution center in Tennessee. During the last
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three years, Delta Apparel has opened its two Honduras plants and closed five
sewing plants in the United States.
Fabrics used by Delta Apparel are primarily 100% cotton and
polyester/cotton blends. Cotton is acquired from several suppliers. Although
Delta Apparel purchases polyester fiber from one supplier, Delta Apparel does
not believe that the loss of this supplier would have a material adverse effect
on it.
Delta Apparel's principal raw material is cotton. Delta Apparel's average
price per pound of cotton purchased and consumed (including freight and carrying
cost) was $.678 in fiscal year 1999, $.817 in fiscal year 1998, $.833 in fiscal
year 1997 and $.944 in fiscal year 1996. In fiscal year 2000 Delta Apparel
expects to use approximately 40 million pounds of cotton in its manufacture of
yarn. Delta Apparel has contracted to purchase approximately 73% of its
expected cotton requirements for fiscal year 2000. The percentage of Delta
Apparel's cotton requirements that Delta Apparel fixes each year varies
depending upon Delta Apparel's forecast of future cotton prices. Current cotton
market prices are at relatively low levels. Delta Apparel believes that recent
cotton prices has enabled it to contract for cotton at prices that will permit
it to be competitive with other companies in the United States apparel industry
when the cotton purchased for future use is put into production. To the extent
that cotton prices decrease before Delta Apparel uses these future purchases,
Delta Apparel could be materially and adversely affected, as there can be no
assurance that it would be able to pass along its own relatively higher costs to
its customers. In addition, to the extent that cotton prices increase and Delta
Apparel has not provided for its requirements with fixed price contracts, Delta
Apparel may be materially and adversely affected, as there can be no assurance
that it would be able to pass along these increased costs to its customers.
No customer accounted for more than 10% of Delta Apparel's sales in fiscal
year 1998 or fiscal year 1999. Approximately 25% of Delta Apparel's fiscal year
1997 sales were to NIKE, Inc. As a result of the loss of this account, part of
Delta Apparel's strategy is not to become dependent on any particular customer.
Many customers place multi-month orders, but request shipment at their
discretion. Third party carriers are used to ship products to Delta Apparel's
customers.
Business Strategy
------------------
Delta Apparel's strategy is to provide the best value to its customers with
respect to the products it manufactures. This strategy includes the following
components:
- Consistently produce high quality products.
- Provide excellent customer service with respect to rapid and accurate
delivery, a close tie in to the customers' inventory needs and order
monitoring.
- Take advantage of being a totally vertical producer to reduce costs,
implement exacting controls and provide consistent products.
- Use its Honduran facility to manufacture most of its product, taking
advantage of the favorable wage differential offered by that country.
- Use its Georgia plant to produce goods needed on a quick turnaround
basis.
- Increase the focus on a relatively small range of core basic products.
- Improve its management of inventory.
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Delta Apparel's management believes that this strategy will take advantage
of the following market trends:
- Name brands have less of a competitive advantage than they used to in
the market for commodity apparel items, such as Delta Apparel's
products.
- Increasing 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' inventories stocked for quick delivery.
- Because of the retailers' focus on cost reduction and enhancing narrow
margins, virtually all productive capacity has gone off shore.
- Continued trend in the market toward more casual clothes.
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.
Delta Apparel competes with a number of United States and Canadian branded
and private label manufacturers of knit apparel. Many of these companies are
larger in size and have greater financial resources than Delta Apparel.
Some of Delta Apparel's competitors have begun to offer consignment and
open-ended payments terms to customers in some market segments. Delta Apparel's
current strategy does not include offering similar terms to its customers.
Delta Apparel believes that the long-term benefits of its approach will outweigh
any short-term loss of business that it may suffer as result of this practice by
some of its competitors.
Approximately three-quarters of the United States market sales of knit
apparel are made by three major knit apparel manufacturers that are Delta
Apparel's primary competitors. Based on mill dozens sold in 1998, Delta Apparel
has an approximate 5% share of the market for decorated tee shirt for
wholesalers and screen printers, which is up from 4% in 1996 and makes it a
second tier supplier to the market.
The principal competitive factors are price, service, delivery time,
quality and flexibility, with the relative importance of each factor depending
upon the needs of particular customers and the specific product offering. Delta
Apparel's products face considerable price pressure. Delta Apparel's strategy
is to provide the best value to its customers. Favorable competitive aspects of
Delta Apparel's business are the relatively high quality of its products, its
state of the art information systems, its relatively low distribution and
selling and general administrative costs and the business' flexibility and
process control, which leads to product consistency. These advantages derive
from Delta Apparel being a totally vertical producer, its focus on service and
quick order turn around times and its relatively low distribution costs. Delta
Apparel's primary relative competitive disadvantage is that its Delta Apparel
brand name is not as well known as the brand names of its largest competitors,
such as Fruit-of-the-loom, Hanes and Russell.
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Employees
---------
At November 4, 1999, Delta Apparel had approximately 1,950 employees.
Delta Apparel's employees are not represented by unions. Delta Apparel believes
that its relations with its employees are good.
Environmental and Regulatory Matters
---------------------------------------
Delta Apparel 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.
Delta Apparel's plants generate very small quantities of hazardous waste, which
are either recycled or disposed of off site. Most of its plants are required to
possess one or more discharge permits.
Delta Apparel believes that it is in compliance in all material respects
with federal, state, and local environmental statutes and requirements.
Delta Apparel incurs capital and other expenditures in each year that are
aimed at achieving compliance with current and future environmental standards.
Generally, the environmental rules applicable to Delta Apparel are becoming
increasingly stringent. For instance, Delta Apparel anticipates that its
Maiden, North Carolina plant will need to incur capital expenditures in the
future to comply with wastewater discharge rules.
Delta Apparel 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 Delta Apparel's
liability, if any, for past failures to comply with laws, regulations and
permits applicable to its operations cannot be determined.
Legal Proceedings
------------------
In April 1994, a products liability and wrongful death suit, captioned
Scelza, et al. v. Caldor, Inc., et al, was filed in the Supreme Court of the
State of New York in New York County, New York, against Duck Head Apparel
Company, Inc. (which conducts the Delta Apparel Company division's business and
the Duck Head Apparel Company division's business) and other parties. The suit
seeks $95 million, plus punitive damages and attorneys' fees, for the death in
January 1993 of Mrs. Scelza allegedly caused by her bodysuit and Duck Head
sweatshirt catching fire while she used a gas range. The suit has been stayed
as a result of the bankruptcy of Caldor, Inc. The case is still in the
preliminary stages and very little discovery has been completed. Because the
allegedly defective sweatshirt was manufactured by the Delta Apparel Company
division, Delta Apparel has agreed to indemnify Delta Woodside and Duck Head
with respect to this suit. Delta Apparel believes that any reasonably likely
recovery in the suit would be covered by insurance and, therefore, does not
believe that the suit will have a material adverse effect on Delta Apparel.
From time to time Delta Apparel and its subsidiaries are defendants in
other legal actions involving claims arising in the normal course of its
business, including product liability claims. Delta Apparel believes that, as a
result of its legal defenses, insurance arrangements and indemnification
provisions with financially capable parties, none of its other actions is
reasonably likely to have a material adverse effect on its results of operations
or financial condition taken as a whole.
58
<PAGE>
PROPERTIES
The following table provides a description of Delta Apparel's principal
production and warehouse facilities.
<TABLE>
<CAPTION>
Approximate
Square
Location Utilization Footage Owned/Leased
- ---------------------------------- ------------------- ------- -------------
<S> <C> <C> <C>
Duluth, GA admin. offices 40,244 Leased(1)
Rainsford Plant, Edgefield, SC spin 296,000 Owned(2)
Maiden Plant, Maiden, NC knit/dye/finish/cut 305,000 Owned
Washington Plant, Washington, GA sew 129,800 Owned
Distribution Center, Knoxville, TN distribution 550,000 Owned
Honduras Plant, San Pedro Sula,
Honduras sew 70,000 Leased(3)
<FN>
____________________________________
(1) The lease of the Duluth, Georgia offices expires in August 2000.
(2) In connection with the Delta Apparel distribution, Delta Mills will
transfer title in the Rainsford plant to Delta Apparel. See "Relationships
Among Delta Apparel, Delta Woodside and Duck Head - Other Relationships".
(3) The Honduras plant has a lease that expires in November 2000.
</TABLE>
In addition, sales offices are leased in New York City on a month-to-month
basis.
All of Delta Apparel's owned facilities will be subject to mortgages and
security interests to be granted in favor of the credit agreement lender. Delta
Apparel's accounts receivable and inventory, and certain other intangible
property, currently secure Delta Woodside's credit facility. In connection with
the Delta Apparel distribution, these liens on the assets of Delta Apparel will
be released and new liens on all of Delta Apparel's assets will be granted to
the credit agreement lender.
Various factors affect the relative use by Delta Apparel of its own
facilities and outside contractors in the various apparel production phases.
Delta Apparel is currently using the majority of its internal production
capacity.
Delta Apparel believes that its equipment and facilities are generally
adequate to allow it to remain competitive with its principal competitors.
59
<PAGE>
MANAGEMENT OF DELTA APPAREL
DIRECTORS
The following eight persons are the members of Delta Apparel's board of
directors. Their term runs until the next annual meeting of stockholders of
Delta Apparel 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 Delta Apparel.
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
<S> <C> <C>
William F. Garrett (59) President of Delta Mills Marketing 1998(1)
Company, a division of a subsidiary of
Delta Woodside (2)
C. C. Guy (67) Retired Businessman 1984(1)
Shelby, North Carolina (3) (10) (11)
Robert W. Humphreys (42) President and Chief Executive Officer 1999
of Delta Apparel (4)
Dr. James F. Kane (68) Dean Emeritus of the College of 1986(1)
Business Administration of the
University of South Carolina
Columbia, South Carolina (5) (10) (11)(12)
Dr. Max Lennon (59) President of Mars Hill College 1986(1)
Mars Hill, North Carolina (6) (10) (11)(12)
E. Erwin Maddrey, II (58) President and Chief Executive 1984(1)
Officer of Delta Woodside;
Chairman of the Board of Delta
Apparel (7)
Buck A. Mickel (44) President and Chief Executive Officer 1984(1)
of RSI Holdings, Inc.
Greenville, South Carolina (8) (11)
Bettis C. Rainsford (48) President of The Rainsford 1984(1)
Development Corporation
Edgefield, South Carolina (9)
<FN>
(1) Includes service as a director of Delta Woodside and Delta Woodside's predecessor by
merger, Delta Woodside Industries, Inc., a Delaware corporation (which this documents refers to as
"Old Delta Woodside"), or any predecessor company to Old Delta Woodside.
(2) William F. Garrett served as a divisional Vice President of J. P. Stevens & Company, Inc.
from 1982 to 1984, and as a divisional President of J. P. Stevens & Company, Inc. from 1984 until
1986, at which time the Delta Mills Marketing Company division was acquired by a predecessor of Old
Delta Woodside. From 1986 until the present he has served as the President of Delta Mills Marketing
Company, a division of a subsidiary of Delta Woodside. Upon consummation of the Delta Apparel
distribution, Mr. Garrett will become President and Chief Executive Officer of Delta Woodside. Mr.
Garrett serves as a director of Delta Woodside and Duck Head.
60
<PAGE>
(3) C. C. Guy served as Chairman of the Board of Old Delta Woodside or its predecessors from
the founding of Old Delta Woodside's predecessors in 1984 until November 1989. Since before the
November 15, 1989 merger (which this document refers to as the "RSI Merger") of Old Delta Woodside
into RSI Corporation, a South Carolina corporation which changed its name to Delta Woodside
Industries, Inc. and is now Delta Woodside, he has been a director of RSI Holdings, Inc., and from
before the RSI Merger until January 1995 he also served as President of RSI Holdings, Inc. RSI
Holdings, Inc. until 1992 was engaged in the sale of outdoor power equipment, until 1994 was engaged
in the sale of turf care products and currently is engaged in the consumer finance business. Prior
to November 15, 1989, RSI Holdings, Inc. was a subsidiary of RSI Corporation. Mr. Guy served from
October 1979 until November 1989 as President, Treasurer and a director of RSI Corporation. Prior to
the RSI Merger, RSI Corporation owned approximately 40% of the outstanding shares of common stock of
Old Delta Woodside and, among other matters, was engaged in the office supply business, as well as
the businesses of selling outdoor power equipment and turf care products. Mr. Guy serves as a
director of Delta Woodside and Duck Head.
(4) Robert W. Humphreys was elected President and Chief Executive Officer of Delta Apparel
in December 1999. He was elected President of the Delta Apparel Company division of a subsidiary of
Delta Woodside in April 1999. He served as Vice President-Finance and Assistant Secretary of Delta
Woodside from May 1998 to November 1999. From January 1987 to May 1998, Mr. Humphreys was President
of Stevcoknit Fabrics Company, the knit fabrics division of a subsidiary of Delta Woodside.
(5) 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, Duck Head and Glassmaster Company.
(6) 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, Duck Head and Duke Power Company.
(7) 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
Delta Apparel distribution, Mr. Maddrey will retire from his officer positions with Delta Woodside.
He also serves as a director of Delta Woodside, Duck Head and Kemet Corporation.
(8) Buck A. Mickel was a Vice President of Old Delta Woodside or its predecessors from the
founding of Old Delta Woodside's predecessors until November 1989, Secretary of Old Delta Woodside
from November 1986 to March 1987, and Assistant Secretary of Old Delta Woodside from March 1987 to
November 1988. He served as Vice President and a director of RSI Holdings, Inc. from before the RSI
Merger until January 1995 and as Vice President of RSI Holdings, Inc. from September 1996 until July
1998 and has served as President, Chief Executive Officer and a director of RSI Holdings, Inc. from
July 1998 to the present. He served as Vice President of RSI Corporation from October 1983 until
November 1989. Mr. Mickel serves as a director of Delta Woodside and Duck Head.
61
<PAGE>
(9) Bettis C. Rainsford was Executive Vice President and Chief Financial Officer of Old Delta
Woodside or its predecessors from the founding of Old Delta Woodside's predecessors in 1984 until the
RSI Merger and served in these positions with Delta Woodside from the RSI Merger until October 1,
1999. Mr. Rainsford served as Treasurer of Old Delta Woodside or its predecessors or Delta Woodside
from 1984 to 1986, from August 1988 to November 1988 and from November 1990 to October 1, 1999. He
is President of The Rainsford Development Corporation which is engaged in general business
development activities in Edgefield, South Carolina. Mr. Rainsford serves as a director of Delta
Woodside, Duck Head and Martin Color-Fi, Inc. and is a member of the managing entity of Mount Vintage
Plantation Golf Club, LLC.
(10) Member of Audit Committee.
(11) Member of Compensation Committee.
(12) Member of Compensation Grants Committee.
</TABLE>
EXECUTIVE OFFICERS
The following provides information regarding the executive officers of
Delta Apparel.
Name and Age Position
- -------------- --------
Robert W. Humphreys (42) President and Chief Executive Officer (1)
Herbert M. Mueller (42) Vice President, Chief Financial Officer
and Treasurer (2)
Marjorie F. Rupp (48) Vice President and Secretary (3)
______________________
(1) See information under the subheading "Directors".
(2) Herbert M. Mueller was elected to serve as Vice President, Chief
Financial Officer and Treasurer of Delta Apparel in December 1999. He was
elected to serve as Vice President of the Delta Apparel division in April 1998.
Prior to joining the Delta Apparel division, Mr. Mueller served as Corporate
Controller (from June 1991 to June 1997 and from October 1997 to April 1998) and
Senior Director of Business Planning (from July 1997 to October 1997) of Swift
Denim, a manufacturer of denim fabric.
(3) Marjorie F. Rupp was elected Vice President and Secretary of Delta
Apparel in December 1999. She was elected to serve as Vice President of Human
Resources of the Delta Apparel division in July 1998. She served as Director of
Human Resources for the Delta Apparel division from May 1992 until July 1998.
Delta Apparel's executive officers are appointed by Delta Apparel's board
of directors and serve at the pleasure of the Board.
62
<PAGE>
MANAGEMENT COMPENSATION
Summary Compensation Table
----------------------------
The following table sets forth information for the fiscal year ended July
3, 1999 respecting the compensation earned by Delta Apparel's current Chief
Executive Officer and by the other current executive officer of Delta Apparel
who earned salary and bonus in fiscal 1999 from Delta Woodside or any of its
subsidiaries in excess of $100,000 (whom this document refers to collectively as
the "Named Executives").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
----------
Annual Compensation Compensation
---------------------------- --------
Awards
Other -------- All
Annual Securities Other
Compen- Underlying Compen-
Name and Salary Bonus sation Options sation
Principal Position Year ($)(a) ($)(a)(b) ($)(c) (#)(d) ($)
- ------------------------------- -------- -------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Humphreys, 1999 223,077 94,286 14,715 0 543,449
(f)(e)
President, Delta
Apparel division
Herbert M. Mueller 1999 140,000 23,080 3,880 0 1,400
(g)(e)
Vice President
Delta Apparel
division
_______________________________
<FN>
(a) The amounts shown in the column include sums the receipt of which has been deferred
pursuant to the Delta Woodside 401(k) Plan or the Delta Woodside deferred compensation plan.
(b) Amounts in this column are cash bonuses paid to reward performance.
(c) The amounts in this column were paid by Delta Woodside in connection with the vesting of
awards under the Delta Woodside Incentive Stock Award Plan and were in each case approximately
sufficient, after the payment of all applicable income taxes, to pay the participant's federal and
state income taxes attributable to the vesting of the award.
(d) For purposes of this table, awards under the Delta Woodside Incentive Stock Award Plan
are treated as options.
(e) 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.
(f) The fiscal 1999 amount represents $666 Delta Woodside contribution allocated to Mr.
Humphrey's account in the Delta Woodside 401(k) Plan, $375 contributed by Delta Woodside to Delta
Woodside's 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. Humphreys because of
63
<PAGE>
Internal Revenue Code contribution limitations, $2,729 contributed by Delta Woodside to the Delta
Woodside 401(k) Plan for Mr. Humphreys with respect to his compensation deferred under the Delta
Woodside 401(k) Plan, $137,241 received as a bonus relating to the period while he was President of
Stevcoknit Fabrics Company (a division of a subsidiary of Delta Woodside), $2,438 earned on Mr.
Humphreys' deferred compensation at a rate in excess of 120% of the Federal mid-term rate and
$400,000 paid in connection with his undertaking the position of President and chief executive
officer of the Delta Apparel division.
(g) Represents the Delta Woodside contribution allocated to Mr. Mueller's account in the Delta
Woodside 401(k) Plan.
</TABLE>
The amounts shown in the table above do not include reimbursement by Delta
Woodside or its subsidiaries for certain commuting expenses and other items.
The non- business personal benefit to any Named Executive of these amounts does
not exceed 10% of the Named Executive's total salary and bonus.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
---------------------------------------------------------------------------
Values
- ------
The following table provides information respecting the exercise by any
Named Executive during fiscal 1999 of awards granted under Delta Woodside's
Incentive Stock Award Plan and options granted under Delta Woodside's Stock
Option Plan, and the fiscal year end value of any unexercised outstanding awards
and options. For purposes of this table, awards under Delta Woodside's
Incentive Stock Award Plan are treated as options.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION VALUES
Shares Number of Securities
Acquired Underlying Unexercised Value of Unexercised In-the-
on Value Options at Money Options
Exercise Realized FY-End at FY-End
Name (#) ($) (#) ($)(a)
----- --- --- --- ------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. 3,000 17,784 22,875 5,625 78,807 14,414
Humphreys
Herbert M. 800 8,622 1,500 4,500 8,906 26,719
Mueller
___________________
(a) Based on the closing sales price of $5.9375 per Delta Woodside share on
July 2, 1999.
</TABLE>
Director Compensation
----------------------
Delta Apparel will pay each current director who is not an officer of Delta
Apparel a fee of $6,667 per year, plus will provide each of these directors
approximately $3,333 annually with which shares of Delta Apparel's common stock
64
<PAGE>
will be purchased. These Delta Apparel shares may be newly issued or acquired
in the open market for this purpose. Each non-officer director will also be
paid $500 ($750 for the committee chair) for each committee meeting attended
and $250 for each telephonic committee meeting in which the director
participates. Each director will also be reimbursed for reasonable travel
expenses in attending each meeting.
Delta Apparel anticipates that any non-officer director subsequently added
to the Delta Apparel Board will be paid a fee of $13,334 per year, plus be
provided approximately $6,666 per year with which shares of Delta Apparel's
common stock will be purchased. Each of these additional directors will be paid
the same meeting fees as payable to Delta Apparel's current directors. Delta
Apparel anticipates that the fees payable to Delta Apparel's existing directors
will increase over a five year period to be the same as the fees payable to any
additional directors.
Robert W. Humphreys Employment Contract
-------------------------------------------
During fiscal 1999, Delta Woodside's board of directors began to consider
strategic alternatives to enhance stockholder value, some of which might have
led to a change in control of all or a significant part of Delta Woodside. In
order to provide an incentive for certain of Delta Woodside's key executives to
remain in Delta Woodside's employ while these alternatives were examined, Delta
Woodside entered into severance agreements in December 1998 with, among others,
Robert W. Humphreys (President and Chief Executive Officer of Delta Apparel).
Pursuant to each of these agreements, Delta Woodside agreed that, if the
applicable officer's position were eliminated because of downsizing,
restructuring or a change of control between the date of the letter and the end
of December 2000, the officer would be paid a severance equal to two years'
salary at the time of termination, in addition to the officer's regular
severance.
In addition to his positions with Delta Apparel, Robert W. Humphreys served
until November 4, 1999 as Vice President-Finance and Assistant Secretary of
Delta Woodside. In April 1999, Mr. Humphreys was appointed to the additional
position of President and chief executive officer of the Delta Apparel Company
division of a subsidiary of Delta Woodside. In connection with this new
position, Delta Woodside agreed in an April 1999 letter that (a) Mr. Humphreys'
salary is $300,000 effective with the pay period beginning April 26, 1999, (b)
he is guaranteed a bonus of $300,000 for the 2000 fiscal year if he remains in
his new position during that year, (c) for fiscal 1999 he would be on the
corporate bonus plan for the first ten months, then at the guaranteed annual
$300,000 rate for the eleventh and twelfth months of fiscal 1999, (d) Delta
Woodside will pay his travel and lodging expenses for commuting to the
division's headquarters in Duluth, Georgia, (e) if he remains as President and
Chief Executive Officer of the Delta Apparel business as a spun-out separate
public company (if that spin-off were to occur), he will participate in a Delta
Apparel bonus plan commencing with the 2001 fiscal year and he will be granted
options under a Delta Apparel performance based stock option plan for shares
equal to approximately five percent of the post-spin-off outstanding shares of
Delta Apparel, (f) the December 1998 severance agreement was modified to provide
that the two years' severance amount, based on a $200,000 salary rate, was
earned in fiscal 1999 and he would no longer be entitled to Delta Woodside's
regular severance and (g) if the restructuring/spin-offs under consideration of
the Delta Apparel business and the Duck Head Apparel business do not occur, he
will be elected as a member of Delta Woodside's board of directors. Delta
Apparel has assumed Delta Woodside's obligations under the April 1999 letter in
connection with the Delta Apparel distribution.
Delta Apparel Stock Option Plan
-----------------------------------
Under the Delta Apparel stock option plan, the compensation committee (or,
in the case of the Named Executives, the compensation grants committee) of the
Delta Apparel board of directors will have the discretion to grant options for
up to an aggregate maximum of 500,000 Delta Apparel shares.
The purpose of the Delta Apparel option plan is to promote the growth and
profitability of Delta Apparel and its subsidiaries by increasing the personal
participation of key and middle level executives in the performance of Delta
Apparel and its subsidiaries, by enabling Delta Apparel 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
Delta Apparel. The compensation committee (or, in the case of the Named
Executives, the compensation grants committee) of the Delta Apparel board of
directors will administer the Delta Apparel option plan.
65
<PAGE>
Participation in the Delta Apparel 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 Delta Apparel board of
directors, of Delta Apparel or one of its subsidiaries who have the greatest
impact on Delta Apparel's long-term performance. In making any determination as
to the key and middle level executives to whom options will be granted and the
number of shares that will be subject to each option, the applicable committee
is to take into account, in each case, the level and responsibility of the
executive's position, the executive's performance, the executive's level of
compensation, the assessed potential of the executive and those other factors
that the applicable committee deems relevant to the accomplishment of the
purposes of the plan. Directors who are not also employees of Delta Apparel are
not eligible to participate in the Delta Apparel option plan. The Delta Apparel
option plan provides that no more than 125,000 Delta Apparel 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
Delta Apparel option plan may be "incentive stock options" for federal income
tax purposes. Delta Apparel is not allowed a deduction at any time in
connection with, and the participant is not taxed upon either the grant or the
exercise of, an "incentive stock option." The difference between the exercise
price of and incentive stock option and the market value of the shares of common
stock at the date of exercise, however, constitutes a tax preference item for
the participant in the year of exercise for alternative minimum tax purposes.
Among other requirements, the stock acquired by the participant must be held for
at least two years after the option is granted and for at least one year after
the option is exercised for the option to qualify as an incentive stock option.
If the participant satisfies these holding period requirements, the participant
will be taxed only upon any gain realized upon disposition of the stock. The
participant's gain will be equal to the difference between the sales price of
the stock and the exercise price. If an incentive stock option is exercised
after the death of the employee by the estate of the decedent, or by a person
who acquired the right to exercise the option by bequest or inheritance or by
reason of the death of the decedent, none of the holding period requirements
apply.
If the participant fails to satisfy the holding period requirements, the
option will be treated in a manner similar to options that are not incentive
stock options. The participant is generally not taxed upon the grant of an
option that is not an incentive stock option. Upon exercise of any the option,
however, the participant recognizes ordinary income equal to the difference
between the fair market value of the shares acquired on the date of exercise and
the exercise price. Subject to Section 162(m) of the Internal Revenue Code
(relating to limitations on corporate income tax deduction of certain executive
compensation in excess of $1 million), generally Delta Apparel 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 Delta Apparel will arise at the time of the early disposition of
the stock and will equal the excess of (a) the lower of the fair market value of
the shares at the time of exercise or the fair market value of the shares at the
time of disposition over (b) the exercise price, and (ii) if the fair market
value of the stock at the time of the early disposition exceeds the exercise
price, the participant will also recognize capital gain income equal to the
difference between the fair market value at the time of exercise and the fair
market value at the time of disposition.
Delta Apparel will attempt, to the maximum extent possible, to structure
grants under the Delta Apparel 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 Delta Apparel), and the option
will be exercisable according to the schedule that the applicable committee may
determine. The recipient of an option will not pay Delta Apparel any amount
66
<PAGE>
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 Delta Apparel option
plan.
Under the Delta Apparel 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 Delta Apparel.
However, if a participant dies while in the employ of Delta Apparel or (if so
determined by the applicable committee at the date of grant) within three-months
after termination of employment or if a participant's employment is terminated
by reason of having become permanently and totally disabled, the option may be
exercised during the one-year period after the participant's death or
termination of employment due to disability. In no event, however, may an option
be exercised after the expiration of its fixed term.
The price per share at which each option granted under the Delta Apparel
option plan may be exercised will be the price set by the applicable committee
at the time of grant based on the criteria adopted by the applicable committee
in good faith; provided, however, in the case of an option intended to qualify
as an incentive stock option, the price per share will not be less than the fair
market value of the stock at the time the option is granted (or 110% of fair
market value if the recipient of the incentive stock option owns stock having
more than ten percent of the total combined voting power of all classes of stock
of Delta Apparel). The Delta Apparel 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 Delta Apparel's common stock on the date of the option grant.
Options may be exercised by the participant tendering to Delta Apparel
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 Delta Apparel
shares rather than in cash.
The Delta Apparel 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 Delta Apparel
shares issuable under the plan (other than an increase pursuant to the
antidilution provisions of the plan).
The Delta Apparel option plan provides that it will terminate on the close
of business on January __, 2010, and no options will be granted under the plan
thereafter, but termination will not affect any option granted under the plan
before the termination date.
As described in "Interests of Directors and Executive Officers in the Delta
Apparel Distribution - Receipt of Delta Apparel Stock Options and Delta Apparel
Incentive Stock Awards", the compensation grants committee or the compensation
committee of the Delta Apparel board of directors currently expects to grant,
within the first six months after the Delta Apparel distribution, stock options
under the Delta Apparel option plan to the executive officers of Delta Apparel.
Delta Apparel Incentive Stock Award Plan
---------------------------------------------
Under the Delta Apparel incentive stock award plan, the compensation
committee (or, in the case of the Named Executives, the compensation grants
committee) of the Delta Apparel board of directors has the discretion to grant
awards for up to an aggregate maximum of 200,000 Delta Apparel shares.
The purposes of the Delta Apparel incentive stock award plan are to
establish or increase the equitable ownership in Delta Apparel by key and middle
level management employees of Delta Apparel and its subsidiaries and to provide
incentives to key and middle level management employees of the Delta Apparel and
its subsidiaries through the prospect of stock ownership.
The Delta Apparel incentive stock award plan authorizes the applicable
committee to grant to officers or other key management employees or middle level
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<PAGE>
management employees of Delta Apparel or any of its subsidiaries rights to
acquire Delta Apparel 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 Delta Apparel
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 Delta Apparel incentive stock award plan
provides that no more than 20,000 Duck Head shares may be covered by awards
granted under the plan in any fiscal year to any particular employee.
A participant may receive an incentive stock award only upon execution of
an incentive stock award agreement with Delta Apparel. 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 Delta Apparel 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 Delta Apparel 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 Delta Apparel 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 Delta Apparel or any
subsidiary on the date set forth in the incentive stock award agreement and (ii)
those additional circumstances (which could include Delta Apparel 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, Delta Apparel 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 Delta Apparel of the
$.01 per share cash purchase price.
The recipient of an award will not pay Delta Apparel 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, Delta Apparel should generally be allowed a
tax deduction equivalent to the holder's taxable income arising from that
vesting. The Delta Apparel incentive stock award plan provides that, at or
about the time the award (or portion of the award) vests, Delta Apparel 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 Delta Apparel.
The portion of any Delta Apparel incentive stock award that vests based on
a participant being an employee at specified dates will not satisfy the
requirements of Section 162(m) of the Internal Revenue Code. Delta Apparel will
attempt, however, to the maximum extent possible, to structure the portion of
incentive stock awards made to the Named Executives that vests in accordance
with performance criteria in a manner that satisfies the deductibility
requirements of Section 162(m). Delta Apparel anticipates that all compensation
payable pursuant to the plan will be deductible by Delta Apparel because 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.
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<PAGE>
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 Delta Apparel 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 Delta Apparel shares covered by the plan (except in
connection with the antidilution provisions of the plan).
As described in "Interests of Directors and Executive Officers in the Delta
Apparel Distribution - Receipt of Delta Apparel Stock Options and Delta Apparel
Incentive Stock Awards", the compensation grants committee or the compensation
committee of the Delta Apparel board of directors currently expects to grant,
within the first six months after the Delta Apparel distribution, incentive
stock awards to the executive officers of Delta Apparel.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following directors will serve on the Compensation Committee of Delta
Apparel's board of directors: C.C. Guy, Dr. James F. Kane, Dr. Max Lennon and
Buck A. Mickel.
The following directors will serve on the Compensation Grants Committee of
Delta Apparel'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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<PAGE>
SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS
AND MANAGEMENT
If the Delta Apparel distribution had occurred immediately prior to the
Delta Apparel record date and the Delta Apparel record date had been December 7,
1999, the following table sets forth what the beneficial ownership of Delta
Apparel's common stock would have been as of the Delta Apparel record date by
(i) any person that would have beneficially owned more than five percent of the
outstanding common stock of Delta Apparel, (ii) the directors of Delta Apparel,
(iii) the Named Executives of Delta Apparel, and (iv) all directors and
executive officers of Delta Apparel as a group. Unless otherwise stated in the
notes to the table, Delta Apparel believes that the persons named in the table
would have had sole voting and investment power with respect to all shares of
common stock of Delta Apparel shown as beneficially owned by them. On December
7, 1999, 23,863,745 Delta Woodside shares were outstanding, corresponding to
2,386,374 Delta Apparel shares. The table does not include Delta Apparel shares
that would be covered by stock options that may be granted under Delta Apparel's
stock option plan or incentive stock awards that may be granted under Delta
Apparel's incentive stock award plan. See "Interests of Directors and Executive
Officers in the Delta Apparel Distribution - Receipt of Delta Apparel Stock
Options and Delta Apparel Incentive Stock Awards".
<TABLE>
<CAPTION>
Shares
------
Beneficially
------------
Beneficial Owner Owned Percentage
- --------------------------------------------- ------- -----------
<S> <C> <C>
Reich & Tang Asset Management L. P. (1) 351,590 14.7%
600 Fifth Avenue
New York, New York 10020
Franklin Resources, Inc. (2) 226,900 9.5%
Franklin Advisory Services, Inc.
Charles B. Johnson
Rupert H. Johnson, Jr.
777 Mariners Island Boulevard
San Mateo, California 94404
Dimensional Fund Advisors Inc. (3) 195,972 8.2%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
E. Erwin Maddrey, II (4) 326,927 13.7%
233 North Main Street
Suite 200
Greenville, SC 29601
Bettis C. Rainsford (5) 319,340 13.4%
108-1/2 Courthouse Square
Post Office Box 388
Edgefield, SC 29824
Buck A. Mickel (6) (7) 157,436 6.6%
Post Office Box 6721
Greenville, SC 29606
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<PAGE>
Micco Corporation (7) 124,063 5.2%
Post Office Box 795
Greenville, SC 29602
Minor H. Mickel (7) (8) 156,523 6.6%
415 Crescent Avenue
Greenville, SC 29605
Minor M. Shaw (7) (9) 152,008 6.4%
Post Office Box 795
Greenville, SC 29602
Charles C. Mickel (7) (10) 149,694 6.3%
Post Office Box 6721
Greenville, SC 29606
William F. Garrett (11) 14,525 (19)
C. C. Guy (12) 2,501 (19)
Robert W. Humphreys (13) 4,161 (19)
Dr. James F. Kane (14) 1,708 (19)
Dr. Max Lennon (15) 1,549 (19)
Herbert M. Mueller (16) 796 (19)
Marjorie F. Rupp (17) 711 (19)
All current directors and executive officers
as a group ( 10 Persons) (18) 829,654 34.6%
<FN>
(1) This information is based on confirmation obtained on December 7, 1999
and on an amendment dated February 12, 1999 to Schedule 13G that was filed with
the Securities and Exchange Commission by Reich & Tang Asset Management L. P.
(which this document refers to as "Reich & Tang") with respect to Delta
Woodside's common stock. In the amendment, Reich & Tang reported that, with
respect to Delta Woodside's common stock, it had shared voting power and shared
dispositive power with respect to all of the shares shown. The amendment
reported that the shares of Delta Woodside's common stock were held on behalf of
certain accounts for which Reich & Tang provides investment advice on a fully
discretionary basis. The amendment reported that none of such accounts has an
interest with respect to more than 5% of the outstanding shares of Delta
Woodside's common stock.
(2) This information is based on confirmation obtained on December 7, 1999
and on an amendment dated January 16, 1998 to Schedule 13G that was filed with
the Securities and Exchange Commission by Franklin Resources, Inc. (which this
document refers to as "FRI") with respect to Delta Woodside's common stock.
Telephone confirmation was given to Delta Woodside that the amendment was
correct in all respects except that the number of Delta Woodside shares
beneficially owned as of December 7, 1999 had changed to 2,269,000 (which, based
on the distribution ratio for the Delta Apparel distribution, would entitle FRI
to beneficial ownership of 226,900 Delta Apparel shares). In the amendment, FRI
reported that, with respect to Delta Woodside's common stock, the shares shown
in the table above were beneficially owned by one or more investment companies
or other managed accounts that are advised by one or more direct and indirect
investment advisory subsidiaries of FRI. The amendment reported that the
investment advisory subsidiary(ies) have investment and/or voting power over the
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<PAGE>
securities owned by their investment advisory clients. Accordingly, such
subsidiary(ies) may be deemed to be the beneficial owner of the shares shown in
the table. The amendment reported that Charles B. Johnson and Rupert H.
Johnson, Jr. (which this document refers to as the "FRI Principal Shareholders")
(each of whom has the same business address as FRI) each own in excess of 10% of
the outstanding common stock and are the principal shareholders of FRI and may
be deemed to be the beneficial owners of securities held by persons and entities
advised by FRI subsidiaries. The amendment reported that one of the investment
advisory subsidiaries, Franklin Advisory Services, Inc. (whose address is One
Parker Plaza, Sixteenth Floor, Fort Lee, New Jersey 07024), has sole voting and
dispositive power with respect to all of the shares shown. FRI, the FRI
Principal Shareholders and the investment advisory subsidiaries disclaim any
economic interest or beneficial ownership in the shares shown in the table above
and are of the view that they are not acting as a "group" for purposes of the
Securities Exchange Act of 1934, as amended.
(3) This information is based on a confirmation obtained on December 7,
1999 and on a Schedule 13F dated September 30, 1999, that was filed with the
Securities and Exchange Commission by Dimensional Fund Advisors Inc. (which this
document refers to as "Dimensional") with respect to Delta Woodside's common
stock. Dimensional reported that it had sole voting power and sole dispositive
power with respect to all of the shares shown. An amendment dated February 12,
1999 to Schedule 13G that was filed by Dimensional reports that Dimensional
furnishes investment advice to four investment companies and serves as
investment manager to certain other investment vehicles, including commingled
group trusts, that all of the shares of Delta Woodside's common stock were owned
by such investment companies or investment vehicles, that Dimensional disclaims
beneficial ownership of such securities and that, to the knowledge of
Dimensional, no such investment company or investment vehicle client owned more
than 5% of the outstanding shares of Delta Woodside's common stock.
(4) Mr. Maddrey is a director of Delta Apparel. He is the President and
Chief Executive Officer (from which officer positions he will resign in
connection with the Delta Apparel distribution and the Duck Head distribution)
and a director of Delta Woodside and Duck Head. The number of shares shown as
beneficially owned by Mr. Maddrey includes approximately 33,493 Delta Woodside
shares (3,349 Delta Apparel shares) allocated to Mr. Maddrey's account in Delta
Woodside's Employee Stock Purchase Plan, 431,470 Delta Woodside shares (43,147
Delta Apparel 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 Delta Apparel 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.
(5) Mr. Rainsford is a director of Delta Apparel. He is also a director
of Delta Woodside and Duck Head. The number of shares shown as beneficially
owned by Mr. Rainsford includes 47,945 Delta Woodside shares (4,794 Delta
Apparel 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
Delta Apparel 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 Duck Head Apparel Company and
Delta Apparel Company. The amendment stated that Mr. Rainsford has significant
72
<PAGE>
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 Duck Head and/or the Delta Apparel 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.
(6) Buck A. Mickel is a director of Delta Apparel. He is also a director
of Delta Woodside and Duck Head. The number of shares shown as beneficially
owned by Buck A. Mickel includes 330,851 Delta Woodside shares (33,085 Delta
Apparel shares) directly owned by him, all of the 1,240,634 Delta Woodside
shares (124,063 Delta Apparel shares) owned by Micco Corporation, and 2,871
Delta Woodside shares (287 Delta Apparel shares) held by him as custodian for a
minor. See Note (7).
(7) Micco Corporation owns 1,240,634 shares of Delta Woodside's common
stock (124,063 Delta Apparel shares). The shares of common stock of Micco
Corporation are owned in equal parts by Minor H. Mickel, Buck A. Mickel (a
director of Delta Apparel), 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 Delta Apparel
shares owned by Micco Corporation. Minor H. Mickel directly owns 116,854 shares
of Delta Woodside's common stock (11,685 Delta Apparel shares) and as personal
representative of her husband's estate owns 207,750 shares of Delta Woodside's
common stock (20,775 Delta Apparel shares). Buck A. Mickel, directly or as
custodian for a minor, owns 333,722 shares of Delta Woodside's common stock
(33,372 Delta Apparel shares). Charles C. Mickel, directly or as custodian for
his children, owns 256,210 shares of Delta Woodside's common stock (25,621 Delta
Apparel shares). Minor M. Shaw, directly or as custodian for her children, owns
264,978 shares of Delta Woodside's common stock (26,497 Delta Apparel 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 Delta Apparel shares), as to which shares
Minor M. Shaw may also be deemed a beneficial owner. Minor M. Shaw disclaims
beneficial ownership with respect to these shares and with respect to the 2,748
shares of Delta Woodside's common stock (274 Delta Apparel 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 Delta Apparel 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 Delta Apparel 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 Delta Apparel shares) held by him as custodian for a minor.
(8) The number of shares shown as beneficially owned by Minor H. Mickel
includes 116,854 Delta Woodside shares (11,685 Delta Apparel shares) directly
owned by her, 207,750 Delta Woodside shares (20,775 Delta Apparel shares) owned
by her as personal representative of her husband's estate and all of the
1,240,634 Delta Woodside shares (124,063 Delta Apparel shares) owned by Micco
Corporation. See Note (7).
73
<PAGE>
(9) The number of shares shown as beneficially owned by Minor M. Shaw
includes 264,978 Delta Woodside shares (26,497 Delta Apparel shares) owned by
her directly or as custodian for her children, approximately 14,474 Delta
Woodside shares (1,447 Delta Apparel 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 Delta Apparel shares) owned
by Micco Corporation. See Note (7).
(10) The number of shares shown as beneficially owned by Charles C. Mickel
includes 256,210 Delta Woodside shares (25,621 Delta Apparel shares) owned by
him directly or as custodian for his children, 100 Delta Woodside shares (10
Delta Apparel shares) owned by his wife and all of the 1,240,634 Delta Woodside
shares (124,063 Delta Apparel shares) owned by Micco Corporation. See Note (7).
(11) William F. Garrett is a director of Delta Apparel. He is also a
director of Delta Woodside and Duck Head. The number of shares shown as
beneficially owned by Mr. Garrett includes approximately 598 Delta Woodside
shares (59 Delta Apparel shares) that are held in two dividend reinvestment
accounts, one of which has approximately 78 Delta Woodside shares (7 Delta
Apparel shares) and is registered in the names of William Garrett and Ann
Garrett, though Mr. Garrett has sole voting and dispositive power of these
shares. It also includes approximately 2,088 Delta Woodside shares (208 Delta
Apparel 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 Delta Apparel 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 Delta Apparel distribution, and there is a likelihood that such an
amendment would become effective within the next 60 days. Consequently, all of
Mr. Garrett's outstanding options are included in the table. See, "Interests of
Directors and Executive Officers in the Delta Apparel Distribution -- Early
Exercisability of Delta Woodside Stock Options."
(12) C. C. Guy is a director of Delta Apparel. He is also a director of
Delta Woodside and Duck Head. The number of shares shown as beneficially owned
by C. C. Guy includes 18,968 Delta Woodside shares (1,896 Delta Apparel shares)
owned by his wife, as to which shares Mr. Guy disclaims beneficial ownership.
(13) Robert W. Humphreys is President and Chief Executive Officer and a
director of Delta Apparel. The number of shares shown as beneficially owned by
Mr. Humphreys includes approximately 1,138 Delta Woodside shares (113 Delta
Apparel shares) allocated to Mr. Humphreys' account in the Delta Woodside 401(k)
Plan. Mr. Humphreys is fully vested in the shares allocated to his account in
the Delta Woodside 401(k) Plan. It also includes approximately 1,752 Delta
Woodside shares (175 Delta Apparel shares) allocated to Mr. Humphreys' account
in Delta Woodside's employee stock purchase plan. The number of shares shown in
the table includes an aggregate of 22,500 unissued Delta Woodside shares (2,250
Delta Apparel 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. Humphreys will
enter into an amendment to his options pursuant to which all of his options will
become exercisable prior to the Delta Apparel distribution, and there is a
likelihood that this amendment would become effective within the next 60 days.
Consequently, all of Mr. Humphrey's outstanding options are included in the
table. See, "Interests of Directors and Executive Officers in the Delta Apparel
Distribution -- Early Exercisability of Delta Woodside Stock Options."
(14) Dr. James F. Kane is a director of Delta Apparel. He is also a
director of Delta Woodside and Duck Head.
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<PAGE>
(15) Dr. Max Lennon is a director of Delta Apparel. He is also a director
of Delta Woodside and Duck Head.
(16) Herbert M. Mueller is Vice President, Chief Financial Officer and
Treasurer of Delta Apparel. The number of shares shown as beneficially owned by
Mr. Mueller includes approximately 368 Delta Woodside shares (36 Delta Apparel
shares) allocated to Mr. Mueller's account in Delta Woodside's employee stock
purchase plan. The number of shares shown in the table includes an aggregate of
6,000 unissued Delta Woodside shares (600 Delta Apparel 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. Mueller will enter into an amendment to his
options pursuant to which all of his options will become exercisable prior to
the Delta Apparel distribution, and there is a likelihood that this amendment
would become effective within the next 60 days. Consequently, all of Mr.
Mueller's outstanding options are included in the table. See, "Interests of
Directors and Executive Officers in the Delta Apparel Distribution -- Early
Exercisability of Delta Woodside Stock Options."
(17) Marjorie F. Rupp is Vice President and Secretary of Delta Apparel.
The number of shares shown as beneficially owned by Ms. Rupp includes an
aggregate of 4,000 unissued Delta Woodside shares (400 Delta Apparel 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 Ms. Rupp will enter into an amendment to
her options pursuant to which all of her options will become exercisable prior
to the Delta Apparel distribution, and there is a likelihood that this amendment
would become effective within the next 60 days. Consequently, all of Ms. Rupp's
outstanding options are included in the table. See, "Interests of Directors and
Executive Officers in the Delta Apparel Distribution -- Early Exercisability of
Delta Woodside Stock Options."
(18) Includes all shares deemed to be beneficially owned by any current
director or executive officer. Includes 4,467 Delta Woodside shares (446 Delta
Apparel shares) of Delta Woodside's common stock held for the executive officers
on December 7, 1999 by the Delta Woodside 401(k) Plan. Each participant in the
Delta Woodside 401(k) Plan has the right to direct the manner in which the
trustee of the Plan votes the shares held by the Delta Woodside 401(k) Plan that
are allocated to that participant's account. Except for shares as to which such
a direction is made, the shares held by the Delta Woodside 401(k) Plan will not
be voted. Also includes 2,120 Delta Woodside shares (212 Delta Apparel 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 127,500 unissued Delta Woodside shares (12,750 Delta Apparel
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 Delta Apparel distribution, and there is a
likelihood that such amendments would become effective within the next 60 days.
Consequently, all of such persons' outstanding options are included in the
table. See, "Interests of Directors and Executive Officers in the Delta Apparel
Distribution -- Early Exercisability of Delta Woodside Stock Options."
(19) Less than one percent.
</TABLE>
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<PAGE>
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN
THE DELTA APPAREL DISTRIBUTION
One or more executive officers of Delta Apparel and one or more members of
the Delta Apparel board of directors will receive economic benefits as a result
of the Delta Apparel distribution and the Duck Head distribution and may have
other interests in the Delta Apparel distribution and the Duck Head 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 Delta Apparel immediately
following the Delta Apparel 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 Delta Apparel Distribution -- Background of
the Delta Apparel Distribution" and "The Delta Apparel Distribution -- Reasons
for the Delta Apparel Distribution."
RECEIPT OF DELTA APPAREL STOCK OPTIONS AND DELTA APPAREL INCENTIVE STOCK AWARDS
The compensation grants committee or compensation committee of the Delta
Apparel board of directors anticipates that, during the first six months
following the Delta Apparel distribution, grants under the Delta Apparel stock
option plan and awards under the Delta Apparel incentive stock award plan will
be made to the following executive officers of Delta Apparel:
<TABLE>
<CAPTION>
Shares Covered by
Name and position Shares Covered by Options(1) Awards
- ---------------------------------------- ---------------------------- ------------------
<S> <C> <C>
Robert W. Humphreys [to be determined] [to be determined]
President and Chief Executive Officer
Herbert M. Mueller [to be determined] [to be determined]
Vice President, Chief Financial Officer
and Treasurer
Marjorie F. Rupp [to be determined] [to be determined]
Vice President and Secretary
___________________________________
<FN>
(1) The compensation grants committee or the compensation committee of the
Delta Apparel board of directors anticipates that the stock options will be
granted at various dates during the six month period. The exercise price
for any option will be the stock's closing market value at the date of
grant.
</TABLE>
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<PAGE>
PAYMENTS IN CONNECTION WITH DELTA APPAREL DISTRIBUTION AND DUCK HEAD
DISTRIBUTION
The Delta Woodside board of directors currently anticipates that, in
connection with the Delta Apparel distribution and the Duck Head distribution,
special cash bonuses may be awarded by Delta Woodside to the following
individuals who are members of the Delta Apparel board of directors:
Name Cash bonus ($)
---- --------------
William F. Garrett 306,000
C.C. Guy 32,625
Robert W. Humphreys 117,000
Dr. James F. Kane 32,625
Dr. Max Lennon 32,250
E. Erwin Maddrey, II 500,000
Buck A. Mickel 31,625
Bettis C. Rainsford 360,000
These bonuses would be made in consideration of these individuals' efforts on
behalf of Delta Woodside leading up to the Delta Apparel distribution and the
Duck Head distribution.
EARLY EXERCISABILITY OF DELTA WOODSIDE STOCK OPTIONS
Pursuant to the distribution agreement, Delta Woodside has provided the
holders of outstanding options granted under the Delta Woodside stock option
plan, whether or not those options were then exercisable, with the opportunity
to amend the terms of their Delta Woodside stock options. The amendment offered
to each holder provided that:
(i) all unexercisable portions of the holder's Delta Woodside stock
options became immediately exercisable in full five (5) business days
prior to the Delta Apparel record date, which permitted the holder to
exercise all or part of the holder's Delta Woodside stock option prior
to the Delta Apparel record date (and thereby receive Delta Apparel
shares in the Delta Apparel distribution and Duck Head shares in the
Duck Head distribution); and
(ii) any Delta Woodside stock options that remained unexercised as of
the Delta Apparel record date remain exercisable for only Delta
Woodside common shares, and for the same number of Delta Woodside
common shares at the same exercise price, after the Delta Apparel
distribution and the Duck Head distribution as before the Delta
Apparel distribution and the Duck Head distribution (and not for a
combination of Delta Woodside shares, Delta Apparel shares and Duck
Head shares).
All holders of outstanding options under the Delta Woodside Stock Option
Plan entered into the proposed amendment.
As a result of these amendments, options for Delta Woodside shares became
exercisable earlier than they otherwise would have for the following Named
Executives and members of the Delta Apparel board of directors for the following
number of shares of Delta Woodside common stock:
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<PAGE>
Name Number of Delta Woodside common shares
- ---- -------------------------------------------
covered by portion of stock options
-------------------------------------------
the exercisability of which was accelerated
-------------------------------------------
William F. Garrett 37,500
Herbert M. Mueller 4,500
Marjorie F. Rupp 3,000
LEASE TERMINATIONS
Delta Woodside has leased its principal corporate office space and space
for its benefits department, purchasing department and financial accounting
department from a corporation (Hammond Square, Ltd.), one-half of the stock of
which is owned by each of E. Erwin Maddrey, II (a director of Delta Apparel and
Duck Head and President and Chief Executive Officer (from which officer
positions he will resign in connection with the Delta Apparel distribution) and
a director of Delta Woodside) and Jane H. Greer (Vice President and Secretary of
Delta Woodside (from which officer positions she will resign in connection with
the Delta Apparel distribution)). Mr. Maddrey and Ms. Greer are also the
directors and executive officers of Hammond Square, Ltd. The lease of this
space was executed effective September 1, 1998, covers approximately 9,662
square feet at a rental rate of $13.50 per square foot per year (plus certain
other expenses) and had an expiration date of August 2003. In connection with
the Delta Apparel distribution and the Duck Head distribution, Hammond Square,
Ltd. and Delta Woodside have agreed that this lease will terminate on the Delta
Apparel distribution date in exchange for the payment by Delta Woodside to
Hammond Square, Ltd. of $135,268. Following the 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 of Delta Apparel, Duck Head and Delta Woodside). Mr.
Rainsford is a director and executive officer and Brenda L. Jones (Assistant
Secretary of Delta Woodside (from which officer positions she will resign in
connection with the Delta Apparel distribution)) is an executive officer of The
Rainsford Development Corporation. In connection with the Delta Apparel
distribution and the Duck Head distribution, The Rainsford Development
Corporation and Delta Woodside have agreed that this lease will terminate on the
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 of Delta Apparel, Duck Head and Delta Woodside) pursuant
to an agreement involving rental payments equal to 3% of gross sales of the
Edgefield store, plus 1% of gross sales of the store for utilities. Under this
lease agreement, $9,944, $11,076 and $10,947 was paid to Mr. Rainsford during
fiscal 1997, 1998 and 1999, respectively.
TRANSFERS OF LIFE INSURANCE POLICIES
In February 1991, each of E. Erwin Maddrey, II (a director of Delta Apparel
and Duck Head and President and Chief Executive Officer (from which officer
positions Mr. Maddrey will resign in connection with the Delta Apparel
distribution) and a director of Delta Woodside) and Bettis C. Rainsford (a
director of Delta Apparel, Duck Head 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,
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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 Delta Apparel distribution and the Duck Head
distribution, Delta Woodside has agreed with each of Mr. Maddrey and Mr.
Rainsford that, effective as of dates in January and February, 2000 (the dates
through which the applicable insurance premiums have been paid), that
individual's First Refusal Agreement will terminate and Delta Woodside will
transfer to the individual the $10 million life insurance policies on his life
the proceeds of which are payable to the beneficiary or beneficiaries he
selects. After this transfer, the recipient individual will be responsible for
payment the premiums on these life insurance policies. Delta Woodside will
allow the remaining $30 million of life insurance payable to Delta Woodside to
lapse.
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DESCRIPTION OF DELTA APPAREL CAPITAL STOCK
Delta Apparel has authorized common stock of 7,500,000 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 Delta Apparel common stock
are, and all the shares of Delta Apparel common stock to be distributed to the
Delta Woodside stockholders in the Delta Apparel distribution will be, fully
paid and nonassessable. The shares of Delta Apparel common stock have no
preference, conversion, exchange or cumulative voting rights.
Upon consummation of the Delta Apparel distribution, the transfer agent for
Delta Apparel common stock will be First Union National Bank.
VOTING RIGHTS
Each share of Delta Apparel common stock is entitled to one vote. Because
Delta Apparel'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 Delta Apparel
blank check preferred stock to be issued will be determined by the Delta Apparel
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 Delta Apparel distribution, the board of directors of Delta
Apparel declared a dividend distribution of one Delta Apparel common stock
purchase right (which this document refers to as a Right) for each then
outstanding share of Delta Apparel common stock. Each Right entitles the
registered holder to purchase from Delta Apparel one quarter share of its common
stock, at a cash exercise price of $__ per quarter share (equivalent to $__ per
whole share), subject to adjustment. The description and terms of the Rights
are set forth in a Shareholder Rights Agreement (which this document refers to
as the rights agreement) between Delta Apparel and First Union National Bank, as
rights agent. The number of Rights outstanding is equal to the number of shares
of the Delta Apparel common stock outstanding.
The following summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the rights agreement.
A copy of the rights agreement has been included as an exhibit to the
Registration Statement on Form 10 of which this Information Statement is a part.
You can access the Registration Statement on the Securities and Exchange
Commission's web site at www.sec.gov by searching the Edgar Archives on the
SEC's web site. You can also get a copy free of charge by calling or writing to
Delta Apparel at the telephone number or address stated under "Summary -- Delta
Apparel."
Certificates; Separation of Rights from Common Stock
Initially, the Rights will not be exercisable, will be attached to all
outstanding shares of Delta Apparel common stock, and no separate Right
certificates will be distributed. The Rights will separate from the Delta
Apparel 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 Delta Apparel
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 Delta Apparel common stock.
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Until the Distribution Date (or earlier redemption or expiration of the
Rights), (a) the Rights will be evidenced by the Delta Apparel common stock
certificates and will be transferred with and only with the Delta Apparel common
stock certificates, (b) Delta Apparel common stock certificates will contain a
notation incorporating the rights agreement by reference, and (c) the surrender
for transfer of any certificates for Delta Apparel common stock will also
constitute the transfer of the Rights associated with the Delta Apparel common
stock represented by the certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on February __, 2010 unless previously redeemed or
exchanged for Delta Apparel common stock by Delta Apparel as described below.
As soon as practicable after the Distribution Date, Right certificates will
be mailed to holders of record of Delta Apparel common stock as of the close of
business on the Distribution Date and, thereafter, the separate Right
Certificates alone will represent the Rights. Except as otherwise determined by
the board of directors, only shares of Delta Apparel 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) Delta
Apparel is the surviving corporation in a merger with an Acquiring Person or any
affiliate or associate of an Acquiring Person and the Delta Apparel 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 Delta Apparel common
stock (or in certain circumstances, cash, property, or other securities of Delta
Apparel) 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)
Delta Apparel is acquired in a merger or other business combination transaction
or (ii) 50% or more of Delta Apparel'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 Delta Apparel common stock,
the board of directors of Delta Apparel 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 Delta Apparel common stock per Right, subject to adjustment as
provided in the rights agreement.
Adjustment of Exercise Price and Underlying Shares in Certain Events
The exercise price payable, and the number of shares of Delta Apparel
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
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reclassification of, the Delta Apparel common stock, (ii) if all holders of the
Delta Apparel common stock are granted certain rights or warrants to subscribe
for Delta Apparel common stock or securities convertible into Delta Apparel
common stock at less than the current market price of the Delta Apparel common
stock, or (iii) upon the distribution to all holders of the Delta Apparel 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 Delta Apparel 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 Delta Apparel 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, Delta Apparel common stock or other consideration
deemed appropriate by the board of directors) by the board of directors at any
time prior to the earlier of the close of business on the tenth day after the
Share Acquisition Date or the final expiration date of the Rights (whichever is
earlier); provided that under certain circumstances, the Rights may not be
redeemed unless there are Disinterested Directors (as defined in the rights
agreement) in office and the redemption is approved by a majority of the
Disinterested Directors. After the redemption period has expired, Delta
Apparel's right of redemption may be reinstated upon the approval of the board
of directors if an Acquiring Person reduces his beneficial ownership to 10% or
less of the outstanding shares of Delta Apparel common stock in a transaction or
series of transactions not involving Delta Apparel and there are no other
Acquiring Persons. Immediately upon the action of the board of directors
ordering redemption of the Rights and without any notice, the Rights will
terminate and thereafter the only right of the holders of Rights will be to
receive the redemption price.
No Rights of Stockholder Until Exercise
Until a Right is exercised, the holder will have no rights as a stockholder
of Delta Apparel (beyond those as an existing stockholder), including the right
to vote or to receive dividends.
Material Federal Income Tax Consequences of Rights Plan
Although the distribution of the Rights will not be taxable to stockholders
or to Delta Apparel, stockholders may, depending upon the circumstances,
recognize taxable income in the event that the Rights become exercisable for
Delta Apparel common stock (or other consideration) of Delta Apparel or for
common stock of an acquiring company as described above.
Amendment of Rights Agreement
Any of the provisions of the rights agreement may be amended by the board
of directors of Delta Apparel prior to the Distribution Date. After the
Distribution Date, the provisions of the rights agreement, other than those
relating to the principal economic terms of the Rights, may be amended by the
board of directors to cure any ambiguity, defect or inconsistency, to make
changes which do not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person), or to shorten or lengthen any
time period under the rights agreement. Amendments adjusting time periods may,
under certain circumstances, require the approval of a majority of Disinterested
Directors, or otherwise be limited.
OTHER PROVISIONS RESPECTING STOCKHOLDER RIGHTS AND EXTRAORDINARY TRANSACTIONS
Set forth below is a brief summary of some of the provisions of Delta
Apparel's articles of incorporation and bylaws respecting stockholder rights and
extraordinary transactions that will govern your rights as a holder of Delta
Apparel common stock after the distribution. Some of these provisions may deter
takeovers of Delta Apparel that you may consider to be in your best interests.
Those takeovers could include offers for Delta Apparel common stock for a
premium over the market price of the stock. If the information in this summary
differs from the information in Delta Apparel's articles of incorporation or
bylaws, you should rely on the information in the articles of incorporation and
the bylaws.
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General
Delta Apparel is a Georgia corporation that is subject to the provisions of
the Official Code of Georgia. The rights of Delta Apparel's stockholders are
governed by its articles of incorporation and bylaws, in addition to Georgia
law.
Authorized Capital
Delta Apparel's authorized capital stock consists of 7,500,000 common
shares and 2,000,000 shares of "blank check" preferred stock.
Under Delta Apparel'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 Delta Apparel by means of a merger,
tender offer, proxy contest or otherwise, and thereby protect the continuity of
Delta Apparel'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 Delta Apparel without any further
action by its stockholders. Delta Apparel'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 Delta Apparel's
preferred stock.
Amendment of the Articles of Incorporation
Except for certain primarily ministerial amendments that may be authorized
by the Delta Apparel board of directors alone to amend Delta Apparel's articles
of incorporation, the following is required to amend Delta Apparel's articles of
incorporation: (1) an authorization by the Delta Apparel board of directors;
followed by (2) a vote of the majority of all outstanding voting stock.
Amendments of the Bylaws
Delta Apparel'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 Delta Apparel's board of directors from
time to time. This provision gives Delta Apparel'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.
Vacancies on Delta Apparel'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 Delta Apparel'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.
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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
Delta Apparel's corporate secretary within the following deadlines:
- in the case of annual meetings of stockholders, at least 120 days
before the anniversary date of the immediately preceding annual
stockholder meeting; and
- in the case of special meetings, the close of business on the seventh
day following the date that notice of the meeting was first given to
stockholders.
A stockholder's nomination for director must include:
- the name and address of the stockholder, the class and number of
shares beneficially owned by the stockholder as of any record date for
the meeting and as of the date of the notice of the meeting and the
name in which those shares are registered;
- a representation that the stockholder intends to appear in person or
by proxy at the meeting to make the nomination;
- a description of all arrangements and understandings between the
stockholder and each nominee and any other person pursuant to which
the nominations are to be made;
- other information that must be disclosed in proxy solicitations;
- the written consent of each nominee to serve as a director of Delta
Apparel if so elected; and
- any other information that Delta Apparel 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 Delta Apparel 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. Delta Apparel's articles of incorporation
contains a provision that limits the personal liability of directors "to the
fullest extent permitted" by the Official Code of Georgia.
This exculpation provision may have the effect of reducing the likelihood
of derivative litigation against Delta Apparel's directors and may discourage or
deter stockholders or Delta Apparel from bringing a lawsuit against its
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directors for breach of their fiduciary duties as directors. However, the
provision does not affect the availability of equitable remedies like an
injunction or rescission.
The foregoing liability and the indemnification provisions described below
may be materially more liberal with respect to directors than available under
the corporate laws of many other states.
Indemnification of Directors
Delta Apparel's bylaws provide that each person who was or is a party, or
is threatened to be made a party, to any threatened, pending or completed action
or proceeding, whether civil, criminal, administrative or investigative, because
that person is or was an Delta Apparel director or officer or is or was serving
at Delta Apparel's request as a director or officer of another entity, shall be
indemnified and held harmless by Delta Apparel to the fullest extent permitted
by Georgia law. This right to indemnification also includes the right to be paid
by Delta Apparel the expenses incurred in connection with that proceeding in
advance of its final disposition to the fullest extent authorized by Georgia
law.
Delta Apparel intends to purchase and maintain insurance on behalf of any
person who is or was one of its directors, officers, employees or agents, or is
or was serving at Delta Apparel'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 Delta Apparel would have the power or the obligation to
indemnify him or her against that liability under the provisions of Delta
Apparel's bylaws.
The indemnification provisions of the Official Code of Georgia and the
provisions of the Official Code of Georgia permitting liability insurance are
set forth in Delta Apparel's bylaws as a contractual right of Delta Apparel's
directors, officers and agents.
Annual Meeting of Stockholders
The annual meeting of stockholders must be held on a date and at a place
fixed by Delta Apparel's board of directors.
Special Meetings of Stockholders
Special meetings may be called at any time and for any purpose by:
- the chairman of Delta Apparel's board of directors;
- Delta Apparel'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 Delta Apparel's bylaws, stockholders may not call a special meeting
and no action may be taken by stockholders of Delta Apparel except at an annual
or special meeting of stockholders. The fact that holders of Delta Apparel
voting stock are unable to call a special meeting or to take action without a
meeting may make it more difficult for stockholders to take action opposed by
Delta Apparel's board of directors.
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Stockholder Proposals
A stockholder wishing to bring business before an annual meeting of
stockholders must provide written notice of the business by personal delivery or
by United States mail, postage pre-paid, to Delta Apparel's corporate secretary
at its principal executive offices. The notice must be received by the earlier
of the following dates:
- at least 120 days prior to the anniversary date of the immediately
preceding annual meeting; or
- at least 10 days after notice or public disclosure of the date of the
annual meeting was made or given to the stockholders.
The notice must include:
- a description of the item of business and the reasons for conducting
it at the meeting and, if the item of business includes a proposal to
amend the articles of incorporation or bylaws, the text of the
proposed amendment;
- the name and address of the stockholder, the class and number of
shares beneficially owned and represented by proxy by the stockholder
as of any record date for the meeting, and as of the date of the
notice of the meeting;
- a representation that the stockholder intends to appear in person or
by proxy at the meeting to propose the item of business; and
- any material interest of the stockholder in the item of business.
Depending on the circumstances, these timing and notice requirements may
preclude or deter some stockholders from bringing matters before an annual
meeting.
Preemptive Rights
In general, preemptive rights allow stockholders whose dividend rights or
voting rights would be adversely affected by issuing new stock to purchase, on
terms and conditions set by the board of directors, that proportion of the new
issue that would preserve the relative dividend or voting rights of those
stockholders. As permitted by Georgia law, Delta Apparel's articles of
incorporation do not grant its stockholders preemptive rights.
Stockholder Action Without Meeting
Delta Apparel'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 Delta Apparel's board of directors.
Dividends, Distributions and Liquidations
Subject to the provisions of any outstanding blank check preferred stock,
the holders of Delta Apparel common stock are entitled to receive whatever
dividends, if any, may be declared from time to time by the Delta Apparel board
of directors in its discretion from funds legally available for that purpose.
Under Georgia law, a corporation generally may pay dividends or make
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distributions on its common stock; provided, however, that no distribution may
be made if, after giving it effect, either (i) the corporation would be unable
to pay its debts when due in the ordinary course of business or (ii) the
corporation's total liabilities would exceed the sum of its total assets, plus
the total dissolution preferences of any senior classes of stock. For a
description of some of the restrictions placed on Delta Apparel'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 Delta
Apparel". The holders of Delta Apparel common stock are entitled to share on a
pro rata basis in any distribution to stockholders upon liquidation, dissolution
or winding up of Delta Apparel, 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. Delta Apparel's articles of
incorporation do not require a higher vote to approve any of those
transactions.
Georgia Business Combinations Statute
Delta Apparel is also subject to Section 14-2-1131 et seq. of the Official
Code of Georgia. In general, this section prohibits a publicly held Georgia
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of five years after the stockholder becomes an
"interested stockholder", unless:
- before that date the board of directors of that corporation
approves either the "business combination" or the transaction
that resulted in the stockholder becoming an "interested
stockholder";
- in the transaction that resulted in the stockholder becoming an
"interested stockholder", the "interested stockholder"owned at
least 90% of the voting stock of the corporation outstanding at
the time that the transaction commenced, excluding, for purposes
of determining the number of shares outstanding, shares owned by
any of the following persons (which this document refers to as
the persons excluded from the voting calculation):
- persons who are directors or officers, their affiliates
and associates;
- subsidiaries of the corporation, and
- employee stock plans that do not provide employees with
the right to determine confidentially the extent to
which shares held subject to the plan will be tendered
in a tender or exchange offer; or
- after becoming an "interested stockholder", the stockholder:
- acquired additional shares resulting in the "interested
stockholder" being the beneficial owner of at least 90%
of the voting stock of the corporation, excluding, for
purposes of determining the number of shares
outstanding, shares owned by the persons excluded from
the voting calculation; and
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- the business combination was approved at an annual or
special meeting of stockholders by the holders of a
majority of the voting stock entitled to vote,
excluding the voting stock beneficially owned by the
"interested stockholder" and the persons excluded from
the voting calculation.
A "business combination" includes a merger, consolidation, asset sale,
lease, liquidation, reclassification or securities, share exchange, issuance in
one transaction or a series of transactions of equity securities of the
corporation that have an aggregate market value of 5% or more of the aggregate
market value of the outstanding common and preferred stock of the corporation
(except pursuant to the exercise of rights granted proportionately to other
stockholders and for convertible or exercisable rights outstanding prior to the
time that the person became an interested stockholder) or other transaction
resulting in a financial benefit to the "interested stockholder".
Under this statute, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within two years did own, 10% or more
of the corporation's voting stock.
The restrictions imposed by this section will not apply to a corporation
unless its bylaws specifically provide for coverage under the statute. In its
bylaws Delta Apparel has opted into the statute. Accordingly, the
restrictions outlined above will apply to Delta Apparel.
"Relevant Factors" Provision
The articles of incorporation expressly requires the Delta Apparel 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
Delta Apparel's outstanding shares of capital stock, but also in relation to the
then current value of Delta Apparel in a freely negotiated transaction and in
relation to the Delta Apparel board of directors' estimate of the future value
of Delta Apparel (including the unrealized value of its properties and assets)
as an independent going concern, as well as any other factors that the Delta
Apparel 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 Delta Apparel in a hostile
takeover effort, and may adversely affect the price that a potential purchaser
would be willing to pay for the stock of Delta Apparel. The provisions may also
make the removal of incumbent management more difficult. The Delta Apparel
board of directors believes that these provisions are in the long-term interests
of Delta Apparel and its stockholders because they may encourage persons seeking
to acquire control of Delta Apparel to consult first with Delta Apparel's board
of directors and permit the board to consider factors other than the
relationship of the price offered to recent market prices. Delta Apparel
believes that any takeover attempt or business combination in which Delta
Apparel is involved should be thoroughly studied by Delta Apparel's board of
directors and that the Delta Apparel stockholders should have the benefit of the
Delta Apparel board's recommendation. Nonetheless, Delta Apparel's stockholders
should be aware that these provisions could reduce the market value of Delta
Apparel common stock.
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RECENT SALES OF UNREGISTERED SECURITIES
Following Delta Apparel's incorporation on December 10, 1999, Delta Apparel
issued 100 shares of its common stock for aggregate consideration of $100 to its
parent corporation, Duck Head Apparel Company, Inc., a Tennessee corporation
which is an indirect wholly-owned subsidiary of Delta Woodside, in a transaction
that was not registered under the Securities Act of 1933 because of the
exemption from registration provided by Section 4(2) of that Act. Prior to the
Delta Apparel distribution, Delta Apparel's parent corporation will merge into
its immediate parent corporation, which in turn will merge into Delta Woodside,
and Delta Apparel 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 Delta Apparel shares needed so that the Delta Apparel
distribution can be effected. The Rights described above will be attached to
the shares of common stock.
2000 ANNUAL MEETING OF DELTA APPAREL STOCKHOLDERS
Delta Apparel plans to hold an annual meeting of its stockholders in the
fall of 2000.
Any stockholder of Delta Apparel who desires to present a proposal at the
2000 annual meeting of stockholders of Delta Apparel for inclusion in the proxy
statement and form of proxy relating to that meeting must submit the proposal to
Delta Apparel at its principal executive offices on or before June 5, 2000. If
a stockholder of Delta Apparel desires to present a proposal at the 2000 annual
meeting of stockholders of Delta Apparel that will not be included in Delta
Apparel's proxy statement and form of proxy relating to that meeting, the
proposal must be submitted to Delta Apparel at its principal executive offices
no later than August 21, 2000 for the proposal to be considered timely.
FORWARD-LOOKING STATEMENTS MAY NOT BE ACCURATE
This document, particularly the material under the headings "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business of Delta Apparel", contains "forward-looking
statements". All statements, other than statements of historical fact, that
address activities, events or developments that Delta Apparel 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 Delta
Apparel's expectations and are necessarily dependent upon assumptions, estimates
and data that Delta Apparel 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 Delta Apparel's control.
Accordingly, any forward-looking statements do not purport to be predictions of
future events or circumstances and may not be realized.
Delta Apparel 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.
89
<PAGE>
INDEPENDENT AUDITORS
Delta Apparel's board of directors has appointed KPMG LLP as its
independent auditors to audit its financial statements for fiscal year 2000.
ADDITIONAL INFORMATION
Delta Apparel has filed a Registration Statement on Form 10 with the SEC
under the Securities Exchange Act of 1934 with respect to the Delta Apparel
common stock.
This document does not contain all of the information set forth in the
Registration Statement and the related exhibits to which this document refers.
Statements in this document as to the contents of any agreement or other
document are summaries only and are not necessarily complete. For complete
information as to these matters, Delta Apparel refers you to the applicable
exhibit to the Registration Statement.
You may inspect and copy the Registration Statement and the related
exhibits filed by Delta Apparel 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.
90
<PAGE>
DELTA APPAREL COMPANY
INDEX TO COMBINED FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Public Accountants F-1
Combined Balance Sheets as of July 3, 1999
and June 27, 1998 F-2
Combined Statements of Operations and Accumulated
Divisional Deficit for the Years ended July 3, 1999,
June 27, 1998 and June 28, 1997 F-3
Combined Statements of Cash Flows for the Years
ended July 3, 1999, June 27, 1998 and June 28, 1997 F-4
Notes to Combined Financial Statements F-5
Condensed Combined Balance Sheet as of
October 2, 1999 (unaudited) F-17
Condensed Combined Statements of Operations and
Accumulated Divisional Deficit for the Three Months
Ended October 2, 1999 and September 26, 1998 (unaudited) F-18
Condensed Combined Statements of Cash Flows for the
Three Months ended October 2, 1999 and
September 26, 1998 (unaudited) F-19
Notes to Unaudited Condensed Combined Financial
Statements (unaudited) F-20
91
<PAGE>
INDEPENDENT AUDITORS' REPORT
Delta Apparel Company:
We have audited the accompanying combined balance sheets of Delta Apparel
Company (the "Company"), as described in note 1, as of July 3, 1999 and June 27,
1998, and the related combined statements of operations and accumulated
divisional deficit and cash flows for each of the years in the three-year period
ended July 3, 1999. These combined financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Delta Apparel
Company as of July 3, 1999 and June 27, 1998, and the results of its operations
and cash flows for each of the years in the three-year period ended July 3,
1999, in conformity with generally accepted accounting principles.
Atlanta, Georgia
August 6, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
DELTA 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 $ 402 101
Accounts receivable, less allowances
of $5,054 in 1999 and $1,329 in 1998 24,049 25,072
Other receivables 241 869
Parent and affiliate receivables (note 8) 9 539
Inventories (notes 3 and 8) 27,034 32,289
Prepaid expenses and other current assets 883 327
Income taxes receivable 90 -
-------------- ----------
Total current assets 52,708 59,197
Property, plant and equipment, net (note 4) 31,441 40,507
Other assets 219 257
-------------- ----------
$ 84,368 99,961
============== ==========
Liabilities and Divisional Deficit
Current liabilities:
Accounts payable $ 5,270 11,484
Accrued expenses (note 5) 5,359 4,276
Current portion of long-term debt (note 6) 239 239
Due to related parties (note 8) 103,319 94,108
Deferred tax liabilities (note 7) 58 1,853
Income taxes payable - 108
-------------- ----------
Total current liabilities 114,245 112,068
Long-term debt (note 6) 100 339
Due to related parties (note 8) 30,417 30,417
Deferred tax liabilities (note 7) 1,261 173
Other liabilities 482 618
-------------- ----------
Total liabilities 146,505 143,615
Divisional deficit (62,137) (43,654)
Commitments and contingencies (notes 9, 10 and 12)
-------------- ----------
$ 84,368 99,961
============== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
(as described in Note 1)
Combined Statements of Operations and Accumulated Divisional Deficit
(Amounts in thousands)
YEAR ENDED
-------------------------------
JULY 3, JUNE 27, JUNE 28,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales $106,779 107,967 112,593
Cost of goods sold 101,125 103,867 109,334
--------- --------- ---------
Gross profit 5,654 4,100 3,259
Selling, general and administrative expenses 10,940 12,223 8,351
Intercompany management fees (note 8) 1,135 1,048 1,138
Provision for bad debts 1,645 685 41
Impairment charges (note 2) 1,415 7,459 -
Other expenses 221 505 132
--------- --------- ---------
Operating loss (9,702) (17,820) (6,403)
--------- --------- ---------
Interest (income) expense:
Interest expense (income), net 121 (162) (262)
Intercompany interest expense (note 8) 9,457 6,541 6,128
--------- --------- ---------
9,578 6,379 5,866
--------- --------- ---------
Loss before income taxes (19,280) (24,199) (12,269)
Income tax benefit (note 7) (797) (3,208) (535)
--------- --------- ---------
Net loss (18,483) (20,991) (11,734)
Accumulated divisional deficit, beginning of year (43,654) (22,663) (10,929)
--------- --------- ---------
Accumulated divisional deficit, end of year $(62,137) (43,654) (22,663)
========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
DELTA 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 $(18,483) (20,991) (11,734)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 9,208 4,312 3,672
Amortization 6 155 250
Deferred taxes (707) (3,316) (992)
Impairment charges 1,415 7,459 -
Provision for losses on accounts receivable 2,045 745 (1,487)
Loss (gain) on sale of property and equipment 347 29 (22)
Changes in operating assets and liabilities:
Accounts receivable (1,022) (7,661) 5,874
Inventories 5,255 8,409 (9,859)
Prepaid expenses and other current assets 72 310 (382)
Other noncurrent assets 38 (253) (304)
Accounts payable (6,214) 3,302 (3,243)
Accrued expenses 1,083 1,100 (55)
Income taxes payable (198) (1,730) 3,500
Due to/from affiliates 530 (4,513) 276
Other liabilities (136) 61 100
--------- --------- ---------
Net cash used in operating activities (6,761) (12,582) (14,406)
--------- --------- ---------
Investing activities:
Purchases of property, plant, and equipment (3,593) (3,658) (2,340)
Proceeds from sale of property, plant, and
equipment 1,683 302 47
--------- --------- ---------
Net cash used in investing activities (1,910) (3,356) (2,293)
--------- --------- ---------
Financing activities:
Principal payments on long-term debt (239) (239) (240)
Change in due to affiliates, net 9,211 16,274 16,885
--------- --------- ---------
Net cash provided by financing
activities 8,972 16,035 16,645
--------- --------- ---------
Increase (decrease) in cash 301 97 (54)
Cash at beginning of year 101 4 58
--------- --------- ---------
Cash at end of year $ 402 101 4
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for interest $ 33 53 69
========= ========= =========
Noncash investing activity - transfer of plant and
equipment from Parent Company $ - 18,758 -
========= ========= =========
See accompanying notes to combined financial statements.
</TABLE>
F-4
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
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 Delta Apparel Company.
Delta Apparel Company is one of two apparel divisions which operate in Duck Head
Apparel Company, Inc., a Tennessee corporation. This corporation is owned by
Alchem Capital Corporation ("Alchem"), a wholly owned subsidiary of Delta
Woodside Industries, Inc. ("DWI" or the "Parent").
In April 1998, Delta Mills, Inc., a wholly owned subsidiary of DWI and
owner of the Rainsford Yarn Mill ("Rainsford"), transferred management and
operational control of Rainsford to Delta Apparel. The accompanying combined
financial statements include the operations and accounts of Rainsford from April
1998. Delta Apparel, Rainsford and the Delta Apparel division of Delta
Consolidated Corporation, a wholly owned subsidiary of Alchem, which constitutes
the marketing and sales operations of Delta Apparel are combined and referred to
herein as the "Company". 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 manufactures and sells T-shirts, fleece goods, and sportswear
to distributors, screen printers, and private label accounts. The Company
operates manufacturing and distribution facilities in the Southeastern United
States as well as manufacturing facilities in Central America. The majority of
the Company's raw materials are readily available, and thus it is not dependent
on a single supplier.
(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 year 1999
consists of 53 weeks and fiscal years 1998 and 1997 each consist of 52 weeks.
(C) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for approximately 94% and 93% of the
inventories at July 3, 1999 and June 27, 1998, respectively. The first-in,
first-out method is principally used for the remainder.
(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 3 to 20 years. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful life of the improvements.
F-5
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
(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 assets exceed the fair value of
the assets.
During fiscal year 1999, the Company continued to operate at a loss,
continued to downsize its operations and was not using certain plant assets at
their full capacity. As a result of applying the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, the Company determined that the carrying value of certain
long-lived assets were impaired based upon the estimated cash flows generated by
the assets and based on the Company's business plan for fiscal 2000. The
Company used an estimate of market value as the basis for measurement of the
asset impairment charge. Accordingly, the Company recorded an impairment charge
of $1,415 for a write-down of fixed assets.
(F) GOODWILL
Goodwill, which represents the excess purchase price over net assets
acquired, was 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 its undiscounted estimated future operating cash flows. During
fiscal year 1998, based on management's assessment of expected future cash flows
and economic conditions, the Company recognized the impairment of the excess
cost over assigned value of net assets acquired by charging pretax income
$7,240.
(G) REVENUE RECOGNITION
Sales are recorded upon shipment.
(H) 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.
F-6
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
(I) COTTON PROCUREMENTS
The Company contracts to buy cotton with future delivery dates at fixed
prices in order to reduce the effects of fluctuations in the prices of cotton
used in the manufacture of its products. These contracts permit settlement by
delivery and are not used for trading purposes. The Company commits to fixed
prices on a percentage of its cotton requirements up to eighteen months in the
future. If market prices for cotton fall below the Companys committed fixed
costs and it is estimated that the costs of cotton are not recoverable in future
sales of finished goods, the differential is charged to income at that time.
(J) 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.
(K) 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 nonowner sources.
Comprehensive income approximates the net loss for all periods presented.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise with Related Information. SFAS No. 131 establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for financial statements for fiscal
years beginning after December 31, 1997. The Company does not believe it has
any reportable segments.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities which was subsequently deferred by SFAS No.
137. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 2000. The Company will determine the applicability of
SFAS No. 133 and apply it if necessary.
F-7
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
(3) INVENTORIES
Inventories consist of the following:
JULY 3, JUNE 27,
1999 1998
-------- --------
Raw materials $ 2,731 4,588
Work in process 7,768 9,073
Finished goods 16,535 18,628
-------- --------
$ 27,034 32,289
======== ========
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
ESTIMATED JULY 3, JUNE 27,
USEFUL LIFE 1999 1998
----------- --------- ---------
Land and land improvements N/A $ 1,778 1,946
Buildings 20 years 12,043 14,202
Machinery and equipment 10-15 years 57,825 62,871
Computers and software 3 years 2,310 3,502
Furniture and fixtures 7 years 432 1,614
Leasehold improvements 3-10 years 733 750
Automobiles 5 years 50 202
Construction in progress N/A 63 2,844
--------- ---------
75,234 87,931
Less accumulated depreciation (43,793) (47,424)
and amortization --------- ---------
$ 31,441 40,507
========= =========
F-8
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
(5) ACCRUED EXPENSES
Accrued expenses consist of the following:
JULY 3, JUNE 27,
1999 1998
-------- --------
Accrued employee compensation and benefits $ 2,619 2,091
Taxes accrued and withheld 699 604
Accrued insurance 1,016 984
Accrued advertising 333 45
Other 692 552
-------- --------
$ 5,359 4,276
======== ========
(6) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 3, JUNE 27,
1999 1998
-------- --------
<S> <C> <C>
Promissory note secured by property and a lien upon certain
real property of the Company, interest at 86.67% of the prime
rate (6.93% at July 3, 1999) and 72% of the prime rate (7.4%
at June 27, 1998) payable monthly, principal payable in
monthly installments of $20 with final payment due December
1, 2000 $ 339 578
Less current installments 239 239
-------- --------
Long-term debt, excluding current installments $ 100 339
======== ========
</TABLE>
The aggregate maturities of long-term debt are as follows:
FISCAL YEAR
------------
2000 $ 239
2001 100
---------
$ 339
=========
F-9
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
(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 that is 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 $ -- -- --
State (90) 108 457
--------- --------- ---------
Total current (90) 108 457
Deferred:
Federal (465) (3,659) (922)
State (242) 343 (70)
--------- --------- ---------
Total deferred (707) (3,316) (992)
--------- --------- ---------
Income tax benefit $ (797) (3,208) (535)
========= ========= =========
</TABLE>
A reconciliation between actual income tax benefit and the income tax
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 $ (6,748) (8,470) (4,294)
State income tax expense (benefit) net of
Federal income taxes (216) 293 105
Valuation allowance adjustments 6,606 2,518 3,719
Nondeductible amortization and
other permanent differences (87) 2,538 --
Other (352) (87) (65)
--------- --------- ---------
Income tax benefit $ (797) (3,208) (535)
========= ========= =========
</TABLE>
F-10
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
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 carryforward $ 15,619 13,924
Investment tax credit 617 617
Currently nondeductible accruals 1,754 965
Other 203 --
--------- ---------
Gross deferred tax assets 18,193 15,506
Less valuation allowance (15,711) (9,105)
--------- ---------
Net deferred tax assets 2,482 6,401
--------- ---------
Deferred tax liabilities:
Depreciation 3,801 6,224
Inventories -- 1,497
Other -- 706
--------- ---------
Deferred tax liabilities 3,801 8,427
--------- ---------
Net deferred tax liability $ (1,319) (2,026)
========= =========
</TABLE>
The valuation allowance for deferred tax assets as of July 3, 1999 and
June 27, 1998 was $15,711 and $9,105, respectively. The net change in the total
valuation allowance for the years ended July 3, 1999 and June 27, 1998 was an
increase of $6,606 and $2,518, 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 that 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 $32 million and $7.9 million in loss carryforwards subject to
limitations, for Federal purposes as calculated under the corporate tax sharing
arrangement. The Company also has state net operating loss carryforwards of
approximately $28 million calculated under the corporate tax sharing
arrangement. These carryforwards expire at various intervals through 2013. If
the Company leaves its current consolidated group, these carryovers may not be
available for future use.
F-11
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
(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., including Delta Mills, Inc. $133,789 124,104
Stevcoknit Fabrics, a division of Delta Mills, Inc. -- (83)
Duck Head Apparel Company (85) (35)
Delta Mills Marketing, a division of Delta Mills, Inc. 23 --
--------- ---------
$133,727 123,986
========= =========
</TABLE>
The Company purchased yarn from Rainsford totaling $3,087 and $2,489 in
fiscal 1998 and 1997, respectively. In addition, the Company had sales to Duck
Head Apparel Company of $465, $156, and $403 in fiscal 1999, 1998, and 1997,
respectively.
The Company participates in a cash management system maintained by DWI.
Under this system, excess cash is forwarded to DWI each day, reducing the due to
parent. Likewise, cash requirements are funded daily by DWI, increasing the 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.
For fiscal 1998, the balance with DWI is primarily due to a $60 million
note due DWI plus accrued interest of $7.2 million.
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.
F-12
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
(9) LEASES
The Company has several noncancelable operating leases relating to
buildings, office equipment, machinery and equipment, and computer systems.
Future minimum lease payments under noncancelable operating leases as of
July 3, 1999 were as follows:
FISCAL YEAR
------------
2000 $ 1,102
2001 286
2002 22
2003 10
2004 6
--------
$ 1,426
========
Rent expense for all operating leases was approximately $1,410, $1,806, and
$904 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 $132, $71, and $85 to the 401(k) Plan during fiscal 1999, 1998,
and 1997, respectively. The Company contributed approximately $90, $155, and
$155 to the Retirement Plan and /or 401(k) Plan during fiscal 1999, 1998, and
1997, respectively.
The Company also participates in a 501(c)(9) trust, the Delta Woodside
Employee Benefit Plan and Trust ("Trust"). The Trust collects both employer and
employee contributions from the Company and makes disbursements for health
claims and other qualified benefits.
F-13
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
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 $481 and $465,
respectively. The Company contributed approximately $6, $10, and $8 to the
Deferred Compensation Plan during fiscal 1999, 1998, and 1997, respectively.
The Company also participates in the Delta Woodside Industries, Inc.
Incentive Stock Award Plan and Stock Option Plan. Under both Plans, the Company
recognized expense of approximately $521, $166, and $164 for fiscal years 1999,
1998, and 1997, respectively.
(11) 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.
(12) COMMITMENTS AND CONTINGENCIES
(A) LITIGATION
The Company is a defendant in a legal action involving a product liability
claim. The Company believes that, as a result of legal defenses, insurance
arrangements, and indemnification provisions with parties believed to be
financially capable, this action should not have a material effect on its
operations or financial condition.
(B) POSTRETIREMENT BENEFITS
The Company provides postretirement life insurance benefits for certain
retired employees. The Plan is noncontributory and is unfunded. Expenses are
paid from the general assets of the Company. All the employees in the Plan are
fully vested.
The Company has applied the transition provisions of SFAS 106 Employers
Accounting for Postretirement Benefits Other Than Pensions and accordingly is
recognizing the transition obligation on a straight-line basis over the average
remaining life expectancy of the Plan participants, which is 12 years.
The postretirement liability recognized on the balance sheet was $1,200 and
$446 for fiscal years 1999 and 1998, respectively. This was determined based on
the total liability due the participants of approximately $2,200 less claims
paid to date using a discount rate of 6.8%. In 1999, based upon an actuarial
determination, the present value of the remaining obligation was determined to
be $1,200 therefore the Company chose to accelerate the recognition of the
liability. The remaining liability will be recognized through fiscal 2003.
F-14
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
(C) COTTON PROCUREMENTS
The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At July 3, 1999, minimum
payments under these contracts with non-cancelable contract terms were $14,800.
(13) 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 28 DECEMBER 28 MARCH 29 JUNE 28
-------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Net sales $ 25,131 17,950 20,598 43,100
Gross profit 4,076 1,180 (695) 1,093
Operating loss 667 (1,290) (3,362) (5,717)
Net loss (734) (2,130) (3,582) (12,037)
1998 QUARTER ENDED
--------------------------------------------------
SEPTEMBER 27 DECEMBER 27 MARCH 28 JUNE 27
------------- ------------ ---------- --------
Net sales $ 26,550 21,939 25,524 33,954
Gross profit (647) (316) 2,624 2,439
Operating loss (3,770) (3,631) (8,322) (2,097)
Net loss (3,458) (2,871) (6,512) (8,150)
</TABLE>
During the fourth quarter of fiscal year 1999, the Company recognized an
impairment loss of $1,415 on certain property and equipment that was written
down to estimated net realizable value.
During the third quarter of fiscal year 1998, the Company recognized
impairment of the excess cost over assigned value of net assets acquired by
charging pretax income for $7,459.
F-15
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
Condensed Combined Balance Sheet
(Amounts in thousands)
(unaudited)
OCTOBER 2, 1999
-----------------
ASSETS
<S> <C>
Current Assets:
Cash $ 102
Accounts and other receivables, net 16,268
Inventories 25,716
Prepaid expenses and other current assets 959
Income taxes receivable 208
-----------------
Total current assets 43,253
Property, plant and equipment, net 29,880
Other assets 197
-----------------
$ 73,330
=================
LIABILITIES AND DIVISIONAL DEFICIT
Current Liabilities:
Current installments on long-term debt $ 239
Accounts payable and accrued liabilities 13,214
Due to affiliates 89,890
Deferred tax liabilities 516
-----------------
Total current liabilities 103,589
Long-term debt 30,457
Deferred tax liabilities 1,112
Other long-term liabilities 498
-----------------
Total liabilities 135,926
Divisional deficit (62,596)
-----------------
$ 73,330
=================
</TABLE>
See accompanying notes to condensed combined financial statements.
F-16
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
Condensed Combined Statements of Operations and Accumulated Divisional Deficit
(Amounts in thousands)
(unudited)
FOR THE THREE MONTHS ENDED
OCTOBER 2, SEPTEMBER 26,
1999 1998
--------- -------------
<S> <C> <C>
Net sales $ 28,659 25,131
Cost of goods sold 24,966 21,028
--------- -------------
Gross profit 3,693 4,103
Selling, general and administrative expenses 1,905 3,334
Other expenses 11 86
--------- -------------
Operating income 1,777 683
--------- -------------
Interest expense, net 2,213 2,194
--------- -------------
Loss before taxes (436) (1,511)
Income tax expense (benefit) 23 (63)
--------- -------------
Net loss (459) (1,448)
Accumulated divisional deficit, beginning of period (62,137) (43,654)
--------- -------------
Accumulated divisional deficit, end of period $(62,596) (45,102)
========= =============
</TABLE>
See accompanying notes to condensed combined financial statements.
F-17
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
Condensed Combined Statements of Cash Flows
(Amounts in thousands)
(unaudited)
FOR THE THREE MONTHS ENDED
------------------------
OCTOBER 2, SEPTEMBER 26,
1999 1998
--------- -------------
<S> <C> <C>
Operating activities:
Net loss $ (459) (1,448)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 1,639 1,659
Deferred taxes 189 --
Loss (gain) on sale of property and equipment (1) 1,022
Changes in operating assets and liabilities
Accounts receivable 8,031 5,080
Inventories 1,318 (3,306)
Prepaid expenses and other current assets (76) (1,047)
Other noncurrent assets 22 (51)
Accounts payable and accrued expenses 2,587 (4,105)
Income taxes payable -- (110)
--------- -------------
Net cash provided by (used in) operating activities 13,250 (2,306)
--------- -------------
Investing activities:
Purchases of property, plant and equipment (127) (1,446)
Assets held for sale 48 ---
Proceeds from sale of property, plant and equipment 2 ---
--------- -------------
Net cash used in investing activities (77) (1,446)
--------- -------------
Financing activities:
Principal payment on long-term debt (60) (60)
Other long-term liabilities 16 2,388
Change in due to related parties, net (13,429) 1,399
--------- -------------
Net cash provided by (used in) financing activities (13,473) 3,727
--------- -------------
Decrease in cash (300) (25)
Cash at beginning of period 402 101
--------- -------------
Cash at end of period $ 102 76
========= =============
Supplemental cash flow information:
Cash paid during the period for interest $ 6 11
========= =============
See accompanying notes to condensed combined financial statements.
</TABLE>
F-18
<PAGE>
DELTA APPAREL COMPANY
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(Amounts in thousands)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed combined financial statements for the three
months ended October 2, 1999 and September 26, 1998, respectively, include the
operations and accounts of Delta Apparel Company, a division of Duck Head
Apparel Company, Inc., a Tennessee Corporation and Rainsford Yarn Mill, a
division of Delta Mills, Inc. Duck Head Apparel, Inc. and Delta Mills, Inc. are
wholly owned subsidiaries of DWI. These condensed combined financial statements
included herein have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations relating to interim financial statements.
In the opinion of management, the accompanying unaudited interim condensed
combined financial statements reflect all adjustments, consisting of only
normal, recurring adjustments, necessary to present fairly the financial
position of the Company at October 2, 1999, and the results of its operations
and its cash flows for the three months ended October 2, 1999 and September 26,
1998, respectively. The results for the three months ended October 2, 1999 are
not necessarily indicative of the expected results for the full year or any
future period. The unaudited condensed combined financial statements included
herein should be read in conjunction with the combined financial statements and
notes thereto included in this filing.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out (LIFO) method for approximately 92% of the inventories at
October 2, 1999.
Inventories consist of the following:
OCTOBER 2,
1999
------
Raw materials 2,247
Work in process 9,358
Finished goods 14,111
------
25,716
======
NOTE 3- COTTON PROCUREMENTS
Delta Apparel has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At October 2, 1999 minimum
payments under these contracts with non-cancelable contract terms were $12.4
million.
F-19
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
Valuation and Qualifying accounts
Fiscal 1999, 1998 and 1997
ALLOWANCES: BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------------- ----------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Year ended July 3, 1999 $ 1,329,000 4,854,000 -- 1,129,000 5,054,000
- ------------------------ ------------- ----------- ---------- ---------- --------------
Year ended June 27, 1998 584,000 880,000 483,000 (1) 618,000 1,329,000
- ------------------------ ------------- ----------- ---------- --- ---------- --------------
Year ended June 28, 1997 2,071,000 (288,000) -- 1,199,000 584,000
- ------------------------ ------------- ----------- ---------- ---------- --------------
<FN>
(1) To reinstate receivable previously written off.
</TABLE>
S-1
<PAGE>
