SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10/A
(Amendment No. 3)
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
Delta Apparel, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-2508794 58-2508794
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
3355 Breckinridge Blvd., Suite 100, Duluth, GA 30096
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(Address of Principal Executive Offices) (Zip Code)
(770) 806-6800
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(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
To Be So Registered Each Class Is To Be Registered
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Common Stock, par value $0.01 American Stock Exchange
Common Stock Purchase Rights American Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act:
None
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Except as otherwise indicated below, the information required to be
contained in this Registration Statement on Form 10/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 Nine Months of Fiscal Year 2000
versus First Nine Months of Fiscal Year 1999 - Order Backlog"
ITEM 2. FINANCIAL INFORMATION.
See "Summary -- Selected Historical Financial Data"
"Management's Discussion and Analysis of Financial Conditions and
Results of Operations" ("MD&A")
"MD&A -- Quantitative and Qualitative Disclosures About Market
Risk"
ITEM 3. PROPERTIES.
See "Business of 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"
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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"
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.
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ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
See Index to Financial Statements
Exhibit 99.2
(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. *
3.2.2 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).
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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.)
10.8.1 Collateral Assignment of Acquisition Agreements dated
May 16, 2000 by and among DH Apparel Company, Inc.,
Delta Apparel, Inc. in favor of Congress Financial
Corporation (Southern).
10.8.2 Loan and Security Agreement by and between Congress
Financial Corporation (Southern), Delta Apparel, Inc.,
dated May 16, 2000 (excluding exhibits and schedules).
10.8.3 Term Promissory Note in the principal amount of
$10,000,000 dated May 16, 2000 by Delta Apparel, Inc.
in favor of Congress Financial Corporation (Southern).
10.8.4 Pledge and Security Agreement dated May 16, 2000 by
Delta Apparel, Inc. by and in favor of Congress
Financial Corporation (Southern) (excluding exhibits
and schedules).
10.8.5 Trademark Security Agreement dated May 16, 2000 by
and between Delta Apparel, Inc. and Congress Financial
Corporation (Southern) (excluding exhibits and
schedules).
21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule (electronic filing only).
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99.1 Information Statement of Delta Apparel, Inc.
99.2 Valuation and Qualifying Accounts
* Previously filed with initial filing, Amendment No. 1
or Amendment No. 2.
The registrant agrees to furnish supplementally to the
Securities and Exchange Commission a copy of any omitted
schedule or exhibit to any of the above filed exhibits upon
request of the Commission.
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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 24, 2000 By: /s/ Herbert M. Mueller
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Herbert M. Mueller
Vice President,
Chief Financial Officer
and Treasurer
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EXHIBITS
<S> <C>
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
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and certain pre-spin-off Delta Woodside Industries, Inc, plan participants.* (Several
persons will sign substantially identical documents. A schedule listing director and
officer signatories will be filed by amendment.)
10.8.1 Collateral Assignment of Acquisition Agreements dated May 16, 2000 by and among DH
Apparel Company, Inc., Delta Apparel, Inc. in favor of Congress Financial Corporation
(Southern).
10.8.2 Loan and Security Agreement by and between Congress Financial Corporation
(Southern), Delta Apparel, Inc., dated May 16, 2000 (excluding exhibits and schedules).
10.8.3 Term Promissory Note in the principal amount of $10,000,000 dated May 16, 2000 by
Delta Apparel, Inc. in favor of Congress Financial Corporation (Southern).
10.8.4 Pledge and Security Agreement dated May 16, 2000 by Delta Apparel, Inc. by and in
favor of Congress Financial Corporation (Southern) (excluding exhibits and schedules).
10.8.5 Trademark Security Agreement dated May 16, 2000 by and between Delta Apparel, Inc.
and Congress Financial Corporation (Southern) (excluding exhibits and schedules).
21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule (electronic filing only).
99.1 Information Statement of Delta Apparel, Inc.
99.2 Valuation and Qualifying Accounts
* Previously filed with initial filing, Amendment No. 1 or Amendment No. 2.
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DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT (this "Distribution Agreement"), dated as of
March 15, 2000, is entered into by and among DELTA WOODSIDE INDUSTRIES, INC., a
South Carolina corporation ("Delta Woodside"), DH APPAREL COMPANY, INC., a
Georgia corporation to be renamed Duck Head Apparel Company, Inc. ("Duck Head"),
and DELTA APPAREL, INC., a Georgia corporation ("Delta Apparel").
WHEREAS, the respective Boards of Directors of Delta Woodside, Duck Head
and Delta Apparel have approved the transactions contemplated by this
Distribution Agreement, upon the terms and subject to the conditions set forth
herein, as being in the best interests of Delta Woodside, Duck Head and Delta
Apparel, respectively;
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein the parties hereto
agree as follows:
ARTICLE 1
CERTAIN DEFINITIONS
1.1 Definitions. (a) As used herein, the following terms have the following
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meanings:
"Action" means any claim, suit, action, arbitration, inquiry, investigation
or other proceeding of any nature (whether criminal, civil, legislative,
administrative, regulatory, prosecutorial or otherwise) by or before any
arbitrator or Governmental Entity.
"Affiliate" means, with respect to any Person, any other Person, directly
or indirectly, controlling, controlled by, or under common control with, that
Person. For the purposes of this definition, the term "control" (including the
correlative terms "controlling", "controlled by" and "under common control
with") means the direct or indirect possession of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract, or otherwise. For purposes of this
Distribution Agreement, no member of one Group shall be treated as an Affiliate
of any member of another Group.
"Business" means the Delta Woodside Business, the Duck Head Business or the
Delta Apparel Business, as the context may indicate.
"Business Day" means any day other than a Saturday, Sunday or one on which
banks are authorized or required by law to close in Greenville, South Carolina.
"Contract" shall mean any note, bond, mortgage, indenture, lease, contract,
agreement, obligation, understanding, commitment or other similar arrangement,
whether written or oral.
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"Defense Materials" means, with respect to any Group, any and all written
or oral information (including, without limitation, any and all (A) written or
electronic communications, (B) documents (including electronic versions
thereof), (C) factual and legal analyses and memoranda, (D) interview reports
and reports of experts, consultants or investigators, (E) meetings in person or
by telephone and e-mail or other forms of electronic communication, and (F)
records, reports or testimony regarding those communications, documents,
memoranda or meetings) (i) within the custody or control, within the meaning of
Rule 34 of the Federal Rules of Civil Procedure, of or reasonably accessible by
that Group or its Representatives and (ii) directly or indirectly arising out of
or relating to, the preparation or litigation of any Action in which Delta
Woodside, Duck Head and/or Delta Apparel have a common interest.
"Delta Apparel Board" means the Board of Directors of Delta Apparel.
"Delta Apparel Business" means the businesses and operations of the Delta
Apparel Group, whether conducted prior to, at or after the Effective Time, which
include the manufacturing, marketing and sale of knit apparel.
"Delta Apparel Common Stock" means the common stock, par value $0.01 per
share, of Delta Apparel.
"Delta Apparel Disclosure Documents" means the Delta Apparel Information
Statement, the Delta Apparel Form 10 and each other report or filing made by
Delta Apparel under the Securities Act or the Exchange Act or with the American
Stock Exchange in connection with the matters contemplated by any of the
Distribution Documents, in each case as amended or supplemented.
"Delta Apparel Employees" means those individuals listed on the payroll
records of any member of the Delta Apparel Group after the Effective Time, or
who are identified as a Delta Apparel Employee on the Delta Apparel Disclosure
Schedule, and shall not include individuals who are Delta Woodside Employees or
Duck Head Employees.
"Delta Apparel Employee Group" means all Delta Apparel Employees and Delta
Apparel Retirees and their respective beneficiaries.
"Delta Apparel Form 10" means the registration statement on Form 10 that
Delta Apparel has filed with the SEC to register the Delta Apparel Common Stock
under the Exchange Act in connection with the Distribution, as that registration
statement may be amended from time to time.
"Delta Apparel Group" means, on and after the Effective Time, Delta Apparel
and the Subsidiaries of Delta Apparel, including all predecessors (other than
any member of the Delta Woodside Group or any member of the Duck Head Group) and
successors to each of those Persons.
"Delta Apparel Group Liabilities" means, except as otherwise specifically
provided in any Distribution Document, all Liabilities, whether arising before,
at or after the Effective Time, (i) of
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or in any way relating, in whole or in part, to any member of the Delta Apparel
Group (other than any Liabilities arising primarily from the conduct of or in
connection with, in whole or in part, the Delta Woodside Business or the Duck
Head Business) or (ii) arising from the conduct of, in connection with or in any
way relating to, in whole or in part, the Delta Apparel Business, or the
ownership or use of assets or property in connection with the Delta Apparel
Business or (iii) arising under Contracts included in the Delta Apparel Assets
(including any Liabilities under such Contracts resulting from the consummation
of the transactions contemplated by this Distribution Agreement) or (iv) of
Delta Apparel arising under any of the Distribution Documents. Notwithstanding
the foregoing, "Delta Apparel Group Liabilities" shall exclude (i) all
Liabilities for Taxes of any member of the Delta Apparel Group (because the Tax
Sharing Agreement will govern those Liabilities) and (ii) all Liabilities for
the fees, costs, expenses and transfer taxes (and other similar fees and
expenses), or portion thereof, that a specific provision of this Distribution
Agreement imposes on Delta Woodside or Duck Head. Without limiting the
generality of the foregoing, Delta Apparel Group Liabilities include all
liabilities that may arise under or in connection with that certain litigation
captioned Scelza et al. v. Caldor, Inc. et al. that is pending in the Supreme
Court of the State of New York in New York County, New York.
"Delta Apparel Information Statement" means the information statement,
substantially complying with the disclosure items of Schedule 14C of the
Exchange Act, that Delta Apparel will file as an exhibit to the Delta Apparel
Form 10 and send to each Delta Woodside Stockholder of record as of the Record
Date in connection with the Distribution.
"Delta Apparel Material Adverse Effect" shall be deemed to occur if the
aggregate consequences of all breaches and inaccuracies of covenants and
representations of Delta Apparel, when read without any exception or
qualification for a Delta Apparel Material Adverse Effect, are reasonably likely
to have a material adverse effect on Delta Apparel's ability to consummate the
transactions contemplated by this Distribution Agreement or on the business,
operations or financial condition of Delta Apparel and its Subsidiaries, Delta
Woodside and its Subsidiaries (excluding the Duck Head Group and the Delta
Apparel Group) or Duck Head and its Subsidiaries taken as a whole.
"Delta Apparel Retirees" means those individuals who were employed in the
Delta Apparel Business immediately before those individuals' retirement or other
termination of employment or who are identified as Delta Apparel Retirees on the
Delta Apparel Disclosure Schedule.
"Delta Apparel Share" means a share of the Delta Apparel Common Stock.
"Delta Woodside Board" means the Board of Directors of Delta Woodside.
"Delta Woodside Business" means the businesses and operations of the Delta
Woodside Group (but excluding the Delta Apparel Business and the Duck Head
Business), whether conducted prior to, at or after the Effective Time, which
include the manufacturing, marketing and sale of woven textile products.
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"Delta Woodside Common Stock" means the common stock, par value $0.01 per
share, of Delta Woodside.
"Delta Woodside Disclosure Documents" means each report or filing made by
Delta Woodside under the Exchange Act in connection with the matters
contemplated by any of the Distribution Documents, any information in the Duck
Head Information Statement, the Duck Head Form 10, the Delta Apparel Information
Statement or the Delta Apparel Form 10 that is provided by Delta Woodside or its
Representatives (other than a matter relating to the Duck Head Group or the
Delta Apparel Group) and each other report or filing made by Delta Woodside
under the Securities Act or the Exchange Act in connection with the matters
contemplated by any of the Distribution Documents, in each case as amended or
supplemented.
"Delta Woodside Employees" means those individuals listed on the payroll
records of any member of the Delta Woodside Group after the Effective Time, or
who are identified as a Delta Woodside Employee on the Delta Woodside Disclosure
Schedule, and shall not include individuals who are Delta Apparel Employees or
Duck Head Employees.
"Delta Woodside Employee Group" means all Delta Woodside Employees and
Delta Woodside Retirees and their respective beneficiaries.
"Delta Woodside Group" means, on and after the Effective Time, Delta
Woodside and the Subsidiaries of Delta Woodside, including all predecessors and
successors to each of those Persons (other than any member of the Delta Apparel
Group or the Duck Head Group).
"Delta Woodside Group Liabilities" means, except as otherwise specifically
provided in any Distribution Document, all Liabilities, whether arising before,
at or after the Effective Time, (i) of or in any way relating, in whole or in
part, to any member of the Delta Woodside Group (other than any Liabilities
arising primarily from the conduct of or in connection with, in whole or in
part, the Duck Head Business or the Delta Apparel Business) or (ii) arising from
the conduct of, in connection with or in any way relating to, in whole or in
part, the Delta Woodside Business, or the ownership or use of assets or property
in connection with the Delta Woodside Business or (iii) arising under Contracts
under which any of Delta Woodside or any of its Subsidiaries has any Liability
and that are not included in the Delta Apparel Assets or the Duck Head Assets
(including any Liabilities under such Contracts resulting from the consummation
of the transactions contemplated by this Distribution Agreement) or (iv) of
Delta Woodside arising under any of the Distribution Documents. Notwithstanding
the foregoing, "Delta Woodside Group Liabilities" shall exclude (i) all
Liabilities for Taxes of any member of the Delta Woodside Group (because the Tax
Sharing Agreement will govern those Liabilities) and (ii) all Liabilities for
the fees, costs, expenses and transfer taxes (and other similar fees and
expenses), or portion thereof, that a specific provision of this Distribution
Agreement imposes on Duck Head or Delta Apparel.
"Delta Woodside Material Adverse Effect" shall be deemed to occur if the
aggregate consequences of all breaches and inaccuracies of covenants and
representations of Delta Woodside,
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when read without any exception or qualification for a Delta Woodside Material
Adverse Effect, are reasonably likely to have a material adverse effect on Delta
Woodside's ability to consummate the transactions contemplated by this
Distribution Agreement or on the business, operations or financial condition of
Delta Woodside and its Subsidiaries (excluding the Duck Head Group and the Delta
Apparel Group), Duck Head and its Subsidiaries or Delta Apparel and its
Subsidiaries, taken as a whole.
"Delta Woodside Retirees" means those individuals who were employed in the
Delta Woodside Business immediately before those individuals' retirement or
other termination of employment or who are identified as Delta Woodside Retirees
on the Delta Woodside Disclosure Schedule.
"Delta Woodside Share" means a share of the Delta Woodside Common Stock.
"Delta Woodside Stockholders" means the holders of the Delta Woodside
Common Stock.
"Distribution" means the distribution by Delta Woodside, pursuant to the
terms and subject to the conditions of this Distribution Agreement, of all of
the outstanding Duck Head Shares and all of the outstanding Delta Apparel Shares
to the Delta Woodside Stockholders of record as of the Record Date.
"Distribution Agent" means First Union National Bank or its successor.
"Distribution Agent Agreement" means an agreement to be entered into prior
to the Effective Time by the Distribution Agent with respect to the
Distribution.
"Distribution Date" means the Business Day on which the Distribution is
effected.
"Distribution Documents" means this Distribution Agreement, the Tax Sharing
Agreement, and the exhibits and schedules to those agreements.
"Duck Head Board" means the Board of Directors of Duck Head.
"Duck Head Business" means the businesses and operations of the Duck Head
Group, whether conducted prior to, at or after the Effective Time, which include
the manufacturing, marketing and sale of apparel bearing the Duck Head
trademark.
"Duck Head Common Stock" means the common stock, par value $0.01 per share,
of Duck Head.
"Duck Head Disclosure Documents" means the Duck Head Information Statement,
the Duck Head Form 10 and each other report or filing made by Duck Head under
the Securities Act or the Exchange Act or with the American Stock Exchange in
connection with the matters contemplated by any of the Distribution Documents,
in each case as amended or supplemented.
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"Duck Head Employees" means those individuals listed on the payroll records
of any member of the Duck Head Group after the Effective Time, or who are
identified as a Duck Head Employee on the Duck Head Disclosure Schedule, and
shall not include individuals who are Delta Woodside Employees or Delta Apparel
Employees.
"Duck Head Employee Group" means all Duck Head Employees and Duck Head
Retirees and their respective beneficiaries.
"Duck Head Form 10" means the registration statement on Form 10 that Duck
Head has filed with the SEC to register the Duck Head Common Stock under the
Exchange Act in connection with the Distribution, as that registration statement
may be amended from time to time.
"Duck Head Group" means, on and after the Effective Time, Duck Head and the
Subsidiaries of Duck Head, including all predecessors (other than any member of
the Delta Woodside Group or any member of the Delta Apparel Group) and
successors to each of those Persons.
"Duck Head Group Liabilities" means, except as otherwise specifically
provided in any Distribution Document, all Liabilities, whether arising before,
at or after the Effective Time, (i) of or in any way relating, in whole or in
part, to any member of the Duck Head Group (other than any Liabilities arising
primarily from the conduct of or in connection with, in whole or in part, the
Delta Woodside Business or the Delta Apparel Business) or (ii) arising from the
conduct of, in connection with or in any way relating to, in whole or in part,
the Duck Head Business, or the ownership or use of assets or property in
connection with the Duck Head Business or (iii) arising under Contracts included
in the Duck Head Assets (including any Liabilities under such Contracts
resulting from the consummation of the transactions contemplated by this
Distribution Agreement) or (iv) of Duck Head arising under any of the
Distribution Documents. Notwithstanding the foregoing, "Duck Head Group
Liabilities" shall exclude (i) all Liabilities for Taxes of any member of the
Duck Head Group (because the Tax Sharing Agreement will govern those
Liabilities) and (ii) all Liabilities for the fees, costs, expenses and transfer
taxes (and other similar fees and expenses), or portion thereof, that a specific
provision of this Distribution Agreement imposes on Delta Woodside or Delta
Apparel.
"Duck Head Information Statement" means the information statement,
substantially complying with the disclosure items of Schedule 14C of the
Exchange Act, that Duck Head will file as an exhibit to the Duck Head Form 10
and send to each Delta Woodside Stockholder of record as of the Record Date in
connection with the Distribution.
"Duck Head Material Adverse Effect" shall be deemed to occur if the
aggregate consequences of all breaches and inaccuracies of covenants and
representations of Duck Head, when read without any exception or qualification
for a Duck Head Material Adverse Effect, are reasonably likely to have a
material adverse effect on Duck Head's ability to consummate the transactions
contemplated by this Distribution Agreement or on the business, operations or
financial condition
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of Duck Head and its Subsidiaries, Delta Woodside and its Subsidiaries
(excluding the Duck Head Group and the Delta Apparel Group) or Delta Apparel and
its Subsidiaries taken as a whole.
"Duck Head Retirees" means those individuals who were employed in the Duck
Head Business immediately before those individuals' retirement or other
termination of employment or who are identified as Duck Head Retirees on the
Duck Head Disclosure Schedule.
"Duck Head Share" means a share of the Duck Head Common Stock.
"Effective Time" means the time immediately before the close of business on
the Distribution Date.
"Governmental Entity" means any government or any state, department or
other political subdivision thereof, or any governmental body, agency, authority
(including, but not limited to, any central bank or taxing authority) or
instrumentality (including, but not limited to, any court, tribunal or grand
jury) exercising executive, prosecutorial, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Group" means, as the context requires, the Delta Woodside Group, the Duck
Head Group or the Delta Apparel Group.
"Knowledge," "best knowledge" or any similar formulation of "knowledge"
shall mean the knowledge of Delta Woodside's, Duck Head's or Delta Apparel's
respective executive officers with respect to Delta Woodside, Duck Head and
Delta Apparel, respectively.
"Liabilities" means any and all claims, debts, liabilities, assessments,
fines, penalties, damages, losses, disgorgements and obligations, of any kind,
character or description (whether fixed, absolute, contingent, matured, not
matured, liquidated, unliquidated, accrued, not accrued, known, unknown, direct,
indirect, derivative or otherwise), whenever and however arising, whether or not
the same would be required by generally accepted accounting principles to be
reflected in financial statements or disclosed in the notes thereto, including,
but not limited to, all costs and expenses relating thereto (including, but not
limited to, all expenses of investigation, all attorneys' fees and all
out-of-pocket expenses in connection with any Action or threatened Action).
"Person" means an individual, corporation, limited liability company,
limited liability partnership, partnership, association, trust or other entity
or organization, including a Governmental Entity.
"Record Date" means the date determined by the Delta Woodside Board (or by
a committee of that board or any other Person acting under authority duly
delegated to that committee or Person by the Delta Woodside Board or a committee
of that board) as the record date for determining the Delta Woodside
Stockholders of record entitled to receive the Distribution.
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"Representatives" means, with respect to any party hereto, such party's
directors, officers, employees, agents, consultants, attorneys and advisors.
"SEC" means the Securities and Exchange Commission.
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other Persons performing
similar functions are at the time directly or indirectly owned by that Person.
"Tax" has the meaning assigned to that term in the Tax Sharing Agreement.
"Tax Sharing Agreement" means the Tax Sharing Agreement to be dated as of
the Distribution Date among Delta Woodside, Duck Head and Delta Apparel.
"Welfare Benefits" means medical, surgical or hospital care or benefits, or
benefits in the event of sickness, accident, disability, death or unemployment,
or vacation benefits, apprenticeship or other training programs, or day care
centers, scholarship funds or prepaid legal services; provided that Welfare
Benefits do not include pensions on retirement or death or insurance to provide
those pensions.
(b) Each of the following terms is defined in the Section (or Article) set
forth opposite that term:
Term Section (or Article)
Alchem 2.1
BNY 4.2
COBRA Coverage 8.8
Code 4.10
Consent 4.4
Damages 14.1
Delta Apparel 401(k) Plan 8.3
Delta Apparel Assets 2.1
Delta Apparel Benefit Plans 6.9
Delta Apparel Disclosure Schedule Article 6
Delta Apparel Financing 2.2
Delta Apparel Interim Financial Statements 6.5
Delta Apparel Obligations 2.1
Delta Apparel Permits 6.12
Delta Apparel Preferred Stock 6.2
Delta Consolidated 2.1
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Delta Merchandising 2.1
Delta Mills 2.1
Delta Mills Credit Agreement 4.2
Delta Woodside 401(k) Plan 8.3
Delta Woodside Benefit Plans 4.9
Delta Woodside Credit Agreement 4.2
Delta Woodside Disclosure Schedule Article 4
Delta Woodside Interim Financial Statements 4.5
Delta Woodside Permits 4.12
Delta Woodside Preferred Stock 4.2
Delta Woodside SEC Reports 4.5
Delta Woodside Stock Options 4.2
DHAC 2.1
Duck Head 401(k) Plan 8.3
Duck Head Assets 2.1
Duck Head Benefit Plans 5.9
Duck Head Disclosure Schedule Article 5
Duck Head Financing 2.2
Duck Head Interim Financial Statements 5.5
Duck Head Obligations 2.1
Duck Head Permits 5.12
Duck Head Preferred Stock 5.2
Environmental Law 4.16
ERISA 4.9
Exchange Act 4.4
GAAP 4.5
GECC 4.2
Hazardous Substance 4.16
Intercompany Reorganization 2.1
IRS 4.10
Lien 4.4
New Delta Woodside Financing 9.7
Permitted Acquisition Proposal 9.6
Rainsford Plant Purchase 2.1
Securities Act 4.4
Violation 4.4
WARN Act 8.11
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ARTICLE 2
PRE-DISTRIBUTION TRANSACTIONS
2.1 Effectuation of Intercompany Reorganization. No later than the
-----------------------------------------------
Effective Time, Delta Woodside, Duck Head and Delta Apparel shall have caused,
to the extent within their respective powers, the following (collectively, the
"Intercompany Reorganization") to have been effected:
(a) Delta Woodside shall contribute and shall cause Alchem and each other
subsidiary (other than Delta Mills, Inc.) that is a creditor with respect to
intercompany debt to contribute, as contributions to capital, to one or more
direct or indirect subsidiaries of Delta Woodside all net debt amounts owed to
Delta Woodside, Alchem or such creditor subsidiary by each of Delta Consolidated
Corporation ("Delta Consolidated"), Delta Merchandising, Inc. ("Delta
Merchandising"), Duck Head Apparel Company, Inc. ("DHAC"), International Apparel
Marketing Corporation ("IAMC"), Cargud, S.A. ("Cargud"), Armonia Textil, S.A.
("Armonia") and Delta Apparel Honduras, S.A. ("Delta Honduras"), and make other
contributions of intercompany debt to one or more direct or indirect
subsidiaries of Delta Woodside, so that, with respect to all such contributions
of intercompany debt, all intercompany debt owed by Duck Head or any of its
subsidiaries (except, if any, by Duck Head or any of its subsidiaries to Duck
Head or any of its subsidiaries) or by Delta Apparel or any of its subsidiaries
(except, if any, by Delta Apparel or any of its subsidiaries to Delta Apparel or
any of its subsidiaries) shall no longer exist as of the Effective Time, with
the exceptions of
(i) with respect to Duck Head, the lesser of (A) the intercompany debt
that is attributable to amounts borrowed since January 1, 2000 from GECC
under the Delta Woodside Credit Agreement for use in the Duck Head Apparel
Company division's business and that have not been not repaid with funds
provided by the Duck Head Apparel Company division or (B) the aggregate
amount that will be borrowed by Duck Head under the Duck Head Financing at
the closing of the Duck Head Financing to repay GECC under the Delta
Woodside Credit Agreement or to pay to Delta Woodside (which borrowing and
payments will cancel the intercompany debt described in clause (A)); and
(ii) with respect to Delta Apparel, (A) the lesser of (1) the
intercompany debt that is attributable to amounts borrowed since January 1,
2000 from GECC under the Delta Woodside Credit Agreement for use in the
Delta Apparel Company division's business and that have not been not repaid
with funds provided by the Delta Apparel Company division or (2) the
aggregate amount that will be borrowed by Delta Apparel under the Delta
Apparel Financing at the closing of the Delta Apparel Financing to repay
GECC under the Delta Woodside Credit Agreement or to pay to Delta Woodside
(which borrowing and payments will cancel the intercompany debt described
in clause (1)) and (B) any amounts owed by Delta Apparel to the Delta
Woodside Group for yarn sold by the Delta Woodside Group to Delta Apparel,
which amounts shall be paid in the ordinary course of business;
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provided, however, that any and all obligations and liabilities that arise under
this Distribution Agreement or the Tax Sharing Agreement remain and will remain
in existence.
(b) Alchem Capital Corporation ("Alchem") shall transfer, as a contribution
to capital, to DHAC all of the outstanding capital stock of Delta Consolidated
and Delta Merchandising.
(c) DHAC shall transfer, as a contribution to capital, to Delta
Consolidated all of the outstanding capital stock of Delta Apparel Honduras,
S.A. that is beneficially owned by DHAC. Each of Delta Woodside, Alchem, Delta
Consolidated and Cargud, S.A. shall sell to a director of Delta Apparel, to be
designated by Delta Apparel, the one share of Delta Apparel Honduras, S.A. that
is owned by such selling corporation (provided that each such director enters
into a sale agreement with Delta Apparel with respect to such share that is
satisfactory to Delta Apparel).
(d) Delta Woodside shall cause title to all assets used in the operation of
the Delta Apparel Company division of various subsidiaries of Delta Woodside and
all assets that pertain to such operation or to such assets (collectively, the
"Delta Apparel Assets"), other than any intellectual property assets owned by
Alchem that are part of the Delta Apparel Assets, any Delta Apparel Assets
already owned by Delta Consolidated, the assets owned by Delta Apparel Honduras,
S.A., the assets owned by Delta Apparel and the Rainsford Plant located in
Edgefield, SC, to be transferred to Delta Consolidated. In order to accomplish
this, among other matters, DHAC shall transfer to Delta Consolidated, as a
contribution to capital, all assets owned by DHAC that are part of the Delta
Apparel Assets.
(e) DHAC shall transfer, as a contribution to capital, to Delta Apparel all
of the outstanding capital stock of Delta Consolidated.
(f) Delta Consolidated shall merge with and into Delta Apparel, with Delta
Apparel to be the surviving corporation in the merger.
(g) Delta Mills, Inc. ("Delta Mills") shall sell to Delta Apparel, and
Delta Apparel shall purchase from Delta Mills, the Rainsford Plant, located in
Edgefield, SC, for a purchase price equal to the book value of the purchased
assets, which Delta Woodside and Delta Apparel believe equals the fair market
value of those assets (the "Rainsford Plant Purchase").
(h) Delta Apparel (either directly or through Delta Consolidated) shall
assume all of the Liabilities of the Delta Apparel Company division of various
subsidiaries of Delta Woodside, including without limitation the Delta Apparel
Group Liabilities (collectively, the "Delta Apparel Obligations"), and shall
cause all holders of indebtedness for borrowed money that are part of the Delta
Apparel Obligations and all lessors of leases that are part of the Delta Apparel
Obligations to release all obligors (other than any member of the Delta Apparel
Group) of such indebtedness and under such leases and to release all related
liens covering the property of any Person other than a
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member of the Delta Apparel Group (except where Delta Woodside or Duck Head, as
applicable, consents to not being released from the obligations).
(i) Delta Woodside shall cause those individuals who are employed by the
Delta Apparel Company division of various subsidiaries of Delta Woodside to
become employees of Delta Apparel, Delta Apparel shall assume the accrued
employee benefits of such employees and Delta Woodside shall cause the account
balance of each such employee in any and all of Delta Woodside's employee
benefit plans (other than the Delta Woodside Stock Option Plan, the Delta
Woodside Incentive Stock Award Plan and the Delta Woodside Long Term Incentive
Plan, if any) to be transferred to a comparable employee benefit plan of Delta
Apparel.
(j) DHAC shall transfer, as a contribution to capital, to Duck Head all of
the outstanding capital stock of Delta Merchandising and Cargud, S.A.
(k) Delta Woodside shall cause title to all assets used in the operation of
the Duck Head Apparel Company division of various subsidiaries of Delta Woodside
and all assets that pertain to such operation or to such assets (collectively,
the "Duck Head Assets"), other than the intellectual property assets owned by
Alchem that are part of the Duck Head Assets, the Duck Head Assets already owned
by Duck Head, the Duck Head Assets owned by Delta Consolidated or Delta Apparel,
the Duck Head Assets owned by Cargud, S.A. (or any other Costa Rican corporation
that is a direct or indirect subsidiary of DHAC) and the Distribution Facility,
located in Winder, GA, that is owned by Delta Woodside and is part of the Duck
Head Assets, to be transferred to Duck Head. In order to accomplish this, among
other matters, DHAC shall transfer to Duck Head, as a contribution to capital,
all assets owned by DHAC that are part of the Duck Head Assets.
(l) Duck Head shall assume all of the Liabilities of the Duck Head Apparel
Company division of Delta Woodside and various subsidiaries of Delta Woodside,
including without limitation the Duck Head Group Liabilities (collectively, the
"Duck Head Obligations"), and shall cause all holders of indebtedness for
borrowed money that are part of the Duck Head Obligations and all lessors of
leases that are part of the Duck Head Obligations to release all obligors (other
than any member of the Duck Head Group) of such indebtedness and under such
leases and to release all related liens covering the property of any Person
other than a member of the Duck Head Group (except where Delta Woodside or Delta
Apparel, as applicable, consents to not being released from the obligations).
(m) Delta Woodside shall cause those individuals who are employed by the
Duck Head Apparel Company division of Delta Woodside and various subsidiaries of
Delta Woodside to become employees of Duck Head, Duck Head shall assume the
accrued employee benefits of such employees and Delta Woodside shall cause the
account balance of each such employee in any and all of Delta Woodside's
employee benefit plans (other than the Delta Woodside Stock Option Plan, the
Delta Woodside Incentive Stock Award Plan and the Delta Woodside Long Term
Incentive Plan, if any) to be transferred to a comparable employee benefit plan
of Duck Head.
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(n) Delta Woodside shall cause all holders of indebtedness for borrowed
money that are not part of the Duck Head Obligations or the Delta Apparel
Obligations and all lessors of leases that are not part of the Duck Head
Obligations or the Delta Apparel Obligations to release all obligors (other than
any member of the Delta Woodside Group) of such indebtedness and under such
leases and to release all related liens covering the property of any Person
other than a member of the Delta Woodside Group (except where Duck Head or Delta
Apparel, as the case may be, consents to not being released from the
obligations).
(o) Delta Apparel shall transfer to Duck Head all of the Duck Head Assets
of Delta Apparel that, immediately prior to the merger described in paragraph
(f) above, were those of the Duck Head Apparel division of Delta Consolidated,
and Duck Head shall assume all of Delta Apparel's obligations relating to such
assets and the portion of the business of Delta Apparel that, immediately prior
to the merger described in paragraph (f) above, was the business of the Duck
Head Apparel division of Delta Consolidated, in exchange for a purchase price
(including assumed liabilities) equal to the fair market value of the purchased
assets.
(p) DHAC and IAMC shall merge with and into Alchem, with Alchem to be in
each case the surviving corporation in the merger.
(q) Alchem shall transfer to Delta Apparel, as a contribution to capital,
all intellectual property assets, if any, owned by Alchem that are part of the
Delta Apparel Assets.
(r) Alchem shall transfer to Duck Head, as a contribution to capital, all
intellectual property assets owned by Alchem that are part of the Duck Head
Assets.
(s) Alchem shall merge with and into Delta Woodside, with Delta Woodside to
be the surviving corporation in the merger.
(t) Delta Woodside shall transfer to Duck Head the Distribution Facility,
located in Winder, GA, that is owned by Delta Woodside and is part of the Duck
Head Assets.
(u) Duck Head shall be renamed "Duck Head Apparel Company, Inc."
2.2 Duck Head Financing and Delta Apparel Financing.
------------------------------------------------
(a) Prior to the Effective Time, Duck Head shall have obtained credit
facilities (the "Duck Head Financing") that Duck Head believes will be
sufficient to satisfy its reasonably anticipated working capital needs.
(b) Prior to the Effective Time, Delta Apparel shall have obtained credit
facilities (the "Delta Apparel Financing") that Delta Apparel believes will be
sufficient to pay the cash portion of the purchase price in the Rainsford Plant
Purchase and to satisfy Delta Apparel's reasonably anticipated working capital
needs.
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ARTICLE 3
THE DISTRIBUTION
3.1 Cooperation Before the Distribution.
------------------------------------
(a) Duck Head.
----------
(i) Delta Woodside and Duck Head have prepared, and Duck Head has
filed with the SEC, the Duck Head Form 10, which includes as an exhibit the
Duck Head Information Statement. The Duck Head Information Statement sets
forth disclosure concerning Duck Head and the Distribution. Delta Woodside
and Duck Head shall use all commercially reasonable efforts to cause the
Duck Head Form 10 (together with the Duck Head Information Statement
attached as an exhibit) to become effective under the Exchange Act as soon
as practicable. After the Duck Head Form 10 (together with the Duck Head
Information Statement attached as an exhibit) has become effective, Delta
Woodside shall mail the Duck Head Information Statement as promptly as
practicable to the Delta Woodside Stockholders of record as of the Record
Date.
(ii) As promptly as practicable, Duck Head shall prepare, file and
pursue an application to permit the listing of shares of the Duck Head
Common Stock on the American Stock Exchange.
(b) Delta Apparel.
--------------
(i) Delta Woodside and Delta Apparel have prepared, and Delta Apparel
has filed with the SEC, the Delta Apparel Form 10, which includes as an
exhibit the Delta Apparel Information Statement. The Delta Apparel
Information Statement sets forth disclosure concerning Delta Apparel and
the Distribution. Delta Woodside and Delta Apparel shall use all
commercially reasonable efforts to cause the Delta Apparel Form 10
(together with the Delta Apparel Information Statement attached as an
exhibit) to become effective under the Exchange Act as soon as practicable.
After the Delta Apparel Form 10 (together with the Delta Apparel
Information Statement attached as an exhibit) has become effective, Delta
Woodside shall mail the Delta Apparel Information Statement as promptly as
practicable to the Delta Woodside Stockholders of record as of the Record
Date.
(ii) As promptly as practicable, Delta Apparel shall prepare, file and
pursue an application to permit the listing of shares of the Delta Apparel
Common Stock on the American Stock Exchange.
(c) Plans. Delta Woodside, Duck Head and Delta Apparel shall cooperate in
------
preparing and filing with the SEC and causing to become effective any
registration statements or amendments
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thereto that are necessary or appropriate to reflect the establishment of or
amendments to any employee benefit and other plans contemplated by the
Distribution Documents.
(d) Blue Sky Laws. Delta Woodside, Duck Head and Delta Apparel shall take
--------------
all actions as may be necessary or appropriate under the securities or blue sky
laws of states or other political subdivisions of the United States in
connection with the transactions contemplated by the Distribution Documents.
3.2 Delta Woodside Board Action. The Delta Woodside Board shall, in its
-----------------------------
discretion, establish (or delegate authority to establish) the Record Date and
the Distribution Date and any appropriate procedures in connection with the
Distribution.
3.3 The Distribution. Subject to the terms and conditions set forth or
------------------
described in this Distribution Agreement, (i) on or before the Distribution
Date, Delta Woodside shall deliver or cause to be delivered to the Distribution
Agent for the benefit of the Delta Woodside Stockholders of record on the Record
Date, a stock certificate or certificates, endorsed by Delta Woodside in blank,
representing all of the then outstanding shares of Duck Head Common Stock, (ii)
on or before the Distribution Date, Delta Woodside shall deliver or cause to be
delivered to the Distribution Agent for the benefit of the Delta Woodside
Stockholders of record on the Record Date, a stock certificate or certificates,
endorsed by Delta Woodside in blank, representing all of the then outstanding
shares of Delta Apparel Common Stock, (iii) the Distribution shall be effective
as of the Effective Time, (iv) Delta Woodside and Duck Head shall instruct the
Distribution Agent to distribute to, or make book-entry credits for, on or as
soon as practicable after the Distribution Date, each Delta Woodside Stockholder
of record as of the Record Date one Duck Head Share for every ten Delta Woodside
Shares so held (subject to Section 3.5), and (v) Delta Woodside and Delta
Apparel shall instruct the Distribution Agent to distribute to, or make
book-entry credits for, on or as soon as practicable after the Distribution
Date, each Delta Woodside Stockholder of record as of the Record Date one Delta
Apparel Share for every ten Delta Woodside Shares so held (subject to Section
3.5). Duck Head agrees to (x) provide all certificates for Duck Head Shares that
Delta Woodside shall require (after giving effect to Sections 3.4 and 3.5) in
order to effect the Distribution and (y) take all necessary actions to adopt a
stock transfer and registration system for Duck Head effective as of the
Distribution Date. Delta Apparel agrees to (x) provide all certificates for
Delta Apparel Shares that Delta Woodside shall require (after giving effect to
Sections 3.4 and 3.5) in order to effect the Distribution and (y) take all
necessary actions to adopt a stock transfer and registration system for Delta
Apparel effective as of the Distribution Date.
3.4 Stock Dividends.
----------------
(a) Duck Head. On or before the Distribution Date, Duck Head shall issue to
----------
Delta Woodside as a stock dividend the number of additional shares of Duck Head
Common Stock that, together with the shares of Duck Head Common Stock already
held by Delta Woodside, will provide Delta Woodside with the number of shares of
Duck Head Common Stock that is required to effect the Distribution, as certified
by the Distribution Agent.
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(b) Delta Apparel. On or before the Distribution Date, Delta Apparel shall
--------------
issue to Delta Woodside as a stock dividend the number of additional shares of
Delta Apparel Common Stock that, together with the shares of Delta Apparel
Common Stock already held by Delta Woodside, will provide Delta Woodside with
the number of shares of Delta Apparel Common Stock that is required to effect
the Distribution, as certified by the Distribution Agent.
3.5 Fractional Shares. No certificate or scrip representing fractional
-------------------
shares of Duck Head Common Stock or Delta Apparel Common Stock will be issued in
the Distribution. In lieu of any such fractional share, each holder of Delta
Woodside Shares who otherwise would be entitled to a fractional share of Duck
Head Common Stock or Delta Apparel Common Stock shall be entitled to receive
promptly from the Distribution Agent a cash payment, without any interest,
representing such holder's proportionate interest in the net proceeds from the
sale or sales by the Distribution Agent on behalf of all such holders of the
aggregate fractional shares of Duck Head Common Stock and Delta Apparel Common
Stock, as applicable, pursuant to this Section 3.5 and the terms of the
Distribution Agent Agreement, after making appropriate deductions of the amount
required, if any, to be withheld for United States federal income tax purposes.
The Distribution Agent shall determine, in its sole discretion, when, how,
through which broker-dealer and at what price such sale(s) shall be made. All
cash in lieu of fractional Duck Head Shares or fractional Delta Apparel Shares
to be paid pursuant to this Section 3.5, if unclaimed at the first anniversary
of the Effective Time, shall be released and paid by the Distribution Agent to
Duck Head (in the case of the sale of fractional Duck Head Shares) and Delta
Apparel (in the case of the sale of fractional Delta Apparel Shares), after
which time persons entitled thereto may look, subject to applicable escheat and
other similar laws, only to the Duck Head or Delta Apparel, respectively, for
payment thereof. Delta Woodside, Duck Head and Delta Apparel will instruct the
Distribution Agent to do the following, as soon as practicable (subject to the
provisions set forth above) after the Effective Time: (a) to determine the
number of whole shares and fractional shares of Duck Head Common Stock and Delta
Apparel Common Stock allocable to each Delta Woodside Stockholder of record as
of the Record Date who, as a result of the Distribution, would own a fractional
share of Duck Head Common Stock or Delta Apparel Common Stock, as applicable,
(b) to aggregate all fractional shares of Duck Head Common Stock and all
fractional shares of Delta Apparel Common Stock held by those holders, and (c)
to sell the whole shares attributable to the aggregate of those fractional
shares, in one or more open market transactions, in each case at the then
prevailing market prices, and to cause to be distributed to each such holder, in
lieu of any fractional share, without interest, that holder's ratable share of
the proceeds of that sale, after making appropriate deductions of the amount
required, if any, to be withheld for United States federal income tax purposes.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF DELTA WOODSIDE
Delta Woodside represents and warrants to Duck Head and Delta Apparel that,
except as disclosed in the Delta Woodside Disclosure Schedule that has been
delivered to Duck Head and
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Delta Apparel prior to the execution of this Distribution Agreement (the "Delta
Woodside Disclosure Schedule") or as contemplated by this Distribution
Agreement, as of immediately prior to the Effective Time the following will be
true and accurate:
4.1 Organization . Delta Woodside is a corporation duly organized and
------------
validly existing under the laws of the State of South Carolina.
4.2 Capitalization. (a) The authorized capital stock of Delta Woodside
---------------
consists of 50,000,000 shares of Delta Woodside Common Stock and 10,000,000
shares of Preferred Stock, $250,000,000 maximum par value per share (the "Delta
Woodside Preferred Stock"). As of the date hereof, 23,307,645 shares of Delta
Woodside Common Stock and no shares of Delta Woodside Preferred Stock are issued
and outstanding, and all such issued and outstanding shares of Delta Woodside
Common Stock were validly issued and are fully paid and nonassessable. As of the
date hereof, except for stock options to acquire an aggregate of 363,818 shares
of Delta Woodside Common Stock (collectively, the "Delta Woodside Stock
Options"), and except as contemplated by this Distribution Agreement, there are
no options, warrants, calls or other rights, agreements or commitments currently
outstanding obligating Delta Woodside to issue, deliver or sell shares of its
capital stock, or obligating Delta Woodside to grant, extend or enter into any
such option, warrant, call or other such right, agreement or commitment.
(b) All the outstanding shares of capital stock of each of Alchem, Delta
Consolidated, Delta Merchandising and DHAC are validly issued, fully paid and
nonassessable and are owned by Delta Woodside or by a wholly-owned Subsidiary of
Delta Woodside, free and clear of any Liens (other than Liens on the capital
stock of certain Subsidiaries of Delta Woodside granted in favor of General
Electric Capital Corporation ("GECC") in connection with the Credit Agreement to
which GECC, Delta Woodside and various Subsidiaries of Delta Woodside are
parties (the "Delta Woodside Credit Agreement") or granted in favor of BNY
Financial Corporation ("BNY"), as Collateral Agent, in connection with the
Credit Agreement to which Delta Mills, BNY and Bank of America, N.A., as
Administrative Agent, are parties (the "Delta Mills Credit Agreement")). All of
the outstanding shares of capital stock of each of Duck Head and Delta Apparel
are owned by Delta Woodside, free and clear of any Liens (other than Liens
granted in favor of GECC in connection with the Delta Woodside Credit Agreement,
which will be released prior to the Effective Time). There are no existing
options, warrants, calls or other rights, agreements or commitments of any
character relating to the sale, issuance or voting of any shares of the issued
or unissued capital stock of any of Alchem, Delta Consolidated, Delta
Merchandising or DHAC that have been issued, granted or entered into by Delta
Woodside or any of its Subsidiaries.
4.3 Authority Relative to this Distribution Agreement. Delta Woodside has
---------------------------------------------------
the necessary corporate power and authority to execute and deliver this
Distribution Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Distribution Agreement and the consummation
of the transactions contemplated hereby by Delta Woodside have been duly and
validly authorized and approved by Delta Woodside's Board of Directors and no
other corporate proceedings on the part of Delta Woodside are necessary to
authorize or approve this
17
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Distribution Agreement or to consummate the transactions contemplated hereby.
This Distribution Agreement has been duly executed and delivered by Delta
Woodside, and, assuming the due authorization, execution and delivery by Duck
Head and Delta Apparel, constitutes the valid and binding obligation of Delta
Woodside enforceable against Delta Woodside in accordance with its terms except
as such enforceability may be limited by general principles of equity or
principles applicable to creditors' rights generally.
4.4 No Conflicts, Required Filings and Consents. (a) None of the execution
---------------------------------------------
and delivery of this Distribution Agreement by Delta Woodside, the consummation
by Delta Woodside of the transactions contemplated hereby or compliance by Delta
Woodside with any of the provisions hereof will (i) conflict with or violate the
Articles of Incorporation or By-laws of Delta Woodside or the comparable
organizational documents of any of Alchem, Delta Consolidated, Delta
Merchandising or DHAC, (ii) subject to receipt or filing of the required
Consents (as defined herein) referred to in Section 4.4(b), conflict with or
violate any statute, ordinance, rule, regulation, order, judgment or decree
applicable to Delta Woodside or any of Delta Woodside's Subsidiaries (other than
a member of the Duck Head Group or a member of the Delta Apparel Group), or by
which any of them or any of their respective properties or assets may be bound
or affected, or (iii) subject to receipt or filing of the required Consents
referred to in Section 4.4(b), result in a violation or breach of or constitute
a default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of any lien, charge,
security interest, pledge, or encumbrance of any kind or nature (any of the
foregoing being a "Lien") on any of the property or assets of Delta Woodside or
any of Delta Woodside's Subsidiaries (other than a member of the Duck Head Group
or a member of the Delta Apparel Group) (any of the foregoing referred to in
clause (ii) or this clause (iii) being a "Violation") pursuant to, any note,
bond, mortgage, indenture, Contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Delta Woodside or any of
Delta Woodside's Subsidiaries (other than a member of the Duck Head Group or a
member of the Delta Apparel Group) is a party or by which Delta Woodside or any
of Delta Woodside's Subsidiaries (other than a member of the Duck Head Group or
a member of the Delta Apparel Group) or any of their respective properties may
be bound or affected, except in the case of the foregoing clause (ii) or (iii)
for any such Violations that would not have a Delta Woodside Material Adverse
Effect.
(b) None of the execution and delivery of this Distribution Agreement by
Delta Woodside, the consummation by Delta Woodside of the transactions
contemplated hereby or compliance by Delta Woodside with any of the provisions
hereof will require any consent, waiver, license, approval, authorization, order
or permit of, or registration or filing with or notification to (any of the
foregoing being a "Consent"), any Governmental Entity, except for (i) compliance
with any applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), (ii) compliance with any applicable requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (iii) certain
state takeover, securities, "blue sky" and environmental statutes, (iv) such
filings as may be required in connection with the taxes described in Section
15.12 (b), and (v) Consents the failure of which to obtain or make would not
have a Delta Woodside Material Adverse Effect.
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4.5 Reports and Financial Statements. (a) Delta Woodside has filed with the
---------------------------------
SEC all forms, reports, schedules, registration statements and definitive proxy
statements (the "Delta Woodside SEC Reports") required to be filed by it with
the SEC since July 3, 1999, including without limitation those required to be
filed in connection with the Distribution. As of their respective dates, the
Delta Woodside SEC Reports complied as to form in all material respects with the
requirements of the Exchange Act or the Securities Act, as the case may be, and
the rules and regulations of the SEC thereunder applicable to such Delta
Woodside SEC Reports. As of their respective dates, the Delta Woodside SEC
Reports did not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(b) The consolidated balance sheets as of July 3, 1999 and June 27, 1998
and the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the three years in the period ended July 3, 1999
(including the related notes and schedules thereto) of Delta Woodside contained
in the Form 10-K of Delta Woodside for the year ended July 3, 1999 present
fairly, in all material respects, the consolidated financial position and the
consolidated results of operations and cash flows of Delta Woodside and its
consolidated subsidiaries as of the dates or for the periods presented therein
in conformity with United States generally accepted accounting principles
("GAAP") applied on a consistent basis during the periods involved except as
otherwise noted therein, including in the related notes.
(c) The consolidated balance sheets and the related consolidated statements
of earnings and cash flows (including, in each case, the related notes thereto)
of Delta Woodside contained in the Form 10-Q of Delta Woodside for the quarterly
period ended January 1, 2000 (the "Delta Woodside Interim Financial Statements")
have been prepared in accordance with the requirements for interim financial
statements contained in Regulation S-X, which do not require all the information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with GAAP. The Delta Woodside Interim
Financial Statements reflect all adjustments necessary to present fairly in
accordance with GAAP (except as indicated), in all material respects, the
consolidated financial position, results of operations and cash flows of Delta
Woodside for all periods presented therein.
4.6 Information. None of the information supplied or to be supplied by
------------
Delta Woodside or its Representatives for inclusion or incorporation by
reference in the Duck Head Information Statement or the Delta Apparel
Information Statement will or did, at the time of their distribution to the
Delta Woodside Stockholders as of the Record Date or the time of the
effectiveness of the Duck Head Form 10 or the Delta Apparel Form 10 with the
SEC, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
4.7 Litigation. Except as disclosed in the Delta Woodside SEC Reports, as
-----------
of the date hereof, there is no suit, action or proceeding pending or, to the
knowledge of Delta Woodside, threatened
19
<PAGE>
against or affecting Delta Woodside or any of its Subsidiaries, nor is there any
judgment, decree, injunction or order of any Governmental Entity or arbitrator
outstanding against Delta Woodside or any of its Subsidiaries, that is
reasonably expected to have a Delta Woodside Material Adverse Effect or to
prevent or materially delay the consummation of the transactions contemplated in
this Distribution Agreement.
4.8 Absence of Certain Changes or Events. Except as disclosed in the Delta
-------------------------------------
Woodside SEC Reports or as contemplated by this Distribution Agreement, since
January 1, 2000, Delta Woodside has conducted its business only in the ordinary
course and there has not been any change that would have a Delta Woodside
Material Adverse Effect, other than changes relating to or arising from general
economic conditions.
4.9 Employee Benefit Plans. Except as disclosed in the Delta Woodside SEC
------------------------
Reports or the Delta Woodside Disclosure Schedule, there are no (a) employee
benefit or compensation plans, agreements or arrangements, including "employee
benefit plans," as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and including, but not limited to,
plans, agreements or arrangements relating to former employees, including, but
not limited to, retiree medical plans or life insurance, maintained by Delta
Woodside or any of its Subsidiaries (other than a member of the Duck Head Group
or a member of the Delta Apparel Group) or (b) collective bargaining agreements
to which Delta Woodside or any of its Subsidiaries (other than a member of the
Duck Head Group or a member of the Delta Apparel Group) is a party
(collectively, the "Delta Woodside Benefit Plans"), other than plans, agreements
or arrangements that, in the aggregate, are not material to Delta Woodside and
its Subsidiaries (other than members of the Duck Head Group or members of the
Delta Apparel Group) as a whole. Delta Woodside and its Subsidiaries (other than
members of the Duck Head Group or members of the Delta Apparel Group) have
complied with the terms of all Delta Woodside Benefit Plans, except for such
noncompliance that would not have a Delta Woodside Material Adverse Effect, and
no default exists with respect to the obligations of Delta Woodside or any of
its Subsidiaries (other than members of the Duck Head Group or members of the
Delta Apparel Group) under such Delta Woodside Benefit Plans that would have a
Delta Woodside Material Adverse Effect. Since July 3, 1999, there have been no
disputes, grievances subject to any grievance procedure, unfair labor practice
proceedings, arbitration or litigation (or, to the knowledge of Delta Woodside,
threatened proceedings or grievances) under such Delta Woodside Benefit Plans,
that have not been finally resolved, settled or otherwise disposed of, nor is
there any default, or any condition that, with notice or lapse of time or both,
would constitute such a default, under any such Delta Woodside Benefit Plan, by
Delta Woodside or its Subsidiaries (excluding members of the Duck Head Group and
members of the Delta Apparel Group) or, to the best knowledge of Delta Woodside,
any other party thereto, other than disputes, grievances, arbitration,
litigation, proceedings, threatened proceedings or grievances, defaults or
conditions that would not have a Delta Woodside Material Adverse Effect. Since
July 3, 1999, there have been no strikes, lockouts or work stoppages or
slowdowns, or to the best knowledge of Delta Woodside, labor jurisdictional
disputes or labor organizing activity occurring or threatened with respect to
the business or operations of Delta Woodside or its Subsidiaries (excluding
members of the Duck Head Group and members of the Delta Apparel Group) that have
had or would have a Delta Woodside Material Adverse Effect.
20
<PAGE>
4.10 ERISA. All Delta Woodside Benefit Plans are in compliance with the
------
applicable provisions of ERISA, the Internal Revenue Code of 1986, as amended
(the "Code"), all other applicable laws and all applicable collective bargaining
agreements, in each case, to the extent applicable, except where such failures
to administer or comply would not have a Delta Woodside Material Adverse Effect.
Each of the Delta Woodside Benefit Plans that is intended to meet the
requirements of Section 401(a) of the Code has been determined by the Internal
Revenue Service ("IRS") to be "qualified," within the meaning of such Section of
the Code and Delta Woodside does not know of any circumstance likely to result
in revocation of such determination. No Delta Woodside Benefit Plan is subject
to Title IV of ERISA or Section 412 of the Code. Neither Delta Woodside nor any
of its Subsidiaries (excluding members of the Duck Head Group and member of the
Delta Apparel Group) (i) has made a complete or partial withdrawal, within the
meaning of Section 4201 of ERISA, from any multiemployer plan or (ii) currently
is a sponsor of or contributes to a multiemployer plan. Neither Delta Woodside
nor any of its Subsidiaries (excluding members of the Duck Head Group and
members of the Delta Apparel Group) has maintained a plan subject to Title IV of
ERISA at any time within the last five years. Except as disclosed in the Delta
Woodside SEC Reports or in the Delta Woodside Disclosure Schedule, neither the
execution and delivery of this Distribution Agreement nor the consummation of
the transactions contemplated hereby will (i) materially increase any benefits
otherwise payable under any Delta Woodside Benefit Plan or (ii) result in the
acceleration of the time of payment or vesting of any such benefits to any
material extent.
4.11 Taxes. Delta Woodside and its Subsidiaries (excluding members of the
------
Duck Head Group and members of the Delta Apparel Group) have duly filed all
foreign, federal, state and local income, franchise, excise, real and personal
property and other tax returns and reports (including, but not limited to, those
filed on a consolidated, combined or unitary basis) required to have been filed
by Delta Woodside and its Subsidiaries (excluding members of the Duck Head Group
and members of the Delta Apparel Group) prior to the Distribution Date, except
for such returns or reports the failure to file which would not have a Delta
Woodside Material Adverse Effect. All of the foregoing returns and reports are
true and correct in all material respects, and Delta Woodside and its
Subsidiaries (excluding members of the Duck Head Group and members of the Delta
Apparel Group) have paid, or prior to the Effective Time will pay, all taxes,
interest and penalties shown on such returns or reports as being due or (except
to the extent the same are contested in good faith) claimed to be due to any
federal, state, local or other taxing authority. Delta Woodside and its
Subsidiaries (other than any member of the Duck Head Group or the Delta Apparel
Group) have paid and will pay all installments of estimated taxes due on or
before the Effective Time, except for any failure to do so that would not have a
Delta Woodside Material Adverse Effect. All taxes and state assessments and
levies that Delta Woodside and its Subsidiaries (excluding members of the Duck
Head Group and members of the Delta Apparel Group) are required by law to
withhold or collect have been withheld or collected and have been paid to the
proper governmental authorities or are held by Delta Woodside for such payment,
except for any failure to do so that would not have a Delta Woodside Material
Adverse Effect. Except as disclosed in the Delta Woodside Disclosure
21
<PAGE>
Schedule, as of the date hereof, all deficiencies proposed as a result of any
audits have been paid or settled.
4.12 Compliance with Applicable Laws. Delta Woodside and its Subsidiaries
---------------------------------
(excluding members of the Duck Head Group and members of the Delta Apparel
Group) hold all permits, licenses, variances, exemptions, orders and approvals
of all Governmental Entities necessary for them to own, lease or operate their
properties and assets and to carry on their businesses substantially as now
conducted (the "Delta Woodside Permits"), except for such permits, licenses,
variances, exemptions, orders and approvals the failure of which to hold would
not have a Delta Woodside Material Adverse Effect. Delta Woodside and its
Subsidiaries (excluding members of the Duck Head Group and members of the Delta
Apparel Group) are in compliance with all applicable laws and the terms of Delta
Woodside Permits, except for such failures so to comply that would not have a
Delta Woodside Material Adverse Effect.
4.13 No Voting Requirement. No vote of the holders of any class or series
-----------------------
of Delta Woodside's capital stock is necessary to approve this Distribution
Agreement and the transactions contemplated by this Distribution Agreement.
4.14 Brokers. No broker or finder is entitled to any broker's or finder's
--------
fee in connection with the transactions contemplated by this Distribution
Agreement based upon arrangements made by or on behalf of Delta Woodside.
4.15 Undisclosed Liabilities. Except as disclosed in Delta Woodside's
-------------------------
Quarterly Report on Form 10-Q for the fiscal quarter ended January 1, 2000 (or
in any subsequently filed Delta Woodside SEC Reports), neither Delta Woodside
nor any of its Subsidiaries (excluding members of the Duck Head Group and
members of the Delta Apparel Group) has any liabilities or any obligations of
any nature whether or not accrued, contingent or otherwise, that would be
required by GAAP to be reflected on a consolidated balance sheet of Delta
Woodside and its Subsidiaries (including the notes thereto) (excluding members
of the Duck Head Group and members of the Delta Apparel Group), except for
liabilities or obligations incurred in the ordinary course of business since
January 1, 2000 that would not have a Delta Woodside Material Adverse Effect or
contemplated to be incurred by this Distribution Agreement.
4.16 Environmental Matters. Except as disclosed in the Delta Woodside SEC
-----------------------
Reports or as would not reasonably be expected to have a Delta Woodside Material
Adverse Effect: (i) to the best knowledge of Delta Woodside no real property
currently or formerly owned or operated by Delta Woodside or any current
Subsidiary (excluding members of the Duck Head Group and members of the Delta
Apparel Group) is contaminated with any Hazardous Substances (as defined below)
to an extent or in a manner or condition now requiring remediation under any
Environmental Law (as defined below); (ii) no judicial or administrative
proceeding is pending or to the best knowledge of Delta Woodside threatened
against Delta Woodside or any of its Subsidiaries (excluding members of the Duck
Head Group and members of the Delta Apparel Group) relating to liability for any
off-site disposal or contamination; and (iii) Delta Woodside and its
Subsidiaries (excluding members
22
<PAGE>
of the Duck Head Group and members of the Delta Apparel Group) have not received
any claims or notices alleging liability under any Environmental Law, and Delta
Woodside has no knowledge of any circumstances that could result in such claims.
"Environmental Law" means any applicable federal, state or local law,
regulation, order, decree or judicial opinion or other agency requirement having
the force and effect of law and relating to noise, odor, Hazardous Substance or
the protection of the environment. "Hazardous Substance" means any toxic or
hazardous substance that is regulated by or under authority of any Environmental
Law, including any petroleum products, asbestos or polychlorinated biphenyls.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF DUCK HEAD
Duck Head represents and warrants to Delta Woodside and Delta Apparel that,
except as disclosed in the Duck Head Disclosure Schedule that has been delivered
to Delta Woodside and Delta Apparel prior to the execution of this Distribution
Agreement (the "Duck Head Disclosure Schedule") or as contemplated by this
Distribution Agreement, as of immediately prior to the Effective Time the
following will be true and accurate:
5.1 Organization and Qualification. Duck Head is a corporation duly
---------------------------------
organized, validly existing and in good standing under the laws of the State of
Georgia. Each of Duck Head and each of its Subsidiaries has the requisite
corporate power and authority to carry on its business as it is now being
conducted and is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified will not have a Duck Head
Material Adverse Effect.
5.2 Capitalization. (a) The authorized capital stock of Duck Head consists
---------------
of 9,000,000 shares of Duck Head Common Stock and 2,000,000 shares of Preferred
Stock, $0.01 par value per share (the "Duck Head Preferred Stock"). As of the
date hereof, 100 shares of Duck Head Common Stock and no shares of Duck Head
Preferred Stock were issued and outstanding, and all such issued and outstanding
shares of Duck Head Common Stock were validly issued and are fully paid and
nonassessable. As of the date hereof, except for a right held by Robert D.
Rockey, Jr. to acquire 1,000,000 shares of Duck Head Common Stock and an
agreement to grant to Mr. Rockey incentive stock awards and stock options to
acquire shares of Duck Head Common Stock, and except as contemplated by this
Distribution Agreement, there were no options, warrants, calls or other rights,
agreements or commitments currently outstanding obligating Duck Head to issue,
deliver or sell shares of its capital stock, or obligating Duck Head to grant,
extend or enter into any such option, warrant, call or other such right,
agreement or commitment.
(b) All the outstanding shares of capital stock of each Subsidiary of Duck
Head are validly issued, fully paid and nonassessable and are owned by Duck Head
or by a wholly-owned Subsidiary
23
<PAGE>
of Duck Head, free and clear of any Liens (except Liens granted to GECC in
connection with the Delta Woodside Credit Facility, which will be released prior
to the Effective Time). There are no existing options, warrants, calls or other
rights, agreements or commitments of any character relating to the sale,
issuance or voting of any shares of the issued or unissued capital stock of any
of the Subsidiaries of Duck Head that have been issued, granted or entered into
by Duck Head or any of its Subsidiaries.
5.3 Authority Relative to This Distribution Agreement. Duck Head has the
----------------------------------------------------
necessary corporate power and authority to execute and deliver this Distribution
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Distribution Agreement and the consummation of the
transactions contemplated hereby by Duck Head have been duly and validly
authorized and approved by Duck Head's Board of Directors and no other corporate
proceedings on the part of Duck Head are necessary to authorize or approve this
Distribution Agreement or to consummate the transactions contemplated hereby.
This Distribution Agreement has been duly executed and delivered by Duck Head,
and, assuming the due authorization, execution and delivery by Delta Woodside
and Delta Apparel, constitutes the valid and binding obligation of Duck Head
enforceable against Duck Head in accordance with its terms except as such
enforceability may be limited by general principles of equity or principles
applicable to creditors' rights generally.
5.4 No Conflicts, Required Filings and Consents. (a) None of the execution
---------------------------------------------
and delivery of this Distribution Agreement by Duck Head, the consummation by
Duck Head of the transactions contemplated hereby or compliance by Duck Head
with any of the provisions hereof will (i) conflict with or violate the Articles
of Incorporation or By-laws of Duck Head or the comparable organizational
documents of any of Duck Head's Subsidiaries, (ii) subject to receipt or filing
of the required Consents referred to in Section 5.4(b), result in a Violation of
any statute, ordinance, rule, regulation, order, judgment or decree applicable
to Duck Head or any of Duck Head's Subsidiaries, or by which any of them or any
of their respective properties or assets may be bound or affected, or (iii)
subject to receipt or filing of the required Consents referred to in Section
5.4(b), result in a Violation pursuant to, any note, bond, mortgage, indenture,
Contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Duck Head or any of Duck Head's Subsidiaries is a party or
by which Duck Head or any of Duck Head's Subsidiaries or any of their respective
properties may be bound or affected, except in the case of the foregoing clause
(ii) or (iii) for any such Violations that would not have a Duck Head Material
Adverse Effect.
(b) None of the execution and delivery of this Distribution Agreement by
Duck Head, the consummation by Duck Head of the transactions contemplated hereby
or compliance by Duck Head with any of the provisions hereof will require any
Consent of any Governmental Entity, except for (i) compliance with any
applicable requirements of the Securities Act and the Exchange Act, (ii) certain
state takeover, securities, "blue sky" and environmental statutes, (iii) such
filings as may be required in connection with the taxes described in Section
15.12(b), and (iv) Consents the failure of which to obtain or make would not
have a Duck Head Material Adverse Effect.
5.5 Reports and Financial Statements. (a) Duck Head has filed with the SEC
---------------------------------
the Duck Head
24
<PAGE>
Form 10, and the Duck Head Form 10 will be the only registration statement
required to be filed by it with the SEC in connection with the Distribution. As
of its effective date, the Duck Head Form 10 complied as to form in all material
respects with the requirements of the Exchange Act and the applicable rules and
regulations of the SEC. As of its effective date and as of the date that the
Duck Head Information Statement is distributed to the Delta Woodside
Stockholders as of the Record Date, the Duck Head Form 10 did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) The combined balance sheets as of July 3, 1999 and June 27, 1998 and
the related combined statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended July 3, 1999 (including the
related notes and schedules thereto) of Duck Head that are contained in the Duck
Head Information Statement present fairly, in all material respects, the
combined financial position and the combined results of operations and cash
flows of Duck Head and its consolidated Subsidiaries as of the dates or for the
periods presented therein in conformity with GAAP applied on a consistent basis
during the periods involved except as otherwise noted therein, including in the
related notes.
(c) The combined balance sheets and the related statements of earnings and
cash flows (including, in each case, the related notes thereto) of Duck Head
that are contained in the Duck Head Information Statement for the six months
ended January 1, 2000 (the "Duck Head Interim Financial Statements") have been
prepared in accordance with the requirements for interim financial statements
contained in Regulation S-X, which do not require all the information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with GAAP. The Duck Head Interim
Financial Statements reflect all adjustments necessary to present fairly in
accordance with GAAP (except as indicated), in all material respects, the
combined financial position, results of operations and cash flows of Duck Head
for all periods presented therein.
(d) The combined pro forma balance sheet as of January 1, 2000 and the
related combined pro forma statements of operations for the year ended July 3,
1999 and the six months ended January 1, 2000 (including the related notes and
schedules thereto) of Duck Head contained in the Duck Head Information Statement
have been prepared in accordance with the requirements for pro forma financial
statements contained in Regulation S-X, which do not require all the information
and footnotes necessary for a fair presentation of financial position or results
of operations in conformity with GAAP, and reflect all adjustments necessary to
present fairly in accordance with GAAP (except as indicated), in all material
respects, the combined pro forma financial position and results of operations of
Duck Head as of the dates and for the periods presented therein.
5.6 Information. None of the information supplied or to be supplied by Duck
------------
Head or its Representatives for inclusion or incorporation by reference in the
Duck Head Form 10 or the Duck Head Information Statement will or did, at the
time of its distribution to the Delta Woodside
25
<PAGE>
Stockholders as of the Record Date or the time of the effectiveness of the Duck
Head Form 10 with the SEC, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Duck Head Form 10 and the Duck Head
Information Statement comply as to form in all material respects with the
applicable provisions of the Securities Act and the Exchange Act and the rules
and regulations thereunder, except that no representation is made by Duck Head
with respect to statements made or incorporated by reference therein based on
information supplied by Delta Woodside or Delta Apparel for inclusion or
incorporation by reference therein.
5.7 Litigation. Except as disclosed in the Duck Head Disclosure Statement,
-----------
as of the date hereof, there is no suit, action or proceeding pending or, to the
knowledge of Duck Head, threatened against or affecting Duck Head or any of its
Subsidiaries, nor is there any judgment, decree, injunction or order of any
Governmental Entity or arbitrator outstanding against Duck Head or any of its
Subsidiaries, that is reasonably expected to have a Duck Head Material Adverse
Effect or to prevent or materially delay the consummation of the transactions
contemplated in this Distribution Agreement.
5.8 Absence of Certain Changes or Events. Except as disclosed in the Duck
--------------------------------------
Head Information Statement or as contemplated by this Distribution Agreement,
since January 1, 2000, Duck Head has conducted its business only in the ordinary
course, and there has not been any change that would have a Duck Head Material
Adverse Effect, other than changes relating to or arising from general economic
conditions.
5.9 Employee Benefit Plans. Except as disclosed in the Duck Head
-------------------------
Information Statement or the Duck Head Disclosure Schedule, there are no (a)
employee benefit or compensation plans, agreements or arrangements, including
"employee benefit plans," as defined in Section 3(3) of ERISA, and including,
but not limited to, plans, agreements or arrangements relating to former
employees, including, but not limited to, retiree medical plans or life
insurance, maintained by Duck Head or any of its Subsidiaries or (b) collective
bargaining agreements to which Duck Head or any of its Subsidiaries is a party
(collectively, the "Duck Head Benefit Plans"), other than plans, agreements or
arrangements that, in the aggregate, are not material to Duck Head and its
Subsidiaries as a whole. Duck Head and its Subsidiaries have complied with the
terms of all Duck Head Benefit Plans, except for such noncompliance that would
not have a Duck Head Material Adverse Effect, and no default exists with respect
to the obligations of Duck Head or any of its Subsidiaries under such Duck Head
Benefit Plans that would have a Duck Head Material Adverse Effect. Since July 3,
1999, there have been no disputes, grievances subject to any grievance
procedure, unfair labor practice proceedings, arbitration or litigation (or, to
the knowledge of Duck Head, threatened proceedings or grievances) under such
Duck Head Benefit Plans, that have not been finally resolved, settled or
otherwise disposed of, nor is there any default, or any condition that, with
notice or lapse of time or both, would constitute such a default, under any such
Duck Head Benefit Plans, by Duck Head or its Subsidiaries or, to the best
knowledge of Duck Head, any other party thereto, other than disputes,
grievances, arbitration, litigation, proceedings, threatened proceedings or
grievances,
26
<PAGE>
defaults or conditions that would not have a Duck Head Material Adverse Effect.
Since July 3, 1999, there have been no strikes, lockouts or work stoppages or
slowdowns, or to the best knowledge of Duck Head, labor jurisdictional disputes
or labor organizing activity occurring or threatened with respect to the
business or operations of Duck Head or its Subsidiaries that have had or would
have a Duck Head Material Adverse Effect.
5.10 ERISA. All the Duck Head Benefit Plans are in compliance with the
------
applicable provisions of ERISA, the Code, all other applicable laws and all
applicable collective bargaining agreements, in each case, to the extent
applicable, except where such failures to administer or comply would not have a
Duck Head Material Adverse Effect. Each of the Duck Head Benefit Plans that is
intended to meet the requirements of Section 401(a) of the Code has been or will
be determined by the IRS to be "qualified," within the meaning of such Section
of the Code and Duck Head does not know of any circumstances likely to result in
revocation of such determination. No Duck Head Benefit Plan is subject to Title
IV of ERISA or Section 412 of the Code. Neither Duck Head nor any of its
Subsidiaries (i) has made a complete or partial withdrawal, within the meaning
of Section 4201 of ERISA, from any multiemployer plan or (ii) currently is a
sponsor of or contributes to a multiemployer plan. Neither Duck Head nor any of
its Subsidiaries has maintained a plan subject to Title IV of ERISA at any time
within the last five years. Except in their capacities as shareholders of Delta
Woodside and except as disclosed in the Duck Head Information Statement or in
the Duck Head Disclosure Schedule, neither the execution and delivery of this
Distribution Agreement nor the consummation of the transactions contemplated
hereby will (i) result in any material payment (including, without limitation,
severance, unemployment compensation or golden parachute) becoming due to any
director or executive officer of Duck Head, (ii) materially increase any
benefits otherwise payable under any Duck Head Benefit Plan or (iii) result in
the acceleration of the time of payment or vesting of any such benefits to any
material extent.
5.11 Taxes. Duck Head and its Subsidiaries have duly filed all foreign,
------
federal, state and local income, franchise, excise, real and personal property
and other tax returns and reports (including, but not limited to, those filed on
a consolidated, combined or unitary basis) required to have been filed by Duck
Head and its Subsidiaries prior to the date hereof, except for such returns or
reports the failure to file which would not have a Duck Head Material Adverse
Effect. All of the foregoing returns and reports are true and correct in all
material respects, and Duck Head and its Subsidiaries have paid or, prior to the
Effective Time will pay, all taxes, interest and penalties shown on such returns
or reports as being due or (except to the extent the same are contested in good
faith) claimed to be due to any federal, state, local or other taxing authority.
Duck Head and its Subsidiaries have paid and will pay all installments of
estimated taxes due on or before the Effective Time, except for any failure to
do so that would not have a Duck Head Material Adverse Effect. All taxes and
state assessments and levies that Duck Head and its Subsidiaries are required by
law to withhold or collect have been withheld or collected and have been paid to
the proper governmental authorities or are held by Duck Head for such payment,
except for any failure to do so that would not have a Duck Head Material Adverse
Effect. Duck Head and its Subsidiaries have paid or made adequate provision in
the financial statements of Duck Head for all taxes payable in respect of all
periods ended on or prior to January 1, 2000, except for such taxes that would
not have a Duck Head
27
<PAGE>
Material Adverse Effect. As of the date hereof, all deficiencies proposed as a
result of any audits have been paid or settled.
5.12 Compliance with Applicable Laws. Duck Head and its Subsidiaries hold
--------------------------------
all permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities necessary for them to own, lease or operate their
properties and assets and to carry on their businesses substantially as now
conducted (the "Duck Head Permits"), except for such permits, licenses,
variances, exemptions, orders and approvals the failure of which to hold would
not have a Duck Head Material Adverse Effect. Duck Head and its Subsidiaries are
in compliance with all applicable laws and the terms of Duck Head Permits,
except for such failures so to comply that would not have a Duck Head Material
Adverse Effect.
5.13 Brokers. No broker or finder is entitled to any broker's or finder's
--------
fee in connection with the transactions contemplated by this Distribution
Agreement based upon arrangements made by or on behalf of Duck Head.
5.14 Undisclosed Liabilities. Except as disclosed in the Duck Head
-------------------------
Information Statement, neither Duck Head nor any of its Subsidiaries has any
liabilities or any obligations of any nature whether or not accrued, contingent
or otherwise, that would be required by GAAP to be reflected on a consolidated
balance sheet of Duck Head and its Subsidiaries (including the notes thereto),
except for liabilities or obligations incurred in the ordinary course of
business since January 1, 2000 that would not have a Duck Head Material Adverse
Effect or contemplated to be incurred by this Distribution Agreement.
5.15 Environmental Matters. Except as disclosed in the Duck Head SEC
-----------------------
Reports or as would not reasonably be expected to have a Duck Head Material
Adverse Effect: (i) to the best knowledge of Duck Head no real property
currently or formerly owned or operated by Duck Head or any current Subsidiary
is contaminated with any Hazardous Substances to an extent or in a manner or
condition now requiring remediation under any Environmental Law; (ii) no
judicial or administrative proceeding is pending or to the best knowledge of
Duck Head threatened against Duck Head or its Subsidiaries relating to liability
for any off-site disposal or contamination; and (iii) Duck Head and its
Subsidiaries have not received any claims or notices alleging liability under
any Environmental Law, and Duck Head has no knowledge of any circumstance that
could result in such claims.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF DELTA APPAREL
Delta Apparel represents and warrants to Delta Woodside and Duck Head that,
except as disclosed in the Delta Apparel Disclosure Schedule that has been
delivered to Delta Woodside and Duck Head prior to the execution of this
Distribution Agreement (the "Delta Apparel Disclosure Schedule") or as
contemplated by this Distribution Agreement, as of immediately prior to the
Effective Time the following will be true and accurate:
28
<PAGE>
6.1 Organization and Qualification. Delta Apparel is a corporation duly
---------------------------------
organized, validly existing and in good standing under the laws of the State of
Georgia. Each of Delta Apparel and each of its Subsidiaries has the requisite
corporate power and authority to carry on its business as it is now being
conducted and is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified will not have a Delta
Apparel Material Adverse Effect.
6.2 Capitalization. (a) The authorized capital stock of Delta Apparel
---------------
consists of 7,500,000 shares of Delta Apparel Common Stock and 2,000,000 shares
of Preferred Stock, $0.01 par value per share (the "Delta Apparel Preferred
Stock"). As of the date hereof, 100 shares of Delta Apparel Common Stock and no
shares of Delta Apparel Preferred Stock were issued and outstanding, and all
such issued and outstanding shares of Delta Apparel Common Stock were validly
issued and are fully paid and nonassessable. As of the date hereof, except as
contemplated by this Distribution Agreement, there were no options, warrants,
calls or other rights, agreements or commitments currently outstanding
obligating Delta Apparel to issue, deliver or sell shares of its capital stock,
or obligating Delta Apparel to grant, extend or enter into any such option,
warrant, call or other such right, agreement or commitment.
(b) All the outstanding shares of capital stock of each Subsidiary of Delta
Apparel are validly issued, fully paid and nonassessable and are owned by Delta
Apparel or by a wholly-owned Subsidiary of Delta Apparel (except for certain
shares of the preferred stock of Delta Apparel Honduras, S.A. that are held by
directors of Delta Apparel as a result of Honduran law requirements), free and
clear of any Liens (except Liens granted to GECC in connection with the Delta
Woodside Credit Facility). There are no existing options, warrants, calls or
other rights, agreements or commitments of any character relating to the sale,
issuance or voting of any shares of the issued or unissued capital stock of any
of the Subsidiaries of Delta Apparel that have been issued, granted or entered
into by Delta Apparel or any of its Subsidiaries.
6.3 Authority Relative to This Distribution Agreement. Delta Apparel has
----------------------------------------------------
the necessary corporate power and authority to execute and deliver this
Distribution Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Distribution Agreement and the consummation
of the transactions contemplated hereby by Delta Apparel have been duly and
validly authorized and approved by Delta Apparel's Board of Directors and no
other corporate proceedings on the part of Delta Apparel are necessary to
authorize or approve this Distribution Agreement or to consummate the
transactions contemplated hereby. This Distribution Agreement has been duly
executed and delivered by Delta Apparel, and, assuming the due authorization,
execution and delivery by Delta Woodside and Duck Head, constitutes the valid
and binding obligation of Delta Apparel enforceable against Delta Apparel in
accordance with its terms except as such enforceability may be limited by
general principles of equity or principles applicable to creditors' rights
generally.
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6.4 No Conflicts, Required Filings and Consents. (a) None of the execution
---------------------------------------------
and delivery of this Distribution Agreement by Delta Apparel, the consummation
by Delta Apparel of the transactions contemplated hereby or compliance by Delta
Apparel with any of the provisions hereof will (i) conflict with or violate the
Articles of Incorporation or By-laws of Delta Apparel or the comparable
organizational documents of any of Delta Apparel's Subsidiaries, (ii) subject to
receipt or filing of the required Consents referred to in Section 6.4(b), result
in a Violation of any statute, ordinance, rule, regulation, order, judgment or
decree applicable to Delta Apparel or any of Delta Apparel's Subsidiaries, or by
which any of them or any of their respective properties or assets may be bound
or affected, or (iii) subject to receipt or filing of the required Consents
referred to in Section 6.4(b), result in a Violation pursuant to, any note,
bond, mortgage, indenture, Contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Delta Apparel or any of
Delta Apparel's Subsidiaries is a party or by which Delta Apparel or any of
Delta Apparel's Subsidiaries or any of their respective properties may be bound
or affected, except in the case of the foregoing clause (ii) or (iii) for any
such Violations that would not have a Delta Apparel Material Adverse Effect.
(b) None of the execution and delivery of this Distribution Agreement by
Delta Apparel, the consummation by Delta Apparel of the transactions
contemplated hereby or compliance by Delta Apparel with any of the provisions
hereof will require any Consent of any Governmental Entity, except for (i)
compliance with any applicable requirements of the Securities Act and the
Exchange Act, (ii) certain state takeover, securities, "blue sky" and
environmental statutes, (iii) such filings as may be required in connection with
the taxes described in Section 15.12(b), and (iv) Consents the failure of which
to obtain or make would not have a Delta Apparel Material Adverse Effect.
6.5 Reports and Financial Statements. (a) Delta Apparel has filed with the
---------------------------------
SEC the Delta Apparel Form 10, and the Delta Apparel Form 10 will be the only
registration statement required to be filed by it with the SEC in connection
with the Distribution. As of its effective date, the Delta Apparel Form 10
complied as to form in all material respects with the requirements of the
Exchange Act and the applicable rules and regulations of the SEC. As of its
effective date and as of the date that the Delta Apparel Information Statement
is distributed to the Delta Woodside Stockholders as of the Record Date, the
Delta Apparel Form 10 did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(b) The combined balance sheets as of July 3, 1999 and June 27, 1998 and
the related combined statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended July 3, 1999 (including the
related notes and schedules thereto) of Delta Apparel that are contained in the
Delta Apparel Information Statement present fairly, in all material respects,
the combined financial position and the combined results of operations and cash
flows of Delta Apparel and its consolidated Subsidiaries as of the dates or for
the periods presented therein in conformity with GAAP applied on a consistent
basis during the periods involved except as otherwise noted therein, including
in the related notes.
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(c) The combined balance sheets and the related statements of earnings and
cash flows (including, in each case, the related notes thereto) of Delta Apparel
that are contained in the Delta Apparel Information Statement for the six months
ended January 1, 2000 (the "Delta Apparel Interim Financial Statements") have
been prepared in accordance with the requirements for interim financial
statements contained in Regulation S-X, which do not require all the information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with GAAP. The Delta Apparel Interim
Financial Statements reflect all adjustments necessary to present fairly in
accordance with GAAP (except as indicated), in all material respects, the
combined financial position, results of operations and cash flows of Delta
Apparel for all periods presented therein.
(d) The combined pro forma balance sheet as of January 1, 2000 and the
related combined pro forma statements of operations for the year ended July 3,
1999 and the six months ended January 1, 2000 (including the related notes and
schedules thereto) of Delta Apparel contained in the Delta Apparel Information
Statement have been prepared in accordance with the requirements for pro forma
financial statements contained in Regulation S-X, which do not require all the
information and footnotes necessary for a fair presentation of financial
position or results of operations in conformity with GAAP, and reflect all
adjustments necessary to present fairly in accordance with GAAP (except as
indicated), in all material respects, the combined pro forma financial position
and results of operations of Delta Apparel as of the dates and for the periods
presented therein.
6.6 Information. None of the information supplied or to be supplied by
------------
Delta Apparel or its Representatives for inclusion or incorporation by reference
in the Delta Apparel Form 10 or the Delta Apparel Information Statement will or
did, at the time of its distribution to the Delta Woodside Stockholders as of
the Record Date or the time of the effectiveness of the Delta Apparel Form 10
with the SEC, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. The Delta Apparel Form 10 and the Delta Apparel Information
Statement comply as to form in all material respects with the applicable
provisions of the Securities Act and the Exchange Act and the rules and
regulations thereunder, except that no representation is made by Delta Apparel
with respect to statements made or incorporated by reference therein based on
information supplied by Delta Woodside or Duck Head for inclusion or
incorporation by reference therein.
6.7 Litigation. Except as disclosed in the Delta Apparel Disclosure
-----------
Statement, as of the date hereof, there is no suit, action or proceeding pending
or, to the knowledge of Delta Apparel, threatened against or affecting Delta
Apparel or any of its Subsidiaries, nor is there any judgment, decree,
injunction or order of any Governmental Entity or arbitrator outstanding against
Delta Apparel or any of its Subsidiaries, that is reasonably expected to have a
Delta Apparel Material Adverse Effect or to prevent or materially delay the
consummation of the transactions contemplated in this Distribution Agreement.
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<PAGE>
6.8 Absence of Certain Changes or Events. Except as disclosed in the Delta
-------------------------------------
Apparel Information Statement or as contemplated by this Distribution Agreement,
since January 1, 2000, Delta Apparel has conducted its business only in the
ordinary course, and there has not been any change that would have a Delta
Apparel Material Adverse Effect, other than changes relating to or arising from
general economic conditions.
6.9 Employee Benefit Plans. Except as disclosed in the Delta Apparel
-------------------------
Information Statement or the Delta Apparel Disclosure Schedule, there are no (a)
employee benefit or compensation plans, agreements or arrangements, including
"employee benefit plans," as defined in Section 3(3) of ERISA, and including,
but not limited to, plans, agreements or arrangements relating to former
employees, including, but not limited to, retiree medical plans or life
insurance, maintained by Delta Apparel or any of its Subsidiaries or (b)
collective bargaining agreements to which Delta Apparel or any of its
Subsidiaries is a party (collectively, the "Delta Apparel Benefit Plans"), other
than plans, agreements or arrangements that, in the aggregate, are not material
to Delta Apparel and its Subsidiaries as a whole. Delta Apparel and its
Subsidiaries have complied with the terms of all Delta Apparel Benefit Plans,
except for such noncompliance that would not have a Delta Apparel Material
Adverse Effect, and no default exists with respect to the obligations of Delta
Apparel or any of its Subsidiaries under such Delta Apparel Benefit Plans that
would have a Delta Apparel Material Adverse Effect. Since July 3, 1999, there
have been no disputes, grievances subject to any grievance procedure, unfair
labor practice proceedings, arbitration or litigation (or, to the knowledge of
Delta Apparel, threatened proceedings or grievances) under such Delta Apparel
Benefit Plans, that have not been finally resolved, settled or otherwise
disposed of, nor is there any default, or any condition that, with notice or
lapse of time or both, would constitute such a default, under any such Delta
Apparel Benefit Plans, by Delta Apparel or its Subsidiaries or, to the best
knowledge of Delta Apparel, any other party thereto, other than disputes,
grievances, arbitration, litigation, proceedings, threatened proceedings or
grievances, defaults or conditions that would not have a Delta Apparel Material
Adverse Effect. Since July 3, 1999, there have been no strikes, lockouts or work
stoppages or slowdowns, or to the best knowledge of Delta Apparel, labor
jurisdictional disputes or labor organizing activity occurring or threatened
with respect to the business or operations of Delta Apparel or its Subsidiaries
that have had or would have a Delta Apparel Material Adverse Effect.
6.10 ERISA. All the Delta Apparel Benefit Plans are in compliance with the
------
applicable provisions of ERISA, the Code, all other applicable laws and all
applicable collective bargaining agreements, in each case, to the extent
applicable, except where such failures to administer or comply would not have a
Delta Apparel Material Adverse Effect. Each of the Delta Apparel Benefit Plans
that is intended to meet the requirements of Section 401(a) of the Code has been
or will be determined by the IRS to be "qualified," within the meaning of such
Section of the Code and Delta Apparel does not know of any circumstances likely
to result in revocation of such determination. No Delta Apparel Benefit Plan is
subject to Title IV of ERISA or Section 412 of the Code. Neither Delta Apparel
32
<PAGE>
nor any of its Subsidiaries (i) has made a complete or partial withdrawal,
within the meaning of Section 4201 of ERISA, from any multiemployer plan or (ii)
currently is a sponsor of or contributes to a multiemployer plan. Neither Delta
Apparel nor any of its Subsidiaries has maintained a plan subject to Title IV of
ERISA at any time within the last five years. Except in their capacities as
shareholders of Delta Woodside and except as disclosed in the Delta Apparel
Information Statement or in the Delta Apparel Disclosure Schedule, neither the
execution and delivery of this Distribution Agreement nor the consummation of
the transactions contemplated hereby will (i) result in any material payment
(including, without limitation, severance, unemployment compensation or golden
parachute) becoming due to any director or executive officer of Delta Apparel,
(ii) materially increase any benefits otherwise payable under any Delta Apparel
Benefit Plan or (iii) result in the acceleration of the time of payment or
vesting of any such benefits to any material extent.
6.11 Taxes. Delta Apparel and its Subsidiaries have duly filed all foreign,
------
federal, state and local income, franchise, excise, real and personal property
and other tax returns and reports (including, but not limited to, those filed on
a consolidated, combined or unitary basis) required to have been filed by Delta
Apparel and its Subsidiaries prior to the date hereof, except for such returns
or reports the failure to file which would not have a Delta Apparel Material
Adverse Effect. All of the foregoing returns and reports are true and correct in
all material respects, and Delta Apparel and its Subsidiaries have paid or,
prior to the Effective Time will pay, all taxes, interest and penalties shown on
such returns or reports as being due or (except to the extent the same are
contested in good faith) claimed to be due to any federal, state, local or other
taxing authority. Delta Apparel and its Subsidiaries have paid and will pay all
installments of estimated taxes due on or before the Effective Time, except for
any failure to do so that would not have a Delta Apparel Material Adverse
Effect. All taxes and state assessments and levies that Delta Apparel and its
Subsidiaries are required by law to withhold or collect have been withheld or
collected and have been paid to the proper governmental authorities or are held
by Delta Apparel for such payment, except for any failure to do so that would
not have a Delta Apparel Material Adverse Effect. Delta Apparel and its
Subsidiaries have paid or made adequate provision in the financial statements of
Delta Apparel for all taxes payable in respect of all periods ended on or prior
to January 1, 2000, except for such taxes that would not have a Delta Apparel
Material Adverse Effect. As of the date hereof, all deficiencies proposed as a
result of any audits have been paid or settled.
6.12 Compliance with Applicable Laws. Delta Apparel and its Subsidiaries
---------------------------------
hold all permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities necessary for them to own, lease or operate their
properties and assets and to carry on their businesses substantially as now
conducted (the "Delta Apparel Permits"), except for such permits, licenses,
variances, exemptions, orders and approvals the failure of which to hold would
not have a Delta Apparel Material Adverse Effect. Delta Apparel and its
Subsidiaries are in compliance with all applicable laws and the terms of Delta
Apparel Permits, except for such failures so to comply that would not have a
Delta Apparel Material Adverse Effect.
6.13 Brokers. No broker or finder is entitled to any broker's or finder's
--------
fee in connection with the transactions contemplated by this Distribution
Agreement based upon arrangements made by or on behalf of Delta Apparel.
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<PAGE>
6.14 Undisclosed Liabilities. Except as disclosed in the Delta Apparel
-------------------------
Information Statement, neither Delta Apparel nor any of its Subsidiaries has any
liabilities or any obligations of any nature whether or not accrued, contingent
or otherwise, that would be required by GAAP to be reflected on a consolidated
balance sheet of Delta Apparel and its Subsidiaries (including the notes
thereto), except for liabilities or obligations incurred in the ordinary course
of business since January 1, 2000 that would not have a Delta Apparel Material
Adverse Effect or contemplated to be incurred by this Distribution Agreement.
6.15 Environmental Matters. Except as disclosed in the Delta Apparel SEC
-----------------------
Reports or as would not reasonably be expected to have a Delta Apparel Material
Adverse Effect: (i) to the best knowledge of Delta Apparel no real property
currently or formerly owned or operated by Delta Apparel or any current
Subsidiary is contaminated with any Hazardous Substances to an extent or in a
manner or condition now requiring remediation under any Environmental Law; (ii)
no judicial or administrative proceeding is pending or to the best knowledge of
Delta Apparel threatened against Delta Apparel or its Subsidiaries relating to
liability for any off-site disposal or contamination; and (iii) Delta Apparel
and its Subsidiaries have not received any claims or notices alleging liability
under any Environmental Law, and Delta Apparel has no knowledge of any
circumstance that could result in such claims.
ARTICLE 7
CONDITIONS PRECEDENT
7.1 Conditions to Each Party's Obligation to Effect the Distribution. The
------------------------------------------------------------------
respective obligations of each party to effect the Distribution shall be subject
to the fulfillment (or waiver by all parties) at or prior to the Effective Time
of the following conditions:
(a) All Consents from Governmental Entities and other third parties
that in any case are required to be received prior to the Effective Time
with respect to the transactions contemplated hereby shall have been
received other than those Consents the absence of which would not have a
Delta Woodside Material Adverse Effect, a Duck Head Material Adverse Effect
or a Delta Apparel Material Adverse Effect;
(b) Without limiting the generality of paragraph (a) above, the Duck
Head Form 10 shall have been declared effective by the SEC and the Delta
Apparel Form 10 shall have been declared effective by the SEC;
(c) The Intercompany Reorganization shall have been completed;
(d) The Duck Head Financing shall have been completed;
34
<PAGE>
(e) The Delta Apparel Financing shall have been completed;
(f) The New Delta Woodside Financing shall have been completed;
(g) Each of the Board of Directors of Delta Woodside and the Board of
Directors of Duck Head shall have received an opinion, addressed and
satisfactory to it, in its sole discretion, from an independent solvency
firm selected by such Board, and shall otherwise be satisfied in its sole
discretion, as to matters relating to the solvency and adequacy of capital
of Duck Head after giving effect to the consummation of the transactions
contemplated by this Distribution Agreement;
(h) Each of the Board of Directors of Delta Woodside and the Board of
Directors of Delta Apparel shall have received an opinion, addressed and
satisfactory to it, in its sole discretion, from an independent solvency
firm selected by such Board, and shall otherwise be satisfied in its sole
discretion, as to matters relating to the solvency and adequacy of capital
of Delta Apparel after giving effect to the consummation of the
transactions contemplated by this Distribution Agreement; and
(i) The consummation of the Distribution shall not be restrained,
enjoined or prohibited by any order, judgment, decree, injunction or ruling
of a court of competent jurisdiction; provided, however, that the parties
shall comply with the provisions of Sections 9.4, 10.4 and 11.4 and shall
further use their respective best efforts to cause any such order,
judgment, decree, injunction or ruling to be vacated or lifted.
7.2 Conditions to Obligation of Delta Woodside to Effect the Distribution.
-----------------------------------------------------------------------
The obligation of Delta Woodside to effect the Distribution shall be subject to
the fulfillment at or prior to the Effective Time of the additional conditions,
unless waived by Delta Woodside, that
(a) Duck Head and Delta Apparel shall have performed in all material
respects their respective agreements contained in this Distribution
Agreement required to be performed at or prior to the Effective Time and
the representations and warranties of Duck Head and Delta Apparel contained
in this Distribution Agreement shall be true, except as contemplated by
this Distribution Agreement and except for inaccuracies in representations
and warranties and failures to perform their respective agreements that in
the aggregate do not constitute a Delta Woodside Material Adverse Effect, a
Duck Head Material Adverse Effect or a Delta Apparel Material Adverse
Effect; and Delta Woodside shall have received a certificate of the Chief
Executive Officer of each of Duck Head and Delta Apparel to that effect;
and
(b) The Delta Woodside Board, in its sole discretion, shall have
determined to effect the Distribution.
7.3 Conditions to Obligations of Duck Head to Effect the Distribution. The
------------------------------------------------------------------
obligation of Duck Head to effect the Distribution shall be subject to the
fulfillment at or prior to the Effective Time of the additional condition,
35
<PAGE>
unless waived by Duck Head, that Delta Woodside and Delta Apparel shall have
performed in all respects their respective agreements contained in this
Distribution Agreement required to be performed at or prior to the Effective
Time and the representations and warranties of Delta Woodside and Delta Apparel
contained in this Distribution Agreement shall be true, except as contemplated
by this Distribution Agreement and except for inaccuracies in representations
and warranties and failures to perform its agreements that in the aggregate do
not constitute a Delta Woodside Material Adverse Effect, a Duck Head Material
Adverse Effect or a Delta Apparel Material Adverse Effect; and Duck Head shall
have received a certificate of the Chief Executive Officer of each of Delta
Woodside and Delta Apparel to that effect.
7.4 Conditions to Obligations of Delta Apparel to Effect the Distribution.
-----------------------------------------------------------------------
The obligation of Delta Apparel to effect the Distribution shall be subject to
the fulfillment at or prior to the Effective Time of the additional condition,
unless waived by Delta Apparel, that Delta Woodside and Duck Head shall have
performed in all respects their respective agreements contained in this
Distribution Agreement required to be performed at or prior to the Effective
Time and the representations and warranties of Delta Woodside and Duck Head
contained in this Distribution Agreement shall be true, except as contemplated
by this Distribution Agreement and except for inaccuracies in representations
and warranties and failures to perform its agreements that in the aggregate do
not constitute a Delta Woodside Material Adverse Effect, a Duck Head Material
Adverse Effect or a Delta Apparel Material Adverse Effect; and Delta Apparel
shall have received a certificate of the Chief Executive Officer of each of
Delta Woodside and Duck Head to that effect.
ARTICLE 8
EMPLOYMENT MATTERS
8.1 Stock Options.
--------------
(a) Prior to the Effective Time, Delta Woodside shall provide holders of
Delta Woodside Stock Options, whether or not then exercisable or vested, the
opportunity to amend the terms of their respective Delta Woodside Stock Options
to provide that (i) all unexercisable portions of such Delta Woodside Stock
Options shall become immediately exercisable in full on a date that is not later
than five (5) business days prior to the Record Date and (ii) if the holder
elects not to exercise all or part of the holder's Delta Woodside Stock Options
prior to the Record Date, such unexercised Delta Woodside Stock Options shall
remain exercisable for the same number of Delta Woodside Shares at the same
exercise price after the Distribution as before the Distribution (and for no
other securities), notwithstanding the occurrence of the Distribution. Delta
Woodside shall amend the Delta Woodside Stock Option Plan to accomplish the
provisions of this paragraph (a), if it deems such amendment advisable.
(b) Prior to the Effective Time, Delta Woodside shall amend the Delta
Woodside Stock Option Plan to provide that, so long as a Duck Head employee who
holds Delta Woodside Stock Options remains an employee of Duck Head or any of
its subsidiaries, those Delta Woodside Stock Options will remain outstanding
36
<PAGE>
until the end of their stated term (with the termination of such employment with
Duck Head or any of its subsidiaries to be treated in the same manner as a
termination of employment with Delta Woodside or any of its subsidiaries would
have been) and so long as a Delta Apparel employee who holds Delta Woodside
Stock Options remains an employee of Delta Apparel or any of its subsidiaries,
those Delta Woodside Stock Options will remain outstanding until the end of
their stated term (with the termination of such employment with Delta Apparel or
any of its subsidiaries to be treated in the same manner as a termination of
employment with Delta Woodside or any of its subsidiaries would have been).
(c) Notwithstanding anything to the contrary herein, if it is determined
that compliance with paragraph (a) or (b) of this Section 8.1 may cause any
individual subject to Section 16 of the Exchange Act to become subject to the
profit recovery provisions thereof, the parties hereto will cooperate, including
by providing alternate arrangements, so as to achieve the intent of the
foregoing together with minimizing or not giving such profit recovery.
8.2 Employees.
----------
(a) Duck Head shall, or shall cause a member of the Duck Head Group to,
assume, honor and be bound by any employment and/or severance agreements between
or among each Duck Head Employee and any member of the Delta Woodside Group, the
Duck Head Group and/or the Delta Apparel Group.
(b) Delta Apparel shall, or shall cause a member of the Delta Apparel Group
to, assume, honor and be bound by any employment and/or severance agreements
between or among each Delta Apparel Employee and any member of the Delta
Woodside Group, the Duck Head Group and/or the Delta Apparel Group.
(c) Delta Woodside shall, or shall cause a member of the Delta Woodside
Group to, assume, honor and be bound by any employment and/or severance
agreements between or among any Delta Woodside Employee and any member the Delta
Woodside Group, the Duck Head Group and/or the Delta Apparel Group.
8.3. Qualified Defined Contribution Plans.
-------------------------------------
(a) No member of the Duck Head Group or the Delta Apparel Group shall have
any obligation to make contributions to the Delta Woodside Industries, Inc.
Savings and Investment Plan (the "Delta Woodside 401(k) Plan") in respect of any
member of the Duck Head Employee Group or the Delta Apparel Employee Group or
otherwise after the Effective Time, except for accrued but unpaid employee and
employer contributions, if any, relating to that employee's compensation earned
before the Effective Time.
(b) Effective not later than the Effective Time, Duck Head shall, or shall
cause a member of the Duck Head Group to, adopt or designate a defined
contribution plan intended to qualify under Section 401(a) and Section 401(k) of
37
<PAGE>
the Code (the "Duck Head 401(k) Plan"). Members of the Duck Head Employee Group
shall be vested in their benefits under and eligible to participate in the Duck
Head 401(k) Plan on and after the Effective Time to the same extent that those
members were vested in their benefits under and eligible to participate in the
Delta Woodside 401(k) Plan immediately before the Effective Time.
(c) Effective not later than the Effective Time, Delta Apparel shall, or
shall cause a member of the Delta Apparel Group to, adopt or designate a defined
contribution plan intended to qualify under Section 401(a) and Section 401(k) of
the Code (the "Delta Apparel 401(k) Plan"). Members of the Delta Apparel
Employee Group shall be vested in their benefits under and eligible to
participate in the Delta Apparel 401(k) Plan on and after the Effective Time to
the same extent that those members were vested in their benefits under and
eligible to participate in the Delta Woodside 401(k) Plan immediately before the
Effective Time.
(d) As soon as practicable after the adoption or designation of the Duck
Head 401(k) Plan, Delta Woodside shall cause to be transferred to the Duck Head
401(k) Plan cash or, to the extent provided below, other assets as the parties
may agree, having a fair market value equal to the aggregate value of the
account balances in the Delta Woodside 401(k) Plan, and any allocable portion of
any suspense account, as of the date of the plan asset transfer for each member
of the Duck Head Employee Group. The plan asset transfer contemplated by this
paragraph (d) shall include any notes evidencing loans to members of the Duck
Head Employee Group from their account balances, securities, Delta Woodside
Shares, if any, Duck Head Shares, if any, and Delta Apparel Shares, if any, held
in any such member's account and the balance in cash, and shall also include all
qualified domestic relations orders, within the meaning of Section 414(p) of the
Code, applicable to members of the Duck Head Employee Group. The transfer of
assets contemplated by this paragraph (d) shall be made only after Duck Head has
supplied to Delta Woodside a written representation from Duck Head (with
appropriate indemnities) to the effect that the Duck Head 401(k) Plan has been
established in accordance with the Code and ERISA, and an agreement that Duck
Head has requested or will request a determination letter from the IRS and will
make any and all changes to the Duck Head 401(k) Plan necessary to receive a
favorable determination letter.
(e) As soon as practicable after the adoption or designation of the Delta
Apparel 401(k) Plan, Delta Woodside shall cause to be transferred to the Delta
Apparel 401(k) Plan cash or, to the extent provided below, other assets as the
parties may agree, having a fair market value equal to the aggregate value of
the account balances in the Delta Woodside 401(k) Plan, and any allocable
portion of any suspense account, as of the date of the plan asset transfer for
each member of the Delta Apparel Employee Group. The plan asset transfer
contemplated by this paragraph (e) shall include any notes evidencing loans to
members of the Delta Apparel Employee Group from their account balances,
securities, Delta Woodside Shares, if any, Duck Head Shares, if any, and Delta
Apparel Shares, if any, held in any such member's account and the balance in
cash, and shall also include all qualified domestic relations orders, within the
meaning of Section 414(p) of the Code, applicable to members of the Delta
Apparel Employee Group. The transfer of assets contemplated by this paragraph
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<PAGE>
(e) shall be made only after Delta Apparel has supplied to Delta Woodside a
written representation from Delta Apparel (with appropriate indemnities) to the
effect that the Delta Apparel 401(k) Plan has been established in accordance
with the Code and ERISA, and an agreement that Delta Apparel has requested or
will request a determination letter from the IRS and will make any and all
changes to the Delta Apparel 401(k) Plan necessary to receive a favorable
determination letter.
(f) In any event, the transfer of plan assets provided for in paragraphs
(d) and (e) above shall occur such that each participant in the Delta Woodside
401(k) Plan immediately prior to the transfer of assets would receive a benefit
immediately after the transfer of assets (if the Delta Woodside 401(k) Plan, the
Duck Head 401(k) Plan and the Delta Apparel 401(k) Plan were then terminated)
that would be equal to or greater than the benefit such participant would have
received immediately before the transfer of assets (if the Delta Woodside 401(k)
Plan had then terminated).
(g) Delta Woodside, Duck Head and Delta Apparel shall cooperate with each
other during the period beginning on the date hereof and ending on the date that
the assets are transferred to the trust maintained under the Duck Head 401(k)
Plan or Delta Apparel 401(k) Plan, as applicable, to ensure the ongoing
operation and administration of the Delta Woodside 401(k) Plan, the Duck Head
401(k) Plan and the Delta Apparel 401(k) Plan with respect to the members of the
Delta Woodside Employee Group, the Duck Head Employee Group and the Delta
Apparel Employee Group. After those transfers of assets, (i) Duck Head shall
assume all of the Delta Woodside Group Liabilities under the Delta Woodside
401(k) Plan with respect to each member of the Duck Head Employee Group and the
Delta Woodside Group shall have no further liability, under this Distribution
Agreement or otherwise, to any member of the Duck Head Group or any member of
the Duck Head Employee Group under the Delta Woodside 401(k) Plan other than
liability arising out of any breach of fiduciary duties or any non-exempt
prohibited transaction occurring before that transfer of assets and liabilities,
and (ii) Delta Apparel shall assume all of the Delta Woodside Group Liabilities
under the Delta Woodside 401(k) Plan with respect to each member of the Delta
Apparel Employee Group and the Delta Woodside Group shall have no further
liability, under this Distribution Agreement or otherwise, to any member of the
Delta Apparel Group or any member of the Delta Apparel Employee Group under the
Delta Woodside 401(k) Plan other than liability arising out of any breach of
fiduciary duties or any non-exempt prohibited transaction occurring before that
transfer of assets and liabilities.
8.4. Welfare Benefit Plans.
----------------------
(a) (i) Effective as of the Effective Time, no member of the Duck Head
Employee Group or the Delta Apparel Employee Group shall be eligible to
participate in any "Employee Welfare Benefit Plan" (within the meaning of
Section 3(1) of ERISA) sponsored by Delta Woodside or any member of the Delta
Woodside Group and neither Delta Woodside nor any member of the Delta Woodside
Group shall have any liability after the Effective Time for Welfare Benefits
(within the contemplation of Section 3(1) of ERISA) of any member of the Duck
Head Employee Group or the Delta Apparel Employee Group.
39
<PAGE>
(ii) Delta Woodside shall be responsible for all Welfare Benefits payable
to or in respect of each member of the Delta Woodside Employee Group regardless
of whether the event(s) giving rise to payment of those benefits occurred
before, on or after the Effective Time.
(b) (i) Effective as of the Effective Time, Duck Head shall establish or
designate one or more Employee Welfare Benefit Plans covering members of the
Duck Head Employee Group as Duck Head, in its sole discretion, shall determine.
(ii) Except as set forth in Section 8.4(d), Duck Head shall be responsible
for all Welfare Benefits payable after the Effective Time to or in respect of
each member of the Duck Head Employee Group including, without limitation,
post-employment medical, dental and life insurance benefits, if any.
(c) (i) Effective as of the Effective Time, Delta Apparel shall establish
or designate one or more Employee Welfare Benefit Plans covering members of the
Delta Apparel Employee Group as Delta Apparel, in its sole discretion, shall
determine.
(ii) Except as set forth in Section 8.4(d), Delta Apparel shall be
responsible for all Welfare Benefits payable after the Effective Time to or in
respect of each member of the Delta Apparel Employee Group including, without
limitation, post-employment medical, dental and life insurance benefits, if any.
(d) Expenses incurred by each member of the Duck Head Employee Group or the
Delta Apparel Employee Group under Delta Woodside's medical and dental plans
during the calendar year that includes the Effective Time shall be taken into
account for purposes of satisfying deductible and coinsurance requirements and
satisfaction of out-of-pocket provisions of the Duck Head Group's or the Delta
Apparel Group's, as applicable, medical and dental plans for that year. Duck
Head shall be liable, and shall to the extent necessary reimburse Delta
Woodside, for all medical or dental claims incurred before the Effective Time by
any member of the Duck Head Employee Group and for life insurance claims in
respect of any member of the Duck Head Employee Group who dies on or before the
Effective Time. Delta Apparel shall be liable, and shall to the extent necessary
reimburse Delta Woodside, for all medical or dental claims incurred before the
Effective Time by any member of the Delta Apparel Employee Group and for life
insurance claims in respect of any member of the Delta Apparel Employee Group
who dies on or before the Effective Time. For purposes of this Section 8.4, a
medical or dental claim shall be deemed "incurred" when the relevant service is
provided or item is purchased.
8.5 Directors. Delta Woodside shall retain all liabilities and related
----------
assets, if any, existing as of the Effective Time relating to any director of
Delta Woodside with respect to his service as a director of Delta Woodside.
40
<PAGE>
8.6 Deferred Compensation.
----------------------
(a) All deferred compensation liabilities to the extent applicable to any
member of the Duck Head Employee Group, and any assets allocable to those
liabilities, shall be transferred to and assumed by Duck Head as of the
Effective Time, and all deferred compensation liabilities to the extent
applicable to any member of the Delta Apparel Employee Group, and any assets
allocable to those liabilities, shall be transferred to and assumed by Delta
Apparel as of the Effective Time.
(b) Delta Woodside shall retain all deferred compensation liabilities, and
any assets allocable to those liabilities, to the extent applicable to any
member of the Delta Woodside Employee Group under the Delta Woodside Deferred
Compensation Plan.
8.7 Employee Benefit Transition Services. Pursuant to and on the terms and
-------------------------------------
conditions set forth in Schedule 8.7 hereto, each party agrees to provide
certain administrative services to the other parties in respect of the members
of the Delta Woodside Employee Group, the Duck Head Employee Group and the Delta
Apparel Employee Group, including but not limited to payroll services, record
keeping services and claims processing services and for the applicable period
set forth in that Schedule. The administrative services contemplated by this
Section 8.7 shall not affect the allocation of liabilities and obligations as
set forth in this Article 8.
8.8 COBRA.
------
(a) As of the Effective Time, Duck Head shall, or shall cause a member of
the Duck Head Group to, assume Delta Woodside's obligations and responsibilities
under ERISA Title I, Subtitle 8, Part 6 and Code Section 4980B ("COBRA
Coverage") to each member of the Duck Head Employee Group.
(b) As of the Effective Time, Delta Apparel shall, or shall cause a member
of the Delta Apparel Group to, assume Delta Woodside's obligations and
responsibilities to provide COBRA Coverage to each member of the Delta Apparel
Employee Group.
(c) Delta Woodside shall, or shall cause a member of the Delta Woodside
Group to, retain the obligation and responsibility to provide COBRA Coverage to
each member of the Delta Woodside Employee Group.
8.9 Third Party Beneficiaries. No provision of this Distribution Agreement
--------------------------
(including without limitation this Article 8) shall (a) create any third party
beneficiary rights in any Person (including any beneficiary or dependent
thereof) in respect of continued employment or resumed employment with the Delta
Woodside Group, the Duck Head Group or the Delta Apparel Group, (b) create any
rights that do not already exist in any Person in respect of any benefits that
may be provided, directly or indirectly, under any employee benefit plan or
benefit arrangement sponsored or to be sponsored by any member of the Delta
Woodside Group, the Duck Head Group or the Delta Apparel Group, or (c) otherwise
establish or create any rights that do not already exist on the part of any
41
<PAGE>
third party. 8.10 No Right to Continued Employment. Nothing in this Article 8
shall confer any right to continued employment before or after the Effective
Time on any member of the Delta Woodside Employee Group, the Duck Head Employee
Group or the Delta Apparel Employee Group.
8.11 WARN Act.
---------
(a) Delta Woodside shall be responsible for providing any notification that
may be required under the Workers Adjustment and Retraining Notification Act
("WARN Act") with respect to any member of the Delta Woodside Employee Group on
or after the Effective Time.
(b) Duck Head shall be responsible for providing any notification that may
be required under the WARN Act with respect to any member of the Duck Head
Employee Group on or after the Effective Time.
(c) Delta Apparel shall be responsible for providing any notification that
may be required under the WARN Act with respect to any member of the Delta
Apparel Employee Group on or after the Effective Time.
ARTICLE 9
ADDITIONAL AGREEMENTS OF DELTA WOODSIDE
9.1 Access to Information. From the date hereof through the Effective Time,
----------------------
Delta Woodside and its Subsidiaries shall afford to Duck Head and Delta Apparel
and their respective accountants, counsel and other representatives full and
reasonable access (subject, however, to existing confidentiality and similar
non-disclosure obligations and the preservation of attorney/client and work
product privileges) during normal business hours (and at such other times as the
parties may mutually agree) to its properties, books, contracts, commitments,
records and personnel and, during such period, shall furnish promptly to Duck
Head and Delta Apparel (i) a copy of each report, schedule and other document
filed or received by it pursuant to the requirements of federal securities laws,
and (ii) all other information concerning its business, properties and personnel
as Duck Head or Delta Apparel may reasonably request.
9.2 Preparation of the Duck Head Form 10, Duck Head Information Statement,
-----------------------------------------------------------------------
Delta Apparel Form 10 and Delta Apparel Information Statement. Delta Woodside
- ----------------------------------------------------------------
will assist Duck Head to comply with Duck Head's obligations under Section 10.2
and will assist Delta Apparel to comply with Delta Apparel's obligations under
Section 11.2. Delta Woodside will cooperate and furnish promptly (a) all
information requested by Duck Head or otherwise required for inclusion in the
Duck Head Form 10 or the Duck Head Information Statement and (b) all information
requested by Delta Apparel or otherwise required for inclusion in the Delta
Apparel Form 10 or the Delta Apparel Information Statement. If at any time prior
42
<PAGE>
to the Effective Time any event or circumstance relating to Delta Woodside or
any of its Subsidiaries, or their respective officers or directors, should be
discovered by Delta Woodside that should be set forth in an amendment or a
supplement to the Duck Head Form 10, the Duck Head Information Statement, the
Delta Apparel Form 10 or the Delta Apparel Information Statement, Delta Woodside
shall promptly inform Duck Head or Delta Apparel, as applicable, thereof and
take appropriate action in respect thereof.
9.3 Public Announcements. So long as this Distribution Agreement is in
----------------------
effect, Delta Woodside agrees to use its reasonable efforts to consult with Duck
Head and Delta Apparel before issuing any press release or otherwise making any
public statement with respect to the transactions contemplated by this
Distribution Agreement.
9.4 Efforts; Consents. (a) Subject to the terms and conditions herein
-------------------
provided, Delta Woodside agrees to use its best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Distribution Agreement and to cooperate with
Duck Head and Delta Apparel in connection with the foregoing. Without limiting
the generality of the foregoing, Delta Woodside shall make or cause to be made
all required filings with or applications to Governmental Entities (including
under the Securities Act and the Exchange Act) to be made by it, and use its
best efforts to (i) obtain all necessary waivers of any Violations and other
Consents of all Governmental Entities and other third parties necessary for the
parties to consummate the transactions contemplated hereby, (ii) oppose, lift or
rescind any injunction or restraining order or other order adversely affecting
the ability of the parties to consummate the transactions contemplated hereby,
and (iii) fulfill all conditions to this Distribution Agreement.
(b) Delta Woodside shall promptly provide Duck Head and Delta Apparel
copies of (i) all filings made by Delta Woodside with any Governmental Entity in
connection with this Distribution Agreement and the transactions contemplated
hereby, and (ii) any inquiry or request for information (including notice of any
oral request for information), pleading, order or other document Delta Woodside
receives from any Governmental Entity with respect to the matters referred to in
this Section 9.4.
9.5 Notice of Breaches. Delta Woodside shall give prompt notice to Duck
-------------------
Head and Delta Apparel of (i) any representation or warranty made by it
contained in this Distribution Agreement that has become untrue or inaccurate in
any material respect, or (ii) the failure by it to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Distribution Agreement; provided, however, that such
notification shall not excuse or otherwise affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Distribution Agreement.
9.6 Acquisition Proposals Respecting the Duck Head Group or the Delta
----------------------------------------------------------------------
Apparel Group. The parties agree that, prior to the Effective Time, Delta
- ---------------
Woodside, its Subsidiaries and their respective Representatives (including,
without limitation, any investment banker, attorney or accountant retained by
Delta Woodside or any of its Subsidiaries) may initiate, continue, solicit and
43
<PAGE>
encourage, directly or indirectly, any inquiries and the making of any proposal
or offer to Delta Woodside and/or any of its Subsidiaries, and engage in any
negotiations concerning, and provide any confidential information or data to,
and have any discussions with, any Person, with respect to a merger,
consolidation or similar transaction involving, or any sale of all or any
significant portion of the assets or any equity securities of, the Delta
Woodside Group, the Duck Head Group or the Delta Apparel Group, singly or
together (any such proposal or offer being hereinafter referred to as an
"Permitted Acquisition Proposal"), and otherwise knowingly facilitate any effort
or attempt to make or implement a Permitted Acquisition Proposal and enter into
any agreement or understanding with any other Person with the intent to effect
any Permitted Acquisition Proposal. Delta Woodside will notify Duck Head and
Delta Apparel of any written Permitted Acquisition Proposals or oral Permitted
Acquisition Proposals made to the Chief Executive Officer of Delta Woodside.
Following receipt of a Permitted Acquisition Proposal, Delta Woodside's Board of
Directors may elect to terminate this Distribution Agreement as provided in
Section 13.1 or to modify the terms of the Distribution and this Distribution
Agreement to permit consummation of the Permitted Acquisition Proposal and
thereby to delete from the Distribution shares of Duck Head Common Stock or
shares of Delta Apparel Common Stock. If Duck Head and Delta Apparel consent to
such modification, the parties shall amend this Distribution Agreement
accordingly, and shall (if still practicable), subject to the other provisions
of this Distribution Agreement, as so modified, use their respective best
efforts to cause the Distribution to be consummated.
9.7 Completion of Financing. No later than the Effective Time, Delta
--------------------------
Woodside or one or more of its Subsidiaries (other than the Duck Head Group and
the Delta Apparel Group) shall have incurred or repaid such indebtedness and
entered into such credit facilities or amendments to credit facilities, if any,
as shall be necessary for Delta Woodside to be able to consummate the
transactions contemplated by this Distribution Agreement (the "New Delta
Woodside Financing").
9.8 Other Securities Law Actions. Delta Woodside shall prepare and file
-------------------------------
with the SEC and cause to become effective any registration statements or
amendments thereto that are necessary or appropriate to reflect the
establishment of or amendments to any employee benefit and other plans of the
Delta Woodside Group contemplated by this Distribution Agreement. Delta Woodside
shall take all actions as may be necessary or appropriate under the securities
or blue sky laws of states or other political subdivisions of the United States
in connection with the transactions contemplated by this Distribution Agreement.
9.9 Delta Woodside Group Liabilities. Except as specifically set forth in
----------------------------------
any of the Distribution Documents, from and after the Effective Time, Delta
Woodside shall, and shall use its reasonable best efforts to cause its
Subsidiaries to, pay, perform and discharge in due course all of the Delta
Woodside Group Liabilities for which such entity is liable
44
<PAGE>
ARTICLE 10
ADDITIONAL AGREEMENTS OF DUCK HEAD
10.1 Access to Information. From the date hereof through the Effective
-----------------------
Time, Duck Head and its Subsidiaries shall afford to Delta Woodside and Delta
Apparel and their respective accountants, counsel and other representatives full
and reasonable access (subject, however, to existing confidentiality and similar
non-disclosure obligations and the preservation of attorney/client and work
product privileges) during normal business hours (and at such other times as the
parties may mutually agree) to its properties, books, contracts, commitments,
records and personnel and, during such period, shall furnish promptly to Delta
Woodside and Delta Apparel (i) a copy of each report, schedule and other
document filed or received by it pursuant to the requirements of federal
securities laws, and (ii) all other information concerning its business,
properties and personnel as Delta Woodside or Delta Apparel may reasonably
request.
10.2 Preparation of Duck Head Form 10 and Duck Head Information Statement.
----------------------------------------------------------------------
To the extent not already accomplished, Duck Head will, as soon as practicable
following the date of this Distribution Agreement, prepare and file the Duck
Head Form 10 and a preliminary Duck Head Information Statement with the SEC and
will use all reasonable efforts to respond to any comments of the SEC or its
staff and to cause the Duck Head Form 10 to be declared effective by the SEC and
the Duck Head Information Statement to be mailed to the Delta Woodside
Stockholders as promptly as practicable after responding to all such comments to
the satisfaction of the SEC or its staff. Duck Head will provide Delta Woodside
and Delta Apparel with a copy of the Duck Head Form 10 and the preliminary Duck
Head Information Statement and all modifications thereto prior to filing or
delivery to the SEC and will consult with Delta Woodside and Delta Apparel in
connection therewith. Duck Head will notify Delta Woodside and Delta Apparel
promptly of the receipt of any comments from the SEC or its staff and of any
request by the SEC or its staff for amendments or supplements to the Duck Head
Form 10 or the Duck Head Information Statement or for additional information and
will supply Delta Woodside and Delta Apparel with copies of all correspondence
between Duck Head or any of its Representatives, on the one hand, and the SEC or
its staff, on the other hand, with respect to the Duck Head Form 10, the Duck
Head Information Statement or the Distribution. Duck Head will cooperate and
furnish promptly all information requested by Delta Woodside or Delta Apparel or
otherwise required for inclusion in any Delta Woodside Disclosure Document or
the Delta Apparel Form 10 or the Delta Apparel Information Statement, as the
case may be. If at any time prior to the Effective Time there shall occur any
event that should be set forth in an amendment or supplement to the Duck Head
Form 10 or the Duck Head Information Statement, Duck Head will promptly, as
appropriate, file with the SEC or prepare and mail to the Delta Woodside
Stockholders such an amendment or supplement. If at any time prior to the
Effective Time any event or circumstance relating to Duck Head, or its officers
or directors, should be discovered by Duck Head that should be set forth in an
amendment or a supplement to any Delta Woodside Disclosure Document or the Delta
Apparel Form 10 or the Delta Apparel Information Statement, Duck Head shall
promptly inform Delta Woodside or Delta Apparel (as the case may be) thereof and
take appropriate action in respect thereof.
45
<PAGE>
10.3 Public Announcements. So long as this Distribution Agreement is in
----------------------
effect, Duck Head agrees to use its reasonable efforts to consult with Delta
Woodside and Delta Apparel before issuing any press release or otherwise making
any public statement with respect to the transactions contemplated by this
Distribution Agreement. Prior to the Effective Time, Duck Head shall not issue
any press release or otherwise make any public statement without the consent of
Delta Woodside.
10.4 Efforts; Consents. (a) Subject to the terms and conditions herein
-------------------
provided, Duck Head agrees to use its best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Distribution Agreement and the Distribution
and to cooperate with Delta Woodside and Delta Apparel in connection with the
foregoing. Without limiting the generality of the foregoing, Duck Head shall
make or cause to be made all required filings with or applications to
Governmental Entities (including under the Securities Act and the Exchange Act)
to be made by it, and use its best efforts to (i) obtain all necessary waivers
of any Violations and other Consents of all Governmental Entities and other
third parties, necessary for the parties to consummate the transactions
contemplated hereby, (ii) oppose, lift or rescind any injunction or restraining
order or other order adversely affecting the ability of the parties to
consummate the transactions contemplated hereby, and (iii) fulfill all
conditions to this Distribution Agreement.
(b) Duck Head shall promptly provide Delta Woodside and Delta Apparel
copies of (i) all filings made by Duck Head with any Governmental Entity in
connection with this Distribution Agreement and the transactions contemplated
hereby, and (ii) any inquiry or request for information (including notice of any
oral request for information), pleading, order or other document Duck Head
receives from any Governmental Entity with respect to the matters referred to in
this Section 10.4.
10.5 Notice of Breaches. Duck Head shall give prompt notice to Delta
--------------------
Woodside and Delta Apparel of (i) any representation or warranty made by it
contained in this Distribution Agreement that has become untrue or inaccurate in
any material respect, or (ii) the failure by it to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Distribution Agreement; provided, however, that such
notification shall not excuse or otherwise affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Distribution Agreement.
10.6 Effectuation of Intercompany Reorganization and Duck Head Financing.
----------------------------------------------------------------------
Duck Head shall perform all actions necessary or appropriate, and within its
power, to accomplish the Intercompany Reorganization, as contemplated by Section
2.1, and the Duck Head Financing, as contemplated by Section 2.2.
10.7 AMEX Listing. As promptly as practicable, Duck Head shall prepare,
-------------
file and pursue an application to permit the listing of the Duck Head Common
Stock on the AMEX, and such listing shall be completed by the Effective Time.
46
<PAGE>
10.8 Other Securities Law Actions. Duck Head shall prepare and file with
-------------------------------
the SEC and cause to become effective any registration statements or amendments
thereto that are necessary or appropriate to reflect the establishment of or
amendments to any employee benefit and other plans of the Duck Head Group
contemplated by this Distribution Agreement. Duck Head shall take all actions as
may be necessary or appropriate under the securities or blue sky laws of states
or other political subdivisions of the United States in connection with the
transactions contemplated by this Distribution Agreement.
10.9 Duck Head Common Stock. Duck Head agrees to provide to the
--------------------------
Distribution Agent all certificates for shares of Duck Head Common Stock that
shall be required in order to consummate the transactions contemplated by this
Distribution Agreement.
10.10 Duck Head Group Liabilities. Except as specifically set forth in any
----------------------------
of the Distribution Documents, from and after the Effective Time, Duck Head
shall, and shall use its reasonable best efforts to cause its Subsidiaries to,
pay, perform and discharge in due course all of the Duck Head Group Liabilities
for which such entity is liable.
ARTICLE 11
ADDITIONAL AGREEMENTS OF DELTA APPAREL
11.1 Access to Information. From the date hereof through the Effective
-----------------------
Time, Delta Apparel and its Subsidiaries shall afford to Delta Woodside and Duck
Head and their respective accountants, counsel and other representatives full
and reasonable access (subject, however, to existing confidentiality and similar
non-disclosure obligations and the preservation of attorney/client and work
product privileges) during normal business hours (and at such other times as the
parties may mutually agree) to its properties, books, contracts, commitments,
records and personnel and, during such period, shall furnish promptly to Delta
Woodside and Duck Head (i) a copy of each report, schedule and other document
filed or received by it pursuant to the requirements of federal securities laws,
and (ii) all other information concerning its business, properties and personnel
as Delta Woodside or Duck Head may reasonably request.
11.2 Preparation of Delta Apparel Form 10 and Delta Apparel Information
---------------------------------------------------------------------
Statement. To the extent not already accomplished, Delta Apparel will, as soon
- ----------
as practicable following the date of this Distribution Agreement, prepare and
file the Delta Apparel Form 10 and a preliminary Delta Apparel Information
Statement with the SEC and will use all reasonable efforts to respond to any
comments of the SEC or its staff and to cause the Delta Apparel Form 10 to be
declared effective by the SEC and the Delta Apparel Information Statement to be
mailed to the Delta Woodside Stockholders as promptly as practicable after
responding to all such comments to the satisfaction of the SEC or its staff.
Delta Apparel will provide Delta Woodside and Duck Head with a copy of the Delta
Apparel Form 10 and the preliminary Delta Apparel Information Statement and all
modifications thereto prior to filing or delivery to the SEC and will consult
with Delta Woodside and Duck Head in connection therewith. Delta Apparel will
notify Delta Woodside and Duck Head promptly of the receipt of any comments from
47
<PAGE>
the SEC or its staff and of any request by the SEC or its staff for amendments
or supplements to the Delta Apparel Form 10 or the Delta Apparel Information
Statement or for additional information and will supply Delta Woodside and Duck
Head with copies of all correspondence between Delta Apparel or any of its
Representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the Delta Apparel Form 10, the Delta Apparel Information
Statement or the Distribution. Delta Apparel will cooperate and furnish promptly
all information requested by Delta Woodside or Duck Head or otherwise required
for inclusion in any Delta Woodside Disclosure Document or the Duck Head Form 10
or the Duck Head Information Statement, as the case may be. If at any time prior
to the Effective Time there shall occur any event that should be set forth in an
amendment or supplement to the Delta Apparel Form 10 or the Delta Apparel
Information Statement, Delta Apparel will promptly, as appropriate, file with
the SEC or prepare and mail to the Delta Woodside Stockholders such an amendment
or supplement. If at any time prior to the Effective Time any event or
circumstance relating to Delta Apparel, or its officers or directors, should be
discovered by Delta Apparel that should be set forth in an amendment or a
supplement to any Delta Woodside Disclosure Document or the Duck Head Form 10 or
the Duck Head Information Statement, Delta Apparel shall promptly inform Delta
Woodside or Duck Head (as the case may be) thereof and take appropriate action
in respect thereof.
11.3 Public Announcements. So long as this Distribution Agreement is in
----------------------
effect, Delta Apparel agrees to use its reasonable efforts to consult with Delta
Woodside and Duck Head before issuing any press release or otherwise making any
public statement with respect to the transactions contemplated by this
Distribution Agreement. Prior to the Effective Time, Delta Apparel shall not
issue any press release or otherwise make any public statement without the
consent of Delta Woodside.
11.4 Efforts; Consents. (a) Subject to the terms and conditions herein
-------------------
provided, Delta Apparel agrees to use its best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Distribution Agreement and the Distribution
and to cooperate with Delta Woodside and Duck Head in connection with the
foregoing. Without limiting the generality of the foregoing, Delta Apparel shall
make or cause to be made all required filings with or applications to
Governmental Entities (including under the Securities Act and the Exchange Act)
to be made by it, and use its best efforts to (i) obtain all necessary waivers
of any Violations and other Consents of all Governmental Entities and other
third parties, necessary for the parties to consummate the transactions
contemplated hereby, (ii) oppose, lift or rescind any injunction or restraining
order or other order adversely affecting the ability of the parties to
consummate the transactions contemplated hereby, and (iii) fulfill all
conditions to this Distribution Agreement.
(b) Delta Apparel shall promptly provide Delta Woodside and Duck Head
copies of (i) all filings made by Delta Apparel with any Governmental Entity in
connection with this Distribution Agreement and the transactions contemplated
hereby, and (ii) any inquiry or request for information (including notice of any
oral request for information), pleading, order or other document Delta Apparel
receives from any Governmental Entity with respect to the matters referred to in
this Section 11.4.
48
<PAGE>
11.5 Notice of Breaches. Delta Apparel shall give prompt notice to Delta
-------------------
Woodside and Duck Head of (i) any representation or warranty made by it
contained in this Distribution Agreement that has become untrue or inaccurate in
any material respect, or (ii) the failure by it to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Distribution Agreement; provided, however, that such
notification shall not excuse or otherwise affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Distribution Agreement.
11.6 Effectuation of Intercompany Reorganization and Delta Apparel
---------------------------------------------------------------------
Financing. Delta Apparel shall perform all actions necessary or appropriate, and
- ----------
within its power, to accomplish the Intercompany Reorganization, as contemplated
by Section 2.1, and the Delta Apparel Financing, as contemplated by Section 2.2.
11.7 AMEX Listing. As promptly as practicable, Delta Apparel shall prepare,
-------------
file and pursue an application to permit the listing of the Delta Apparel Common
Stock on the AMEX, and such listing shall be completed by the Effective Time.
11.8 Other Securities Law Actions. Delta Apparel shall prepare and file
-------------------------------
with the SEC and cause to become effective any registration statements or
amendments thereto that are necessary or appropriate to reflect the
establishment of or amendments to any employee benefit and other plans of the
Delta Apparel Group contemplated by this Distribution Agreement. Delta Apparel
shall take all actions as may be necessary or appropriate under the securities
or blue sky laws of states or other political subdivisions of the United States
in connection with the transactions contemplated by this Distribution Agreement.
11.9 Delta Apparel Common Stock. Delta Apparel agrees to provide to the
-----------------------------
Distribution Agent all certificates for shares of Delta Apparel Common Stock
that shall be required in order to consummate the transactions contemplated by
this Distribution Agreement.
11.10 Delta Apparel Group Liabilities. Except as specifically set forth in
--------------------------------
any of the Distribution Documents, from and after the Effective Time, Delta
Apparel shall, and shall use its reasonable best efforts to cause its
Subsidiaries to, pay, perform and discharge in due course all of the Delta
Apparel Group Liabilities for which such entity is liable
49
<PAGE>
ARTICLE 12
ACCESS TO INFORMATION
12.1 Provision of Corporate Records. Immediately before or as soon as
----------------------------------
practicable after the Effective Time, each Group shall provide to the applicable
other Group all documents, contracts, books, records and data (including, but
not limited to, minute books, stock registers, stock certificates, documents of
title and documents in electronic format) in its possession relating primarily
to the other Group or its business and affairs; provided that if any of those
documents, contracts, books, records or data relate to more than one Group or
the businesses and operations of more than one Group, each Group shall provide
to the other applicable Group when and if requested true and complete copies
(including, if requested, versions of these documents in electronic format) of
those documents, contracts, books, records or data.
12.2 Access to Information. After the Effective Time, each Group shall
-----------------------
promptly provide reasonable access during normal business hours to each of the
other Groups and its Representatives to all documents, contracts, books,
records, Defense Materials, computer data and other data in that Group's
possession relating to the other applicable Group or its business and affairs
(other than data and information subject to an attorney/client or other
privilege that is not subject to the provisions of any joint defense arrangement
between the relevant member or members of one Group and the relevant member or
members of another Group), to the extent that such access is reasonably
requested by the other Group, including, but not limited to, for audit,
accounting, litigation, disclosure and reporting purposes.
12.3 Future Litigation and Other Proceedings. Each Group shall use all
-------------------------------------------
commercially reasonable efforts to make its directors, officers, employees and
representatives available as witnesses to another Group and its accountants,
counsel and other designated representatives, upon reasonable written request.
Additionally, each Group shall otherwise cooperate with the other Groups, to the
extent reasonably required in connection with any Action arising out of any
Group's business and operations in which the requesting party may be involved.
12.4 Reimbursement. Except and to the extent that any member of one Group
--------------
is obligated to indemnify any member of the other Group under Article 14 for
that cost or expense, each Group providing information or witnesses to the other
Group, or otherwise incurring any expense in connection with cooperating, under
this Agreement shall be entitled to receive from the recipient thereof, upon the
presentation of invoices therefor, payment for all reasonable out-of-pocket
costs and expenses as may reasonably be incurred in providing such information,
witnesses or cooperation.
12.5 Retention of Records. Except as otherwise required by law or agreed to
---------------------
in writing, each party shall retain, and shall cause the members of its Group to
retain, all information relating to any other Group's business and operations in
accordance with the past practice of that party. Notwithstanding the foregoing,
any party may destroy or otherwise dispose of any of that information at any
time, provided that, for a period of six years after the Effective Time, before
destruction or disposal of information that such party consciously knows relates
50
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to any other Group's business and operations, (i) that party shall use its best
efforts to provide not less than 90 days' prior written notice to the other
party, specifying the information proposed to be destroyed or disposed of, and
(ii) if the recipient of that notice shall request in writing before the
scheduled date for destruction or disposal that any of the information proposed
to be destroyed or disposed of be delivered to that requesting party, the party
proposing the destruction or disposal shall promptly deliver to that requesting
party, at the expense of the requesting party, the information that was
requested.
12.6 Confidentiality. Each party shall hold and shall cause its
----------------
Representatives to hold in strict confidence all information (other than any
information relating primarily to the business or affairs of that party)
concerning another party (or the Group of which it forms a part) unless and to
the extent that (i) that party is compelled to disclose that information by
judicial or administrative process or, in the opinion of its counsel, by other
requirements of law or (ii) that information can be shown to have been (A) in
the public domain through no fault of that party, (B) lawfully acquired after
the Effective Time on a non-confidential basis or (C) acquired or developed
independently by that party after the Effective Time without violating this
Section 12.6 or any other confidentiality agreement with the other party.
Notwithstanding the foregoing, a party may disclose that information to its
Representatives so long as those Representatives are informed by that party of
the confidential nature of that information and are directed by that party to
treat that information confidentially. Each party shall be responsible for any
breach of such direction or of this Section by any of its Representatives. If a
party or any of its Representatives becomes legally compelled to disclose any
documents or information subject to this Section 12.6, that party shall promptly
notify the other party so that the other party may seek a protective order or
other remedy or waive that party's compliance with this Section 12.6. If no such
protective order or other remedy is obtained or waiver granted, that party will
furnish only the portion of the information that it is advised by counsel is
legally required and will exercise all commercially reasonable efforts to obtain
reliable assurance that confidential treatment will be accorded that
information. Without prejudice to the rights and remedies of any party to this
Distribution Agreement, if any party breaches or threatens to breach any
provision of this Section 12.6, the affected party shall be entitled to
equitable relief by way of an injunction without the requirement for the posting
of bond.
12.7 Inapplicability of Article to Tax Matters. Notwithstanding anything to
------------------------------------------
the contrary in this Article 12, this Article 12 shall not apply to information,
records and other matters relating to Taxes, all of which shall be governed by
the Tax Sharing Agreement.
ARTICLE 13
TERMINATION, AMENDMENT AND WAIVER
13.1 Termination. This Distribution Agreement may be terminated at any time
------------
prior to the Effective Time by Delta Woodside for any reason.
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13.2 Effect of Termination. In the event of termination of this
-------------------------
Distribution Agreement by Delta Woodside, as provided in Section 13.1, this
Distribution Agreement shall forthwith become void and there shall be no
liability hereunder on the part of any of Delta Woodside, Duck Head or Delta
Apparel or their respective officers or directors; provided that Sections 13.2
and 15.11 shall survive the termination.
13.3 Amendment. This Distribution Agreement may be amended by the parties
----------
hereto at any time. This Distribution Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
13.4 Waiver. At any time prior to the Effective Time, the parties hereto
-------
may, to the extent permitted by applicable law, (i) extend the time for the
performance of any of the obligations or other acts of any other party hereto,
(ii) waive any inaccuracies in the representations and warranties by any other
party contained herein or in any documents delivered by any other party pursuant
hereto and (iii) waive compliance with any of the agreements of any other party
or with any conditions to its own obligations contained herein. Any agreement on
the part of a party hereto to any such extension or to any waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party. No
delay on the part of any party hereto in exercising any right, power or
privilege hereunder will operate as a waiver thereof, nor will any waiver on the
part of any party hereto of any right, power or privilege hereunder operate as a
waiver of any other right, power or privilege hereunder, nor will any single or
partial exercise of any right, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege hereunder. Unless otherwise provided, the rights and remedies herein
provided are cumulative and are not exclusive of any rights or remedies that the
parties may otherwise have at law or in equity.
ARTICLE 14
INDEMNIFICATION
14.1 Indemnification by Delta Woodside. From and after the Effective Time,
----------------------------------
Delta Woodside shall indemnify and hold harmless, to the full extent permitted
by law, each member of the Duck Head Group and each member of the Delta Apparel
Group, and each present and former director, officer, employee and agent of any
member of the Duck Head Group and/or the Delta Apparel Group, against any and
all liabilities and expenses, including reasonable attorneys' fees, fines,
losses, claims, damages, liabilities, costs, expenses, judgments and amounts
paid in settlement (collectively, "Damages"), incurred or suffered by such
member of the Duck Head Group or member of the Delta Apparel Group, or such
director, officer, employee or agent, as the case may be, whether or not in
connection with any threatened, pending or completed Action (and whether
asserted or commenced prior to or after the Effective Time), and Delta Woodside
shall advance expenses to each such indemnified Person, arising out of or
pertaining to:
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(a) any breach of the representations and warranties made by Delta
Woodside in Article 4 (which representations and warranties shall not
expire for purposes of this Article 14, notwithstanding any other provision
of this Distribution Agreement to the contrary);
(b) the breach by any member of the Delta Woodside Group of any
obligation under (i) this Distribution Agreement or (ii) any of the other
Distribution Documents, other than the Tax Sharing Agreement;
(c) any and all Delta Woodside Group Liabilities; or
(d) any untrue statement or alleged untrue statement of a material
fact contained in any Delta Woodside Disclosure Document, or any omission
or alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as those Damages are caused by any
such untrue statement or omission or alleged untrue statement or omission
that was based upon information furnished to Delta Woodside by any member
of the Duck Head Group or any member of the Delta Apparel Group expressly
for use therein.
14.2 Indemnification by Duck Head. From and after the Effective Time, Duck
-----------------------------
Head shall indemnify and hold harmless, to the full extent permitted by law,
each member of the Delta Woodside Group and each member of the Delta Apparel
Group, and each present and former director, officer, employee and agent of any
member of the Delta Woodside Group and/or the Delta Apparel Group, against any
and all Damages incurred or suffered by such member of the Delta Woodside Group
or member of the Delta Apparel Group, or such director, officer, employee or
agent, as the case may be, whether or not in connection with any threatened,
pending or completed Action (and whether asserted or commenced prior to or after
the Effective Time), and Duck Head shall advance expenses to each such
indemnified Person, arising out of or pertaining to:
(a) any breach of the representations and warranties made by Duck Head
in Article 5 (which representations and warranties shall not expire for
purposes of this Article 14, notwithstanding any other provision of this
Distribution Agreement to the contrary);
(b) the breach by any member of the Duck Head Group of any obligation
under (i) this Distribution Agreement or (ii) any of the other Distribution
Documents, other than the Tax Sharing Agreement;
(c) any and all Duck Head Group Liabilities; or
(d) any untrue statement or alleged untrue statement of a material
fact contained in any Duck Head Disclosure Document, or any omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as those Damages are caused by any
such untrue statement or omission or alleged untrue statement or omission
that was based upon information furnished to Duck Head by any member of the
Delta Woodside Group or any member of the Delta Apparel Group expressly for
use therein.
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14.3 Indemnification by Delta Apparel. From and after the Effective Time,
---------------------------------
Delta Apparel shall indemnify and hold harmless, to the full extent permitted by
law, each member of the Delta Woodside Group and each member of the Duck Head
Group, and each present and former director, officer, employee and agent of any
member of the Delta Woodside Group and/or the Duck Head Group, against any and
all Damages incurred or suffered by such member of the Delta Woodside Group or
member of the Duck Head Group, or such director, officer, employee or agent, as
the case may be, whether or not in connection with any threatened, pending or
completed Action (and whether asserted or commenced prior to or after the
Effective Time), and Delta Apparel shall advance expenses to each such
indemnified Person, arising out of or pertaining to:
(a) any breach of the representations and warranties made by Delta
Apparel in Article 6 (which representations and warranties shall not expire
for purposes of this Article 14, notwithstanding any other provision of
this Distribution Agreement to the contrary);
(b) the breach by any member of the Delta Apparel Group of any
obligation under (i) this Distribution Agreement or (ii) any of the other
Distribution Documents, other than the Tax Sharing Agreement;
(c) any and all Delta Apparel Group Liabilities; or
(d) any untrue statement or alleged untrue statement of a material
fact contained in any Delta Apparel Disclosure Document, or any omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as those Damages are caused by any
such untrue statement or omission or alleged untrue statement or omission
that was based upon information furnished to Delta Apparel by any member of
the Delta Woodside Group or any member of the Duck Head Group expressly for
use therein.
14.4 Third-Party Rights; Insurance Proceeds; Tax Benefits; Mitigation.
-----------------------------------------------------------------
(a) No insurer or any other third party shall be (i) entitled by reason of
this Article 14 to a benefit (as a third-party beneficiary or otherwise) that it
would not be entitled to receive in the absence of Section 14.1, 14.2 or 14.3,
(ii) relieved by reason of this Article 14 of the responsibility to pay any
claim to which it is obligated or (iii) entitled to any subrogation right with
respect to any obligation under Section 14.1, 14.2 or 14.3.
(b) The amount that any indemnifying party is or may be required to pay to
any indemnified Person pursuant to this Article 14 (i) shall be reduced
(including retroactively) by (A) any insurance proceeds or other amounts
actually recovered by or on behalf of such indemnified Person in reduction of
the related Damages and (B) any Tax benefits realized or realizable by such
54
<PAGE>
indemnified Person based on the present value thereof by reason of such loss and
(ii) shall be increased by any Tax liability incurred by such indemnified Person
based on such indemnity payment. If an indemnified Person shall have received
the payment required by this Distribution Agreement from an indemnifying party
in respect of Damages and shall subsequently actually receive insurance
proceeds, Tax benefits or other amounts in respect of such Damages as specified
above, then such indemnified Person shall pay to such indemnifying party a sum
equal to the amount of such insurance proceeds, Tax benefits or other amounts
actually received. The indemnified Person shall take all reasonable steps to
mitigate all Damages, including availing itself of any defenses, limitations,
rights of contribution, claims against third parties and other rights at law (it
being understood that any reasonable out-of-pocket costs paid to third parties
in connection with such mitigation shall constitute Damages), and shall provide
such evidence and documentation of the nature and extent of any Damages as may
be reasonably requested by the indemnifying party.
(c) In addition to any adjustments required pursuant to paragraph (b)
above, if the amount of any Damages shall, at any time subsequent to the payment
required by this Distribution Agreement, be reduced by recovery, settlement or
otherwise, the amount of such reduction, less any expenses incurred in
connection therewith, shall promptly be repaid by the indemnified Person to the
indemnifying party.
14.5 Indemnification Procedures.
---------------------------
(a) In the event of any Action (whether asserted or commenced prior to or
after the Effective Time) as to which indemnification will be sought pursuant to
Section 14.1, 14.2 or 14.3, the indemnifying party shall be entitled to
participate in and, to the extent that it may wish, to assume the defense
thereof with counsel selected by the indemnifying party and reasonably
acceptable to the indemnified Person; provided that the indemnified Person shall
have the right to participate in those proceedings and to be represented by
counsel of its own choosing at the indemnified Person's sole cost and expense;
provided, however, that, if any indemnified Person (or group of indemnified
Persons) reasonably believes that, as a result of an actual or potential
conflict of interest, it is advisable for such indemnified Person (or group of
indemnified Persons) to be represented by separate counsel or if the
indemnifying party shall fail to assume responsibility for such defense, such
indemnified Person (or group of indemnified Persons) will act in good faith with
respect to such Action and may retain counsel satisfactory to such indemnified
Person (or group of indemnified Persons) who will represent such indemnified
Person or Persons, and the indemnifying party shall pay all reasonable fees and
expenses of such counsel promptly as statements therefor are received. The
indemnified Persons and the indemnifying party shall use their respective best
efforts to assist in the vigorous defense of any such matter. The indemnifying
party shall not be liable for any settlement effected without its written
consent, which consent shall not be unreasonably withheld. The indemnifying
party may settle or compromise the Action without the prior written consent of
the indemnified Person so long as any settlement or compromise of the Action
includes an unconditional release of the indemnified Person from all claims that
are the subject of that Action, provided, however, that the indemnifying party
may not agree to any such settlement or compromise that includes any remedy or
relief (other than monetary damages for which the indemnifying party shall be
responsible under this Article) applying to or against the indemnified Person,
without the prior written consent of the indemnified Person (which consent shall
55
<PAGE>
not be unreasonably withheld). Notwithstanding the other provisions of this
Article, the indemnifying party shall have no obligation under this Article to
any indemnified Person when and if a court of competent jurisdiction shall
ultimately determine, in a decision constituting a final determination, that
such indemnified Person is not entitled to indemnification hereunder.
(b) Any indemnified Person wishing to claim indemnification under this
Article, upon learning of any such Action, shall promptly notify the
indemnifying party thereof in writing and shall deliver to the indemnifying
party an undertaking to repay any amounts advanced pursuant to this Article when
and if a court of competent jurisdiction shall ultimately determine, in a
decision constituting a final determination, that such indemnified Person is not
entitled to indemnification hereunder. The failure of the indemnified Person to
give notice as provided in this paragraph (b) or paragraph (f) below shall not
relieve the indemnifying party of its obligations under this Article, except to
the extent that the indemnifying party is prejudiced by the failure to give
notice. The indemnified Persons may as a group retain only one law firm pursuant
to the preceding paragraph (a) to represent them at the expense of the
indemnifying party with respect to any such matter unless there is, under
applicable standards of professional conduct, a conflict on any significant
issue between the positions of any two or more indemnified Persons in which case
the indemnified Persons may retain, at the expense of the indemnifying party,
such number of additional counsel as are reasonably necessary to eliminate all
such conflicts.
(c) This Article shall survive the Effective Time and the Distribution, is
intended to benefit each indemnified Person and their respective successors,
heirs, personal representatives and assigns (each of whom shall be entitled to
enforce this Article), and shall be binding on all successors and assigns of the
indemnifying party.
(d) In the event any indemnifying party or any of its successors or assigns
(i) consolidates with or merges into any other entity and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers all or substantially all of its assets to any entity, then,
and in each such case, proper provision shall be made so that the successors and
assigns of the indemnifying party assume the obligations of the indemnifying
party set forth in this Article.
(e) Each of the parties hereto agrees vigorously to defend against any
Action in which such party is named as a defendant and that seeks to enjoin,
restrain or prohibit the transactions contemplated hereby or seeks damages with
respect to such transactions.
(f) If any indemnified Person determines that it is or may be entitled to
indemnification by any party under this Article 14 (other than in connection
with any Action), the indemnified Person shall promptly deliver to the
indemnifying party a written notice specifying, to the extent reasonably
practicable, the basis for the indemnified Person's claim for indemnification
and the amount for which the indemnified Person reasonably believes it is
entitled to be indemnified.
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(g) In the event of payment by an indemnifying party to any indemnified
Person in connection with any claim, such indemnifying party shall be subrogated
to and shall stand in the place of such indemnified Person as to any events,
circumstances or Persons in respect of which such indemnified Person may have
any right or claim relating to such claim. Such indemnified Person shall
cooperate with such indemnifying party in a reasonable manner, and at the cost
and expense of such indemnifying party, in prosecuting any subrogated right or
claim.
(h) The remedies provided in this Article 14 shall be cumulative and shall
not preclude assertion by any indemnified Person of any other rights or the
seeking of any and all other remedies against any indemnifying party.
14.6 Contribution. If for any reason the indemnification provided for in
-------------
Section 14.1, 14.2 or 14.3 is unavailable to any indemnified Person, or
insufficient to hold the indemnified Person harmless, then the indemnifying
party shall contribute to the amount paid or payable by that indemnified Person
as a result of those Damages in that proportion as is appropriate to reflect the
relative fault of the indemnifying party, on the one hand, and of the
indemnified Person, on the other hand, respecting those Damages, which relative
fault shall be determined by reference to the Business and Group to which the
relevant actions, conduct, statements or omissions are primarily related, as
well as any other relevant equitable considerations.
ARTICLE 15
GENERAL PROVISIONS
15.1 Intercompany Accounts. Except for any amounts owed by Delta Apparel to
----------------------
the Delta Woodside Group for yarn sold by the Delta Woodside Group to Delta
Apparel, which amounts shall be paid in the ordinary course of business, and
except for obligations arising under this Distribution Agreement or the Tax
Sharing Agreement, each of the parties hereto represents to each of the other
parties hereto that it is not aware of any intercompany receivable, payable or
loan balance that will exist as of the Effective Time, following completion of
the Intercompany Reorganization, between any member of its Group and any member
of either of the other two Groups.
15.2 Existing Arrangements. Except for the Distribution Documents and
-----------------------
except as otherwise contemplated by any Distribution Document, all prior
executory agreements and arrangements, including those relating to goods, rights
or services provided or licensed, between any member(s) of any Group and any
member(s) of any other Group shall be terminated effective as of the Effective
Time, if not previously terminated. No such agreements or arrangements shall be
in effect after the Effective Time unless embodied in the Distribution
Documents.
15.3 Intellectual Property Rights and Licenses. No Group shall have any
--------------------------------------------
right or license in or to any technology, software, intellectual property
(including, without limitation, any trademark, service mark, patent or
copyright), know-how or other proprietary right owned, licensed or used by any
other Group.
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15.4 Further Assurances and Consents. In addition to the actions
------------------------------------
specifically provided for elsewhere in this Distribution Agreement and the other
Distribution Documents, each of the parties to this Distribution Agreement shall
use all commercially reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things, reasonably necessary,
proper or advisable under applicable laws, regulations and agreements or
otherwise to consummate and make effective the transactions contemplated by this
Distribution Agreement and the other Distribution Documents, including, but not
limited to, using all commercially reasonable efforts to obtain any Consents and
approvals and to make any filings and applications necessary or desirable in
order to consummate the transactions contemplated by this Distribution Agreement
and the other Distribution Documents; provided that no party to this
Distribution Agreement shall be obligated to pay any consideration for any
consent or approval (except for filing fees and other similar charges) to any
third party from whom a consent or approval is requested or to take any action
or omit to take any action if the taking of or the omission to take that action
would be unreasonably burdensome to that party, its Group or its Group's
business.
15.5 Notices. All notices or other communications under this Distribution
--------
Agreement shall be in writing and shall be given (and shall be deemed to have
been duly given upon receipt) by delivery in person, by telecopy (with
confirmation of receipt), or by registered or certified mail, postage prepaid,
return receipt requested, addressed as follows:
If to Delta Woodside:
Delta Woodside Industries, Inc.
233 North Main Street
Greenville, South Carolina 29601
Attention: President
Telecopy No.: (864) 232-6164
If to Duck Head:
Duck Head Apparel Company, Inc.
1020 Barrow Industrial Parkway
P.O. Box 688
Winder, Georgia 30680
Attention: President
Telecopy No.: (770) 867-3111
58
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If to Delta Apparel:
Delta Apparel, Inc.
3355 Breckinridge Blvd.
Suite 100
Duluth, Georgia 30096
Attention: President
Telecopy No.: (770) 806-6800
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section.
15.6 Specific Performance. The parties hereto agree that irreparable damage
---------------------
would occur in the event that any of the provisions of this Distribution
Agreement were not performed in accordance with its specific terms or were
otherwise breached. Accordingly, each party shall be entitled, without posting
any bond, to an injunction or injunctions to prevent breaches of this
Distribution Agreement and to enforce specifically the terms and provisions
hereof, this being in addition to any other remedy to which it is entitled under
this Distribution Agreement, at law or in equity.
15.7 Entire Agreement. This Distribution Agreement (together with the
------------------
Distribution Documents and the other documents and instruments referred to
herein) constitutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the parties, or any
of them, with respect to the subject matter hereof.
15.8 Assignments; Parties in Interest. Prior to the Effective Time, neither
---------------------------------
this Distribution Agreement nor any of the rights, interests or obligations
hereunder may be assigned by any of the parties hereto (whether by operation of
law or otherwise) without the prior written consent of the other parties.
Subject to the preceding and succeeding sentences, this Distribution Agreement
shall be binding upon and inure solely to the benefit of each of the parties
hereto and their respective successors and assigns. Nothing in this Distribution
Agreement, express or implied, is intended to or shall confer upon any Person
not a party hereto any right, benefit or remedy of any nature whatsoever under
or by reason of this Distribution Agreement, including to confer third party
beneficiary rights, except as specifically set forth in Article 14 in respect of
any indemnified Person and except for the provisions of Section 3.5.
15.9 Governing Law. This Distribution Agreement shall be governed in all
--------------
respects by the laws of the State of South Carolina (without giving effect to
the provisions thereof relating to conflicts of law).
15.10 Headings; Disclosure. The descriptive headings herein are inserted
----------------------
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Distribution Agreement. Any
disclosure by Delta Woodside, Duck Head or Delta Apparel in any portion of its
respective disclosure schedule shall be deemed disclosure in each other portion
of such disclosure schedule.
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15.11 Expenses. Except as specifically provided otherwise in any of the
---------
Distribution Documents, whether or not the Distribution is consummated, all
costs and expenses incurred in connection with the preparation, execution and
delivery of the Distribution Documents and the consummation of the transactions
contemplated hereby and thereby (including, without limitation, (x) the fees and
expenses of all counsel, accountants and financial and other advisors of all
Groups in connection therewith, and all expenses in connection with preparing,
filing and printing the Disclosure Documents and (y) any fees and expenses
incurred to repay any indebtedness, but not to incur any indebtedness (which
shall be paid by the party incurring such indebtedness)) shall be paid by Delta
Woodside, Duck Head and Delta Apparel proportionately in accordance with the
respective benefits received by Delta Woodside, Duck Head and Delta Apparel as
determined in good faith by the parties; provided that the holders of the Delta
Woodside Shares shall pay their own expenses, if any, incurred in connection
with the Distribution.
15.12 Tax Sharing Agreement; Certain Transfer Taxes.
----------------------------------------------
(a) Except to the extent that a provision of this Distribution Agreement
expressly indicates otherwise, this Distribution Agreement shall not govern any
Tax matters, and any and all Liabilities relating to Taxes shall be governed
exclusively by the Tax Sharing Agreement.
(b) Notwithstanding the Tax Sharing Agreement, all transfer, documentary,
sales, use, stamp and registration taxes and fees (including filing fees and any
penalties and interest) incurred in connection with any of the transactions
described in this Distribution Agreement (including without limitation the
Intercompany Reorganization) shall be borne and paid by Delta Woodside, Duck
Head and Delta Apparel proportionately in accordance with the respective
benefits received by Delta Woodside, Duck Head and Delta Apparel as determined
in good faith by the parties. The party or parties that is or are required by
applicable law to file any Return (as defined in the Tax Sharing Agreement) or
make any payment with respect to any of those taxes shall do so, and the other
party or parties shall cooperate with respect to that filing or payment as
necessary. The non-paying party or parties shall promptly reimburse the paying
party in accordance with this Section 15.12, as appropriate, after it or they
receive(s) notice of the payment of those taxes.
15.13 Jurisdiction. Any Action seeking to enforce any provision of, or
-------------
based on any matter arising out of or in connection with, any of the
Distribution Documents or any of the transactions contemplated by any of the
Distribution Documents shall be brought exclusively in the United States
District Court for the District of South Carolina or any South Carolina State
court sitting in Greenville County, and each of the parties hereby consents to
the exclusive jurisdiction of those courts (and of the appropriate appellate
courts therefrom) in any such Action and irrevocably waives, to the fullest
extent permitted by law, any objection that it may now or hereafter have to the
laying of the venue of any such Action in any of those courts or that any such
Action that is brought in any of those courts has been brought in an
inconvenient forum. Process in any such Action may be served on any party
anywhere in the world, whether within or without the jurisdiction of any such
court. Without limiting the foregoing, each party agrees that service of process
on that party as provided in Section 15.5 shall be deemed effective service of
process on that party.
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15.14 Counterparts. This Distribution Agreement may be executed in two or
-------------
more counterparts which together shall constitute a single agreement.
15.15 Severability. If any provision of this Distribution Agreement is
-------------
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other provisions of this Distribution Agreement shall nevertheless
remain in full force and effect so long as the economics or legal substance of
the transactions contemplated hereby are not affected in any manner materially
adverse to any party. Upon determination that any term or other provision hereof
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Distribution Agreement so as to effect
the original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
61
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IN WITNESS WHEREOF, Delta Woodside, Duck Head and Delta Apparel have caused
this Distribution Agreement to be signed by their respective officers thereunto
duly authorized all as of the date first written above.
DELTA WOODSIDE INDUSTRIES, INC.
By: /s/ E. Erwin Maddrey, II
--------------------------------
Title: President & CEO
DH APPAREL COMPANY, INC.
By: /s/ Robert D. Rockey, Jr.
--------------------------------
Title: Chairman, President & CEO
DELTA APPAREL, INC.
By: /s/ Robert W. Humphreys
--------------------------------
Title: President & CEO
COLLATERAL ASSIGNMENT OF ACQUISITION AGREEMENTS
-----------------------------------------------
THIS COLLATERAL ASSIGNMENT OF ACQUISITION AGREEMENTS ("Assignment"), dated
May 16, 2000, is by and among DH APPAREL COMPANY, INC., a Georgia corporation
("Duck Head"), with its chief executive office at 1020-A Barrow Industrial
Parkway, Winter, Georgia 30680, and DELTA APPAREL, INC., a Georgia corporation
("Delta", and together with Duck Head, each individually, an "Assignor" and
collectively, "Assignors"), with its chief execute office at 3355 Breckinridge
Boulevard, Suite 100, Duluth, Georgia 30096, in favor of CONGRESS FINANCIAL
CORPORATION (SOUTHERN), a Georgia corporation ("Assignee"), having an office at
200 Galleria Parkway, Suite 1500, Atlanta, Georgia 30339.
W I T N E S S E T H:
--------------------
WHEREAS, each of Assignors has acquired certain assets of Delta Woodside
Industries, Inc. ("Seller"), as set forth in the Distribution Agreement, dated
March 15, 2000, by and among Seller and Assignors (as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, the "Distribution Agreement", together with the other agreements,
documents and instruments referred to therein in Section 2.1 thereof or at any
time executed and/or delivered in connection with the transactions contemplated
by such Section 2.1, collectively, the "Acquisition Agreements");
WHEREAS, Duck Head and Assignee have entered or are about to enter into
financing arrangements pursuant to which Assignee may make loans and advances
and provide other financial accommodations to Duck Head as set forth in the Loan
and Security Agreement, dated of even date herewith, among Duck Head, Delta
Merchandising, Inc. and Assignee (as the same now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced, the
"Duck Head Loan Agreement") and other agreements, documents and instruments
referred to therein or at any time executed and/or delivered in connection
therewith or related thereto, including, but not limited to, this Assignment
(all of the foregoing, together with the Loan Agreement, as the same now exist
or may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced, being collectively referred to herein as the "Duck Head Financing
Agreements");
WHEREAS, Delta and Assignee have entered or are about to enter into
financing arrangements pursuant to which Assignee may make loans and advances
and provide other financial accommodations to Delta as set forth in the Loan and
Security Agreement, dated of even date herewith, between Delta and Assignee (as
the same now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced, the "Delta Loan Agreement") and other
agreements, documents and instruments referred to therein or at any time
executed and/or delivered in connection therewith or related thereto, including,
but not limited to, this Assignment (all of the foregoing, together with the
Loan Agreement, as the same now exist
- 1 -
<PAGE>
or may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced, being collectively referred to herein as the "Delta Financing
Agreements" and together with the Duck Head Financing Agreements, collectively,
the "Financing Agreements");
WHEREAS, in order to induce Assignee to make loans and advances and provide
other financial accommodations to each Assignor pursuant to each of the Duck
Head Loan Agreement and the Delta Loan Agreement and the other Financing
Agreements, each Assignor has agreed to grant to Assignee certain collateral
security as set forth herein;
NOW, THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. GRANT OF SECURITY INTEREST AND ASSIGNMENT
-----------------------------------------
As collateral security for the prompt performance, observance and
indefeasible payment in full of all of the Obligations (as hereinafter defined),
each Assignor hereby assigns, pledges, transfers and sets over to Assignee, and
grants to Assignee a continuing security interest in and a general lien upon,
all of each of Assignor's now existing or hereafter arising right, title and
interest in and to each of the Acquisition Agreements and all proceeds
thereunder, including, but not limited to, (a) all rights of each Assignor to
receive monies due to become due to it thereunder or in connection therewith;
(b) all rights of each Assignor to indemnification and claims for damages or
other relief pursuant to such Acquisition Agreements; (c) all rights of each
Assignor to perform and exercise all remedies thereunder and to require
performance by the other parties thereto; and (d) all proceeds, collections,
recoveries and rights of subrogation with respect to the foregoing (all of the
foregoing being collectively referred to herein as the "Collateral").
2. OBLIGATIONS SECURED
-------------------
The assignment, security interest and lien granted to Assignee pursuant to
this Assignment shall secure the prompt performance, observance and payment in
full of any and all obligations, liabilities and indebtedness of every kind,
nature and description owing by each of Assignors to Assignee and/or its
affiliates, including principal, interest, charges, fees, premiums, indemnities,
and expenses, however evidenced, whether as principal, surety, endorser,
guarantor or otherwise, arising under this Assignment, the Duck Head Loan
Agreement, the Delta Loan Agreement and the other Financing Agreements, whether
now existing or hereafter arising, whether arising before, during or after the
initial or any renewal term of the Duck Head Loan Agreement or the Delta Loan
Agreement or after the commencement of any case with respect to any Assignor
under the United States Bankruptcy Code or any similar statute (including,
without limitation, the payment of interest and other amounts which would accrue
and become due but for the commencement of such case), whether direct or
indirect, absolute or contingent, joint or several, due or not due, primary or
secondary, liquidated or unliquidated, secured or unsecured (all of the
foregoing being collectively referred to herein as the "Obligations").
-2-
<PAGE>
3. NO ASSUMPTION OF DUTIES
-----------------------
This Assignment is executed only as security for the Obligations and,
therefore, the execution and delivery of this Assignment shall not subject
Assignee to, or transfer or pass to Assignee, or in any way affect or modify,
the liability of Assignors under the Acquisition Agreements. In no event shall
the acceptance of this Assignment by Assignee or the exercise by Assignee of any
rights hereunder or assigned hereby, constitute an assumption of any liability
or obligation of Assignors to any of the other parties to the Acquisition
Agreements or any other persons.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
Each Assignor hereby represents, warrants and covenants with and to
Assignee the following (all of such representations, warranties and covenants
being continuing as long as any of the Obligations are outstanding):
(a) Each of the Acquisition Agreements is and shall be a legal, valid and
binding obligation of each Assignor.
(b) As of the date hereof, no default or event of default under or with
respect to the Acquisition Agreements exists or has occurred.
(c) Each Assignor has obtained all consents required for the valid and
binding assignment of the Acquisition Agreements.
(d) Each Assignor shall promptly and faithfully abide by, perform and
discharge in all material respects the obligations, covenants, conditions and
duties which the Acquisition Agreements provide are to be performed by each
Assignor.
(e) Each of the Acquisition Agreements is in full force and effect and,
without the prior written consent of Assignee, Assignors will not amend,
supplement or otherwise modify or terminate any of the terms or provisions of
any of the Acquisition Agreements, in any manner that would materially,
adversely affect the rights or claims of Assignors or materially, adversely
affect any of the Collateral or the rights of Assignors or Assignee with respect
thereto; provided, that, unless and until an Event of Default exists or has
occurred and is continuing, Assignors may, upon notice thereof to Lender, amend,
supplement or otherwise modify or terminate any of the terms or provisions of
the Acquisition Agreements so long as either (i) such amendment, supplement,
modification or termination does not waive, release or limit any rights or
claims of Assignors or increase the obligations of Assignors or make any terms
thereof more restrictive or burdensome to Assignors or in any manner adversely
affect Assignee or any rights of Assignee as determined in good faith by
Assignee and confirmed by Assignee to Assignors in writing or (ii) Assignee has
consented in writing to such amendment, supplement, modification or termination.
-3-
<PAGE>
(f) At Assignors' sole cost and expense, Assignors shall appear in and
defend any action or proceedings affecting Assignee and arising under, growing
out of or in any manner connected with the obligations, covenants, conditions,
duties, agreements or liabilities of Assignors under the Acquisition Agreements.
(g) Each Assignor shall: (i) promptly notify Assignee of each and every
dispute with, proceeding or claim against, cause of action or litigation
involving any person for which any Assignor has or may have any right to
indemnification or claim for damages or other relief or remedies, whether at law
or in equity, arising under or in connection with the Acquisition Agreements,
(ii) diligently enforce all rights to indemnification or claim for damages or
other relief or remedies, whether at law or in equity, arising under or in
connection with the Acquisition Agreements and (iii) not take or permit, and has
not taken or permitted since the execution of the Acquisition Agreements, any
action that adversely affects, in the good faith judgment of Assignee, the
Obligations or the Collateral.
(h) Each Assignor shall promptly deliver or cause to be delivered a copy of
every written notice or communication received by such Assignor pursuant to any
of the Acquisition Agreements to Assignee in the manner and at the place
provided for notices contained herein.
(i) In no event shall any Assignor without the prior written consent of
Assignee, waive in any material respect, or release or discharge any of its
rights or any of the obligations, duties or liabilities of any other party to
the Acquisition Agreements, or compromise or settle any right or any claim or
dispute with respect to any of its rights or any of the obligations, duties or
liabilities of any other party to the Acquisition Agreements. No such waiver,
release, discharge, compromise or settlement shall be effective without the
prior written consent of Assignee.
5. EVENTS OF DEFAULT
-----------------
All Obligations shall become immediately due and payable, without notice or
demand, at the option of Assignee, upon the occurrence of any Event of Default,
as such term is defined in the Duck Head Loan Agreement or the Delta Loan
Agreement (each an "Event of Default" hereunder).
6. RIGHTS AND REMEDIES
-------------------
(a) At any time an Event of Default exists or has occurred and is
continuing, Assignee shall have the absolute right to enforce, in its name, any
and all rights to indemnification or claim for damages or other relief or
remedies, whether at law or in equity, arising under or in connection with the
Acquisition Agreements, or otherwise and apply the proceeds thereof to the
Obligations in such order or manner as Assignee shall determine.
-4-
<PAGE>
(b) In order to effectuate the foregoing, each Assignor, for itself and its
respective successors and assigns, hereby constitutes and appoints Assignee and
each officer and employee thereof as its attorney-in-fact with power to assert
claims and commence and prosecute suit against any Person or to settle or
compromise any such claim or suit relating to any such right, claim, relief or
remedy, and to sign and file any and all papers required in connection therewith
and to take any and all other action which Assignee may, in its good faith
discretion, deem appropriate. Each Assignor hereby ratifies and approves all
acts which Assignee or any officer or employee thereof as attorney may do and
this power of attorney, being coupled with an interest, is irrevocable as long
as any of the Obligations remain outstanding.
(c) No failure to exercise, and no delay in exercising on the part of
Assignee any right, power or privilege under this Assignment, the Loan Agreement
or under any of the other Financing Agreements or other documents referred to
herein or therein shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder or thereunder
preclude any other or further exercise thereof or the exercise of any other
right, power and privilege. The rights and remedies of Assignee under this
Assignment, the other Financing Agreements or applicable law, are cumulative and
not exclusive and all such rights and remedies may be exercised alternatively,
successively or concurrently.
7. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW
------------------------------------------------------------
(a) The validity, interpretation and enforcement of this Assignment and the
other Financing Agreements and any dispute arising out of the relationship
between the parties hereto, whether in contract, tort, equity or otherwise,
shall be governed by the internal laws of the State of Georgia (without giving
effect to principles of conflicts of law).
(b) Assignor and Assignee irrevocably consent and submit to the
non-exclusive jurisdiction of the Superior Court of Fulton County, Georgia and
the United States District for the Northern District of Georgia and waive any
objection based on venue or forum non conveniens with respect to any action
instituted therein arising under this Assignment or any of the other Financing
Agreements or in any way connected or related or incidental to the dealings of
each Assignor and Assignee in respect of this Assignment or the other Financing
Agreements or the transactions related hereto or thereto, in each case whether
now existing or thereafter arising, and whether in contract, tort, equity or
otherwise, and agree that any dispute with respect to any such matters shall be
heard only in the courts described above (except that Assignee shall have the
right to bring any action or proceeding against any Assignor or its property in
the courts of any other jurisdiction which Assignee deems necessary or
appropriate in order to realize on any collateral granted to Assignee or to
otherwise enforce its rights against each Assignor or its property).
-5-
<PAGE>
(c) Each Assignor hereby waives personal service of any and all process
upon it and consents that all such service of process may be made by certified
mail (return receipt requested) directed to its address set forth herein and
service so made shall be deemed to be completed ten (10) days after the same
shall have been so deposited in the U.S. mails, or, at Assignee's option, by
service upon Assignor in any other manner provided under the rules of any such
courts. Within thirty (30) days after such service, such Assignor shall appear
in answer to such process, failing which such Assignor shall be deemed in
default and judgment may be entered by Assignee against such Assignor for the
amount of the claim and other relief requested.
(d) EACH ASSIGNOR AND ASSIGNEE HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF
ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS ASSIGNMENT
OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT TO THIS
ASSIGNMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED
HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. EACH ASSIGNOR AND ASSIGNEE
HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT EACH ASSIGNOR OR
ASSIGNEE MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS ASSIGNMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF SUCH ASSIGNOR AND ASSIGNEE TO THE
WAIVER OF THEIR RIGHTS TO TRIAL BY JURY.
8. MISCELLANEOUS
-------------
(a) All notices, requests and demands hereunder shall be in writing and
shall be deemed to have been duly given or made: if delivered in person,
immediately upon delivery; if by telex, telegram, or facsimile transmission,
immediately upon sending and upon confirmation of receipt; if by nationally
recognized overnight courier service with instructions to deliver the next
business day, one (1) business day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing. All notices, requests and
demands upon the parties are to be given to the following addresses (or to such
other address as any party may designate by notice in accordance with this
Section):
If to Assignors: DH Apparel Company, Inc.
1020-A Barrow Industrial Parkway
Winter, Georgia 30680
Attention: Chief Financial Officer
Delta Apparel, Inc.
3355 Breckinridge Boulevard
Suite 100
Duluth, Georgia 30096
Attention: Chief Financial Officer
-6-
<PAGE>
If to Assignee: Congress Financial Corporation
(Southern)
200 Galleria Parkway, Suite 1500
Atlanta, Georgia 30339
Attention: Portfolio Manger
(b) All references to the plural herein shall also mean the singular and to
the singular shall also mean the plural. All references to Assignor and Assignee
herein shall include their respective successors and assigns. All references to
the term "Person" or "person" herein shall mean any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code of
1986, as amended), limited liability company, limited liability corporation,
limited liability partnership, business trust, unincorporated association, joint
stock company, trust, joint venture or other entity or any government or any
agency instrumentality or political subdivision thereof.
(c) No provision hereof may be changed, waived, discharged or terminated
except by an instrument in writing signed by the party against whom enforcement
of the change, waiver, discharge or termination is sought.
(d) This Assignment shall be binding upon each Assignor and its successors
and assigns and inure to the benefit of and be enforceable by Assignee and its
successors and assigns.
(e) If any provision of this Assignment is held to be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate this
Assignment as a whole but this Assignment shall be construed as though it did
not contain the particular provision or provisions held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by law.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
-7-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this instrument to be executed
by persons duly authorized, as of the date first above written.
ASSIGNORS:
DH APPAREL COMPANY, INC.
By: /s/ K. Scott Grassmyer
-----------------------------
Title: Sr. Vice President & CFO
DELTA APPAREL, INC.
By: /s/ Herbert M. Mueller
------------------------------
Title: Vice President & CFO
ASSIGNEE:
CONGRESS FINANCIAL CORPORATION
(SOUTHERN)
By: /s/ Daniel Cott
--------------------------
Title: Executive Vice President
- 8 -
LOAN AND SECURITY AGREEMENT
by and between
CONGRESS FINANCIAL CORPORATION (SOUTHERN)
as Lender
and
DELTA APPAREL, INC.
as Borrower
Dated: May 16, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C> <C>
SECTION 1 DEFINITIONS .......................................................................1
SECTION 2 CREDIT FACILITIES ................................................................19
2.1 Revolving Loans ..................................................................19
2.2 Letter of Credit Accommodations ..................................................20
2.3 Term Loan ........................................................................23
SECTION 3 INTEREST AND FEES ................................................................23
3.1 Interest. ........................................................................23
3.2 Closing Fee ......... ............................................................25
3.3 Servicing Fee ....................................................................25
3.4 Unused Line Fee ..................................................................25
3.5 Changes in Laws and Increased Costs of Loans. ....................................25
SECTION 4 CONDITIONS PRECEDENT .............................................................27
4.1 Conditions Precedent to Initial Loans and Letter of Credit Accommodations ........27
4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations ............30
SECTION 5 GRANT OF SECURITY INTEREST .......................................................31
SECTION 6 COLLECTION AND ADMINISTRATION ....................................................32
6.1 Borrower's Loan Account ..........................................................32
6.2 Statements .......................................................................32
6.3 Collection of Accounts ...........................................................32
6.4 Payments .........................................................................33
6.5 Authorization to Make Loans ......................................................34
6.6 Use of Proceeds ..................................................................34
SECTION 7 COLLATERAL REPORTING AND COVENANTS ...............................................35
7.1 Collateral Reporting .............................................................35
7.2 Accounts Covenants ...............................................................35
7.3 Inventory Covenants ..............................................................37
7.4 Equipment and Real Property Covenants ............................................37
7.5 Power of Attorney ................................................................38
7.6 Right to Cure ....................................................................39
7.7 Access to Premises ...............................................................39
7.8 Bills of Lading and Other Documents of Title......................................40
(i)
<PAGE>
SECTION 8 REPRESENTATIONS AND WARRANTIES ...................................................40
8.1 Corporate Existence, Power and Authority; Subsidiaries............................40
8.2 Financial Statements; No Material Adverse Change. ................................41
8.3 Chief Executive Office; Collateral Locations. ....................................41
8.4 Priority of Liens; Title to Properties ...........................................41
8.5 Tax Returns ......................................................................41
8.6 Litigation .......................................................................42
8.7 Compliance with Other Agreements and Applicable Laws .............................42
8.8 Environmental Compliance .........................................................43
8.9 Employee Benefits. ...............................................................43
8.10 Bank Accounts ....................................................................44
8.11 Intellectual Property ............................................................44
8.12 Acquisition of Assets ............................................................45
8.13 Solvency .........................................................................45
8.14 Labor Disputes ...................................................................46
8.15 Corporate Name; Prior Transactions ...............................................46
8.16 Restrictions on Subsidiaries .....................................................46
8.17 Material Contracts ...............................................................46
8.18 Accuracy and Completeness of Information. ........................................46
8.19 Survival of Warranties; Cumulative ...............................................46
SECTION 9 AFFIRMATIVE AND NEGATIVE COVENANTS ...............................................47
9.1 Maintenance of Existence .........................................................47
9.2 New Collateral Locations .........................................................47
9.3 Compliance with Laws, Regulations, Etc. ..........................................47
9.4 Payment of Taxes and Claims ......................................................48
9.5 Insurance ........................................................................49
9.6 Financial Statements and Other Information .......................................49
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. .........................51
9.8 Encumbrances .....................................................................52
9.9 Indebtedness .....................................................................53
9.10 Loans, Investments, Guarantees, Etc. .............................................53
9.11 Dividends and Redemptions ........................................................55
9.12 Transactions with Affiliates .....................................................56
9.13 Additional Bank Accounts .........................................................57
9.14 Compliance with ERISA. ...........................................................57
9.15 End of Fiscal Years: Fiscal Quarters .............................................57
9.16 Change in Business................................................................57
9.17 Limitation of Restrictions Affecting Subsidiaries ................................57
9.18 Existing Real Property; After Acquired Real Property .............................58
9.19 Costs and Expenses ...............................................................59
9.20 Further Assurances ...............................................................59
9.21 Year 2000 Compliance .............................................................59
(ii)
<PAGE>
SECTION 10 EVENTS OF DEFAULT AND REMEDIES ...................................................60
10.1 Events of Default ................................................................60
10.2 Remedies .........................................................................62
SECTION 11 JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW.......................................................63
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver ............63
11.2 Waiver of Notices ................................................................65
11.3 Amendments and Waivers ...........................................................65
11.4 Waiver of Counterclaims ..........................................................65
11.5 Indemnification ..................................................................65
SECTION 12 TERM OF AGREEMENT; MISCELLANEOUS .................................................66
12.1 Term .............................................................................66
12.2 Interpretative Provisions ........................................................67
12.3 Notices ..........................................................................68
12.4 Partial Invalidity ...............................................................68
12.5 Successors .......................................................................68
12.6 Entire Agreement .................................................................69
</TABLE>
(iii)
<PAGE>
INDEX TO
EXHIBITS AND SCHEDULES
----------------------
Exhibit A Information Certificate
Exhibit B Applicable Margins for Interest Rate Calculation
Schedule 1.15 Customs Brokers
Schedule 1.30 Existing Letters of Credit
Schedule 1.31 Existing Real Property
Schedule 1.60 Permitted Holders
Schedule 8.2 Pro Forma Balance Sheet and Cash Flow Projections
Schedule 8.4 Existing Liens
Schedule 8.7 Permits
Schedule 8.8 Environmental Matters
Schedule 8.10 Bank Accounts
Schedule 8.11 Licensed Intellectual Property
Schedule 8.14 Labor Matters
Schedule 8.17 Material Contracts
Schedule 9.9 Existing Indebtedness
Schedule 9.10 Existing Loans, Advances and Guarantees
(i)
<PAGE>
LOAN AND SECURITY AGREEMENT
---------------------------
This Loan and Security Agreement dated May 16, 2000 is entered into by and
between Congress Financial Corporation (Southern), a Georgia corporation
("Lender") and Delta Apparel, Inc., a Georgia corporation ("Borrower").
W I T N E S S E T H:
--------------------
WHEREAS, Borrower has requested that Lender enter into certain financing
arrangements with Borrower pursuant to which Lender may make loans and provide
other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS
-----------
For purposes of this Agreement, the following terms shall have the
respective meanings given to them below:
1.1 "Accounts" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 "Adjusted Eurodollar Rate" shall mean, with respect to each Interest
Period for any Eurodollar Rate Loan, the rate per annum (rounded upwards, if
necessary, to the next one- sixteenth (1/16) of one (1%) percent) determined by
dividing (a) the Eurodollar Rate for such Interest Period by (b) a percentage
equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes hereof,
"Reserve Percentage" shall mean the reserve percentage, expressed as a decimal,
prescribed by any United States or foreign banking authority for determining the
reserve requirement which is or would be applicable to deposits of United States
dollars in a non-United States or an international banking office of Reference
Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate Loan made with
the proceeds of such deposit, whether or not the Reference Bank actually holds
or has made any such deposits or loans. The Adjusted Eurodollar Rate shall be
adjusted on and as of the effective day of any change in the Reserve Percentage.
1
<PAGE>
1.3 "Affiliate" shall mean, with respect to a specified Person, any other
Person (a) which directly or indirectly through one or more intermediaries
controls, or is controlled by, or is under common control with, such specified
person; (b) which beneficially owns or holds five (5%) percent or more of any
class of the Voting Stock or other equity interest of such specified person; or
(c) of which five (5%) percent or more of the Voting Stock or other equity
interest is beneficially owned or held by such specified person or a Subsidiary
of such specified person. For purposes of this definition, "control" (including,
with correlative meanings, the terms "controlling", "controlled by" and "under
common control with") when used with respect to any specified person shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through the
ownership of Voting Stock, by agreement or otherwise.
1.4 "Blocked Accounts" shall have the meaning set forth in Section 6.3
hereof.
1.5 "Borrowing Base" shall mean, at any time, the amount equal to:
(a) eighty-five (85%) percent of the Net Amount of Eligible Accounts, plus
(b) the lesser of: (i) fifty-five (55%) percent of the Value of Eligible
Inventory consisting of finished goods, raw materials consisting of raw cotton
and yarn for such finished goods, and finished yarn categorized as
work-in-process, or (ii) Inventory Loan Limit, less (c) any Reserves. For
purposes only of applying the sublimit on Revolving Loans based on Eligible
Inventory set forth clause (b)(ii) above, Lender may treat the then undrawn
amounts of outstanding Letter of Credit Accommodations for the purpose of
purchasing Eligible Inventory as Revolving Loans to the extent Lender is in
effect basing the issuance of the Letter of Credit Accommodations on the Value
of the Eligible Inventory being purchased with such Letter of Credit
Accommodations. In determining the actual amounts of such Letter of Credit
Accommodations to be so treated for purposes of the sublimit, the outstanding
Revolving Loans and Reserves shall be attributed first to any components of the
lending formulas set forth above that are not subject to such sublimit, before
being attributed to the components of the lending formulas subject to such
sublimit.
1.6 "Business Day" shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks are authorized or required to close under
the laws of the State of New York, the State of Georgia or the State of North
Carolina, and a day on which the Reference Bank and Lender are open for the
transaction of business, except that if a determination of a Business Day shall
relate to any Eurodollar Rate Loans, the term Business Day shall also exclude
any day on which banks are closed for dealings in dollar deposits in the London
interbank market or other applicable Eurodollar Rate market.
1.7 "Capital Expenditures" shall mean, with respect to any Person, all
expenditures made and liabilities incurred for the acquisition of assets which
are not, in accordance with GAAP, treated as expense items for such Person in
the year made or incurred or as a prepaid expense applicable to a future year or
years.
1.8 "Capital Leases" shall mean, as applied to any Person, any lease of (or
any agreement conveying the right to use) any property (whether real, personal
or mixed) by such
2
<PAGE>
Person as lessee which in accordance with GAAP, is required to be reflected as a
liability on the balance sheet of such Person.
1.9 "Capital Stock" shall mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's capital stock, partnership interests or limited liability company
interests at any time outstanding, and any and all rights, warrants or options
exchangeable for or convertible into such capital stock or other interests (but
excluding any debt security that is exchangeable for or convertible into such
capital stock).
1.10 "Cash Equivalents" shall mean, at any time, (a) any evidence of
Indebtedness with a maturity date of one hundred eighty (180) days or less
issued or directly and fully guaranteed or insured by the United States of
America of any agency or instrumentality thereof; provided, that, the full faith
and credit of the United States of America is pledged in support thereof; (b)
certificates of deposit or bankers' acceptances with a maturity of one hundred
eighty (180) days or less of any financial institution that is a member of the
Federal Reserve System having combined capital and surplus and undivided profits
of not less than $250,000,000; (c) commercial paper (including variable rate
demand notes) with a maturity of one hundred eighty (180) days or less issued by
a corporation (except an Affiliate of Borrower) organized under the laws of any
State of the United States of America or the District of Columbia and rated at
least A-1 by Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc. or at least P-1 by Moody's Investors Service, Inc.; (d)
repurchase obligations with a term of not more than thirty (30) days for
underlying securities of the types described in clause (a) above entered into
with any financial institution having combined capital and surplus and undivided
profits of not less than $250,000,000; (e) repurchase agreements and reverse
repurchase agreements relating to marketable direct obligations issued or
unconditionally guaranteed by the United States of America or issued by any
governmental agency thereof and backed by the full faith and credit to the
United States of America, in each case maturing within one hundred eighty (180)
days or less from the date of acquisition; provided, that, the terms of such
agreements comply with the guidelines set forth in the Federal Financial
Agreements of Depository Institutions with Securities Dealers and Others, as
adopted by the Comptroller of the Currency on October 31, 1985; and (f)
investments in money market funds and mutual funds which invest substantially
all of their assets in securities of the types described in clauses (a) through
(e) above.
1.11 "Change of Control" shall mean (a) the transfer (in one transaction or
a series of transactions) of all or substantially all of the assets of Borrower
to any Person or group (as such term is used in Section 13(d)(3) of the Exchange
Act); (b) the liquidation or dissolution of Borrower or the adoption of a plan
by the stockholders of Borrower relating to the dissolution or liquidation of
Borrower; (c) the acquisition by any Person or group (as such term is used in
Section 13(d)(3) of the Exchange Act), except for one or more Permitted Holders,
of beneficial ownership, directly or indirectly, of fifty (50%) percent or more
of the voting power of the total outstanding Voting Stock of Borrower or the
Board of Directors of Borrower; or (d) during any period of two (2) consecutive
years, individuals who at the beginning of such period constituted the Board of
Directors of Borrower (together with any new directors who have been appointed
by any Permitted Holder, or whose nomination for election by the stockholders of
Borrower, as the
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case may be, was approved by a vote of at least sixty-six and two-thirds (66
2/3%) percent of the directors then still in office who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of Borrower then still in office.
1.12 "Code" shall mean the Internal Revenue Code of 1986, together with all
rules, regulations and interpretations thereunder or related thereto.
1.13 "Collateral" shall have the meaning set forth in Section 5 hereof.
1.14 "Collateral Access Agreement" shall mean an agreement in writing, in
form and substance satisfactory to Lender, from any lessor of premises to
Borrower, or any other person to whom any Collateral (including Inventory,
Equipment, bills of lading or other documents of title) is consigned or who has
custody, control or possession of any such Collateral or is otherwise the owner
or operator of any premises on which any of such Collateral is located, pursuant
to which such lessor, consignee or other person, inter alia, acknowledges the
first priority security interest of Lender in such Collateral, agrees to waive
any and all claims such lessor, consignee or other person may, at any time, have
against such Collateral, whether for processing, storage or otherwise, and
agrees to permit Lender access to, and the right to remain on, the premises of
such lessor, consignee or other person so as to exercise Lender's rights and
remedies and otherwise deal with such Collateral and in the case of any person
who at any time has custody, control or possession of any bills of lading or
other documents of title, agrees to hold such bills of lading or other documents
as bailee for Lender and to follow all instructions of Lender with respect
thereto.
1.15 "Customs Brokers" shall mean the persons listed on Schedule 1.15
hereto or such other person as may be selected by Borrower after the date hereof
and after written notice by Borrower to Lender who is reasonably acceptable to
Lender, provided, that, as to each such person (including those listed on such
Schedule), Borrower has used reasonable efforts to obtain a Collateral Access
Agreement duly authorized, executed and delivered by such person.
1.16 "Distribution Agreements" shall mean, individually and collectively,
(a) the Distribution Agreement, dated as of March 15, 2000 by and among
Woodside, DH Apparel Company, Inc. and Borrower (the "DWI Distribution
Agreement") and (b) Deed, dated as of the date hereof, from Delta Mills, Inc. to
Borrower, with respect to the real property located in Edgefield, South
Carolina, the Bill of Sale, Assignment and Assumption Agreement, dated the date
hereof, made by Delta Mills, Inc., as Seller and Borrower, as Purchaser, and the
Agreement for the Purchase and Sale of Property dated April 1, 2000, by and
between Delta Mills, Inc., as Seller and Borrower, as Buyer, and (c) all bills
of sale, quitclaim deeds, assignment and assumption agreements and such other
instruments of transfer as are referred to in the agreements described in clause
(a) and (b) above and all side letters with respect thereto, and all agreements,
documents and instruments executed and/or delivered in connection therewith, as
all of the foregoing now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced; provided, that, the term
"Distribution Agreements" as used herein shall not include any of the "Financing
Agreements" as such term is defined herein.
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1.17 "EBITDA" shall mean, as to any Person, with respect to any period, an
amount equal to: (a) the Net Income of such Person and its Subsidiaries for such
period on a consolidated basis determined in accordance with GAAP, plus
depreciation, amortization and other non-cash charges (including, but not
limited to, imputed interest and deferred compensation) for such period (to the
extent deducted in the computation of Net Income), all in accordance with GAAP,
plus the Interest Expense for such period (to the extent deducted in the
computation of Net Income), plus charges for Federal, Provincial, State,
district, municipal, local and foreign income taxes.
1.18 "Eligible Accounts" shall mean Accounts created by Borrower which are
and continue to be acceptable to Lender based on the criteria set forth below.
In general, Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and bona fide sale and delivery of
goods by Borrower or rendition of services by Borrower in the ordinary course of
its business which transactions are completed in accordance with the terms and
provisions contained in any documents related thereto;
(b) such Accounts are not unpaid more than the earlier of (i) sixty (60)
days after the original due date or for them (ii) one hundred twenty (120) days
after the date of the original invoice for them (or one hundred fifty (150) days
after the date of the original invoice for them for certain account debtors of
Borrower which are pre-approved by Lender, on terms and conditions acceptable to
Lender);
(c) such Accounts comply with the terms and conditions contained in Section
7.2(c) of this Agreement;
(d) such Accounts do not arise from sales on consignment, guaranteed sale,
sale and return, sale on approval, or other terms under which payment by the
account debtor may be conditional or contingent;
(e) the chief executive office of the account debtor with respect to such
Accounts is located in the United States of America or Canada (provided, that,
at any time promptly upon Lender's request, Borrower shall execute and deliver,
or cause to be executed and delivered, such other agreements, documents and
instruments as may be required by Lender to perfect the security interests of
Lender in those Accounts of an account debtor with its chief executive office or
principal place of business in Canada in accordance with the applicable laws of
the Province of Canada in which such chief executive office or principal place
of business is located and take or cause to be taken such other and further
actions as Lender may request to enable Lender as secured party with respect
thereto to collect such Accounts under the applicable Federal or Provincial laws
of Canada) or, at Lender's option, if the chief executive office and principal
place of business of the account debtor with respect to such Accounts is located
other than in the United States of America or Canada, then if either: (i) the
account debtor has delivered to Borrower an irrevocable letter of credit issued
or confirmed by a bank satisfactory to Lender and payable only in the United
States of America and in U.S. dollars, sufficient to cover such
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Account, in form and substance satisfactory to Lender and if required by Lender,
the original of such letter of credit has been delivered to Lender or Lender's
agent and the issuer thereof notified of the assignment of the proceeds of such
letter of credit to Lender, or (ii) such Account is subject to credit insurance
payable to Lender issued by an insurer and on terms and in an amount acceptable
to Lender, or (iii) such Account is otherwise acceptable in all respects to
Lender (subject to such lending formula with respect thereto as Lender may
determine);
(f) such Accounts do not consist of progress billings (such that the
obligation of the account debtors with respect to such Accounts is conditioned
upon Borrower's satisfactory completion of any further performance under the
agreement giving rise thereto), bill and hold invoices or retainage invoices,
except as to bill and hold invoices, if Lender shall have received an agreement
in writing from the account debtor, in form and substance satisfactory to
Lender, confirming the unconditional obligation of the account debtor to take
the goods related thereto and pay such invoice;
(g) the account debtor with respect to such Accounts has not asserted a
counterclaim, defense or dispute and does not have, and does not engage in
transactions which may give rise to any right of setoff or recoupment against
such Accounts (but the portion of the Accounts of such account debtor in excess
of the amount at any time and from time to time owed by Borrower to such account
debtor or claimed owed by such account debtor may be deemed Eligible Accounts);
(h) there are no facts, events or occurrences which would impair the
validity, enforceability or collectability of such Accounts or reduce the amount
payable or delay payment thereunder;
(i) such Accounts are subject to the first priority, valid and perfected
security interest of Lender and any goods giving rise thereto are not, and were
not at the time of the sale thereof, subject to any liens except those permitted
in this Agreement;
(j) neither the account debtor nor any officer or employee of the account
debtor with respect to such Accounts is an officer, employee, agent or other
Affiliate of Borrower;
(k) the account debtors with respect to such Accounts are not any foreign
government, the United States of America, any State, political subdivision,
department, agency or instrumentality thereof, unless, if the account debtor is
the United States of America, any State, political subdivision, department,
agency or instrumentality thereof, upon Lender's request, the Federal Assignment
of Claims Act of 1940, as amended or any similar State or local law, if
applicable, has been complied with in a manner satisfactory to Lender;
(l) there are no proceedings or actions which are threatened or pending
against the account debtors with respect to such Accounts which might result in
any material adverse change in any such account debtor's financial condition;
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(m) such Accounts of a single account debtor or its affiliates do not
constitute more than fifteen (15%) percent of all otherwise Eligible Accounts
(but the portion of the Accounts not in excess of such percentage may be deemed
Eligible Accounts);
(n) such Accounts are not owed by an account debtor who has Accounts unpaid
more than the earlier of (i) sixty (60) days after the original due date or for
them (ii) one hundred twenty (120) days after the original invoice date for them
(or one hundred fifty (150) days after the date of the original invoice for them
for certain account debtors of Borrower which are pre- approved by Lender, on
terms and conditions acceptable to Lender) which constitute more than fifty
(50%) percent of the total Accounts of such account debtor;
(o) the account debtor is not located in a state requiring the filing of a
Notice of Business Activities Report or similar report in order to permit
Borrower to seek judicial enforcement in such State of payment of such Account,
unless Borrower has qualified to do business in such state or has filed a Notice
of Business Activities Report or equivalent report for the then current year or
such failure to file and inability to seek judicial enforcement is capable of
being remedied without any material delay or material cost;
(p) such Accounts are owed by account debtors whose total indebtedness to
Borrower does not exceed the credit limit with respect to such account debtors
(as determined by Borrower from time to time substantially consistent with its
current practices as of the date hereof) by more than twenty (20%) percent and
as is reasonably acceptable to Lender (but the portion of the Accounts not in
excess of such credit limit may be deemed Eligible Accounts); and
(q) such Accounts are owed by account debtors deemed creditworthy at all
times by Borrower consistent with its current practice and who are reasonably
acceptable to Lender.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith based on an event, condition or other
circumstance arising after the date hereof, or existing on the date hereof to
the extent Lender has no written notice thereof from Borrower, which adversely
affects or could reasonably be expected to adversely affect the Accounts in the
good faith determination of Lender. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.19 "Eligible Inventory" shall mean Inventory consisting of finished goods
held for resale in the ordinary course of the business of Borrower, raw
materials for such finished goods and finished yarn categorized as
work-in-process, which are acceptable to Lender based on the criteria set forth
below. In general, Eligible Inventory shall not include (a) work-in-process
(other than finished yarn); (b) raw materials other than yarn and raw cotton;
(c) spare parts for equipment; (d) packaging and shipping materials; (e)
supplies used or consumed in Borrower's business; (f) Inventory at premises
other than those owned and controlled by Borrower, except any Inventory which
would otherwise be deemed Eligible Inventory at locations in the United States
of America which are not owned and operated by Borrower may nevertheless be
considered Eligible Inventory: (i) as to locations which are leased by Borrower
if Lender shall have received a Collateral Access Agreement from the owner and
lessor of such location, duly
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authorized, executed and delivered by such owner and lessor, except that
notwithstanding that Lender shall not have received such an agreement for a
particular leased location, Lender may consider Inventory at such leased
location which would otherwise be Eligible Inventory to be Eligible Inventory
and in such event, Lender may at any time establish such Reserves as Lender may
determine in respect of amounts at any time payable by Borrower to the owner or
lessor of such location, without limiting any other rights and remedies of
Lender under this Agreement or under the other Financing Agreements with respect
to the establishment of Reserves or otherwise and (ii) as to premises of third
parties (including consignees and processors), Lender shall have received a
Collateral Access Agreement duly authorized, executed and delivered by the owner
and operator of such premises (except that notwithstanding that Lender shall not
have received such an agreement as to a particular third party location, Lender
may consider Inventory at such location which would otherwise be Eligible
Inventory to be Eligible Inventory and in such event, Lender may at any time
establish such Reserves as Lender may determine in respect of amounts at any
time payable by Borrower to such third party, without limiting any other rights
or remedies of Lender under this Agreement or under the other Financing
Agreements with respect to the establishment of Reserves or otherwise), and in
addition, if required by Lender, as to premises of third parties where assets of
Borrower are located: (A) the owner and operator executes appropriate UCC-1
financing statements in favor of Borrower, which are duly assigned to Lender and
(B) any secured lender to the owner and operator is properly notified of the
first priority lien on such Inventory of Lender; (g) Inventory located outside
the United States of America shall only be Eligible Inventory if (i) it is in
transit to either the premises of a Customs Broker in the United States or
premises of Borrower in the United States and as to premises of a Customs Broker
or premises which are not owned and controlled by Borrower only if Lender has
received a Collateral Access Agreement duly authorized, executed and delivered
by such Customs Broker or the owner, lessor and operator of such other premises,
as the case may be, (ii) Lender has a first priority perfected security interest
in and control and possession of all originals of documents of title with
respect to such Inventory, (iii) Lender has received a Collateral Access
Agreement from the Customs Broker dealing with such Inventory, duly authorized,
executed and delivered by such person, and such agreement is in full force and
effect, binding upon such person and such person has complied with the terms
thereof, (iv) Lender has received (A) a copy of the certificate of marine cargo
insurance in connection therewith in which it has been named as an additional
insured and loss payee in a manner acceptable to Lender and (B) a copy of the
invoice and manifest with respect thereto, and (v) such Inventory is not subject
to any Letter of Credit Accommodation; (h) Inventory subject to a security
interest or lien in favor of any person other than Lender, except those
permitted in this Agreement; (i) bill and hold goods; (j) Inventory which is not
subject to the first priority, valid and perfected security interest of Lender;
(k) damaged and/or defective Inventory which is unsaleable or which any Borrower
has not marked down to its realizable value; (l) Inventory purchased or sold on
consignment; (m) samples; and (n) Inventory to be returned to vendors. General
criteria for Eligible Inventory may be established and revised from time to time
by Lender in good faith based on an event, condition or other circumstance
arising after the date hereof, or existing on the date hereof to the extent
Lender has no written notice thereof from Borrower, which adversely affects or
could reasonably be expected to adversely affect the Inventory in the good faith
determination of Lender. Any Inventory which is not Eligible Inventory shall
nevertheless be part of the Collateral.
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1.20 "Environmental Laws" shall mean all foreign, Federal, State and local
laws (including common law), legislation, rules, codes, licenses, permits
(including any conditions imposed therein), authorizations, judicial or
administrative decisions, injunctions or agreements between Borrower and any
Governmental Authority, (a) relating to pollution and the protection,
preservation or restoration of the environment (including air, water vapor,
surface water, ground water, drinking water, drinking water supply, surface
land, subsurface land, plant and animal life or any other natural resource), or
to human health or safety, (b) relating to the exposure to, or the use, storage,
recycling, treatment, generation, manufacture, processing, distribution,
transportation, handling, labeling, production, release or disposal, or
threatened release, of Hazardous Materials, or (c) relating to all laws with
regard to recordkeeping, notification, disclosure and reporting requirements
respecting Hazardous Materials. The term "Environmental Laws" includes (i) the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, the Federal Superfund Amendments and Reauthorization Act, the Federal
Water Pollution Control Act of 1972, the Federal Clean Water Act, the Federal
Clean Air Act, the Federal Resource Conservation and Recovery Act of 1976
(including the Hazardous and Solid Waste Amendments thereto), the Federal Solid
Waste Disposal and the Federal Toxic Substances Control Act, the Federal
Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water
Act of 1974, (ii) applicable state counterparts to such laws, and (iii) any
common law or equitable doctrine that may impose liability or obligations for
injuries or damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Materials.
1.21 "Equipment" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.22 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, together with all rules, regulations and interpretations
thereunder or related thereto.
1.23 "ERISA Affiliate" shall mean any person required to be aggregated with
Borrower or any of its Subsidiaries under Sections 414(b), 414(c), 414(m) or
414(o) of the Code.
1.24 "ERISA Event" shall mean (a) any "reportable event", as defined in
Section 4043 of ERISA or the regulations issued thereunder, with respect to a
Plan; (b) the adoption of any amendment to a Plan that would require the
provision of security pursuant to Section 401(a)(29) of the Code or Section 307
of ERISA; (c) the existence with respect to any Plan of an "accumulated funding
deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA),
whether or not waived; (d) the filing pursuant to Section 412 of the Code or
Section 303(d) of ERISA of an application for a waiver of the minimum funding
standard with respect to any Plan; (e) the occurrence of a "prohibited
transaction" with respect to which Borrower or any of its Subsidiaries is a
"disqualified person" (within the meaning of Section 4975 of the Code) or with
respect to which Borrower or any of its Subsidiaries could otherwise be liable;
(f) a complete or partial withdrawal by the Borrower or any ERISA Affiliate from
a Multiemployer
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Plan or a cessation of operations which is treated as such a withdrawal or
notification that a Multiemployer Plan is in reorganization; (g) the filing of a
notice of intent to terminate, the treatment of a Plan amendment as a
termination under Section 4041 or 4041A of ERISA, or the commencement of
proceedings by the Pension Benefit Guaranty Corporation to terminate a Plan or
Multiemployer Plan; (h) an event or condition which might reasonably be expected
to constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan or Multiemployer Plan; (i) the
imposition of any liability under Title IV of ERISA, other than the Pension
Benefit Guaranty Corporation premiums due but not delinquent under Section 4007
of ERISA, upon Borrower or any ERISA Affiliate; and (j) any other event or
condition with respect to a Plan or Multiemployer Plan or any Plan subject to
Title IV of ERISA maintained, or contributed to, by any ERISA Affiliate that
could reasonably be expected to result in liability of Borrower.
1.25 "Eurodollar Rate" shall mean with respect to the Interest Period for a
Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic
average of the rates of interest per annum (rounded upwards, if necessary, to
the next one-sixteenth (1/16) of one (1%) percent) at which Reference Bank is
offered deposits of United States dollars in the London interbank market (or
other Eurodollar Rate market selected by Borrower and approved by Lender) on or
about 9:00 a.m. (New York time) two (2) Business Days prior to the commencement
of such Interest Period in amounts substantially equal to the principal amount
of the Eurodollar Rate Loans requested by and available to Borrower in
accordance with this Agreement, with a maturity of comparable duration to the
Interest Period selected by Borrower.
1.26 "Eurodollar Rate Loans" shall mean any Loans or portion thereof on
which interest is payable based on the Adjusted Eurodollar Rate in accordance
with the terms hereof.
1.27 "Event of Default" shall mean the occurrence or existence of any event
or condition described in Section 10.1 hereof.
1.28 "Excess Availability" shall mean the amount, as determined by Lender,
calculated at any time, equal to: (a) the lesser of: (i) the Borrowing Base and
(ii) the Revolving Loan Limit, minus (b) the sum of: (i) the amount of all then
outstanding and unpaid Obligations (but not including for this purpose the then
outstanding principal amount of the Term Loan), plus (ii) the aggregate amount
of all then outstanding and unpaid trade payables and other obligations of
Borrower which are more than sixty (60) days past due as of such time, plus
(iii) the amount of checks issued by Borrower to pay trade payables and other
obligations which are more than sixty (60) days past due as of such time, but
not yet sent.
1.29 "Exchange Act" shall mean the Securities Exchange Act of 1934,
together with all rules, regulations and interpretations thereunder or related
thereto.
1.30 "Existing Letters of Credit" shall mean the letters of credit issued
for the account of Borrower listed on Schedule 1.30 hereto.
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1.31 "Existing Real Property" shall mean all now owned real property of
Borrower, including leasehold interests, together with the buildings, structures
and other improvements located thereon, and all licenses, easements and
appurtenances relating thereto, wherever located, as more particularly described
on Schedule 1.31 hereto but not including the Real Property subject to the
Mortgages.
1.32 "Financing Agreements" shall mean, collectively, this Agreement and
all notes, guarantees, security agreements and other agreements, documents and
instruments now or at any time hereafter executed and/or delivered by Borrower
or any Obligor in connection with this Agreement.
1.33 "Fixed Charge Coverage Ratio" shall mean, with respect to Borrower and
its Subsidiaries, on a consolidated basis, for any period of determination, the
ratio of (a) EBITDA during such period to (b) Fixed Charges of Borrower and its
Subsidiaries for the same period.
1.34 "Fixed Charges" for any period shall mean the sum of, without
duplication, (a) all Interest Expense, (b) all Capital Expenditures, and (c) all
regularly scheduled (as determined at the beginning of the respective period)
principal payments of Indebtedness for borrowed money and Indebtedness with
respect to Capital Leases (and without duplicating in items (a) and (c) of this
definition, the interest component with respect to Indebtedness under Capital
Leases).
1.35 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied.
1.36 "Governmental Authority" shall mean any nation or government, any
state, province, or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled, through stock or capital ownership or otherwise, by any of the
foregoing.
1.37 "Hazardous Materials" shall mean any hazardous, toxic or dangerous
substances, materials and wastes, including hydrocarbons (including naturally
occurring or man-made petroleum and hydrocarbons), flammable explosives,
asbestos, urea formaldehyde insulation, radioactive materials, biological
substances, polychlorinated biphenyls, pesticides, herbicides and any other kind
and/or type of pollutants or contaminants (including materials which include
hazardous constituents), sewage, sludge, industrial slag, solvents and/or any
other similar substances, materials, or wastes and including any other
substances, materials or wastes that are or become regulated under any
Environmental Law (including any that are or become classified as hazardous or
toxic under any Environmental Law).
1.38 "Indebtedness" shall mean, with respect to any Person, any liability,
whether or not contingent, (a) in respect of borrowed money (whether or not the
recourse of the lender is to the
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whole of the assets of such Person or only to a portion thereof) or evidenced by
bonds, notes, debentures or similar instruments; (b) representing the balance
deferred and unpaid of the purchase price of any property or services (except
any such balance that constitutes an account payable to a trade creditor
(whether or not an Affiliate) created, incurred, assumed or guaranteed by such
Person in the ordinary course of business of such Person in connection with
obtaining goods, materials or services that is not overdue by more than ninety
(90) days, unless the trade payable is being contested in good faith); (c) all
obligations as lessee under leases which have been, or should be, in accordance
with GAAP recorded as Capital Leases; (d) any contractual obligation, contingent
or otherwise, of such Person to pay or be liable for the payment of any
indebtedness described in this definition of another Person, including, without
limitation, any such indebtedness, directly or indirectly guaranteed, or any
agreement to purchase, repurchase, or otherwise acquire such indebtedness,
obligation or liability or any security therefor, or to provide funds for the
payment or discharge thereof, or to maintain solvency, assets, level of income,
or other financial condition; (e) all obligations with respect to redeemable
stock and redemption or repurchase obligations under any Capital Stock or other
equity securities issued by such Person; (f) all reimbursement obligations and
other liabilities of such Person with respect to surety bonds (whether bid,
performance or otherwise), letters of credit, banker's acceptances or similar
documents or instruments issued for such Person's account; and (g) all
indebtedness of such Person in respect of indebtedness of another Person for
borrowed money or indebtedness of another Person otherwise described in this
definition which is secured by any consensual lien, security interest,
collateral assignment, conditional sale, mortgage, deed of trust, or other
encumbrance on any asset of such Person, whether or not such obligations,
liabilities or indebtedness are assumed by or are a personal liability of such
Person, all as of such time.
1.39 "Information Certificate" shall mean the Information Certificate of
Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
1.40 "Intellectual Property" shall mean Borrower's now owned and hereafter
arising or acquired: patents, patent rights, patent applications, copyrights,
works which are the subject matter of copyrights, copyright registrations,
trademarks, trade names, trade styles, trademark and service mark applications,
and licenses and rights to use any of the foregoing; all extensions, renewals,
reissues, divisions, continuations, and continuations-in-part of any of the
foregoing; all rights to sue for past, present and future infringement of any of
the foregoing; inventions, trade secrets, formulae, processes, compounds,
drawings, designs, blueprints, surveys, reports, manuals, and operating
standards; goodwill; customer and other lists in whatever form maintained; and
trade secret rights, copyright rights, rights in works of authorship, and
contract rights relating to computer software programs, in whatever form created
or maintained.
1.41 "Interest Expense" shall mean, for any period, as to any Person, all
of the following as determined in accordance with GAAP: (a) total interest
expense, whether paid or accrued during such period (including the interest
component of Capital Leases for such period), including, without limitation, all
bank fees, commissions, discounts and other fees and charges
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owed with respect to letters of credit (but excluding amortization of discount
and amortization of deferred financing fees paid in cash in connection with the
transactions contemplated hereby, interest paid in property other than cash and
any other interest expense not payable in cash), minus (b) any net payments
received during such period as interest income received in respect of its
investments in cash.
1.42 "Interest Period" shall mean for any Eurodollar Rate Loan, a period of
approximately one (1), two (2), or three (3) months duration as Borrower may
elect, the exact duration to be determined in accordance with the customary
practice in the applicable Eurodollar Rate market; provided, that, Borrower may
not elect an Interest Period which will end after the last day of the
then-current term of this Agreement.
1.43 "Interest Rate" shall mean:
(a) Subject to clauses (b) and (c) of this definition below: as to Prime
Rate Loans, the Prime Rate and, as to Eurodollar Rate Loans, a rate of two
percent per annum in excess of the Adjusted Eurodollar Rate (based on the
Eurodollar Rate applicable for the Interest Period selected by Borrower as in
effect two (2) Business Days after the date of receipt by Lender of the request
of Borrower for such Eurodollar Rate Loans in accordance with the terms hereof,
whether such rate is higher or lower than any rate previously quoted to
Borrower);
(b) Subject to clause (c) below, effective as of the first day of the month
after Lender's receipt of the financial statements required to be delivered to
Lender pursuant to Section 9.6(a)(ii) hereof in respect of the fiscal quarter
ending June 30, 2000, the Interest Rate payable by Borrower shall be increased
or decreased, as the case may be, to the rate equal to the applicable margin set
forth in Exhibit B hereto, on a per annum basis, in excess of the Prime Rate as
to Prime Rate Loans, and in excess of the Adjusted Eurodollar Rate as to
Eurodollar Rate Loans, in each case, based on either (i) the quarterly average
of the Excess Availability of Borrower for the immediately preceding full fiscal
quarter or (ii) Borrower's Fixed Charge Coverage Ratio, calculated on a
quarterly basis, for the immediately preceding four (4) consecutive fiscal
quarters of Borrower, ending June 30, 2000 (except that for purposes of
calculating the Fixed Charge Coverage Ratio for the period ending June 30, 2000:
(A) the Fixed Charge Coverage Ratio shall be calculated on a fiscal year to date
basis as of July 1, 1999, and (B) the Interest Expense paid to Lender in respect
of the Obligations from the date of closing to June 30, 2000 shall be calculated
on an annualized basis) as calculated by Lender in good faith.
(c) Notwithstanding anything to the contrary contained in clauses (a) and
(b) above, the applicable margin otherwise used to calculate the Interest Rate
shall be the highest percentage set forth on Exhibit B hereto for each category
of Loans (without regard to the amount of Excess Availability or Fixed Charge
Coverage Ratio) plus two (2%) percent per annum, at Lender's option, without
notice, (i) either (A) for the period on and after the date of termination or
non- renewal hereof until such time as all Obligations are indefeasibly paid and
satisfied in full, or (B) for the period from and after the date of the
occurrence of any Event of Default, and for so long as such Event of Default is
continuing as determined by Lender and (ii) on the Revolving Loans at any time
outstanding in excess of the amounts available to Borrower under Section 2
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(whether or not such excess(es) arise or are made with or without Lender's
knowledge or consent and whether made before or after an Event of Default).
1.44 "Inventory" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.45 "Inventory Loan Limit" shall mean $15,000,000, provided, that, in the
event Lender determines that the number of days of the turnover of the Inventory
for any period has not materially changed, the Inventory Loan Limit shall be (i)
$18,000,000 for the period commencing July 1, 2001 through and including June
30, 2002, and (ii) $20,000,000 for the period commencing July 1, 2002 and at all
times thereafter.
1.46 "Letter of Credit Accommodations" shall mean the letters of credit,
merchandise purchase or other guaranties which are from time to time either (a)
issued or opened by Lender for the account of Borrower or any Obligor or (b)
with respect to which Lender has agreed to indemnify the issuer or guaranteed to
the issuer the performance by Borrower of its obligations to such issuer
(including without limitation, the Existing Letters of Credit).
1.47 "Loans" shall mean the Revolving Loans and the Term Loan.
1.48 "Material Contract" shall mean (a) any contract or other agreement
(other than the Financing Agreements), written or oral, of Borrower involving
monetary liability of or to any Person in an amount in excess of $1,000,000 in
any fiscal year and (b) any other contract or other agreement (other than the
Financing Agreements), whether written or oral, to which Borrower is a party as
to which the breach, nonperformance, cancellation or failure to renew by any
party thereto would have a material adverse effect on the business, assets,
condition (financial or otherwise) or results of operations or prospects of
Borrower or the validity or enforceability of this Agreement, any of the other
Financing Agreements, or any of the rights and remedies of Lender hereunder or
thereunder.
1.49 "Maximum Credit" shall mean the amount of $35,000,000 subject to
increase as set forth in Section 2.1(d) hereof.
1.50 "Maximum Interest Rate" shall mean the maximum non-usurious rate of
interest under applicable Federal or State law as in effect from time to time
that may be contracted for, taken, reserved, charged or received in respect of
the indebtedness of Borrower to Lender, or to the extent that at any time such
applicable law may thereafter permit a higher maximum non- usurious rate of
interest, then such higher rate. Notwithstanding any other provision hereof, the
Maximum Interest Rate shall be calculated on a daily basis (computed on the
actual number of days elapsed over a year of three hundred sixty-five (365) or
three hundred sixty-six (366) days, as the case may be).
1.51 "Mortgages" shall mean, individually and collectively, each of the
following: (a) the Deed of Trust and Security Agreement, dated of even date
herewith, by Borrower in favor of
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Lender with respect to the Real Property and related assets of Borrower located
in Maiden, North Carolina, (b) the Deed of Trust and Security Agreement, dated
of even date herewith, by Borrower in favor of Lender with respect to the Real
Property and related assets of Borrower located in Knoxville, Tennessee, and (c)
the Open-End Mortgage and Security Agreement, dated of even date herewith, by
Borrower in favor of Lender with respect to the Real Property and related assets
of Borrower located in Edgefield, South Carolina.
1.52 "Multiemployer Plan" shall mean a "multi-employer plan" as defined in
Section 4001(a)(3) of ERISA which is or was at any time during the current year
or the immediately preceding six (6) years contributed to by Borrower or any
ERISA Affiliate.
1.53 "Net Amount of Eligible Accounts" shall mean the gross amount of
Eligible Accounts less (a) sales, excise or similar taxes included in the amount
thereof and (b) returns, discounts, claims, credits and allowances of any nature
at any time issued, owing, granted, outstanding, available or claimed with
respect thereto.
1.54 "Net Income" shall mean, with respect to any Person, for any period,
the aggregate of the net income (loss) of such Person and its Subsidiaries, on a
consolidated basis, for such period (excluding to the extent included therein
any extraordinary, one-time or non-recurring gains) after deducting all charges
which should be deducted before arriving at the net income (loss) for such
period and after deducting the Provision for Taxes for such period, all as
determined in accordance with GAAP; provided, that, (a) the net income of any
Person that is not a wholly-owned Subsidiary or that is accounted for by the
equity method of accounting shall be included only to the extent of the amount
of dividends or distributions paid or payable to such Person or a wholly-owned
Subsidiary of such Person; (b) the effect of any change in accounting principles
adopted by such Person or its Subsidiaries after the date hereof shall be
excluded; and (c) the net income (if positive) of any wholly-owned Subsidiary to
the extent that the declaration or payment of dividends or similar distributions
by such wholly-owned Subsidiary to such Person or to any other wholly-owned
subsidiary of such Person is not at the time permitted by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to such wholly-owned Subsidiary shall
be excluded. For the purpose of this definition, net income excludes any gain
(but not loss) together with any related Provision for Taxes for such gain (but
not loss) realized upon the sale or other disposition of any assets that are not
sold in the ordinary course of business (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or of any Capital
Stock of such Person or a Subsidiary of such Person and any net income realized
as a result of changes in accounting principles or the application thereof to
such Person.
1.55 "Net Proceeds" shall mean the aggregate cash proceeds received by
Borrower, or any of its Subsidiaries in respect of any asset sale permitted
under Section 9.7 hereof, net of the direct costs relating to such asset sale
(including, without limitation, legal, accounting and investment banking fees,
and sales commissions) and any relocation expenses incurred as a result thereof,
taxes paid or payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements), amounts
applied to the repayment of indebtedness secured by a lien on the asset or
assets that are the subject of such asset sale and any
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other indebtedness required to be repaid in connection with such transaction and
any reserve for adjustment in respect of the sale price of such asset or assets.
Net Proceeds shall exclude any non-cash proceeds received from any asset sale,
but shall include such proceeds when and as converted by Borrower or any
Subsidiary of Borrower to cash.
1.56 "Obligations" shall mean any and all Revolving Loans, the Term Loan,
Letter of Credit Accommodations and all other obligations, liabilities and
indebtedness of every kind, nature and description owing by Borrower to Lender
and/or its affiliates, including principal, interest, charges, fees, costs and
expenses, however evidenced, whether as principal, surety, endorser, guarantor
or otherwise, whether arising under this Agreement or otherwise, whether now
existing or hereafter arising, whether arising before, during or after the
initial or any renewal term of this Agreement or after the commencement of any
case with respect to Borrower under the United States Bankruptcy Code or any
similar statute (including the payment of interest and other amounts which would
accrue and become due but for the commencement of such case, whether or not such
amounts are allowed or allowable in whole or in part in such case), whether
direct or indirect, absolute or contingent, joint or several, due or not due,
primary or secondary, liquidated or unliquidated, secured or unsecured, and
however acquired by Lender.
1.57 "Obligor" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than Borrower.
1.58 "Payment Account" shall have the meaning set forth in Section 6.3
hereof.
1.59 "Permits" shall have the meaning set forth in Section 8.7 hereof.
1.60 "Permitted Holders" shall mean the persons listed on Schedule 1.60
hereto and their respective successors and assigns.
1.61 "Person" or "person" shall mean any individual, sole proprietorship,
partnership, corporation (including any corporation which elects subchapter S
status under the Code), limited liability company, limited liability
partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.
1.62 "Plan" means an employee benefit plan (as defined in Section 3(3) of
ERISA) which Borrower sponsors, maintains, or to which it makes, is making, or
is obligated to make contributions, or in the case of a Multiemployer Plan has
made contributions at any time during the immediately preceding six (6) plan
years.
1.63 "Prime Rate" shall mean the rate from time to time publicly announced
by First Union National Bank, or its successors, as its prime rate, whether or
not such announced rate is the best rate available at such bank.
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1.64 "Prime Rate Loans" shall mean any Loans or portion thereof on which
interest is payable based on the Prime Rate in accordance with the terms
thereof.
1.65 "Provision for Taxes" shall mean an amount equal to all taxes imposed
on or measured by net income, whether Federal, State, Provincial, municipal or
local, and whether foreign or domestic, that are paid or payable by any Person
in respect of any period in accordance with GAAP.
1.66 "Real Property" shall mean all now owned and hereafter acquired real
property of Borrower, including leasehold interests, together with all
buildings, structures, and other improvements located thereon and all licenses,
easements and appurtenances relating thereto, wherever located, including the
real property and related assets more particularly described in the Mortgages.
1.67 "Receivables" shall mean: (a) all Accounts; (b) all amounts at any
time payable to Borrower in respect of the sale or other disposition by Borrower
of any Account or other obligation for the payment of money; (c) all interest,
fees, late charges, penalties, collection fees and other amounts due or to
become due or otherwise payable in connection with any Account; (d) all letters
of credit, indemnities, guarantees, security or other deposits and proceeds
thereof issued payable to Borrower or otherwise in favor of or delivered to
Borrower in connection with any Account; or (e) all other contract rights,
chattel paper, instruments, notes, general intangibles and other forms of
obligations owing to Borrower, whether from the sale and lease of goods or other
property, licensing of any property (including Intellectual Property or other
general intangibles), rendition of services or from loans or advances by
Borrower or to or for the benefit of any third person (including loans or
advances to any Affiliates or Subsidiaries) or otherwise associated with any
Accounts, Inventory or general intangibles of Borrower (including, without
limitation, choses in action, causes of action, tax refunds, tax refund claims,
any funds which may become payable to Borrower in connection with the
termination of any Plan or other employee benefit plan and any other amounts
payable to Borrower from any Plan or other employee benefit plan, rights and
claims against carriers and shippers, rights to indemnification, business
interruption insurance and proceeds thereof, casualty or any similar types of
insurance and any proceeds thereof and proceeds of insurance covering the liens
of employees on which Borrower is beneficiary.
1.68 "Records" shall mean all of Borrower's present and future books of
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (including any rights of Borrower with respect to the
foregoing maintained with or by any other person).
1.69 "Reference Bank" shall mean First Union National Bank, or such other
bank as Lender may from time to time designate.
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1.70 "Renewal Date" shall the meaning set forth in Section 12.1 hereof.
1.71 "Reserves" shall mean as of any date of determination, such amounts as
Lender may from time to time establish and revise in good faith reducing the
amount of Revolving Loans and Letter of Credit Accommodations which would
otherwise be available to Borrower under the lending formula(s) provided for
herein: (a) to reflect events, conditions, contingencies or risks arising after
the date of this Agreement or of which Lender had no actual knowledge as of such
date, which, as determined by Lender in good faith, adversely affect, or would
have a reasonable likelihood of adversely affecting, either (i) the Collateral
or any other property which is security for the Obligations or its value, (ii)
the assets, business or financial condition of Borrower or any Obligor or (iii)
the security interests and other rights of Lender in the Collateral (including
the enforceability, perfection and priority thereof); or (b) to reflect Lender's
good faith belief that any collateral report or financial information furnished
by or on behalf of Borrower or any Obligor to Lender is or may have been
incomplete, inaccurate or misleading in any material respect; or (c) to reflect
outstanding Letter of Credit Accommodations as provided in Section 2.2 hereof;
(d) $255,000 in respect of deferred compensation liabilities of Borrower for its
employees and those of any member of the Delta Apparel Employee Group (as such
term is defined in the DWI Distribution Agreement) such reserve to terminate
upon Lender's receipt of evidence, in form and substance satisfactory to it that
the option provided to members of the Delta Apparel Employee Group to receive a
distribution of deferred compensation benefits in connection with the
transactions contemplated by the Distribution Agreement has expired; or (e) in
respect of any state of facts which Lender determines in good faith constitutes
an Event of Default or may, with notice or passage of time or both, constitute
an Event of Default. To the extent Lender may revise the lending formulas used
to determine the Borrowing Base or establish new criteria or revise existing
criteria for Eligible Accounts or Eligible Inventory so as to address any
circumstances, condition, event or contingency in an manner satisfactory to
Lender, Lender shall not establish a Reserve for the same purpose. The amount of
any Reserve established by Lender shall have a reasonable relationship to the
event, condition or other matter which is the basis for such reserve as
determined by Lender in good faith.
1.72 "Revolving Loan Limit" shall mean $25,000,000 subject to increase as
provided in Section 2.1(d) hereof.
1.73 "Revolving Loans" shall mean the loans now or hereafter made by Lender
to or for the benefit of Borrower on a revolving basis (involving advances,
repayments and readvances) as set forth in Section 2.1 hereof.
1.74 "Subsidiary" or "subsidiary" shall mean, with respect to any Person,
any corporation, limited liability company, limited liability partnership or
other limited or general partnership, trust, association or other business
entity of which an aggregate of at least a majority of the outstanding Capital
Stock or other interests entitled to vote in the election of the board of
directors of such corporation (irrespective of whether, at the time, Capital
Stock of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency), managers, trustees
or other controlling persons, or an equivalent
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controlling interest therein, of such Person is, at the time, directly or
indirectly, owned by such Person and/or one or more subsidiaries of such Person.
1.75 "Term Loan" shall mean the term loan made by Lender to Borrower as
provided for in Section 2.3 hereof.
1.76 "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost computed on a first-in first-out
basis in accordance with GAAP or (b) market value.
1.77 "Voting Stock" shall mean with respect to any Person, (a) one (1) or
more classes of Capital Stock of such Person having general voting powers to
elect at least a majority of the board of directors, managers or trustees of
such Person, irrespective of whether at the time Capital Stock of any other
class or classes have or might have voting power by reason of the happening of
any contingency, and (b) any Capital Stock of such Person convertible or
exchangeable without restriction at the option of the holder thereof into
Capital Stock of such Person described in clause (a) of this definition.
1.78 "Woodside" shall mean Delta Woodside Industries, Inc., a South
Carolina corporation, and its successors and assigns.
SECTION 2. CREDIT FACILITIES
-----------------
2.1 Revolving Loans.
----------------
(a) Subject to and upon the terms and conditions contained herein, Lender
agrees to make Revolving Loans to Borrower from time to time in amounts
requested by Borrower up to the amount equal to the lesser of: (i) the Borrowing
Base or (ii) the Revolving Loan Limit.
(b) Lender may, in its discretion, from time to time, upon not less than
five (5) days prior notice to Borrower, (i) reduce the lending formula with
respect to Eligible Accounts to the extent that Lender determines in good faith
that (A) the dilution with respect to the Accounts for any period (based on the
ratio of (1) the aggregate amount of reductions in Accounts other than as a
result of payments in cash to (2) the aggregate amount of total sales) has
increased in any material respect or may be reasonably anticipated to increase
in any material respect above historical levels, or (B) the general
creditworthiness of account debtors has materially declined or (ii) reduce the
lending formula(s) with respect to Eligible Inventory to the extent that Lender
determines that: (A) the number of days of the turnover of the Inventory for any
period has changed or (B) the liquidation value of the Eligible Inventory, or
any category thereof, has decreased, or (C) the nature, quality or mix of the
Inventory has materially deteriorated. The amount of any decrease in the lending
formulas shall have a reasonable relationship to the event, condition or
circumstance which is the basis for such decrease as determined by Lender in
good faith. In determining whether to reduce the lending formula(s), Lender may
consider events,
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conditions, contingencies or risks which are also considered in determining
Eligible Accounts, Eligible Inventory or in establishing Reserves.
(c) Except in Lender's discretion, (i) the aggregate amount of the
Revolving Loans outstanding at any time shall not exceed the Revolving Loan
Limit, (ii) the aggregate amount of Revolving Loans and Letter of Credit
Accommodations based on Eligible Inventory consisting of yarn classified as
work-in- process outstanding at any time shall not exceed $1,000,000 at any time
and (iii) the aggregate amount of the Loans and the Letter of Credit
Accommodations outstanding at any time shall not exceed the Maximum Credit. In
the event that the outstanding amount of any component of the Loans, or the
aggregate amount of the outstanding Loans and Letter of Credit Accommodations,
exceed the amounts available under the lending formulas, the Revolving Loan
Limit, the sublimits for Letter of Credit Accommodations set forth in Section
2.2(e), the Inventory Loan Limit or the Maximum Credit, as applicable, such
event shall not limit, waive or otherwise affect any rights of Lender in that
circumstance or on any future occasions and Borrower shall, upon demand by
Lender, which may be made at any time or from time to time, immediately repay to
Lender the entire amount of any such excess(es) for which payment is demanded.
(d) The Revolving Loan Limit may be permanently increased, one time only,
by $5,000,000 to $30,000,000, upon the written request of Borrower to Lender,
such request shall be irrevocable and shall become effective three (3) Business
Days after such request is received by Lender, provided, that, as of the
proposed effective date of any such increase, Lender has determined that no
Event of Default or any act, condition or event which with notice or passage of
time or both, would constitute an Event of Default, shall exist or have
occurred. To the extent any such increase becomes effective, the Maximum Credit
shall be automatically deemed increased by $5,000,000.
2.2 Letter of Credit Accommodations.
--------------------------------
(a) Subject to and upon the terms and conditions contained herein, at the
request of Borrower, Lender agrees to provide or arrange for Letter of Credit
Accommodations for the account of Borrower containing terms and conditions
acceptable to Lender and the issuer thereof. Any payments made by Lender to any
issuer thereof and/or related parties in connection with the Letter of Credit
Accommodations shall constitute additional Revolving Loans to Borrower pursuant
to this Section 2.
(b) In addition to any charges, fees or expenses charged by any bank or
issuer in connection with the Letter of Credit Accommodations, Borrower shall
pay to Lender a letter of credit fee at a rate equal to one and one-half (1
1/2%) percent per annum on the daily outstanding balance of the Letter of Credit
Accommodations for the immediately preceding month (or part thereof), payable in
arrears as of the first day of each succeeding month, except that Borrower shall
pay to Lender such letter of credit fee, at Lender's option, without notice, at
a rate equal to three and one-half (3 1/2%) percent per annum on such daily
outstanding balance for: (i) the period from and after the date of termination
or non-renewal hereof until Lender has received full and final payment of all
Obligations (notwithstanding entry of a judgment against Borrower) and
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(ii) the period from and after the date of the occurrence of an Event of Default
for so long as such Event of Default is continuing as determined by Lender. Such
letter of credit fee shall be calculated on the basis of a three hundred sixty
(360) day year and actual days elapsed and the obligation of Borrower to pay
such fee shall survive the termination or non-renewal of this Agreement.
(c) Borrower shall give Lender two (2) Business Days' prior written of
Borrower's request for the issuance of a Letter of Credit Accommodation. Such
notice shall be irrevocable and shall specify the original face amount of the
Letter of Credit Accommodation requested, the effective date (which date shall
be a Business Day) of issuance of such requested Letter of Credit Accommodation,
whether such Letter of Credit Accommodations may be drawn in a single or in
partial draws, the date on which such requested Letter of Credit Accommodation
is to expire (which date shall be a Business Day), the purpose for which such
Letter of Credit Accommodation is to be issued, and the beneficiary of the
requested Letter of Credit Accommodation. Borrower shall attach to such notice
the proposed form of the Letter of Credit Accommodation.
(d) In addition to being subject to the satisfaction of the applicable
conditions precedent contained in Section 4 hereof and the other terms and
conditions contained herein, no Letter of Credit Accommodations shall be
available unless each of the following conditions precedent have been satisfied
in a manner satisfactory to Lender: (i) Borrower shall have delivered to the
proposed issuer of such Letter of Credit Accommodation at such times and in such
manner as such proposed issuer may require, an application in form and substance
satisfactory to such proposed issuer and Lender for the issuance of the Letter
of Credit Accommodation and such other documents as may be required pursuant to
the terms thereof, and the form and terms of the proposed Letter of Credit
Accommodation shall be satisfactory to Lender and such proposed issuer, (ii) as
of the date of issuance, no order of any court, arbitrator or other Governmental
Authority shall purport by its terms to enjoin or restrain money center banks
generally from issuing letters of credit of the type and in the amount of the
proposed Letter of Credit Accommodation, and no law, rule or regulation
applicable to money center banks generally and no request or directive (whether
or not having the force of law) from any Governmental Authority with
jurisdiction over money center banks generally shall prohibit, or request that
the proposed issuer of such Letter of Credit Accommodation refrain from, the
issuance of letters of credit generally or the issuance of such Letters of
Credit Accommodation; and (iii) the Excess Availability, prior to giving effect
to any Reserves with respect to such Letter of Credit Accommodations, on the
date of the proposed issuance of any Letter of Credit Accommodations, shall be
equal to or greater than: (A) if the proposed Letter of Credit Accommodation is
for the purpose of purchasing Eligible Inventory, the sum of (1) forty-five
(45%) percent multiplied by the Value of such Eligible Inventory, plus (2)
freight, taxes, duty and other amounts which Lender estimates must be paid by
Borrower in connection with such Inventory upon arrival and for delivery to one
of Borrower's locations for Eligible Inventory within the United States of
America and (iv) if the proposed Letter of Credit Accommodation is for any other
purpose, an amount equal to one hundred (100%) percent of the face amount
thereof and all other commitments and obligations made or incurred by Lender
with respect
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thereto. Effective on the issuance of each Letter of Credit Accommodation, a
Reserve shall be established in the applicable amount set forth in Section
2.2(d)(iii)(A) or Section 2.2(d)(iii)(B).
(e) Except in Lender's discretion, the amount of all outstanding Letter of
Credit Accommodations and all other commitments and obligations made or incurred
by Lender in connection therewith shall not at any time exceed $10,000,000. At
any time an Event of Default exists or has occurred and is continuing, upon
Lender's request, Borrower will either furnish cash collateral to secure the
reimbursement obligations to the issuer in connection with any Letter of Credit
Accommodations or furnish cash collateral to Lender for the Letter of Credit
Accommodations.
(f) Borrower shall indemnify and hold Lender harmless from and against any
and all losses, claims, damages, liabilities, costs and expenses which Lender
may suffer or incur in connection with any Letter of Credit Accommodations and
any documents, drafts or acceptances relating thereto, including any losses,
claims, damages, liabilities, costs and expenses due to any action taken by any
issuer or correspondent with respect to any Letter of Credit Accommodation.
Borrower assumes all risks with respect to the acts or omissions of the drawer
under or beneficiary of any Letter of Credit Accommodation and for such purposes
the drawer or beneficiary shall be deemed Borrower's agent. Borrower assumes all
risks for, and agrees to pay, all foreign, Federal, State and local taxes,
duties and levies relating to any goods subject to any Letter of Credit
Accommodations or any documents, drafts or acceptances thereunder. Borrower
hereby releases and holds Lender harmless from and against any acts, waivers,
errors, delays or omissions, whether caused by Borrower, by any issuer or
correspondent or otherwise with respect to or relating to any Letter of Credit
Accommodation, except for the gross negligence or wilful misconduct of Lender as
determined pursuant to a final, non-appealable order of a court of competent
jurisdiction. The provisions of this Section 2.2(e) shall survive the payment of
Obligations and the termination or non-renewal of this Agreement.
(g) In connection with Inventory purchased pursuant to Letter of Credit
Accommodations, Borrower will, at Lender's request, instruct all suppliers,
carriers, forwarders, customs brokers, warehouses or others receiving or holding
cash, checks, Inventory, documents or instruments in which Lender holds a
security interest to deliver them to Lender and/or subject to Lender's order,
and if they shall come into Borrower's possession, to deliver them, upon
Lender's request, to Lender in their original form. Borrower shall also, at
Lender's request, designate Lender as the consignee on all bills of lading and
other negotiable and non-negotiable documents.
(h) Borrower hereby irrevocably authorizes and directs any issuer of a
Letter of Credit Accommodation to name Borrower as the account party therein and
to deliver to Lender all instruments, documents and other writings and property
received by issuer pursuant to the Letter of Credit Accommodations and to accept
and rely upon Lender's instructions and agreements with respect to all matters
arising in connection with the Letter of Credit Accommodations or the
applications therefor. Nothing contained herein shall be deemed or construed to
grant Borrower any right or authority to pledge the credit of Lender in any
manner. Lender shall have no liability of any kind with respect to any Letter of
Credit Accommodation
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<PAGE>
provided by an issuer other than Lender unless Lender has duly executed and
delivered to such issuer the application or a guarantee or indemnification in
writing with respect to such Letter of Credit Accommodation. Borrower shall be
bound by any interpretation made in good faith by Lender, or any other issuer or
correspondent under or in connection with any Letter of Credit Accommodation or
any documents, drafts or acceptances thereunder, notwithstanding that such
interpretation may be inconsistent with any instructions of Borrower. Lender
shall have the sole and exclusive right and authority to, and Borrower shall
not: (i) at any time an Event of Default exists or has occurred and is
continuing, (A) approve or resolve any questions of non-compliance of documents,
(B) give any instructions as to acceptance or rejection of any documents or
goods or (C) execute any and all applications for steamship or airway
guaranties, indemnities or delivery orders, and (ii) at all times, (A) grant any
extensions of the maturity of, time of payment for, or time of presentation of,
any drafts, acceptances, or documents, and (B) agree to any amendments,
renewals, extensions, modifications, changes or cancellations of any of the
terms or conditions of any of the applications, Letter of Credit Accommodations,
or documents, drafts or acceptances thereunder or any letters of credit included
in the Collateral. Lender may take such actions either in its own name or in
Borrower's name.
(i) Any rights, remedies, duties or obligations granted or undertaken by
Borrower to any issuer or correspondent in any application for any Letter of
Credit Accommodation, or any other agreement in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed to
have been granted or undertaken by Borrower to Lender. Any duties or obligations
undertaken by Lender to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement by Lender in favor of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall be
deemed to have been undertaken by Borrower to Lender and to apply in all
respects to Borrower.
2.3 Term Loan. Lender is making a Term Loan to Borrower in the original
----------
principal amount of $10,000,000. The Term Loan is (a) evidenced by a Term
Promissory Note in such original principal amount duly executed and delivered by
Borrower to Lender concurrently herewith; (b) to be repaid, together with
interest and other amounts, in accordance with this Agreement, the Term
Promissory Note, and the other Financing Agreements and (c) secured by all of
the Collateral.
SECTION 3. INTEREST AND FEES
-----------------
3.1 Interest.
---------
(a) Borrower shall pay to Lender interest on the outstanding principal
amount of the Loans at the Interest Rate. All interest accruing hereunder on and
after the date of any Event of Default or termination or non-renewal hereof or
on the principal amount of the Revolving Loans at any time outstanding in excess
of the amounts available to Borrower under Section 2 (whether or not such
excess(es), arise or are made with or without Lender's knowledge or consent and
whether made before or after an Event of Default) shall be payable ON DEMAND.
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(b) Borrower may from time to time request that Prime Rate Loans be
converted to Eurodollar Rate Loans or that any existing Eurodollar Rate Loans
continue for an additional Interest Period. Such request from Borrower shall
specify the amount of the Prime Rate Loans which will constitute Eurodollar Rate
Loans (subject to the limits set forth below) and the Interest Period to be
applicable to such Eurodollar Rate Loans. Subject to the terms and conditions
contained herein, two (2) Business Days after receipt by Lender of such a
request from Borrower, such Prime Rate Loans shall be converted to Eurodollar
Rate Loans or such Eurodollar Rate Loans shall continue, as the case may be,
provided, that, (i) no Event of Default, or act, condition or event which with
notice or passage of time or both would constitute an Event of Default shall
exist or have occurred and be continuing, (ii) no party hereto shall have sent
any notice of termination or non-renewal of this Agreement, (iii) Borrower shall
have complied with such customary procedures as are established by Lender and
specified by Lender to Borrower from time to time for requests by Borrower for
Eurodollar Rate Loans, (iv) no more than four (4) Interest Periods may be in
effect at any one time, (v) the aggregate amount of the Eurodollar Rate Loans
must be in an amount not less than $3,000,000 or an integral multiple of
$1,000,000 in excess thereof, and (vi) Lender shall have determined that the
Interest Period or Adjusted Eurodollar Rate is available to Lender through the
Reference Bank and can be readily determined as of the date of the request for
such Eurodollar Rate Loan by Borrower. Any request by Borrower to convert Prime
Rate Loans to Eurodollar Rate Loans or to continue any existing Eurodollar Rate
Loans shall be irrevocable. Notwithstanding anything to the contrary contained
herein, Lender and Reference Bank shall not be required to purchase United
States Dollar deposits in the London interbank market or other applicable
Eurodollar Rate market to fund any Eurodollar Rate Loans, but the provisions
hereof shall be deemed to apply as if Lender and Reference Bank had purchased
such deposits to fund the Eurodollar Rate Loans.
(c) Any Eurodollar Rate Loans shall automatically convert to Prime Rate
Loans upon the last day of the applicable Interest Period, unless Lender has
received and approved a request to continue such Eurodollar Rate Loan at least
two (2) Business Days prior to such last day in accordance with the terms
hereof. Any Eurodollar Rate Loans shall, at Lender's option, upon notice by
Lender to Borrower, convert to Prime Rate Loans in the event that this Agreement
shall terminate or not be renewed. Borrower shall pay to Lender, upon demand by
Lender (or Lender may, at its option, charge any loan account of Borrower) any
amounts required to compensate Lender, the Reference Bank or any participant
with Lender for any loss (including loss of anticipated profits), cost or
expense incurred by such person, as a result of the conversion of Eurodollar
Rate Loans to Prime Rate Loans pursuant to any of the foregoing.
(d) Interest shall be payable by Borrower to Lender monthly in arrears not
later than the first day of each calendar month and shall be calculated on the
basis of a three hundred sixty (360) day year and actual days elapsed. Borrower
acknowledges and understands that the calculation of interest on the basis of
the actual days elapsed over the period of a three hundred sixty (360) day year
as opposed to a year of three hundred sixty-five (365) or three hundred sixty-
six (366) days results in a higher effective rate of interest. The interest rate
on non-contingent obligations (other than Eurodollar Rate Loans) shall increase
or decrease by an amount equal to each increase or decrease in the Prime Rate
effective on the first day of the month after any
24
<PAGE>
change in such Prime Rate is announced based on the Prime Rate in effect on the
last day of the month in which any such change occurs.
(e) On the date hereof, the Prime Rate is nine (9 %) percent and therefore
the rate of interest in effect hereunder for Prime Rate Loans outstanding on the
date of this Agreement, expressed in simple interest terms, is nine (9 %)
percent per annum.
3.2 Closing Fee. Borrower shall pay to Lender as a closing fee the amount
------------
of $175,000 which shall be fully earned and payable as of the date hereof. Such
closing fee shall not be subject to rebate upon any prepayment of the
Obligations except to the extent required by Section 3.6 of this Agreement or
applicable law. Such closing fee shall compensate Lender for the costs
associated with the origination, structuring, processing, approving and closing
of the transactions contemplated by this Agreement, exclusive of any expenses
for which Borrower has agreed to reimburse Lender pursuant to any other
provision of this Agreement or the other Financing Agreements (such as
attorneys' fees).
3.3 Servicing Fee. Borrower shall pay to Lender monthly a servicing fee in
--------------
an amount equal to $2,000 in respect of Lender's services for each month (or
part thereof) while this Agreement remains in effect and for so long thereafter
as any of the Obligations are outstanding, which fee shall be fully earned as of
and payable in advance on the date hereof and on the first day of each month
hereafter.
3.4 Unused Line Fee. Borrower shall pay to Lender monthly an unused line
----------------
fee at a rate equal to one-quarter of one (1/4%) percent per annum calculated
upon the amount by which the Revolving Loan Limit exceeds the average daily
principal balance of the outstanding Revolving Loans and Letter of Credit
Accommodations during the immediately preceding month (or part thereof) while
this Agreement is in effect and for so long thereafter as any of the Obligations
are outstanding, which fee shall be payable on the first day of each month in
arrears.
3.5 Changes in Laws and Increased Costs of Loans.
---------------------------------------------
(a) Notwithstanding anything to the contrary contained herein, all
Eurodollar Rate Loans shall, upon notice by Lender to Borrower, convert to Prime
Rate Loans in the event that (i) any change in applicable law or regulation (or
the interpretation or administration thereof) shall either (A) make it unlawful
for Lender, Reference Bank or any participant with Lender to make or maintain
Eurodollar Rate Loans or to comply with the terms hereof in connection with the
Eurodollar Rate Loans, or (B) shall result in the increase in the costs to
Lender, Reference Bank or any participant of making or maintaining any
Eurodollar Rate Loans by an amount deemed by Lender to be material, or (C)
reduce the amounts received or receivable by Lender in respect thereof, by an
amount deemed by Lender to be material or (ii) the cost to Lender, Reference
Bank or any participant of making or maintaining any Eurodollar Rate Loans shall
otherwise increase by an amount deemed by Lender to be material. Borrower shall
pay to Lender, upon demand by Lender (or Lender may, at its option, charge any
loan account of Borrower) any amounts required to compensate Lender, the
Reference Bank or any participant with Lender for any loss (including loss of
anticipated profits), cost or expense incurred by such person as a result of the
foregoing,
25
<PAGE>
including, without limitation, any such loss, cost or expense incurred by reason
of the liquidation or reemployment of deposits or other funds acquired by such
person to make or maintain the Eurodollar Rate Loans or any portion thereof. A
certificate of Lender setting forth the basis for the determination of such
amount necessary to compensate Lender as aforesaid shall be delivered to
Borrower and shall be conclusive, absent manifest error.
(b) If any payments or prepayments in respect of the Eurodollar Rate Loans
are received by Lender other than on the last day of the applicable Interest
Period (whether pursuant to acceleration, upon maturity or otherwise), including
any payments pursuant to the application of collections under Section 6.3 or any
other payments made with the proceeds of Collateral, Borrower shall pay to
Lender upon demand by Lender (or Lender may, at its option, charge any loan
account of Borrower) any amounts required to compensate Lender, the Reference
Bank or any participant with Lender for any additional loss (including loss of
anticipated profits), cost or expense incurred by such person as a result of
such prepayment or payment, including, without limitation, any loss, cost or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by such person to make or maintain such Eurodollar Rate
Loans or any portion thereof.
3.6 Maximum Interest.
-----------------
(i) Notwithstanding anything to the contrary contained in this Agreement or
any of the other Financing Agreements, in no event whatsoever shall the
aggregate of all amounts that are contracted for, charged or received by Lender
pursuant to the terms of this Agreement or any of the other Financing Agreements
and that are deemed interest under applicable law exceed the Maximum Interest
Rate (including, to the extent applicable, the provisions of Section 5197 of the
Revised Statutes of the United States of America as amended, 12 U.S.C.
Section 85, as amended). No agreements, conditions, provisions or stipulations
contained in this Agreement or any of the other Financing Agreements, or any
Event of Default, or the exercise by Lender of the right to accelerate the
payment or the maturity of all or any portion of the Obligations, or the
exercise of any option whatsoever contained in this Agreement or any of the
other Financing Agreements, or the prepayment by Borrower of any of the
Obligations, or the occurrence of any event or contingency whatsoever, shall
entitle Lender to contract for, charge or receive in any event, interest or any
charges, amounts, premiums or fees deemed interest by applicable law in excess
of the Maximum Interest Rate. In no event shall Borrower be obligated to pay
interest or such amounts as may be deemed interest under applicable law in
amounts which exceed the Maximum Interest Rate. All agreements, conditions or
stipulations, if any, which may in any event or contingency whatsoever operate
to bind, obligate or compel Borrower to pay interest or such amounts which are
deemed to constitute interest in amounts which exceed the Maximum Interest Rate
shall be without binding force or effect, at law or in equity, to the extent of
the excess of interest or such amounts which are deemed to constitute interest
over such Maximum Interest Rate.
(ii) In the event any Interest is charged or received in excess of the
Maximum Interest Rate ("Excess"), Borrower acknowledges and stipulates that any
such charge or receipt shall be the result of an accident and bona fide error,
and that any Excess received by Lender
26
<PAGE>
shall be applied, first, to the payment of the then outstanding and unpaid
principal hereunder; second to the payment of the other Obligations then
outstanding and unpaid; and third, returned to Borrower, it being the intent of
the parties hereto not to enter into a usurious or otherwise illegal
relationship. The right to accelerate the maturity of any of the Obligations
does not include the right to accelerate any interest that has not otherwise
accrued on the date of such acceleration, and Lender does not intend to collect
any unearned interest in the event of any such acceleration. Borrower recognizes
that, with fluctuations in the rates of interest set forth in Section 3.1 of
this Agreement and the Maximum Interest Rate, such an unintentional result could
inadvertently occur. All monies paid to Lender hereunder or under any of the
other Financing Agreements, whether at maturity or by prepayment, shall be
subject to any rebate of unearned interest as and to the extent required by
applicable law.
(iii) By the execution of this Agreement, Borrower agrees that (A) the
credit or return of any Excess shall constitute the acceptance by Borrower of
such Excess, and (B) Borrower shall not seek or pursue any other remedy, legal
or equitable, against Lender, based in whole or in part upon contracting for,
charging or receiving any interest or such amounts which are deemed to
constitute interest in excess of the Maximum Interest Rate. For the purpose of
determining whether or not any Excess has been contracted for, charged or
received by Lender, all interest at any time contracted for, charged or received
from Borrower in connection with this Agreement or any of the other Financing
Agreements shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread during the entire term of this Agreement in
accordance with the amounts outstanding from time to time hereunder and the
Maximum Interest Rate from time to time in effect in order to lawfully charge
the maximum amount of interest permitted under applicable laws.
(iv) Borrower and Lender shall, to the maximum extent permitted under
applicable law, (i) characterize any non-principal payment as an expense, fee or
premium rather than as interest and (ii) exclude voluntary prepayments and the
effects thereof.
(v) The provisions of this Section 3.6 shall be deemed to be incorporated
into each of the other Financing Agreements (whether or not any provision of
this Section is referred to therein). Each of the Financing Agreements and
communications relating to any interest owed by Borrower and all figures set
forth therein shall, for the sole purpose of computing the extent of the
Obligations, be automatically recomputed by Borrower, and by any court
considering the same, to give effect to the adjustments or credits required by
this Section.
SECTION 4. CONDITIONS PRECEDENT
--------------------
4.1 Conditions Precedent to Initial Loans and Letter of Credit
---------------------------------------------------------------------
Accommodations. Each of the following is a condition precedent to Lender making
- ---------------
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(a) Lender shall have received, in form and substance satisfactory to
Lender, evidence that the Distribution Agreements have been duly executed and
delivered by and to the appropriate parties thereto and all of the transactions
contemplated under the terms of the
27
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Distribution Agreements, including without limitation, all of the reorganization
events described in Section 2.1 of the DWI Distribution Agreement have been
consummated prior to or contemporaneously with the execution of this Agreement
and that Borrower has good and marketable title to all of the assets used in the
operations and business of the Delta Apparel division of Woodside;
(b) Lender shall have received a copy of the summary of the opinion, in
form and substance satisfactory to Lender, addressed and delivered to the Board
of Directors of Woodside as to the solvency of Borrower at the time of the
distribution contemplated by the Distribution Agreements;
(c) Lender shall have received a copy of the opinion, in form and substance
satisfactory to Lender, addressed and delivered to Delta Mills, Inc. to the
effect that the sale by Delta Mills, Inc. to Borrower of the Rainsford yarn
plant in Edgefield, South Carolina including related inventory is fair from a
financial point of view to the holders of Delta Mills, Inc.'s 9 5/8% Senior
Notes in the aggregate principal amount of $150,000,000;
(d) Lender shall have received, in form and substance satisfactory to
Lender, all releases, terminations and such other documents as Lender may
request to evidence and effectuate the termination by the existing lenders to
Borrower of their respective financing arrangements with Borrower and the
termination and release by it or them, as the case may be, of any interest in
and to any assets and properties of Borrower and each Obligor, duly authorized,
executed and delivered by it or each of them, including, but not limited to, (i)
UCC termination statements for all UCC financing statements previously filed by
it or any of them or their predecessors, as secured party and Borrower or any
Obligor, as debtor and (ii) satisfactions and discharges of any mortgages, deeds
of trust or deeds to secure debt by Borrower or any Obligor in favor of such
existing lender or lenders, in form acceptable for recording with the
appropriate Governmental Authority;
(e) all requisite corporate action and proceedings in connection with the
transactions contemplated by the Distribution Agreements, this Agreement and the
other Financing Agreements shall be satisfactory in form and substance to
Lender, and Lender shall have received all information and copies of all
documents, including records of requisite corporate action and proceedings which
Lender may have requested in connection therewith, such documents where
requested by Lender or its counsel to be certified by appropriate corporate
officers or Governmental Authorities;
(f) no material adverse change shall have occurred in the assets, business
or financial condition of Borrower since the date of Lender's latest field
examination and no change or event shall have occurred which would impair the
ability of Borrower or any Obligor to perform its obligations hereunder or under
any of the other Financing Agreements to which it is a party or of Lender to
enforce the Obligations or realize upon the Collateral;
(g) Lender shall have completed a field review of the Records and such
other information with respect to the Collateral as Lender may require to
determine the amount of
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<PAGE>
Revolving Loans available to Borrower (including, without limitation, current
perpetual inventory records and/or roll-forwards of Accounts and Inventory
through the date of closing and test counts of the Inventory in a manner
satisfactory to Lender, together with such supporting documentation as may be
necessary or appropriate, and other documents and information that will enable
Lender to accurately identify and verify the Collateral), the results of which
each case shall be satisfactory to Lender, not more than three (3) Business Days
prior to the date hereof;
(h) Lender shall have received, in form and substance satisfactory to
Lender, all consents, waivers, acknowledgments and other agreements from third
persons which Lender may deem necessary or desirable in order to permit, protect
and perfect its security interests in and liens upon the Collateral or to
effectuate the provisions or purposes of this Agreement and the other Financing
Agreements, including, without limitation, Collateral Access Agreements by
owners and lessors of leased premises of Borrower and by warehouses at which
Collateral is located;
(i) Lender shall have received, in form and substance satisfactory to
Lender, duly authorized, executed and delivered by Woodside and Borrower the
agreement of Woodside consenting to the collateral assignment by Borrower to
Lender of all of its rights and remedies and claims for damages and other relief
under the Distribution Agreements and granting Lender such other rights as
Lender may require, duly authorized, executed and delivered by Woodside;
(j) Lender shall have received, in form and substance satisfactory to
Lender, a pro-forma consolidated balance sheet of Borrower reflecting the
initial transactions contemplated under the Distribution Agreements and
hereunder, including, but not limited to, (i) the consummation of the transfer
of the assets by Woodside to Borrower and the other transactions contemplated by
the Distribution Agreements and (ii) the Loans and Letter of Credit
Accommodations provided by Lender to Borrower on the date hereof and the use of
the proceeds of the initial Loans as provided herein, accompanied by a
certificate, dated of even date herewith, of the chief financial officer of
Borrower stating that such pro-forma balance sheet annexed thereto represents
the reasonable, good faith opinion of such officer as to the subject matter
thereof as of the date of such certificate;
(k) the Excess Availability as determined by Lender, as of the date hereof,
shall be not less than $8,000,000 after giving effect to the initial Loans made
or to be made and Letter of Credit Accommodations issued or to be issued in
connection with the initial transactions hereunder;
(l) Lender shall have received, in form and substance satisfactory to
Lender, all agreements with the depository banks and Borrower with respect to
the Blocked Accounts as Lender may require pursuant to Section 6.3 hereof, duly
authorized, executed and delivered by such depository banks and Borrower;
(m) Lender shall have received evidence, in form and substance satisfactory
to Lender, that Lender has a valid perfected first priority security interest in
all of the Collateral;
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<PAGE>
(n) Lender shall have received and reviewed UCC search results for all
jurisdictions in the United States and Canada which assets of Borrower are
located, which search results shall be in form and substance satisfactory to
Lender;
(o) Lender shall have received any existing environmental audits of
Borrower's plants and the Real Property conducted by an independent
environmental engineering firm acceptable to Lender, and in form, scope and
methodology satisfactory to Lender, confirming (i) Borrower is in compliance
with all material applicable Environmental Laws and (ii) the absence of any
material potential or actual liability of Borrower for any remedial action with
respect to any environmental condition or any other material environmental
problems;
(p) Lender shall have received, in form and substance satisfactory to
Lender, valid and effective title insurance policy with respect to the Real
Property of Borrower located in Edgefield, South Carolina, issued by a company
and agent acceptable to Lender (i) insuring the priority, amount and sufficiency
of the Mortgages, (ii) insuring against matters that would be disclosed by
surveys and (iii) containing any legally available endorsements, assurances or
affirmative coverage requested by Lender for protection of its interests;
(q) Lender shall have received evidence of insurance and loss payee
endorsements required hereunder and under the other Financing Agreements, in
form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(r) Lender shall have received, in form and substance satisfactory to
Lender, such opinion letters of counsel to Borrower with respect to the
Distribution Agreements, the Financing Agreements and such other matters as
Lender may request; and
(s) the other Financing Agreements and all instruments and documents
hereunder and thereunder shall have been duly executed and delivered to Lender,
in form and substance satisfactory to Lender.
4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations.
-----------------------------------------------------------------------
Each of the following is an additional condition precedent to Lender making
Loans and/or providing Letter of Credit Accommodations to Borrower, including
the initial Loans and Letter of Credit Accommodations and any future Loans and
Letter of Credit Accommodations:
(a) all representations and warranties contained herein and in the other
Financing Agreements shall be true and correct in all material respects with the
same effect as though such representations and warranties had been made on and
as of the date of the making of each such Loan or providing each such Letter of
Credit Accommodation and after giving effect thereto, except to the extent that
such representations and warranties expressly relate solely to an earlier date
(in which case such representations and warranties shall have been true and
accurate on and as of such earlier date);
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(b) no law, regulation, order, judgment or decree of any Governmental
Authority shall exist, and no action, suit, investigation, litigation or
proceeding shall be pending or threatened in any court or before any arbitrator
or Governmental Authority, which (i) purports to enjoin, prohibit, restrain or
otherwise affect (A) the making of the Loans or providing the Letter of Credit
Accommodations, or (B) the consummation of the transactions contemplated
pursuant to the terms hereof or the other Financing Agreements or (ii) has or
could reasonably be expected to have a material adverse effect on the assets,
business or prospects of Borrower or would impair the ability of Borrower to
perform its obligations hereunder or under any of the other Financing Agreements
or of Lender to enforce any Obligations or realize upon any of the Collateral;
and
(c) no Event of Default and no act, condition or event which, with notice
or passage of time or both, would constitute an Event of Default, shall exist or
have occurred and be continuing on and as of the date of the making of such Loan
or providing each such Letter of Credit Accommodation and after giving effect
thereto.
SECTION 5. GRANT OF SECURITY INTEREST
--------------------------
To secure payment and performance of all Obligations, Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and hereby assigns to Lender as security, the following
property and interests in property of Borrower, whether now owned or hereafter
acquired or existing, and wherever located (together with all other collateral
security for the Obligations at any time granted to or held or acquired by
Lender, collectively, the "Collateral"):
5.1 Receivables;
5.2 all other present and future general intangibles (including
Intellectual Property and existing and future leasehold interests in equipment,
real estate and fixtures), chattel paper, documents, instruments, investment
property (including securities, whether certificated or uncertificated,
securities accounts, security entitlements, commodity contracts or commodity
accounts), letters of credit, bankers' acceptances and guaranties;
5.3 all present and future monies, securities and other investment
property, credit balances, deposits, deposit accounts and other property of
Borrower now or hereafter held or received by or in transit to Lender or its
Affiliates or at any other depository or other institution from or for the
account of Borrower, whether for safekeeping, pledge, custody, transmission,
collection or otherwise, and all present and future liens, security interests,
rights, remedies, title and interest in, to and in respect of Receivables and
other Collateral, including (a) rights and remedies under or relating to
guaranties, contracts of suretyship, letters of credit and credit and other
insurance related to the Collateral, (b) rights of stoppage in transit,
replevin, repossession, reclamation and other rights and remedies of an unpaid
vendor, lien or secured party, (c) goods described in invoices, documents,
contracts or instruments with respect to, or otherwise representing or
evidencing, Receivables or other Collateral, including returned, repossessed and
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reclaimed goods, and (d) deposits by and property of account debtors or other
persons securing the obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
5.6 Real Property;
5.7 Records; and
5.8 all products and proceeds of the foregoing, in any form, including
insurance proceeds and all claims against third parties for loss or damage to or
destruction of any or all of the foregoing.
5.9 Notwithstanding anything to the contrary contained in Section 5.1
through 5.8 above, the types or items of Collateral described in such Section
shall not include any Equipment which is, or at the time of Borrower's
acquisition thereof shall be, subject to a purchase money mortgage or other
purchase money lien or security interest (including capitalized or finance
leases) permitted under Section 9.8 hereof if: (a) the valid grant of a security
interest or lien to Lender in such item of Equipment is prohibited by the terms
of the agreement between Borrower and the holder of such purchase money mortgage
or other purchase money lien or security interest or under applicable law and
such prohibition has not been or is not waived, or the consent of the holder of
the purchase money mortgage or other purchase money lien or security interest
has not been or is not otherwise obtained, or under applicable law such
prohibition cannot be waived and (b) the purchase money mortgage or other
purchase money lien or security interest on such item of Equipment is or shall
become valid and perfected.
SECTION 6. COLLECTION AND ADMINISTRATION
-----------------------------
6.1 Borrower's Loan Account. Lender shall maintain one or more loan
--------------------------
account(s) on its books in which shall be recorded (a) all Loans, Letter of
Credit Accommodations and other Obligations and the Collateral, (b) all payments
made by or on behalf of Borrower and (c) all other appropriate debits and
credits as provided in this Agreement, including fees, charges, costs, expenses
and interest. All entries in the loan account(s) shall be made in accordance
with Lender's customary practices as in effect from time to time.
6.2 Statements. Lender shall render to Borrower each month a statement
-----------
setting forth the balance in the Borrower's loan account(s) maintained by Lender
for Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrower and conclusively binding
upon Borrower as an account stated except to the extent that Lender receives a
written notice from Borrower of any specific exceptions of Borrower thereto
within thirty (30) days after the date such statement has been mailed by Lender.
Until such time as Lender shall have rendered to
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Borrower a written statement as provided above, the balance in Borrower's loan
account(s) shall be presumptive evidence of the amounts due and owing to Lender
by Borrower.
6.3 Collection of Accounts.
-----------------------
(a) Borrower shall establish and maintain, at its expense, blocked accounts
or lockboxes and related blocked accounts (in either case, "Blocked Accounts"),
as Lender may specify, with such banks as are acceptable to Lender into which
Borrower shall promptly deposit and direct its account debtors to directly remit
all payments on Receivables and all payments constituting proceeds of Inventory
or other Collateral in the identical form in which such payments are made,
whether by cash, check or other manner. The banks at which the Blocked Accounts
are established shall enter into an agreement, in form and substance
satisfactory to Lender, providing that all items received or deposited in the
Blocked Accounts are the property of Lender, that the depository bank has no
lien upon, or right to setoff against, the Blocked Accounts, the items received
for deposit therein, or the funds from time to time on deposit therein and that
the depository bank will wire, or otherwise transfer, in immediately available
funds, on a daily basis, all funds received or deposited into the Blocked
Accounts to such bank account of Lender as Lender may from time to time
designate for such purpose ("Payment Account"). Borrower agrees that all
payments made to such Blocked Accounts or other funds received and collected by
Lender, whether in respect of the Receivables, as proceeds of Inventory or other
Collateral or otherwise shall be treated as payments to Lender in respect of the
Obligations and therefore shall constitute the property of Lender to the extent
of the then outstanding Obligations.
(b) For the purposes of calculating interest on the Obligations, such
payments or other funds received will be applied (conditional upon final
collection) to the Obligations one (1) Business Day following the date of
receipt of immediately available funds by Lender in the Payment Account. For
purposes of calculating the amount of the Revolving Loans available to Borrower,
such payments will be applied (conditional upon final collection) to the
Obligations on the Business Day of receipt by Lender of immediately available
funds in the Payment Account, if such payments are received in sufficient time
(in accordance with Lender's usual and customary practices as in effect from
time to time) to credit Borrower's loan account on such day, and if not, then on
the next Business Day.
(c) Borrower and all of shareholders, directors, employees, agents,
Subsidiaries or other Affiliates shall, acting as trustee for Lender, receive,
as the property of Lender, any monies, checks, notes, drafts or any other
payment relating to and/or proceeds of Accounts or other Collateral which come
into their possession or under their control and immediately upon receipt
thereof, shall deposit or cause the same to be deposited in the Blocked
Accounts, or remit the same or cause the same to be remitted, in kind, to
Lender. In no event shall the same be commingled with Borrower's own funds.
Borrower agrees to reimburse Lender on demand for any amounts owed or paid to
any bank at which a Blocked Account is established or any other bank or person
involved in the transfer of funds to or from the Blocked Accounts arising out of
Lender's payments to or indemnification of such bank or person. The obligation
of Borrower to
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reimburse Lender for such amounts pursuant to this Section 6.3 shall survive the
termination or non-renewal of this Agreement.
6.4 Payments. All Obligations shall be payable to the Payment Account as
---------
provided in Section 6.3 or such other place as Lender may designate from time to
time. Lender shall apply payments received or collected from Borrower or for the
account of Borrower (including the monetary proceeds of collections or of
realization upon any Collateral) as follows: first, to pay any fees, indemnities
or expense reimbursements then due to Lender from Borrower; second, to pay
interest due in respect of any Loans; third, to pay principal due in respect of
the Loans; fourth, to pay or prepay any other Obligations whether or not then
due, in such order and manner as Lender determines. Notwithstanding anything to
the contrary contained in this Agreement, unless so directed by Borrower, or
unless an Event of Default shall exist or have occurred and be continuing,
Lender shall not apply any payments which it receives to any Eurodollar Rate
Loans, except (a) on the expiration date of the Interest Period applicable to
any such Eurodollar Rate Loans, or (b) in the event that there are no
outstanding Prime Rate Loans. At Lender's option, all principal, interest, fees,
costs, expenses and other charges provided for in this Agreement or the other
Financing Agreements may be charged directly to the loan account(s) of Borrower.
Borrower shall make all payments to Lender on the Obligations free and clear of,
and without deduction or withholding for or on account of, any setoff,
counterclaim, defense, duties, taxes, levies, imposts, fees, deductions,
withholding, restrictions or conditions of any kind. If after receipt of any
payment of, or proceeds of Collateral applied to the payment of, any of the
Obligations, Lender is required to surrender or return such payment or proceeds
to any Person for any reason, then the Obligations intended to be satisfied by
such payment or proceeds shall be reinstated and continue and this Agreement
shall continue in full force and effect as if such payment or proceeds had not
been received by Lender. Borrower shall be liable to pay to Lender, and does
hereby indemnify and hold Lender harmless for the amount of any payments or
proceeds surrendered or returned. This Section 6.4 shall remain effective
notwithstanding any contrary action which may be taken by Lender in reliance
upon such payment or proceeds. This Section 6.4 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
6.5 Authorization to Make Loans. Lender is authorized to make the Loans and
----------------------------
provide the Letter of Credit Accommodations based upon telephonic or other
instructions received from anyone purporting to be an officer of Borrower or
other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of Credit
Accommodations hereunder shall specify the date on which the requested advance
is to be made or Letter of Credit Accommodations established (which day shall be
a Business Day) and the amount of the requested Loan. Requests received after
11:00 a.m. Atlanta, Georgia time on any day shall be deemed to have been made as
of the opening of business on the immediately following Business Day. All Loans
and Letter of Credit Accommodations under this Agreement shall be conclusively
presumed to have been made to, and at the request of and for the benefit of,
Borrower when deposited to the credit of Borrower or otherwise disbursed or
established in accordance with the instructions of Borrower or in accordance
with the terms and conditions of this Agreement.
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6.6 Use of Proceeds. The initial Revolving Loan under this Agreement shall
-----------------
be in an amount that is not less than $250,000. Borrower shall use the initial
proceeds of the Loans provided by Lender to Borrower hereunder only for:
(a) payments to each of the persons listed in the disbursement direction letter
furnished by Borrower to Lender on or about the date hereof and (b) costs,
expenses and fees in connection with the preparation, negotiation, execution and
delivery of this Agreement and the other Financing Agreements. All other Loans
made or Letter of Credit Accommodations provided by Lender to Borrower pursuant
to the provisions hereof shall be used by Borrower only for general operating,
working capital and other proper corporate purposes of Borrower not otherwise
prohibited by the terms hereof. None of the proceeds will be used, directly or
indirectly, for the purpose of purchasing or carrying any margin security or for
the purposes of reducing or retiring any indebtedness which was originally
incurred to purchase or carry any margin security or for any other purpose which
might cause any of the Loans to be considered a "purpose credit" within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System,
as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
----------------------------------
7.1 Collateral Reporting.
---------------------
(a) Borrower shall provide Lender with the following documents in a form
satisfactory to Lender:
(i) on a weekly basis or more frequently, as required by Lender, a
schedule of sales made, credits issued and cash received;
(ii) on a monthly basis or more frequently as Lender may request, (A)
perpetual inventory reports, (B) inventory reports by location and
category, (C) agings of accounts payable (and including information
indicating the status of payments to owners and lessors of the leased
premises of Borrower) and (D) agings of accounts receivable (together with
a reconciliation to the previous month's aging and general ledger);
(iii) upon Lender's request, (A) copies of customer statements and
credit memos, remittance advices and reports, and copies of deposit slips
and bank statements, (B) copies of shipping and delivery documents, and
(C) copies of purchase orders, invoices and delivery documents for
Inventory and Equipment acquired by Borrower;
(iv) such other reports as to the Collateral as Lender shall request
from time to time; and
(b) If any of Borrower's records or reports of the Collateral are prepared
or maintained by an accounting service, contractor, shipper or other agent,
Borrower hereby irrevocably authorizes such service, contractor, shipper or
agent to deliver such records, reports, and related documents to Lender and to
follow Lender's instructions with respect to further services at any time that
an Event of Default exists or has occurred and is continuing.
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7.2 Accounts Covenants.
-------------------
(a) Borrower shall notify Lender promptly of: (i) any material delay in
Borrower's performance of any of its obligations to any account debtor involving
an Account exceeding $100,000 or the assertion of any claims, offsets, defenses
or counterclaims by any account debtor involving an amount exceeding $100,000,
or any disputes with account debtors, or any settlement, adjustment or
compromise thereof involving an amount exceeding $100,000, (ii) all material
adverse information relating to the financial condition of any account debtor
and (iii) any event or circumstance which, to Borrower's knowledge would cause
Lender to consider any then existing Accounts as no longer constituting Eligible
Accounts. No credit, discount, allowance or extension or agreement for any of
the foregoing shall be granted to any account debtor without Lender's consent,
except in the ordinary course of Borrower's business in accordance with
practices and policies previously disclosed in writing to Lender. So long as no
Event of Default exists or has occurred and is continuing, Borrower shall
settle, adjust or compromise any claim, offset, counterclaim or dispute with any
account debtor. At any time that an Event of Default exists or has occurred and
is continuing, Lender shall, at its option, have the exclusive right to settle,
adjust or compromise any claim, offset, counterclaim or dispute with account
debtors or grant any credits, discounts or allowances.
(b) Without limiting the obligation of Borrower to deliver any other
information to Lender, Borrower shall promptly report to Lender any return of
Inventory by any one account debtor if the Inventory so returned in such case
has a value in excess of $50,000. At any time that Inventory is returned,
reclaimed or repossessed, the Account (or portion thereof) which arose from the
sale of such returned, reclaimed or repossessed Inventory shall not be deemed an
Eligible Account. In the event any account debtor returns Inventory when an
Event of Default exists or has occurred and is continuing, Borrower shall, upon
Lender's request, (i) hold the returned Inventory in trust for Lender, (ii)
segregate all returned Inventory from all of its other property, (iii) dispose
of the returned Inventory solely according to Lender's instructions, and
(iv) not issue any credits, discounts or allowances with respect thereto without
Lender's prior written consent.
(c) With respect to each Account: (i) the amounts shown on any invoice
delivered to Lender or schedule thereof delivered to Lender shall be true and
complete, (ii) no payments shall be made thereon except payments immediately
delivered to Lender pursuant to the terms of this Agreement, (iii) no credit,
discount, allowance or extension or agreement for any of the foregoing shall be
granted to any account debtor except as reported to Lender in accordance with
this Agreement and except for credits, discounts, allowances or extensions made
or given in the ordinary course of Borrower's business in accordance with
practices and policies previously disclosed to Lender, (iv) there shall be no
setoffs, deductions, contras, defenses, counterclaims or disputes existing or
asserted with respect thereto except as reported to Lender in accordance with
the terms of this Agreement, (v) none of the transactions giving rise thereto
will violate any applicable State or Federal laws or regulations, all
documentation relating thereto will be legally sufficient under such laws and
regulations and all such documentation will be legally enforceable in accordance
with its terms.
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(d) Lender shall have the right at any time or times, in Lender's name or
in the name of a nominee of Lender, to verify the validity, amount or any other
matter relating to any Account or other Collateral, by mail, telephone,
facsimile transmission or otherwise.
(e) Borrower shall deliver or cause to be delivered to Lender, with
appropriate endorsement and assignment, with full recourse to Borrower, all
chattel paper and instruments which Borrower now owns or may at any time acquire
immediately upon Borrower's receipt thereof, except as Lender may otherwise
agree.
(f) Lender may, at any time or times that an Event of Default exists or has
occurred and is continuing, (i) notify any or all account debtors that the
Accounts have been assigned to Lender and that Lender has a security interest
therein and Lender may direct any or all accounts debtors to make payment of
Accounts directly to Lender, (ii) extend the time of payment of, compromise,
settle or adjust for cash, credit, return of merchandise or otherwise, and upon
any terms or conditions, any and all Accounts or other obligations included in
the Collateral and thereby discharge or release the account debtor or any other
party or parties in any way liable for payment thereof without affecting any of
the Obligations, (iii) demand, collect or enforce payment of any Accounts or
such other obligations, but without any duty to do so, and Lender shall not be
liable for its failure to collect or enforce the payment thereof nor for the
negligence of its agents or attorneys with respect thereto and (iv) take
whatever other action Lender may deem necessary or desirable for the protection
of its interests. At any time that an Event of Default exists or has occurred
and is continuing, at Lender's request, all invoices and statements sent to any
account debtor shall state that the Accounts and such other obligations have
been assigned to Lender and are payable directly and only to Lender and Borrower
shall deliver to Lender such originals of documents evidencing the sale and
delivery of goods or the performance of services giving rise to any Accounts as
Lender may require.
7.3 Inventory Covenants. With respect to the Inventory: (a) Borrower shall
--------------------
at all times maintain inventory records reasonably satisfactory to Lender,
keeping correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, Borrower's cost therefor and daily
withdrawals therefrom and additions thereto; (b) Borrower shall conduct a
physical count of the Inventory at least once each year, but at any time or
times as Lender may request on or after an Event of Default, and promptly
following such physical inventory shall supply Lender with a report in the form
and with such specificity as may be reasonably satisfactory to Lender concerning
such physical count; (c) Borrower shall not remove any Inventory from the
locations set forth or permitted herein, without the prior written consent of
Lender, except for sales of Inventory in the ordinary course of Borrower's
business and except to move Inventory directly from one location set forth or
permitted herein to another such location and except for Inventory shipped from
the manufacturer thereof to Borrower which is in transit to the locations set
forth or permitted herein; (d) upon Lender's request, Borrower shall, at its
expense, twice in any twelve (12) month period, but at any time or times as
Lender may request on or after an Event of Default, deliver or cause to be
delivered to Lender written reports or appraisals as to the Inventory in form,
scope and methodology acceptable to Lender and by an appraiser acceptable to
Lender, addressed to Lender and upon which Lender is expressly permitted to
rely; (e) Borrower shall produce, use, store and maintain the Inventory with all
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reasonable care and caution and in accordance with applicable standards of any
insurance and in conformity with applicable laws (including the requirements of
the Federal Fair Labor Standards Act of 1938, as amended and all rules,
regulations and orders related thereto); (f) Borrower assumes all responsibility
and liability arising from or relating to the production, use, sale or other
disposition of the Inventory; (g) Borrower shall not sell Inventory to any
customer on approval, or any other basis which entitles the customer to return
or may obligate Borrower to repurchase such Inventory except for the right of
return given to customers of Borrower consistent with its current policies as of
the date hereof; (h) Borrower shall keep the Inventory in good and marketable
condition; and (i) Borrower shall not, without prior written notice to Lender,
acquire or accept any Inventory on consignment or approval.
7.4 Equipment and Real Property Covenants. With respect to the Equipment
----------------------------------------
and Real Property: (a) at any time or times as Lender may request on or after an
Event of Default, deliver or cause to be delivered to Lender written reports or
appraisals as to the Equipment and/or the Real Property in form, scope and
methodology acceptable to Lender and by an appraiser acceptable to Lender,
addressed to Lender and upon which Lender is expressly permitted to rely; (b)
Borrower shall keep the Equipment in good order, repair, running and marketable
condition (ordinary wear and tear excepted); (c) Borrower shall use the
Equipment and Real Property with all reasonable care and caution and in
accordance with applicable standards of any insurance and in conformity with all
applicable laws; (d) the Equipment is and shall be used in Borrower's business
and not for personal, family, household or farming use; (e) Borrower shall not
remove any Equipment from the locations set forth or permitted herein, except to
the extent necessary to have any Equipment repaired or maintained in the
ordinary course of the business of Borrower or to move Equipment directly from
one location set forth or permitted herein to another such location except for
the movement of motor vehicles used by or for the benefit of Borrower in the
ordinary course of business and Borrower shall not remove any Equipment
currently located in the United States to any location outside of the United
States except for the excess sewing equipment currently located at 314 Water
Street, Washington, Georgia; (f) the Equipment is now and shall remain personal
property and Borrower shall not permit any of the Equipment to be or become a
part of or affixed to real property so as to become a fixture or an accession to
real property unless it is attached to the Real Property subject to the
Mortgage; and (g) Borrower assumes all responsibility and liability arising from
the use of the Equipment and Real Property.
7.5 Power of Attorney. Borrower hereby irrevocably designates and appoints
------------------
Lender (and all persons designated by Lender) as Borrower's true and lawful
attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name, to: (a)
at any time an Event of Default or act, condition or event which with notice or
passage of time or both would constitute an Event of Default exists or has
occurred and is continuing (i) demand payment on Receivables or other
Collateral, (ii) enforce payment of Receivables by legal proceedings or
otherwise, (iii) exercise all of Borrower's rights and remedies to collect any
Receivable or other Collateral, (iv) sell or assign any Receivable upon such
terms, for such amount and at such time or times as the Lender deems advisable,
(v) settle, adjust, compromise, extend or renew an Account, (vi) discharge and
release any Receivable, (vii) prepare, file and sign Borrower's name on any
proof of claim in bankruptcy or other similar document against an account debtor
other obligor in respect of any Receivables or other Collateral, (viii) notify
the post office authorities to change the address for
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delivery of remittances from account debtors or other obligors in respect of
Receivables or other proceeds of Collateral to an address designated by Lender,
and open and dispose of all mail addressed to Borrower and handle and store all
mail relating to the Collateral; and (ix) do all acts and things which are
necessary, in Lender's determination, to fulfill Borrower's obligations under
this Agreement and the other Financing Agreements and (b) at any time to (i)
take control in any manner of any item of payment in respect of Receivables or
constituting Collateral or otherwise received in or for deposit in the Blocked
Accounts or otherwise received by Lender, (ii) have access to any lockbox or
postal box into which remittances from account debtors or other obligors in
respect of Receivables or other proceeds of Collateral are sent or received,
(iii) endorse Borrower's name upon any items of payment in respect of
Receivables or constituting Collateral or otherwise received by Lender and
deposit the same in Lender's account for application to the Obligations, (iv)
endorse Borrower's name upon any chattel paper, document, instrument, invoice,
or similar document or agreement relating to any Receivable or any goods
pertaining thereto or any other Collateral, including any warehouse or other
receipts, or bills of lading and other negotiable or non-negotiable documents,
(v) clear Inventory the purchase of which was financed with Letter of Credit
Accommodations through U.S. Customs in Borrower's name, Lender's name or the
name of Lender's designee, and to sign and deliver to customs officials powers
of attorney in Borrower's name for such purpose, and to complete in Borrower's
or Lender's name, any order, sale or transaction, obtain the necessary documents
in connection therewith and collect the proceeds thereof, (vi) sign Borrower's
name on any verification of Receivables and notices thereof to account debtors
or other obligors in respect thereof and (vii) execute in Borrower's name and
file any UCC financing statements or amendments thereto. Borrower hereby
releases Lender and its officers, employees and designees from any liabilities
arising from any act or acts under this power of attorney and in furtherance
thereof, whether of omission or commission, except as a result of Lender's own
gross negligence or wilful misconduct as determined pursuant to a final
non-appealable order of a court of competent jurisdiction.
7.6 Right to Cure. Lender may, at its option, (a) upon notice to Borrower,
--------------
cure any default by Borrower under any material agreement with a third party
which affects the Collateral, its value or the ability of Lender to collect,
sell or otherwise dispose of the Collateral or the rights and remedies of Lender
therein or the ability of Borrower to perform its obligations under the other
Financing Agreements, (b) pay or bond on appeal any judgment entered against
Borrower, (c) discharge taxes, liens, security interests or other encumbrances
at any time levied on or existing with respect to the Collateral and (d) pay any
amount, incur any expense or perform any act which, in Lender's judgment, is
necessary or appropriate to preserve, protect, insure or maintain the Collateral
and the rights of Lender with respect thereto. Lender may add any amounts so
expended to the Obligations and charge Borrower's account therefor, such amounts
to be repayable by Borrower on demand. Lender shall be under no obligation to
effect such cure, payment or bonding and shall not, by doing so, be deemed to
have assumed any obligation or liability of Borrower. Any payment made or other
action taken by Lender under this Section shall be without prejudice to any
right to assert an Event of Default hereunder and to proceed accordingly.
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7.7 Access to Premises. From time to time as requested by Lender, at the
-------------------
cost and expense of Borrower, (a) Lender or its designee shall have complete
access to all of Borrower's premises during normal business hours and after
notice to Borrower, or at any time and without notice to Borrower if an Event of
Default exists or has occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and all of Borrower's books
and records, including the Records, and (b) Borrower shall promptly furnish to
Lender such copies of such books and records or extracts therefrom as Lender may
request, and (c) Lender or its designee may use during normal business hours
such of Borrower's personnel, equipment, supplies and premises as may be
reasonably necessary for the foregoing (provided, that, Borrower shall make such
personnel, equipment, supplies and premises available to Lender or its designee
in such manner so as to minimize any interference with the operations of
Borrower and so as to enable Lender or its designee to comply with applicable
health and safety procedures and regulations) and if an Event of Default exists
or has occurred and is continuing for the collection of Accounts and realization
of other Collateral.
7.8 Bills of Lading and Other Documents of Title. In the event that any
------------------------------------------------
Inventory which would otherwise be Eligible Inventory located outside the United
States of America which is in transit to premises of a Customs Broker in the
United States or premises of Borrower as described in the definition of Eligible
Inventory, constitutes Eligible Inventory then (a) Borrower shall cause all
bills of lading and other documents of title relating to goods being purchased
by Borrower which are outside the United States and in transit to the premises
of Borrower or the premises of a Customs Broker in the United States to name
Borrower as consignee, unless and until Lender may direct otherwise; (b) at such
time and from time to time as Lender may direct, Borrower shall cause Lender or
such financial institution or other person as Lender may specify to be named as
consignee; (c) without limiting any other rights of Lender hereunder, Lender
shall have the right to endorse and negotiate on behalf of, and as
attorney-in-fact for, Borrower any bill of lading or other document of title
with respect to such goods naming Borrower as consignee to Lender; (d) there
shall be three (3) originals of each of such bill of lading or other document of
title which unless and until Lender shall direct otherwise shall be delivered as
follows: (i) one (1) original to such Customs Broker as Borrower may specify (so
long as Lender has received a Collateral Access Agreement duly authorized,
executed and delivered by such Customs Broker), and (ii) two (2) originals to
Lender or to such other person as Lender may designate for such purpose; (e)
Borrower shall obtain a copy (but not the originals) of such bill of lading or
other documents from the Customs Broker; and (f) Borrower shall cause all bills
of lading or other documents of title relating to goods purchased by Borrower
which are outside the United States and in transit to the premises of Borrower
or the premises of a Customs Broker in the United States to be issued in a form
so as to constitute negotiable documents as such term is defined in the Uniform
Commercial Code.
SECTION 8. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which are a continuing
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condition of the making of Loans and providing Letter of Credit Accommodations
by Lender to Borrower:
8.1 Corporate Existence, Power and Authority; Subsidiaries. Borrower is a
--------------------------------------------------------
corporation duly organized and in good standing under the laws of its state of
incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on Borrower's financial condition,
results of operation or business or the rights of Lender in or to any of the
Collateral. The execution, delivery and performance of this Agreement, the other
Financing Agreements and the transactions contemplated hereunder and thereunder
are all within Borrower's corporate powers, have been duly authorized and are
not in contravention of law or the terms of Borrower's certificate of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which Borrower is a party or by which Borrower or
its property are bound. This Agreement and the other Financing Agreements
constitute legal, valid and binding obligations of Borrower enforceable in
accordance with their respective terms. Borrower does not have any Subsidiaries
except as set forth on the Information Certificate.
8.2 Financial Statements; No Material Adverse Change. (a) All financial
----------------------------------------------------
statements relating to Borrower which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance with GAAP and fairly present
the financial condition and the results of operation of Borrower as at the dates
and for the periods set forth therein. Except as disclosed in any interim
financial statements furnished by Borrower to Lender prior to the date of this
Agreement, there has been no material adverse change in the assets, liabilities,
properties and condition, financial or otherwise, of Borrower, since the date of
the most recent audited financial statements furnished by Borrower to Lender
prior to the date of this Agreement.
(b) The pro forma balance sheets and future cash flow projections attached
as Schedule 8.2 for Borrower and its Subsidiaries (together with the summaries
of assumptions and projected assumptions, based on historical performance with
respect thereto) furnished by Borrower to Lender prior to the date of this
Agreement represent the reasonable, good faith opinion of Borrower and its
management as to the subject matter thereof.
8.3 Chief Executive Office; Collateral Locations. The chief executive
-------------------------------------------------
office of Borrower and Borrower's Records concerning Accounts are located only
at the address set forth on the signature page hereto, and its only other places
of business and the only other locations of Collateral, if any, are the
addresses set forth in the Information Certificate, subject to the right of
Borrower to establish new locations in accordance with Section 9.2 below. The
Information Certificate correctly identifies any of such locations which are not
owned by Borrower and sets forth the owners and/or operators thereof and to the
best of Borrower's knowledge, the holders of any mortgages on such locations.
8.4 Priority of Liens; Title to Properties. The security interests and
-----------------------------------------
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected
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first priority liens and security interests in and upon the Collateral subject
only to the liens indicated on Schedule 8.4 hereto and the other liens permitted
under Section 9.8 hereof other than Collateral located in Borrower's locations
outside of the United States as set forth in item 9 of the Information
Certificate and Mexico, pursuant to Section 9.10 hereof. Borrower has good and
marketable title to all of its properties and assets subject to no liens,
mortgages, pledges, security interests, encumbrances or charges of any kind,
except those granted to Lender and such others as are specifically listed on
Schedule 8.4 hereto or permitted under Section 9.8 hereof.
8.5 Tax Returns. Borrower has filed, or caused to be filed, in a timely
-------------
manner all tax returns, reports and declarations which are required to be filed
by it. All information in such tax returns, reports and declarations is complete
and accurate in all material respects. Borrower has paid or caused to be paid
all taxes due and payable or claimed due and payable in any assessment received
by it, except taxes the validity of which are being contested in good faith by
appropriate proceedings diligently pursued and available to Borrower and with
respect to which adequate reserves have been set aside on its books. Adequate
provision has been made for the payment of all accrued and unpaid Federal,
State, county, local, foreign and other taxes whether or not yet due and payable
and whether or not disputed.
8.6 Litigation. Except as set forth on the Information Certificate, there
-----------
is no present investigation by any Governmental Authority pending, or to the
best of Borrower's knowledge threatened, against or affecting Borrower, its
assets or business and there is no action, suit, proceeding or claim by any
Person pending, or to the best of Borrower's knowledge threatened, against
Borrower or its assets or goodwill, or against or affecting any transactions
contemplated by this Agreement, which if adversely determined against Borrower
would result in any material adverse change in the assets, business or prospects
of Borrower or would impair the ability of Borrower to perform its obligations
hereunder or under any of the other Financing Agreements to which it is a party
or of Lender to enforce any Obligations or realize upon any Collateral.
8.7 Compliance with Other Agreements and Applicable Laws.
-----------------------------------------------------
(a) Borrower is not in default in any material respect under, or in
violation in any respect of any of the terms of, any agreement, contract,
instrument, lease or other commitment to which it is a party or by which it or
any of its assets are bound. Borrower is in compliance in all material respects
with the requirements of all applicable laws, rules, regulations and orders of
any Governmental Authority relating to its business, including, without
limitation, those set forth in or promulgated pursuant to the Occupational
Safety and Health Act of 1970, as amended, the Fair Labor Standards Act of 1938,
as amended, ERISA, the Code, as amended, and the rules and regulations
thereunder, all Federal, State and local statutes, regulations, rules and orders
relating to consumer credit (including, without limitation, as each has been
amended, the Truth-in- Lending Act, the Fair Credit Billing Act, the Equal
Credit Opportunity Act and the Fair Credit Reporting Act, and regulations, rules
and orders promulgated thereunder), all Federal, State and local states,
regulations, rules and orders pertaining to sales of consumer goods (including,
without limitation, the Consumer Products Safety Act of 1972, as amended, and
the Federal Trade Commission Act of 1914, as amended, and all regulations, rules
and orders promulgated thereunder).
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(b) Borrower has obtained all material permits, licenses, approvals,
consents, certificates, orders or authorizations of any governmental agency
required for the lawful conduct of its business. Schedule 8.7 hereto sets forth
all material permits, licenses, approvals, consents, certificates, orders or
authorizations (the "Permits") issued to or held by Borrower as of the date
hereof by any Federal, State or local governmental agency and any applications
pending by Borrower with such federal, state or local governmental agency. The
Permits constitute all permits, licenses, approvals, consents, certificates,
orders or authorizations necessary for Borrower to own and operate its business
as presently conducted or proposed to be conducted where the failure to have
such Permits would have a material adverse effect on the business, performance,
operations or properties of Borrower or the legality, validity or enforceability
of this Agreement or the other Financing Agreements or the ability of Borrower
to perform its obligations under the Agreement or any of the other Financing
Agreements or the rights and remedies of Lender under this Agreement or any of
the other Financing Agreements. All of the Permits are valid and subsisting and
in full force and effect. There are no actions, claims or proceedings pending or
threatened that seek the revocation, cancellation, suspension or modification of
any of the Permits.
8.8 Environmental Compliance.
-------------------------
(a) Except as set forth on Schedule 8.8 hereto, Borrower and any Subsidiary
have not generated, used, stored, treated, transported, manufactured, handled,
produced or disposed of any Hazardous Materials, on or off its premises (whether
or not owned by it) in any manner which at any time violates any applicable
Environmental Law or any license, permit, certificate, approval or similar
authorization thereunder and the operations of Borrower and any Subsidiary
complies in all material respects with all Environmental Laws and all licenses,
permits, certificates, approvals and similar authorizations thereunder.
(b) Except as set forth on Schedule 8.8 hereto, there has been no
investigation, proceeding, complaint, order, directive, claim, citation or
notice by any Governmental Authority or any other person nor is any pending or
to the best of Borrower's knowledge threatened, with respect to any
non-compliance with or violation of the requirements of any Environmental Law by
Borrower and any Subsidiary or the release, spill or discharge, threatened or
actual, of any Hazardous Material or the generation, use, storage, treatment,
transportation, manufacture, handling, production or disposal of any Hazardous
Materials or any other environmental, health or safety matter, which affects
Borrower or its business, operations or assets or any properties at which
Borrower has transported, stored or disposed of any Hazardous Materials.
(c) Borrower and its Subsidiaries have no material liability (contingent or
otherwise) in connection with a release, spill or discharge, threatened or
actual, of any Hazardous Materials or the generation, use, storage, treatment,
transportation, manufacture, handling, production or disposal of any Hazardous
Materials.
(d) Borrower and its Subsidiaries have all licenses, permits, certificates,
approvals or similar authorizations required to be obtained or filed in
connection with the operations of
43
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Borrower under any Environmental Law and all of such licenses, permits,
certificates, approvals or similar authorizations are valid and in full force
and effect.
8.9 Employee Benefits.
------------------
(a) Each Plan is in material compliance with the applicable provisions of
ERISA, the Code and other federal or state law. Each Plan which is intended to
qualify under Section 401(a) of the Code has received a favorable determination
letter from the Internal Revenue Service and to the best knowledge of the
Borrower, nothing has occurred which would cause the loss of such qualification.
Borrower and its ERISA Affiliates have made all required contributions to any
Plan subject to Section 412 of the Code, and no application for a funding waiver
or an extension of any amortization period pursuant to Section 412 of the Code
has been made with respect to any Plan.
(b) There are no pending or to the best knowledge of Borrower, threatened
claims, actions or lawsuits, or action by any Governmental Authority, with
respect to any Plan. There has been no prohibited transaction or violation of
the fiduciary responsibility rules with respect to any Plan that has not been
fully cured by reversal of the transaction or otherwise, including payment in
full of any applicable fees or penalties.
(c) (i) No ERISA Event has occurred or is reasonably expected to occur;
(ii) the current value of each Plan's assets (determined in accordance with the
assumptions used for funding such Plan pursuant to Section 412 of the Code) do
not exceed such Plan's liabilities under Section 4001(a)(16) of ERISA;
(iii) Borrower and its ERISA Affiliate have not incurred and do not reasonably
expect to incur, any liability under Title IV of ERISA with respect to any Plan
(other than premiums due and not delinquent under Section 4007 of ERISA);
(iv) Borrower and its ERISA Affiliates have not incurred and do not reasonably
expect to incur, any liability (and no event has occurred which, with the giving
of notice under Section 4219 of ERISA, would result in such liability) under
Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and
(v) Borrower and its ERISA Affiliates have not engaged in a transaction that
could be subject to Section 4069 or 4212(c) of ERISA.
8.10 Bank Accounts. All of the deposit accounts, investment accounts or
--------------
other accounts in the name of or used by Borrower maintained at any bank or
other financial institution are set forth on Schedule 8.10 hereto, subject to
the right of Borrower to establish new accounts in accordance with Section 9.13
below.
8.11 Intellectual Property. Borrower owns or licenses or otherwise has the
----------------------
right to use all Intellectual Property necessary for the operation of its
business as presently conducted or proposed to be conducted. As of the date
hereof, Borrower does not have any Intellectual Property registered, or subject
to pending applications, in the United States Patent and Trademark Office or any
similar office or agency in the United States, any State thereof, any political
subdivision thereof or in any other country, other than those described in
Schedule 8.11 hereto and has not granted any licenses with respect thereto other
than as set forth in Schedule 8.11 hereto. No event has occurred which permits
or would permit after notice or passage of time or
44
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both, the revocation, suspension or termination of such rights. To the best of
the knowledge of Borrower, no slogan or other advertising device, product,
process, method, substance or other Intellectual Property or goods bearing or
using any Intellectual Property presently contemplated to be sold by or employed
by Borrower infringes any patent, trademark, servicemark, tradename, copyright,
license or other Intellectual Property owned by any other Person presently and
no claim or litigation is pending or threatened against or affecting Borrower
contesting its right to sell or use any such Intellectual Property. Schedule
8.11 sets forth all of the agreements or other arrangements of Borrower pursuant
to which Borrower has a license or other right to use any trademarks, logos,
designs, representations or other Intellectual Property owned by another person
as in effect on the date hereof and the dates of the expiration of such
agreements or other arrangements of Borrower as in effect on the date hereof. No
trademark, servicemark or other Intellectual Property at any time used by
Borrower which is owned by another person, or owned by Borrower subject to any
security interest, lien, collateral assignment, pledge or other encumbrance in
favor of any person other than Lender, is affixed to any Eligible Inventory,
except to the extent permitted under the term of the license agreements listed
on Schedule 8.11 hereto.
8.12 Acquisition of Assets.
----------------------
(a) The Distribution Agreements and the transactions contemplated
thereunder have been duly executed, delivered and performed (except to the
extent that the Distribution Agreements as in effect on the date hereof
expressly contemplate performance after the date hereof) in accordance with
their terms by the respective parties thereto in all material respects,
including the fulfillment of all conditions precedent set forth therein and
giving effect to the terms of the Distribution Agreements and the assignments to
be executed and delivered by Woodside (or any of its affiliates or subsidiaries)
thereunder, Borrower has acquired and has good and marketable title to the
assets of the Delta Apparel division of Woodside, free and clear of all claims,
liens, pledges and encumbrances of any kind, except as permitted hereunder.
Borrower has acquired all of the assets consisting of the Delta Apparel Company
division of all of the various subsidiaries of Woodside.
(b) All actions and proceedings, required by the Distribution Agreements in
respect of the Intercompany Reorganization (as such term is defined in the DWI
Distribution Agreement), applicable law or regulation (including, but not
limited to, compliance with the Hart-Scott-Rodino Anti-Trust Improvements Act of
1976, as amended if applicable) to be taken have been taken and the transactions
required thereunder have been duly and validly taken and consummated hereof
(except for those provisions thereof that are solely for the benefit of Woodside
and not for Borrower and which do not otherwise affect or relate to Borrower).
(c) No court of competent jurisdiction has issued any injunction,
restraining order or other order which prohibits consummation of the
transactions described in the Distribution Agreements and no governmental or
other action or proceeding has been threatened or commenced, seeking any
injunction, restraining order or other order which seeks to void or otherwise
modify the transactions described in the Distribution Agreements.
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(d) Borrower has delivered, or caused to be delivered, to Lender, true,
correct and complete copies of the Distribution Agreements.
8.13 Solvency. Borrower is solvent and will continue to be solvent after
---------
the creation of the Obligations, the security interests of Lender and the other
transaction contemplated hereunder, is able to pay its debts as they mature and
has (and has reason to believe it will continue to have) sufficient capital (and
not unreasonably small capital) to carry on its business and all businesses in
which it is about to engage. The assets and properties of Borrower at a fair
valuation and at their present salable value are, and will be, greater than the
Indebtedness of Borrower, and including subordinated and contingent liabilities
computed at the amount which, to the best of Borrower's knowledge, represents an
amount which can reasonably be expected to become an actual or mature liability.
8.14 Labor Disputes.
---------------
(a) Set forth on Schedule 8.14 hereto is a list (including dates of
termination) of all collective bargaining or similar agreements between or
applicable to Borrower and any union, labor organization or other bargaining
agent in respect of the employees of Borrower on the date hereof.
(b) There is (i) no significant unfair labor practice complaint pending
against Borrower or, to the best of the knowledge of Borrower, threatened
against it, before the National Labor Relations Board, and no significant
grievance or significant arbitration proceeding arising out of or under any
collective bargaining agreement is pending on the date hereof against Borrower
or, to best of the knowledge of Borrower, threatened against it, and (ii) no
significant strike, labor dispute, slowdown or stoppage is pending against
Borrower or, to the best of the knowledge of Borrower, threatened against
Borrower.
8.15 Corporate Name; Prior Transactions. Borrower has not, during the past
-----------------------------------
five years, been known by or used by any other corporate or fictitious name or
been a party to any merger or consolidation, or acquired all or substantially
all of the assets of any Person, or acquired any of its property or assets out
of the ordinary course of business, except as set forth in the Information
Certificate.
8.16 Restrictions on Subsidiaries. Except for restrictions contained in
-----------------------------
this Agreement or any other agreement with respect to Indebtedness of Borrower
permitted hereunder as in effect on the date hereof, there are no contractual or
consensual restrictions on Borrower or any of its Subsidiaries which prohibit or
otherwise restrict (a) the transfer of cash or other assets (i) between Borrower
and any of its Subsidiaries or (ii) between any Subsidiaries of Borrower or
(b) the ability of Borrower or any of its Subsidiaries to incur Indebtedness or
grant security interests to Lender in the Collateral.
8.17 Material Contracts. Schedule 8.17 hereto sets forth all Material
--------------------
Contracts to which Borrower is a party or is bound as of the date hereof.
Borrower has delivered true, correct and complete copies of such Material
Contracts to Lender on or before the date hereof. Borrower is
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not in breach of or in default under any Material Contract and has not received
any notice of the intention of any other party thereto to terminate any Material
Contract.
8.18 Accuracy and Completeness of Information. All information furnished by
-----------------------------------------
or on behalf of Borrower in writing to Lender in connection with this Agreement
or any of the other Financing Agreements or any transaction contemplated hereby
or thereby, including all information on the Information Certificate is true and
correct in all material respects on the date as of which such information is
dated or certified and does not omit any material fact necessary in order to
make such information not misleading. No event or circumstance has occurred
which has had or could reasonably be expected to have a material adverse affect
on the business, assets or prospects of Borrower, which has not been fully and
accurately disclosed to Lender in writing.
8.19 Survival of Warranties; Cumulative. All representations and warranties
-----------------------------------
contained in this Agreement or any of the other Financing Agreements shall
survive the execution and delivery of this Agreement and shall be deemed to have
been made again to Lender on the date of each additional borrowing or other
credit accommodation hereunder and shall be conclusively presumed to have been
relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
----------------------------------
9.1 Maintenance of Existence. Borrower shall at all times preserve, renew
-------------------------
and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, tradenames, approvals, authorizations, leases and
contracts necessary to carry on the business as presently or proposed to be
conducted. Borrower shall give Lender thirty (30) days prior written notice of
any proposed change in its corporate name, which notice shall set forth the new
name and Borrower shall deliver to Lender a copy of the amendment to the
Certificate of Incorporation of Borrower providing for the name change certified
by the Secretary of State of the jurisdiction of incorporation of Borrower as
soon as it is available.
9.2 New Collateral Locations. Borrower may open any new location within the
-------------------------
continental United States provided Borrower (a) gives Lender fifteen (15) days
prior written notice of the intended opening of any such new location and (b)
executes and delivers, or causes to be executed and delivered, to Lender such
agreements, documents, and instruments as Lender may deem reasonably necessary
or desirable to protect its interests in the Collateral at such location,
including UCC financing statements.
9.3 Compliance with Laws, Regulations, Etc.
---------------------------------------
(a) Borrower shall, and shall cause any Subsidiary to, at all times, comply
in all material respects with all laws, rules, regulations, licenses, permits,
approvals and orders
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applicable to it and duly observe all requirements of any Federal, State or
local Governmental Authority, including ERISA, the Code, the Occupational Safety
and Health Act of 1970, as amended, the Fair Labor Standards Act of 1938, as
amended, and all statutes, rules, regulations, orders, permits and stipulations
relating to environmental pollution and employee health and safety, including
all of the Environmental Laws.
(b) At the reasonable request of Lender and in any event, to the extent
required by applicable law, Borrower shall establish and maintain, at its
expense, a system to assure and monitor its continued compliance with all
Environmental Laws in all of its operations, which system shall include annual
reviews of such compliance by employees or agents of Borrower who are familiar
with the requirements of the Environmental Laws. Copies of all environmental
surveys, audits, assessments, feasibility studies and results of remedial
investigations shall be promptly furnished, or caused to be furnished, by
Borrower to Lender. Borrower shall take prompt and appropriate action to respond
to any non-compliance with any of the Environmental Laws and shall regularly
report to Lender on such response.
(c) Borrower shall give both oral and written notice to Lender immediately
upon Borrower's receipt of any notice of, or Borrower's otherwise obtaining
knowledge of, (i) the occurrence of any event involving the release, spill or
discharge, threatened or actual, of any Hazardous Material or (ii) any
investigation, proceeding, complaint, order, directive, claims, citation or
notice with respect to: (A) any non-compliance with or violation of any
Environmental Law by Borrower or (B) the release, spill or discharge, threatened
or actual, of any Hazardous Material or (C) the generation, use, storage,
treatment, transportation, manufacture, handling, production or disposal of any
Hazardous Materials or (D) any other environmental, health or safety matter,
which affects Borrower or its business, operations or assets or any properties
at which Borrower transported, stored or disposed of any Hazardous Materials.
(d) Without limiting the generality of the foregoing, whenever Lender
reasonably determines that there is non-compliance, or any condition which
requires any action by or on behalf of Borrower in order to avoid any material
non-compliance, with any Environmental Law, Borrower shall, at Lender's request
and Borrower's expense: (i) cause an independent environmental engineer
acceptable to Lender to conduct such tests of the site where Borrower's
non-compliance or alleged non-compliance with such Environmental Laws has
occurred as to such non-compliance and prepare and deliver to Lender a report as
to such non-compliance setting forth the results of such tests, a proposed plan
for responding to any environmental problems described therein, and an estimate
of the costs thereof and (ii) provide to Lender a supplemental report of such
engineer whenever the scope of such non-compliance, or Borrower's response
thereto or the estimated costs thereof, shall change in any material respect.
(e) Borrower shall indemnify and hold harmless Lender, its directors,
officers, employees, agents, invitees, representatives, successors and assigns,
from and against any and all losses, claims, damages, liabilities, costs, and
expenses (including attorneys' fees and legal expenses) directly or indirectly
arising out of or attributable to the use, generation, manufacture,
reproduction, storage, release, threatened release, spill, discharge, disposal
or presence of a Hazardous Material, including the costs of any required or
necessary repair, cleanup or other
48
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remedial work with respect to any property of Borrower and the preparation and
implementation of any closure, remedial or other required plans. All
representations, warranties, covenants and indemnifications in this Section 9.3
shall survive the payment of the Obligations and the termination or non-renewal
of this Agreement.
9.4 Payment of Taxes and Claims. Borrower shall, and shall cause any
------------------------------
Subsidiary to, duly pay and discharge all taxes, assessments, contributions and
governmental charges upon or against it or its properties or assets, except for
taxes the validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to Borrower or such Subsidiary, as
the case may be, and with respect to which adequate reserves have been set aside
on its books. Borrower shall be liable for any tax or penalties imposed on
Lender as a result of the financing arrangements provided for herein and
Borrower agrees to indemnify and hold Lender harmless with respect to the
foregoing, and to repay to Lender on demand the amount thereof, and until paid
by Borrower such amount shall be added and deemed part of the Loans, provided,
that, nothing contained herein shall be construed to require Borrower to pay any
income or franchise taxes attributable to the income of Lender from any amounts
charged or paid hereunder to Lender. The foregoing indemnity shall survive the
payment of the Obligations and the termination or non-renewal of this Agreement.
9.5 Insurance. Borrower shall, and shall cause any Subsidiary to, at all
----------
times, maintain with financially sound and reputable insurers insurance with
respect to the Collateral against loss or damage and all other insurance of the
kinds and in the amounts customarily insured against or carried by corporations
of established reputation engaged in the same or similar businesses and
similarly situated. Said policies of insurance shall be satisfactory to Lender
as to form, amount and insurer. Borrower shall furnish certificates, policies or
endorsements to Lender as Lender shall require as proof of such insurance, and,
if Borrower fails to do so, Lender is authorized, but not required, to obtain
such insurance at the expense of Borrower. All policies shall provide for at
least thirty (30) days prior written notice to Lender of any cancellation or
reduction of coverage and that Lender may act as attorney for Borrower in
obtaining, and at any time an Event of Default exists or has occurred and is
continuing, adjusting, settling, amending and canceling such insurance. Borrower
shall cause Lender to be named as a loss payee and an additional insured (but
without any liability for any premiums) under such insurance policies and
Borrower shall obtain non-contributory lender's loss payable endorsements to all
insurance policies in form and substance satisfactory to Lender. Such lender's
loss payable endorsements shall specify that the proceeds of such insurance
shall be payable to Lender as its interests may appear and further specify that
Lender shall be paid regardless of any act or omission by Borrower or any of its
Affiliates. At its option, Lender may apply any insurance proceeds received by
Lender at any time to the cost of repairs or replacement of Collateral and/or to
payment of the Obligations, whether or not then due, in any order and in such
manner as Lender may determine or hold such proceeds as cash collateral for the
Obligations.
9.6 Financial Statements and Other Information.
-------------------------------------------
(a) Borrower shall, and shall cause any Subsidiary to, keep proper books
and records in which true and complete entries shall be made of all dealings or
transactions of or in
49
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relation to the Collateral and the business of Borrower and its Subsidiaries in
accordance with GAAP. Borrower shall promptly furnish to Lender all such
financial and other information as Lender shall reasonably request relating to
the Collateral and the assets, business and operations of Borrower, and to
notify the auditors and accountants of Borrower that Lender is authorized to
obtain such information directly from them. Without limiting the foregoing,
Borrower shall furnish or cause to be furnished to Lender, the following: (i)
within thirty (30) days after the end of each fiscal month (other than at the
end of a fiscal quarter), monthly unaudited consolidated financial statements
(including in each case balance sheets, statements of income and loss,
statements of cash flow, and statements of shareholders' equity), all in
reasonable detail, fairly presenting the financial position and the results of
the operations of Borrower and its Subsidiaries as of the end of and through
such fiscal month, certified to be correct by the chief financial officer of
Borrower, subject to normal year-end adjustments, (ii) within forty-five (45)
days after the end of each fiscal quarter (other than at the end of the fiscal
year), unaudited consolidated financial statements (including in each case
balance sheets, statements of income and loss, statements of cash flow, and
statements of shareholders' equity) and (iii) within ninety (90) days after the
end of each fiscal year, audited consolidated financial statements (including in
each case balance sheets, statements of income and loss, statements of cash flow
and statements of shareholders' equity), and the accompanying notes thereto, all
in reasonable detail, fairly presenting the financial position and the results
of the operations of Borrower and its Subsidiaries as of the end of and for such
fiscal year, together with the unqualified opinion of independent certified
public accountants, which accountants shall be an independent accounting firm
selected by Borrower and reasonably acceptable to Lender, that such financial
statements have been prepared in accordance with GAAP, and present fairly the
results of operations and financial condition of Borrower and its Subsidiaries
as of the end of and for the fiscal year then ended.
(b) Borrower shall promptly notify Lender in writing of the details of (i)
any loss, damage, investigation, action, suit, proceeding or claim relating to
the Collateral or any other property which is security for the Obligations or
which would result in any material adverse change in Borrower's business,
properties, assets, goodwill or condition, financial or otherwise, (ii) any
Material Contract of Borrower being terminated or amended or any new Material
Contract entered into (in which event Borrower shall provide Lender with a copy
of such Material Contract), (iii) any order, judgment or decree in excess of
$500,000 shall have been entered against Borrower or any of its properties or
assets, (iv) any notification of violation of laws or regulations received by
Borrower, (v) any ERISA Event, and (vi) the occurrence of any Event of Default
or act, condition or event which, with notice or the passage of time or giving
of notice or both, would constitute an Event of Default.
(c) Borrower shall promptly after the sending or filing thereof furnish or
cause to be furnished to Lender copies of all reports which Borrower sends to
its stockholders generally and copies of all reports and registration statements
which Borrower files with the Securities and Exchange Commission, any national
securities exchange or the National Association of Securities Dealers, Inc.
(d) Borrower shall deliver, or cause to be delivered, to Lender, within
ninety (90) days from the date hereof, an opening unaudited consolidated balance
sheet of Borrower and its
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Subsidiaries after giving effect to the transactions contemplated by this
Agreement and the Distribution Agreements, which present fairly the financial
condition of Borrower as of such date.
(e) Borrower shall furnish or cause to be furnished to Lender such budgets,
forecasts, projections and other information respecting the Collateral and the
business of Borrower, as Lender may, from time to time, reasonably request.
Lender is hereby authorized to deliver a copy of any financial statement or any
other information relating to the business of Borrower to any court or other
Government Authority to the extent required by statute, rule, regulation,
subpoena or court order or to any participant or assignee or prospective
participant or assignee. Borrower hereby irrevocably authorizes and directs all
accountants or auditors to deliver to Lender, at Borrower's expense, copies of
the financial statements of Borrower and any reports or management letters
prepared by such accountants or auditors on behalf of Borrower and to disclose
to Lender such information as they may have regarding the business of Borrower.
Any documents, schedules, invoices or other papers delivered to Lender may be
destroyed or otherwise disposed of by Lender one (1) year after the same are
delivered to Lender, except as otherwise designated by Borrower to Lender in
writing.
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrower shall
--------------------------------------------------------
not, and shall not permit any Subsidiary to, directly or indirectly,
(a) merge into or with or consolidate with any other Person or permit any
other Person to merge into or with or consolidate with it; or
(b) sell, assign, lease, transfer, abandon or otherwise dispose of any
Capital Stock or Indebtedness to any other Person or any of its assets to any
other Person, except for
(i) sales of Inventory in the ordinary course of business,
(ii) the disposition of worn-out or obsolete Equipment so long as (A)
any proceeds are paid to Lender and (B) such sales do not involve Equipment
having an aggregate fair market value in excess of $100,000 all such
Equipment disposed of in any fiscal year of Borrower;
(iii) the issuance and sale by Borrower of Capital Stock of Borrower
after the date hereof; provided, that, (A) Lender shall have received not
less than ten (10) Business Days prior written notice of such issuance and
sale by Borrower, which notice shall specify the parties to whom such
shares are to be sold, the terms of such sale, the total amount which it is
anticipated will be realized from the issuance and sale of such stock and
the net cash proceeds which it is anticipated will be received by Borrower
from such sale, (B) Borrower shall not be required to pay any cash
dividends or repurchase or redeem such Capital Stock or make any other
payments in respect thereof except as permitted in Section 9.11 hereof, (C)
the terms of such Capital Stock, and the terms and conditions of the
purchase and sale thereof, shall not include any terms that include any
limitation on the right of Borrower to request or receive Loans or Letter
of Credit Accommodations or the right of Borrower to amend or modify any of
the terms
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and conditions of this Agreement or any of the other Financing Agreements or
otherwise in any way relate to or affect the arrangements of Borrower with
Lender are more restrictive or burdensome to Borrower than the terms of any
Capital Stock in effect on the date hereof, and (D) as of the date of such
issuance and sale and after giving effect thereto, no Event of Default or act,
condition or event which with notice or passage of time or both would constitute
an Event of Default shall exist or have occurred;
(iv) the issuance of Capital Stock of Borrower consisting of common stock
pursuant to a stock option plan, 401(k) plan, or incentive stock award plan of
Borrower for the benefit of its employees, directors and consultants, provided,
that, in no event shall Borrower be required to issue, or shall Borrower issue,
Capital Stock pursuant to such stock option plan, 401(k) plan, or incentive
stock award plan which would result in an Event of Default;
(v) sales of Existing Real Property (other than Existing Real Property
covered by a Mortgage pursuant to Section 9.18 hereof) and related assets,
provided, that, as to each and all of such sales (A) Lender shall have received
not less than ten (10) days prior written notice of such sale, which notice
shall set forth in reasonable detail satisfactory to Lender, the parties to such
sale, the Existing Real Property to be sold, the purchase price and the manner
of payment thereof and such other information with respect thereto as Lender may
request, (B) such sale shall be on commercially reasonable terms in a bona fide
arm's-length transaction with a non- affiliated person, (C) all of the Net
Proceeds of any such sale shall be paid either (i) directly to Lender or (ii) to
Borrower, provided, that, the entire amount of the Net Proceeds are used to
repay the outstanding amount of Revolving Loans which amounts may be reborrowed,
(D) Borrower shall not incur any liabilities in connection with such sales
except as permitted herein, and (E) as of the date of such sale and after giving
effect thereto, no Event of Default, or act, condition or event which with
notice or passage of time or both would constitute an Event of Default shall
exist or have occurred and be continuing.
(c) form or acquire any Subsidiaries other than those listed on the
Information Certificate and as permitted in accordance with Section 9.10 hereof;
(d) wind up, liquidate or dissolve; or
(e) agree to do any of the foregoing.
9.8 Encumbrances. Borrower shall not, and shall permit any Subsidiary to,
-------------
create, incur, assume or suffer to exist any security interest, mortgage,
pledge, lien, charge or other encumbrance of any nature whatsoever on any of its
assets or properties, including the Collateral, except:
(a) the security interests and liens of Lender;
(b) liens securing the payment of taxes, either not yet overdue or the
validity of which are being contested in good faith by appropriate proceedings
diligently pursued and
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available to Borrower or such Subsidiary, as the case may be and with respect to
which adequate reserves have been set aside on its books;
(c) non-consensual statutory liens (other than liens securing the payment
of taxes) arising in the ordinary course of Borrower's or such Subsidiary's
business to the extent: (i) such liens secure Indebtedness which is not overdue
or (ii) such liens secure Indebtedness relating to claims or liabilities which
are fully insured and being defended at the sole cost and expense and at the
sole risk of the insurer or being contested in good faith by appropriate
proceedings diligently pursued and available to Borrower or such Subsidiary, in
each case prior to the commencement of foreclosure or other similar proceedings
and with respect to which adequate reserves have been set aside on its books;
(d) zoning restrictions, easements, licenses, covenants and other
restrictions affecting the use of Real Property which do not interfere in any
material respect with the use of such Real Property or ordinary conduct of the
business of Borrower or such Subsidiary as presently conducted thereon or
materially impair the value of the Real Property which may be subject thereto;
(e) purchase money security interests in Equipment (including Capital
Leases) to secure Indebtedness permitted under Section 9.9(b) hereof; and
(f) the security interests and liens set forth on Schedule 8.4 hereto.
9.9 Indebtedness. Borrower shall not, and shall not permit any Subsidiary
-------------
to, incur, create, assume, become or be liable in any manner with respect to, or
permit to exist, any Indebtedness, except:
(a) the Obligations;
(b) purchase money Indebtedness (including Capital Leases) to the extent
secured by purchase money security interests in Equipment (including Capital
Leases) not to exceed $1,000,000 in the aggregate at any time outstanding so
long as such security interests do not apply to any property of Borrower other
than the Equipment so acquired, and the Indebtedness secured thereby does not
exceed the cost of the Equipment so acquired;
(c) Indebtedness of Borrower under interest swap agreements, interest rate
cap agreements, interest rate collar agreements, interest rate exchange
agreements and similar contractual agreements entered into for the purpose of
protecting a Person against fluctuations in interest rates; provided, that, such
arrangements are with banks or other financial institutions that have combined
capital and surplus and undivided profits of not less than $100,000,000 and are
not for speculative purposes and such Indebtedness shall be unsecured;
(d) the Indebtedness set forth on Schedule 9.9 hereto; provided, that, (i)
Borrower may only make regularly scheduled payments of principal and interest in
respect of such Indebtedness in accordance with the terms of the agreement or
instrument evidencing or giving
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rise to such Indebtedness as in effect on the date hereof, (ii) Borrower shall
not, directly or indirectly, (A) amend, modify, alter or change the terms of
such Indebtedness or any agreement, document or instrument related thereto as in
effect on the date hereof except, that, Borrower may, after prior written notice
to Lender, amend, modify, alter or change the terms thereof so as to extend the
maturity thereof, or defer the timing of any payments in respect thereof, or to
forgive or cancel any portion of such Indebtedness (other than pursuant to
payments thereof), or to reduce the interest rate or any fees in connection
therewith, or (B) redeem, retire, defease, purchase or otherwise acquire such
Indebtedness, or set aside or otherwise deposit or invest any sums for such
purpose, and (iii) Borrower shall furnish to Lender all notices or demands in
connection with such Indebtedness either received by Borrower or on its behalf,
promptly after the receipt thereof, or sent by Borrower or on its behalf,
concurrently with the sending thereof, as the case may be.
9.10 Loans, Investments, Guarantees, Etc. Borrower shall not, and shall not
------------------------------------
permit any Subsidiary to, directly or indirectly, make any loans or advance
money or property to any person, or invest in (by capital contribution, dividend
or otherwise) or purchase or repurchase the Capital Stock or Indebtedness or all
or a substantial part of the assets or property of any person, or guarantee,
assume, endorse, or otherwise become responsible for (directly or indirectly)
the Indebtedness, performance, obligations or dividends of any Person, or form
or acquire any Subsidiaries, or agree to do any of the foregoing, except:
(a) the endorsement of instruments for collection or deposit in the
ordinary course of business;
(b) investments in cash or Cash Equivalents, provided, that, (i) no
Revolving Loans are then outstanding and (ii) as to any of the foregoing, unless
waived in writing by Lender, Borrower shall take such actions as are deemed
necessary by Lender to perfect the security interest of Lender in such
investments;
(c) the existing equity investments of Borrower as of the date hereof in
its Subsidiaries, provided, that, Borrower shall have no obligation to make any
other investment in, or loans to, or other payments in respect of, any such
Subsidiaries;
(d) guarantees by any Subsidiaries of Borrower of the Obligations in favor
of Lender; (e) equity investment of Borrower in a wholly-owned Subsidiary
organized under the laws of Mexico (the "Mexican Subsidiary"), provided, that,
each of the following conditions is satisfied (i) Borrower shall execute and
deliver to Lender in form and substance satisfactory to Lender, a pledge and
security agreement granting to Lender a first pledge of and lien on at least
sixty-five (65%) of all of the issued and outstanding shares of Capital Stock of
such Subsidiary, (ii) Borrower shall deliver the original stock certificates
evidencing such shares of Capital Stock (or such other evidence as may be issued
in the case of a limited liability company) together with stock powers with
respect thereto duly executed in blank, and (iii) as of the date of such
investment and after giving effect thereto, no Event of Default, or act,
condition or event which
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with notice or passage of time or both would constitute an Event of Default
shall exist or have occurred;
(f) stock or obligations issued to Borrower by any Person (or the
representative of such Person) in respect of Indebtedness of such Person owing
to Borrower in connection with the insolvency, bankruptcy, receivership or
reorganization of such Person or a composition or readjustment of the debts of
such Person; provided, that, the original of any such stock or instrument
evidencing such obligations shall be promptly delivered to Lender, upon Lender's
request, together with such stock power, assignment or endorsement by Borrower
as Lender may request;
(g) obligations or account debtors to Borrower arising from Accounts which
are past due evidenced by a promissory note made by such account debtor payable
to Borrower; provided, that, promptly upon the receipt of the original of any
such promissory note by Borrower, such promissory note shall be endorsed to the
order of Lender by Borrower and promptly delivered to Lender as so endorsed;
(h) the loans, advances and guarantees set forth on Schedule 9.10 hereto;
provided, that, as to such loans, advances and guarantees, (i) Borrower shall
not, directly or indirectly, (A) amend, modify, alter or change the terms of
such loans, advances or guarantees or any agreement, document or instrument
related thereto, or (B) as to such guarantees, redeem, retire, defease, purchase
or otherwise acquire the obligations arising pursuant to such guarantees, or set
aside or otherwise deposit or invest any sums for such purpose, and (ii)
Borrower shall furnish to Lender all notices or demands in connection with such
loans, advances or guarantees or other Indebtedness subject to such guarantees
either received by Borrower or on its behalf, promptly after the receipt
thereof, or sent by Borrower or on its behalf, concurrently with the sending
thereof, as the case may be.
9.11 Dividends and Redemptions. Borrower shall not, directly or indirectly,
--------------------------
declare or pay any dividends on account of any shares of class of Capital Stock
of Borrower now or hereafter outstanding, or set aside or otherwise deposit or
invest any sums for such purpose, or redeem, retire, defease, purchase or
otherwise acquire any shares of any class of Capital Stock (or set aside or
otherwise deposit or invest any sums for such purpose) for any consideration
other than common stock or apply or set apart any sum, or make any other
distribution (by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing except, that:
(a) any Subsidiary of Borrower may pay dividends to Borrower;
(b) Borrower may pay cash dividends or distributions from legally available
funds therefor, to its shareholders from time to time in amounts such that the
aggregate amount paid to shareholders does not exceed twenty-five (25%) percent
of its cumulative Net Income (calculated from the date of this Agreement to date
of determination), provided, that, (i) Lender shall have received ten (10) days
prior to any payment thereof, a certificate signed by Borrower's chief financial
officer (A) setting forth Borrower's cumulative Net Income with respect to which
the
55
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dividend or distribution is to be made and providing full information and
computations with respect thereto and (B) such dividend or distribution is not
in violation of applicable law or any other agreement to which Borrower is a
party or by which it is bound, (ii) as of the date of any such payment and after
giving effect thereto, the Excess Availability shall be not less than
$6,000,000, and (iii) as of the date of any such payment and after giving effect
thereto, no Event of Default or any act, condition or event which, with notice
or passage of time or both, would constitute an Event of Default, shall exist or
have occurred;
(c) Borrower may repurchase its Capital Stock consisting of common stock,
provided, that, as to (i) any such repurchase, each of the following conditions
is satisfied: (A) as of the date of the payment for such repurchase and after
giving effect thereto, no Event of Default or any act, condition or event which,
with notice or passage of time or both, would constitute an Event of Default,
shall exist or have occurred and be continuing, (B) such repurchase shall be
paid with funds legally available therefor, (C)such repurchase shall not violate
any law or regulation or the terms of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower or its property is bound, (D) as
of the date of any such payment for such repurchase and after giving effect
thereto, the Excess Availability shall be not less than $3,000,000, and (E) the
aggregate amount of all payments for such repurchases during the term of this
Agreement shall not exceed $3,000,000.
9.12 Transactions with Affiliates. Borrower shall not, and shall not permit
-----------------------------
any Subsidiary to, directly or indirectly,
(a) purchase, acquire or lease any property from, or sell, transfer or
lease any property to, any officer, director, agent or other person affiliated
with Borrower, except in the ordinary course of and pursuant to the reasonable
requirements of Borrower's business and upon fair and reasonable terms no less
favorable to the Borrower than Borrower would obtain in a comparable arm's
length transaction with an unaffiliated person; or
(b) make any payments of management, consulting or other fees for
management or similar services, or of any Indebtedness owing to any officer,
employee, shareholder, director or other Affiliate of Borrower, except,
(i) reasonable compensation to officers, employees and directors for
services rendered to Borrower in the ordinary course of business;
(ii) dividends permitted under Section 9.11 (b) above;
(iii) payments by Borrower to Delta Apparel Honduras, S.A. for (A)
actual and necessary reasonable out-of-pocket administrative, operating and
capital expenditures of Delta Apparel Honduras, S.A. for the business of
Borrower as presently conducted in the ordinary course of business
(including lease payments, payroll, insurance, franchise taxes and similar
items), provided, that, the amount of all such payments permitted under
Section 9.12 (iii)(A) in respect of capital expenditures shall not exceed
$250,000 in the aggregate in any fiscal year of Borrower, and (B) actual
and necessary reasonable out-of-pocket legal, accounting, insurance
56
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(including premiums for such insurance), marketing, payroll and similar
types of services paid for by Delta Apparel Honduras, S.A. in the ordinary
course of its business as conducted as of the date hereof or as the same
may be directly attributable to Borrower; provided, that, (1) such expenses
are in the ordinary course of and pursuant to the reasonable requirements
of Borrower's business as conducted on the date hereof, and (2) to the
extent such expenses are payable to Delta Apparel Honduras, S.A., such
expenses shall be payable upon terms no less favorable to Borrower, than
Borrower, could obtain in a comparable arm's length transaction with a
person who is not an Affiliate; and
(iv) payments by Borrower to Mexican Subsidiary for (A) actual and
necessary reasonable out-of-pocket administrative, operating and capital
expenses of Mexican Subsidiary for the business of Borrower as presently
conducted in the ordinary course of business (including lease payments,
payroll, insurance, franchise taxes and similar items), provided, that, the
amount of all such payments permitted under Section 9.12 (iv)(A) in respect
of capital expenditures shall not exceed $750,000 in the aggregate in any
fiscal year of Borrower and (B) actual and necessary reasonable
out-of-pocket legal, accounting, insurance (including premiums for such
insurance), marketing, payroll and similar types of services paid for by
Mexican Subsidiary in the ordinary course of its business as conducted as
of the date hereof or as the same may be directly attributable to Borrower;
provided, that, (1) such expenses are in the ordinary course of and
pursuant to the reasonable requirements of Borrower's business as conducted
on the date hereof, and (2) to the extent such expenses are payable to
Mexican Subsidiary, such expenses shall be payable upon terms no less
favorable to Borrower, than Borrower, could obtain in a comparable arm's
length transaction with a person who is not an Affiliate.
9.13 Additional Bank Accounts. Borrower shall not, directly or indirectly,
-------------------------
open, establish or maintain any deposit account, investment account or any other
account with any bank or other financial institution, other than the Blocked
Accounts and the accounts set forth in Schedule 8.10 hereto, except: (a) as to
any new or additional Blocked Accounts and other such new or additional accounts
which contain any Collateral or proceeds thereof, with the prior written consent
of Lender and subject to such conditions thereto as Lender may establish and
(b) as to any accounts used by Borrower to make payments of payroll, taxes or
other obligations to third parties, after prior written notice to Lender.
9.14 Compliance with ERISA. Borrower shall and shall cause each of its
------------------------
ERISA Affiliates to: (a) maintain each Plan in compliance in all material
respects with the applicable provisions of ERISA, the Code and other Federal and
State law; (b) cause each Plan which is qualified under Section 401(a) of the
Code to maintain such qualification; (c) not terminate any of such Plans so as
to incur any liability to the Pension Benefit Guaranty Corporation; (d) not
allow or suffer to exist any prohibited transaction involving any of such Plans
or any trust created thereunder which would subject Borrower or such ERISA
Affiliate to a tax or penalty or other liability on prohibited transactions
imposed under Section 4975 of the Code or ERISA; (e) make all required
contributions to any Plan which it is obligated to pay under Section 302 of
ERISA, Section 412 of the Code or the terms of such Plan; (f) not allow or
suffer to exist any accumulated funding deficiency, whether or not waived, with
respect to any such Plan; or (g) allow or suffer to exist any occurrence of a
reportable event or any other event or condition
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which presents a material risk of termination by the Pension Benefit Guaranty
Corporation of any such Plan that is a single employer plan, which termination
could result in any liability to the Pension Benefit Guaranty Corporation.
9.15 End of Fiscal Years: Fiscal Quarters. Borrower shall, for financial
--------------------------------------
reporting purposes, cause its, and each of its Subsidiaries' (a) fiscal years to
end the Saturday closest to June 30 of each year and (b) fiscal quarters to end
on the last day of the thirteenth (13th) week following the end of the
immediately preceding fiscal quarter, provided, that, the end of the fourth
fiscal quarter shall be on the last day of the fourteenth (14th) week following
the end of the third fiscal quarter whenever necessary to have the fourth fiscal
quarter end on the Saturday closest to June 30.
9.16 Change in Business. Borrower shall not engage in any business other
-------------------
than the business of Borrower on the date hereof and any business reasonably
related, ancillary or complimentary to the business in which Borrower is engaged
on the date hereof.
9.17 Limitation of Restrictions Affecting Subsidiaries. Borrower shall
-----------------------------------------------------
not, directly, or indirectly, create or otherwise cause or suffer to exist any
encumbrance or restriction which prohibits or limits the ability of any
Subsidiary of Borrower to (a) pay dividends or make other distributions or pay
any Indebtedness owed to Borrower or any Subsidiary of Borrower; (b) make loans
or advances to Borrower or any Subsidiary of Borrower, (c) transfer any of its
properties or assets to Borrower or any Subsidiary of Borrower; or (d) create,
incur, assume or suffer to exist any lien upon any of its property, assets or
revenues, whether now owned or hereafter acquired, other than encumbrances and
restrictions arising under (i) applicable law, (ii) this Agreement,
(iii) customary provisions restricting subletting or assignment of any lease
governing a leasehold interest of Borrower or any of its Subsidiaries,
(iv) customary restrictions on dispositions of real property interests found in
reciprocal easement agreements of Borrower or its Subsidiary, (v) any agreement
relating to permitted Indebtedness incurred by a Subsidiary of Borrower prior to
the date on which such Subsidiary was acquired by Borrower and outstanding on
such acquisition date, and (vi) the extension or continuation of contractual
obligations in existence on the date hereof; provided, that, any such
encumbrances or restrictions contained in such extension or continuation are no
less favorable to Lender than those encumbrances and restrictions under or
pursuant to the contractual obligations so extended or continued.
9.18 Existing Real Property; After Acquired Real Property. (a) In the event
-----------------------------------------------------
that Lender determines that (i) the average daily Excess Availability of the
Borrower shall have been less than $3,000,000 during any consecutive thirty (30)
day period, or (ii) an Event of Default, or act, condition or event which with
notice or passage of time or both would constitute an Event of Default exists,
without limiting any other rights of Lender, or duties or obligations of
Borrower, upon Lender's request, Borrower shall promptly, execute and deliver to
Lender (A) a mortgage, deed of trust or deed to secure debt, as Lender may
determine, in form and substance substantially similar to the Mortgages in
respect of any or all of the Existing Real Property (as Lender shall determine
in its sole discretion, exercised in good faith), and as to any provisions
relating to specific state laws satisfactory to Lender and in form appropriate
for recording in the real estate records of the jurisdiction in which such
Existing Real Property is located granting to
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Lender a first and only lien and mortgage on and security interest in such
Existing Real Property, fixtures or other property located thereon, and (B) such
other agreements, surveys, title insurance policies, documents and instruments
as Lender may require in connection therewith.
(b) If Borrower hereafter acquires any Real Property, fixtures or any other
property that is of the kind or nature described in the Mortgages and such Real
Property, fixtures or other property at any one location has a fair market value
in an amount equal to or greater than $500,000 (or if an Event of Default, or
act, condition or event which with notice or passage of time or both would
constitute an Event of Default exists, then regardless of the fair market value
of such assets), without limiting any other rights of Lender, or duties or
obligations of Borrower, upon Lender's request, Borrower shall execute and
deliver to Lender a mortgage, deed of trust or deed to secure debt, as Lender
may determine, in form and substance substantially similar to the Mortgages and
as to any provisions relating to specific state laws satisfactory to Lender and
in form appropriate for recording in the real estate records of the jurisdiction
in which such Real Property or other property is located granting to Lender a
first and only lien and mortgage on and security interest in such Real Property,
fixtures or other property (except as Borrower would otherwise be permitted to
incur hereunder or under the Mortgages or as otherwise consented to in writing
by Lender) and such other agreements, documents and instruments as Lender may
require in connection therewith.
9.19 Costs and Expenses. Borrower shall pay to Lender on demand all costs,
-------------------
expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents which may hereafter be contemplated (whether or not executed) or
entered into in respect hereof and thereof, including: (a) all costs and
expenses of filing or recording (including Uniform Commercial Code financing
statement filing taxes and fees, documentary taxes, intangibles taxes and
mortgage recording taxes and fees, if applicable); (b) costs and expenses and
fees for insurance premiums, environmental audits, surveys, assessments,
engineering reports and inspections, appraisal fees and search fees, costs and
expenses of remitting loan proceeds, collecting checks and other items of
payment, and establishing and maintaining the Blocked Accounts, together with
Lender's customary charges and fees with respect thereto; (c) charges, fees or
expenses charged by any bank or issuer in connection with the Letter of Credit
Accommodations; (d) costs and expenses of preserving and protecting the
Collateral; (e) costs and expenses paid or incurred in connection with obtaining
payment of the Obligations, enforcing the security interests and liens of
Lender, selling or otherwise realizing upon the Collateral, and otherwise
enforcing the provisions of this Agreement and the other Financing Agreements or
defending any claims made or threatened against Lender arising out of the
transactions contemplated hereby and thereby (including preparations for and
consultations concerning any such matters); (f) all out-of-pocket expenses and
costs heretofore and from time to time hereafter incurred by Lender during the
course of periodic field examinations of the Collateral and Borrower's
operations, plus a per diem charge at the rate of $650 per person per day for
Lender's examiners in the field and office; and (g) the fees and disbursements
of counsel (including legal assistants) to Lender in connection with any of the
foregoing.
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9.20 Further Assurances. At the request of Lender at any time and from time
-------------------
to time, Borrower shall, at its expense, duly execute and deliver, or cause to
be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Lender may
at any time and from time to time request a certificate from an officer of
Borrower representing that all conditions precedent to the making of Loans and
providing Letter of Credit Accommodations contained herein are satisfied. In the
event of such request by Lender, Lender may, at its option, cease to make any
further Loans or provide any further Letter of Credit Accommodations until
Lender has received such certificate and, in addition, Lender has determined
that such conditions are satisfied. Where permitted by law, Borrower hereby
authorizes Lender to execute and file one or more UCC financing statements
signed only by Lender.
9.21 Year 2000 Compliance. Borrower shall take all action which may be
----------------------
required so that its computer-based information systems, including, without
limitation, all of its proprietary computer hardware and software (and whether
supplied by others or with which Borrower's systems interface) are able to
operate effectively and correctly process data using dates on or after January
1, 2000. Compliance with the foregoing shall mean that the systems will operate
and correctly process data without human intervention such that (a) there is
correct century recognition, (b) calculations properly accommodate same century
and multi-century formulas and date values, and (c) all leap years shall be
calculated correctly. Upon Lender's request, Borrowers shall certify to Lender
in writing that its information systems have been modified, updated and
programmed as required by this Section. On and after January 1, 2000, the
computer-based information systems of Borrower shall be, and with ordinary
course upgrading and maintenance, will continue to be sufficient to permit
Borrower to conduct its business without any adverse effect as a result of the
year 2000.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
------------------------------
10.1 Events of Default. The occurrence or existence of any one or more of
------------------
the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(a) (i) Borrower fails to pay any of the Obligations within three (3)
Business Days after the same becomes due and payable or (ii) Borrower or any
Obligor fails to perform any of the covenants contained in Sections 9.3, 9.4,
9.6, 9.13, 9.14, 9.16, or 9.21 of this Agreement and such failure shall continue
for ten (10) days; provided, that, such ten (10) day period shall not apply in
the case of: (A) any failure to observe any such covenant which is not capable
of being cured at all or within such ten (10) day period or which has been the
subject of a prior failure within a six (6) month period or (B) an intentional
breach of Borrower or any Obligor of any such covenant or (iii) Borrower fails
to perform any of the terms, covenants, conditions or provisions contained in
this Agreement or any of the other Financing Agreements other than those
described in Sections 10.1(a)(i) and 10.1(a)(ii) above;
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(b) any representation, warranty or statement of fact made by Borrower to
Lender in this Agreement, the other Financing Agreements or any other agreement,
schedule, confirmatory assignment or otherwise shall when made or deemed made be
false or misleading in any material respect;
(c) any Obligor revokes, terminates or fails to perform any of the terms,
covenants, conditions or provisions of any guarantee, endorsement or other
agreement of such party in favor of Lender;
(d) any judgment for the payment of money is rendered against Borrower or
any Obligor in excess of $500,000 in any one case or in excess of $2,000,000 in
the aggregate and shall remain undischarged or unvacated for a period in excess
of thirty (30) days or execution shall at any time not be effectively stayed, or
any judgment other than for the payment of money, or injunction, attachment,
garnishment or execution is rendered against Borrower or any Obligor or any of
their assets having a value in excess of $500,000 in the aggregate;
(e) any Obligor (being a natural person or a general partner of an Obligor
which is a partnership) dies or Borrower or any Obligor, which is a partnership,
limited liability company, limited liability partnership or a corporation,
dissolves or suspends or discontinues doing business;
(f) Borrower or any Obligor becomes insolvent (however defined or
evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its creditors or principal
creditors;
(g) a case or proceeding under the bankruptcy laws of the United States of
America now or hereafter in effect or under any insolvency, reorganization,
receivership, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction now or hereafter in effect (whether at law or in equity) is
filed against Borrower or any Obligor or all or any part of its properties and
such petition or application is not dismissed within forty-five (45) days after
the date of its filing or Borrower or any Obligor shall file any answer
admitting or not contesting such petition or application or indicates its
consent to, acquiescence in or approval of, any such action or proceeding or the
relief requested is granted sooner;
(h) a case or proceeding under the bankruptcy laws of the United States of
America now or hereafter in effect or under any insolvency, reorganization,
receivership, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction now or hereafter in effect (whether at a law or equity) is
filed by Borrower or any Obligor or for all or any part of its property; or
(i) any default by Borrower or any Obligor under any agreement, document or
instrument relating to any Indebtedness for borrowed money owing to any person
other than Lender, or any capitalized lease obligations, contingent Indebtedness
in connection with any guarantee, letter of credit, indemnity or similar type of
instrument in favor of any person other than Lender, in any case in an amount in
excess of $500,000, which default continues for more
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than the applicable cure period, if any, with respect thereto, or any material
default under any of the Distribution Agreements by Borrower, Woodside, DH
Apparel Company, Inc. or any other party thereto or under any other material
contract, lease, license or other obligation to any person other than Lender,
which default continues for more than the applicable cure period, if any, with
respect thereto;
(j) an ERISA Event shall occur which results in or could reasonably be
expected to result in liability of Borrower in an aggregate amount in excess of
$500,000;
(k) any Change of Control;
(l) the indictment by any Governmental Authority, or as Lender may
reasonably and in good faith determine, the threatened indictment by any
Governmental Authority of Borrower of which Borrower or Lender receives notice,
in either case, as to which there is a reasonable possibility of an adverse
determination, in the good faith determination of Lender, under any criminal
statute, or commencement or threatened commencement of criminal or civil
proceedings against Borrower, pursuant to which statute or proceedings the
penalties or remedies sought or available include forfeiture of (i) any of the
Collateral with an aggregate value in excess of $500,000 or more, or (ii) any
other property of Borrower which is necessary or material to the conduct of its
business;
(m) there shall be a material adverse change in the business, assets or
prospects of Borrower or any Obligor after the date hereof; or
(n) there shall be an event of default under any of the other Financing
Agreements.
10.2 Remedies.
---------
(a) At any time an Event of Default exists or has occurred and is
continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by Borrower or any Obligor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or other applicable law, are
cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against Borrower or any Obligor to collect the principal
balance of the Obligations and all interest accrued thereon without prior
recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of Default exists
or has occurred and is continuing, Lender may, in its discretion and without
limitation, (i) accelerate the payment of the principal balance of the
Obligations and all interest accrued thereon and
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demand immediate payment thereof to Lender (provided, that, upon the occurrence
of any Event of Default described in Sections 10.1(g) and 10.1(h), the principal
balance of the Obligations and all interest accrued thereon shall automatically
become immediately due and payable), (ii) with or without judicial process or
the aid or assistance of others, enter upon any premises on or in which any of
the Collateral may be located and take possession of the Collateral or complete
processing, manufacturing and repair of all or any portion of the Collateral,
(iii) require Borrower, at Borrower's expense, to assemble and make available
to Lender any part or all of the Collateral at any place and time designated by
Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon
any and all Collateral, (v) remove any or all of the Collateral from any
premises on or in which the same may be located for the purpose of effecting the
sale, foreclosure or other disposition thereof or for any other purpose, (vi)
sell, lease, transfer, assign, deliver or otherwise dispose of any and all
Collateral (including, without limitation, entering into contracts with respect
thereto, public or private sales at any exchange, broker's board, at any office
of Lender or elsewhere) at such prices or terms as Lender may deem reasonable,
for cash, upon credit or for future delivery, with the Lender having the right
to purchase the whole or any part of the Collateral at any such public sale, all
of the foregoing being free from any right or equity of redemption of Borrower,
which right or equity of redemption is hereby expressly waived and released by
Borrower and/or (vii) terminate this Agreement. If any of the Collateral is sold
or leased by Lender upon credit terms or for future delivery, the Obligations
shall not be reduced as a result thereof until payment therefor is finally
collected by Lender. If notice of disposition of Collateral is required by law,
five (5) days prior notice by Lender to Borrower designating the time and place
of any public sale or the time after which any private sale or other intended
disposition of Collateral is to be made, shall be deemed to be reasonable notice
thereof and Borrower waives any other notice. In the event Lender institutes an
action to recover any Collateral or seeks recovery of any Collateral by way of
prejudgment remedy, Borrower waives the posting of any bond which might
otherwise be required.
(c) For the purpose of enabling Lender to exercise the rights and remedies
hereunder, Borrower hereby grants to Lender, to the extent assignable, an
irrevocable, non- exclusive license (exercisable without payment of royalty or
other compensation to Borrower) to use, assign, license or sublicense any of the
trademarks, service-marks, trade names, business names, trade styles, designs,
logos and other source of business identifiers and other Intellectual Property
and general intangibles now owned or hereafter acquired by Borrower, wherever
the same maybe located, including in such license reasonable access to all media
in which any of the licensed items may be recorded or stored and to all computer
programs used for the compilation or printout thereof.
(d) Lender may apply the cash proceeds of Collateral actually received by
Lender from any sale, lease, foreclosure or other disposition of the Collateral
to payment of the Obligations, in whole or in part and in such order as Lender
may elect, whether or not then due. Borrower shall remain liable to Lender for
the payment of any deficiency with interest at the highest rate provided for
herein and all costs and expenses of collection or enforcement, including
attorneys' fees and legal expenses.
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<PAGE>
(e) Without limiting the foregoing, upon the occurrence of an Event of
Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice, (i)
cease making Loans or arranging for Letter of Credit Accommodations or reduce
the lending formulas or amounts of Revolving Loans and Letter of Credit
Accommodations available to Borrower and/or (ii) terminate any provision of this
Agreement providing for any future Loans or Letter of Credit Accommodations to
be made by Lender to Borrower.
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW
------------------------------------------------------------
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.
----------------------------------------------------------------------
(a) The validity, interpretation and enforcement of this Agreement and the
other Financing Agreements and any dispute arising out of the relationship
between the parties hereto, whether in contract, tort, equity or otherwise,
shall be governed by the internal laws of the State of Georgia (without giving
effect to principles of conflicts of law).
(b) Borrower and Lender irrevocably consent and submit to the non-exclusive
jurisdiction of the Superior Court of Fulton County, Georgia and the United
States District Court for the Northern District of Georgia and waive any
objection based on venue or forum non conveniens with respect to any action
instituted therein arising under this Agreement or any of the other Financing
Agreements or in any way connected with or related or incidental to the dealings
of the parties hereto in respect of this Agreement or any of the other Financing
Agreements or the transactions related hereto or thereto, in each case whether
now existing or hereafter arising, and whether in contract, tort, equity or
otherwise, and agree that any dispute with respect to any such matters shall be
heard only in the courts described above (except that Lender shall have the
right to bring any action or proceeding against Borrower or its property in the
courts of any other jurisdiction which Lender deems necessary or appropriate in
order to realize on the Collateral or to otherwise enforce its rights against
Borrower or its property).
(c) Borrower hereby waives personal service of any and all process upon it
and consents that all such service of process may be made by certified mail
(return receipt requested) directed to its address set forth on the signature
pages hereof and service so made shall be deemed to be completed five (5) days
after the same shall have been so deposited in the U.S. mails, or, at Lender's
option, by service upon Borrower in any other manner provided under the rules of
any such courts. Within thirty (30) days after such service, Borrower shall
appear in answer to such process, failing which Borrower shall be deemed in
default and judgment may be entered by Lender against Borrower for the amount of
the claim and other relief requested.
(d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF
ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT OR
ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR
RELATED OR
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INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR
ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR
THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN
CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER EACH HEREBY AGREES AND
CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED
BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR LENDER MAY FILE AN ORIGINAL
COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF
THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Borrower (whether in tort,
contract, equity or otherwise) for losses suffered by Borrower in connection
with, arising out of, or in any way related to the transactions or relationships
contemplated by this Agreement, or any act, omission or event occurring in
connection herewith, unless it is determined by a final and non-appealable
judgment or court order binding on Lender, that the losses were the result of
acts or omissions constituting gross negligence or willful misconduct. In any
such litigation, Lender shall be entitled to the benefit of the rebuttable
presumption that it acted in good faith and with the exercise of ordinary care
in the performance by it of the terms of this Agreement.
11.2 Waiver of Notices. Borrower hereby expressly waives demand,
--------------------
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on Borrower which Lender may elect to give shall entitle Borrower
to any other or further notice or demand in the same, similar or other
circumstances. Without limiting the generality of the foregoing, Borrower waives
(i) notice prior to Lender's taking possession or control of any of the
Collateral or any bond or security which might be required by any court prior to
allowing Lender to exercise any of Lender's remedies, including the issuance of
an immediate writ of possession and (ii) the benefit of all valuation,
appraisement and exemption laws.
11.3 Amendments and Waivers. Neither this Agreement nor any provision
------------------------
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender, and as to amendments, as also signed by an authorized officer of
Borrower. Lender shall not, by any act, delay, omission or otherwise be deemed
to have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.
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11.4 Waiver of Counterclaims. Borrower waives all rights to interpose any
-------------------------
claims, deductions, setoffs or counterclaims of any nature (other then
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
11.5 Indemnification. Borrower shall indemnify and hold Lender, and its
----------------
directors, agents, employees and counsel, harmless from and against any and all
losses, claims, damages, liabilities, costs or expenses imposed on, incurred by
or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including amounts paid in settlement, court costs, and the fees and expenses of
counsel, except for such losses, claims, damages, liabilities, costs or expenses
resulting from the gross negligence or wilful misconduct of Lender, its
directors, agents, employees or counsel as determined pursuant to a final,
non-appealable order of a court of competent jurisdiction. To the extent that
the undertaking to indemnify, pay and hold harmless set forth in this Section
may be unenforceable because it violates any law or public policy, Borrower
shall pay the maximum portion which it is permitted to pay under applicable law
to Lender in satisfaction of indemnified matters under this Section. The
foregoing indemnity shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
--------------------------------
12.1 Term.
-----
(a) This Agreement and the other Financing Agreements shall become
effective as of the date set forth on the first page hereof and shall continue
in full force and effect for a term ending on the date three (3) years from the
date hereof (the "Renewal Date"), and from year to year thereafter, unless
sooner terminated pursuant to the terms hereof. Lender or Borrower may terminate
this Agreement and the other Financing Agreements effective on the Renewal Date
or on the anniversary of the Renewal Date in any year by giving to the other
party at least sixty (60) days prior written notice; provided, that, this
Agreement and all other Financing Agreements must be terminated simultaneously.
Upon the effective date of termination or non-renewal of the Financing
Agreements, Borrower shall pay to Lender, in full, all outstanding and unpaid
Obligations and shall furnish cash collateral to Lender in such amounts as
Lender determines are reasonably necessary to secure Lender from loss, cost,
damage or expense, including attorneys' fees and legal expenses, in connection
with any contingent Obligations, including issued and outstanding Letter of
Credit Accommodations and checks or other payments provisionally credited to the
Obligations and/or as to which Lender has not yet received final and
indefeasible payment. Such payments in respect of the Obligations and cash
collateral shall be remitted by wire transfer in Federal funds to such bank
account of Lender, as Lender may, in its discretion, designate in writing to
Borrower for such purpose. Interest shall be due until and including the
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next Business Day, if the amounts so paid by Borrower to the bank account
designated by Lender are received in such bank account later than 12:00 noon,
Atlanta, Georgia time.
(b) No termination of this Agreement or the other Financing Agreements
shall relieve or discharge Borrower of its respective duties, obligations and
covenants under this Agreement or the other Financing Agreements until all
Obligations have been fully and finally discharged and paid, and Lender's
continuing security interest in the Collateral and the rights and remedies of
Lender hereunder, under the other Financing Agreements and applicable law, shall
remain in effect until all such Obligations have been fully and finally
discharged and paid.
(c) If for any reason this Agreement is terminated prior to the end of the
then current term or renewal term of this Agreement, in view of the
impracticality and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Lender's lost
profits as a result thereof, Borrower agrees to pay to Lender, upon the
effective date of such termination, an early termination fee in the amount equal
to one (1%) percent of the Maximum Credit. Such early termination fee shall be
presumed to be the amount of damages sustained by Lender as a result of such
early termination and Borrower agrees that it is reasonable under the
circumstances currently existing. In addition, Lender shall be entitled to such
early termination fee upon the occurrence of any Event of Default described in
Sections 10.1(g) and 10.1(h) hereof, even if Lender does not exercise its right
to terminate this Agreement, but elects, at its option, to provide financing to
Borrower or permit the use of cash collateral under the United States Bankruptcy
Code. The early termination fee provided for in this Section 12.1 shall be
deemed included in the Obligations.
(d) Notwithstanding anything to the contrary contained in Section 12.1(c)
above, in the event of the termination of this Agreement at the request of
Borrower prior to the end of the term of this Agreement and the full and final
repayment of all Obligations and the receipt by Lender of cash collateral all as
provided in Section 12.1(a) above, Borrower shall not be required to pay to
Lender an early termination fee if such payments are made to Lender with the
initial proceeds of a financing transaction provided or underwritten by First
Union National Bank to Borrower.
12.2 Interpretative Provisions.
--------------------------
(a) All terms used herein which are defined in Article 1 or Article 9 of
the Uniform Commercial Code shall have the meanings given therein unless
otherwise defined in this Agreement.
(b) All references to the plural herein shall also mean the singular and to
the singular shall also mean the plural unless the context otherwise requires.
(c) All references to Borrower and Lender pursuant to the definitions set
forth in the recitals hereto, or to any other person herein, shall include their
respective successors and assigns.
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(d) The words "hereof", "herein", "hereunder", "this Agreement" and words
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not any particular provision of this Agreement and as this Agreement
now exists or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced.
(e) The word "including" when used in this Agreement shall mean "including,
without limitation".
(f) An Event of Default shall exist or continue or be continuing until such
Event of Default is waived in accordance with Section 11.3 or is cured in a
manner satisfactory to Lender, if such Event of Default is capable of being
cured as determined by Lender.
(g) Any accounting term used in this Agreement shall have, unless otherwise
specifically provided herein, the meaning customarily given in accordance with
GAAP, and all financial computations hereunder shall be computed unless
otherwise specifically provided herein, in accordance with GAAP as consistently
applied and using the same method for inventory valuation as used in the
preparation of the financial statements of Borrower most recently received by
Lender prior to the date hereof.
(h) In the computation of periods of time from a specified date to a later
specified date, the word "from" means "from and including", the words "to" and
"until" each mean "to but excluding" and the word "through" means "to and
including".
(i) Unless otherwise expressly provided herein, (i) references herein to
any agreement, document or instrument shall be deemed to include all subsequent
amendments, modifications, supplements, extensions, renewals, restatements or
replacements with respect thereto, but only to the extent the same are not
prohibited by the terms hereof or of any other Financing Agreement, and
(ii) references to any statute or regulation are to be construed as including
all statutory and regulatory provisions consolidating, amending, replacing,
recodifying, supplementing or interpreting the statute or regulation.
(j) The captions and headings of this Agreement are for convenience of
reference only and shall not affect the interpretation of this Agreement.
(k) This Agreement and other Financing Agreements may use several different
limitations, tests or measurements to regulate the same or similar matters. All
such limitations, tests and measurements are cumulative and shall each be
performed in accordance with their terms.
(l) This Agreement and the other Financing Agreements are the result of
negotiations among and have been reviewed by counsel to Lender and the other
parties, and are the products of all parties. Accordingly, this Agreement and
the other Financing Agreements shall not be construed against Lender merely
because of Lender's involvement in their preparation.
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12.3 Notices. All notices, requests and demands hereunder shall be in
--------
writing and (a) made to Lender at its address set forth below and to Borrower at
its chief executive office set forth below, or to such other address as either
party may designate by written notice to the other in accordance with this
provision, and (b) deemed to have been given or made: if delivered in person,
immediately upon delivery; if by telex, telegram or facsimile transmission,
immediately upon sending and upon confirmation of receipt; if by nationally
recognized overnight courier service with instructions to deliver the next
Business Day, one (1) Business Day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.
12.4 Partial Invalidity. If any provision of this Agreement is held to be
--------------------
invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
12.5 Successors. This Agreement, the other Financing Agreements and any
-----------
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrower and their respective
successors and assigns, except that Borrower may not assign its rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written consent of Lender. Lender may,
after notice to Borrower, assign its rights and delegate its obligations under
this Agreement and the other Financing Agreements and further may assign, or
sell participations in, all or any part of the Loans, the Letter of Credit
Accommodations or any other interest herein to another financial institution or
other person, in which event, the assignee or participant shall have, to the
extent of such assignment or participation, the same rights and benefits as it
would have if it were the Lender hereunder, except as otherwise provided by the
terms of such assignment or participation.
12.6 Entire Agreement. This Agreement, the other Financing Agreements, any
-----------------
supplements hereto or thereto, and any instruments or documents delivered or to
be delivered in connection herewith or therewith represents the entire agreement
and understanding concerning the subject matter hereof and thereof between the
parties hereto, and supersede all other prior agreements, understandings,
negotiations and discussions, representations, warranties, commitments,
proposals, offers and contracts concerning the subject matter hereof, whether
oral or written. In the event of any inconsistency between the terms of this
Agreement and any schedule or exhibit hereto, the terms of this Agreement shall
govern.
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IN WITNESS WHEREOF, Lender and Borrower have caused these presents to be
duly executed as of the day and year first above written.
LENDER
- ------
CONGRESS FINANCIAL CORPORATION
(SOUTHERN)
By: /s/ Daniel Cott
-------------------------
Title: Executive Vice President
Address:
- --------
200 Galleria Parkway
Suite 1500
Atlanta, Georgia 30339
BORROWER
- --------
DELTA APPAREL, INC.
By: /s/ Herbert M. Mueller
-----------------------------
Title: Vice President & CFO
Chief Executive Office:
- -----------------------
3355 Breckinridge Boulevard
Suite 100
Duluth, Georgia 30096
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EXHIBIT B
- ---------
Applicable Margins for Interest Rate Calculations
-------------------------------------------------
The applicable margins will be determined as set forth below:
<TABLE>
<CAPTION>
When Excess Availability or Applicable Applicable
Fixed Charge Coverage Ratio Is: Prime Rate Margin Eurodollar Margin
<S> <C> <C>
$20,000,000 or more
or equal to or greater than 2.0 to 1.0 - 2.00%
$10,000,000 to $19,999,999
or equal to or greater than 1.5 to 1 but
less than 2.0 to 1 .25% 2.25%
Less than $10,000,000
or less than 1.5 to 1 .50% 2.50%
</TABLE>
Borrower need only meet either the Excess Availability test or the Fixed Charge
Coverage Ratio test to qualify for the corresponding applicable margin.
TERM PROMISSORY NOTE
--------------------
$10,000,000 New York, New York
May 16, 2000
FOR VALUE RECEIVED, DELTA APPAREL, INC., a Georgia corporation (the
"Debtor"), hereby unconditionally promises to pay to the order of CONGRESS
FINANCIAL CORPORATION (SOUTHERN), a Georgia corporation ("Payee"), at the
offices of Payee at 200 Galleria Parkway, Suite 1500, Atlanta, Georgia 30339, or
at such other place as the Payee or any holder hereof may from time to time
designate, the principal sum of TEN MILLION DOLLARS ($10,000,000) in lawful
money of the United States of America and in immediately available funds, in
sixty (60) consecutive monthly installments (or earlier as hereinafter provided)
on the first day of each month commencing June 1, 2000 of which the first
fifty-nine (59) installments shall each be in the amount of ONE HUNDRED
SIXTY-SIX THOUSAND SIX HUNDRED SIXTY-SIX DOLLARS AND 66/100 ($166,666.66), and
the last installment shall be in the amount of the entire unpaid balance of this
Note.
Debtor hereby further promises to pay interest to the order of Payee on the
unpaid principal balance hereof at the Interest Rate. Such interest shall be
paid in like money at said office or place from the date hereof, commencing June
1, 2000 and on the first day of each month thereafter until the indebtedness
evidenced by this Note is paid in full. Interest payable upon and after an Event
of Default or termination or non-renewal of the Loan Agreement (as hereinafter
defined) shall be payable upon demand.
For purposes hereof, (a) subject to clauses (b) and (c) below, "Interest
Rate" shall mean as to Prime Rate Loans, the Prime Rate and, as to Eurodollar
Rate Loans, a rate of two (2%) percent per annum in excess of the Adjusted
Eurodollar Rate (based on the Eurodollar Rate applicable for the Interest Period
selected by Debtor as in effect two (2) Business Days after the date of receipt
by Payee of the request of Debtor for such Eurodollar Rate Loans in accordance
with the terms of the Loan Agreement, whether such rate is higher or lower than
any rate previously quoted to Debtor); (b) subject to clause (c) below,
effective as of the first day of the month after Payee's receipt of the
financial statements required to be delivered to Payee pursuant to Section 9.6
of the Loan Agreement in respect of the fiscal quarter ending June 30, 2000, the
Interest Rate payable by Debtor shall be increased or decreased, as the case may
be, to the rate equal to the applicable margin set forth in Exhibit A hereto, on
a per annum basis, in excess of the Prime Rate as to Prime Rate Loans, and in
excess of the Adjusted Eurodollar Rate as to Eurodollar Rate Loans, in each
case, based on either (i) the quarterly average of the Excess Availability of
Debtor for the immediately preceding full fiscal quarter or (ii) Debtor's Fixed
Charge Coverage Ratio, calculated on a quarterly basis, for the immediately
preceding four (4) consecutive fiscal quarters of Debtor, ending June 30, 2000
(except that for purposes of calculating the Fixed Charge Coverage Ratio for the
period ending June 30, 2000: (A) the Fixed Charge Coverage Ratio shall
-1-
<PAGE>
be calculated on a fiscal year to date basis as of July 1, 1999, and (B) the
Interest Expense paid to Payee in respect of the Obligations from the date
hereof, through and including June 30, 2000 shall be calculated on an annualized
basis) as calculated by Payee in good faith; (c) notwithstanding anything to the
contrary contained in clauses (a) and (b) above, the applicable margin otherwise
used to calculate the Interest Rate shall be the highest percentage set forth on
Exhibit A hereto (without regard to the amount of Excess Availability or Fixed
Charge Coverage Ratio) plus two (2%) percent per annum, at Payee's option,
without notice, (i) either (A) for the period on and after the date of
termination or non-renewal hereof until such time as all Obligations are
indefeasibly paid and satisfied in full, or (B) for the period from and after
the date of the occurrence of any Event of Default, and for so long as such
Event of Default is continuing as determined by Payee; (d) the term "Prime Rate"
shall mean the rate from time to time publicly announced by First Union National
Bank, or its successors, from time to time, as its prime rate, whether or not
such announced rate is the best rate available at such bank; (e) the term "Event
of Default" shall mean an Event of Default as such term is defined in the Loan
Agreement; and (f) the term "Loan Agreement" shall mean the Loan and Security
Agreement, dated of even date herewith, between Debtor and Payee, as the same
now exists or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced. Unless otherwise defined herein, all capitalized
terms used herein shall have the meaning assigned thereto in the Loan Agreement.
The Interest Rate applicable to Prime Rate Loans payable hereunder shall
increase or decrease by an amount equal to each increase or decrease,
respectively, in the Prime Rate, effective on the first day of the month after
any change in the Prime Rate is announced. The increase or decrease shall be
based on the Prime Rate in effect on the last day of the month in which any such
change occurs. Interest shall be calculated on the basis of a three hundred
sixty (360) day year and actual days elapsed. In no event shall the interest
charged hereunder exceed the maximum permitted under the laws of the State of
Georgia or other applicable law.
This Note is issued pursuant to the terms and provisions of the Loan
Agreement to evidence the Term Loan by Payee to Debtor. This Note is secured by
the Collateral described in the Loan Agreement and all notes, guarantees,
security agreements and other agreements, documents and instrument now or at any
time hereafter executed and/or delivered by Debtor or any other party in
connection therewith (all of the foregoing, together with the Loan Agreement, as
the same now exist or may hereafter be amended, modified, supplemented, renewed,
extended, restated or replaced, being collectively referred to herein as the
"Financing Agreements"), and is entitled to all of the benefits and rights
thereof and of the other Financing Agreements. At the time any payment is due
hereunder, at its option, Payee may charge the amount thereof to any account of
Debtor maintained by Payee.
If any payment of principal or interest is not made within three (3)
business days after the same becomes due hereunder, or if any other Event of
Default shall occur for any reason, or if the Loan Agreement shall be terminated
or not renewed for any reason whatsoever, then and in any such event, in
addition to all rights and remedies of Payee under the Financing Agreements,
-2-
<PAGE>
applicable law or otherwise, all such rights and remedies being cumulative, not
exclusive and enforceable alternatively, successively and concurrently, Payee
may, at its option, declare any or all of Debtor's obligations, liabilities and
indebtedness owing to Payee under the Loan Agreement and the other Financing
Agreements (the "Obligations"), including, without limitation, all amounts owing
under this Note, to be due and payable, whereupon the then unpaid balance
hereof, together with all interest accrued thereon, shall forthwith become due
and payable, together with interest accruing thereafter at the then applicable
Interest Rate stated above until the indebtedness evidenced by this Note is paid
in full, plus the costs and expenses of collection hereof, including, but not
limited to, attorneys' fees and legal expenses.
Debtor (i) waives diligence, demand, presentment, protest and notice of any
kind, (ii) agrees that it will not be necessary for Payee to first institute
suit in order to enforce payment of this Note and (iii) consents to any one or
more extensions or postponements of time of payment, release, surrender or
substitution of collateral security, or forbearance or other indulgence, without
notice or consent. The pleading of any statute of limitations as a defense to
any demand against Debtor is expressly hereby waived by Debtor. Upon any Event
of Default or termination or non-renewal of the Loan Agreement, Payee shall have
the right, but not the obligation to setoff against this Note all money owed by
Payee to Debtor.
Payee shall not be required to resort to any Collateral for payment, but
may proceed against Debtor and any guarantors or endorsers hereof in such order
and manner as Payee may choose. None of the rights of Payee shall be waived or
diminished by any failure or delay in the exercise thereof.
The validity, interpretation and enforcement of this Note and the other
Financing Agreements and any dispute arising in connection herewith or therewith
shall be governed by the internal laws of the State of Georgia (without giving
effect to principles of conflicts of law).
Debtor irrevocably consents and submits to the non-exclusive jurisdiction
of the Superior Court of Fulton County, Georgia and the United States District
Court for the Northern District of Georgia and waives any objection based on
venue or forum non conveniens with respect to any action instituted therein
arising under this Note or any of the other Financing Agreements or in any way
connection with or related or incidental to the dealings of Debtor and Payee in
respect of this Note or any of the other Financing Agreements or the
transactions related hereto or thereto, in each case whether now existing or
hereafter arising, and whether in contract, tort, equity or otherwise, and
agrees that any dispute arising out of the relationship between Debtor and Payee
or the conduct of such persons in connection with this Note or otherwise shall
be heard only in the courts described above (except that Payee shall have the
right to bring any action or proceeding against Debtor or its property in the
courts of any other jurisdiction which Payee deems necessary or appropriate in
order to realize on the Collateral or to otherwise enforce its rights against
Debtor or its property).
-3-
<PAGE>
Debtor hereby waives personal service of any and all process upon it and
consents that all such service of process may be made by certified mail (return
receipt requested) directed to it and service so made shall be deemed to be
completed five (5) days after the same shall have been so deposited in the U.S.
mails, or, at Payee's option, by service upon Debtor in any other manner
provided under the rules of any such courts. Within thirty (30) days after such
service, Debtor shall appear in answer to such process, failing which Debtor
shall be deemed in default and judgment may be entered by Payee against Debtor
for the amount of the claim and other relief requested.
DEBTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS NOTE OR (ii) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS BETWEEN DEBTOR AND PAYEE
IN RESPECT OF THIS NOTE OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE
TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. DEBTOR
AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL
BE DECIDED BY COURT TRIAL WITHOUT A JURY.
The execution and delivery of this Note has been authorized by the Board of
Directors and by any necessary vote or consent of the stockholders of Debtor.
Debtor hereby authorizes Payee to complete this Note in any particulars
according to the terms of the loan evidenced hereby.
This Note shall be binding upon the successors and assigns of Debtor and
inure to the benefit of Payee and its successors, endorsees and assigns.
Whenever used herein, the term "Debtor" shall be deemed to include its
successors and assigns and the term "Payee" shall be deemed to include its
successors, endorsees and assigns. If any term or provision of this Note shall
be held invalid, illegal or unenforceable, the validity of all other terms and
provisions hereof shall in no way be affected thereby.
DELTA APPAREL, INC.
By: /s/ Herbert M. Mueller
------------------------------
Title: Vice President & CFO
-4-
<PAGE>
EXHIBIT A
- ---------
Applicable Margins for Interest Rate Calculations
-------------------------------------------------
The applicable margins will be determined as set forth below:
<TABLE>
<CAPTION>
When Excess Availability or Applicable Applicable
Fixed Charge Coverage Ratio Is: Prime Rate Margin Eurodollar Margin
- ------------------------------- ----------------- -----------------
<S> <C> <C>
$20,000,000 or more
or equal to or greater than 2.0 to 1.0 - 2.00%
$10,000,000 to $19,999,999
or equal to or greater than 1.5 to 1 but
less than 2.0 to 1 .25% 2.25%
Less than $10,000,000
or less than 1.5 to 1 .50% 2.50%
</TABLE>
Debtor need only meet either the Excess Availability test or the Fixed Charge
Coverage Ratio test to qualify for the corresponding applicable margin.
-5-
PLEDGE AND SECURITY AGREEMENT
-----------------------------
THIS PLEDGE AND SECURITY AGREEMENT ("Pledge Agreement"), dated May 16,
2000, is by DELTA APPAREL, INC., a Georgia corporation ("Pledgor"), with its
chief executive office at 3355 Breckinridge Boulevard, Suite 100, Duluth,
Georgia 30096 to and in favor of CONGRESS FINANCIAL CORPORATION (SOUTHERN), a
Georgia corporation ("Pledgee"), having an office at 200 Galleria Parkway, Suite
1500, Atlanta, Georgia 30339.
W I T N E S S E T H:
--------------------
WHEREAS, Pledgor is now the direct and beneficial owner of 2,496 of the
2,500 issued and outstanding shares of capital stock of Delta Apparel Horduras,
S.A., a Honduran corporation ("Issuer"), 1,622 of which shares of capital stock
are being delivered by Pledgor to Pledgee pursuant to the terms hereof and which
are as described on Exhibit A annexed hereto and made a part hereof (the
"Pledged Securities");
WHEREAS, Pledgee and Pledgor have entered into or are about to enter into
financing arrangements pursuant to which Pledgee may make loans and advances and
provide other financial accommodations to Pledgor as set forth in the Loan and
Security Agreement, dated of even date herewith, by and between Pledgee and
Pledgor (as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced, the "Loan Agreement") and
other agreements, documents and instruments referred to therein or at any time
executed and/or delivered in connection therewith or related thereto, including,
but not limited to, this Pledge Agreement (all of the foregoing, together with
the Loan Agreement, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced, being collectively
referred to herein as the "Financing Agreements"); and
WHEREAS, in order to induce Pledgee to enter into the Loan Agreement and
the other Financing Agreements and to make loans and advances and provide other
financial accommodations to Pledgor pursuant thereto, Pledgor has agreed to
secure the payment and performance of the Obligations (as hereinafter defined)
to Pledgee and to accomplish same by (i) executing and delivering to Pledgee
this Pledge Agreement, (ii) delivering to Pledgee the Pledged Securities which
are registered in the name of Pledgor, together with appropriate powers duly
executed in blank by Pledgor, and (iii) delivering to Pledgee any and all other
documents which Pledgee deems necessary to protect Pledgee's interests
hereunder;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Pledgor hereby agrees as follows:
- 1 -
<PAGE>
1. GRANT OF SECURITY INTEREST
--------------------------
As collateral security for the prompt performance, observance and
indefeasible payment in full of all of the Obligations (as hereinafter defined),
Pledgor hereby assigns, pledges, hypothecates, transfers and sets over to
Pledgee and grants to Pledgee a security interest in and lien upon (a) the
Pledged Securities, together with all cash dividends, stock dividends,
interests, profits, redemptions, warrants, subscription rights, stock,
securities options, substitutions, exchanges and other distributions now or
hereafter distributed by Issuer or which may hereafter be delivered to the
possession of Pledgor or Pledgee with respect thereto, (b) Pledgor's records
with respect to the foregoing, and (c) the proceeds of all of the foregoing (all
of the foregoing being collectively referred to herein as the "Pledged
Property").
2. OBLIGATIONS SECURED
-------------------
The security interest, lien and other interests granted to Pledgee pursuant
to this Pledge Agreement shall secure the prompt performance and payment in full
of any and all obligations, liabilities and indebtedness of every kind, nature
and description owing by Pledgor to Pledgee and/or its affiliates, including
principal, interest, charges, fees, costs and expenses, however evidenced,
whether as principal, surety, endorser, guarantor or otherwise, whether arising
under this Pledge Agreement, the Loan Agreement, the other Financing Agreements
or otherwise, whether now existing or hereafter arising, whether arising before,
during or after the initial or any renewal term of the Loan Agreement or after
the commencement of any case with respect to Pledgor under the United States
Bankruptcy Code or any similar statute (including, without limitation, the
payment of interest and other amounts which would accrue and become due but for
the commencement of such case), whether direct or indirect, absolute or
contingent, joint or several, due or not due, primary or secondary, liquidated
or unliquidated, secured or unsecured, and however acquired by Pledgee (all of
the foregoing being collectively referred to herein as the "Obligations").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
Pledgor hereby represents, warrants and covenants with and to Pledgee the
following (all of such representations, warranties and covenants being
continuing so long as any of the Obligations are outstanding):
(a) The Pledged Securities are duly authorized, validly issued, fully paid
and non-assessable capital stock of Issuer and constitute approximately
sixty-five (65%) percent of Pledgor's entire interest in Issuer and are not
registered, nor has Pledgor authorized the registration thereof, in the name of
any person or entity other than Pledgor or Pledgee.
(b) The Pledged Property is directly, legally and beneficially owned by
Pledgor, free and clear of all claims, liens, pledges and encumbrances of any
kind, nature or description, except for the pledge and security interest in
favor of Pledgee and the pledges and security interests permitted under the Loan
Agreement.
- 2 -
<PAGE>
(c) The Pledged Property is not subject to any restrictions relative to the
transfer thereof and Pledgor has the right to transfer and hypothecate the
Pledged Property free and clear of any liens, encumbrances or restrictions.
(d) The Pledged Property is duly and validly pledged to Pledgee and no
consent or approval of any governmental or regulatory authority or of any
securities exchange or the like, nor any consent or approval of any other third
party, was or is necessary to the validity and enforceability of this Pledge
Agreement.
(e) Pledgor authorizes Pledgee to: (i) store, deposit and safeguard the
Pledged Property, (ii) perform any and all other acts which Pledgee in good
faith deems reasonable and/or necessary for the protection and preservation of
the Pledged Property or its value or Pledgee's security interest therein,
including, without limitation, transferring, registering or arranging for the
transfer or registration of the Pledged Property to or in Pledgee's own name and
receiving the income therefrom as additional security for the Obligations and
(iii) pay any charges or expenses which Pledgee deems necessary for the
foregoing purpose, but without any obligation to do so. Any obligation of
Pledgee for reasonable care for the Pledged Property in Pledgee's possession
shall be limited to the same degree of care which Pledgee uses for similar
property pledged to Pledgee by other persons.
(f) If Pledgor shall become entitled to receive or acquire, or shall
receive any stock certificate, or option or right with respect to the stock of
Issuer (including without limitation, any certificate representing a dividend or
a distribution or exchange of or in connection with reclassification of the
Pledged Securities) whether as an addition to, in substitution of, or in
exchange for any of the Pledged Property or otherwise, Pledgor agrees to accept
same as Pledgee's agent, to hold same in trust for Pledgee and to deliver same
forthwith to Pledgee or Pledgee's agent or bailee in the form received, with the
endorsement(s) of Pledgor where necessary and/or appropriate powers and/or
assignments duly executed to be held by Pledgee or Pledgee's agent or bailee
subject to the terms hereof, as further security for the Obligations.
(g) Pledgor shall not, without the prior consent of Pledgee, directly or
indirectly, sell, assign, transfer, or otherwise dispose of, or grant any option
with respect to the Pledged Property, nor shall Pledgor create, incur or permit
any further pledge, hypothecation, encumbrance, lien, mortgage or security
interest with respect to the Pledged Property.
(h) So long as no Event of Default (as hereinafter defined) has occurred
and is continuing, Pledgor shall have the right to vote and exercise all
corporate rights with respect to the Pledged Securities, except as expressly
prohibited herein, and to receive any cash dividends payable in respect of the
Pledged Securities.
(i) Pledgor shall not permit Issuer, directly or indirectly, to issue,
sell, grant, assign, transfer or otherwise dispose of, any additional shares of
capital stock of Issuer or any option or warrant with respect to, or other right
or security convertible into, any additional shares of capital stock of Issuer,
now or hereafter authorized, unless all such additional shares, options,
warrants, rights or other such securities are made and shall remain part of the
Pledged Property subject to the pledge and security interest granted herein.
- 3 -
<PAGE>
(j) Pledgor shall pay all charges and assessments of any nature against the
Pledged Property or with respect thereto prior to said charges and/or
assessments being delinquent.
(k) Pledgor shall promptly reimburse Pledgee on demand, together with
interest at the rate then applicable to the Obligations set forth in the Loan
Agreement, for any charges, assessments or expenses paid or incurred by Pledgee
in its discretion for the protection, preservation and maintenance of the
Pledged Property and the enforcement of Pledgee's rights hereunder, including,
without limitation, attorneys' fees and legal expenses incurred by Pledgee in
seeking to protect, collect or enforce its rights in the Pledged Property or
otherwise hereunder.
(l) Pledgor shall furnish, or cause to be furnished, to Pledgee such
information concerning Issuer and the Pledged Property as Pledgee may from time
to time reasonably request in good faith, including, without limitation, current
financial statements.
(m) Pledgee may notify Issuer or the appropriate transfer agent of the
Pledged Securities to register the security interest and pledge granted herein
and honor the rights of Pledgee with respect thereto.
(n) Pledgor waives: (i) all rights to require Pledgee to proceed against
any other person, entity or collateral or to exercise any remedy, (ii) the
defense of the statute of limitations in any action upon any of the Obligations,
(iii) any right of subrogation or interest in the Obligations or Pledged
Property until all Obligations have been paid in full, (iv) any rights to notice
of any kind or nature whatsoever, unless specifically required in this Pledge
Agreement or non-waivable under any applicable law, and (v) to the extent
permissible, its rights under Section 9-112 and 9-207 of the Uniform Commercial
Code. Pledgor agrees that the Pledged Property, other collateral, or any other
guarantor or endorser may be released, substituted or added with respect to the
Obligations, in whole or in part, without releasing or otherwise affecting the
liability of Pledgor, the pledge and security interests granted hereunder, or
this Pledge Agreement. Pledgee is entitled to all of the benefits of a secured
party set forth in Section 9-207 of the New York Uniform Commercial Code.
4. EVENTS OF DEFAULT
-----------------
All Obligations shall become immediately due and payable, without notice or
demand, at the option of Pledgee, upon the occurrence of any Event of Default,
as such term is defined in the Loan Agreement (each an "Event of Default"
hereunder).
5. RIGHTS AND REMEDIES
-------------------
At any time an Event of Default exists or has occurred and is continuing,
in addition to all other rights and remedies of Pledgee, whether provided under
this Pledge Agreement, the Loan Agreement, the other Financing Agreements,
applicable law or otherwise, Pledgee shall have the following rights and
remedies which may be exercised without notice to, or consent by, Pledgor except
as such notice or consent is expressly provided for hereunder:
- 4 -
<PAGE>
(a) Pledgee, at its option, shall be empowered to exercise its continuing
right to instruct the Issuer (or the appropriate transfer agent of the Pledged
Securities) to register any or all of the Pledged Securities in the name of
Pledgee or in the name of Pledgee's nominee and Pledgee may complete, in any
manner Pledgee may deem expedient, any and all stock powers, assignments or
other documents heretofore or hereafter executed in blank by Pledgor and
delivered to Pledgee. After said instruction, and without further notice,
Pledgee shall have the exclusive right to exercise all voting and corporate
rights with respect to the Pledged Securities and other Pledged Property, and
exercise any and all rights of conversion, redemption, exchange, subscription or
any other rights, privileges, or options pertaining to any shares of the Pledged
Securities or other Pledged Property as if Pledgee were the absolute owner
thereof, including, without limitation, the right to exchange, in its
discretion, any and all of the Pledged Securities and other Pledged Property
upon any merger, consolidation, reorganization, recapitalization or other
readjustment with respect thereto. Upon the exercise of any such rights,
privileges or options by Pledgee, Pledgee shall have the right to deposit and
deliver any and all of the Pledged Securities and other Pledged Property to any
committee, depository, transfer agent, registrar or other designated agency upon
such terms and conditions as Pledgee may determine, all without liability,
except to account for property actually received by Pledgee. However, Pledgee
shall have no duty to exercise any of the aforesaid rights, privileges or
options (all of which are exercisable in the sole discretion of Pledgee) and
shall not be responsible for any failure to do so or delay in doing so.
(b) In addition to all the rights and remedies of a secured party under the
Uniform Commercial Code or other applicable law, Pledgee shall have the right,
at any time and without demand of performance or other demand, advertisement or
notice of any kind (except the notice specified below of time and place of
public or private sale) to or upon Pledgor or any other person (all and each of
which demands, advertisements and/or notices are hereby expressly waived to the
extent permitted by applicable law), to proceed forthwith to collect, redeem,
recover, receive, appropriate, realize, sell, or otherwise dispose of and
deliver said Pledged Property or any part thereof in one or more lots at public
or private sale or sales at any exchange, broker's board or at any of Pledgee's
offices or elsewhere at such prices and on such terms as Pledgee may deem best.
The foregoing disposition(s) may be for cash or on credit or for future delivery
without assumption of any credit risk, with Pledgee having the right to purchase
all or any part of said Pledged Property so sold at any such sale or sales,
public or private, free of any right or equity of redemption in Pledgor, which
right or equity is hereby expressly waived or released by Pledgor. The proceeds
of any such collection, redemption, recovery, receipt, appropriation,
realization, sale or other disposition, after deducting all costs and expenses
of every kind incurred relative thereto or incidental to the care, safekeeping
or otherwise of any and all Pledged Property or in any way relating to the
rights of Pledgee hereunder, including attorneys' fees and legal expenses, shall
be applied first to the satisfaction of the Obligations (in such order as
Pledgee may elect and whether or not due) and then to the payment of any other
amounts required by applicable law, including Section 9-504(1)(c) of the Uniform
Commercial Code, with Pledgor to be and remain liable for any deficiency.
Pledgor shall be liable to Pledgee for the payment on demand of all such costs
and expenses, together with interest at the then applicable rate set forth in
the Loan Agreement, and any attorneys' fees and legal expenses. Pledgor agrees
that five (5) days prior written notice by Pledgee designating the place and
time of any public sale or of the time after which any private sale or other
intended disposition of any or all of the Pledged Property is to be made, is
reasonable notification of such matters.
- 5 -
<PAGE>
(c) Pledgor recognizes that Pledgee may be unable to effect a public sale
of all or part of the Pledged Property by reason of certain prohibitions
contained in the Securities Act of 1933, as amended, as now or hereafter in
effect or in applicable Blue Sky or other state securities law, as now or
hereafter in effect, but may be compelled to resort to one or more private sales
to a restricted group of purchasers who will be obliged to agree, among other
things, to acquire such Pledged Property for their own account for investment
and not with a view to the distribution or resale thereof. If at the time of any
sale of the Pledged Property or any part thereof, the same shall not, for any
reason whatsoever, be effectively registered (if required) under the Securities
Act of 1933 (or other applicable state securities law), as then in effect,
Pledgee in its sole and absolute discretion is authorized to sell such Pledged
Property or such part thereof by private sale in such manner and under such
circumstances as Pledgee or its counsel may deem necessary or advisable in order
that such sale may legally be effected without registration. Pledgor agrees that
private sales so made may be at prices and other terms less favorable to the
seller than if such Pledged Property were sold at public sale, and that Pledgee
has no obligation to delay the sale of any such Pledged Property for the period
of time necessary to permit Issuer, even if Issuer would agree, to register such
Pledged Property for public sale under such applicable securities laws. Pledgor
agrees that any private sales made under the foregoing circumstances shall be
deemed to have been in a commercially reasonable manner.
(d) All of the Pledgee's rights and remedies, including, but not limited
to, the foregoing and those otherwise arising under this Pledge Agreement, the
Loan Agreement and the other Financing Agreements, the instruments comprising
the Pledged Property, applicable law or otherwise, shall be cumulative and not
exclusive and shall be enforceable alternatively, successively or concurrently
as Pledgee may deem expedient. No failure or delay on the part of Pledgee in
exercising any of its options, powers or rights or partial or single exercise
thereof, shall constitute a waiver of such option, power or right.
6. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW
------------------------------------------------------------
(a) The validity, interpretation and enforcement of this Pledge Agreement
and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of Georgia
(without giving effect to principles of conflicts of law).
(b) Pledgor irrevocably consents and submits to the non-exclusive
jurisdiction of the Superior Court of Fulton County, Georgia and the United
States District Court for the Northern District of Georgia and waives any
objection based on venue or forum non conveniens with respect to any action
instituted therein arising under this Pledge Agreement or any of the other
Financing Agreements or in any way connected with or related or incidental to
the dealings of the parties hereto in respect of this Pledge Agreement or any of
the other Financing Agreements or the transactions related hereto or thereto, in
each case whether now existing or hereafter arising, and whether in contract,
tort, equity or otherwise, and agrees that any dispute with respect to any such
matters shall be heard only in the courts described above (except that Pledgee
shall have the right to bring any action or proceeding against Pledgor or its
property in the courts
- 6 -
<PAGE>
of any other jurisdiction which Pledgee deems necessary or appropriate in order
to realize on the Pledged Property or to otherwise enforce its rights against
Pledgor or its property).
(c) Pledgor hereby waives personal service of any and all process upon it
and consents that all such service of process may be made by certified mail
(return receipt requested) directed to its address set forth herein and service
so made shall be deemed to be completed five (5) days after the same shall have
been so deposited in the U.S. mails, or, at Pledgee's option, by service upon
Pledgor in any other manner provided under the rules of any such courts. Within
thirty (30) days after such service, Pledgor shall appear in answer to such
process, failing which Pledgor shall be deemed in default and judgment may be
entered by Pledgee against Pledgor for the amount of the claim and other relief
requested.
(d) PLEDGOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS PLEDGE AGREEMENT OR ANY OF THE
OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF PLEDGOR AND PLEDGEE IN RESPECT OF THIS PLEDGE
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED
HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. PLEDGOR HEREBY AGREES AND
CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED
BY COURT TRIAL WITHOUT A JURY AND THAT PLEDGOR OR PLEDGEE MAY FILE AN ORIGINAL
COUNTERPART OF A COPY OF THIS PLEDGE AGREEMENT WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY.
(e) Pledgee shall not have any liability to Pledgor (whether in tort,
contract, equity or otherwise) for losses suffered by Pledgor in connection
with, arising out of, or in any way related to the transactions or relationships
contemplated by this Pledge Agreement, or any act, omission or event occurring
in connection herewith, unless it is determined by a final and non-appealable
judgment or court order binding on Pledgee, that the losses were the result of
acts or omissions constituting gross negligence or willful misconduct. In any
such litigation, Pledgee shall be entitled to the benefit of the rebuttable
presumption that it acted in good faith and with the exercise of ordinary care
in the performance by it of the terms of this Pledge Agreement.
7. MISCELLANEOUS
-------------
(a) Pledgor agrees that at any time and from time to time upon the written
request of Pledgee, Pledgor shall execute and deliver such further documents,
including, but not limited to, irrevocable proxies or stock powers, in form
satisfactory to counsel for Pledgee, and will take or cause to be taken such
further acts as Pledgee may request in order to effect the purposes of this
Pledge Agreement and perfect or continue the perfection of the security interest
in the Pledged Property granted to Pledgee hereunder.
- 7 -
<PAGE>
(b) Beyond the exercise of reasonable care to assure the safe custody of
the Pledged Property (whether such custody is exercised by Pledgee, or Pledgee's
nominee, agent or bailee) Pledgee or Pledgee's nominee agent or bailee shall
have no duty or liability to protect or preserve any rights pertaining thereto
and shall be relieved of all responsibility for the Pledged Property upon
surrendering it to Pledgor or foreclosure with respect thereto.
(c) All notices, requests and demands to or upon the respective parties
hereto shall be in writing and shall be deemed to have been duly given or made:
if delivered in person, immediately upon delivery; if by telex, telegram or
facsimile transmission, immediately upon sending and upon confirmation of
receipt; if by nationally recognized overnight courier service with instructions
to deliver the next business day, one (1) business day after sending; and if by
registered or certified mail, return receipt requested, five (5) days after
mailing. All notices, requests and demands upon the parties are to be given to
the following addresses (or to such other address as any party may designate by
notice in accordance with this Section):
If to Pledgor: Delta Apparel, Inc.
3355 Breckinridge Boulevard, Suite 100
Duluth, Georgia 30096
Attention: Chief Financial Officer
If to Pledgee: Congress Financial Corporation (Southern)
200 Galleria Parkway, Suite 1500
Atlanta, Georgia 30339
Attention: Portfolio Manager
(d) All references to the plural herein shall also mean the singular and to
the singular shall also mean the plural. All references to Pledgor, Pledgee and
Issuer pursuant to the definitions set forth in the recitals hereto, or to any
other person herein, shall include their respective successors and assigns. The
words "hereof," "herein," "hereunder," "this Pledge Agreement" and words of
similar import when used in this Pledge Agreement shall refer to this Pledge
Agreement as a whole and not any particular provision of this Pledge Agreement
and as this Pledge Agreement now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced. An Event of Default shall
exist or continue or be continuing until such Event of Default is waived in
accordance with Section 7(g) hereof. All references to the term "Person" or
"Persons" herein shall mean any individual, sole proprietorship, partnership,
corporation (including, without limitation, any corporation which elects
subchapter S status under the Internal Revenue Code of 1986, as amended),
limited liability corporation, limited liability participation, business trust,
unincorporated association, joint stock company, trust, joint venture or other
entity or any government or any agency, instrumentality or political subdivision
thereof.
(e) This Pledge Agreement, the other Financing Agreements and any other
document referred to herein or therein shall be binding upon Pledgor and its
successors and assigns and inure to the benefit of and be enforceable by Pledgee
and its successors and assigns.
- 8 -
<PAGE>
(f) If any provision of this Pledge Agreement is held to be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate this
Pledge Agreement as a whole, but this Pledge Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
(g) Neither this Pledge Agreement nor any provision hereof shall be
amended, modified, waived or discharged orally or by course of conduct, but only
by a written agreement signed by an authorized officer of Pledgee. Pledgee shall
not, by any act, delay, omission or otherwise be deemed to have expressly or
impliedly waived any of its rights, powers and/or remedies unless such waiver
shall be in writing and signed by an authorized officer of Pledgee. Any such
waiver shall be enforceable only to the extent specifically set forth therein. A
waiver by Pledgee of any right, power and/or remedy on any one occasion shall
not be construed as a bar to or waiver of any such right, power and/or remedy
which Pledgee would otherwise have on any future occasion, whether similar in
kind or otherwise.
- 9 -
<PAGE>
IN WITNESS WHEREOF, Pledgor has executed this Pledge Agreement as of the
day and year first above written.
DELTA APPAREL, INC.
By: /s/ Herbert M. Mueller
-----------------------------
Title: Vice President & CFO
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<PAGE>
EXHIBIT A
TO
PLEDGE AND SECURITY AGREEMENT
-----------------------------
Issuer Certificate No. Shares
------ --------------- ------
Delta Apparel Honduras, S.A. 1,622
- 11 -
TRADEMARK SECURITY AGREEMENT
----------------------------
THIS AGREEMENT ("Agreement"), dated May 16, 2000, is by and between DELTA
APPAREL, INC., a Georgia corporation ("Debtor"), with its chief executive office
at 3355 Breckinridge Boulevard, Suite 100, Duluth, Georgia 30096 and CONGRESS
FINANCIAL CORPORATION (Southern), a Georgia corporation ("Secured Party"),
having an office at 200 Galleria Parkway, Suite 1500, Atlanta, Georgia 30339.
W I T N E S S E T H :
---------------------
WHEREAS, Debtor has adopted, used and is using, and is the owner of the
entire right, title, and interest in and to the trademarks, trade names, terms,
designs and applications therefor described in Exhibit A hereto and made a part
hereof;
WHEREAS, Secured Party and Debtor have entered or are about to enter into
financing arrangements pursuant to which Secured Party may make loans and
advances and provide other financial accommodations to Debtor as set forth in
the Loan and Security Agreement, dated of even date herewith, by and between
Secured Party and Debtor (as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced, the "Loan
Agreement") and other agreements, documents and instruments referred to therein
or at any time executed and/or delivered in connection therewith or related
thereto, including, but not limited to, this Agreement (all of the foregoing,
together with the Loan Agreement, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced, being
collectively referred to herein as the "Financing Agreements"); and
WHEREAS, in order to induce Secured Party to enter into the Loan Agreement
and the other Financing Agreements and to make loans and advances and provide
other financial accommodations to Debtor pursuant thereto, Debtor has agreed to
grant to Secured Party certain collateral security as set forth herein;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Debtor hereby agrees as follows:
1. GRANT OF SECURITY INTEREST
--------------------------
As collateral security for the prompt performance, observance and
indefeasible payment in full of all of the Obligations (as hereinafter defined),
Debtor hereby grants to Secured Party a continuing security interest in and a
general lien upon the following (being collectively referred to herein as the
"Collateral"): (a) all of Debtor's now existing or hereafter acquired right,
title, and interest in and to: (i) all of Debtor's trademarks, tradenames, trade
styles and service marks and all applications, registrations and recordings
relating to the foregoing as may at any time be
- 1 -
<PAGE>
filed in the United States Patent and Trademark Office or in any similar office
or agency of the United States, any State thereof, any political subdivision
thereof or in any other country, including, without limitation, the trademarks,
terms, designs and applications described in Exhibit A hereto, together with all
rights and privileges arising under applicable law with respect to Debtor's use
of any trademarks, tradenames, trade styles and service marks, and all reissues,
extensions, continuation and renewals thereof (all of the foregoing being
collectively referred to herein as the "Trademarks"); and (ii) all prints and
labels on which such trademarks, tradenames, tradestyles and service marks
appear, have appeared or will appear, and all designs and general intangibles of
a like nature; (b) the goodwill of the business symbolized by each of the
Trademarks, including, without limitation, all customer lists and other records
relating to the distribution of products or services bearing the Trademarks; (c)
all income, fees, royalties and other payments at any time due or payable with
respect thereto, including, without limitation, payments under all licenses at
any time entered into in connection therewith; (d) the right to sue for past,
present and future infringements thereof; (e) all rights corresponding thereto
throughout the world; and (f) any and all other proceeds of any of the
foregoing, including, without limitation, damages and payments or claims by
Debtor against third parties for past or future infringement of the Trademarks.
2. OBLIGATIONS SECURED
-------------------
The security interest, lien and other interests granted to Secured Party
pursuant to this Agreement shall secure the prompt performance, observance and
payment in full of any and all obligations, liabilities and indebtedness of
every kind, nature and description owing by Debtor to Secured Party and/or its
affiliates, including principal, interest, charges, fees, costs and expenses,
however evidenced, whether as principal, surety, endorser, guarantor or
otherwise, whether arising under this Agreement, the Loan Agreement, the other
Financing Agreements or otherwise, whether now existing or hereafter arising,
whether arising before, during or after the initial or any renewal term of the
Loan Agreement or after the commencement of any case with respect to Debtor
under the United States Bankruptcy Code or any similar statute (including,
without limitation, the payment of interest and other amounts which would accrue
and become due but for the commencement of such case), whether direct or
indirect, absolute or contingent, joint or several, due or not due, primary or
secondary, liquidated or unliquidated, secured or unsecured, and however
acquired by Secured Party (all of the foregoing being collectively referred to
herein as the "Obligations").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
Debtor hereby represents, warrants and covenants with and to Secured Party
the following (all of such representations, warranties and covenants being
continuing so long as any of the Obligations are outstanding):
(a) Debtor shall pay and perform all of the Obligations according to their
terms.
- 2 -
<PAGE>
(b) All of the existing Collateral is valid and subsisting in full force
and effect, and Debtor owns the sole, full and clear title thereto, and the
right and power to grant the security interest granted hereunder. Debtor shall,
at Debtor's expense, perform all acts and execute all documents necessary to
maintain the existence of the Collateral consisting of registered Trademarks as
registered trademarks and to maintain the existence of all of the Collateral as
valid and subsisting, including, without limitation, the filing of any renewal
affidavits and applications. The Collateral is not subject to any liens, claims,
mortgages, assignments, licenses, security interests or encumbrances of any
nature whatsoever, except: (i) the security interests granted hereunder and
pursuant to the Loan Agreement, (ii) the security interests permitted under the
Loan Agreement, and (iii) the licenses permitted under Section 3(e) below.
(c) Debtor shall not assign, sell, mortgage, lease, transfer, pledge,
hypothecate, grant a security interest in or lien upon, encumber, grant an
exclusive or non-exclusive license relating to the Collateral, or otherwise
dispose of any of the Collateral, in each case without the prior written consent
of Secured Party, except as otherwise permitted herein or in the Loan Agreement.
Nothing in this Agreement shall be deemed a consent by Secured Party to any such
action, except as such action is expressly permitted hereunder.
(d) Debtor shall, at Debtor's expense, promptly perform all acts and
execute all documents requested at any time by Secured Party to evidence,
perfect, maintain, record or enforce the security interest in the Collateral
granted hereunder or to otherwise further the provisions of this Agreement.
Debtor hereby authorizes Secured Party to execute and file one or more financing
statements (or similar documents) with respect to the Collateral, signed only by
Secured Party or as otherwise determined by Secured Party. Debtor further
authorizes Secured Party to have this Agreement or any other similar security
agreement filed with the Commissioner of Patents and Trademarks or any other
appropriate federal, state or government office.
(e) As of the date hereof, Debtor does not have any Trademarks registered,
or subject to pending applications, in the United States Patent and Trademark
Office or any similar office or agency in the United States, any State thereof,
any political subdivision thereof or in any other country, other than those
described in Exhibit A hereto and has not granted any licenses with respect
thereto other than as set forth in Exhibit B hereto.
(f) Debtor shall, concurrently with the execution and delivery of this
Agreement, execute and deliver to Secured Party five (5) originals of a Special
Power of Attorney in the form of Exhibit C annexed hereto for the implementation
of the assignment, sale or other disposition of the Collateral pursuant to
Secured Party's exercise of the rights and remedies granted to Secured Party
hereunder.
(g) Secured Party may, in its discretion, pay any amount or do any act
which Debtor fails to pay or do as required hereunder or as requested by Secured
Party to preserve, defend, protect, maintain, record or enforce the Obligations,
the Collateral, or the security interest granted hereunder including, but not
limited to, all filing or recording fees, court costs, collection charges,
attorneys' fees and legal expenses. Debtor shall be liable to Secured Party for
any such
- 3 -
<PAGE>
payment, which payment shall be deemed an advance by Secured Party to Debtor,
shall be payable on demand together with interest at the rate then applicable to
the Obligations set forth in the Loan Agreement and shall be part of the
Obligations secured hereby.
(h) Debtor shall not file any application for the registration of a
Trademark with the United States Patent and Trademark Office or any similar
office or agency in the United States, unless Debtor has given Secured Party
thirty (30) days prior written notice of such action. If, after the date hereof,
Debtor shall (i) obtain any registered trademark or tradename, or apply for any
such registration in the United States Patent and Trademark Office or in any
similar office or agency in the United States, any State thereof, any political
subdivision thereof or in any other country, or (ii) become the owner of any
trademark registrations or applications for trademark registration used in the
United States or any State thereof, political subdivision thereof or in any
other country, the provisions of Section 1 hereof shall automatically apply
thereto. Upon the request of Secured Party, Debtor shall promptly execute and
deliver to Secured Party any and all assignments, agreements, instruments,
documents and such other papers as may be requested by Secured Party to evidence
the security interest in such Trademark in favor of Secured Party.
(i) Debtor has not abandoned any of the Trademarks and Debtor will not do
any act, nor omit to do any act, whereby the Trademarks may become abandoned,
invalidated, unenforceable, avoided, or avoidable. Debtor shall notify Secured
Party immediately if it knows or has reason to know of any reason why any
application, registration, or recording with respect to the Trademarks may
become abandoned, canceled, invalidated, avoided, or avoidable.
(j) Debtor shall render any assistance, as Secured Party shall determine is
necessary, to Secured Party in any proceeding before the United States Patent
and Trademark Office, any federal or state court, or any similar office or
agency in the United States, any State thereof, any political subdivision
thereof or in any other country, to maintain such application and registration
of the Trademarks as Debtor's exclusive property and to protect Secured Party's
interest therein, including, without limitation, filing of renewals, affidavits
of use, affidavits of incontestability and opposition, interference, and
cancellation proceedings.
(k) To the best of Debtor's knowledge, no material infringement or
unauthorized use presently is being made of any of the Trademarks that would
adversely affect in any material respect the fair market value of the Collateral
or the benefits of this Agreement granted to Secured Party, including, without
limitation, the validity, priority or perfection of the security interest
granted herein or the remedies of Secured Party hereunder. Debtor shall promptly
notify Secured Party if Debtor (or any affiliate or subsidiary thereof) learns
of any use by any person of any term or design which infringes on any Trademark
or is likely to cause confusion with any Trademark. If requested by Secured
Party, Debtor, at Debtor's expense, shall join with Secured Party in such action
as Secured Party, in Secured Party's discretion, may deem advisable for the
protection of Secured Party's interest in and to the Trademarks.
(l) Debtor assumes all responsibility and liability arising from the use of
the Trademarks and Debtor hereby indemnifies and holds Secured Party harmless
from and against any claim,
- 4 -
<PAGE>
suit, loss, damage, or expense (including attorneys' fees and legal expenses)
arising out of any alleged defect in any product manufactured, promoted, or sold
by Debtor (or any affiliate or subsidiary thereof) in connection with any
Trademark or out of the manufacture, promotion, labelling, sale or advertisement
of any such product by Debtor (or any affiliate or subsidiary thereof). The
foregoing indemnity shall survive the payment of the Obligations, the
termination of this Agreement and the termination or non-renewal of the Loan
Agreement.
(m) Debtor shall promptly pay Secured Party for any and all expenditures
made by Secured Party pursuant to the provisions of this Agreement or for the
defense, protection or enforcement of the Obligations, the Collateral, or the
security interests granted hereunder, including, but not limited to, all filing
or recording fees, court costs, collection charges, travel expenses, and
attorneys' fees and legal expenses. Such expenditures shall be payable on
demand, together with interest at the rate then applicable to the Obligations
set forth in the Loan Agreements and shall be part of the Obligations secured
hereby.
4. EVENTS OF DEFAULT
-----------------
All Obligations shall become immediately due and payable, without notice or
demand, at the option of Secured Party, upon the occurrence of any Event of
Default, as such term is defined in the Loan Agreement (each an "Event of
Default" hereunder).
5. RIGHTS AND REMEDIES
-------------------
At any time an Event of Default exists or has occurred and is continuing,
in addition to all other rights and remedies of Secured Party, whether provided
under this Agreement, the Loan Agreement, the other Financing Agreements,
applicable law or otherwise, Secured Party shall have the following rights and
remedies which may be exercised without notice to, or consent by, Debtor except
as such notice or consent is expressly provided for hereunder:
(a) Secured Party may require that neither Debtor nor any affiliate or
subsidiary of Debtor make any use of the Trademarks or any marks similar thereto
for any purpose whatsoever. Secured Party may make use of any Trademarks for the
sale of goods, completion of work-in-process or rendering of services in
connection with enforcing any other security interest granted to Secured Party
by Debtor or any subsidiary or affiliate of Debtor or for such other reason as
Secured Party may determine.
(b) Secured Party may grant such license or licenses relating to the
Collateral for such term or terms, on such conditions, and in such manner, as
Secured Party shall in its discretion deem appropriate. Such license or licenses
may be general, special or otherwise, and may be granted on an exclusive or
non-exclusive basis throughout all or any part of the United States of America,
its territories and possessions, and all foreign countries.
(c) Secured Party may assign, sell or otherwise dispose of the Collateral
or any part thereof, either with or without special conditions or stipulations
except that if notice to Debtor of
- 5 -
<PAGE>
intended disposition of Collateral is required by law, the giving of five (5)
days prior written notice to Debtor of any proposed disposition shall be deemed
reasonable notice thereof and Debtor waives any other notice with respect
thereto. Secured Party shall have the power to buy the Collateral or any part
thereof, and Secured Party shall also have the power to execute assurances and
perform all other acts which Secured Party may, in its discretion, deem
appropriate or proper to complete such assignment, sale, or disposition. In any
such event, Debtor shall be liable for any deficiency.
(d) In addition to the foregoing, in order to implement the assignment,
sale, or other disposition of any of the Collateral pursuant to the terms
hereof, Secured Party may at any time execute and deliver on behalf of Debtor,
pursuant to the authority granted in the Powers of Attorney described in Section
3(f) hereof, one or more instruments of assignment of the Trademarks (or any
application, registration, or recording relating thereto), in form suitable for
filing, recording, or registration. Debtor agrees to pay Secured Party on demand
all costs incurred in any such transfer of the Collateral, including, but not
limited to, any taxes, fees, and attorneys' fees and legal expenses. Debtor
agrees that Secured Party has no obligation to preserve rights to the Trademarks
against any other parties.
(e) Secured Party may first apply the proceeds actually received from any
such license, assignment, sale or other disposition of any of the Collateral to
the costs and expenses thereof, including, without limitation, attorneys' fees
and all legal, travel and other expenses which may be incurred by Secured Party.
Thereafter, Secured Party may apply any remaining proceeds to such of the
Obligations as Secured Party may in its discretion determine. Debtor shall
remain liable to Secured Party for any of the Obligations remaining unpaid after
the application of such proceeds, and Debtor shall pay Secured Party on demand
any such unpaid amount, together with interest at the rate then applicable to
the Obligations set forth in the Loan Agreement.
(f) Debtor shall supply to Secured Party or to Secured Party's designee,
Debtor's knowledge and expertise relating to the manufacture and sale of the
products and services bearing the Trademarks and Debtor's customer lists and
other records relating to the Trademarks and the distribution thereof.
(g) Nothing contained herein shall be construed as requiring Secured Party
to take any such action at any time. All of Secured Party's rights and remedies,
whether provided under this Agreement, the other Financing Agreements,
applicable law, or otherwise, shall be cumulative and none is exclusive. Such
rights and remedies may be enforced alternatively, successively, or
concurrently.
6. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW
------------------------------------------------------------
(a) The validity, interpretation and enforcement of this Agreement and the
other Financing Agreements and any dispute arising out of the relationship
between the parties hereto, whether in
- 6 -
<PAGE>
contract, tort, equity or otherwise, shall be governed by the internal laws of
the State of Georgia (without giving effect to principles of conflicts of law).
(b) Debtor and Secured Party irrevocably consent and submit to the
non-exclusive jurisdiction of the Superior Court of Fulton County, Georgia and
the United States District Court for the Northern District of Georgia and waive
any objection based on venue or forum non conveniens with respect to any action
instituted therein arising under this Agreement or any of the other Financing
Agreements or in any way connected or related or incidental to the dealings of
Debtor and Secured Party in respect of this Agreement or the other Financing
Agreements or the transactions related hereto or thereto, in each case whether
now existing or thereafter arising, and whether in contract, tort, equity or
otherwise, and agree that any dispute with respect to any such matters shall be
heard only in the courts described above (except that Secured Party shall have
the right to bring any action or proceeding against Debtor or its property in
the courts of any other jurisdiction which Secured Party deems necessary or
appropriate in order to realize on the Collateral or to otherwise enforce its
rights against Debtor or its property).
(c) Debtor hereby waives personal service of any and all process upon it
and consents that all such service of process may be made by certified mail
(return receipt requested) directed to its address set forth herein and service
so made shall be deemed to be completed five (5) days after the same shall have
been so deposited in the U.S. mails, or, at Secured Party's option, by service
upon Debtor in any other manner provided under the rules of any such courts.
Within thirty (30) days after such service, Debtor shall appear in answer to
such process, failing which Debtor shall be deemed in default and judgment may
be entered by Secured Party against Debtor for the amount of the claim and other
relief requested.
(d) DEBTOR AND SECURED PARTY EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY
OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT
OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF DEBTOR AND SECURED PARTY IN RESPECT OF
THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NO EXISTING OR HEREAFTER ARISING,
AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. DEBTOR AND SECURED PARTY
EACH HEREBY AGREES AN CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT DEBTOR OR SECURED
PARTY MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF DEBTOR AND SECURED PARTY TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Secured Party shall not have any liability to Debtor (whether in tort,
contract, equity or otherwise) for losses suffered by Debtor in connection with,
arising out of, or in any way related to the transactions or relationships
contemplated by this Agreement, or any act, omission or event
- 7 -
<PAGE>
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Secured Party that the losses
were the result of acts or omissions constituting gross negligence or willful
misconduct. In any such litigation, Secured Party shall be entitled to the
benefit of the rebuttable presumption that it acted in good faith and with the
exercise of ordinary care in the performance by it of the terms of this
Agreement and the other Financing Agreements.
7. MISCELLANEOUS
-------------
(a) All notices, requests and demands hereunder shall be in writing and
deemed to have been given or made: if delivered in person, immediately upon
delivery; if by telex, telegram or facsimile transmission, immediately upon
sending and upon confirmation of receipt; if by nationally recognized overnight
courier service with instructions to deliver the next business day, one (1)
business day after sending; and if by certified mail, return receipt requested,
five (5) days after mailing. All notices, requests and demands upon the parties
are to be given to the following addresses (or to such other address as any
party may designate by notice in accordance with this Section):
If to Debtor: Delta Apparel, Inc.
3355 Breckinridge Boulevard
Suite 100
Duluth, Georgia 30096
Attention: Chief Financial Officer
If to Secured Congress Financial Corporation (Southern)
Party: 200 Galleria Parkway
Suite 1500
Atlanta, Georgia 30339
Attention: Portfolio Manager
(b) All references to the plural herein shall also mean the singular and to
the singular shall also mean the plural. All references to Debtor and Secured
Party pursuant to the definitions set forth in the recitals hereto, or to any
other person herein, shall include their respective successors and assigns. The
words "hereof," "herein," "hereunder," "this Agreement" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not any particular provision of this Agreement and as this Agreement now exists
or may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced. An Event of Default shall exist or continue or be continuing until
such Event of Default is waived in accordance with Section 7(e) hereof. All
references to the term "Person" or "person" herein shall mean any individual,
sole proprietorship, partnership, corporation (including, without limitation,
any corporation which elects subchapter S status under the Internal Revenue Code
of 1986, as amended), limited liability company, limited liability partnership,
business trust, unincorporated
- 8 -
<PAGE>
association, joint stock company, trust, joint venture or other entity or any
government or any agency or instrumentality or political subdivision thereof.
(c) This Agreement, the other Financing Agreements and any other document
referred to herein or therein shall be binding upon Debtor and its successors
and assigns and inure to the benefit of and be enforceable by Secured Party and
its successors and assigns.
(d) If any provision of this Agreement is held to be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate this
Agreement as a whole, but this Agreement shall be construed as though it did not
contain the particular provision held to be invalid or unenforceable and the
rights and obligations of the parties shall be construed and enforced only to
such extent as shall be permitted by applicable law.
(e) Neither this Agreement nor any provision hereof shall be amended,
modified, waived or discharged orally or by course of conduct, but only by a
written agreement signed by an authorized officer of Secured Party. Secured
Party shall not, by any act, delay, omission or otherwise be deemed to have
expressly or impliedly waived any of its rights, powers and/or remedies unless
such waiver shall be in writing and signed by an authorized officer of Secured
Party. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Secured Party of any right, power and/or remedy on
any one occasion shall not be construed as a bar to or waiver of any such right,
power and/or remedy which Secured Party would otherwise have on any future
occasion, whether similar in kind or otherwise.
- 9 -
<PAGE>
IN WITNESS WHEREOF, Debtor and Secured Party have executed this Agreement
as of the day and year first above written.
DELTA APPAREL, INC.
By: /s/ Herbert M. Mueller
--------------------------------
Title: Vice President & CFO
CONGRESS FINANCIAL CORPORATION
(SOUTHERN)
By: /s/ Daniel Cott
--------------------------------
Title: Executive Vice President
- 10 -
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 16th day of May, 2000, before me personally came Herbert M.
Mueller, to me known, who being duly sworn, did depose and say, that he/she is
the Vice President & CFO of DELTA APPAREL, INC., the corporation described in
and which executed the foregoing instrument; and that he/she signed his/her name
thereto by order of the Board of Directors of said corporation.
/s/ Cathleen A. Pellegrino
------------------------------------
Notary Public
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 16th day of May, 2000, before me personally came Daniel Cott, to me
known, who, being duly sworn, did depose and say, that he/she is the Executive
Vice President of CONGRESS FINANCIAL CORPORATION (SOUTHERN), the corporation
described in and which executed the foregoing instrument; and that he/she signed
his/her name thereto by order of the Board of Directors of said corporation.
/s/ Cathleen A. Pellegrino
--------------------------------------
Notary Public
- 11 -
<PAGE>
EXHIBIT A
TO
TRADEMARK SECURITY AGREEMENT
----------------------------
<TABLE>
<CAPTION>
LIST OF TRADEMARKS AND TRADEMARK APPLICATIONS
---------------------------------------------
Registration Registration Expiration
Trademark Number Date Date
--------- --------- -------
<S> <C> <C>
- ------------------------------ ---------------------------- --------------------------- ----------------------------
- ------------------------------ ---------------------------- --------------------------- ----------------------------
- ------------------------------ ---------------------------- --------------------------- ----------------------------
</TABLE>
<TABLE>
<CAPTION>
Trademark Application/Serial Application
Application Number Date
----------- ------ ----
<S> <C> <C>
- ---------------------------------------- ------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
<PAGE>
EXHIBIT B
TO
TRADEMARK SECURITY AGREEMENT
----------------------------
LIST OF LICENSES
----------------
<PAGE>
EXHIBIT C
TO
TRADEMARK SECURITY AGREEMENT
----------------------------
SPECIAL POWER OF ATTORNEY
-------------------------
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
KNOW ALL MEN BY THESE PRESENTS, that DELTA APPAREL, INC. ("Debtor"), having
an office at 1020-A Barrow Industrial Parkway Winder, Georgia 30680 hereby
appoints and constitutes, severally, CONGRESS FINANCIAL CORPORATION (SOUTHERN)
("Secured Party"), and each of its officers, its true and lawful attorney, with
full power of substitution and with full power and authority to perform the
following acts on behalf of Debtor:
1. Execution and delivery of any and all agreements, documents, instrument
of assignment, or other papers which Secured Party, in its discretion, deems
necessary or advisable for the purpose of assigning, selling, or otherwise
disposing of all right, title, and interest of Debtor in and to any trademarks
and all registrations, recordings, reissues, extensions, and renewals thereof,
or for the purpose of recording, registering and filing of, or accomplishing any
other formality with respect to the foregoing.
2. Execution and delivery of any and all documents, statements,
certificates or other papers which Secured Party, in its discretion, deems
necessary or advisable to further the purposes described in Subparagraph 1
hereof.
This Power of Attorney is made pursuant to a Trademark Security Agreement,
dated of even date herewith, between Debtor and Secured Party (the "Security
Agreement") and is subject to the terms and provisions thereof. This Power of
Attorney, being coupled with an interest, is irrevocable until all
"Obligations", as such term is defined in the Security Agreement, are paid in
full and the Security Agreement is terminated in writing by Secured Party.
Dated: May 16, 2000
DELTA APPAREL, INC.
By: /s/ Herbert M. Mueller
--------------------------------
Title: Vice President & CFO
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 16th day of May 2000, before me personally came Herbert M. Mueller,
to me known, who being duly sworn, did depose and say, that he/she is the Vice
President and CFO of DELTA APPAREL, INC., the corporation described in and which
executed the foregoing instrument; and that he/she signed his/her name thereto
by order of the Board of Directors of said corporation.
/s/ Cathleen A. Pellegrino
----------------------------------
Notary Public
A- 1
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 16th day of May 2000, before me personally came Herbert M. Mueller,
to me known, who being duly sworn, did depose and say, that he/she is the Vice
President & CFO of DELTA APPAREL, INC., the corporation described in and which
executed the foregoing instrument; and that he/she signed his/her name thereto
by order of the Board of Directors of said corporation.
/s/ Cathleen A. Pellegrino
----------------------------------
Notary Public
A- 2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> APR-01-2000
<CASH> 116
<SECURITIES> 0
<RECEIVABLES> 20256
<ALLOWANCES> (2774)
<INVENTORY> 31217
<CURRENT-ASSETS> 49847
<PP&E> 73316
<DEPRECIATION> (45538)
<TOTAL-ASSETS> 77775
<CURRENT-LIABILITIES> 113866
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (67030)
<TOTAL-LIABILITY-AND-EQUITY> 77775
<SALES> 77513
<TOTAL-REVENUES> 77513
<CGS> (65847)
<TOTAL-COSTS> (65847)
<OTHER-EXPENSES> (5721)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6431)
<INCOME-PRETAX> (486)
<INCOME-TAX> (13)
<INCOME-CONTINUING> (473)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (473)
<EPS-BASIC> .20
<EPS-DILUTED> .20
</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 June
16, 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 June 16, 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 30, 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 June 1, 2000, and Delta Apparel first mailed
this document to stockholders on June 5, 2000.
<PAGE>
<TABLE>
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 ...............................................................................................54
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.............................................................55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................................................61
BUSINESS OF DELTA APPAREL.....................................................................................69
MANAGEMENT OF DELTA APPAREL...................................................................................75
SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS AND
MANAGEMENT...................................................................................................85
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE
DELTA APPAREL DISTRIBUTION...................................................................................91
DESCRIPTION OF DELTA APPAREL CAPITAL STOCK....................................................................97
2000 ANNUAL MEETING OF DELTA APPAREL STOCKHOLDERS............................................................107
FORWARD-LOOKING STATEMENTS MAY NOT BE ACCURATE...............................................................107
INDEPENDENT AUDITORS.........................................................................................107
ADDITIONAL INFORMATION.......................................................................................108
INDEX TO COMBINED FINANCIAL STATEMENTS.......................................................................109
INDEPENDENT AUDITORS' REPORT.............................................................................. F-1
AUDITED COMBINED FINANCIAL STATEMENTS FOR DELTA APPAREL'S THREE MOST
RECENT FISCAL YEARS....................................................................................... F-2
UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS FOR THE FIRST NINE MONTHS OF DELTA APPAREL'S 2000 FISCAL YEAR. F-17
</TABLE>
2
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE DELTA APPAREL DISTRIBUTION
The following questions and answers highlight important information about
the Delta Apparel distribution. For a more complete description of the terms of
the Delta Apparel distribution, please read this entire document and the other
materials to which it refers.
Q: WHAT WILL HAPPEN IN THE DELTA APPAREL DISTRIBUTION AND RELATED
TRANSACTIONS?
A: Delta Woodside is separating the two apparel businesses (the Delta Apparel
Company division and the Duck Head Apparel Company division) currently
conducted by its wholly-owned subsidiaries, Delta Apparel, Inc. and Duck
Head Apparel Company, Inc., respectively, from each other and from the
textile fabric business (which this document refers to as Delta Mills
Marketing Company) conducted by its wholly-owned subsidiary, Delta Mills,
Inc., a Delaware corporation (which this document refers to as Delta
Mills). It is accomplishing this as follows:
- Delta Woodside has created two new wholly-owned corporations, 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, have been transferred to Delta Apparel, and the Duck Head
Apparel Company business, and associated assets and liabilities, have
been 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 June 16, 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 June 16,
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 June 16, 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 Section 355 of the US Internal
Revenue Code of 1986, as amended ("Code"). 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
<PAGE>
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
30, 2000.
Q: WHAT IF I HOLD MY SHARES OF DELTA WOODSIDE COMMON STOCK THROUGH MY
STOCKBROKER, BANK OR OTHER NOMINEE?
A: If you hold your shares of Delta Woodside common stock through your
stockbroker, bank or other nominee, you are probably not a registered
stockholder of record and your receipt of 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 30,
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 30, 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 30, 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 June 14 and June 30, 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. If you sell
any of your shares of Delta Woodside common stock prior to or during this
period, you will also be selling the attached due bill, and you will
thereby lose the right to receive the Delta Apparel common stock and Duck
Head common stock represented by the due bill.
Delta Woodside does not expect that "ex-distribution" trading for Delta
Woodside common stock will develop before the 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 have entered or
will enter 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
44-53.
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. Except where the context otherwise indicates, all
descriptions in this document of Delta Apparel's business assume that the
transactions contemplated to occur prior to 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 June 16,
2000. Based on the number of shares of Delta Woodside common stock
outstanding as of May 19, 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 June 16, 2000.
DELTA APPAREL RECORD DATE
June 16, 2000 (5:00 p.m., Eastern time).
DELTA APPAREL DISTRIBUTION DATE
June 30, 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 61 of this document. The combined financial
statements of Delta Apparel include the operations and accounts of the Delta
Apparel Company division, which consisted 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 April 1, 2000 and
March 27, 1999 and for the nine months ended April 1, 2000 and March 27, 1999
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>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
------------------------------------------------------------------- --------------------------
July 3, June 27, June 28, June 29, July 1, April 1, March 27,
-------- --------- --------- --------- ------- --------- ---------
1999 1998 1997 1996 1995 2000 1999
---- ---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS
DATA: (In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 106,779 107,967 112,593 124,601 104,257 77,513 63,679
Cost of goods sold (101,125) (103,867) (109,334) (108,660) (85,927) (65,847) (59,118)
Selling, general and
administrative expenses (13,720) (13,956) (9,530) (10,945) (10,974) (5,700) (8,353)
Impairment charges (1,415) (7,459) - (2,393) - - -
Other income (loss) (221) (505) (132) 501 55 (21) (193)
------------ ------------ ------------ ----------- ------------- ------------- ------------
Operating income (loss) (9,702) (17,820) (6,403) 3,104 7,411 5,945 (3,985)
Interest expense, net (9,578) (6,379) (5,866) (5,736) (5,620) 6,431 6,870
------------ ------------ ------------ ----------- ------------- ------------- ------------
Income (loss) before
taxes
(19,280) (24,199) (12,269) (2,632) 1,791 (486) (10,855)
Income tax expense
(benefit) (90) 108 (208) (342) 976 (13) (51)
------------ ------------ ------------ ----------- ------------- ------------- ------------
Income (loss) before
cumulative change in
accounting principle (19,190) (24,307) (12,061) (2,290) 815 (473) (10,804)
Cumulative effect of
change in accounting
principle - - - (182) - - -
------------ ------------ ------------ ----------- ------------- ------------- ------------
Net income (loss) $ (19,190) (24,307) (12,061) (2,472) 815 (473) (10,804)
============ ============ ============ =========== ============= ============= ============
BALANCE SHEET DATA (AT PERIOD END):
Working capital
(deficit) $ (67,217) (56,756) 10,333 13,357 14,093 (64,019) (59,838)
Total assets 84,357 99,950 90,704 95,299 106,491 77,775 100,767
Total long-term debt 30,517 30,756 63,186 60,818 61,057 30,417 30,577
Divisional deficit (66,556) (47,366) (23,059) (10,998) (8,526) (67,030) (58,170)
</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 nine month period ended April 1, 2000 and for the year ended July 3, 1999
that are set forth under the heading "Unaudited Pro Forma Combined Financial
Statements" and give effect to the transactions described in that section of
this document as if those transactions had occurred, in the case of the pro
forma balance sheet, on the date of that balance sheet and, in the case of the
pro forma statements of operations, at the beginning of the fiscal year that
ended July 3, 1999.
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 nine
month period ended April 1, 2000, included on pages 55-60 and F-1 to F-20,
respectively.
12
<PAGE>
<TABLE>
<CAPTION>
FISCAL NINE MONTHS
YEAR ENDED ENDED
JULY 3, 1999 APRIL 1, 2000
--------------------- --------------------
(dollars in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Net sales $ 106,779 77,513
Cost of goods sold (101,125) (65,847)
--------------------- ------------------------
Gross Profit 5,654 11,666
Selling, general and administrative expenses (10,940) (5,549)
Intercompany management fees (1,135) (681)
Provision for bad debt (1,645) (151)
Impairment charges (1,415) ---
Other expenses (221) (21)
--------------------- ------------------------
Operating income (loss) (9,702) 5,264
Interest (income) expense:
Interest expense, net (2,703) (1,075)
Intercompany interest expense --- ---
--------------------- ------------------------
(2,703) (1,075)
--------------------- ------------------------
Income (loss) before taxes (12,405) 4,189
Income tax expense (benefit) (95) 698
--------------------- ------------------------
Net income (loss) $ (12,310) 3,491
===================== ========================
Basic and diluted net income (loss) per share $ (5.13) 1.45
===================== ========================
Weighted average shares outstanding used in basic and
diluted per share calculation (a) 2,400,000 2,400,000
===================== ========================
BALANCE SHEET DATA:
Working capital $ 32,002
Total assets 77,775
Total long-term debt 11,100
Stockholders' equity 48,308
- --------------------------------------------------------------------------------
(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 pro forma weighted
average shares outstanding do not include securities that would be anti-dilutive
for each of the periods presented.
</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 Code Section 355. For this purpose, the phrase "more likely than
not" means that, in KPMG LLP's opinion, if KPMG's conclusion is challenged by
the IRS, based on all the facts and circumstances, there is a greater than 50%
chance of success that the conclusions of KPMG LLP's opinion will be sustained
on their own merit.
If the Delta Apparel distribution and the Duck Head distribution qualify as
tax-free under 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 $5.9 million in the nine months ended April 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 nine months of the 2000 fiscal year,
Delta Apparel generated $8.8 million of cash from operations.
Delta Apparel believes that the primary factors that have contributed to
its recent positive operating results have been:
14
<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
64.3% in the first nine 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 nine months of fiscal 2000 and in part because Delta Mills' Senior
Note Indenture has not permitted dividends by Delta Mills to Delta Woodside.
Prior to fiscal year 2000, when the 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 nine months ended April 1, 2000, Delta Apparel generated $8.8 million
of cash from operations and reduced the balance of the affiliated debt to Delta
Woodside by $7.5 million. Both the cash generated from operations and the
reduction in affiliated debt were after the effect of $6.4 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 70.6% 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
30.8% 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 adversely
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.
18
<PAGE>
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 from third party suppliers 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 April 1, 2000, on a pro forma basis, after giving effect to the Delta
Apparel distribution, Delta Apparel's total indebtedness would have been
approximately $15.9 million, and total stockholders' equity would have been
approximately $48.3 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 25%. In addition, at that
date and after giving effect to the Delta Apparel distribution, approximately
$22.6 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:
19
<PAGE>
(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 IMPOSES 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 contains 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 also contains customary representations and warranties,
funding conditions and events of default.
A breach of one or more covenants or any other event of default under the
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 lender 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
limits 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 that have 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 provides that a "change of control",
as defined in that agreement, would be an event of default and 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 document 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
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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.
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
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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.
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
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resign their positions with Delta Woodside. The announcement stated that, upon
consummation of the spin-offs, Delta Mills Marketing Company would be Delta
Woodside's sole remaining business, and William Garrett, the head of the Delta
Mills Marketing Company division, would become President and Chief Executive
Officer of the remaining Delta Woodside. The announcement stated that, in
connection with the proposed spin-offs, significant equity incentives, in the
form of stock options and incentive stock awards for the new public companies'
stock, would be granted to the managements of the new companies. The
announcement stated that Delta Woodside could not determine at that time whether
the receipt of the apparel companies' stock would, or would not, be taxable to
the Delta Woodside stockholders for federal income tax purposes, but that, at
the time that Delta Woodside had sufficient information to determine the
appropriate federal income tax treatment of the spin-offs, it would promptly
provide the necessary income tax information to the Delta Woodside stockholders.
The announcement stated that Delta Woodside believed that, even if the spin-offs
were determined to be taxable for federal income tax purposes, the spin-offs
would still be in the best interests of Delta Woodside's stockholders.
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
The following discussion contains various "forward-looking statements".
Please refer to "Forward-Looking Statements May Not Be Accurate" for a
description of the uncertainties and risks associated with forward-looking
statements.
Since the summer of 1998, Delta Woodside's board of directors has been
engaged in the process of exploring various means to maximize stockholder value.
The alternatives that the Delta Woodside Board has examined have included:
(a) A potential sale of the Duck Head Apparel Company division;
(b) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a sale of
the remaining company;
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(c) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a
recapitalization of the remaining company that would involve a cash
distribution to Delta Woodside's stockholders by that remaining
company;
(d) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders;
(e) A pro rata taxable spin-off of Delta Woodside's two apparel businesses
to Delta Woodside's stockholders;
(f) A disproportionate tax-free spin-off of one of Delta Woodside's
apparel businesses to one of Delta Woodside's major stockholders
accompanied by a pro rata tax-free spin-off of the other apparel
business to all the other stockholders;
(g) A potential sale of the Delta Apparel Company business or assets;
(h) A purchase by Delta Mills, Inc. of the 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
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(5) The Delta Woodside board's conclusion that the interests of Delta
Woodside and its stockholders would be adversely affected by any
decision of the Delta Woodside board to delay implementing the
separation of its businesses. The Board believes that continuing
uncertainty in the marketplace as to Delta Woodside's strategic plans
is likely to be damaging the relations of one or more of Delta
Woodside's businesses with certain of its respective suppliers and
customers, and that continuing uncertainty by the employees of Delta
Woodside and its subsidiaries as to Delta Woodside's strategic plans
could cause Delta Woodside or its subsidiaries to lose valuable
employees.
The Delta Woodside board, therefore, concluded that the best interests of
Delta Woodside and its stockholders would be furthered by separating into
distinct public companies Delta Woodside's three businesses (Delta Mills
Marketing Company, 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;
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- 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;
- 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 and related services,
Houlihan Lokey will be paid a fee of $225,000 plus reasonable out-of-pocket
expenses. No portion of this fee is contingent upon the consummation of the
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.
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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"
has been 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" has been completed.
Delta Woodside's board of directors has requested that Houlihan Lokey
render its written opinion to the Delta Woodside board and the 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.
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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
(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.
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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) for comparison to Delta Apparel. Observed market
pricing multiples of the Comparable Public Companies were as follows: (I)
EV/Latest Twelve Month ("LTM") Revenue 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 factors
which relate to, among other things, the nature of the industry in which Delta
Apparel and the Comparable Public Companies are engaged and the 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 $67.2 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 application of the Market Multiple
Approach described above, wherein projected fundamentals were capitalized based
on selected market multiples. Indications of Enterprise Value were developed by
applying an appropriate discount rate or cost of capital to the projected cash
flows and terminal value. The concluded Enterprise Value, or sum of the
projected cash flows and terminal value, ranged between $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
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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 million 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.
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 Delta Apparel's 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 obligations 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 June 1, 2000 that, assuming the Transaction has been consummated
as proposed, immediately after and giving effect to the Transaction:
(i) on a pro forma basis, the fair value and present fair saleable value
of 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.
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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.
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 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.
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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.
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 30, 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 June 16, 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 May 19, 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 30, 2000.
If a holder of Delta Woodside common stock owns a number of shares of Delta
Woodside common stock that is not a whole multiple of ten and therefore would be
entitled to receive a fraction of a whole share of 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.
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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.
The following description is for general purposes only and is based on the
US 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 Code Section 355. 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
Code Section 355. Whether the Delta Apparel distribution and the Duck Head
distribution qualify under Code Section 355 as tax-free spin-offs will depend on
whether the criteria in Code Section 355 and the relevant rules and regulations
of the IRS are satisfied.
Delta Woodside has obtained an opinion from KPMG LLP that it is more likely
than not that each of the 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 Delta Apparel common
stock and Duck Head common stock in those distributions will not recognize
gain upon either of the distributions, except as described immediately
below with respect to fractional shares.
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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.
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 a 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.
39
<PAGE>
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
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.
40
<PAGE>
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 and 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 present 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% or greater interest in Delta
Woodside, Delta Apparel or Duck Head. See "Security Ownership of Significant
Beneficial Owner and Management."
Net Operating Loss Carry Forwards
---------------------------------
As of July 3, 1999, Delta Woodside has net operating loss carry forwards,
for US consolidated federal income tax purposes, of approximately $68 million.
KPMG LLP has provided its opinion that it is more likely than not that (a) Duck
Head will retain as its attribute its allocable share of the Delta Woodside US
consolidated federal income tax net operating loss carry forward; (b) Delta
Apparel will retain as its attribute its allocable share of the Delta Woodside
US consolidated federal income tax net operating loss carry forward; and (c) the
Delta Woodside US consolidated federal income tax group will retain as its
attribute the balance of the Delta Woodside net operating loss not allocable to
Duck Head and Delta Apparel. Delta Woodside has estimated Duck Head's and Delta
Apparel's allocable shares of the US consolidated federal income tax net
operating loss carry forward as of July 3, 1999 at $3 million and $9 million,
respectively. Delta Woodside believes that these loss carryforwards will expire
at various dates in fiscal year 2011 through 2019.
Prior to the 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.
41
<PAGE>
TRADING MARKET
As of the Delta Apparel record date, all of the outstanding shares of Delta
Apparel will be owned by Delta Woodside. As of that date, there will be
approximately 2,500 record holders of the common stock of Delta Woodside. As a
result of the 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
42
<PAGE>
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.
43
<PAGE>
RELATIONSHIPS AMONG DELTA APPAREL,
DELTA WOODSIDE AND DUCK HEAD
This section describes the primary agreements among Delta Apparel, Delta
Woodside and Duck Head that will define the ongoing relationships among them and
their respective subsidiaries after the Delta Apparel distribution and the Duck
Head 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
and the Duck Head distribution with respect to, among other things,
indemnification arrangements and employee benefit arrangements.
Intercompany reorganization
---------------------------
Pursuant to the distribution agreement, Delta Woodside, Delta Apparel and
Duck Head have caused the following to be effected:
(a) Delta Woodside and its subsidiaries (other than Delta Mills)
contributed, as contributions to capital, all net debt amounts owed to
any of them by the corporations that conducted the Delta Apparel
Company division's business and the Duck Head Apparel Company
division's business, with the exceptions of (i) the intercompany debt
that was attributable to the portion of the amounts borrowed since
January 1, 2000 for use by the Delta Apparel Company division's
business or the Duck Head Apparel Company division's business from
Delta Woodside's credit agreement lender that were repaid to that
lender or to Delta Woodside with borrowings under Delta Apparel's and
Duck Head's new credit facilities (which repayments cancelled such
intercompany debt) and (ii) any amounts owed by Delta Apparel to Delta
Mills for yarn sold by Delta Mills to Delta Apparel, which amounts
shall be paid in the ordinary course of business. These intercompany
contributions of debt did not, however, affect any obligation that
Delta Woodside, Delta Apparel or Duck Head may have under the
distribution agreement or the tax sharing agreement. Prior to
completion of the intercompany reorganization, the Delta Apparel
Company division's assets were owned by several of Delta Woodside's
wholly-owned subsidiaries, and the Duck Head Apparel Company
division's assets were 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 were transferred to Delta Apparel or a subsidiary
of Delta Apparel to the extent not already owned by Delta Apparel or
its subsidiaries. This transfer included the sale by Delta Mills to
Delta Apparel of the Rainsford plant, located in Edgefield, SC, which
is described below under the subheading "Other Relationships".
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<PAGE>
(c) Delta Apparel assumed all of the liabilities of the Delta Apparel
Company division of Delta Woodside, and caused all holders of
indebtedness for borrowed money that were part of the assumed Delta
Apparel liabilities and all lessors of leases that were part of the
assumed Delta Apparel liabilities to agree to look only to Delta
Apparel or a subsidiary of Delta Apparel for payment of that
indebtedness or lease (except where Delta Woodside or Duck Head, as
applicable, consented to not being released from the obligations).
(d) All the assets used in the operations of the Duck Head Apparel Company
division's business were transferred to Duck Head or a subsidiary of
Duck Head to the extent not already owned by Duck Head or its
subsidiaries.
(e) Duck Head assumed all of the liabilities of the Duck Head Apparel
Company division of Delta Woodside, and caused all holders of
indebtedness for borrowed money that were part of the assumed Duck
Head liabilities and all lessors of leases that were part of the
assumed Duck Head liabilities to agree to look only to Duck Head or a
subsidiary of Duck Head for payment of that indebtedness or lease
(except where Delta Woodside or Delta Apparel, as applicable,
consented to not being released from the obligations).
(f) Delta Woodside caused all holders of indebtedness for borrowed money
and all lessors of leases that were not part of the liabilities
assumed by 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, consented 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 has caused the employees of the Delta Apparel Company
division to become employees of Delta Apparel, Delta Apparel has assumed the
accrued employee benefits of these employees and Delta Woodside will cause the
account balance of each of these employees in any and all of Delta Woodside's
employee benefit plans (other than the Delta Woodside stock option plan, the
Delta Woodside incentive stock award plan and the Delta Woodside long term
incentive plan, if any) to be transferred to a comparable employee benefit plan
of Delta Apparel.
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<PAGE>
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 April 1, 2000, these amounts aggregated approximately $2.8 million.
Other than any obligations described in or arising under the distribution
agreement or the tax sharing agreement, each of Delta Woodside, Delta Apparel
and Duck Head has represented to each other that it is not aware of any other
intercompany receivable, payable or loan balance that will exist as of the time
of the Delta Apparel distribution and the Duck Head distribution between any of
them.
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
46
<PAGE>
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.
(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 and the Duck Head 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.
47
<PAGE>
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.
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 nine months of fiscal year
2000:
48
<PAGE>
<TABLE>
<CAPTION>
(in thousands of dollars)
Fiscal year First nine months
----------- of
1997 1998 1999 Fiscal year 2000
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
Sold to Duck Head 403 156 481 28
Purchased from Duck Head 653 132 - -
Purchased from Delta Mills(1) 26,456 17,683 - -
- ----------------------------------------
</TABLE>
(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, and yarn produced by the Rainsford
plant and used by Delta Apparel, after that transfer, is not treated as
sold by Delta Mills to Delta Apparel.
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 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.
Pursuant to the distribution agreement, Delta Mills sold to Delta Apparel
the Rainsford plant and related inventory effective as of May 6, 2000. Delta
Mills and Delta Apparel agreed that the purchase price for these assets would be
the assets' book value as of the effective date of the sale. The purchase price
for the real property, furniture, fixtures and equipment was approximately $12.0
million and the purchase price for the inventory and other tangible personal
property was approximately $1.4 million. This purchase price was paid in cash in
the amount of approximately $12.5 million and by the assumption by Delta Apparel
of certain liabilities aggregating approximately $0.9 million as of the
effective date of the sale. Delta Apparel paid the cash portion of the purchase
price with borrowings under its credit facility. In connection with the closing,
Delta Apparel agreed to assume any environmental liability that may arise with
respect to the Rainsford plant regardless of the time period with respect to
which that liability arises.
Until the effective date of the transfer of title from Delta Mills to Delta
Apparel of the Rainsford plant, all yarn produced by the Rainsford plant for
use in the Delta Apparel business was sold by Delta Mills to Delta Apparel. The
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amounts owed by Delta Apparel to Delta Mills from these sales, which aggregated
$2.8 million at April 1, 2000, will be paid in the ordinary course of business.
The terms of the 9 5/8% Senior Notes of Delta Mills required 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 the sale by Delta Mills to Delta Apparel of the Rainsford plant.
Delta Mills engaged The Robinson-Humphrey Company, LLC to provide this opinion.
THE OPINION PROVIDED BY ROBINSON-HUMPHREY RESPECTING THE SALE OF THE
RAINSFORD PLANT ADDRESSED THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE
SALE TO THE HOLDERS OF THE SENIOR NOTES OF DELTA MILLS. THE OPINION DID 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 provided 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 a draft of 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;
- 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 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 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 was
necessarily based upon market, economic and other conditions as they existed on,
and could 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
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<PAGE>
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 of 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
was 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 was 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.
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 May 11, 2000. 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 28 proposed, pending or completed merger and acquisition
transactions in the textile industry since 1995 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.
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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 16% to
20% 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 delivered its written opinion
that, as of the date of its opinion, the sale of the Rainsford plant was 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.
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.
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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 nine 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.
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CAPITALIZATION
The following table sets forth at April 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 portions of this document found
under the headings "The Delta Apparel Distribution" and "Relationships Among
Delta Apparel, Delta Woodside and Duck Head - Distribution Agreement". You
should read this table in conjunction with the information located under the
heading "Combined Financial Statements" and the condensed combined financial
statements of Delta Apparel and related notes as of April 1, 2000 and for the
nine months ended April 1, 2000, included on pages 55-60 and F-17 to F-20,
respectively, of this document.
<TABLE>
<CAPTION>
AS OF APRIL 1, 2000
-----------------------------------------------
ACTUAL PROFORMA
------------------ -------------------
(Dollars in thousands)
<S> <C> <C>
Long-term debt, including current maturities
Revolver loan $ --- 3,100
Five year term loan --- 10,000
Due to parent and affiliates 131,964 2,815
------------------ -------------------
Total long-term debt (including current maturities) 131,964 15,915
Less current maturities (101,547) (4,815)
------------------ -------------------
Total long-term debt (excluding current maturities) 30,417 11,100
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 --- 48,284
Divisional deficit (67,030) ---
------------------ -------------------
Total stockholders' equity (deficit) (67,030) 48,308
------------------ -------------------
Total capitalization $ (36,613) 59,408
================== ===================
</TABLE>
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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 April 1, 2000:
- The contribution to equity or repayment of the intercompany debt owed
by Delta Apparel to Delta Woodside and its subsidiaries (other than
accounts payable for yarn purchases) and the distribution of Delta
Apparel common stock to the existing Delta Woodside stockholders; and
- The incurrence of new financing.
The unaudited pro forma combined statements of operations for the year
ended July 3, 1999 and for the nine months ended April 1, 2000 give effect to
the following transactions as if they had occurred at the beginning of the
fiscal year ended July 3, 1999:
- The decreased interest expense attributable to the contribution to
equity or repayment of the intercompany debt and borrowings utilizing
outside financing;
- The incurrence by 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.
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<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
APRIL 1, 2000
PRO FORMA PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- -------------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 116 116
Accounts and other receivables 17,482 17,482
Inventories 31,217 31,217
Prepaid expenses and other current assets 1,032 1,032
------------ ---------------
Total current assets 49,847 49,847
Property, plant and equipment, net 27,778 27,778
Other assets 150 150
------------ ---------------
77,775 77,775
============ ===============
LIABILITIES AND STOCKHOLDERS'/DIVISIONAL EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt $ ---- 2,000 (2) 2,000
Accounts payable and accrued liabilities 12,051 12,051
Due to related parties 101,547 (98,732) (1) 2,815
Income taxes payable 268 711 (3) 979
------------ ------------ ---------------
Total current liabilities 113,866 (96,021) 17,845
Due to related parties 30,417 (30,417) (1) --
Long-term debt -- 11,100 (2) 11,100
Other long-term liabilities 522 522
------------ ------------ ---------------
Total liabilities 144,805 (115,338) 29,467
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 -- 48,284 (1) 48,284
Divisional deficit (67,030) 67,030 (1) --
------------ ------------ ---------------
Total stockholders'/divisional equity (deficit) (67,030) 115,338 48,308
------------ ------------ ---------------
$ 77,775 -- 77,775
============ ============ ===============
</TABLE>
See notes to unaudited pro forma combined financial statements.
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NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
APRIL 1, 2000
(in thousands of dollars, unless otherwise noted)
The following is a summary of the adjustments reflected in the unaudited pro
forma combined balance sheet:
1) To reflect the contribution to equity or repayment of net intercompany debt
owed by Delta Apparel to Delta Woodside and subsidiaries totaling $129,149
less $2,815 for yarn purchases 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 with new outside
financing totaling $13,100, the proceeds of which are used to pay the
purchase price of the Rainsford plant and associated inventory (which for
purposes of these pro forma financial statements is deemed to be the net
book value of those assets as of April 1, 2000).
3) To reflect estimated tax liability.
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<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) (1,135)
Provision for bad debt (1,645) (1,645)
Impairment charges (1,415) (1,415)
Other expenses (221) (221)
------------------- -------------- -------------------
Operating loss (9,702) (9,702)
Interest income (expense):
Interest expense, net (121) (2,582) (1) (2,703)
Intercompany interest expense (9,457) 9,457 (1) ---
------------------- -------------- -------------------
(9,578) 6,875 (2,703)
------------------- -------------- -------------------
Loss before income taxes (19,280) 6,875 (12,405)
Income tax (benefit) (90) (5) (3) (95)
------------------- -------------- -------------------
Net loss $ (19,190) 6,880 (12,310)
=================== ============== ===================
Basic and diluted net loss per share $ (5.13)
===================
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>
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<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED APRIL 1, 2000
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C>
Net sales $ 77,513 77,513
Cost of goods sold (65,847) (65,847)
-------------- ---------------
Gross profit 11,666 11,666
Selling, general and administrative expenses (5,549) (5,549)
Intercompany management fees -- (681) (2) (681)
Provision for bad debts (151) (151)
Other expenses (21) (21)
-------------- ------------ ---------------
Operating income 5,945 (681) 5,264
Interest income (expense):
Interest expense, net (27) (1,048) (1) (1,075)
Intercompany interest expense (6,404) 6,404 (1) --
-------------- ------------ ---------------
(6,431) 5,356 (1,075)
-------------- ------------ ---------------
Income (loss) before income
taxes (486) 4,675 4,189
Income taxes (benefit) (13) 711 (3) 698
-------------- ------------ ---------------
Net income (loss) $ (473) 3,964 3,491
============== ============ ===============
Basic and diluted net income per share $ 1.45
===============
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>
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NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 3, 1999 AND THE NINE MONTHS ENDED APRIL 1, 2000
(in thousands of dollars, unless otherwise noted)
The following is a summary of the adjustments reflected in the unaudited pro
forma combined statements of operations:
1) To reflect interest expense on new borrowings from the new credit agreement
lender of $10,000 under a term loan and amounts outstanding under a
revolver loan (including working capital borrowings to replace intercompany
borrowings for working capital needs)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 nine months ended April 1, 2000
and the fiscal year ended July 3, 1999 totaling $6,404 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 $15 higher in the nine
months ended April 1, 2000.
2) To reflect intercompany management fees for the nine month period ended
April 1, 2000 of $681, related to payroll and purchasing administrative
expenses, director fees, SEC reporting expenses, software expenses and
audit fees. The amount was adjusted based upon the historical amount
charged by Delta Woodside for the year ended July 3, 1999.
3) To reflect estimated tax liability.
4) To reflect earnings per share based on the weighted-average shares
outstanding assuming a distribution of one 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 33%
from fiscal year 1996 to the third 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 two years, 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
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its facilities at or near full capacity during fiscal 2000, even though that
capacity has increased as a result of Delta Apparel's modernization of its knit
and dye operations in fiscal years 1998 and 1999. Delta Apparel invested over $7
million in capital improvements in fiscal years 1998 and 1999, resulting in
increased capacity and lower operating costs.
FIRST NINE MONTHS OF FISCAL YEAR 2000 VERSUS FIRST NINE MONTHS OF FISCAL YEAR
1999
Net Sales. Net sales for the nine month period ended April 1, 2000 were
$77.5 million as compared to net sales of $63.7 million for the prior year nine
month period. This increase was due to significantly higher unit volume (up 38%,
accounting for $24.3 million) at lower average selling prices (down 12%,
accounting for $(10.5) million).
Gross Margin. Gross profit and gross profit margin for the first nine month
period of fiscal year 2000 were $11.7 million and 15.0%, respectively, as
compared to $4.6 million and 7.2%, respectively, in the prior year nine month
period. The improvement is partially due to a $2.4 million adjustment to fixed
assets resulting from a physical inventory completed in the third quarter of
fiscal 1999. In addition, the lower average selling prices were largely offset
by lower costs of raw materials and lower manufacturing costs, driven by
improved manufacturing efficiencies and higher capacity utilization in the
fiscal year 2000 nine month period.
Selling General and Administrative Expenses. For the nine month period
ended April 1, 2000, selling, general and administrative expenses were $5.7
million, or 7.4% of sales, a decrease of $2.7 million from the prior year nine
month period of $8.4 million, or 13.2% of sales. This decrease was due to a
number of factors, including lower corporate overhead, reduced bad debt expense,
lower commission 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 nine month period ended April 1, 2000 operating
income was $5.9 million or 7.7% of sales. The $9.9 million improvement from the
operating loss of $4.0 million for the prior year nine month period was due to
the factors described above.
Net Interest Expense. For the nine month period ended April 1, 2000, net
interest expense was $6.4 million, as compared to $6.9 million for the nine
month period ended March 27, 1999. The decrease in interest expense was
primarily a result of a 9% decrease in the average principal balance outstanding
on affiliated debt.
Taxes. The effective tax benefit rate was 2.7% for the nine months ended
April 1, 2000 as compared to the effective tax benefit of 0.5% for the nine
months ended March 27, 1999. Although both periods reflected a pretax loss, the
current period's benefit is larger due to the release of valuation allowance
previously set up against net operating losses.
Net Loss. The net loss for the nine month period ended April 1, 2000 of
$0.5 million was $10.3 million lower than the net loss of $10.8 million for the
prior year period. This decrease was due to the factors described above.
Inventories. Inventories at Delta Apparel at April 1, 2000 were $31.2
million as compared to $46.0 million on March 27, 1999. This reduction in
inventory was due to lower units on hand, better management of in process
inventory, and the lower manufacturing cost of goods described above.
Capital Expenditures. Capital expenditures were $1.3 million for the nine
month period ended April 1, 2000 as compared to $2.5 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 April 1, 2000 was $18.3
million, a $12.4 million decrease from the $30.7 million at March 27, 1999. In
the third quarter of fiscal 1999, as a result of excessive inventory quantities,
Delta Apparel began offering special pricing as part of Delta Apparel's
inventory reduction plan. This caused the March 27, 1999 order backlog to be
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unusually high and to increase significantly over the December 26, 1998 backlog
amount. Due to the lower inventory levels during fiscal 2000, these special
pricing allowances were not given, thereby causing the order backlog at April 1,
2000 to be significantly less than at March 27, 1999. Delta Apparel believes
that backlog orders can give a general indication of future sales.
FISCAL YEAR 1999 VERSUS FISCAL YEAR 1998
Net Sales. Net sales for fiscal year 1999 were $107 million, which was
consistent with net sales of $108 million in fiscal year 1998. Fiscal year 1999
net sales included $5.0 million of outside yarn sales from the Rainsford plant
versus none in fiscal year 1998. Control of operations, management and net
assets of the Rainsford plant was transferred by Delta Mills to Delta Apparel in
April 1998, and the results of operations and net assets of the Rainsford plant
have been included in Delta Apparel since that time. Lower fiscal year 1999 net
sales were the result of lower unit prices (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. Part of the average lower sales prices
resulted from reserves that were established for sales promotion programs to
distributors ($0.5 million), an increase in the reserve for general returns and
allowances that resulted from a higher rate of returns and allowances during the
fiscal year ($0.3 million), and a higher number of unresolved chargebacks at
the end of the fiscal year ($0.3 million).
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 reserves established of approximately
$1.0 million for two customer bankruptcies. In addition, the reserve for bad
debt also increased in the fiscal year due to a higher level of aged
receivables.
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 as described below under the subheading "Fiscal year 1998
versus fiscal year 1997." 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. Pursuant to the distribution
agreement, the affiliated debt has recently been contributed to equity or repaid
and replaced with significantly lower levels of third party debt. See
"Capitalization"; "Unaudited Pro Forma Combined Financial Statements".
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Taxes. The effective tax rate for the year ended July 3, 1999 was 0.5% 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.
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. As part of the close for fiscal year 1997, due to the loss
of NIKE (Delta Apparel's largest customer), which had contributed to Delta
Apparel suffering significant operating loss, an impairment analysis was
performed that compared the net book value of Delta Apparel's long lived assets
to projected undiscounted cash flows. The projected undiscounted cash flows
exceeded the net book value of the long lived assets, so no impairment was
deemed to exist at that time. During the third quarter of fiscal year 1998.
Accordingly, a charge of $7.3 million was taken to write-off this excess of cost
over assigned value of net assets acquired. The Rainsford plant was deemed
acquired by Delta Apparel in April 1998 at its written down cost. 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.
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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 difference 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.
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 nine 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 $8.8 million of cash
provided in the first nine months of fiscal 2000 as compared to $11.6 million of
net cash used in the first nine 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 nine 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 $6.4 million of interest due to Delta
Woodside on affiliated debt in the first nine months of fiscal year 2000. 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
Pursuant to the distribution agreement, all net debt amounts (other than
certain accounts payable) owed to Delta Woodside by the corporations that
previously had conducted the Delta Apparel Company division's business and the
Duck Head Apparel Company division's business have been contributed to capital
or repaid. As a result of this action, Delta Apparel no longer owes 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 has
entered into the following financing arrangements:
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- Delta Apparel has entered into a credit agreement with a lending
institution, under which the lender has provided 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
banks prime rate plus an applicable margin. Delta Apparel has granted
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 contains limitations on, or prohibitions of, cash
dividends, stock purchases, related party transactions, mergers,
acquisitions, sales of assets, indebtedness and investments.
- Principal of the term loan will be repaid in monthly installments of
principal based on a 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 is 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 and intercompany debt repayments had occurred and these new debt
facilities were in place as of April 1, 2000 (for purposes of the pro forma
balance sheet) or the beginning of the 1999 fiscal year (for purposes of the pro
forma income statements). Using the same assumptions as are in these pro forma
income statements, if the 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 $0.1 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 on the institutional
lender debt as compared to the actual interest charged on the affiliated debt.
Using the same assumptions as are in the pro forma income statements, if
the Delta Apparel distribution had taken place at the beginning of fiscal year
1999, cash provided by operating activities during the first nine months of
fiscal year 2000 would have been approximately $12.8 million. This $4.0 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 has
purchased from Delta Mills the Rainsford plant, located in Edgefield, South
Carolina, and related inventory. Delta Mills and Delta Apparel agreed that the
purchase price for these assets would be the assets' book value as of the
effective date of the sale. The purchase price for the real property, furniture,
fixtures and equipment was approximately $12.0 million and the purchase price
for the inventory and other tangible personal property was approximately $1.4
million. This purchase price was paid in cash in the amount of approximately
$12.5 million and by the assumption by Delta Apparel of certain liabilities
aggregating approximately $0.9 million as of the effective date of the sale.
Delta Apparel paid the cash portion of the purchase price with borrowings under
its credit facility.
Typically, Delta Apparel's peak borrowing needs are in the third and fourth
fiscal quarters. When Delta Apparel entered into its new credit facility, it
owed amounts to the lender on Delta Woodside's existing credit facility or to
Delta Woodside for certain borrowings made to fund Delta Apparel's needs after
January 1, 2000. These borrowings were refinanced by proceeds of Delta Apparel's
new credit facility.
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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.
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
April 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 $1.4 million on the value of the contracts.
Interest Rate Sensitivity. Delta Apparel's credit agreement provides that
the interest rate on outstanding amounts owed shall bear interest at variable
rates. An interest rate increase would have a negative impact on 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 $111,000 higher in the nine months ended April 1, 2000. The
actual increase in interest expense resulting from a change in interest rates
would depend on the magnitude of the increase in rates and the average principal
balance outstanding.
YEAR 2000 COMPLIANCE
The Year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, software programs that have time sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000.
To date, 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 management'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.
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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 permits the payment of
cash dividends in an amount up to 25% of cumulative net income (excluding
extraordinary or unusual non-cash items), provided that no event of default
exists or would result from that payment and after the payment at least $6.0
million remains available under the revolving credit facility. Delta Apparel's
credit agreement also permits 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
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opened its two Honduras plants and closed five sewing plants in the United
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 $.616 in the first nine 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 had, at April 1, 2000, contracted
to purchase approximately 73% and fixed the price on approximately 39% of its
expected cotton 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 have 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 nine 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 largely a totally vertical producer to reduce
costs, plan efficient production, implement exacting controls and
provide consistent products.
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- 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.
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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
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 largely 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
believes 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.
72
<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., a Tennessee corporation (which conducted 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
Square
Location Utilization Footage Owned/Leased
- -------- ----------- ------------------ ------------
<S> <C> <C> <C>
Duluth, GA admin. offices 40,244 Leased (1)
Rainsford Plant, Edgefield, SC spin 296,000 Owned (2)
Maiden Plant, Maiden, NC knit/dye/finish/cut 305,000 Owned
Washington Plant, Washington, GA sew 129,800 Owned
Distribution Center, Knoxville, TN distribution 550,000 Owned
Honduras Plant, San Pedro Sula,
Honduras sew 70,000 Leased (3)
Honduras Plan, San Pedro Sula,
Honduras sew 30,000 Leased (3)
- ------------------------------------
(1) The lease of the Duluth, Georgia offices expires in August 2000.
(2) In connection with the Delta Apparel distribution, Delta Mills has
transferred title to 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.
</TABLE>
In addition, sales offices are leased in New York City on a month-to-month
basis.
73
<PAGE>
Substantially all of Delta Apparel's assets are subject to liens in favor
of 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.
74
<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>
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)
</TABLE>
(1) Includes service as a director of Delta Woodside and Delta Woodside's
predecessor by merger, Delta Woodside Industries, Inc., a Delaware corporation
(which this documents refers to as "Old Delta Woodside"), or any predecessor
company to Old Delta Woodside.
(2) William F. Garrett served as a divisional Vice President of J. P.
Stevens & Company, Inc. from 1982 to 1984, and as a divisional President of J.
P. Stevens & Company, Inc. from 1984 until 1986, at which time the Delta Mills
Marketing Company division was acquired by a predecessor of Old Delta Woodside.
From 1986 until the present he has served as the President of Delta Mills
Marketing Company, a division of a subsidiary of Delta Woodside. Upon
75
<PAGE>
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 currently has ceased business operations but is evaluating
other business opportunities. Prior to November 15, 1989, RSI Holdings, Inc. was
a subsidiary of RSI Corporation. Mr. Guy served from October 1979 until November
1989 as President, Treasurer and a director of RSI Corporation. Prior to the RSI
Merger, RSI Corporation owned approximately 40% of the outstanding shares of
common stock of Old Delta Woodside and, among other matters, was engaged in the
office supply business, as well as the businesses of selling outdoor power
equipment and turf care products. Mr. Guy also serves as a director of Delta
Woodside and 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 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
76
<PAGE>
positions with Delta Woodside from the RSI Merger until October 1, 1999. Mr.
Rainsford served as Treasurer of Old Delta Woodside or its predecessors or Delta
Woodside from 1984 to 1986, from August 1988 to November 1988 and from November
1990 to October 1, 1999. He is President of The Rainsford Development
Corporation which is engaged in general business development activities in
Edgefield, South Carolina. Mr. Rainsford also serves as a director of Delta
Woodside, 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.
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 from Delta Woodside or any of its
subsidiaries that was earned by Delta Apparel's current Chief Executive Officer
and by the other current executive officer of Delta Apparel who earned salary
77
<PAGE>
and bonus in fiscal 1999 from Delta Woodside or any of its subsidiaries in
excess of $100,000 (whom this document refers to collectively as the "Named
Executives"). Except as described in the notes to the table with respect to
Robert W. Humphreys, each individual listed in the table worked exclusively for
the Delta Apparel Company division during fiscal year 1999 to the extent that
individual was employed during that period by any member of the Delta Woodside
group of corporations.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
Awards
Other
Annual Securities
Compen- Underlying All Other
Fiscal Salary Bonus sation Options Compen-
Name and Principal Position Year ($)(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
- -------------------------------
</TABLE>
(a) The amounts shown in the column include sums the receipt of which has
been deferred pursuant to the Delta Woodside Savings and Investment Plan (the
"Delta Woodside 401(k) Plan") or the Delta Woodside deferred compensation plan.
(b) Amounts in this column are cash bonuses paid to reward performance.
(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.
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<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 $400,000 paid in connection with his undertaking the position
of President and chief executive officer of the Delta Apparel Company division.
(h) Represents the Delta Woodside contribution allocated to Mr. Mueller's
account in the Delta Woodside 401(k) Plan.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
---------------------------------------------------------------------------
Values
------
The following table provides information respecting the exercise by any
Named Executive during fiscal 1999 of awards granted under Delta Woodside's
Incentive Stock Award Plan and options granted under Delta Woodside's Stock
Option Plan, and the fiscal year end value of any unexercised outstanding awards
and options. For purposes of this table, awards under Delta Woodside's Incentive
Stock Award Plan are treated as options.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Shares
Acquired Value Number of Securities Underlying Value of Unexercised
on Exercise Realized Unexercised In-the-Money Options at
Name (#) ($) 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
- -------------------------------------
</TABLE>
(a) Based on the closing sales price of $5.9375 per Delta Woodside share on
July 2, 1999.
79
<PAGE>
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.
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. 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 will be paid a bonus of at least
$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 minimum annual $300,000 rate for the eleventh
and twelfth months of fiscal 1999, (d) Delta Woodside will pay his travel and
lodging expenses for commuting to the division's headquarters in Duluth,
Georgia, (e) if he remains as President and Chief Executive Officer of the Delta
Apparel business as a spun-out separate public company (if that spin-off were to
occur), he will participate in a Delta Apparel bonus plan commencing with the
2001 fiscal year and he will be granted options under a Delta Apparel
performance based stock option plan for shares equal to approximately five
percent of the post-spin-off outstanding shares of Delta Apparel, (f) the
December 1998 severance agreement was modified to provide that the two years'
severance amount, based on a $200,000 salary rate, was earned in fiscal 1999 and
he would no longer be entitled to Delta Woodside's regular severance and (g) if
the restructuring/spin-offs under consideration of the Delta Apparel business
and the Duck Head Apparel business do not occur, he will be elected as a member
of Delta Woodside's board of directors. Delta Apparel has assumed Delta
Woodside's obligations under the April 1999 letter in connection with the Delta
Apparel distribution.
Delta Apparel Stock Option Plan
-------------------------------
Under the Delta Apparel stock option plan, the compensation committee (or,
in the case of at least the Named Executives, the compensation grants committee)
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<PAGE>
of the Delta Apparel board of directors will have the discretion to grant
options for up to an aggregate maximum of 500,000 Delta Apparel shares.
The purpose of the Delta Apparel option plan is to promote the growth and
profitability of Delta Apparel and its subsidiaries by increasing the personal
participation of key and middle level executives in the performance of Delta
Apparel and its subsidiaries, by enabling Delta Apparel and its subsidiaries to
attract and retain key and middle level executives of outstanding competence and
by providing these key and middle level executives with an equity opportunity in
Delta Apparel. The compensation committee (or, in the case of 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.
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<PAGE>
Delta Apparel will attempt, to the maximum extent possible, to structure
grants under the Delta Apparel option plan to the Named Executives in a manner
that satisfies the deductibility requirements of Section 162(m) of the Internal
Revenue Code.
The term of each option will be established by the applicable committee,
but will not exceed ten years (or five years in the case of an incentive stock
option recipient who owns stock having more than ten percent of the total
combined voting power of all classes of stock of Delta Apparel), and the option
will be exercisable according to the schedule that the applicable committee may
determine. The recipient of an option will not pay Delta Apparel any amount 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.
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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.
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.
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The portion of any Delta Apparel incentive stock award that vests or is
paid based on a participant being an employee at specified dates will not
satisfy the requirements of Section 162(m) of the Internal Revenue Code. 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 or is
paid in accordance with performance criteria in a manner that satisfies the
deductibility requirements of Section 162(m). Delta Apparel anticipates that all
compensation payable pursuant to the plan will be deductible by Delta Apparel
because no Named Executive is expected to receive aggregate compensation that
counts against the Section 162(m) cap in excess of $1 million in any fiscal year
in which compensation paid pursuant to the plan becomes taxable.
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 May 19,
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
May 19, 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) 300,700 12.9%
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) 193,822 8.3%
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) 845 (19)
Marjorie F. Rupp (17) 711 (19)
All current directors and executive officers
as a group (10 Persons) (18)(20) 889,059 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 and on telephone confirmation
received on May 15, 2000. In the amendment, Reich & Tang reported that, with
respect to Delta Woodside's common stock, it had shared voting power and shared
dispositive power with respect to all of the shares shown. The amendment
reported that the shares of Delta Woodside's common stock were held on behalf of
certain accounts for which Reich & Tang provides investment advice and as to
which Reich & Tang has full voting and dispositive power for as long as it
retains management of the assets. According to the amendment, each account has
the right to receive and the power to direct the receipt of dividends from, or
the proceeds from the sale of, the Delta Woodside shares. The amendment reported
that none of such accounts has an interest with respect to more than 5% of the
outstanding shares of Delta Woodside's common stock.
(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
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accounts that are advised by one or more direct and indirect investment advisory
subsidiaries of FRI. The amendment reported that the advisory contracts grant to
the applicable investment advisory subsidiary(ies) all investment and/or voting
power over the securities owned by their investment advisory clients.
Accordingly, such subsidiary(ies) may be deemed to be the beneficial owner of
the shares shown in the table. The amendment reported that Charles B. Johnson
and Rupert H. Johnson, Jr. (whom this document refers to as the "FRI Principal
Shareholders") (each of whom has the same business address as FRI) each own in
excess of 10% of the outstanding common stock and are the principal shareholders
of FRI and may be deemed to be the beneficial owners of securities held by
persons and entities advised by FRI subsidiaries. The amendment reported that
one of the investment advisory subsidiaries, Franklin Advisory Services, LLC
(whose address is One Parker Plaza, Sixteenth Floor, Fort Lee, New Jersey
07024), has sole voting and dispositive power with respect to all of the shares
shown. FRI, the FRI Principal Shareholders and the investment advisory
subsidiaries disclaim any economic interest or beneficial ownership in the
shares shown in the table above and are of the view that they are not acting as
a "group" for purposes of the Securities Exchange Act of 1934, as amended. The
amendment reported that Franklin Balance Sheet Investment Fund, a series of
Franklin Value Investors Trust, a company registered under the Investment
Company Act of 1940, has an interest in more than 5% of the class of securities
reported in the amendment.
(3) This information is based on an amendment to Schedule 13G dated
February 4, 2000 and a Schedule 13F filed on May 4, 2000 that were filed with
the Securities and Exchange Commission by Dimensional Fund Advisors Inc. (which
this document refers to as "Dimensional") with respect to Delta Woodside's
common stock. Dimensional reported that it had sole voting power and sole
dispositive power with respect to all of the shares shown. The amendment reports
that Dimensional furnishes investment advice to four investment companies and
serves as investment manager to certain other commingled group trusts and
separate accounts, that all of the shares of Delta Woodside's common stock were
owned by such investment companies, trusts or accounts, that in its role as
investment adviser or manager Dimensional possesses voting and/or investment
power over the Delta Woodside shares reported, that Dimensional disclaims
beneficial ownership of such securities and that, to the knowledge of
Dimensional, no such investment company, trust or account client owned more than
5% of the outstanding shares of Delta Woodside's common stock.
(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
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Delta Apparel Company. The amendment stated that Mr. Rainsford has significant
concerns regarding the tax ramifications to Delta Woodside's shareholders of the
recently announced spin-offs as well as significant concerns regarding the value
and liquidity of the spun-off shares after the spin-off. The amendment stated
that Mr. Rainsford strongly objected to the adoption on December 9, 1999 by the
Delta Woodside board of directors of new Bylaws containing anti-takeover
provisions and an anti-takeover Shareholder Rights Plan. The amendment stated
that, in his capacity as an officer, director and significant shareholder of
Delta Woodside, Mr. Rainsford has discussed and proposed a variety of
alternatives as to how best to restructure Delta Woodside. The amendment stated
that, if certain alternatives proposed by Mr. Rainsford were pursued and
consummated, such a transaction could result in a substantial change in Delta
Woodside's corporate organization and operations, including particularly the
possible sale of the 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 324,604 shares of Delta
Woodside's common stock (32,460 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 324,604 Delta Woodside shares (32,460 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 this amendment will
become effective within the next 60 days. Consequently, all of Mr. Garrett's
outstanding options are included in the table. See, "Interests of Directors and
Executive Officers in the 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 623 Delta Woodside shares (62 Delta Apparel
shares) allocated to Mr. Mueller's account in Delta Woodside's employee stock
purchase plan. The number of shares shown in the table includes an aggregate of
6,000 unissued Delta Woodside shares (600 Delta Apparel shares) subject to
employee stock options under Delta Woodside's stock option plan. Not all of
these options will become exercisable within 60 days or less under the current
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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 will 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 will 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) held for the directors and executive officers on May 19, 2000 by
the Delta Woodside 401(k) Plan. Each participant in the Delta Woodside 401(k)
Plan has the right to direct the manner in which the trustee of the Plan votes
the shares held by the Delta Woodside 401(k) Plan that are allocated to that
participant's account. Except for shares as to which such a direction is made,
the shares held by the Delta Woodside 401(k) Plan are not voted. Also includes
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
will become effective within the next 60 days. Consequently, all of such
persons' outstanding options are included in the table. See, "Interests of
Directors and Executive Officers in the 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, on one or more dates 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
- -------------------------------------
</TABLE>
(1) The compensation grants committee of the Delta Apparel board of directors
anticipates that the stock options will be granted on one or more dates
during the six month period. The exercise price for any option will be the
stock's closing market value at the date of grant. The compensation grants
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 (or, in the case of Mr. Humphreys, August 1, 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.
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 the record date 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 Delta Apparel distribution and the Duck Head
distribution, Delta Woodside's board (based on resolutions of its compensation
grants and compensation committees) has decided that, once the record date for
the Delta Apparel distribution and the Duck Head 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 ($1.50 per
share).
The table below sets forth the Delta Woodside shares that will thereby be
issued and the cash that will thereby be paid to the individuals who are
directors or executive officers of Delta Apparel. The Delta Woodside board
anticipates that these Delta Woodside shares will be issued and this cash will
be paid prior to the record date for the Delta Apparel distribution and the Duck
Head distribution.
Name Delta Woodside Shares(#) Cash ($)
- ---- ------------------------ --------
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 will also be issued and cash will also be paid to Minor H. Mickel, as
personal representative of the estate of Buck Mickel (father of Buck A. Mickel).
Buck Mickel was a member of the Delta Woodside board of directors until his
death in 1998, and 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 as an officer 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.
On or about the time of the Delta Apparel distribution and the Duck Head
distribution, William F. Garrett will become the President and Chief Executive
Officer of Delta Woodside. In recognition of Mr. Garrett's past service to Delta
Woodside and in order to provide him with an additional incentive to remain with
Delta Woodside, the Delta Woodside board has authorized the payment to him of
$100,000 in connection with the Delta Apparel distribution and the Duck Head
distribution and the payment to him of six additional annual payments of
$150,000 each, with the first of these annual payments to be made in October
2000. Mr. Garrett will forfeit any of these payments remaining to be made in the
event that he voluntarily leaves employment with Delta Woodside or such
employment is terminated by Delta Woodside for cause. Any remaining amounts
payable to him under the arrangement will be paid to him in the event of his
death or disability or in the event there is a change of control of Delta
Woodside and he does not remain with Delta Woodside. See also the information
below under the subheading "Early Exercisability and Other Amendments of Delta
Woodside Stock Options and Amendments to Deferred Compensation Plan".
Jane H. Greer is the Vice President and Secretary of Delta Woodside. On or
about the time of the Delta Apparel distribution and the Duck Head distribution,
Ms. Greer will resign from her officer positions with Delta Woodside and its
subsidiaries. In connection with this resignation, Delta Woodside will pay Ms.
Greer $53,846 of severance in accordance with the normal provisions of Delta
Woodside's severance plan and $400,000 of severance pursuant to the terms of an
employment agreement. Pursuant to amendments to Delta Woodside's stock option
plan and her stock options, all of Ms. Greer's outstanding stock options for
Delta Woodside shares (covering an aggregate of 22,500 Delta Woodside shares)
will remain exercisable until their stated expiration dates notwithstanding the
termination of Ms. Greer's employment with Delta Woodside.
David R. Palmer is the Controller of Delta Woodside. On or about the time
of the Delta Apparel distribution and the Duck Head distribution, Mr. Palmer
will resign from his officer positions with Delta Woodside and its subsidiaries.
In connection with this resignation, Delta Woodside will pay Mr. Palmer $61,250
of severance pursuant to the terms of an employment agreement. Pursuant to
amendments to Delta Woodside's stock option plan and his stock options, all of
Mr. Palmer's unexercisable stock options for Delta Woodside shares (covering an
aggregate of 1,250 Delta Woodside shares) will become exercisable in full no
later than 5 business days prior to the record date for the Delta Apparel and
Duck Head distributions, and all of Mr. Palmer's outstanding stock options for
Delta Woodside shares (covering an aggregate of 5,000 Delta Woodside shares)
will remain exercisable until their stated expiration dates notwithstanding the
termination of Mr. Palmer's employment with Delta Woodside.
Brenda L. Jones is the Assistant Secretary of Delta Woodside. On or about
the time of the Delta Apparel distribution and the Duck Head distribution, Ms.
Jones will resign from her officer positions with Delta Woodside and its
subsidiaries. In connection with this resignation, Delta Woodside will pay Ms.
Jones $37,019 of severance in accordance with the normal provisions of Delta
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Woodside's severance plan and $37,019 pursuant to the terms of an employment
agreement. Pursuant to amendments to Delta Woodside's stock option plan and her
stock options, all of Ms. Jones' unexercisable stock options for Delta Woodside
shares (covering an aggregate of 375 Delta Woodside shares) will become
exercisable in full no later than 5 business days prior to the record date for
the Delta Apparel and Duck Head distributions, and all of Ms. Jones' outstanding
stock options for Delta Woodside shares (covering an aggregate of 1,375 Delta
Woodside shares) will remain exercisable until their stated expiration dates
notwithstanding the termination of Ms. Jones' employment with Delta Woodside.
EARLY EXERCISABILITY AND OTHER AMENDMENTS OF DELTA WOODSIDE STOCK OPTIONS AND
AMENDMENTS TO DEFERRED COMPENSATION PLAN
Pursuant to the distribution agreement, Delta Woodside is providing the
holders of outstanding options granted under the Delta Woodside stock option
plan, whether or not those options are currently exercisable, with the
opportunity to amend the terms of their Delta Woodside stock options. The
amendment being offered to each holder provides that:
(i) all unexercisable portions of the holder's Delta Woodside stock options
become immediately exercisable in full on a date that is no later than five
(5) business days prior to the Delta Apparel record date and the Duck Head
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 the Duck Head 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 and the Duck Head 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 outstanding 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 of which
Name will be accelerated
---- ----------------------------------------------------
William F. Garrett 37,500
Herbert M. Mueller 4,500
Marjorie F. Rupp 3,000
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.
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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 and Duck Head distributions, each
participant in Delta Woodside's deferred compensation plan will be provided with
the opportunity to receive all or part of his or her vested deferred
compensation account in cash in exchange for consenting to an amendment to the
deferred compensation plan. Under the plan amendment, only the corporation that
employs the participant, and not any other member of Delta Woodside's current
group of corporations, will be responsible in the future for the participant's
deferred compensation. Delta Woodside anticipates that each director and officer
of 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.
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
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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. The initial
term of the engagement will be one year. 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.
Carolina Benefits Services expects that it will provide similar payroll
processing and 401(k) plan administration services to Duck Head and 401(k) plan
administration services to Delta Woodside after the Delta Apparel distribution
and the Duck Head distribution.
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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. Until the Distribution Date (described below),
the number of Rights outstanding from time to time 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
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<PAGE>
of an increase or decrease in the size of the board of directors, each director
then serving nevertheless continues as a director until the expiration of his
current term or his prior death, retirement, resignation or until a successor is
appointed.
Vacancies on Delta Apparel's Board of Directors
Any vacancy that occurs during the year or that occurs as a result of
death, resignation, removal, an increase in the size of Delta Apparel's board of
directors or otherwise, may be filled by a vote of majority of the directors
remaining in office or by the sole remaining director.
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 contain
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
- after becoming an "interested stockholder", the stockholder:
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- 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.
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 require 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.
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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 was 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. As part of
the intercompany reorganization described in "Relationships Among Delta Apparel,
Delta Woodside and Duck Head - Distribution Agreement", Delta Apparel's parent
corporation merged into its immediate parent corporation, which in turn merged
into Delta Woodside. Prior to the Delta Apparel distribution, 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 July 31, 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 date that is ten days after notice or public disclosure of the date of
the meeting is made or given to stockholders. After that date, the proposal will
not be considered timely. Stockholders submitting proposals for inclusion in the
proxy statement and form of proxy must comply with the Securities Exchange Act
of 1934 and all stockholders submitting proposals or nominations for director
must comply with the bylaw requirements described under the headings
"Description of 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",
"The Delta Apparel Distribution - Reasons for the Delta Apparel Distribution",
"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
April 1, 2000 (unaudited) F-18
Condensed Combined Statements of Operations and
Accumulated Divisional Deficit for the Nine Months
Ended April 1, 2000 and March 27, 1999 (unaudited) F-19
Condensed Combined Statements of Cash Flows for the
Nine Months ended April 1, 2000 and
March 27, 1999 (unaudited) F-20
Notes to Unaudited Condensed Combined Financial
Statements (unaudited) F-21
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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
F-1
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
(as described in Note 1)
Combined Balance Sheets
(Amounts in thousands)
JULY 3, JUNE 27,
Assets 1999 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash $ 402 101
Accounts receivable, less allowances of $5,054 in 1999 and
$1,329 in 1998 24,049 25,072
Other receivables 241 869
Parent and affiliate receivables (note 8) 9 539
Inventories (notes 3 and 8) 27,034 32,289
Prepaid expenses and other current assets 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)
APRIL 1, 2000
----------------
ASSETS
<S> <C>
Current Assets:
Cash $ 116
Accounts and other receivables, net 17,482
Inventories 31,217
Prepaid expenses and other current assets 1,032
----------------
Total current assets 49,847
Property, plant and equipment, net 27,778
Other assets 150
----------------
$ 77,775
================
LIABILITIES AND DIVISIONAL DEFICIT
Current Liabilities:
Current installments on long-term debt $ -
Accounts payable and accrued liabilities 12,051
Due to affiliates 101,547
Income taxes payable 268
----------------
Total current liabilities 113,866
Long-term debt 30,417
Other long-term liabilities 522
----------------
Total liabilities 144,805
Divisional deficit (67,030)
----------------
$ 77,775
================
See accompanying notes to condensed combined financial statements.
</TABLE>
F-17
<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 NINE MONTHS ENDED
-------------------------
APRIL 1, MARCH 27,
2000 1999
------------------- ----------------
<S> <C> <C>
Net sales $ 77,513 63,679
Cost of goods sold 65,847 59,118
------------------- -----------------
Gross profit 11,666 4,561
Selling, general and administrative expenses 5,700 8,353
Other expenses 21 193
------------------- -----------------
Operating income (loss) 5,945 (3,985)
------------------- -----------------
Interest expense, net 6,431 6,870
------------------- -----------------
Loss before taxes (486) (10,855)
Income tax benefit (13) (51)
------------------- -----------------
Net loss (473) (10,804)
Accumulated divisional deficit, beginning of period (66,556) (47,366)
------------------- -----------------
Accumulated divisional deficit, end of period $ (67,030) (58,170)
=================== =================
Pro forma net loss per share (note 4)
Basic and diluted $ .20
==================
Basic and diluted weighted-average
common shares outstanding 2,400,000
==================
See accompanying notes to condensed combined financial statements.
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
DELTA APPAREL COMPANY
Condensed Combined Statement of Cash Flows
(Amounts in thousands)
(unaudited)
FOR THE NINE MONTHS ENDED
-----------------------------------------
APRIL 1, 2000 MARCH 27, 1999
----------------- --------------------
<S> <C> <C>
Operating activities:
Net loss $ (473) (10,803)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation 4,922 7,562
Loss (gain) on sale of property and equipment 1 467
Other 40 27
Changes in operating assets and liabilities
Accounts receivable 6,817 9,705
Inventories (4,183) (13,739)
Prepaid expenses and other current assets (160) (39)
Other noncurrent assets 69 (7)
Deferred taxes
Accounts payable and accrued expenses 1,422 (4,632)
Income taxes payable 358 (102)
----------------- --------------------
Net cash provided by (used in) operating activities 8,813 (11,560)
----------------- --------------------
Investing activities:
Purchases of property, plant and equipment (1,261) (2,470)
----------------- --------------------
Net cash used in investing activities (1,261) (2,470)
----------------- --------------------
Financing activities:
Principal payment on long-term debt (339) (180)
Change in due to related parties, net (7,499) 14,184
----------------- --------------------
Net cash provided by (used in) financing activities (7,838) 14,004
----------------- --------------------
Decrease in cash (286) (26)
Cash at beginning of period 402 101
----------------- --------------------
Cash at end of period $ 116 74
================= ====================
Supplemental cash flow information:
Cash paid during the period for interest $ 27 27
================= ====================
See accompanying notes to condensed combined financial statements.
</TABLE>
F-19
<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 nine
months ended April 1, 2000 and March 27, 1999, 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 April 1, 2000, and the results of its operations and its cash flows for the
nine months ended April 1, 2000 and March 27, 1999, respectively. The results
for the nine months ended April 1, 2000 are not necessarily indicative of the
expected results for the full year or any future period. The unaudited condensed
combined financial statements included herein should be read in conjunction with
the combined financial statements and notes thereto included in this filing.
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:
April 1,
2000
-----------
Raw materials $ 2,847
Work in process 9,430
Finished goods 18,940
------
$ 31,217
======
NOTE 3 - COTTON PROCUREMENTS
Delta Apparel has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At April 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.
F-20
<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>
Nine Month, 2000 3,199,000 151,000 (1,183,000) 2,167,000
1999 776,000 2,795,000 (372,000) 3,199,000
1998 443,000 685,000 (352,000) 776,000
1997 1,499,000 41,000 (1,097,000) 443,000
RETURNS AND ALLOWANCES
BEG EXPENSE CHARGED TO OTHER CREDITS ISSUED END
--- ------- ---------------- -------------- ---
Nine Month, 2000 1,855,000 841,000 (2,089,000) 607,000
1999 553,000 2,059,000 (757,000) 1,855,000
1998 141,000 195,000 483,000 (266,000) 553,000
1997 572,000 (329,000) (102,000) 141,000
TOTAL
BEG EXPENSE CHARGED TO OTHER CREDITS ISSUED END
--- ------- ---------------- -------------- ---
Nine Month, 2000 5,054,000 992,000 (3,272,000) 2,774,000
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>
