SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10/A
(Amendment No. 2)
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
Delta Apparel, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-2508794
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
3355 Breckinridge Blvd., Suite 100, Duluth, GA 30096
(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
------------------- ------------------------------
Common Stock, par value $0.01 American Stock Exchange
Common Stock Purchase Rights American Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act:
None
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Except as otherwise indicated below, the information required to be
contained in this Registration Statement on Form 10/A of Delta Apparel, Inc., a
Georgia corporation ("Delta Apparel" or "the Company"), is contained in the
Information Statement included as Exhibit 99.1 hereto (the "Information
Statement") and is incorporated herein by reference from that document as
specified below. Below is a list of the items of information required by the
instructions to Form 10 and the locations in the Information Statement where
such information can be found if not otherwise included below.
ITEM 1. BUSINESS.
See "Business of Delta Apparel"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - First Six Months of Fiscal Year 2000 versus
First Six Months of Fiscal Year 1999 - Order Backlog"
ITEM 2. FINANCIAL INFORMATION.
See "Summary -- Selected Historical Financial Data"
"Management's Discussion and Analysis of Financial Conditions and
Results of Operations" ("MD&A")
"MD&A -- Quantitative and Qualitative Disclosures About Market Risk"
ITEM 3. PROPERTIES.
See "Business of 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*
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(b) Exhibits.
2.1 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. *
3.2.1 Bylaws of the Company. *
3.2.2Amendment to Bylaws of the Company adopted January 20,
2000.*
3.2.3Amendment to Bylaws of the Company adopted February 17,
2000.*
4.1 See Exhibits 3.1, 3.2.1, 3.2.2 and 3.2.3.
4.2 Specimen certificate for common stock, par value $0.01 per
share, of the Company.
4.3 Shareholder Rights Agreement, dated January 27, 2000, by and
among the Company and First Union National Bank.*
10.1 See Exhibits 2.1 and 4.3.
10.2 Tax Sharing Agreement by and among Delta Woodside
Industries, Inc., 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 Delta Apparel, Inc. 2000 Stock Option Plan, Effective as of
February 15, 2000, Amended & Restated March 15, 2000.*
10.5 Delta Apparel, Inc. Incentive Stock Award Plan, Effective
February 15, 2000, Amended & Restated March 15, 2000.*
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10.6 Delta Apparel, Inc. Deferred Compensation Plan for Key
Managers.*
10.7 Form of Amendment of Certain Rights and Benefits Relating to
Stock Options and Deferred Compensation by and between Delta
Woodside Industries, Inc., the Company and certain
pre-spin-off Delta Woodside Industries, Inc, plan
participants. * (Several persons will sign substantially
identical documents. A schedule listing director and officer
signatories will be filed by amendment.)
21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule (electronic filing only).
99.1 Information Statement of Delta Apparel, Inc.
99.2 Valuation and Qualifying Accounts
* Previously filed with initial filing or Amendment No. 1
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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: May 2, 2000 By: /s/ Herbert M. Mueller
-------------- --------------------------------
Herbert M. Mueller
Vice President, Chief Financial Officer
and Treasurer
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EXHIBITS
2.1 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. *
3.2.1 Bylaws of the Company. *
3.2.2 Amendment to Bylaws of the Company adopted January 20, 2000.*
3.2.3 Amendment to Bylaws of the Company adopted February 17, 2000.*
4.1 See Exhibits 3.1, 3.2.1, 3.2.2 and 3.2.3.
4.2 Specimen certificate for common stock, par value $0.01 per share, of the
Company.
4.3 Shareholder Rights Agreement, dated January 27, 2000, by and among the
Company and First Union National Bank.*
10.1 See Exhibits 2.1 and 4.3.
10.2 Tax Sharing Agreement by and among Delta Woodside Industries, Inc., 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 Delta Apparel, Inc. 2000 Stock Option Plan, Effective as of February 15,
2000, Amended & Restated March 15, 2000.*
10.5 Delta Apparel, Inc. Incentive Stock Award Plan, Effective February 15,
2000, Amended & Restated March 15, 2000.*
10.6 Delta Apparel, Inc. Deferred Compensation Plan for Key Managers.*
10.7 Form of Amendment of Certain Rights and Benefits Relating to Stock Options
and Deferred Compensation by and between Delta Woodside Industries, Inc.,
the Company and certain pre-spin-off Delta Woodside Industries, Inc, plan
participants. * (Several persons will sign substantially identical
documents. A schedule listing director and officer signatories will be
filed by amendment.)
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21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule (electronic filing only).
99.1 Information Statement of Delta Apparel, Inc.
99.2 Valuation and Qualifying Accounts
* Previously filed with initial filing.
8
DELTA APPAREL, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF GEORGIA
DA ____________ Shares
COMMON STOCK SEE REVERSE FOR
THIS CERTIFICATE IS TRANSFERABLE IN CERTAIN DEFINITIONS
NEW YORK, NEW YORK OR CUSIP 247368 10 3
CHARLOTTE, NORTH CAROLINA
This is to certify that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $0.01, OF
Delta Apparel, Inc. transferable on the books of the Corporation in person or by
duly authorized Attorney upon surrender of this Certificate properly endorsed.
This Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
VICE PRESIDENT AND SECRETARY. PRESIDENT AND CHIEF EXECUTIVE OFFICER.
COUNTERSIGNED AND REGISTERED:
FIRST UNION NATIONAL BANK
(CHARLOTTE, NORTH CAROLINA)
TRANSFER AGENT
AND REGISTRAR
BY: ____________________________
AUTHORIZED SIGNATURE
<PAGE>
DELTA APPAREL, INC.
This certificate also evidences and entitles the holder hereof to certain Rights
as set forth in a Shareholder Rights Agreement between Delta Apparel, Inc. and
First Union National Bank, as Rights Agent, dated as of January 27, 2000 (the
"Rights Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal offices of Delta
Apparel, Inc. Under certain circumstances, as set forth in the Rights Agreement,
such Rights will be evidenced by separate certificates and will no longer be
evidenced by this certificate. Delta Apparel, Inc. will mail to the holder of
this certificate a copy of the Rights Agreement, as in effect on the date of
mailing, without charge promptly after receipt of a written request therefor.
Under certain circumstances, Rights issued to Acquiring Persons or any
Affiliates or Associates thereof (as defined in the Rights Agreement) and any
subsequent holder of such Rights may become null and void.The following
abbreviations, when used in the inscription on the face of this certificate,
shall be construed as though they were written out in full according to
applicable laws or regulations:
TEN COM-as tenants in common UNIF GIFT MIN ACT .....Custodian .....
TEN ENT-as tenents by the entireties Cust. Minor
JT TEN- as joint tenants with right of under Uniform Gift to Minors
survivorship and not as tenants Act .................
in common State
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------- shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated:
-----------------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
-------------------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15. KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED
OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> JUL-01-2000
<CASH> 69
<SECURITIES> 0
<RECEIVABLES> 17988
<ALLOWANCES> (4015)
<INVENTORY> 29449
<CURRENT-ASSETS> 44405
<PP&E> 73070
<DEPRECIATION> (43929)
<TOTAL-ASSETS> 73722
<CURRENT-LIABILITIES> 110549
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (67764)
<TOTAL-LIABILITY-AND-EQUITY> 73722
<SALES> 50221
<TOTAL-REVENUES> 50221
<CGS> (43511)
<TOTAL-COSTS> (43511)
<OTHER-EXPENSES> (3691)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4286)
<INCOME-PRETAX> (1267)
<INCOME-TAX> (59)
<INCOME-CONTINUING> (1208)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1208)
<EPS-BASIC> (.50)
<EPS-DILUTED> (.50)
</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 May
19, 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 May 19, 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 June 2, 2000.
------------------------
The American Stock Exchange has approved shares of Delta Apparel's common
stock for listing, subject to official notice of issuance.
------------------------
You should carefully review this entire document. In reviewing this
document, you should carefully consider the matters affecting 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 14.
------------------------
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 May 9, 2000, and Delta Apparel first mailed
this document to stockholders on May 10, 2000.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE DELTA APPAREL DISTRIBUTION.....................................................3
SUMMARY .......................................................................................................7
RISK FACTORS..................................................................................................14
THE DELTA APPAREL DISTRIBUTION................................................................................25
TRADING MARKET ...............................................................................................42
RELATIONSHIPS AMONG DELTA APPAREL, DELTA WOODSIDE AND DUCK HEAD ..............................................44
CAPITALIZATION ...............................................................................................53
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.............................................................54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................................................60
BUSINESS OF DELTA APPAREL.....................................................................................68
MANAGEMENT OF DELTA APPAREL...................................................................................74
SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS AND
MANAGEMENT...................................................................................................84
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE
DELTA APPAREL DISTRIBUTION...................................................................................90
DESCRIPTION OF DELTA APPAREL CAPITAL STOCK....................................................................95
2000 ANNUAL MEETING OF DELTA APPAREL STOCKHOLDERS............................................................105
FORWARD-LOOKING STATEMENTS MAY NOT BE ACCURATE...............................................................105
INDEPENDENT AUDITORS.........................................................................................105
ADDITIONAL INFORMATION.......................................................................................106
INDEX TO COMBINED FINANCIAL STATEMENTS.......................................................................107
INDEPENDENT AUDITOR'S REPORT.............................................................................. 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 SIX MONTHS........................................................................... F-17
</TABLE>
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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 distribute simultaneously 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 May 19, 2000. (This document
refers to this record date for the Delta Apparel distribution as the
Delta Apparel record date, and to 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 May 19,
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 May 19, 2000, the Duck Head record date. After
the Delta Apparel distribution and the Duck Head distribution, you will
also continue to own the shares of Delta Woodside common stock that you
owned immediately before the Delta Apparel distribution and the Duck Head
distribution.
Q: WILL I BE TAXED AS A RESULT OF THE DELTA APPAREL DISTRIBUTION?
A: Delta Woodside has obtained an opinion from KPMG LLP that it is more likely
than not that each of the Delta Apparel distribution and the Duck Head
distribution will qualify as tax-free under US Internal Revenue Code
Section 355. If the Delta Apparel distribution and the Duck Head
distribution qualify as tax-free under US Internal Revenue Code Section
355, your receipt of Delta Apparel shares in the Delta Apparel distribution
and Duck Head shares in the Duck Head distribution will be tax-free for
United States federal income tax purposes, except that you will be taxed on
any gain attributable to cash that you receive in lieu of a fractional
share.
3
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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, First Union National Bank (which this document refers to as the
distribution agent), will automatically send to you a stock certificate for
the number of whole shares of Delta Apparel common stock to which you are
entitled. This stock certificate will be mailed to you on or around June 2,
2000.
Q: WHAT IF I HOLD MY SHARES OF DELTA WOODSIDE COMMON STOCK THROUGH MY
STOCKBROKER, BANK OR OTHER NOMINEE?
A: If you hold your shares of Delta Woodside common stock through your
stockbroker, bank or other nominee, you are probably not a registered
stockholder of record and your receipt of 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 June 2,
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.
4
<PAGE>
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: The American Stock Exchange has approved shares of Delta Apparel's common
stock for listing, subject to official notice of issuance.
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 June 2, 2000. Delta Apparel believes, however, that there is a
possibility 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 June 2, 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 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.
5
<PAGE>
Q: HOW WILL I BE ABLE TO BUY AND SELL DELTA WOODSIDE COMMON STOCK BEFORE THE
DELTA APPAREL DISTRIBUTION DATE?
A: Delta Woodside expects that its common stock will continue to trade on the
New York Stock Exchange on a regular basis through the 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 May 17 and June 2, 2000) will be
accompanied by an attached "due bill" representing Delta Apparel common
stock to be distributed in the Delta Apparel distribution and Duck Head
common stock to be distributed in the Duck Head distribution.
Delta Woodside does not expect 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 could 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.
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, and after the
Duck Head distribution Delta Woodside will not own any of Duck Head's
common stock. Seven of Delta Apparel's initial directors will also be Delta
Woodside directors after the Delta Apparel 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 44-52.
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
6
<PAGE>
SUMMARY
The following information and the material under the heading "Questions and
Answers About the Delta Apparel Distribution" are a brief summary of the matters
that this document addresses. This summary and the material under the heading
"Questions and Answers About the Delta Apparel Distribution" do 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. All descriptions in this document of Delta
Apparel's business assume that the transactions contemplated by the distribution
had been consummated.
DELTA APPAREL
Delta Apparel is a Georgia corporation with its principal executive offices
located at 3355 Breckinridge Blvd., Suite 100, Duluth, Georgia 30096 (telephone
number: 770-806-6800). Delta Apparel is a vertically integrated supplier of knit
apparel, particularly T-shirts, sportswear and fleece goods. Approximately 92%
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 April 1, 2000 had approximately
2,100 employees.
THE DELTA APPAREL DISTRIBUTION
The following information and the material under the heading "Questions and
Answers About the Delta Apparel Distribution" are 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 AND DUCK HEAD
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;
7
<PAGE>
(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) As a reason to accomplish the Duck Head distribution, 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 May 19,
2000. Based on the number of shares of Delta Woodside common stock
outstanding as of April 25, 2000, the Delta Apparel distribution ratio
of one Delta Apparel common share for every ten Delta Woodside common
shares and the number of Delta Woodside shares to be issued before the
Delta Apparel record date as described in "Interests of Directors and
Executive Officers in the Delta Apparel Distribution - Payments in
Connection with Delta Apparel Distribution and Duck Head
Distribution", Delta Woodside will distribute approximately 2,400,000
shares of Delta Apparel common stock to Delta Woodside stockholders.
After the Delta Apparel distribution, Delta Apparel will have
approximately 1,500 stockholders of record.
8
<PAGE>
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 May 19, 2000.
DELTA APPAREL RECORD DATE
May 19, 2000 (5:00 p.m., Eastern time).
DELTA APPAREL DISTRIBUTION DATE
June 2, 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
Delta Woodside has appointed 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. The American Stock Exchange has approved shares of Delta
Apparel's common stock for listing, subject to official notice of
issuance. Delta Apparel believes that there is a possibility that a
"when-issued" trading market will develop before the Delta Apparel
distribution date.
RISK FACTORS
You should carefully consider the matters discussed under the section
of this document entitled "Risk Factors".
RELATIONSHIP WITH DELTA WOODSIDE AND DUCK HEAD AFTER THE DELTA APPAREL
DISTRIBUTION
Delta Apparel has entered into a distribution agreement with Delta
Woodside and Duck Head dated as of March 15, 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 44 to 48 of this document.
9
<PAGE>
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-20 of this document, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which begins on page 60 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 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 January 1, 2000 and
December 26, 1998 and for the six months ended January 1, 2000 and December 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.
10
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Fiscal Year Ended Six Months Ended
------------------------------------------------------------------- --------------------------
July 3, June 27, June 28, June 29, July 1, January 1, December
------- -------- -------- -------- ------- ---------- --------
1999 1998 1997 1996 1995 2000 26, 1998
------- -------- -------- -------- ------- ---------- ----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net Sales $ 106,779 107,967 112,593 124,601 104,257 50,221 43,081
Cost of goods sold (101,125) (103,867) (109,334) (108,660) (85,927) (43,511) (37,825)
Selling, general and
administrative expenses (13,720) (13,956) (9,530) (10,945) (10,974) (3,679) (5,561)
Impairment charges (1,415) (7,459) - (2,393) - - -
Other income (loss) (221) (505) (132) 501 55 (12) (318)
------------ ------------ ------------ ----------- ------------- ------------- ------------
Operating income (loss) (9,702) (17,820) (6,403) 3,104 7,411 3,019 (623)
Interest expense, net (9,578) (6,379) (5,866) (5,736) (5,620) (4,286) (4,416)
------------ ------------ ------------ ----------- ------------- ------------- ------------
Income (loss) before
taxes
(19,280) (24,199) (12,269) (2,632) 1,791 (1,267) (5,039)
Income tax expense
(benefit) (90) 108 (208) (342) 976 (59) (23)
------------ ------------ ------------ ----------- ------------- ------------- ------------
Income (loss) before
cumulative change in
accounting principle (19,190) (24,307) (12,061) (2,290) 815 (1,208) (5,016)
Cumulative effect of
change in accounting
principle - - - (182) - - -
------------ ------------ ------------ ----------- ------------- ------------- ------------
Net income (loss) $ (19,190) (24,307) (12,061) (2,472) 815 (1,208) (5,016)
============ ============ ============ =========== ============= ============= ============
BALANCE SHEET DATA (AT PERIOD END):
=====================================================
Working capital
(deficit) $ (67,217) (56,756) 10,333 13,357 14,093 (66,144) (57,462)
Total assets 84,357 99,950 90,704 95,299 106,491 73,722 99,287
Total long-term debt 30,517 30,756 63,186 60,818 61,057 30,417 30,696
Divisional deficit (66,556) (47,366) (23,059) (10,998) (8,526) (67,764) (52,382)
</TABLE>
11
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The unaudited pro forma financial data set forth below are derived from the
unaudited pro forma combined financial statements of Delta Apparel at and for
the six month period ended January 1, 2000 and for the year ended July 3, 1999
that are set forth under the heading "Unaudited Pro Forma Combined Financial
Statements" and give effect to the transactions described in that section of
this document as if those transactions had occurred, in the case of the pro
forma balance sheet, on the date of that balance sheet and, in the case of the
pro forma statements of operations, at the beginning of the fiscal year that
ended July 3, 1999.
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 six
month period ended January 1, 2000, included on pages 54-59 and F-1 to F-20,
respectively.
12
<PAGE>
<TABLE>
<CAPTION>
FISCAL SIX MONTHS
YEAR ENDED ENDED
JULY 3, 1999 JANUARY 1, 2000
--------------------- --------------------
(dollars in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Net sales $ 106,779 50,221
Cost of goods sold (101,125) (43,511)
--------------------- ------------------------
Gross Profit 5,654 6,710
Selling, general and administrative expenses (10,940) (3,563)
Intercompany management fees (550) (162)
Provision for bad debt (1,645) (116)
Impairment charges (1,415) ---
Other expenses (221) (12)
--------------------- ------------------------
Operating income (loss) (9,117) 2,857
Interest (income) expense:
Interest expense, net (2,584) (692)
Intercompany interest expense --- ---
--------------------- ------------------------
(2,584) (692)
--------------------- ------------------------
Income (loss) before taxes (11,701) 2,165
Income tax expense (benefit) (90) 48
--------------------- ------------------------
Net income (loss) $ (11,611) 2,117
===================== ========================
Basic and diluted net income (loss) per share $ (4.84) 0.88
===================== ========================
Weighted average shares outstanding used in basic and
diluted per share calculation (a) 2,400,000 2,400,000
===================== ========================
BALANCE SHEET DATA:
Working capital $ 28,205
Total assets 73,722
Total long-term debt 12,555
Stockholders' equity 44,447
<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 outstanding on the record date. The proforma weighted shares outstanding do not
include securities that would be anti-dilutive for each of the periods presented.
</FN>
</TABLE>
13
<PAGE>
RISK FACTORS
In addition to all other information in this document, you should read and
carefully consider the following risk factors which may affect 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 UNITED
STATES FEDERAL INCOME TAX PURPOSES, BE TAXABLE TO THE DELTA WOODSIDE
STOCKHOLDERS.
Delta Woodside has obtained an opinion from KPMG LLP that it is more likely
than not that each of the Delta Apparel distribution and the Duck Head
distribution will qualify as tax-free for United States federal income tax
purposes under Section 355 of the Internal Revenue Code of 1986, as amended. For
this purpose, the phrase "more likely than not" means that, in KPMG LLP's
opinion, if KPMG's conclusion is challenged by the IRS, based on all the facts
and circumstances, there is a greater than 50% chance of success that the
conclusions of KPMG LLP's opinion will be sustained on their own merit.
If the Delta Apparel distribution and the Duck Head distribution qualify as
tax-free under Internal Revenue Code Section 355, your receipt of Delta Apparel
shares in the Delta Apparel distribution and Duck Head shares in the Duck Head
distribution will be tax-free for United States federal income tax purposes,
except that you will be taxed on any gain attributable to cash that you receive
in lieu of a fractional share.
The opinion of KPMG LLP is not binding upon the IRS, any other tax
authority or any court. No assurance can, therefore, be given that a position
contrary to that expressed in the opinion of KPMG LLP will not be asserted by
the IRS or any other tax authority and ultimately sustained by a court of law.
Delta Woodside has not sought a ruling from the IRS regarding the Delta
Apparel distribution or the Duck Head distribution, in part because neither
distribution satisfies all the conditions imposed by the IRS for such a ruling.
Accordingly, if the IRS and the courts disagree with the conclusion of KPMG
LLP, each Delta Woodside stockholder as of the record date for the 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 ITS LAST SEVERAL FULL FISCAL YEARS AND THESE
LOSSES AND THIS USE OF CASH MAY RECUR.
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 $3.0 million in the six months ended January 1, 2000.
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 $13.7 million in
the 1997 fiscal year. During the first six months of the 2000 fiscal year, Delta
Apparel generated $10.7 million of cash from operations.
Delta Apparel believes that the primary factors that have contributed to
its recent positive operating results have been:
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<PAGE>
- Its use of its Honduras plants and sewing contractors with facilities
in the Caribbean basin to satisfy its sewing needs. Delta Apparel's
offshore sewing accounted for 88% of its sew production in fiscal year
1999 compared to 42% in fiscal year 1996;
- Its effective utilization of the new information systems that it has
implemented;
- Efficiencies gained from the modernization of its textile
manufacturing operation in Maiden, North Carolina;
- The increased proportion of its sales to T-shirt screen printers and
sales to private label accounts (from 56.5% in fiscal year 1998 to
63.8% in the first six months of fiscal year 2000); and
- The closing down by some of its competitors of manufacturing capacity.
The benefits that these factors have provided to Delta Apparel may decline
as its competitors make similar or other changes to their operations. Such a
change in competitive conditions, coupled with the long-term trend of declining
prices for Delta Apparel's products, may cause Delta Apparel to incur operating
losses or to use significant amounts of cash in its operations. Significant
operating losses or significant uses by Delta Apparel of cash in its operations
could cause Delta Apparel to be unable to pay its debts as they become due and
to default on its credit facility, which would have an adverse effect on the
value of the Delta Apparel shares.
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. This affiliation has historically benefitted
Delta Apparel because, until fiscal year 2000, Delta Mills Marketing Company was
a significant source of needed funds for Delta Apparel's business. Since the end
of fiscal 1999, Delta Mills Marketing Company has ceased being a source of funds
for Delta Apparel, in part because Delta Apparel's operations generated cash in
the first six months of fiscal 2000 and in part because Delta Mills' Senior Note
Indenture has not permitted dividends by Delta Mills to Delta Woodside.
Prior to fiscal year 2000, when the 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 $41.7 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 six months ended January 1, 2000, Delta Apparel generated $10.7
million of cash from operations and reduced the balance of the affiliated debt
to Delta Woodside by $9.9 million. Both the cash generated from operations and
the reduction in affiliated debt were after the effect of $4.2 million in
interest charges on debt owed to Delta Woodside.
In addition, lenders to Delta Apparel as a stand alone company will not be
able to take advantage of the diversification of risk that might be provided by
lending to a business that had more than one operation, which may in some
circumstances adversely affect Delta Apparel's ability to obtain financing on
acceptable terms.
DELTA APPAREL'S REVOLVING CREDIT FACILITY MAY NOT BE AVAILABLE OR SUFFICIENT TO
SATISFY DELTA APPAREL'S NEEDS FOR WORKING CAPITAL.
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. Approximately 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.
15
<PAGE>
Delta Apparel's ability to borrow under its $25 million revolving credit
facility will be based upon, and thereby limited by, the amounts of its accounts
receivable and inventory. Any material deterioration in Delta Apparel's results
of operations could, therefore, result in a reduction in Delta Apparel's
borrowing base, which could cause Delta Apparel to lose its ability to borrow
additional amounts under its revolving credit facility or to issue additional
letters of credit to suppliers. In such a circumstance, the borrowing
availability under Delta Apparel's credit facility may not be sufficient for
Delta Apparel's working capital 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 and the availability of alternative sources
of supply.
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 PURCHASES SIGNIFICANT AMOUNTS OF COTTON IN ITS BUSINESS. AS A
RESULT, EVEN SMALL INCREASES IN THE PRICE OF COTTON CAN SIGNIFICANTLY INCREASE
DELTA APPAREL'S PRODUCT COSTS.
Delta Apparel's principal raw material is cotton. In fiscal year 2000 Delta
Apparel expects to use approximately 40 million pounds of cotton in its
manufacture of yarn. Accordingly, a one cent per pound increase in the average
price of cotton during that period would increase Delta Apparel's product costs
by approximately $400,000.
The recent improvements in Delta Apparel's results of operations have been
due in part to the fact that cotton prices have declined over the last few
years. Delta Apparel has contracts that fix the prices it pays for cotton for a
significant portion of its short-term requirements, but these contracts provide
no price protection in the longer term. If cotton prices were to increase, Delta
Apparel may not be able to increase the prices of its products to offset the
corresponding increases in its product costs.
DELTA APPAREL'S ABILITY TO EXPAND PRODUCTION SIGNIFICANTLY IS LIMITED.
Delta Apparel's ability to increase production is constrained primarily by
the capacity of its textile manufacturing operation. The ability of Delta
Apparel to acquire fabric from outside sources is limited, and relatively
significant expenditures would be required to expand the productive capacity of
its Maiden, North Carolina textile plant. See "Business of Delta Apparel."
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.
16
<PAGE>
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 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 experiencing significant
financial difficulties. These difficulties may lead these competitors to sell
substantial amounts of goods at prices against which Delta Apparel cannot
effectively compete.
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' inherent 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. Moreover, the financial difficulties of other
companies in Delta Apparel's industry are likely to have a depressive effect on
the market for the Delta Apparel shares. 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 2,400,000 shares of common stock. Delta Apparel
believes that approximately 67.8% of this stock will be beneficially owned by
persons who beneficially own more than 5% of the outstanding shares of Delta
Apparel common stock and related individuals, and that of this approximately
30.7% 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 AND ECONOMIC UNCERTAINTY IN HONDURAS COULD ADVERSELY AFFECT DELTA
APPAREL.
Delta Apparel has two company-operated sewing facilities located in
Honduras. The Honduran labor market has recently tightened, which has had some
adverse effects on most industries located in Honduras. In addition, 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. For example, a growing economy could lower unemployment which
could increase wage rates or make it difficult to retain employees or employ
enough people to meet demand. The government could also decide to add additional
holidays or change employment law increasing Delta Apparel's costs to produce.
17
<PAGE>
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 produced in one of the three countries in order to
benefit from the agreement. NAFTA has phased out all trade restrictions and
tariffs among the three countries on apparel products competitive with those of
Delta Apparel. Because most of Delta Apparel's internal production of apparel
currently 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
provisions of the tariff code that are commonly referred to as Section 807 and
Section 807A. 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 in exchange for reductions by the United States
in 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 incurred legal costs in the past to establish and protect its
trademarks, but this cost has not been significant. Delta Apparel may in the
future be required to expend 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.
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A LOSS OF KEY MANAGEMENT PERSONNEL, PARTICULARLY ROBERT W. 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 W. 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
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 third and fourth 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 January 1, 2000, on a pro forma basis, after giving effect to the
Delta Apparel distribution, Delta Apparel's total indebtedness would have been
approximately $17.8 million, and total stockholders' equity would have been
approximately $44.4 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 29%. In addition, at that
date and after giving effect to the Delta Apparel distribution, approximately
$16.1 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:
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(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 or to take
advantage of business opportunities and may make Delta Apparel more
vulnerable to changes in the industry and economic conditions; and
(ii) 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 anticipated capital expenditures and to service its debt
requirements as they become due for the foreseeable future. Significant
assumptions underlie this belief, however, including, among other matters, that
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
AND RESULT IN THE EXERCISE OF REMEDIES BY THE CREDIT AGREEMENT LENDER.
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.
ENVIRONMENTAL RULES COULD ADVERSELY AFFECT DELTA APPAREL.
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, payroll, accounting, internal audit, employee benefits and
services, stockholder services, insurance, treasury, purchasing, cotton
procurement, management information services, and tax accounting. 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 DOES NOT 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 jointly and severally 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 and including
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 periods beginning before the Delta Apparel distribution.
In addition, Delta Woodside has the authority to decide all disputes that arise
under the tax sharing agreement. These arrangements may result in conflicts of
interest among Delta Apparel, Delta Woodside and Duck Head. In addition, if
Delta Woodside does not 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 38.6% 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 elections
of Delta Apparel's directors.
VARIOUS RESTRICTIONS AND AGREEMENTS COULD HINDER ANY ATTEMPT BY A THIRD PERSON
TO CHANGE CONTROL OF DELTA APPAREL.
Delta Apparel has entered 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 by the Delta Apparel board. 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. These include provisions requiring advance notification of
stockholder nominations for director and stockholder proposals, setting forth
additional factors to be considered by the board of directors in evaluating
extraordinary transactions, prohibiting cumulative voting, limiting business
combinations with stockholders having a significant beneficial ownership in
Delta Apparel shares, and prohibiting stockholders from calling a special
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.
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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 acquirer that is
interested in acquiring Delta Apparel from doing so. You can find more
information on these provisions under the portions of this documents found under
the heading "Description of Delta Apparel Capital Stock".
Bettis C. Rainsford, a director and significant stockholder of Delta
Woodside and a director of Delta Apparel and Duck Head, filed with the SEC on
December 14, 1999 an amendment to his Schedule 13D in which, among other
matters, he stated that he was filing the amendment to disclose the fact that he
is considering the possibility of making an offer to purchase those Delta
Woodside shares that he does not currently own. The amendment stated that the
terms and financing for any such offer had not yet been established by Mr.
Rainsford. See "Security Ownership of Significant Beneficial Owners and
Management".
Since the filing of this amendment to his Schedule 13D, Mr. Rainsford has
made no proposal to Delta Woodside to acquire Delta Woodside shares. If he were
to make any such proposal, the Delta Woodside board would consider the terms of
the offer in light of the board's views as to the best interests of the holders
of the Delta Woodside shares. If the board concluded that any such offer were in
the Delta Woodside stockholders' best interests, it would redeem the rights
under the Delta Woodside shareholders' rights plan and permit the proposed
transaction to take place. If the board concluded that the offer were not in the
stockholders' best interests, it would not redeem the rights, which would
effectively prevent the proposed transaction from taking place, unless a court
were to order a different result.
In addition to the shareholder rights plan, Delta Woodside's articles of
incorporation and bylaws and the South Carolina code contain provisions that
could delay or prevent a change in control of Delta Woodside in a transaction
not approved by its board of directors. These include provisions in the South
Carolina code limiting business combinations with stockholders that have a
significant beneficial ownership in Delta Woodside shares unless certain
conditions are met and eliminating the voting rights of Delta Woodside shares
acquired by holders of 20% or more of the outstanding voting power of Delta
Woodside common stock unless voting power is approved by Delta Woodside's
stockholders or limited statutory exceptions are satisfied, and provisions
similar to those of Delta Apparel prohibiting stockholders from calling a
special meeting, setting forth additional factors to be considered by the board
of directors in evaluating extraordinary transactions, and requiring advance
notification of stockholder nominations for director and stockholder proposals.
If the Delta Woodside board were to conclude that any offer by Mr. Rainsford
were not in the stockholders' best interests, it would rely upon these
provisions to oppose Mr. Rainsford's attempts to gain control of additional
Delta Woodside shares.
If Mr. Rainsford were to make any proposal to Delta Apparel to acquire
Delta Apparel shares following the Delta Apparel distribution, the Delta Apparel
board would consider the terms of the offer in light of the board's views as to
the best interests of the holders of the Delta Apparel shares. If the board
concluded that any such offer were in the Delta Apparel stockholders' best
interests, it would redeem the rights under the Delta Apparel shareholders'
rights plan and permit the proposed transaction to take place. If the board
concluded that the offer were not in the Delta Apparel stockholders' best
interests, it would not redeem the rights, which would effectively prevent the
proposed transaction from taking place, unless a court were to order a different
result.
In addition to the shareholder rights plan, Delta Apparel's articles of
incorporation and bylaws and the Georgia code contain provisions that could
delay or prevent a change in control of Delta Apparel in a transaction not
approved by its board of directors. These include provisions in the Georgia code
limiting business combinations with stockholders that have a significant
beneficial ownership in Delta Apparel shares unless certain conditions are met,
and provisions prohibiting stockholders from calling a special meeting, setting
forth additional factors to be considered by the Delta Apparel board of
directors in evaluating extraordinary transactions, and requiring advance
notification of stockholder nominations for director and stockholder proposals.
If the Delta Apparel board were to conclude that any offer by Mr. Rainsford were
not in the stockholders' best interests, it would rely upon these provisions to
oppose Mr. Rainsford's attempts to gain control of additional Delta Apparel
shares.
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The antitakeover provisions applicable to Delta Woodside and Delta Apparel
were not adopted as a result of Mr. Rainsford's amendment to his Schedule 13D or
the information contained in that amendment or in response to any other takeover
communication.
The antitakeover provisions that are applicable to Delta Apparel do not
materially differ from the antitakeover provisions that are applicable to Delta
Woodside. The Delta Woodside shareholder rights plan does not contain the
provisions in the Delta Apparel shareholder rights plan, described under the
heading "Description of Delta Apparel Capital Stock - Rights Plan", relating to
redemptions and extensions of time requiring the concurrence of a majority of
Disinterested Directors. South Carolina, Delta Woodside's state of
incorporation, has a control share acquisition act that eliminates the voting
rights of Delta Woodside shares acquired by holders of 20% or more of the
outstanding voting power of Delta Woodside's common stock unless voting power is
approved by Delta Woodside's stockholders or limited statutory exceptions are
satisfied. Georgia, Delta Apparel's state of incorporation, does not have a
comparable act. South Carolina also has a business combinations act analogous,
but not identical, to that of Georgia described under the heading "Description
of Delta Apparel Capital Stock - Other Provisions Respecting Stockholder Rights
and Extraordinary Transactions - Georgia Business Combinations Statute." South
Carolina's business combinations act may apply to Delta Apparel depending
primarily upon whether it has, at the time of determination, more than 40% of
its assets in South Carolina.
IF A COURT WERE TO DETERMINE THAT DELTA WOODSIDE DID NOT HAVE THE LEGAL
AUTHORITY TO MAKE THE DELTA APPAREL DISTRIBUTION AND THE DUCK HEAD DISTRIBUTION,
OR IF A COURT WERE TO DETERMINE THAT THE DELTA APPAREL DISTRIBUTION AND THE DUCK
HEAD DISTRIBUTION CONSTITUTED A FRAUDULENT CONVEYANCE, THE DELTA WOODSIDE
STOCKHOLDERS COULD BE LIABLE FOR THE VALUE OF THE DELTA APPAREL SHARES THEY
RECEIVE IN THE DELTA APPAREL DISTRIBUTION AND THE DUCK HEAD SHARES THEY RECEIVE
IN THE DUCK HEAD DISTRIBUTION.
Under South Carolina corporate law, a shareholder may be held liable for
the amount of any "distribution" that the shareholder receives from a
corporation if the shareholder knows that the distribution violates corporate
law. The Delta Apparel distribution and the Duck Head distribution are
"distributions" for South Carolina corporate law purposes.
South Carolina corporate law generally prohibits a corporation from making
a "distribution" if, after giving effect to the "distribution", the corporation
would not be able to pay its debts as they become due in the usual course of
business or the corporation's total assets would be less than its total
liabilities. Under South Carolina corporate law, a board of directors may base a
determination that a distribution is not prohibited under this rule either on
financial statements prepared on the basis of accounting practices and
principles that are reasonable in the circumstances or on a fair valuation or
other method that is reasonable in the circumstances.
Under general fraudulent conveyance law, a creditor of a corporation can
typically obtain a remedy against a shareholder of the corporation who receives
corporate property if, among other matters, the corporation does not receive a
reasonably equivalent value in exchange for the transferred property and the
corporation was left with property that was unreasonably small in relation to
the corporation's business or was or thereby became insolvent.
Applying the tests prescribed by South Carolina corporate law, Delta
Woodside's board of directors has determined that Delta Woodside may legally
make the Delta Apparel distribution and the Duck Head distribution. In addition,
Delta Woodside's board has determined that Delta Woodside's assets remaining
after the Delta Apparel distribution and the Duck Head distribution will not be
unreasonably small in relation to Delta Woodside's business, and before and
after the distributions Delta Woodside will not be insolvent.
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A court might disagree with any of these determinations by Delta Woodside's
board, if they are challenged. In that event, any Delta Woodside shareholder who
receives Delta Apparel shares in the Delta Apparel distribution and Duck Head
shares in the Duck Head distribution may be liable for the value of the Delta
Apparel shares and Duck Head shares so received.
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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 and its
subsidiaries 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 Delta Woodside and 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 30096 (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 boys' 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, and has taken various actions to enhance stockholder
value.
On March 9, 1998, Delta Woodside announced that it was withdrawing from the
circular knit fabrics business, which had operated under the name of Stevcoknit
Fabrics Company, and would be selling or closing and liquidating its two
knitting, dyeing and finishing plants in Wallace, North Carolina, and its yarn
spinning plant in Spartanburg, South Carolina. In the announcement, Delta
Woodside also stated that it had decided to sell its Nautilus International
fitness equipment division, and had retained an investment banking firm to
handle the sale.
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Delta Woodside completed most of the liquidation and sale of the Stevcoknit
Fabrics Company division during its 1998 fiscal year. The Nautilus International
sale was consummated in January 1999.
On September 15, 1998, Delta Woodside announced that its board of directors
had approved a plan to purchase from time to time up to 2,500,000 outstanding
Delta Woodside common shares at prices and at times at the discretion of Delta
Woodside's top management. The announcement stated that Delta Woodside believed
that, at times, its stock price was undervalued and that these purchases would
enhance stockholder value.
At a meeting on October 9, 1998, the Delta Woodside board of directors made
the decision to sell the Duck Head Apparel Company division. To assist in this
transaction, Delta Woodside hired an investment banking firm.
On January 21, 1999, Delta Woodside announced that it had had discussions
with third parties with respect to a possible sale of the Duck Head Apparel
Company division, and that, based on these discussions, Delta Woodside was
continuing to explore strategic alternatives for the Duck Head Apparel Company
division, but could not be reasonably certain that a transaction on satisfactory
terms would be consummated in the near future. The announcement stated that, for
this reason, Delta Woodside had made the decision to continue to report the Duck
Head Apparel Company division as a part of continuing operations.
At a meeting on February 4, 1999, the Delta Woodside board of directors
approved a plan to effect a major restructuring of Delta Woodside. This
restructuring would have involved the spin-off to the Delta Woodside
stockholders of each of Delta Woodside's two apparel divisions, leaving the
Delta Mills, Inc. subsidiary, and its operating division, Delta Mills Marketing
Company, in Delta Woodside. Simultaneously with the spin-off, Delta Woodside
would have been sold to a third party buyer not yet identified. Under this plan,
the Delta Woodside stockholders would have received, for their shares of Delta
Woodside common stock, shares of each of the new spun-off apparel companies and
cash for their post spin-off Delta Woodside shares. The plan would have been
subject to the approval of the Delta Woodside stockholders. If the plan had been
approved by the requisite stockholder vote, the Rainsford plant in Edgefield,
South Carolina, would have been sold by the Delta Mills, Inc. subsidiary to the
Delta Apparel Company division, the 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
Securities") to advise the Delta Woodside board of directors with respect to the
previously announced plan to sell the portion of Delta Woodside remaining after
the distribution to the Delta Woodside stockholders of the shares of stock of
Delta Woodside's apparel businesses. The announcement also stated that the Duck
Head Apparel Company division was no longer for sale.
Following this announcement, Delta Woodside provided information to
nineteen companies respecting a possible sale of the remaining Delta Woodside.
None of these potential purchasers, however, made an offer for the remaining
Delta Woodside that Delta Woodside considered to be satisfactory.
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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, through its wholly-owned subsidiary, Delta Mills, Inc.,
would have continued to own the Duck Head Apparel Company division and
the Delta Apparel Company division. This internal ownership
restructuring could, however, have provided Delta Woodside with
substantial cash, because Delta Mills, Inc. then had a substantial
cash position and its senior note indenture would have permitted it to
use cash for this purpose but not for the purpose of making dividend
payments to its parent company, Delta Woodside. If this purchase
scenario had been adopted, Delta Woodside could have used the cash
provided by Delta Mills, Inc. in the purchase to make acquisitions of
Delta Woodside common stock or other businesses, or for other
purposes.
- Under the spin-off/recapitalization scenario, Delta Woodside
stockholders would have received, for their Delta Woodside common
shares, shares of each of the new spun-off apparel companies, cash and
stock in the remaining Delta Woodside. Also, additional shares of the
remaining Delta Woodside (representing more than 20% of the then
outstanding shares of the remaining Delta Woodside) would have been
sold to members of management of Delta Mills Marketing Company.
Consummation of the spin-off/recapitalization transaction was to be
conditioned upon receiving a favorable vote of the Delta Woodside
stockholders.
Following this announcement, Delta Woodside, with the assistance of
Prudential Securities, explored the possibility of Delta Mills, Inc. refinancing
its existing $150 million of 9-5/8% Senior Notes with a larger issue of
indebtedness in order to effect the proposed recapitalization. During the time
frame of this examination, however, the interest rates payable by issuers of new
senior debt in the textile and apparel industries became higher than were deemed
acceptable by the Delta Woodside board of directors.
On August 20, 1999, Delta Woodside announced that, due to weakness in the
bond market, Delta Woodside believed that its previously announced
recapitalization/spin-off strategy was not feasible at that time. Delta Woodside
further announced that, because Delta Woodside believed that its stockholders
would best be served by separating the operating companies, Delta Woodside did
not plan to pursue the acquisition of the two apparel divisions by its textile
subsidiary, Delta Mills, Inc., at that time. The announcement also stated that
Delta Woodside was continuing to explore strategic alternatives to accomplish
the separation of its operating companies, and would announce specific plans in
the upcoming months.
On October 4, 1999, Delta Woodside announced that it planned to spin off to
the Delta Woodside stockholders its two apparel businesses (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
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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.
On December 13, 1999, Delta Woodside announced that its board of directors
had adopted a shareholders rights plan pursuant to which stock purchase rights
have been distributed as a dividend to the Delta Woodside stockholders at a rate
of one right for each Delta Woodside share held of record as of December 22,
1999. Delta Woodside stated that the rights plan is designed to enhance the
Delta Woodside board's ability to prevent any person interested in acquiring
control of Delta Woodside from depriving stockholders of the long-term value of
their investment and to protect shareholders against attempts to acquire Delta
Woodside by means of unfair or abusive takeover tactics. Delta Woodside stated
that its board had adopted the rights plan at that time because the Delta
Woodside shares were trading at their lowest levels in Delta Woodside's history.
At the same time, Delta Woodside announced that its board had approved a
plan to purchase from time to time up to an aggregate of 5,000,000 shares of
Delta Woodside's outstanding stock at prices and at times at the discretion of
Delta Woodside's top management. The announcement stated that this stock
repurchase plan replaces the 2,500,000 stock purchase plan announced by Delta
Woodside in September 1998.
On December 30, 1999, Delta Woodside announced that each of Duck Head and
Delta Apparel had filed a registration statement with the SEC to register the
subsidiary's stock under the Securities Exchange Act of 1934, and that these
filings were pursuant to the previously announced plan of Delta Woodside to spin
off to its stockholders the Delta Apparel Company division and the Duck Head
Apparel Company division as two separate publicly-owned corporations. Delta
Woodside also stated that, following completion of the spin-offs, Delta Woodside
intends to propose to its stockholders the adoption of a new Delta Woodside
stock option plan and a new Delta Woodside incentive stock award plan pursuant
to which significant equity incentives could be granted to the new management of
Delta Woodside.
REASONS FOR THE 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;
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(d) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders;
(e) A pro rata taxable spin-off of Delta Woodside's two apparel businesses
to Delta Woodside's stockholders;
(f) A disproportionate tax-free spin-off of one of Delta Woodside's
apparel businesses to one of Delta Woodside's major stockholders
accompanied by a pro rata tax-free spin-off of the other apparel
business to all the other stockholders;
(g) A potential sale of the Delta Apparel Company business or assets;
(h) A purchase by Delta Mills, Inc. of the 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:
(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
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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) As a reason to accomplish the Duck Head distribution, eliminate the
complaints of certain customers of Delta Mills Marketing Company
(which, as a supplier to those customers, has access to certain of
their competitive information) that a competitor of theirs (Duck Head
Apparel Company) is under common management with Delta Mills Marketing
Company;
(d) Permit each business to obtain, when needed, the best equity and debt
financing possible without being affected by the operational results
of the other businesses;
(e) Permit each business to establish long-range plans geared toward the
expected cyclicality, competitive conditions and market trends in its
own line of business, unaffected by the markets, needs and constraints
of the other businesses;
(f) Promote a more streamlined management structure for each of the three
businesses, better able to respond quickly to customer and market
demands; and
(g) Permit the value of each of the three divisions to be more accurately
reflected in the equity market by separating the results of each
business from the other two businesses.
In reaching its conclusion to effect the Delta Apparel distribution, the
Board also took into account the following additional factors:
- The opinion delivered to the Delta Woodside board by Houlihan Lokey
Howard & Zukin Financial Advisors, Inc. that is described below;
- The advice provided to the Delta Woodside board by Prudential
Securities that is described below;
- The financial information and statements of Delta Apparel set forth in
this document under the heading, "Unaudited Pro Forma Combined
Financial Statements", and at pages F-1 to F-20;
- The Delta Woodside board's knowledge of the business, operations,
assets and financial condition of Delta Apparel;
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- 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.
All members of the Delta Woodside board (other than Bettis C. Rainsford)
voted in favor of effectuating the Delta Apparel distribution, the Duck Head
distribution and related transactions. See "Security Ownership of Significant
Beneficial Owners and Management."
This discussion of the information and factors considered by the Delta
Woodside board is not meant to be exhaustive but is believed to include the
material factors considered by the Delta Woodside board in authorizing the 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.
Opinion of Houlihan Lokey
-------------------------
Delta Woodside engaged Houlihan Lokey to provide to the Delta Woodside
board and the Delta Apparel board an opinion as to the solvency of Delta Apparel
as of the time of the Delta Apparel distribution. Delta Woodside selected
Houlihan Lokey based on Houlihan Lokey's extensive experience in providing
solvency opinions.
In consideration of its services in connection with the opinion described
below and a similar opinion with respect to Duck Head, Houlihan Lokey will be
paid a fee of $200,000 plus reasonable out-of-pocket expenses. No portion of
this fee is contingent upon the consummation of the Delta Apparel distribution
or the Duck Head distribution or the conclusions reached in Houlihan Lokey's
opinions. Delta Woodside has also agreed to provide indemnification to Houlihan
Lokey and certain other parties with respect to certain matters. Houlihan Lokey
has had no other material relationship with Delta Woodside or its subsidiaries
during the past two years.
The preparation of a solvency opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following is a brief summary and general description of the solvency analysis
and valuation methodologies utilized by Houlihan Lokey. Although the summary
sets forth all material facts respecting the opinion of Houlihan Lokey, the
summary does not purport to be a complete statement of the analyses and
procedures applied, the judgments made or the conclusion reached by Houlihan
Lokey or a complete description of its presentation to the Delta Woodside board
or the Delta Apparel board. Houlihan Lokey believes, and so advised the Delta
Woodside board and the Delta Apparel board, that its analyses must be considered
as a whole and that selecting portions of its analyses and of the factors
considered by it, without considering all factors and analyses, could create an
incomplete view of the process underlying its analyses and opinions.
The Delta Apparel distribution and other related transactions disclosed to
Houlihan Lokey are referred to collectively in this summary as the
"Transaction." For purposes of its opinion, Houlihan Lokey assumed that the
third party financing described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
will be entered into on or prior to the date of the Delta Apparel distribution
and that, prior to the Delta Apparel distribution, the intercompany
reorganization described in "Relationships Among Delta Apparel, Delta Woodside
and Duck Head - Distribution Agreement" will be completed.
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Delta Woodside's board of directors has requested that Houlihan Lokey
render its written opinion to the Delta Woodside board and the Delta Apparel
board as to whether, assuming the Transaction has been consummated as proposed,
immediately after and giving effect to the Transaction: (a) on a pro forma
basis, the fair value and present fair saleable value of Delta Apparel would
exceed its stated liabilities and identified contingent liabilities, (b) Delta
Apparel should be able to pay its debts as they become absolute and mature; (c)
the capital remaining in Delta Apparel after the Transaction would not be
unreasonably small for the business in which Delta Apparel is engaged, as
management has indicated it is now conducted and is proposed to be conducted
following the consummation of the Transaction; and (d) the financial test for
distributions of the state of incorporation of Delta Apparel (i.e. Georgia) has
been satisfied.
Houlihan Lokey's opinion does not address Delta Woodside's underlying
business decision to effect the Transaction. Houlihan Lokey has not been
requested to, and did not, solicit third party indications of interest in
acquiring all or part of Delta Apparel.
In connection with the preparation of its opinion, Houlihan Lokey made such
reviews, analyses and inquiries as it deemed necessary and appropriate under the
circumstances. Among other things, Houlihan Lokey:
(i) reviewed Delta Apparel's annual financial statements for the 1997,
1998 and 1999 fiscal years and year-to-date statements for the first
nine months of fiscal year 2000, which Delta Apparel's and Delta
Woodside's managements have identified as the most current information
available;
(ii) reviewed the proposal from the third party lender to provide Delta
Apparel revolving credit and term loan facilities;
(iii)spoke with certain members of the senior management of Delta Woodside
and Delta Apparel to discuss the operations, financial condition,
future prospects and projected operations and performance of Delta
Apparel;
(iv) toured the Edgefield, SC (Rainsford) and Maiden, NC manufacturing
facilities of Delta Apparel;
(v) reviewed budgets and forecasts prepared by Delta Apparel's management
with respect to the periods ended January 1, 2000 through fiscal year
2004;
(vi) reviewed marketing and promotional material relating to Delta Apparel;
(vii)reviewed the preliminary registration statement filed with the SEC
for Delta Apparel;
(viii) reviewed other publicly available financial data for Delta Apparel
and certain companies that Houlihan Lokey deems comparable to Delta
Apparel; and
(ix) conducted such other studies, analyses and investigations as Houlihan
Lokey has deemed appropriate.
In assessing the solvency of Delta Apparel immediately after and giving
effect to the Transaction, Houlihan Lokey:
(i) analyzed the fair value and present fair saleable value of Delta
Apparel's assets relative to Delta Apparel's stated liabilities and
identified contingent liabilities on a pro forma basis ("balance sheet
test");
(ii) assessed Delta Apparel's ability to pay its debts as they become
absolute and mature ("cash flow test"); and
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(iii)assessed the capital remaining in Delta Apparel after the Transaction
so as not to be unreasonably small ("reasonable capital test").
Each of "fair value" and "present fair saleable value" is defined as the amount
that may be realized if Delta Apparel's aggregate assets (including goodwill)
are sold as an entirety with reasonable promptness in an arm's length
transaction under present conditions for the sale of comparable business
enterprises, as such conditions can be reasonably evaluated.
Balance Sheet Test
The Balance Sheet Test determines whether or not the fair value and present
fair saleable value of Delta Apparel's assets exceeds its stated liabilities and
identified contingent liabilities after giving effect to the Transaction. This
test requires an analysis of the fair market value of Delta Apparel as a
going-concern. As part of this analysis, Houlihan Lokey considered, among other
things,
(i) historical and projected financial performance for Delta Apparel as
prepared by Delta Apparel;
(ii) the business environment in which Delta Apparel competes;
(iii)performance of certain publicly traded companies deemed by Houlihan
Lokey to be comparable to Delta Apparel, in terms of, among other
things: lines of business, size, profitability, financial leverage and
growth;
(iv) capitalization rates ("multiples") for certain publicly traded
companies deemed by Houlihan Lokey to be comparable to Delta Apparel
(including (a) Enterprise Value ("EV")/Revenue; (b) EV/earnings before
interest, taxes, depreciation and amortization ("EBITDA") and (c)
EV/earnings before interest and taxes ("EBIT");
(v) multiples derived from acquisitions of companies deemed by Houlihan
Lokey to be comparable to Delta Apparel;
(vi) the Discounted Cash Flow approach;
(vii) the capital structure and debt obligations of Delta Apparel; and
(viii) non-operating assets and identified contingent liabilities.
"Enterprise Value" or "EV" is defined as total market value of equity plus net
interest bearing debt.
In determining the fair value and present fair saleable value of the
aggregate assets of Delta Apparel, the following methodologies were employed:
the Market Multiple approach and the Discounted Cash Flow approach.
Market Multiple Approach. The application of the Market Multiple Approach
involves the derivation of indication of value through the multiplication of
relevant performance fundamentals of the subject entity by appropriate
multiples. Multiples were determined through an analysis of: (i) publicly traded
companies that were determined by Houlihan Lokey to be comparable from an
investment standpoint to Delta Apparel ("Comparable Public Companies"); and,
(ii) change of control transactions involving companies that were determined by
Houlihan Lokey to be comparable to Delta Apparel from an investment standpoint
("Comparable Transactions"). Houlihan Lokey selected four publicly traded
domestic companies that are engaged in the manufacturing and marketing of
private label apparel (Garan, Inc., Gildan Activewear, Inc., Russell Corporation
and Tarrant Apparel Group). Observed market pricing multiples of the Comparable
Public Companies were as follows: (I) EV/Latest Twelve Month ("LTM") Revenue
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ranging from 0.46x to 1.56x with a median of 0.77x; (ii) EV/LTM EBIT ranging
from 4.9x to 12.4x with a median of 8.0x and (iii) EV/LTM EBITDA ranging from
4.1x to 10.7x with a median of 5.3x. A comparative analysis between Delta
Apparel and the Comparable Public Companies formed the basis for the selection
of appropriate multiples for Delta Apparel. The comparative analysis
incorporates both quantitative and qualitative risk factors which relate to,
among other things, the nature of the industry in which Delta Apparel and the
Comparable Public Companies are engaged and relative financial performance of
Delta Apparel and the Comparable Public Companies. An indicated Enterprise Value
of $67.2 million was derived based on the application of selected market
multiples to the relevant fundamentals of Delta Apparel and an adjustment for
control through the application of a 25% control premium. The selected control
premium of 25% was based on change of control transactions of publicly-traded
apparel companies and available market studies. The indicated Enterprise Value
of $67.23 million reflects implied multiples for Delta Apparel of 0.6x LTM
Revenues of $114 million, 17.6x LTM EBIT of $3.8 million and 5.0x LTM EBITDA of
$13.5 million. The indicated Enterprise Value for Delta Apparel based on the
Comparable Public Companies analysis exceeded its stated liabilities and
identified contingent liabilities by $54 million.
For the Comparable Transactions, Houlihan Lokey analyzed apparel industry
merger and acquisition transactions between 1998 and 1999 where financial
information was publicly disclosed. Market multiples were developed from sixteen
comparable transactions, of which seven were 1999 transactions and considered
most relevant. The 1999 transactions included Alba-Waldenisan/Tefron Ltd.,
Synthetic Industries/Investcorp, Authentic Fitness/Warnaco Group, Inc. Concord
Fabrics, Inc/Private Group, Segrets Inc./Liz Claiborne, St. Johns Knits/Private
Group and Koret of California/Kellwood Company. From the application of market
multiples, indications of value were developed through the capitalization of the
relevant performance fundamentals of Delta Apparel. Relevant fundamentals
considered were LTM Revenues, EBITDA and EBIT. Within the seven most recent
transactions, observed EV/Revenues multiples ranged from 0.4x to 1.7x with a
median of 1.0x. EV/EBITDA ranged from 6.2x to 8.5x with a median of 6.4x and
EV/EBIT ranged from 7.4x to 12.0x with a median of 8.7x. Based on the Comparable
Transactions analysis, an Enterprise Value of $59.5 million was derived for
Delta Apparel. The indicated Enterprise Value of $59.5 million produced implied
multiples of 0.8x LTM Revenue, 7.3x LTM EBITDA and 9.6x LTM EBIT. The indicated
Enterprise Value for Delta Apparel based on the Comparable Transactions analysis
exceeded its stated liabilities and identified contingent liabilities by $46.2
million.
Discounted Cash Flow Approach. The Discounted Cash Flow Approach involved
the development of Enterprise Value indications from the appraisal of projected
cash flows to be generated by Delta Apparel, which were based on fiscal years
2000 to 2004 financial forecasts prepared by the management of Delta Apparel.
The projected cash flows include interim cash flows over the forecast period and
a terminal year cash flow, which represents the value of Delta Apparel beyond
the forecast period. The interim cash flows reflect the cash available to all
capital providers (debt and equity) after accounting for required capital
investments. The terminal year cash flow reflects an estimate of the fair and
saleable value of Delta Apparel at the end of the forecast period, June 30,
2004. This estimation was developed from the Market Multiple Approach described
above, wherein projected fundamentals were capitalized based on selected market
multiples. Indications of Enterprise Value were developed by applying an
appropriate discount rate or cost of capital to the projected cash flows and
terminal value. The concluded Enterprise Value, or sum of the projected cash
flows and terminal value, ranged between $119.8 and $130.0 million depending on
the discount rate and terminal multiple selected. The discount rate reflects the
degree of risk inherent in the assets of Delta Apparel and its ability to
produce the projected cash flows. The range of discount rates and terminal
multiples considered was 12% to 13% and 4.0x to 4.5x, respectively. The
concluded range of Enterprise Values for Delta Apparel based on the discounted
cash flow approach exceeded its stated liabilities and identified contingent
liabilities by $106.5 to $116.8 million.
Cash Flow Test
The Cash Flow Test focuses on whether or not Delta Apparel should be able
to repay its debts as they become absolute and mature (including the debts
incurred in the Transaction). This test involves a two-step analysis of Delta
Apparel's fiscal year 2000 to fiscal year 2004 financial projections, (i)
examines the financial projections relative to a variety of factors including:
historical performance, marketing plans and cost structure, and (ii) analyzes
the sensitivity of the projections to changes in key operating variables.
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Delta Apparel has made changes to its management team, restructured its
operations, reduced certain costs and implemented certain marketing plans. As a
result of the changes implemented by Delta Apparel, management's forecast for
the business represents an improvement over Delta Apparel's recent financial
performance. Delta Apparel's financial performance for fiscal year 2000 reflects
in part the changes implemented by management and represents an improvement over
financial results for fiscal year 1999.
The sensitivity analysis of Delta Apparel's projections involved testing a
number of underlying operating assumptions, including: revenue growth, operating
margins and capital investment requirements. Delta Apparel's ability to meet its
debt obligation was analyzed in the context of varying a number of the operating
assumptions. Based on the sensitivity analysis conducted on Delta Apparel's
financial forecast, Delta Apparel demonstrated an ability to meet its
obligations as they came due under a range of financial forecast scenarios.
Reasonable Capital Test
The Reasonable Capital Test follows from the Balance Sheet and Cash Flow
Tests. The determination as to whether the net assets remaining with Delta
Apparel constitute unreasonably small capital involves an analysis of various
factors, including, (i) the degree of sensitivity demonstrated in the cash flow
test; (ii) historical and expected volatility in revenues, cash flow and capital
expenditures; (iii) the adequacy of working capital; (iv) historical and
expected volatility of going-concern asset values; (v) the maturity structure
and the ability to refinance Delta Apparel's obligations; (vi) the magnitude,
timing and nature of identified contingent liabilities; and (vii) the nature of
the business and the impact of financial leverage on its operations.
Solvency
Based upon the foregoing, and in reliance thereon, it is Houlihan Lokey's
opinion as of May 9, 2000 that, assuming the Transaction has been consummated
as proposed, immediately after and giving effect to the Transaction:
(i) on a pro forma basis, the fair value and present fair saleable value
of Delta Apparel's assets would exceed Delta Apparel's stated
liabilities and identified contingent liabilities;
(ii) Delta Apparel should be able to pay its debts as they become absolute
and mature; and
(iii)the capital remaining in Delta Apparel after the Transaction would
not be unreasonably small for the business in which Delta Apparel is
engaged, as management has indicated it is now conducted and is
proposed to be conducted following the consummation of the
Transaction.
Assumptions and Limiting Conditions
Notwithstanding the use of the defined terms "fair value" and "present fair
saleable value", Houlihan Lokey has not been engaged to identify prospective
purchasers or to ascertain the actual prices at which and terms on which Delta
Apparel can currently be sold, and Houlihan Lokey knows of no such efforts by
others. Because the sale of any business enterprise involves numerous
assumptions and uncertainties, not all of which can be quantified or ascertained
prior to engaging in an actual selling effort, Houlihan Lokey expresses no
opinion as to whether Delta Apparel would actually be sold for the amount
Houlihan Lokey believes to be its fair value and present fair saleable value.
Houlihan Lokey has relied upon and assumed, without independent
verification, that the financial forecasts and projections provided to it have
been reasonably prepared and reflect the best currently available estimates of
the future financial results and condition of Delta Apparel, and that there has
been no material adverse change in the assets, financial condition, business or
prospects of Delta Apparel since the date of the most recent financial
statements made available to Houlihan Lokey.
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Houlihan Lokey has not independently verified the accuracy and completeness
of the information supplied to it with respect to Delta Apparel, and does not
assume any responsibility with respect to it. Houlihan Lokey has not made any
physical inspection or independent appraisal of any of the properties or assets
of Delta Apparel. Houlihan Lokey's opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by
Houlihan Lokey at the date of its opinion.
Houlihan Lokey's opinion is furnished solely for the benefit of the Delta
Woodside board and the Delta Apparel board and may not be relied upon by any
other person without Houlihan Lokey's prior written consent. Houlihan Lokey's
opinion is delivered to each recipient subject to the conditions, scope of
engagement, limitations and understandings set forth in its opinion and Houlihan
Lokey's engagement letter with Delta Woodside.
Advice of Prudential Securities
-------------------------------
Delta Woodside's board of directors received financial advice from
Prudential Securities regarding the issues surrounding the separation of the
apparel and textile fabric businesses. The points described above under the
heading "The Delta Apparel Distribution - Reasons for the Delta Apparel
Distribution" include the material factors discussed by Prudential Securities.
Prudential Securities also advised the Delta Woodside board regarding the issues
surrounding various alternatives to the Delta Apparel distribution and the Duck
Head distribution, including a sale of either or both of Delta Apparel or Duck
Head and a liquidation of either or both of Delta Apparel or Duck Head.
Prudential Securities' financial advice was based on its analysis of the trading
prices and trading multiples of approximately 11 textile and apparel companies
which Prudential Securities believed provided relevant comparisons. In addition,
Prudential Securities reviewed recent acquisitions, also deemed to provide
relevant comparisons, in the textile and apparel industries, including the
prices paid and multiples of financial performance that those acquisitions
implied. Prudential Securities' advice regarding Delta Woodside's alternatives
with regard to Delta Apparel was also based on its review and understanding of
prevailing textile and apparel market conditions, as well as its review of Delta
Apparel's historical market performance.
Prudential Securities was not requested to, and did not, undertake the
types of analyses customary to deliver a financial opinion and did not deliver
any such opinion.
Pursuant to an engagement letter, Prudential Securities has been paid by
Delta Woodside an advisory fee of $500,000 for its services. Delta Woodside has
agreed to indemnify Prudential Securities for certain liabilities relating to or
arising from Prudential Securities' engagement by Delta Woodside. Prudential
Securities has also performed various investment banking services for Delta
Woodside in the past, and has received customary fees for those services.
Prudential Securities is a nationally recognized investment banking firm
and, as a customary part of its investment banking activities, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements, and
valuations for corporate and other purposes. Delta Woodside selected Prudential
Securities because of its expertise, reputation and familiarity with Delta
Woodside. In the ordinary course of business, Prudential Securities and its
affiliates may actively trade or hold the securities and other instruments and
obligations of Delta Woodside for their own account and for the accounts of
customers and, accordingly, may at any time hold long or short positions in such
securities, instruments or obligations.
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DESCRIPTION OF THE 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
June 2, 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 May 19, 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 one-for-ten Delta
Apparel distribution ratio, the number of shares of Delta Woodside common stock
outstanding on April 25, 2000 and the number of Delta Woodside shares to be
issued before the Delta Apparel record date as described in "Interests of
Directors and Executive Officers in the Delta Apparel Distribution - Payments in
Connection with Delta Apparel Distribution and Duck Head Distribution", Delta
Woodside will distribute approximately 2,400,000 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 June 2, 2000.
If a holder of Delta Woodside common stock owns a number of shares of Delta
Woodside common stock that is not a whole multiple of ten and therefore would be
entitled to receive a fraction of a whole share of 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 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
The following is a summary of the material US federal income tax
consequences generally applicable to a Delta Woodside stockholder who is a US
Holder. The term "US Holder" means a beneficial owner of Delta Woodside shares
that is (i) a citizen or resident of the United States, (ii) a corporation,
partnership (other than certain partnerships as may be provided in the
applicable provisions of the US Treasury Regulations), or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to US
federal income taxation regardless of its source, (iv) a trust if (a) a US court
is able to exercise primary supervision over the trust's administration and (b)
one or more US persons have the authority to control all of the trust's
substantial decisions, or (v) otherwise subject to US federal income taxation on
a net income basis in respect of the Delta Woodside shares.
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The following description is for general purposes only and is based on the
Internal Revenue Code of 1986, as amended from time to time (the "Code"), US
Treasury Regulations and judicial and administrative interpretations thereof,
all as in effect on the date of this document and all of which are subject to
change, possibly retroactively. The tax treatment of a US Holder may vary
depending upon the holder's particular situation. For instance, certain holders,
including, but not limited to, insurance companies, tax-exempt organizations,
financial institutions, persons subject to the alternative minimum tax, dealers
in securities or currencies, persons that have a "functional currency" other
than the US dollar or as part of a "hedging" or "conversion" transaction for US
federal income tax purposes and persons owning, directly or indirectly, 5
percent or more of the Delta Woodside shares may be subject to special rules not
discussed below. The following summary is limited to investors who hold the
Delta Woodside shares as "capital assets" within the meaning of Section 1221 of
the Code. The discussion below does not address the effect of any other laws
(including other federal, state, local or foreign tax laws) on a US Holder of
Delta Woodside shares. As such, the summary does not discuss US federal estate
and gift tax considerations or US state and local tax considerations.
Delta Woodside has structured the 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.
Delta Woodside has not sought a ruling from the US Internal Revenue Service
("IRS") regarding the Delta Apparel distribution or the Duck Head distribution,
in part because neither distribution satisfies all the conditions imposed by the
IRS for such a ruling. The fact that Delta Woodside is not eligible to receive a
private letter ruling from the IRS on the issue does not, however, in and of
itself, mean that the distributions do not qualify as tax-free spin-offs under
Section 355. Whether the 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 has obtained an opinion from KPMG LLP that it is more likely
than not that each of the Delta Apparel distribution and the Duck Head
distribution qualifies as tax-free under Code Section 355.
Material Federal Income Tax Consequences if the Delta Apparel Distribution
---------------------------------------------------------------------------
and the Duck Head Distribution Qualify as Tax-Free Spin-Offs under Code
---------------------------------------------------------------------------
Section 355
-----------
If the Delta Apparel distribution and the Duck Head distribution qualify as
tax-free spin-offs under Code Section 355, then:
1. The US Holders of Delta Woodside stock who receive those shares will not
recognize gain upon either of the distributions, except as described
immediately below with respect to fractional shares.
2. Cash, if any, received by a US Holder of Delta Woodside stock instead of a
fractional share of Delta Apparel common stock or Duck Head common stock
will be treated as received in exchange for that fractional share. That US
Holder will recognize gain or loss to the extent of the difference between
his, her or its tax basis in that fractional share and the amount received
for that fractional share, and, provided that fractional share is held as a
capital asset, the gain or loss will be capital gain or loss.
3. Each US Holder of Delta Woodside stock will be required to apportion his,
her or its tax basis in the US Holder's Delta Woodside shares between the
Delta Woodside shares retained and the Delta Apparel shares and Duck Head
shares received, with this apportionment to be made in proportion to the
shares' relative fair market values for federal income tax purposes
immediately after the distributions.
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4. The holding period for the Delta Apparel shares and the Duck Head shares
received by a US Holder in the distributions will be the same as the US
Holder's holding period for the Delta Woodside shares with respect to which
the 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 deferred intercompany gains, but
that this gain will be offset by Delta Woodside's net operating losses.
US Treasury Regulations Section 1.355-5 requires that each US Holder that
receives Delta Apparel shares in the Delta Apparel distribution and Duck Head
shares in the Duck Head distribution attach a statement to his, her or its US
federal income tax return for the taxable year in which the distributions occur,
showing the applicability of Code Section 355 to the Delta Apparel distribution
and the Duck Head distribution. US Holders should consult their own tax advisors
regarding these disclosure requirements.
As noted above, Delta Woodside has not sought a ruling from the IRS
regarding the Delta Apparel distribution or the Duck Head distribution. The fact
that no ruling has been sought should not be construed as an indication that the
IRS would necessarily reach a different conclusion regarding the Delta Apparel
distribution or the Duck Head distribution than the conclusion set out in the
opinion of KPMG LLP. The opinion of KPMG LLP referred to in this description is
not binding upon the IRS, any other tax authority or any court, and no assurance
can be given that a position contrary to those expressed in the opinion of KPMG
LLP will be not asserted by the tax authority and ultimately sustained by a
court of law.
Material Federal Income Tax Consequences if the Delta Apparel Distribution
---------------------------------------------------------------------------
and the Duck Head Distribution Do Not Qualify as Tax-Free Spin-Offs under
---------------------------------------------------------------------------
Code Section 355
----------------
If the Delta Apparel distribution and the Duck Head distribution do not
qualify as tax-free spin-offs under Code Section 355, then the following are the
material federal income tax consequences to each participating Delta Woodside
stockholder and to Delta Woodside:
1. Each Delta Woodside stockholder will recognize dividend income to the
extent of the lesser of (a) the value of the 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. The fair market value for federal income tax purposes of the Delta
Apparel shares and the Duck Head shares received by the Delta Woodside
stockholders in the distributions 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 $15.4 million (approximately $0.64 per Delta
Woodside share). The amount, if any, of Delta Woodside's earnings and
profits for fiscal year 2000 cannot be determined at this time.
2. Any value of the 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
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Delta Woodside shares will be taxable to the Delta Woodside stockholder as
gain, which will be capital gain if the Delta Woodside stock is held as a
capital asset. This capital gain will be taxable as either long term or
short term capital gain, depending upon the stockholder's holding period
for those Delta Woodside shares.
3. The Delta Woodside stockholder's tax basis in the 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.
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.
KPMG LLP is an internationally recognized accounting, tax and consulting
firm and, as a customary part of its tax practice, is regularly engaged to
provide opinions on the federal income tax consequences of merger and
acquisition transactions. Delta Woodside selected KPMG LLP because of its
expertise and its familiarity with Delta Woodside, Delta Apparel and Duck Head.
KPMG LLP acts as the independent auditor of the financial statements of Delta
Woodside, Delta Apparel and Duck Head and as their respective tax advisors. KPMG
LLP has also provided various consulting services to Delta Woodside. KPMG LLP
receives and has received customary fees for those services.
Pursuant to an engagement letter, Delta Woodside has agreed to pay KPMG LLP
a fee of $250,000 in connection with the preparation and delivery of its opinion
on the federal income tax consequences of the Delta Apparel and Duck Head
distributions. Delta Woodside has agreed to indemnify KPMG LLP for certain
liabilities relating to KPMG LLP's engagement by Delta Woodside.
In connection with the opinion of KPMG LLP respecting the U.S. federal
income tax consequences of the Delta Apparel distribution and the Duck Head
distribution, each of E. Erwin Maddrey, II, Buck A. Mickel, Micco Corporation,
Minor H. Mickel, Minor M. Shaw and Charles C. Mickel will represent to KPMG LLP
that such greater than 5% beneficial owner of Delta Woodside shares has no
binding commitment to sell, exchange, transfer by gift or otherwise dispose of
any Delta Woodside shares, Delta Apparel shares or Duck Head shares after the
Delta Apparel Duck Head distributions, that such shareholder has no present plan
or intention to sell, exchange, transfer by gift or otherwise dispose of any
Delta Woodside shares, Delta Apparel shares or Duck Head shares except when
paired with a proportionate disposition of shares in all three companies and
that such shareholder has no plan or intention to acquire (directly or
indirectly) during the period ending 2 years from the date of the Delta Apparel
distribution and the Duck Head distribution additional Delta Woodside shares,
Delta Apparel shares or Duck Head shares that, when added to such shareholder's
existing stockholding, would represent a 50% of greater interest in Delta
Woodside, Delta Apparel or Duck Head. See "Security Ownership of Significant
Beneficial Owner and Management."
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Net Operating Loss Carry Forwards
---------------------------------
As of July 3, 1999, Delta Woodside had net operating loss carry forwards,
for federal income tax purposes, of approximately $68 million. KPMG LLP has
provided its opinion that it is more likely than not that, following the Delta
Apparel distribution and the Duck Head distribution, and assuming the
distributions are tax-free pursuant to Code Section 355, approximately $56
million of this net operating loss carry forward will remain as a tax attribute
of Delta Woodside as of July 3, 1999 ($10 million of which will be subject to
limitation under the separate return limitation rules), approximately $9 million
will be a tax attribute of Delta Apparel as of July 3, 1999 and approximately $3
million will be a tax attribute of Duck Head as of July 3, 1999. Delta Apparel's
and Duck Head's federal net operating losses will expire at various dates in
fiscal years 2011 through 2019.
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, however, 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.
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.
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 will be owned by an indirect wholly-owned subsidiary of Delta Woodside.
As of that date, there will be approximately 2,500 record holders of the common
stock of Delta Woodside. As a result of the Delta Apparel distribution ratio of
one Delta Apparel share for ten Delta Woodside shares, Delta Apparel anticipates
that, upon the Delta Apparel distribution, there will be approximately 1,500
record holders of Delta Apparel shares.
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 for the Delta Apparel shares will develop or be sustained in the
future. The American Stock Exchange has approved shares of Delta Apparel's
common stock for listing, subject to official notice of issuance. Delta Apparel
believes that there is a possibility 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 (if
"when-issued" trading develops) 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, analyst coverage of and interest in 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.
Generally, Delta Apparel affiliates may sell their Delta Apparel shares received
in the Delta Apparel distribution only under an effective registration statement
under the Securities Act of 1933 or pursuant to Rule 144, which contains volume
and manner of sale limitations on such sales.
At the time of the Delta Apparel distribution, the only outstanding equity
securities of Delta Apparel will be the approximately 2,400,000 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 incentive 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 or awards granted
under the incentive stock award plan will be registered on a Registration
Statement on Form S-8 under the Securities Act of 1933 and will therefore
generally be freely transferable under the securities laws, except by affiliates
as described above. See "Interests of Directors and Executive Officers in the
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 equity 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.
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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 respective subsidiaries 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. 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 March 15, 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 each other and 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 currently conduct
the Delta Apparel Company division's business and the Duck Head
Apparel Company division's business. The Delta Apparel Company
division's assets are currently owned by several of Delta Woodside's
wholly-owned subsidiaries. The Duck Head Apparel Company division's
assets are currently owned by Delta Woodside and several of its
wholly-owned subsidiaries.
(b) All the assets used in the operations of the Delta Apparel Company
division's business will have been transferred to Delta Apparel or a
subsidiary of Delta Apparel to the extent not already owned by Delta
Apparel or its subsidiaries. This transfer will include the sale by
Delta Mills to Delta Apparel of the Rainsford plant, located in
Edgefield, SC, which is 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 agree to look only to
Delta Apparel or a subsidiary of Delta Apparel for payment of that
indebtedness or lease (except where Delta Woodside or Duck Head, as
applicable, consents to not being released from the obligations).
(d) All the assets used in the operations of the Duck Head Apparel Company
division's business will have been transferred to Duck Head or a
subsidiary of Duck Head to the extent not already owned by Duck Head
or its subsidiaries.
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(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 agree to look only to Duck
Head or a subsidiary of Duck Head for payment of that indebtedness or
lease (except where Delta Woodside or Delta Apparel, as applicable,
consents to not being released from the obligations).
(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 agree to look only to Delta Woodside or a remaining
subsidiary of Delta Woodside for payment of that indebtedness or lease
(except where Delta Apparel or Duck Head, as applicable, consents to
not being released from the obligations).
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 the employees of the Delta Apparel Company
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 January 1, 2000, these amounts aggregated approximately $3.1 million.
Other than any amounts owed under the tax sharing agreement and except as
provided in the distribution 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 or
Delta Woodside, on the other hand, will be deemed to have been paid in full by
the party or parties owing the relevant obligation.
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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, Duck Head and Delta Apparel proportionately in
accordance with the respective benefits received by Delta Woodside, Duck Head
and Delta Apparel as determined in good faith by the parties; provided that the
holders of the Delta Woodside shares shall pay their own expenses, if any,
incurred in connection with the Delta Apparel distribution and the Duck Head
distribution.
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, for each
taxable period that ends prior to or 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 any
increase in those state taxes, and shall be entitled to receive the
benefit of any refund of or saving in those state taxes, with respect
to that corporation (or any predecessor by merger of that corporation)
or that results from any tax proceeding with respect to any returns
relating to those state taxes of that corporation (or any predecessor
by merger of that corporation).
- With respect to federal employment taxes
(a) Delta Woodside shall be responsible for the federal employment
taxes payable with respect to the compensation paid, whether
before, on or after the date of the Delta Apparel distribution,
by any member of the Delta Woodside federal income tax
consolidated group for any period ending prior to or on the date
of the Delta Apparel distribution or by any member of the Delta
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.
46
<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 Duck Head distribution, by any member of
the Delta Woodside federal income tax consolidated group for any
period ending prior to or on the date of the Duck Head
distribution or by any member of the Duck Head tax group for any
period after that date to all individuals who are past or present
employees of the business of Duck Head.
(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 period ending prior to or on the date
of the Delta Apparel distribution or by any member of the Delta
Apparel tax group for any period after that date to all
individuals who are past or present employees of the business of
Delta Apparel.
- 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 group that relate to any taxable period after the Delta
Apparel distribution. The Duck Head tax group shall be responsible for
all taxes, and shall receive the benefit of all tax items, of any
member of the Duck Head tax group that relate to any taxable period
after the Duck Head distribution. 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 and
other tax proceedings. In addition, the tax sharing agreement provides that all
disagreements and disputes relating to the agreement are to be resolved by Delta
Woodside. These arrangements may result in conflicts of interest among Delta
Apparel, Delta Woodside and Duck Head concerning such matters as whether a tax
relates to the business of Delta Woodside, Delta Apparel or Duck Head. Delta
Woodside might determine that a tax was a liability of Delta Apparel even though
Delta Apparel disagreed with that determination.
47
<PAGE>
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.
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).
Principal Stockholders
----------------------
The Delta Apparel shares will be distributed in the Delta Apparel
distribution, and the Duck Head shares will be distributed in the Duck Head
distribution, to the Delta Woodside stockholders proportionately among the Delta
Woodside shares. Therefore, immediately following the Delta Apparel
distribution, Delta Woodside's principal stockholders will be the same
individuals and entities as Delta Apparel's and Duck Head's principal
stockholders, and those principal stockholders will have the same respective
percentages of outstanding beneficial ownership in each of Delta Woodside, Delta
Apparel and Duck Head (assuming no acquisitions or dispositions of shares by
those stockholders between the record date for the Delta Apparel distribution or
the Duck Head distribution and the completion of either distribution). See
"Security Ownership of Significant Beneficial Owners and Management".
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 six months of fiscal year
2000:
<TABLE>
<CAPTION>
(in thousands of dollars)
Fiscal year First six months
of
1997 1998 1999 Fiscal year 2000
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
Sold to 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
________________________________________
(1) For purposes of this table, yarn produced by the Rainsford plant and used
by Delta Apparel, prior to the transfer from Delta Mills to Delta Apparel
in April 1998 of operational control of the Rainsford plant, is treated as
sold by Delta Mills to Delta Apparel.
</TABLE>
48
<PAGE>
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.
Purchase of Rainsford Plant
---------------------------
The Rainsford plant in Edgefield, South Carolina, manufactures yarn for use
in knitting operations. In April 1998, control of the operations and management
of the Rainsford plant 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 Mills and Delta Apparel have agreed that the purchase price for these
assets will be the assets' book value. This purchase price will be paid in cash
and by the assumption of certain liabilities. Delta Apparel estimates that the
purchase price for the real property, furniture, fixtures and equipment will be
approximately $12.0 million and the purchase price for the inventory will be
approximately $1.9 million. Delta Apparel will pay the cash portion of the
purchase price with borrowings under its credit facility.
The terms of the 9 5/8% Senior Notes of Delta Mills require that Delta
Mills 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. Delta Mills has engaged The Robinson-Humphrey
Company, LLC to provide this opinion.
THE OPINION TO BE PROVIDED BY ROBINSON-HUMPHREY RESPECTING THE SALE OF THE
RAINSFORD PLANT ADDRESSES THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE
SALE TO THE HOLDERS OF THE SENIOR NOTES OF DELTA MILLS. THE OPINION DOES NOT
ADDRESS THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE SALE TO DELTA APPAREL
OR DELTA APPAREL'S CREDITORS OR STOCKHOLDERS.
The following summarizes Robinson-Humphreys' analyses and the opinion that
Robinson-Humphreys anticipates providing to the indenture trustee for the Senior
Notes of Delta Mills with respect to the Rainsford plant sale.
Material and Information Considered by Robinson-Humphrey
In arriving at its opinion, Robinson-Humphrey:
- Reviewed the sale agreement respecting the Rainsford plant sale;
- Reviewed certain internal financial statements and other financial and
operating data concerning the Rainsford plant;
- Conducted discussions with members of Delta Mills' and the Rainsford
plant's managements concerning the Rainsford plant's business,
operations, present condition and prospects;
- Compared the results of operations and present financial condition of
the Rainsford plant with those of certain publicly traded companies
that Robinson-Humphrey deemed to be reasonably similar to the
Rainsford plant;
49
<PAGE>
- Reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions that
Robinson-Humphrey deemed relevant;
- Performed certain financial analyses with respect to the Rainsford
plant's projected future operating performance; and
- Reviewed such other financial statistics and analyses and performed
such other investigations and took into account such other matters as
Robinson-Humphrey deemed appropriate.
Robinson-Humphrey has relied upon the accuracy and completeness of the
financial and other information provided to it by Delta Mills in arriving at its
opinion without independent verification. With respect to the financial
forecasts of the Rainsford plant for the years 2000 through 2004,
Robinson-Humphrey has assumed that the assumptions provided by management have
been reasonably prepared and reflect the best currently available estimates and
judgment of Delta Mills' management. In arriving at its opinion,
Robinson-Humphrey conducted only a limited physical inspection of the properties
and facilities of the Rainsford plant, and did not make appraisals of the
Rainsford plant or any of its assets. Robinson-Humphrey's opinion is necessarily
based upon market, economic and other conditions as they exist on, and can be
evaluated as of, the date of its letter.
In connection with the preparation of its fairness opinion,
Robinson-Humphrey performed certain financial and comparative analyses, the
material portions of which are summarized below. The following is a summary of
the material factors considered and principal financial analyses performed by
Robinson-Humphrey to arrive at its opinion, but does not purport to be a
complete description of the factors considered or the analyses performed by
Robinson-Humphrey in arriving at its opinion. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances, and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. In addition,
Robinson-Humphrey believes that its analyses must be considered as an integrated
whole, and that selecting portions of the analyses and the factors considered by
it, without considering all of the analyses and factors, could create a
misleading or an incomplete view of the process underlying its analyses set
forth in its opinion. In performing its analyses, Robinson-Humphrey made
numerous assumptions with respect to industry and economic conditions and other
matters, many of which are beyond the control of Delta Mills or management of
the Rainsford plant. Any estimates contained in such analyses are not
necessarily indicative of actual past or future results or values, which may be
significantly more or less favorable than as set forth in the opinion. Estimates
of values or companies do not purport to be appraisals or necessarily to reflect
the price at which those companies may actually be sold, and such estimates are
inherently subject to uncertainty. No public company utilized as a comparison is
identical to the Rainsford plant, and no merger and acquisition transaction
involved assets identical to the sale of the Rainsford plant. An analysis of the
results of such comparisons is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and transactions and other factors
that could affect the values of companies and transactions to which the sale of
the Rainsford plant is being compared.
Analysis of Selected Comparable Public Companies
Robinson-Humphrey reviewed and compared selected publicly available
financial data, market information and trading multiples for diversified textile
companies that Robinson-Humphrey deemed comparable to Delta Mills.
Robinson-Humphrey also reviewed and compared selected publicly available
financial data, market information and trading multiples for diversified textile
companies with revenues and firm values less than $1.0 billion that
Robinson-Humphrey deemed comparable to Delta Mills.
50
<PAGE>
For the comparable companies in each category, Robinson-Humphrey compared,
among other things, firm value as a multiple of latest twelve months ("LTM")
revenues, firm value as a multiple of LTM earnings before interest, taxes,
depreciation and amortization ("EBITDA"), firm value as a multiple of LTM
earnings before interest and taxes ("EBIT"), equity value per share ("Price") as
a multiple of LTM earnings per share ("EPS") and equity value as a multiple of
book value for the comparable companies. All multiples were based on closing
stock prices as of December 7, 1999. Revenues, EBITDA, EBIT, EPS and book value
for the comparable companies were based on historical financial information
available in public filings of the comparable companies.
Analysis of Selected Merger & Acquisition Transactions
Robinson-Humphrey reviewed the financial terms, to the extent publicly
available, of 54 proposed, pending or completed merger and acquisition
transactions in the textile industry since 1991 involving companies that
Robinson-Humphrey deemed to be comparable based on operating characteristics of
the Rainsford plant. Robinson-Humphrey also reviewed the financial terms, to the
extent publicly available, of completed merger and acquisition transactions in
the textile industry occurring between 1980 and 1990 involving companies that
Robinson-Humphrey deemed to be comparable based on operating characteristics of
the Rainsford plant. Robinson-Humphrey calculated various financial multiples
based on certain publicly available information for each of the compared
transactions and compared them to corresponding financial multiples for the
purchase price in the proposed sale of the Rainsford plant.
With respect to each category of compared transactions, Robinson-Humphrey
compared, among other things, firm value as a multiple of LTM revenues, firm
value as a multiple of LTM EBIT, firm value as a multiple of LTM EBITDA, and
equity value as a multiple of LTM net income and book value for the comparable
merger and acquisition transactions.
Discounted Cash Flow Analysis
Robinson-Humphrey performed a discounted cash flow analysis using financial
projections for 2000 through 2004 to estimate the net present equity value for
the Rainsford plant. Robinson-Humphrey derived ranges of net present equity
value for the Rainsford plant on a stand-alone basis which were based upon the
discounted cash flows of the Rainsford plant from 2000 to 2004 plus a terminal
value calculated using a range of multiples of the Rainsford plant's projected
year 2004 EBITDA. Robinson-Humphrey applied discount rates ranging from 14% to
18% and multiples of 2004 EBITDA ranging from 3.0x to 5.0x.
Equipment Appraisal Value
Robinson-Humphrey examined a third party appraisal of the Rainsford plant
that was provided to Delta Mills in July 1999. The appraisal had been obtained
to arrive at a conclusion of orderly liquidation value and forced liquidation
value for the Rainsford plant's assets effective the date of inspection.
Fairness Opinion to Holders of Delta Mills' Senior Notes
Based on these analyses, Robinson-Humphrey anticipates delivering a written
opinion that, as of the date of its opinion, the proposed sale of the Rainsford
plant is fair, from a financial point of view, to the holders of Delta Mills' 9
5/8% Senior Notes due 2007.
Robinson-Humphrey based its analyses on assumptions that it deemed
reasonable, including assumptions concerning general business and economic
conditions and industry-specific factors. The preparation of fairness opinions
does not involve mathematical weighing of the results of the individual analyses
performed, but requires Robinson-Humphrey to exercise its professional
judgement, based on its experience and expertise, in considering a wide variety
of analyses taken as a whole. Each of the analyses conducted by
Robinson-Humphrey was carried out in order to provide a different perspective on
the transaction and to add to the total mix of information available.
Robinson-Humphrey did not form a conclusion as to whether any individual
analysis, considered in isolation, supported or failed to support an opinion as
to fairness. Rather, in reaching its conclusion, Robinson-Humphrey considered
the results of the analyses in light of each other and ultimately reached its
conclusion based on the results of all analyses taken as a whole.
51
<PAGE>
Information Concerning Robinson-Humphrey
Robinson-Humphrey is a nationally recognized investment banking firm and,
as a customary part of its investment banking activities, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, private placements, and valuations
for corporate and other purposes. Delta Mills selected Robinson-Humphrey because
of its expertise, reputation in the textile industry and familiarity with Delta
Mills and the Rainsford plant, and because of Delta Woodside's experience with
Robinson-Humphrey's assistance in the proposed sale by Delta Woodside of the
Duck Head Apparel Company division during part of 1998 and 1999. In the ordinary
course of business, Robinson-Humphrey and its affiliates may actively trade or
hold the securities and other instruments and obligations of Delta Woodside for
their own account and for the accounts of customers and, accordingly, may at any
time hold long or short positions in such securities, instruments or
obligations.
Pursuant to an engagement letter, Delta Mills agreed to pay
Robinson-Humphrey a fee of $100,000 in connection with the preparation and
delivery of its fairness opinion. Delta Mills has agreed to indemnify
Robinson-Humphrey for certain liabilities related to, arising out of or in
connection with Robinson-Humphrey's engagement by Delta Mills. Robinson-Humphrey
has also performed various investment banking services for Delta Woodside in the
past, and has received customary fees for those services.
Management Services
-------------------
Delta Woodside has provided various services to the operating divisions of
its subsidiaries, including the Delta Mills Marketing Company, Duck Head Apparel
Company and Delta Apparel Company divisions. These services include financial
planning, SEC reporting, payroll, accounting, internal audit, employee benefits
and services, stockholder services, insurance, treasury, purchasing, 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. During the first six months of fiscal year 2000, Delta
Woodside charged the Delta Apparel Company division $0 for these services.
Other
-----
For further information on transactions with affiliates by Delta Apparel,
see Notes 2 and 8 to the Combined Financial Statements of Delta Apparel under
"Index to Combined 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.
52
<PAGE>
CAPITALIZATION
The following table sets forth at January 1, 2000: (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 January 1, 2000 and for the
six months ended January 1, 2000, included on pages 54-59 and F-17 to F-20,
respectively, of this document.
<TABLE>
<CAPTION>
AS OF JANUARY 1, 2000
-----------------------------------------------
ACTUAL PROFORMA
------------------ -------------------
(Dollars in thousands)
<S> <C> <C>
Long-term debt; including current maturities
Industrial revenue bonds $ 219
Revolver loan - 4,555
Five year term loan --- 10,000
Due to related parties 129,595 3,198
------------------ -------------------
Total long-term debt (including current maturities) 129,814 17,753
Less current maturities (99,397) (5,198)
------------------ -------------------
Total long-term debt (excluding current maturities) 30,417 12,555
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; 2,400,000 shares issued and
outstanding on a pro forma basis --- 24
Additional paid-in capital --- 44,423
Divisional deficit (67,764) ---
------------------ -------------------
Total stockholders' equity (deficit) (67,764) 44,447
------------------ -------------------
Total capitalization $ (37,347) 57,002
================== ===================
</TABLE>
53
<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-20.
The unaudited pro forma combined balance sheet has been prepared to give
effect to the following transactions as if they occurred on January 1, 2000:
- The contribution to equity of the intercompany debt owed by Delta
Apparel to Delta Woodside and its subsidiaries (other than an amount
equal to a purchase price for the Rainsford plant and associated
inventory equal to net book value of such assets) and the distribution
of Delta Apparel common stock to the existing Delta Woodside
stockholders; and
- The refinancing of existing debt.
The unaudited pro forma combined statements of operations for the year
ended July 3, 1999 and for the six months ended January 1, 2000 give effect to
the following transactions as if they had occurred at the beginning of the
fiscal year ended July 3, 1999:
- The decreased interest expense attributable to the contribution to
equity of the intercompany debt and borrowings utilizing outside
financing;
- The elimination of the intercompany management fees and the incurrence
by 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.
54
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JANUARY 1, 2000
PRO FORMA PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- ------------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 69 69
Accounts and other receivables 13,973 13,973
Inventories 29,449 29,449
Prepaid expenses and other current assets 914 914
------------ ---------------
Total current assets 44,405 44,405
Property, plant and equipment, net 29,142 29,142
Other assets 175 175
------------ ---------------
73,722 73,722
============ ===============
LIABILITIES AND STOCKHOLDERS'/DIVISIONAL EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt $ 219 1,781 (2) 2,000
Accounts payable and accrued liabilities 10,930 10,930
Due to related parties 99,178 (95,980) (1) 3,198
Income taxes payable 222 (150) (3) 72
------------ ------------ ---------------
Total current liabilities 110,549 (94,349) 16,200
Due to related parties 30,417 (30,417) (1) --
Long-term debt -- 12,555 (2) 12,555
Other long-term liabilities 520 520
------------ ------------ ---------------
Total liabilities 141,486 (112,211) 29,275
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; 2,400,000 shares issued and outstanding
on a pro forma basis -- 24 (1) 24
Additional paid-in capital -- 44,423 (1) 44,423
Divisional deficit (67,764) 67,764 (1) --
------------ ------------ ---------------
Total stockholders'/divisional equity (deficit) (67,764) 112,211 44,447
------------ ------------ ---------------
$ 73,722 -- 73,722
============ ============ ===============
</TABLE>
See notes to unaudited pro forma combined financial statements.
55
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JANUARY 1, 2000
(in thousands of dollars, unless otherwise noted)
The following is a summary of the adjustments reflected in the unaudited pro
forma combined balance sheet:
1) To reflect the contribution to equity of net intercompany debt owed by
Delta Apparel to Delta Woodside and subsidiaries totaling $126,397 less
$14,555 and the distribution of 2,400,000 Delta Apparel common shares to
Delta Woodside's existing stockholders.
2) To reflect the replacement of the intercompany debt and existing outside
financing with new outside financing totaling $14,555, the proceeds of
which are used to pay the purchase price of the Rainsford plant and
associated inventory (which is deemed to be the net book value of those
assets as of January 1, 2000).
3) To reflect estimated tax liability.
56
<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
---------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C>
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 (benefit) (90) (90)
------------------- -------------- -------------------
Net loss $ (19,190) 7,579 (11,611)
=================== ============== ===================
Basic and diluted net loss per share $ (4.84)
===================
Weighted average shares outstanding used in basic
and diluted per share calculation (4) 2,400,000
===================
See notes to unaudited pro forma combined financial statements.
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JANUARY 1, 2000
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C>
Net sales $ 50,221 50,221
Cost of goods sold (43,511) (43,511)
-------------- ---------------
Gross profit 6,710 6,710
Selling, general and administrative expenses (3,563) (3,563)
Intercompany management fees -- (162) (2) (162)
Provision for bad debts (116) (116)
Other expenses (12) (12)
-------------- ------------ ---------------
Operating income 3,019 (162) 2,857
Interest income (expense):
Interest expense, net (10) (682) (1) (692)
Intercompany interest expense (4,276) 4,276 (1) --
-------------- ------------ ---------------
(4,286) 3,594 (692)
-------------- ------------ ---------------
Income (loss) before income
taxes (1,267) 3,432 2,165
Income taxes (benefit) (59) 107 (3) 48
-------------- ------------ ---------------
Net income (loss) $ (1,208) 3,325 2,117
============== ============ ===============
Basic and diluted net income per share $ 0.88
===============
Weighted average shares outstanding used in basic
and diluted per share calculation (4) 2,400,000
===============
See notes to unaudited pro forma combined financial statements.
</TABLE>
58
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 3, 1999 AND THE SIX MONTHS ENDED JANUARY 1, 2000
(in thousands of dollars, unless otherwise noted)
The following is a summary of the adjustments reflected in the unaudited pro
forma combined statements of operations:
1) To reflect interest expense on new borrowings committed to by a financial
institution lender of $10,000 under a term loan and amounts outstanding
under a revolver loan at an assumed interest rate (including the
amortization of lender fees) of 9.5%. Also, to reflect the elimination of
intercompany interest expense for the six months ended January 1, 2000 and
the fiscal year ended July 3, 1999 totaling $4,276 and $9,457,
respectively, on the intercompany debt owed by Delta Apparel to Delta
Woodside and subsidiaries. If the interest rate on Delta Apparel's
outstanding new borrowings were increased by 1/8 percent, Delta Apparel's
pro forma interest expense would have been approximately $33 higher in the
fiscal year ended July 3, 1999 and approximately $9 higher in the six
months ended January 1, 2000.
2) To eliminate intercompany management fees for the six month period ended
January 1, 2000 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 estimated tax liability.
4) To reflect earnings per share based on the weighted-average shares
outstanding assuming a distribution of one Delta Apparel share for every
ten Delta Woodside shares outstanding on the record date.
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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 fiscal 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. During the
same period, most competitors of Delta Apparel also moved sewing operations
off-shore and selling prices for T-shirts started a decline that continued
through the first six months of fiscal year 2000. For example, the average sale
price of a dozen of Delta Apparel's basic T-shirt dropped approximately 32% from
fiscal year 1996 to the second quarter of fiscal year 2000. Sales prices have
dropped in response to lower sewing costs and a general decline in the cost of
raw materials, particularly cotton. Recently, sales prices have stopped their
decline, and Delta Apparel believes that the rate of price declines is likely to
slow generally 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 business conditions,
to take an impairment charge of $7.3 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 and
continue to improve 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 twenty-four 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 past and ongoing 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 continued improvements in Delta
Apparel's information technology and 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
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.
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FIRST SIX MONTHS OF FISCAL YEAR 2000 VERSUS FIRST SIX MONTHS OF FISCAL YEAR 1999
Net Sales. Net sales for the six month period ended January 1, 2000 were
$50.2 million as compared to net sales of $43.1 million for the prior year six
month period. This increase was due to significantly higher unit volume (up 38%,
accounting for $13.2 million) at lower average selling prices (down 15%,
accounting for $(6.1) million).
Gross Margin. Gross profit and gross profit margin for the first six month
period of fiscal year 2000 were $6.7 million and 13.3%, respectively, as
compared to $5.3 million and 12.3%, respectively, in the prior year six month
period. The lower average selling prices described above were offset by lower
manufacturing costs, driven by improved manufacturing efficiencies and higher
capacity utilization.
Selling General and Administrative Expenses. For the six month period ended
January 1, 2000, selling, general and administrative expenses were $3.7 million,
or 7.4% of sales, a decrease of $1.9 million from the prior year six month
period of $5.6 million, or 12.9% of sales. This decrease was due to a number of
factors, including a reduction in head count, lower allocated Delta Woodside
corporate overhead, reduced bad debt expense, lower selling expense, and a
reduction in distribution expense. This lower level of selling, general and
administrative spending is expected to continue in the future.
Operating Income. For the six month period ended January 1, 2000 operating
income was $3.0 million or 6.0% of sales. The $3.6 million improvement from the
operating loss of $0.6 million for the prior year six month period was due to
the factors described above.
Net Interest Expense. For the six month period ended January 1, 2000, net
interest expense was $4.3 million, as compared to $4.4 million for the six month
period ended December 26, 1998.
Taxes. The effective tax benefit rate was 4.7% for the six months ended
January 1, 2000 as compared to the effective tax benefit rate of 0.5% for the
six months ended December 26, 1998. Although both periods reflected a pretax
loss, the current period's tax benefit results from lower franchise tax due.
Net Loss. The net loss for the six month period ended January 1, 2000 of
$1.2 million was $3.8 million lower than the net loss of $5.0 million for the
prior year period. This decrease was due to the factors described above.
Inventories. Inventories at Delta Apparel at January 1, 2000 were $29.4
million as compared to $41.0 million on December 26, 1998. This reduction in
inventory was due to lower units on hand, better management of in process
inventory, and lower manufacturing cost of goods, as described above.
Capital Expenditures. Capital expenditures were $1.0 million for the six
month period ended January 1, 2000 as compared to $1.3 for the prior year
period. This decrease was due to a reduction in spending for domestic textile
modernization.
Order Backlog. Delta Apparel's order backlog at January 1, 2000 was $12.8
million, an increase of 2.4% from the order backlog of $12.5 million at December
26, 1998. This increase is the net result of an 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.
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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 (down 11%, accounting for $(5.7)
million) partially offset by increased unit sales (up 12%, accounting for $11.7
million) 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. The decrease in selling, general and administrative expenses was
driven by a reduction of $1.3 million in administrative cost offset by bad debt
expense of $1.6 million which was $1.0 million higher than the amount in fiscal
1998. The lower administrative cost resulted from headcount and cost reductions.
The higher bad debt cost resulted from two customer bankruptcies.
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 $7.3
million that was recorded to write off the excess of cost over assigned value of
net assets acquired. This impairment charge was recorded because Delta Apparel
continued to incur operating losses, the T-shirt apparel industry continued to
see declines in margins due to offshore competition and Delta Apparel had lost
its largest customer in the fourth quarter of fiscal year 1997. Concurrently
with Delta Apparel's annual planning process, Delta Apparel determined that the
future undiscounted cash flows were below the carrying value of goodwill. The
fiscal 1999 operating loss included a $1.4 million impairment charge to adjust
the carrying value of certain plant assets, primarily with respect to the
Washington, Georgia sewing facility and the Knoxville, Tennessee distribution
center. The Washington, Georgia facility incurs significantly higher operating
cost as compared to off-shore sewing operations. The distribution center is a
multistory building, which creates distribution inefficiencies. Both assets had
book values in excess of their respective market values. In the impairment
charge, Delta Apparel recognized the inability for the facilities to generate
cash flow that would warrant the excess book value. Both of these facilities
were written down to their respective estimated fair values.
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"; "Unaudited Pro Forma Combined Financial Statements".
Taxes. The effective tax rate for the year ended July 3, 1999 was 0.5% as
compared to a (0.4)% 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 $19.2 million, as
compared to $24.3 million for the year ended June 27, 1998, due to the factors
described above.
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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, as well as the implementation of the Enterprise Wide
Resource Planning system.
FISCAL YEAR 1998 VERSUS FISCAL YEAR 1997
Net Sales. Net sales for fiscal year 1998 were $108 million, a decline of
4.4% from net sales of $113 million in fiscal year 1997. The decline in sales
was due almost entirely to lower unit prices (down 4.2%).
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 off-shore 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, as a result of
continued disappointing results during fiscal 1998 that were considerably below
previous estimates made as part of the close for fiscal year 1997, Delta Apparel
determined that the excess of cost over assigned value of net assets acquired
was impaired. Accordingly, a charge of $7.3 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 (0.4)%
as compared to a 1.7% 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 expense recognized due to higher permanent non-deductible
differences.
Net Loss. Net loss for the year ended June 27, 1998, was $24.3 million, as
compared to $12.1 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 lower finished goods and work in process inventory resulting from a
production cutback during fiscal year 1998 in order to maintain a lower amount
of working capital.
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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 the first six months of fiscal year 2000 and in each of fiscal years
1999, 1998 and 1997, Delta Apparel's source of liquidity and capital has been
the informal borrowing arrangement it has had with its parent company, Delta
Woodside. As funds were needed, the affiliated debt was increased, and as funds
were generated, the affiliated debt was decreased.
Delta Apparel's operating activities resulted in $10.7 million of cash
provided in the first six months of fiscal 2000 as compared to $5.8 million of
net cash used in the first six months 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 $13.7 million in fiscal year 1997. The cash
provided in the first six months of fiscal year 2000 was primarily due to a
reduction in accounts receivable and an increase in accounts payable and accrued
expenses and was after the charge of $4.3 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 enter into a credit agreement with a lending
institution, under which the lender will provide Delta Apparel with a
$10 million term loan and a 3-year $25 million revolving credit
facility. All loans under the credit agreement will bear interest at
rates based on an adjusted LIBOR rate plus an applicable margin or a
bank's prime rate plus an applicable margin. Delta Apparel will grant
the lender a first mortgage lien on or security interest in
substantially all of its assets. Delta Apparel will have the option to
increase the revolving credit facility from $25 million to $30
million, provided that no event of default exists under the facility.
- 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.
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- Principal of the term loan will be repaid in monthly installments of
principal based on a 60 month amortization, with payment of all
outstanding principal and interest required upon earlier termination
of the credit facility.
- 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
January 1, 2000 (for purposes of the pro forma balance sheet) or the beginning
of the 1999 fiscal year (for purposes of the pro forma income statements). Using
the same assumptions as are in these pro forma income statements, if the 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 (as compared to $6.8 million actual use of cash from
operations). The lower use of cash would have been mainly 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 income statements, if
the Delta Apparel distribution had taken place at the beginning of fiscal year
1999, cash provided by operating activities during the first six months of
fiscal year 2000 would have been approximately $13.9 million. This $3.2 million
increase in cash provided by operations would have been due to lower interest
payments on the institutional lender debt as compared to the actual interest
charged on the affiliated debt.
In connection with the Delta Apparel distribution, Delta Apparel will
purchase from Delta Mills the Rainsford plant, located in Edgefield, South
Carolina, and related inventory. Delta Apparel and Delta Mills have agreed that
the purchase price for these assets will be the assets' book value. This
purchase price will be paid in cash and by the assumption of certain
liabilities. Delta Apparel estimates that the purchase price for the real
property, furniture, fixtures and equipment will be approximately $12.0 million
and the purchase price for the inventory will be approximately $1.9 million.
Delta Apparel will pay the cash portion of the purchase price with borrowings
under its new credit facility.
Typically, Delta Apparel's peak borrowing needs are in the third and fourth
fiscal quarters. Delta Apparel anticipates that at the time it enters into its
new credit facility, it will owe amounts to the lender on Delta Woodside's
existing credit facility for borrowings made to fund Delta Apparel's working
capital needs after January 1, 2000 and to fund the repayment in March 2000 of
Delta Apparel's existing mortgage debt. Any such borrowings will be refinanced
by proceeds of Delta Apparel's new credit facility.
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.
Approximately 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 $25 million
revolving credit facility should be sufficient to satisfy its foreseeable
working capital needs, and that the cash flow generated by its operations and
funds available under its revolving credit line should be sufficient to service
its debt payment requirements, to satisfy its day-to-day working capital needs
and to fund its planned capital expenditures. Any material deterioration in
Delta Apparel's results of operations, however, may result in Delta Apparel
losing its ability to borrow under its revolving credit facility and to issue
letters of credit to suppliers or may cause the borrowing availability under
that facility not to be sufficient for Delta Apparel's needs.
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SUMMARY FINANCIAL INFORMATION FOR THIRD QUARTER OF FISCAL 2000 AS COMPARED TO
THIRD QUARTER OF FISCAL 1999
The following table summarizes Delta Apparel's results of operations for
the third quarter of fiscal year 2000 as compared to the third quarter of fiscal
year 1999.
<TABLE>
<CAPTION>
Net Sales Gross Profit Operating Profit (Losses)
--------- ------------ -------------------------
<S> <C> <C> <C>
Fiscal year 2000 ($) 27.3 5.0 2.9
- ---------------------------- -------------------------- -------------------------- --------------------------
Fiscal year 1999 ($) 20.6 (0.7) (3.5)
- ---------------------------- -------------------------- -------------------------- --------------------------
Increase (Decrease) ($) 6.7 5.7 6.4
- ---------------------------- -------------------------- -------------------------- --------------------------
Percent (Decrease) (13.4%) 31.4%
</TABLE>
The increase in net sales was due to significantly higher unit volume at
lower average selling prices. Gross profits increased because the lower average
selling prices were largely offset by lower costs of raw materials and lower
manufacturing costs. The lower manufacturing costs were driven by improved
manufacturing efficiencies and higher capacity utilization in the quarter. The
gross profit improvement is also partially due to a $2.4 million adjustment to
fixed assets that was recorded in the third quarter of fiscal 1999. The higher
gross profits, coupled with a $0.9 million decrease in selling, general and
administrative expenses, led to the operating profit in the third quarter of
fiscal year 2000 as compared to the operating loss during the prior year's third
quarter. The decrease in selling, general and administrative expenses was due to
a number of factors, including lower corporate overhead, reduced bad debt
expense, lower commission expense and a reduction in distribution expense.
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
January 1, 2000, 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 $1.3 million on the value of the contracts.
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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 $72,000 higher in the six months ended January 1, 2000. The
actual increase in interest expense resulting from a change in interest rates
would depend on the magnitude of the increase in rates and the average principal
balance outstanding.
YEAR 2000 COMPLIANCE
The Year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, software programs that have time sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000.
To date, Delta Apparel has spent approximately $401,000 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 incurring any material additional costs associated with the
Year 2000 issue.
Delta Apparel has not suffered any material adverse effect as a result of
the Year 2000 problem.
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 30096 (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 92% of Delta
Apparel's fiscal year 1999 sales were of T-shirts. Delta Apparel specializes in
selling to the decorated knit apparel marketplace products such as blank
T-shirts, golf shirts and fleece sweatshirts. 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 4 to 10 percentage points 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. In order to expand its textile
production capacity, Delta Apparel is establishing an arrangement with a third
party textile manufacturer under which the manufacturer will supply textile
fabrics to Delta Apparel. 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 three years, Delta Apparel has
opened its two Honduras plants and closed five sewing plants in the United
68
<PAGE>
States. At 1999, 1998 and 1997 fiscal year ends, Delta Apparel's long-lived
assets in Honduras comprised 6.6%, 4.9% and 11.8%, respectively, of Delta
Apparel's total net property, plant and equipment. Delta Apparel is currently
planning to establish a leased sewing facility in Mexico which could commence
production by the end of calendar year 2000.
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 $.690 in the first six months of fiscal year 2000. 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 and has fixed
the price for approximately 100% of its expected cotton requirements for fiscal
year 2000. For fiscal year 2001, Delta Apparel has contracted to purchase
approximately 78% and has fixed the price on approximately 25% of its expected
requirements. The percentage of its cotton requirements that Delta Apparel fixes
each year varies depending upon its 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. Since the middle of fiscal year 1999, polyester prices
have been increasing.
No customer accounted for more than 10% of Delta Apparel's sales in the
first six months of fiscal year 2000 or in fiscal year 1999 or fiscal year 1998.
Approximately 25% of Delta Apparel's fiscal year 1997 sales were to NIKE, Inc.
As a consequence of the loss of this account (which resulted from Delta
Apparel's inability at that time to service a private label program of that
magnitude), 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.
- Shift the product mix to better margin items, such as youth style,
long sleeve and heather T-shirts.
- Take advantage of being a totally vertical producer to reduce costs,
plan efficient production, implement exacting controls and provide
consistent products.
69
<PAGE>
- Use its Honduran facilities to manufacture most of its product, taking
advantage of the favorable wage differential offered by that country.
- Establish a Mexican sewing plant to take advantage of the favorable
wage differential offered by that country and the benefits offered by
NAFTA.
- 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.
- Have a balanced mix of customers.
- Improve its management of inventory and accounts receivable.
- Increase production capacity to the extent economically feasible.
Delta Apparel's management believes that this strategy will take advantage
of the following market trends:
- 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 offer their product on consignment
(whereby the customer is not billed until the customer resells the product) or
with extended payment terms (90 to 180 days) 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 which 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 T-shirts for wholesalers
70
<PAGE>
and screen printers, which is up from 4% in 1996 and makes it a second tier
supplier to the market. In fiscal year 1999, approximately 92% of Delta
Apparel's sales were of T-shirts, 5% of Delta Apparel's sales were of fleece
sweatshirts and 3% of Delta Apparel's sales were of other products.
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.
Employees
---------
At April 1, 2000, Delta Apparel had approximately 2,100 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's Maiden, North Carolina textile plant has received
complaints from downstream owners about the color of its effluent discharge into
a river's tributary. Although Delta Apparel's current NPDES permit, which
expires in July 2000, does not regulate the color of effluent, some additional
regulatory control of color is likely to occur in the future. Delta Apparel
estimates that it can reduce the color of its effluent discharge at an estimated
cost of approximately $200,000 to $300,000 per year.
As a result of environmental rules relating to waste water discharge, any
significant increase in production capacity of the Maiden, North Carolina plant
would require significant expenditures for environmental studies and, depending
on the results of those studies, possible significant other expenditures. The
plant holds a permit to discharge 1 million gallons per day, and currently
discharges approximately 950,000 gallons per day.
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.
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.
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<PAGE>
Legal Proceedings
-----------------
In April 1994, a product 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., a defendant in the case. 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 in the distribution agreement 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.
All other pending litigation to which Delta Apparel is a party is ordinary
routine product liability litigation or contract breach litigation incident to
its business that does not depart from the normal kind of such actions. Delta
Apparel believes that none of these actions, if adversely decided, would have a
material adverse effect on its results of operations or financial condition
taken as a whole.
PROPERTIES
The following table provides a description of Delta Apparel's principal
production and warehouse facilities.
<TABLE>
<CAPTION>
Approximate
Sqare
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)
Honduras Plant, San Pedro Sula, Honduras sew 30,000 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 lease of each of these Honduras plants expires in November 2000. Delta
Apparel has an option to extend each lease for an additional 5 years.
</FN>
</TABLE>
In addition, sales offices are leased in New York City on a month-to-month
basis.
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<PAGE>
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 substantially all of Delta Apparel's assets will be
granted to Delta Apparel's 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.
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<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 (43) 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 (59) 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
74
<PAGE>
Marketing Company, a division of a subsidiary of Delta Woodside. Upon
consummation of the Delta Apparel distribution and the Duck Head distribution,
Mr. Garrett will become President and Chief Executive Officer of Delta Woodside.
Mr. Garrett also serves as a director of Delta Woodside and Duck Head.
(3) C. C. Guy served as Chairman of the Board of Old Delta Woodside or its
predecessors from the founding of Old Delta Woodside's predecessors in 1984
until November 1989. Since before the November 15, 1989 merger (which this
document refers to as the "RSI Merger") of Old Delta Woodside into RSI
Corporation, a South Carolina corporation which changed its name to Delta
Woodside Industries, Inc. and is now Delta Woodside, he has been a director of
RSI Holdings, Inc., and from before the RSI Merger until January 1995 he also
served as President of RSI Holdings, Inc. RSI Holdings, Inc. until 1992 was
engaged in the sale of outdoor power equipment, until 1994 was engaged in the
sale of turf care products, until January 2000 was engaged in the consumer
finance business and is currently evaluating other business opportunities. Prior
to November 15, 1989, RSI Holdings, Inc. was a subsidiary of RSI Corporation.
Mr. Guy served from October 1979 until November 1989 as President, Treasurer and
a director of RSI Corporation. Prior to the RSI Merger, RSI Corporation owned
approximately 40% of the outstanding shares of common stock of Old Delta
Woodside and, among other matters, was engaged in the office supply business, as
well as the businesses of selling outdoor power equipment and turf care
products. Mr. Guy also serves as a director of Delta Woodside and 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 and the Duck Head 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 also serves as a director of Delta Woodside and Duck Head.
(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.
75
<PAGE>
Rainsford served as Treasurer of Old Delta Woodside or its predecessors or Delta
Woodside from 1984 to 1986, from August 1988 to November 1988 and from November
1990 to October 1, 1999. He is President of The Rainsford Development
Corporation which is engaged in general business development activities in
Edgefield, South Carolina. Mr. Rainsford also serves as a director of Delta
Woodside, 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.
</FN>
</TABLE>
The Delta Apparel board is considering the establishment of a board
governance committee of the Delta Apparel board.
EXECUTIVE OFFICERS
The following provides information regarding the executive officers of
Delta Apparel.
Name and Age Position
- ------------ --------
Robert W. Humphreys (43) 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 Company division in
April 1998. Prior to joining the Delta Apparel Company 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 Company division in July 1998. She served as
Director of Human Resources for the Delta Apparel Company 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.
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
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<PAGE>
subsidiaries in excess of $100,000 (whom this document refers to collectively as
the "Named Executives"). Except as described in the notes to the table with
respect to Robert W. Humphreys, each individual listed in the table worked
exclusively for the Delta Apparel Company division during fiscal year 1999 to
the extent that individual was employed during that period by any member of the
Delta Woodside group of corporations.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
Awards
Other
Annual Securities
Compen- Underlying All Other
Fiscal Salary Bonus sation Options Compen-
Name and Principal Position Year ($)(a) ($)(a)(b) ($)(c) (#)(d) sation($)
- --------------------------- ------ ------ -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Humphreys 1999 223,077 94,286 14,715 0 543,449 (f)(g)
President and Chief
Executive Officer,
Delta Apparel division(e)
Herbert M. Mueller 1999 140,000 23,080 3,880 0 372 (f)(h)
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 Savings and Investment Plan (the
"Delta Woodside 401(k) Plan") or the Delta Woodside deferred compensation plan.
(b) Amounts in this column are cash bonuses paid to reward performance.
(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) This was Mr. Humphreys' principal position with Delta Apparel during
fiscal 1999. Mr. Humphreys became the President and chief executive officer of
Delta Apparel in April 1999. The compensation information provided for Mr.
Humphreys includes all compensation earned by him in fiscal 1999 in whatever
capacity from Delta Woodside and its subsidiaries. For a description of the
compensation that Delta Woodside has agreed to pay Mr. Humphreys for his service
as President and chief executive officer of Delta Apparel, see the material
under the sub-heading below, "Robert W. Humphreys Employment Contract". Delta
Apparel will assume Delta Woodside's obligations under this agreement in
connection with the Delta Apparel distribution.
77
<PAGE>
(f) 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.
(g) 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
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 $400,000 paid in connection with his undertaking the position
of President and chief executive officer of the Delta Apparel Company division.
(h) Represents the Delta Woodside contribution allocated to Mr. Mueller's
account in the Delta Woodside 401(k) Plan.
</FN>
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
---------------------------------------------------------------------------
Values
- ------
The following table provides information respecting the exercise by any
Named Executive during fiscal 1999 of awards granted under Delta Woodside's
Incentive Stock Award Plan and options granted under Delta Woodside's Stock
Option Plan, and the fiscal year end value of any unexercised outstanding awards
and options. For purposes of this table, awards under Delta Woodside's Incentive
Stock Award Plan are treated as options.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION VALUES
Shares
Acquired Value
on Exercise Realized Number of Securities Underlying Value of Unexercised
Unexercised In-the-Money Options at
Name (#) ($) Options at FY-End (#) FY-End ($)(a)
---- ----------- -------- ------------------------------- ------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Humphreys 3,000 17,784 22,875 5,625 78,807 14,414
Herbert M. Mueller 800 8,622 1,500 4,500 8,906 26,719
_____________________________________
<FN>
(a) Based on the closing sales price of $5.9375 per Delta Woodside share on
July 2, 1999.
</FN>
</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
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, $250
for each telephonic board and committee meeting in which the director
participates and $500 for each board meeting attended in addition to 4 quarterly
board meetings. Each director will also be reimbursed for reasonable travel
expenses in attending each meeting.
78
<PAGE>
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 will assume 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 at least 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
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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 at least the Named
Executives, the compensation grants committee) of the Delta Apparel board of
directors will administer the Delta Apparel option plan.
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 an
incentive stock option and the market value of the shares of common stock at the
date of exercise, however, constitutes a tax preference item for the participant
in the year of exercise for alternative minimum tax purposes. Among other
requirements, the stock acquired by the participant must be held for at least
two years after the option is granted and for at least one year after the option
is exercised for the option to qualify as an incentive stock option. If the
participant satisfies these holding period requirements, the participant will be
taxed only upon any gain realized upon disposition of the stock. The
participant's gain will be equal to the difference between the sales price of
the stock and the exercise price. If an incentive stock option is exercised
after the death of the employee by the estate of the decedent, or by a person
who acquired the right to exercise the option by bequest or inheritance or by
reason of the death of the decedent, none of the holding period requirements
apply.
If the participant fails to satisfy the holding period requirements, the
option will be treated in a manner similar to options that are not incentive
stock options. The participant is generally not taxed upon the grant of an
option that is not an incentive stock option. Upon exercise of any the option,
however, the participant recognizes ordinary income equal to the difference
between the fair market value of the shares acquired on the date of exercise and
the exercise price. Subject to Section 162(m) of the Internal Revenue Code
(relating to limitations on corporate income tax deduction of certain executive
compensation in excess of $1 million), generally 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 sales price of the shares at the time
of disposition over (b) the exercise price, and (ii) if the sales price of the
stock at the time of the early disposition exceeds the fair market value of the
shares at the time of exercise, the participant will also recognize capital gain
income equal to that excess.
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.
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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 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 an 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 February 14, 2010, and no options will be granted under the plan
thereafter, but termination will not affect any option granted under the plan
before the termination date.
As described in "Interests of Directors and Executive Officers in the 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 at least 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.
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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
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 Delta Apparel 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
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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.
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 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 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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SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS
AND MANAGEMENT
Based on the beneficial ownership of Delta Woodside shares as of April 25,
2000, the following table sets forth what the beneficial ownership of Delta
Apparel's common stock would be immediately following the Delta Apparel
distribution by (i) any person that would beneficially own 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 sole voting and investment power with respect to all
shares of common stock of Delta Apparel shown as beneficially owned by them. On
April 25, 2000, 23,307,645 Delta Woodside shares were outstanding, corresponding
to 2,330,764 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".
Shares
Beneficially
Beneficial Owner Owned Percentage
- ---------------- ------------ ----------
Reich & Tang Asset Management L. P. (1) 317,060 13.6%
600 Fifth Avenue
New York, New York 10020
Franklin Resources, Inc. (2) 224,000 9.6%
Franklin Advisory Services, LLC
Charles B. Johnson
Rupert H. Johnson, Jr.
777 Mariners Island Boulevard
San Mateo, California 94404
Dimensional Fund Advisors Inc. (3) 195,322 8.4%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
E. Erwin Maddrey, II (4)(20) 347,592 14.8%
233 North Main Street
Suite 200
Greenville, SC 29601
Bettis C. Rainsford (5)(20) 334,218 14.3%
108-1/2 Courthouse Square
Post Office Box 388
Edgefield, SC 29824
Buck A. Mickel (6) (7)(20) 158,742 6.8%
Post Office Box 6721
Greenville, SC 29606
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Micco Corporation (7) 124,063 5.3%
Post Office Box 795
Greenville, SC 29602
Minor H. Mickel (7) (8)(20) 157,804 6.8%
415 Crescent Avenue
Greenville, SC 29605
Minor M. Shaw (7) (9) 152,008 6.5%
Post Office Box 795
Greenville, SC 29602
Charles C. Mickel (7) (10) 149,694 6.4%
Post Office Box 6721
Greenville, SC 29606
William F. Garrett (11)(20) 27,171 1.2%
C. C. Guy (12)(20) 3,848 (19)
Robert W. Humphreys (13)(20) 8,996 (19)
Dr. James F. Kane (14)(20) 4,055 (19)
Dr. Max Lennon (15)(20) 2,881 (19)
Herbert M. Mueller (16) 819 (19)
Marjorie F. Rupp (17) 711 (19)
All current directors and executive officers
as a group (10 Persons) (18)(20) 889,033 38.1%
(1) This information is based on an amendment dated February 14, 2000 to
Schedule 13G that was filed with the Securities and Exchange Commission by Reich
& Tang Asset Management L. P. (which this document refers to as "Reich & Tang")
with respect to Delta Woodside's common stock. In the amendment, Reich & Tang
reported that, with respect to Delta Woodside's common stock, it had shared
voting power and shared dispositive power with respect to all of the shares
shown. The amendment reported that the shares of Delta Woodside's common stock
were held on behalf of certain accounts for which Reich & Tang provides
investment advice and as to which Reich & Tang has full voting and dispositive
power for as long as it retains management of the assets. According to the
amendment, each account has the right to receive and the power to direct the
receipt of dividends from, or the proceeds from the sale of, the Delta Woodside
shares. The amendment reported that none of such accounts has an interest with
respect to more than 5% of the outstanding shares of Delta Woodside's common
stock.
(2) This information is based on an amendment dated January 19, 2000 to
Schedule 13G that was filed with the Securities and Exchange Commission by
Franklin Resources, Inc. (which this document refers to as "FRI") with respect
to Delta Woodside's common stock. In the amendment, FRI reported that, with
respect to Delta Woodside's common stock, the shares shown in the table above
were beneficially owned by one or more investment companies or other managed
accounts that are advised by one or more direct and indirect investment advisory
subsidiaries of FRI. The amendment reported that the advisory contracts grant to
the applicable investment advisory subsidiary(ies) all investment and/or voting
power over the securities owned by their investment advisory clients.
Accordingly, such subsidiary(ies) may be deemed to be the beneficial owner of
the shares shown in the table. The amendment reported that Charles B. Johnson
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and Rupert H. Johnson, Jr. (whom this document refers to as the "FRI Principal
Shareholders") (each of whom has the same business address as FRI) each own in
excess of 10% of the outstanding common stock and are the principal shareholders
of FRI and may be deemed to be the beneficial owners of securities held by
persons and entities advised by FRI subsidiaries. The amendment reported that
one of the investment advisory subsidiaries, Franklin Advisory Services, LLC
(whose address is One Parker Plaza, Sixteenth Floor, Fort Lee, New Jersey
07024), has sole voting and dispositive power with respect to all of the shares
shown. FRI, the FRI Principal Shareholders and the investment advisory
subsidiaries disclaim any economic interest or beneficial ownership in the
shares shown in the table above and are of the view that they are not acting as
a "group" for purposes of the Securities Exchange Act of 1934, as amended. The
amendment reported that Franklin Balance Sheet Investment Fund, a series of
Franklin Value Investors Trust, a company registered under the Investment
Company Act of 1940, has an interest in more than 5% of the class of securities
reported in the amendment.
(3) This information is based on an amendment to Schedule 13G dated
February 4, 2000 that was filed with the Securities and Exchange Commission by
Dimensional Fund Advisors Inc. (which this document refers to as "Dimensional")
with respect to Delta Woodside's common stock. Dimensional reported that it had
sole voting power and sole dispositive power with respect to all of the shares
shown. The amendment reports that Dimensional furnishes investment advice to
four investment companies and serves as investment manager to certain other
commingled group trusts and separate accounts, that all of the shares of Delta
Woodside's common stock were owned by such investment companies, trusts or
accounts, that in its role as investment adviser or manager Dimensional
possesses voting and/or investment power over the Delta Woodside shares
reported, that Dimensional disclaims beneficial ownership of such securities and
that, to the knowledge of Dimensional, no such investment company, trust or
account client owned more than 5% of the outstanding shares of Delta Woodside's
common stock.
(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 a director of 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
concerns regarding the tax ramifications to Delta Woodside's shareholders of the
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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 Apparel Company and/or the Delta Apparel Company
divisions. The amendment stated that Mr. Rainsford may modify or change his
intentions based upon developments in Delta Woodside's business, discussions
with Delta Woodside, actions of management or a change in market or other
conditions or other factors. The amendment stated that Mr. Rainsford will
continually consider modifications of his position, or may take other steps,
change his intentions, or trade in Delta Woodside's securities at any time, or
from time to time.
(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).
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(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 Anne
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 it is likely that such an amendment would
become effective within the next 60 days. Consequently, all of Mr. Garrett's
outstanding options are included in the table. See, "Interests of Directors and
Executive Officers in the 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, all of which are currently exercisable.
(14) Dr. James F. Kane is a director of Delta Apparel. He is also a
director of Delta Woodside and Duck Head.
(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
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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 it is likely 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 it is likely 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 directors and
executive officers on April 25, 2000 by the Delta Woodside 401(k) Plan. Each
participant in the Delta Woodside 401(k) Plan has the right to direct the manner
in which the trustee of the Plan votes the shares held by the Delta Woodside
401(k) Plan that are allocated to that participant's account. Except for shares
as to which such a direction is made, the shares held by the Delta Woodside
401(k) Plan are not voted. Also includes 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 it is likely that such amendments would become effective
within the next 60 days. Consequently, all of such persons' outstanding options
are included in the table. See, "Interests of Directors and Executive Officers
in the Delta Apparel Distribution -- Early Exercisability of Delta Woodside
Stock Options."
(19) Less than one percent.
(20) Includes the Delta Apparel shares attributable to the Delta Woodside
shares that the Delta Woodside board of directors anticipates paying to certain
directors and key executives prior to the record date for the Delta Apparel
distribution and the Duck Head distribution, as described under "Interests of
Directors and Executive Officers in the Delta Apparel Distribution - Payments in
Connection with Delta Apparel Distribution and Duck Head Distribution." The
other notes above to the table do not include these Delta Apparel shares or the
Delta Woodside shares to which they relate.
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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 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 covering an
aggregate of approximately 162,500 Delta Apparel shares will be made and awards
under the Delta Apparel incentive stock award plan covering an aggregate of
approximately 59,200 Delta Apparel shares will be made, including the following
anticipated option and award grants to the following executive officers of Delta
Apparel:
<TABLE>
<CAPTION>
Name and position Shares Covered by Options(1) Shares Covered by Awards(2)
----------------- ---------------------------- --------------------------
<S> <C> <C>
Robert W. Humphreys 62,500 20,000
President and Chief Executive Officer
Herbert M. Mueller 14,000 6,000
Vice President, Chief Financial Officer
and Treasurer
Marjorie F. Rupp 8,000 4,000
Vice President and Secretary
<FN>
___________________________________
(1) The compensation grants 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. The compensation grants
committee anticipates that the options will vest over a four year period.
(2) The compensation grants committee of the Delta Apparel board of directors
anticipates that 20% of each award will vest at the end of each of fiscal
year 2000, fiscal year 2001 and fiscal year 2002 and up to the remaining
40% will vest at the end of fiscal year 2002 to the extent that certain
performance criteria based on cumulative earnings before interest and taxes
are met.
</FN>
</TABLE>
For a description of the Delta Apparel stock option plan and the Delta
Apparel incentive stock award plan and the anticipated treatment under Section
162(m) of the Internal Revenue Code of grants of options and awards under these
plans, see "Management of Delta Apparel - Management Compensation."
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PAYMENTS IN CONNECTION WITH DELTA APPAREL DISTRIBUTION AND DUCK HEAD
DISTRIBUTION
In 1997, the Delta Woodside board of directors adopted and the Delta
Woodside stockholders approved the Delta Woodside long term incentive plan.
Under that plan, award grants could be made to key executives and non-employee
directors of Delta Woodside that, depending on the attainment of certain
performance measurement goals over a three-year period, could translate into
stock options for Delta Woodside shares being granted to participants in the
plan. In connection with the exercise of any option granted under the plan,
Delta Woodside would pay cash to the participant to offset the income taxes
attributable to the option exercise and to such cash payment, using an assumed
38% income tax rate.
No award grants complying with all the terms of the plan were made. Around
the time of adoption of the plan, however, Delta Woodside did identify the
individuals who would be plan participants, determined performance targets for
these individuals and communicated these actions to the affected individuals.
These communications also informed the participants that new three-year
performance goals would be established annually.
To take account of the communications previously made to the plan
participants, the fact that all three-year performance periods contemplated by
the plan would expire following consummation of the Delta Apparel and Duck Head
distributions and the efforts of the key executives and directors on behalf of
Delta Woodside leading up to the Duck Head distribution and the Delta Apparel
distribution, Delta Woodside's board (based on resolutions of its compensation
grants and compensation committees) has decided that, once the record date for
the Duck Head distribution and the Delta Apparel distribution is established,
Delta Woodside shares shall be issued and cash shall be paid prior to the Delta
Apparel and Duck Head record date, to those individuals who were intended
participants in the plan. These actions, which have been reflected in an
amendment to the long term incentive plan, provide that (a) Delta Woodside would
issue Delta Woodside shares and make cash payments to the individuals identified
for participation in the plan, (b) as a condition to receipt of those Delta
Woodside shares and that cash, those individuals would surrender any rights they
may have under the plan and (c) no further awards, options or Delta Woodside
shares would be granted or issued under the plan.
The number of Delta Woodside shares to be issued and the cash amounts to be
paid have been determined by Delta Woodside's compensation grants and
compensation committees and the Delta Woodside board. In determining the number
of Delta Woodside shares to be issued to each participant, the Delta Woodside
compensation grants committee, compensation committee and board used the closing
sale price of the Delta Woodside common stock on March 15, 2000 ($1.50 per
share).
The table below sets forth the Delta Woodside shares that would thereby be
issued and the cash that would thereby be paid to the individuals who are
directors or executive officers of Delta Apparel. The Delta Woodside board
anticipates that these Delta Woodside shares would be issued and this cash would
be paid prior to the record date for the Delta Apparel distribution and the Duck
Head distribution.
Name Delta Woodside Shares(#) Cash ($)
- ---- ------------------------ --------
William F. Garrett 126,480 116,280
C.C. Guy 13,485 12,398
Robert W. Humphreys 48,360 44,460
Dr. James F. Kane 13,485 12,398
Dr. Max Lennon 13,330 12,255
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E. Erwin Maddrey, II 206,667 190,000
Buck A. Mickel 13,072 12,018
Bettis C. Rainsford 148,800 136,800
Shares would also be issued and cash would also be paid to the estate of Buck
Mickel (father of Buck A. Mickel), a member of the Delta Woodside board of
directors until his death in 1998, who participated in the early stages of that
board's strategic planning.
E. Erwin Maddrey, II is a participant in Delta Woodside's severance plan.
Upon the termination of Mr. Maddrey's services with Delta Woodside (which is
anticipated to occur on or about the time of the Delta Apparel distribution and
the Duck Head distribution), Delta Woodside will pay Mr. Maddrey $147,115 of
severance in accordance with the normal provisions of this plan.
EARLY EXERCISABILITY AND OTHER AMENDMENTS OF DELTA WOODSIDE STOCK OPTIONS AND
AMENDMENTS TO DEFERRED COMPENSATION PLAN
Pursuant to the distribution agreement, Delta Woodside is providing the
holders of outstanding options granted under the Delta Woodside stock option
plan, whether or not those options are currently exercisable, with the
opportunity to amend the terms of their Delta Woodside stock options. The
amendment being offered to each holder provides that:
(i) all unexercisable portions of the holder's Delta Woodside stock options
become immediately exercisable in full five (5) business days prior to the
Delta Apparel record date, which will permit the holder to exercise all or
part of the holder's Delta Woodside stock option prior to the 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 option that remains unexercised as of the
Delta Apparel record date will remain exercisable for only Delta Woodside
shares, and for the same number of Delta Woodside shares at the same
exercise price, after the 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).
Delta Woodside anticipates that all holders of Delta Woodside stock options
will probably enter into the proposed amendment.
As a result of these amendments, options for Delta Woodside shares will
become exercisable earlier than they otherwise would have for the following
Named Executives and members of the Delta Apparel board of directors for the
following number of Delta Woodside shares:
Number of Delta Woodside shares covered by
portion of stock options the exercisability
Name of which will be accelerated
---- -------------------------------------------
William F. Garrett 37,500
Herbert M. Mueller 4,500
Marjorie F. Rupp 3,000
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Also, in connection with the Delta Apparel distribution, Delta Woodside has
added a provision to the Delta Woodside stock option plan that provides that, so
long as a Delta Apparel employee who holds Delta Woodside stock options remains
an employee of Delta Apparel or any of its subsidiaries, those Delta Woodside
stock options will remain outstanding until the end of their stated term. This
amendment will apply to all Delta Woodside stock options currently held by Mr.
Humphreys (under which he can acquire an aggregate of 22,500 Delta Woodside
shares), Mr. Mueller (under which he can acquire an aggregate of 6,000 Delta
Woodside shares) and Ms. Rupp (under which she can acquire an aggregate of 4,000
Delta Woodside shares).
In connection with the Delta Apparel distribution, each participant in
Delta Woodside's deferred compensation plan will be provided with the
opportunity to receive all or part of his or her vested deferred compensation
account in cash in exchange for consenting to an amendment to the deferred
compensation plan. Under the plan amendment, only the corporation that employs
the participant, and not any other member of Delta Woodside's current group of
corporations, will be responsible in the future for the participant's deferred
compensation. Delta Woodside anticipates that each director and officer of Delta
Apparel will consent to the proposed plan amendment and will choose to continue
to defer his or her vested deferred compensation account under the amended plan.
LEASE TERMINATIONS
Delta Woodside has leased its principal corporate office space and space
for its benefits department, purchasing department and financial accounting
department from a corporation (233 North Main, Inc.), one-half of the stock of
which is owned by each of E. Erwin Maddrey, II (a director and significant
stockholder of 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 the Duck Head distribution) and a director and
significant stockholder of Delta Woodside) and Jane H. Greer (Vice President and
Secretary of Delta Woodside (from which officer positions she will resign in
connection with the Delta Apparel distribution and the Duck Head distribution)).
Mr. Maddrey and Ms. Greer are also the directors and executive officers of 233
North Main, Inc. The lease of this space was executed effective September 1,
1998, covers approximately 9,662 square feet at a rental rate of $13.50 per
square foot per year (plus certain other expenses) and had an expiration date of
August 2003. In connection with the Delta Apparel distribution and the Duck Head
distribution, 233 North Main, Inc. and Delta Woodside have agreed that this
lease will terminate on the Delta Apparel and Duck Head distribution date in
exchange for the payment by Delta Woodside to 233 North Main, Inc. of $135,268.
Following the Delta Apparel and Duck Head distribution date, Delta Woodside may
continue to use the space on an as needed month-to-month basis at the rental
rate of $14.00 per square foot per year (plus certain other expenses).
Delta Woodside has leased office space in Edgefield, South Carolina from
The Rainsford Development Corporation, a corporation wholly owned by Bettis C.
Rainsford (a director and significant stockholder of 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
position she will resign in connection with the Delta Apparel distribution and
the Duck Head 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 and
Duck Head distribution date in exchange for the payment by Delta Woodside to The
Rainsford Development Corporation of $33,299.08.
LEASE OF STORE IN EDGEFIELD, SOUTH CAROLINA
Duck Head leases a building in Edgefield, South Carolina from Bettis C.
Rainsford (a director and significant stockholder of 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 were paid
to Mr. Rainsford during fiscal 1997, 1998 and 1999, respectively.
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TRANSFERS OF LIFE INSURANCE POLICIES
In February 1991, each of E. Erwin Maddrey, II (a director and significant
stockholder 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 the Duck Head distribution) and a director
and significant stockholder of Delta Woodside) and Bettis C. Rainsford (a
director and significant stockholder 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, 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 a date on or about the date the Delta Apparel
distribution and the Duck Head distribution occur, that individual's First
Refusal Agreement will terminate and, if the individual desires, Delta Woodside
will transfer to the individual the $10 million life insurance policies on his
life the proceeds of which are payable to the beneficiary or beneficiaries he
selects. After this transfer, the recipient individual will be responsible for
payment the premiums on these life insurance policies. Delta Woodside will allow
the remaining $30 million of life insurance payable to Delta Woodside to lapse.
EMPLOYEE BENEFIT SERVICES
On or about the date of the Delta Apparel distribution, Delta Apparel
anticipates engaging Carolina Benefits Services, Inc. to provide payroll
processing and 401(k) plan administration services for Delta Apparel. Carolina
Benefits Services, Inc. is owned by E. Erwin Maddrey, II (a director and
significant stockholder 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 the Duck Head distribution)
and a director and significant stockholder of Delta Woodside) and Jane H. Greer
(Vice President and Secretary of Delta Woodside (from which officer positions
she will resign in connection with the Delta Apparel distribution and the Duck
Head distribution)). Ms. Greer is also an executive officer of Carolina Benefits
Services, Inc.
For the services to be provided by Carolina Benefits Services, Delta
Apparel anticipates paying fees based on the numbers of employees, 401(k) plan
participants and plan transactions and other items. Delta Apparel anticipates
that on an annual basis these fees will be approximately $84,000. Delta Apparel
elected to engage Carolina Benefits Services to provide these services after
receiving proposals from other providers of similar services and determining
that Carolina Benefits Services' proposal was Delta Apparel's least costly
alternative.
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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 $20.00 per quarter share (equivalent to
$80.00 per whole share), subject to adjustment. The description and terms of the
Rights are set forth in a Shareholder Rights Agreement (which this document
refers to as the rights agreement) between 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.
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 January 20, 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 Delta Apparel 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
reclassification of, the Delta Apparel common stock, (ii) if all holders of the
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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 Delta Apparel board of directors) by the Delta Apparel
board of directors at any time prior to the close of business on the tenth day
after the Share Acquisition Date or the final expiration date of the Rights
(whichever is earlier); provided that, under certain circumstances, the Rights
may not be redeemed unless there are Disinterested Directors (as defined in the
rights agreement) in office and the redemption is approved by a majority of the
Disinterested Directors. After the redemption period has expired, Delta
Apparel's right of redemption may be reinstated upon the approval of the Delta
Apparel 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 Delta Apparel
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 for federal
income tax purposes 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) or for common stock of an acquiring company as described above or
in the event the Rights are redeemed by Delta Apparel.
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
Delta Apparel board of directors to cure any ambiguity, defect or inconsistency,
to make changes that do not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person), or to shorten or lengthen any
time period under the rights agreement. Amendments adjusting time periods may,
under certain circumstances, require the approval of a majority of Disinterested
Directors, or otherwise be limited.
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OTHER PROVISIONS RESPECTING STOCKHOLDER RIGHTS AND EXTRAORDINARY TRANSACTIONS
Set forth below is a brief summary of some of the provisions of 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 Delta Apparel 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.
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.
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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.
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 by the following deadlines:
- in the case of annual meetings of stockholders, at least 120 days
before the anniversary date of the immediately preceding annual
stockholder meeting; and
- in the case of special meetings, the close of business on the seventh
day following the date that notice of the meeting was first given to
stockholders.
A stockholder's nomination for director must include:
- the name and address of the stockholder, the class and number of
shares beneficially owned by the stockholder as of any record date for
the meeting and as of the date of the notice of the meeting and the
name in which those shares are registered;
- a representation that the stockholder intends to appear in person or
by proxy at the meeting to make the nomination;
- a description of all arrangements and understandings between the
stockholder and each nominee and any other person pursuant to which
the nominations are to be made;
- other information that must be disclosed in proxy solicitations;
- the written consent of each nominee to serve as a director of 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.
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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
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 Delta Apparel shall indemnify its
directors and officers (and each person who at its request served as an officer
or director of another entity) to the fullest extent permitted by Georgia law.
This right to indemnification also includes the right to be paid by Delta
Apparel the expenses incurred in connection with a proceeding in advance of its
final disposition to the fullest extent authorized by Georgia law.
Delta Apparel's bylaws provide that it may purchase and maintain insurance
on behalf of any person who is or was one of its directors, officers, employees
or agents, or is or was serving at 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 and advancement of expenses provisions described above
are set forth in Delta Apparel's bylaws as a contractual right of Delta
Apparel's directors and officers.
Annual Meeting of Stockholders
The annual meeting of stockholders must be held on a date and at a place
fixed by Delta Apparel's board of directors.
Special Meetings of Stockholders
Special meetings of stockholders may be called at any time and for any
purpose by:
- the chairman of 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 or by unanimous written consent. The fact
that holders of Delta Apparel voting stock are unable to call a special meeting
or to take action without a meeting except by unanimous written consent may make
it more difficult for stockholders to take action opposed by 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;
- any material interest of the stockholder in the item of business;
- a description of all arrangements and understandings between the
stockholder and any other person or persons (with the name of the
persons) pursuant to which the proposal is made by the stockholder;
and
- such other information as Delta Apparel may reasonably request.
Depending on the circumstances, these timing and notice requirements may
preclude or deter some stockholders from bringing matters before an annual
meeting.
Preemptive Rights
In general, preemptive rights allow stockholders whose dividend rights or
voting rights would be adversely affected by the issuance of new stock to
purchase, on terms and conditions set by the board of directors, that proportion
of the new issue that would preserve the relative dividend or voting rights of
those stockholders. As permitted by Georgia law, 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.
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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
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 Georgia corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of five years after the date the stockholder becomes an "interested
stockholder", unless:
- before that date the board of directors of that corporation approves
either the "business combination" or the transaction that resulted in
the stockholder becoming an "interested stockholder";
- in the transaction that resulted in the stockholder becoming an
"interested stockholder", the "interested stockholder" owned at least
90% of the voting stock of the corporation outstanding at the time
that the transaction commenced, excluding, for purposes of determining
the number of shares outstanding, shares owned by any of the following
persons (which this document refers to as the persons excluded from
the voting calculation):
- persons who are directors or officers, their affiliates
and associates;
- subsidiaries of the corporation, and
- employee stock plans that do not provide employees with
the right to determine confidentially the extent to
which shares held subject to the plan will be tendered
in a tender or exchange offer; or
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- after becoming an "interested stockholder", the stockholder:
- acquired additional shares resulting in the "interested
stockholder" being the beneficial owner of at least 90%
of the outstanding voting stock of the corporation,
excluding, for purposes of determining the number of
shares outstanding, shares owned by the persons
excluded from the voting calculation; and
- the business combination was approved at an annual or
special meeting of stockholders by the holders of a
majority of the voting stock entitled to vote,
excluding the voting stock beneficially owned by the
"interested stockholder" and the persons excluded from
the voting calculation.
A "business combination" includes:
- a merger, consolidation or share exchange of the corporation or any
subsidiary with any interested stockholder or an affiliate of any
interested stockholder;
- a sale, lease, transfer or other disposition (other than in the
ordinary course of business) in one or a series of transactions to any
interested stockholder or an affiliate or associate of an interested
stockholder of any assets of the corporation or any of its
subsidiaries with an aggregate book value of 10% or more of the
corporation's net assets;
- an issuance or transfer by the corporation or its subsidiaries to any
interested stockholder or its affiliates or associates in one
transaction or a series of transactions of equity securities of the
corporation that have an aggregate market value of 5% or more of the
total market value of the outstanding common and preferred stock of
the corporation (except pursuant to the exercise of rights granted
proportionately to other stockholders and for convertible or
exercisable rights outstanding prior to the time that the person
became an interested stockholder);
- the adoption of any plan or proposal for the liquidation or
dissolution of the corporation;
- any reclassification of securities or merger or consolidation of the
corporation or its subsidiaries that has the effect of increasing by
5% or more the proportionate amount of equity securities of the
corporation or its subsidiaries beneficially owned by the interested
stockholder or its affiliates; and
- any other transaction (other than in the ordinary course of business)
resulting in a disproportionate financial benefit to the "interested
stockholder" or its affiliates or associates.
Under this statute, an "interested stockholder" is a person who
beneficially owns 10% or more of the corporation's outstanding voting stock or
is an affiliate of the corporation and within the two prior years beneficially
owned 10% or more of the corporation's then outstanding stock.
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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.
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
Delta Apparel shares of common stock.
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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
by the earlier of July 7, 2000 or ten days after notice or public disclosure of
the date of the meeting is made or given to stockholders. After that date, the
proposal will not be considered timely. Stockholders submitting proposals for
inclusion in the proxy statement and form of proxy must comply with the Exchange
Act and all stockholders submitting proposals or nominations for director must
comply with the bylaw requirements described under the headings "Description of
Delta Apparel Capital Stock - Nominations of Directors" and "Description of
Delta Apparel Capital Stock - Stockholder Proposals.".
FORWARD-LOOKING STATEMENTS MAY NOT BE ACCURATE
This document, particularly the material under the headings "Risk Factors",
"Trading Market", "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business of 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.
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.
KPMG LLP also serves as tax advisors to Delta Apparel.
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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.
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.
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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
January 1, 2000 (unaudited) F-18
Condensed Combined Statements of Operations and
Accumulated Divisional Deficit for the Six Months
Ended January 1, 2000 and December 26, 1998 (unaudited) F-19
Condensed Combined Statements of Cash Flows for the
Six Months ended January 1, 2000 and
December 26, 1998 (unaudited) F-20
Notes to Unaudited Condensed Combined Financial
Statements (unaudited) F-21
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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. In connection with our audits of the combined financial
statements, we also have audited the schedule of valuation and qualifying
accounts for each of the years in the three year period ended July 3, 1999.
These combined financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Delta Apparel
Company as of July 3, 1999 and June 27, 1998, and the results of its operations
and its cash flows for each of the years in the three-year period ended July 3,
1999, in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic combined financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
Atlanta, Georgia KPMG LLP
August 6, 1999
F1
<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 872 316
Income taxes receivable 90 -
--------- ---------
Total current assets 52,697 59,186
Property, plant and equipment, net (note 4) 31,441 40,507
Other assets 219 257
--------- ---------
$ 84,357 99,950
========= =========
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) 109,046 99,835
Income taxes payable - 108
--------- ---------
Total current liabilities 119,914 115,942
Long-term debt (note 6) 100 339
Due to related parties (note 8) 30,417 30,417
Other liabilities 482 618
-------- ---------
Total liabilities 150,913 147,316
Divisional deficit (66,556) (47,366)
Commitments and contingencies (notes 9, 10 and 12)
---------- --------
$ 84,357 99,950
========== ========
</TABLE>
See accompanying notes to combined financial statements.
F2
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
(as described in Note 1)
Combined Statements of Operations and Accumulated Divisional Deficit
(Amounts in thousands, except per share amounts)
Year ended
--------------------------------
JULY 3, JUNE 27, JUNE 28,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 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 expense (benefit) (note 7) (90) 108 (208)
--------- --------- ---------
Net loss (19,190) (24,307) (12,061)
Accumulated divisional deficit, beginning of year (47,366) (23,059) (10,998)
--------- --------- ---------
Accumulated divisional deficit, end of year $(66,556) (47,366) (23,059)
========= ========= =========
Unaudited pro forma net loss per share
(note 2):
Basic and diluted $ (8.00)
=========
Basic and diluted weighted-average common shares outstanding
2,400,000
=========
See accompanying notes to combined financial statements.
</TABLE>
F3
<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 $ (19,190) (24,307) (12,061)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 9,208 4,312 3,672
Amortization 6 155 250
Impairment charges 1,415 7,459 -
Provision for allowances on accounts 3,725 745 (1,487)
receivable
Loss (gain) on sale of property and equipment 347 29 (22)
Changes in operating assets and liabilities:
Accounts receivable (2,702) (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) (13,741)
--------- --------- ----------
Investing activities:
Purchases of property, plant, and equipment (3,593) (3,658) (2,340)
Proceeds from sale of property, plant, and
quipment 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 16,220
--------- --------- ----------
Net cash provided by financing activities 8,972 16,035 15,980
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>
F4
<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 (first-in, first-out) or
market. Estimated losses on inventories represent reserves for
obsolescence, excess quantities, and irregulars and slow moving
inventory. The Company estimates the losses on the basis of its
assessment of the inventory's net realizable value based upon current
market conditions and historical experience.
F5
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
The Company adopted the first-in, first-out (FIFO) method of
determining the cost of inventories. The Company had previously
recorded such inventories using the last-in, first-out (LIFO) method.
The Company has experience a significant decline in prices and level
of finished goods recently, and a significant portion of the
manufacturing component has moved to lower cost off-shore facilities
as such, the FIFO method is considered preferable because it more
closely matches current costs with current revenues in periods of
price-level decreases. LIFO inventories made up 94% and 93% of
inventories at July 3, 1999 and June 27, 1998, respectively. All
periods presented have been restated to reflect the retroactive
application of this accounting principle as provided by the special
exemption for an initial public distribution in APB Opinion 20,
"Accounting Changes". The accounting change increased the net loss by
$707, $3,316 and $327 in fiscal 1999, 1998 and 1997, respectively.
(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.
(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, which triggered an impairment review of
its long-lived assets. Based on the Company's business plan for fiscal
2000, the trend in the apparel industry to move production off-shore
and the age and condition of the Company's distribution facility in
the United States the Company determined that certain of its plant
assets were impaired. The Company calculated the present value of
expected cash flows of certain plant assets consisting of land,
buildings, machinery and equipment to be held and used to determine
the fair value of the assets. Accordingly, in the fourth quarter of
fiscal 1999, the Company recorded an impairment charge of $1,415.
(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 cash flows. In 1998, the Company continued to incur operating
losses, the T-shirt apparel industry continued to see declines in
margins due to offshore competition and the Company lost its largest
customer in the fourth quarter of fiscal 1997. Concurrent with the
Company's annual planning process, the Company determined that the
future undiscounted cash flows were below the carrying value of the
goodwill. Accordingly, during the third quarter of fiscal 1998 the
Company wrote off the goodwill of $7,240 as a deduction from pretax
income. The estimated fair value was based on anticipated future cash
F6
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
flows discounted at a rate commensurate with the risk involved.
(g) REVENUE RECOGNITION
Sales of goods are recognized upon shipment of the goods to the
customer. The Company estimates allowances for merchandise returns and
markdowns based on historical credits issued as a percentage of sales.
(h) RELATED PARTY TRANSACTIONS.
The Company participates in a cash management system maintained by
DWI. Under this system, excess cash is forwarded to DWI each day,
reducing the due to parent, and cash requirements are funded daily by
DWI, increasing the due to parent. Interest is charged on loan payable
to DWI balances based on the weighted-average cost of DWI's
borrowings. In addition, the Company incurs management fees from DWI
for various corporate services including management, treasury,
computer, benefits, payroll, auditing, accounting and tax services.
For these services, DWI charges actual cost based on relative usage
and other factors which, in the opinion of management, represents a
reasonable and appropriate method of allocation.
(i) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
The Company's operations are included in the consolidated Federal tax
return of DWI. Under the consolidated tax sharing arrangement, the
Company's tax receivable or payable is calculated as if the Company
separately filed a Federal tax return. Any tax settlement due to or
from the Parent is settled when the Parent receives or pays taxes to
the government.
(j) ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs amounted
to $1,300, $852 and $453, in fiscal 1999, 1998 and 1997, respectively.
(k) COMPUTATION OF UNAUDITED PRO FORMA NET LOSS PER SHARE
The Company has presented the unaudited historical pro forma net loss
per share pursuant to SFAS 128, Earnings per Share. Pursuant to SFAS
128, unvested stock is excluded from basic earnings per share and
included in diluted earnings per share if dilutive. The unaudited
historical pro forma net loss per share is calculated by dividing the
historical net loss by the unaudited pro forma weighted-average common
F7
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
shares outstanding. The unaudited pro forma weighted-average common
shares outstanding was determined assuming a distribution of one share
of Delta Apparel common stock for every ten shares of DWI stock
outstanding on the record date. The weighted-average shares do not
include securities that would be antidilutive for each of the periods
presented.
(l) 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 Company's 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.
(m) 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.
(n) 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 131, Disclosures about Segments of
an Enterprise with Related Information. SFAS 131 establishes standards
for the way public business enterprises report information about
operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in
interim financial reports issued to stockholders. SFAS 131 is
effective for financial statements for fiscal years beginning after
December 31, 1997. The Company does not believe it has any reportable
segments.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities which was subsequently deferred by
SFAS 137. SFAS 133 establishes accounting and reporting standards for
F8
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
derivative instruments, including derivative instruments embedded in
other contracts, and for hedging activities. SFAS 133 is effective for
all fiscal years beginning after June 15, 2000. The Company will
determine the applicability of SFAS 133 and apply it if necessary.
F9
<PAGE>
<TABLE>
<CAPTION>
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
--------- --------
<S> <C> <C>
Raw materials $ 2,731 4,588
Work in process 7,768 9,073
Finished goods 16,535 18,628
--------- --------
$ 27,034 32,289
========= ========
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED JULY 3, JUNE 27,
USEFUL LIFE 1999 1998
----------- --------- ---------
<S> <C> <C> <C>
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
and amortization (43,793) (47,424)
--------- ---------
$ 31,441 40,507
========= =========
</TABLE>
F10
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
(5) ACCRUED EXPENSES
Accrued expenses consist of the following:
JULY 3, JUNE 27,
1999 1998
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
(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
ate (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
=========
F11
<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 - - (572)
--------- -------- --------
State --- --- (93)
========= ========== ========
Total deferred --- --- (665)
-------- -------- --------
Income tax expense (benefit) (90) 108 (208)
========= ========== ========
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:
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 (59) 70 237
Valuation allowance adjustments 6,112 5,217 4,326
Nondeductible amortization and
other permanent differences 127 2,538 --
Other 478 753 (477)
-------- --------- --------
Income tax expense(benefit) (90) 108 (208)
======== ========= ========
</TABLE>
F12
<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 $ 15,208 13,775
Investment tax credit 617 617
Currently nondeductible accruals 2,841 1,494
Other 203 --
--------- --------
Gross deferred tax assets 18,869 15,886
Less valuation allowance (15,068) (8,956)
--------- --------
Net deferred tax assets 3,801 6,930
--------- --------
Deferred tax liabilities:
Depreciation (3,801) (6,224)
Other -- (706)
--------- --------
Deferred tax liabilities (3,801) (6,930)
--------- --------
Net deferred tax liability $ --- ---
========= ========
</TABLE>
The valuation allowance for deferred tax assets as of July 3, 1999 and June
27, 1998 was $15,068 and $8,956, respectively. The net change in the total
valuation allowance for the years ended July 3, 1999 and June 27, 1998 was
an increase of $6,112 and $5,217, 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 $30 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 $26 million calculated under the corporate
tax sharing arrangement. These carryforwards expire at various intervals
through 2019. If the Company leaves its current consolidated group, these
carryovers may not be available for future use.
F13
<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. 139,525 130,370
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 --
-------- ---------
139,463 130,252
======== =========
</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.
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.
F14
<PAGE>
DELTA APPAREL COMPANY
(as described in Note 1)
Three Years ended July 3, 1999
(Amounts in thousands)
(9) LEASES
The Company has several noncancellable operating leases relating to
buildings, office equipment, machinery and equipment, and computer systems.
Future minimum lease payments under noncancellable 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.
F15
<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.
F16
<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 26 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 income (loss) 667 (1,290) (3,362) (5,717)
Net loss (1,520) (3,496) (5,788) (8,386)
</TABLE>
<TABLE>
<CAPTION>
1998 QUARTER ENDED
-----------------------------------------------------------
SEPTEMBER 28 DECEMBER 26 MARCH 29 JUNE 28
-------------- --------------- -------------- ----------
<S> <C> <C> <C> <C>
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 (4,004) (3,325) (7,541) (9,437)
</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.
F17
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
Condensed Combined Balance Sheet
(Amounts in thousands)
(unaudited)
JANUARY 1,
2000
------------
<S> <C>
Assets
Current Assets:
Cash $ 69
Accounts and other receivables, net 13,973
Inventories 29,449
Prepaid expenses and other current assets 914
------------
Total current assets 44,405
Property, plant and equipment, net 29,142
Other assets 175
------------
$ 73,722
============
LIABILITIES AND DIVISIONAL DEFICIT
Current Liabilities:
Current installments on long-term debt $ 219
Accounts payable and accrued liabilities 10,930
Due to affiliates 99,178
Income taxes payable 222
------------
Total current liabilities 110,549
Long-term debt 30,417
Other long-term liabilities 520
------------
Total liabilities 141,486
Divisional deficit (67,764)
------------
$ 73,722
============
</TABLE>
See accompanying notes to condensed combined financial statements.
F18
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
Condensed Combined Statements of Operations and Accumulated Divisional Deficit
(Amounts in thousands, except per share amounts)
(unaudited)
FOR THE SIX MONTHS ENDED
--------------------------
JANUARY 1, DECEMBER 26,
2000 1998
------------ ------------
<S> <C> <C>
Net sales $ 50,221 43,081
Cost of goods sold 43,511 37,825
------------ ------------
Gross profit 6,710 5,256
Selling, general and administrative expenses 3,679 5,561
Other expenses 12 318
------------ ------------
Operating income 3,019 (623)
------------ ------------
Interest expense, net 4,286 4,416
------------ ------------
Loss before taxes (1,267) (5,039)
Income tax benefit (59) (23)
------------ ------------
Net loss (1,208) (5,016)
Accumulated divisional deficit, beginning of period (66,556) (47,366)
------------ ------------
Accumulated divisional deficit, end of period $ (67,764) (52,382)
============ ===========
Pro forma net loss per share (note 4)
Basic and diluted $ 0.50
============
Basic and diluted weighted-average
common shares outstanding 2,400,000
============
</TABLE>
See accompanying notes to condensed combined financial statements.
F19
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
Condensed Combined Statement of Cash Flows
(Amounts in thousands)
(unaudited)
FOR THE SIX MONTHS ENDED
----------------------------------
JANUARY 1, 2000 DECEMBER 26, 1998
--------------- -----------------
<S> <C> <C>
Operating activities:
Net loss $ (1,208) (5,016)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation 3,293 2,814
Loss (gain) on sale of property and equipment 6 842
Other 38 70
Changes in operating assets and liabilities
Accounts receivable 10,326 9,394
Inventories (2,415) (8,750)
Prepaid expenses and other current assets (42) (71)
Other noncurrent assets 44 (29)
Accounts payable and accrued expenses 301 (4,976)
Income taxes payable 312 (67)
--------------- -----------------
Net cash provided by (used in) operating activities 10,655 (5,789)
--------------- -----------------
Investing activities:
Purchases of property, plant and equipment (1,017) (1,279)
Proceeds from sale of property, plant and equipment 17 ---
--------------- -----------------
Net cash used in investing activities (1,000) (1,279)
--------------- -----------------
Financing activities:
Principal payment on long-term debt (120) (100)
Change in due to related parties, net (9,868) 7,104
--------------- -----------------
Net cash provided by (used in) financing activities (9,988) 7,004
--------------- -----------------
Decrease in cash (333) (64)
Cash at beginning of period 402 101
--------------- -----------------
Cash at end of period $ 69 37
=============== =================
Supplemental cash flow information:
Cash paid during the period for interest $ 11 24
=============== =================
</TABLE>
See accompanying notes to condensed combined financial statements.
F20
<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 six
months ended January 1, 2000 and December 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 January 1, 2000, and the results of its operations
and its cash flows for the six months ended January 1, 2000 and December 26,
1998, respectively. The results for the six months ended January 1, 2000 are
not necessarily indicative of the expected results for the full year or any
future period. The unaudited condensed combined financial statements included
herein should be read in conjunction with the combined financial statements and
notes thereto included in this filing.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Estimated losses on inventories represent reserves for obsolescence, excess
quantities, and irregulars and slow moving inventory. The Company estimates the
losses on the basis of its assessment of the inventory's net realizable value
based upon current market conditions and historical experience.
Inventories consist of the following:
JANUARY 1,
2000
----------
Raw materials 2,091
Work in process 10,236
Finished goods 17,122
----------
29,449
==========
NOTE 3 - COTTON PROCUREMENTS
Delta Apparel has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At January 1, 2000 minimum
payments under these contracts with non-cancelable contract terms were $12.9
million.
NOTE 4 - COMPUTATION OF PRO FORMA NET LOSS PER SHARE
The Company has presented the unaudited historical pro forma net loss per share
pursuant to SFAS 128, Earnings per Share. Pursuant to SFAS 128, unvested stock
is excluded from basic earnings per share and included in diluted earnings per
share if dilutive. The unaudited historical pro forma net loss per share is
calculated by dividing the historical net loss by the unaudited pro forma
weighted-average common shares outstanding. The unaudited pro forma
weighted-average common shares outstanding was determined assuming a
distribution of one share of Delta Apparel common stock for every ten shares of
DWI stock outstanding on the record date. The weighted-average shares do not
include securities that would be antidilutive for each of the periods presented.
F21
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
Valuation and qualifying accounts
---------------------------------
ALLOWANCE FOR DOUBTFUL ACCTS:
BEG EXPENSE CHARGED TO OTHER CREDITS ISSUED END
--- -------- ---------------- -------------- ---
<S> <C> <C> <C> <C> <C>
1999 537,000 2,049,000 (372,000) 2,214,000
1998 443,000 685,000 (591,000) 537,000
1997 1,499,000 41,000 (1,097,000) 443,000
RETURNS AND ALLOWANCES
BEG EXPENSE CHARGED TO OTHER CREDITS ISSUED END
--- ------- ---------------- -------------- ---
1999 792,000 2,805,000 (757,000) 2,840,000
1998 141,000 195,000 483,000 (27,000) 792,000
1997 572,000 (329,000) (102,000) 141,000
TOTAL
BEG EXPENSE CHARGED TO OTHER CREDITS ISSUED END
--- ------- ---------------- -------------- ---
1999 1,329,000 4,854,000 (1,129,000) 5,054,000
1998 584,000 880,000 483,000 (618,000) 1,329,000
1997 2,071,000 (288,000) (1,199,000) 584,000
</TABLE>
