SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 25, 2000
--------------
DELTA WOODSIDE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
South Carolina 1-10095 57-0535180
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) No.)
233 N. Main Street, Suite 200
Greenville, South Carolina 29601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 232-8301
--------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS
On May 25, 2000:
- Delta Apparel, Inc. ("Delta Apparel"), a wholly-owned subsidiary of
Delta Woodside Industries, Inc. ("Delta Woodside"), filed with the
Securities and Exchange Commission (the "SEC") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), Amendment No. 3
to Form 10/A (General Form for Registration of Securities Pursuant to
Section 12(b) or 12(g) of the Securities Exchange Act of 1934) (File
No. 1-15583) (the "Amended Delta Apparel Form 10") to register the
shares of common stock (the "Delta Apparel Shares") of Delta Apparel
to be distributed by Delta Woodside to the stockholders of Delta
Woodside on a pro rata basis when the Delta Apparel distribution
described in the Amended Delta Apparel Form 10 occurs; and
- Duck Head Apparel Company, Inc. ("Duck Head"), a wholly-owned
subsidiary of Delta Woodside, filed with the SEC under the Exchange
Act Amendment No. 3 to Form 10/A (File No. 1-15585) (the "Amended Duck
Head Form 10") to register the shares of common stock (the "Duck Head
Shares") of Duck Head to be distributed by Delta Woodside to the
stockholders of Delta Woodside on a pro rata basis when the Duck Head
distribution described in the Amended Duck Head Form 10 occurs.
The following portions of the Information Statement of Delta Apparel,
included as Exhibit 99.1 to the Amended Delta Apparel Form 10, are incorporated
herein by reference: "The Delta Apparel Distribution", "Relationships Among
Delta Apparel, Delta Woodside and Duck Head" and "Interests of Directors and
Executive Officers in the Delta Apparel Distribution". This information that is
incorporated herein by reference is included as Exhibit 99.3 to this Report.
The following portions of the Information Statement of Duck Head, included
as Exhibit 99.1 to the Amended Duck Head Form 10, are incorporated herein by
reference: "The Duck Head Distribution", "Relationships Among Duck Head, Delta
Woodside and Delta Apparel" and "Interests of Directors and Executive Officers
in the Duck Head Distribution". This information that is incorporated herein by
reference is included as Exhibit 99.4 to this Report.
Delta Woodside currently anticipates that early in June 2000 its Board of
Directors will declare the record date for the Delta Apparel distribution and
the record date for the Duck Head distribution. Delta Woodside currently
anticipates that the record date for each distribution will be June16, 2000, and
that each distribution will occur on or about June 30, 2000.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Not applicable.
(b) Although pro forma financial statements are not required to be
included in this filing by the instructions to Form 8-K, Delta Woodside has
elected to include pro forma financial statements for Delta Woodside in this
filing because each of the Amended Delta Apparel Form 10 and the Amended Duck
Head Form 10 includes pro forma financial statements, and Delta Woodside
believes that pro forma statements for Delta Woodside that correspond to the pro
forma statements included in the Amended Delta Apparel Form 10 and the Amended
Duck Head Form 10 would be helpful to Delta Woodside's stockholders.
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
information has been prepared from and should be read in conjunction with the
historical financial statements and the related notes thereto of Delta Woodside
incorporated by reference into Delta Woodside's Form 10-K for the fiscal year
ended July 3, 1999, and the historical financial statements and the related
notes thereto of Delta Woodside included in Delta Woodside's Form 10-Q for the
quarterly period ended April 1, 2000.
The unaudited pro forma condensed consolidated 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 net intercompany debt owed
by Delta Apparel to its parents, the contribution to equity or
repayment of net intercompany debt owed by Duck Head to its parents
and the distribution of Delta Apparel common stock and Duck Head
common stock to existing Delta Woodside stockholders.
- The incurrence of new financing by Delta Apparel and Duck Head.
- The purchase of the net assets of the Rainsford plant by Delta Apparel
from Delta Mills.
The unaudited pro forma condensed consolidated 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 distribution of Delta Apparel common stock and Duck Head common
stock to existing Delta Woodside stockholders.
- The elimination of corporate expenses associated with a multidivision
operation.
- The reduction in interest expense to Delta Woodside associated with
the debt assumed or repaid by Delta Apparel and Duck Head.
- The interest income on the cash balance generated by the sale of the
Rainsford plant.
Delta Woodside believes that the assumptions used provide a reasonable
basis on which to present the unaudited pro forma condensed consolidated
financial statements. Delta Woodside is providing the unaudited pro forma
condensed consolidated financial statements for informational purposes only.
<PAGE>
These pro forma condensed consolidated financial statements should not be
construed to be indicative of Delta Woodside's results of operations or
financial position had the transactions and events described above been
consummated on the dates assumed. These pro forma condensed consolidated
financial statements also do not project the results of operations or financial
position for any future period or date.
<PAGE>
<TABLE>
<CAPTION>
DELTA WOODSIDE INDUSTRIES, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS AT APRIL 1, 2000
(IN THOUSANDS)
Pro Forma Pro Forma
Historical Adjustments As Adjusted
----------- ------------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 8,964 $ 13,100 (1) $ 22,064
Accounts receivable
Factor 59,490 59,490
Customer 642 2,815 (2) 3,457
----------- ------------ ----------
60,132 2,815 62,947
Less allowances for doubtful accounts and returns 142 142
----------- ------------ ----------
59,990 2,815 62,805
Inventories:
Finished goods 7,326 7,326
Work in process 32,255 32,255
Raw material and supplies 7,205 7,205
----------- ------------ ----------
46,786 0 46,786
Net current assets of discontinued operations 57,547 (57,228) (3) 319
Deferred income taxes 0 0 0
Prepaid expenses and other current assets 491 491
----------- ------------ ----------
Total current assets 173,778 (41,313) 132,465
Property, plant and equipment
Cost 166,019 166,019
Accumulated depreciation 72,757 72,757
----------- ------------ ----------
93,262 0 93,262
Noncurrent assets of discontinued operations 37,727 (37,588) (3) 139
Other assets 6,066 6,066
----------- ------------ ----------
Total Assets $ 310,833 ($78,901) $ 231,932
=========== ============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELTA WOODSIDE INDUSTRIES, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS AT APRIL 1, 2000
(IN THOUSANDS)
Pro Forma Pro Forma
Historical Adjustments As Adjusted
----------- ------------- -----------
<S> <C> <C> <C>
LIABILITIES
Current liabilities
Short term bank debt $ 8,639 ($5,760) (1) 2,879
Trade accounts payable 12,575 0 12,575
Accrued and sundry liabilities 19,268 (229) (4) 19,039
Deferred income taxes 1,650 (1,650) (4) 0
----------- ------------- -----------
Total current liabilities 42,132 (7,639) 34,493
Long-term debt (less current portion) 122,505 122,505
Other liabilities and deferred credits 8,266 (1,295) (3) 6,971
SHAREHOLDERS EQUITY
Common Stock, par value $.01 - Authorized
50,000,000 shares issued and outstanding
23,308,000 shares at April 1, 2000 233 233
Additional paid in capital 160,074 (69,967) (3) 90,107
Accumulated deficit (22,377) (22,377)
----------- ------------- -----------
137,930 (69,967) 67,963
----------- ------------- -----------
Total Liabilities and Equity $ 310,833 ($78,901) $ 231,932
=========== ============= ===========
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED 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 condensed consolidated balance sheet:
(1) To reflect the transfer of cash from Duck Head to fund primarily the
repayment of its mortgage debt which was repaid by Delta Woodside during the
third quarter of fiscal 2000 ($5,760), and the purchase of the net assets of the
Rainsford plant by Delta Apparel from Delta Mills at a cash purchase price equal
to the net book value of the assets less the net book value of certain assumed
liabilities ($13,100).
(2) To reflect a receivable from Delta Apparel related to yarn sales from Delta
Mills which was previously classified as an inter-company receivable and
therefore eliminated upon consolidation.
(3) To reflect the spin-off of the assets and liabilities of Delta Apparel and
Duck Head.
(4) To reflect reclassifications and spin-off of income tax attributes.
<PAGE>
<TABLE>
<CAPTION>
DELTA WOODSIDE INDUSTRIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED JULY 3, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Unaudited
-----------------------------------
Pro Forma Pro Forma
Historical Adjustments As Adjusted
----------- ------------- -----------
<S> <C> <C> <C>
Net sales $ 493,027 ($178,572) (5) $ 314,455
Cost of goods sold 420,763 (163,019) (5) 257,744
----------- ------------- -----------
Gross profit on sales 72,264 (15,553) 56,711
Selling, general, and administrative expense 69,175 (51,115) (1)&(5) 18,060
Restructuring and impairment charge 13,996 (13,996) (5) 0
Other income (expense) (1,295) 1,421 (5) 126
----------- ------------- -----------
Operating profit (12,202) 50,979 38,777
Interest expense 19,929 (1,077) (2) 18,852
Interest (income) (467) (525) (3) (992)
----------- ------------- -----------
Net interest expense 19,462 (1,602) 17,860
Income (loss) from continuing operations
before income taxes (31,664) 52,581 20,917
Income tax expense (benefit) 825 (2,743) (4) (1,918)
----------- ------------- -----------
Income (loss) from continuing operations (32,489) 55,324 22,835
(Loss) on disposal of discontinued operations
less applicable income taxes (6,906) 0 (6,906)
----------- ------------- -----------
Net income (loss) ($39,395) $ 55,324 $ 15,929
=========== ============= ===========
Basic and diluted earnings (loss) per share:
Continuing operations ($1.35) $ 2.29 $ 0.94
Discontinued operations ($0.28) $ 0.00 ($0.28)
----------- ------------- -----------
Net income ($1.63) $ 2.29 $ 0.66
=========== ============= ===========
Weighted average shares outstanding 24,149 24,149 24,149
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELTA WOODSIDE INDUSTRIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED APRIL 1, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
Pro Forma Pro Forma
Historical Adjustments As Adjusted
----------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 177,534 $ 177,534
Cost of goods sold 155,642 155,642
----------- ------------- -------------
Gross profit on sales 21,892 0 21,892
Selling, general, and administrative expense 12,709 (1,044) (1) 11,665
Other income (expense) (309) (309)
----------- ------------- -------------
Operating profit 8,874 1,044 9,918
Interest expense 13,621 (410) (2) 13,211
Interest (income) (892) (491) (3) (1,383)
----------- ------------- -------------
Net interest expense 12,729 (901) 11,828
Income (loss) from continuing operations
before income taxes (3,855) 1,945 (1,910)
Income tax expense (benefit) (408) 206 (4) (202)
----------- ------------- -------------
Income (loss) from continuing operations (3,447) 1,739 (1,708)
Extraordinary gain less applicable income taxes 5,550 5,550
Income from operations of discontinued
operations less applicable income taxes 2,641 (2,641) (5) 0
----------- ------------- -------------
Net income (loss) 4,744 ($902) $ 3,842
=========== ============= =============
Basic and diluted earnings (loss) per share:
Continuing operations ($0.14) $ 0.07 ($0.07)
Extraordinary gain $ 0.23 $ 0.23
Discontinued operations $ 0.11 ($0.11) $ 0.00
----------- ------------- -------------
Net income $ 0.20 ($0.04) $ 0.16
=========== ============= =============
Weighted average shares outstanding 23,727 23,727 23,727
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED 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 condensed consolidated statements of operations:
(1) To reflect the net reduction in general and administrative expenses due to
the elimination of corporate expenses associated with a multi division
operation. These adjustments totaled $1,880 for year ended July 3, 1999 and
$1,044 for the nine months ended April 1, 2000
(2) To reflect the reduction in interest expense to Delta Woodside associated
with the net debt assumed or repaid by Delta Apparel and Duck Head.
(3) To reflect interest income on the cash balance generated by the sale of the
Rainsford plant.
(4) To reflect the income tax effect of the pro forma adjustments.
(5) To eliminate the results of operations of Delta Apparel and Duck Head.
<PAGE>
(c) Exhibits
2.1 Distribution Agreement, dated as of March 15, 2000, by and among
Delta Woodside Industries, Inc., DH Apparel Company, Inc. and
Delta Apparel, Inc.: Incorporated by reference to Exhibit 2.1 to
the Form 10/A of Delta Apparel, Inc. (File No. 1-15583).
10.17Tax Sharing Agreement by and among Delta Woodside Industries,
Inc., Duck Head Apparel Company, Inc. and Delta Apparel, Inc.:
Incorporated by reference to Exhibit 10.2 to the Form 10/A of
Delta Apparel, Inc. (File No. 1-15583).
99.1 Information Statement of Delta Apparel, Inc.: Incorporated by
reference to Exhibit 99.1 to the Form 10/A of Delta Apparel, Inc.
(File No. 1-15583).
99.2 Information Statement of Duck Head Apparel Company, Inc.:
Incorporated by reference to Exhibit 99.1 to the Form 10/A of
Duck Head Apparel Company, Inc. (File No. 1-15585).
99.3 The following portions of the Information Statement of Delta
Apparel, included as Exhibit 99.1 to the Amended Delta Apparel
Form 10: "The Delta Apparel Distribution", "Relationships Among
Delta Apparel, Delta Woodside and Duck Head" and "Interests of
Directors and Executive Officers in the Delta Apparel
Distribution".
99.4 The following portions of the Information Statement of Duck Head,
included as Exhibit 99.1 to the Amended Duck Head Form 10: "The
Duck Head Distribution", "Relationships Among Duck Head, Delta
Woodside and Delta Apparel" and "Interests of Directors and
Executive Officers in the Duck Head Distribution".
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DELTA WOODSIDE INDUSTRIES, INC.
(Registrant)
By: /s/ E. Erwin Maddrey, II
------------------------------
E. Erwin Maddrey, II
President and Chief Executive
Officer
Date: June 1, 2000
<PAGE>
EXHIBIT INDEX
99.3 The following portions of the Information Statement of Delta
Apparel, included as Exhibit 99.1 to the Amended Delta Apparel
Form 10: "The Delta Apparel Distribution", "Relationships Among
Delta Apparel, Delta Woodside and Duck Head" and "Interests of
Directors and Executive Officers in the Delta Apparel
Distribution".
99.4 The following portions of the Information Statement of Duck Head,
included as Exhibit 99.1 to the Amended Duck Head Form 10: "The
Duck Head Distribution", "Relationships Among Duck Head, Delta
Woodside and Delta Apparel" and "Interests of Directors and
Executive Officers in the Duck Head Distribution".
<PAGE>
THE DUCK HEAD DISTRIBUTION
PARTIES TO THE DISTRIBUTION AGREEMENT
Delta Woodside
---------------
Delta Woodside is a South Carolina corporation with its principal executive
offices located at 233 North Main Street, Suite 200, Greenville, South Carolina
29601 (telephone number: 864-232-8301).
Prior to the Duck Head distribution, Delta Woodside and its subsidiaries
had three operating divisions: Delta Mills Marketing Company, Duck Head Apparel
Company and Delta Apparel Company.
- Delta Mills Marketing Company produces a range of cotton, synthetic
and blended finished and unfinished woven products that are sold for
the ultimate production of apparel, home furnishings and other
products. After the Duck Head distribution and the Delta Apparel
distribution, Delta Mills Marketing Company will remain the only
continuing Delta Woodside operation.
- Pursuant to the Duck Head distribution, Delta Woodside will distribute
to its stockholders all of the outstanding common stock of Duck Head,
which will continue the business formerly conducted by the Duck Head
Apparel Company division of Delta Woodside and various subsidiaries of
Delta Woodside. For a description of the business of the Duck Head
Apparel Company division, see the information under the heading
"Business of Duck Head".
- Simultaneously with the Duck Head distribution, Delta Woodside will,
pursuant to the Delta Apparel distribution, distribute to its
stockholders all of the outstanding stock of Delta Apparel, which will
continue the business formerly conducted by the Delta Apparel Company
division of various subsidiaries of Delta Woodside. For a description
of the business of the Delta Apparel Company division, see the
information below under the subheading "Delta Apparel".
Duck Head
----------
Duck Head is a Georgia corporation with its principal executive offices
located at 1020 Barrow Industrial Parkway, P.O. Box 688, Winder, Georgia 30680
(telephone number: 770-867-3111).
Delta Apparel
--------------
Delta Apparel is a Georgia corporation with its principal executive offices
located at 3355 Breckinridge Blvd., Suite 100, Duluth, Georgia 30096 (telephone
number: 770-806-6800). Delta Apparel is a vertically integrated supplier of
knit apparel, particularly T-shirts, sportswear and fleece goods and sells its
products to distributors, screen printers and private label accounts.
BACKGROUND OF THE DUCK HEAD DISTRIBUTION
Since the middle of its 1998 fiscal year, Delta Woodside's board of
directors has explored various means, in addition to effectively operating Delta
Woodside's businesses, and has taken various actions to enhance stockholder
value.
On March 9, 1998, Delta Woodside announced that it was withdrawing from the
circular knit fabrics business, which had operated under the name of Stevcoknit
Fabrics Company, and would be selling or closing and liquidating its two
knitting, dyeing and finishing plants in Wallace, North Carolina, and its yarn
spinning plant in Spartanburg, South Carolina. In the announcement, Delta
Woodside also stated that it had decided to sell its Nautilus International
fitness equipment division, and had retained an investment banking firm to
handle the sale.
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.
<PAGE>
On September 15, 1998, Delta Woodside announced that its board of directors
had approved a plan to purchase from time to time up to 2,500,000 outstanding
Delta Woodside common shares at prices and at times at the discretion of Delta
Woodside's top management. The announcement stated that Delta Woodside believed
that, at times, its stock price was undervalued and that these purchases would
enhance stockholder value.
At a meeting on October 9, 1998, the Delta Woodside board of directors made
the decision to sell the Duck Head Apparel Company division. To assist in this
transaction, Delta Woodside hired an investment banking firm.
On January 21, 1999, Delta Woodside announced that it had had discussions
with third parties with respect to a possible sale of the Duck Head Apparel
Company division, and that, based on these discussions, Delta Woodside was
continuing to explore strategic alternatives for the Duck Head Apparel Company
division, but could not be reasonably certain that a transaction on satisfactory
terms would be consummated in the near future. The announcement stated that,
for this reason, Delta Woodside had made the decision to continue to report the
Duck Head Apparel Company division as a part of continuing operations.
At a meeting on February 4, 1999, the Delta Woodside board of directors
approved a plan to effect a major restructuring of Delta Woodside. This
restructuring would have involved the spin-off to the Delta Woodside
stockholders of each of Delta Woodside's two apparel divisions, leaving the
Delta Mills, Inc. subsidiary, and its operating division, Delta Mills Marketing
Company, in Delta Woodside. Simultaneously with the spin-off, Delta Woodside
would have been sold to a third party buyer not yet identified. Under this
plan, the Delta Woodside stockholders would have received, for their shares of
Delta Woodside common stock, shares of each of the new spun-off apparel
companies and cash for their post spin-off Delta Woodside shares. The plan
would have been subject to the approval of the Delta Woodside stockholders. If
the plan had been approved by the requisite stockholder vote, the Rainsford
plant in Edgefield, South Carolina, would have been sold by the Delta Mills,
Inc. subsidiary to the Delta Apparel Company division, the Duck Head Apparel
Company division and the Delta Apparel Company division would have been
separated into two corporations, and the stock of each of the Duck Head
corporation and the Delta Apparel corporation would have been distributed to all
of the Delta Woodside stockholders. The Delta Woodside board of directors
decided that Delta Woodside would promptly begin the process of soliciting
offers for the purchase of the post spin-off Delta Woodside common stock, and
that Delta Woodside would retain an investment banking firm to assist in the
implementation of this restructuring plan.
On March 16, 1999, Delta Woodside announced that Robert Rockey was assuming
the position of chief executive officer of the Duck Head Apparel Company
division, effective immediately. The announcement stated that, after the
planned spin-off of the Duck Head Apparel Company operation, Mr. Rockey would
serve as chairman and chief executive officer of that new separate corporation.
On March 23, 1999, Delta Woodside announced that it had engaged Prudential
Securities Incorporated (which this document refers to as "Prudential
Securities") to advise the Delta Woodside board of directors with respect to the
previously announced plan to sell the portion of Delta Woodside remaining after
the distribution to the Delta Woodside stockholders of the shares of stock of
Delta Woodside's apparel businesses. The announcement also stated that the Duck
Head Apparel Company division was no longer for sale.
Following this announcement, Delta Woodside provided information--- to
nineteen companies respecting a possible sale of the remaining Delta Woodside.
None of these potential purchasers, however, made an offer for the remaining
Delta Woodside that Delta Woodside considered to be satisfactory.
On April 21, 1999, Delta Woodside announced that Robert W. Humphreys was
assuming the position of president and chief executive officer of the Delta
Apparel Company division. The announcement stated that, after the planned
spin-off of the Delta Apparel Company operation, Mr. Humphreys would serve as
the president and chief executive officer of that new separate corporation.
At a meeting on June 24, 1999, the Delta Woodside board of directors
decided to terminate the process of attempting to sell a post-spin-off Delta
Woodside comprised solely of Delta Mills Marketing Company in line with its
previously-announced plan, because it had not received any satisfactory offer
for the business. The Board determined to continue to explore other strategies
to enhance stockholder value, including: (1) the purchase of the Delta Apparel
Company division and the Duck Head Apparel Company division by the Delta Mills,
<PAGE>
Inc. subsidiary, or (2) a spin-off/recapitalization in which the apparel
divisions would be spun-off to the Delta Woodside stockholders as separate
public companies, and substantial cash would be paid out to stockholders from
new borrowings by the remaining Delta Woodside.
- Under the purchase of the Duck Head Apparel Company division and the Delta
Apparel Company division by Delta Mills, Inc. scenario, Delta Woodside,
through its wholly-owned subsidiary, Delta Mills, Inc., would have
continued to own the Duck Head Apparel Company division and the Delta
Apparel Company division. This internal ownership restructuring could,
however, have provided Delta Woodside with substantial cash, because Delta
Mills, Inc. then had a substantial cash position and its senior note
indenture would have permitted it to use cash for this purpose but not for
the purpose of making dividend payments to its parent company, Delta
Woodside. If this purchase scenario had been adopted, Delta Woodside could
have used the cash provided by Delta Mills, Inc. in the purchase to make
acquisitions of Delta Woodside common stock or other businesses, or for
other purposes.
- Under the spin-off/recapitalization scenario, Delta Woodside stockholders
would have received, for their Delta Woodside common shares, shares of each
of the new spun-off apparel companies, cash and stock in the remaining
Delta Woodside. Also, additional shares of the remaining Delta Woodside
(representing more than 20% of the then outstanding shares of the remaining
Delta Woodside) would have been sold to members of management of Delta
Mills Marketing Company. Consummation of the spin-off/recapitalization
transaction was to be conditioned upon receiving a favorable vote of the
Delta Woodside stockholders.
Following this announcement, Delta Woodside, with the assistance of
Prudential Securities, explored the possibility of Delta Mills, Inc. refinancing
its existing $150 million of 9-5/8% Senior Notes with a larger issue of
indebtedness in order to effect the proposed recapitalization. During the time
frame of this examination, however, the interest rates payable by issuers of new
senior debt in the textile and apparel industries became higher than were deemed
acceptable by the Delta Woodside board of directors.
On August 20, 1999, Delta Woodside announced that, due to weakness in the
bond market, Delta Woodside believed that its previously announced
recapitalization/spin-off strategy was not feasible at that time. Delta
Woodside further announced that, because Delta Woodside believed that its
stockholders would best be served by separating the operating companies, Delta
Woodside did not plan to pursue the acquisition of the two apparel divisions by
its textile subsidiary, Delta Mills, Inc., at that time. The announcement also
stated that Delta Woodside was continuing to explore strategic alternatives to
accomplish the separation of its operating companies, and would announce
specific plans in the upcoming months.
On October 4, 1999, Delta Woodside announced that it planned to spin off to
the Delta Woodside stockholders its two apparel businesses (Duck Head Apparel
Company and Delta Apparel Company) as two separate publicly-owned corporations.
The announcement further stated that Delta Woodside was in the process of
transferring various corporate functions to its three operating divisions (Delta
Mills Marketing Company, Duck Head Apparel Company and Delta Apparel Company).
The announcement stated that, upon the complete transfer of these functions or
at the time of the spin-offs (as appropriate), the functions then being
performed at the Delta Woodside level would no longer need to be performed at
that level, and the executive officers of Delta Woodside would resign their
positions with Delta Woodside. The announcement stated that, upon consummation
of the spin-offs, Delta Mills Marketing Company would be Delta Woodside's sole
remaining business, and William Garrett, the head of the Delta Mills Marketing
Company division, would become President and Chief Executive Officer of the
remaining Delta Woodside. The announcement stated that, in connection with the
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.
<PAGE>
On December 13, 1999, Delta Woodside announced that its board of directors
had adopted a shareholders rights plan pursuant to which stock purchase rights
have been distributed as a dividend to the Delta Woodside stockholders at a rate
of one right for each Delta Woodside share held of record as of December 22,
1999. Delta Woodside stated that the rights plan is designed to enhance the
Delta Woodside board's ability to prevent any person interested in acquiring
control of Delta Woodside from depriving stockholders of the long-term value of
their investment and to protect shareholders against attempts to acquire Delta
Woodside by means of unfair or abusive takeover tactics. Delta Woodside stated
that its board had adopted the rights plan at that time because the Delta
Woodside shares were trading at their lowest levels in Delta Woodside's history.
At the same time, Delta Woodside announced that its board had approved a
plan to purchase from time to time up to an aggregate of 5,000,000 shares of
Delta Woodside's outstanding stock at prices and at times at the discretion of
Delta Woodside's top management. The announcement stated that this stock
repurchase plan replaces the 2,500,000 stock purchase plan announced by Delta
Woodside in September 1998.
On December 30, 1999, Delta Woodside announced that each of Duck Head and
Delta Apparel had filed a registration statement with the SEC to register the
subsidiary's stock under the Securities Exchange Act of 1934, and that these
filings were pursuant to the previously announced plan of Delta Woodside to spin
off to its stockholders the Delta Apparel Company division and the Duck Head
Apparel Company division as two separate publicly-owned corporations. Delta
Woodside also stated that, following completion of the spin-offs, Delta Woodside
intends to propose to its stockholders the adoption of a new Delta Woodside
stock option plan and a new Delta Woodside incentive stock award plan pursuant
to which significant equity incentives could be granted to the new management of
Delta Woodside.
REASONS FOR THE DUCK HEAD DISTRIBUTION
The following discussion contains various "forward-looking statements".
Please refer to "Forward-Looking Statements May Not Be Accurate" for a
description of the uncertainties and risks associated with forward-looking
statements.
Since the summer of 1998, Delta Woodside's board of directors has been
engaged in the process of exploring various means to maximize stockholder value.
The alternatives that the Delta Woodside Board has examined have included:
(a) A potential sale of the Duck Head Apparel Company division;
(b) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a sale of
the remaining company;
(c) A pro rata tax-free spin-off of Delta Woodside's two apparel
businessesto Delta Woodside's stockholders accompanied by a
recapitalization of the remaining company that would involve a cash
distribution to Delta Woodside's stockholders by that remaining
company;
(d) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders;
(e) A pro rata taxable spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders;
(f) A disproportionate tax-free spin-off of one of Delta Woodside's
apparel businesses to one of Delta Woodside's major stockholders
accompanied by a pro rata tax-free spin-off of the other apparel
business to all the other stockholders;
(g) A potential sale of the Delta Apparel Company business or assets;
(h) A purchase by Delta Mills, Inc. of the Duck Head Apparel Company and
the Delta Apparel Company businesses; and
<PAGE>
(i) Leaving Delta Woodside's three businesses in Delta Woodside in their
current corporate form.
During the course of this exploration, the Delta Woodside board witnessed a
deterioration of general market conditions in the textile and apparel
industries. This deterioration caused the market's perceived values of textile
and apparel businesses to decline significantly.
This decline, together with the information obtained by Delta Woodside in
the process of exploring the alternatives described above, led the Delta
Woodside board to conclude that:
(i) Any sale or liquidation at this time or in the near future of any of
Delta Woodside's businesses would, more likely than not, be at
depressed and unacceptable prices; and
(ii) Absent a change in circumstances, the interests of Delta Woodside and
its stockholders would be best served by not pursuing the sale or
liquidation of any of Delta Woodside's businesses at this time.
The Delta Woodside Board also determined that the best interests of Delta
Woodside and its stockholders would not be served by pursuing at this time any
of the additional alternatives described above other than a pro rata spin-off of
Delta Woodside's two apparel businesses to Delta Woodside's stockholders. The
major factors that led to this conclusion were the general market condition
deterioration described above and:
(1) Contractual constraints, which added significantly to the costs of
those alternatives that required additional financing to be incurred
by Delta Mills;
(2) Unfavorable debt market conditions, particularly for debt issuances by
textile and apparel companies;
(3) Insufficient buyer interest in any of Delta Woodside's businesses at
prices deemed sufficient by the Delta Woodside board;
(4) The Delta Woodside board's belief in the future enhanced stockholder
value available from separating Delta Woodside's businesses into
separate companies; and
(5) The Delta Woodside board's conclusion that the interests of Delta
Woodside and its stockholders would be adversely affected by any
decision of the Delta Woodside board to delay implementing the
separation of its businesses. The Board believes that continuing
uncertainty in the marketplace as to Delta Woodside's strategic plans
is likely to be damaging the relations of one or more of Delta
Woodside's businesses with certain of its respective suppliers and
customers, and that continuing uncertainty by the employees of Delta
Woodside and its subsidiaries as to Delta Woodside's strategic plans
could cause Delta Woodside or its subsidiaries to lose valuable
employees.
The Delta Woodside board, therefore, concluded that the best interests of
Delta Woodside and its stockholders would be furthered by separating into
distinct public companies Delta Woodside's three businesses (Delta Mills
Marketing Company, Delta Apparel Company and Duck Head Apparel Company), and
that the best method to accomplish this separation and thereby enhance
stockholder value that is available to Delta Woodside at this time is to effect
a pro rata spin-off to Delta Woodside's stockholders of each of Delta Woodside's
apparel businesses, whether that spin-off is tax-free or taxable for federal
income tax purposes.
In reaching this determination, the Delta Woodside Board took into account
its belief that the separation of Delta Woodside's three businesses will further
the following objectives, among others, and thereby enhance stockholder value:
(a) Permit the grant of equity incentives to the separate management of
each business, which incentives would not be affected by the results
of the other businesses and, therefore, would have excellent potential
to align closely the interests of that management with those of the
stockholders;
<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) Eliminate the complaints of certain customers of Delta Mills Marketing
Company (which, as a supplier to those customers, has access to
certain of their competitive information) that a competitor of theirs
(Duck Head Apparel Company) is under common management with Delta
Mills Marketing Company;
(d) Permit each business to obtain, when needed, the best equity and debt
financing possible without being affected by the operational results
of the other businesses;
(e) Permit each business to establish long-range plans geared toward the
expected cyclicality, competitive conditions and market trends in its
own line of business, unaffected by the markets, needs and constraints
of the other businesses;
(f) Promote a more streamlined management structure for each of the three
businesses, better able to respond quickly to customer and market
demands; and
(g) Permit the value of each of the three divisions to be more accurately
reflected in the equity market by separating the results of each business from
the other two businesses.
In reaching its conclusion to effect the Duck Head distribution, the Board
also took into account the following additional factors:
- The opinion delivered to the Delta Woodside board by Houlihan Lokey
Howard & Zukin Financial Advisors, Inc. that is described below;
- The advice provided to the Delta Woodside board by Prudential
Securities that is described below;
- The financial information and statements of Duck Head set forth in
this document under the heading, "Unaudited Pro Forma Combined
Financial Statements", and at pages F-1 to F-22;
- The Delta Woodside board's knowledge of the business, operations,
assets and financial condition of Duck Head;
- Duck Head management's assessment of the prospects of Duck Head;
- The current and prospective economic environment in which Duck Head
operates; and
- The terms of the distribution agreement and the tax sharing agreement.
All members of the Delta Woodside board (other than Bettis C. Rainsford)
voted in favor of effectuating the Duck Head distribution, the Delta Apparel
distribution and related transactions. See "Security Ownership of Significant
Beneficial Owners and Management."
This discussion of the information and factors considered by the Delta
Woodside board is not meant to be exhaustive but is believed to include the
material factors considered by the Delta Woodside board in authorizing the Duck
Head distribution. The Delta Woodside board did not quantify or attach any
particular weight to the various factors that it considered in reaching its
determination that the Duck Head distribution, the Delta Apparel distribution
and related transactions are advisable and in the best interests of Delta
Woodside and its stockholders. In reaching its determination, the Delta
Woodside board took the various factors into account collectively and the Delta
Woodside board did not perform a factor_by_factor analysis.
<PAGE>
Opinion of Houlihan Lokey
----------------------------
Delta Woodside engaged Houlihan Lokey to provide to the Delta Woodside
board and the Duck Head board an opinion as to the solvency of Duck Head as of
the time of the Duck Head distribution. Delta Woodside selected Houlihan Lokey
based on Houlihan Lokey's extensive experience in providing solvency opinions.
In consideration of its services in connection with the opinion described
below and a similar opinion with respect to Delta Apparel and related services,
Houlihan Lokey will be paid a fee of $225,000 plus reasonable out-of-pocket
expenses. No portion of this fee is contingent upon the consummation of the
Duck Head distribution or the Delta Apparel distribution or the conclusions
reached in Houlihan Lokey's opinions. Delta Woodside has also agreed to provide
indemnification to Houlihan Lokey and certain other parties with respect to
certain matters. Houlihan Lokey has had no other material relationship with
Delta Woodside or its subsidiaries during the past two years.
The preparation of a solvency opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following is a brief summary and general description of the solvency analysis
and valuation methodologies utilized by Houlihan Lokey. Although the summary
sets forth all material facts respecting the opinion of Houlihan Lokey, the
summary does not purport to be a complete statement of the analyses and
procedures applied, the judgments made or the conclusion reached by Houlihan
Lokey or a complete description of its presentation to the Delta Woodside board
or the Duck Head board. Houlihan Lokey believes, and so advised the Delta
Woodside board and the Duck Head board, that its analyses must be considered as
a whole and that selecting portions of its analyses and of the factors
considered by it, without considering all factors and analyses, could create an
incomplete view of the process underlying its analyses and opinions.
The Duck Head distribution and other related transactions disclosed to
Houlihan Lokey are referred to collectively in this summary as the
"Transaction." For purposes of its opinion, Houlihan Lokey assumed that the
third party financing described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
has been entered into on or prior to the date of the Duck Head distribution and
that, prior to the Duck Head distribution, the intercompany reorganization
described in "Relationships Among Duck Head, Delta Woodside and Delta Apparel -
Distribution Agreement" has been completed.
Delta Woodside's board of directors has requested that Houlihan Lokey
render its written opinion to the Delta Woodside board and the Duck Head board
as to whether, assuming the Transaction has been consummated as proposed,
immediately after and giving effect to the Transaction: (a) on a pro forma
basis, the fair value and present fair saleable value of Duck Head would exceed
its stated liabilities and identified contingent liabilities, (b) Duck Head
should be able to pay its debts as they become absolute and mature; (c) the
capital remaining in Duck Head after the Transaction would not be unreasonably
small for the business in which Duck Head is engaged, as management has
indicated it is now conducted and is proposed to be conducted following the
consummation of the Transaction; and (d) the financial test for distributions of
the state of incorporation of Duck Head (i.e. Georgia) has been satisfied.
Houlihan Lokey's opinion does not address Delta Woodside's underlying
business decision to effect the Transaction. Houlihan Lokey has not been
requested to, and did not, solicit third party indications of interest in
acquiring all or part of Duck Head.
In connection with the preparation of its opinion, Houlihan Lokey made such
reviews, analyses and inquiries as it deemed necessary and appropriate under the
circumstances. Among other things, Houlihan Lokey:
(i) reviewed Duck Head's annual financial statements for the 1997, 1998
and 1999 fiscal years and year-to-date statements for the first nine
months of fiscal year 2000, which Duck Head's and Delta Woodside's
managements have identified as the most current information available;
(ii) reviewed the proposal from the third party lender to provide Duck Head
revolving credit and term loan facilities;
<PAGE>
(iii)spoke with certain members of the senior management of Delta Woodside
and Duck Head to discuss the operations, financial condition, future
prospects and projected operations and performance of Duck Head;
(iv) reviewed budgets and forecasts prepared by Duck Head's management with
respect to the periods ended January 1, 2000 through fiscal year 2004;
(v) reviewed marketing and promotional material relating to Duck Head;
(vi) reviewed the preliminary registration statement filed with the SEC for
Duck Head;
(vii)reviewed other publicly available financial data for Duck Head and
certain companies that Houlihan Lokey deems comparable to Duck Head;
and
(viii) conducted such other studies, analyses and investigations as
Houlihan Lokey has deemed appropriate.
In assessing the solvency of Duck Head immediately after and giving effect
to the Transaction, Houlihan Lokey:
(i) analyzed the fair value and present fair saleable value of Duck Head's
assets relative to Duck Head's stated liabilities and identified
contingent liabilities on a pro forma basis ("balance sheet test");
(ii) assessed Duck Head's ability to pay its debts as they become absolute
and mature ("cash flow test"); and
(iii)assessed the capital remaining in Duck Head after the Transaction so
as not to be unreasonably small ("reasonable capital test").
Each of "fair value" and "present fair saleable value" is defined as the amount
that may be realized if Duck Head's aggregate assets (including goodwill) are
sold as an entirety with reasonable promptness in an arm's length transaction
under present conditions for the sale of comparable business enterprises, as
such conditions can be reasonably evaluated.
Balance Sheet Test
-----
The Balance Sheet Test determines whether or not the fair value and present
fair saleable value of Duck Head's assets exceeds its stated liabilities and
identified contingent liabilities after giving effect to the Transaction. This
test requires an analysis of the fair market value of Duck Head as a
going-concern. As part of this analysis, Houlihan Lokey considered, among other
things,
(i) historical and projected financial performance for Duck Head as
prepared by Duck Head;
(ii) the business environment in which Duck Head competes;
(iii)performance of certain publicly traded companies deemed by Houlihan
Lokey to be comparable to Duck Head, in terms of, among other things:
lines of business, size, profitability, financial leverage and growth;
(iv) capitalization rates ("multiples") for certain publicly traded
companies deemed by Houlihan Lokey to be comparable to Duck Head,
including (a) Enterprise Value ("EV")/Revenue; and (b) EV/earnings
before interest, taxes, depreciation and amortization ("EBITDA");
(v) multiples derived from acquisitions of companies deemed by Houlihan
Lokey to be comparable to Duck Head;
<PAGE>
(vi) the Discounted Cash Flow Approach;
(vii) the capital structure and debt obligations of Duck Head; and
(viii) non-operating assets and identified contingent liabilities.
"Enterprise Value" or "EV" is defined as total market value of equity plus net
interest bearing debt.
In determining the fair value and present fair saleable value of the
aggregate assets of Duck Head, the following methodologies were employed: the
Market Multiple Approach and the Discounted Cash Flow Approach.
Market Multiple Approach. The application of the Market Multiple Approach
involves the derivation of indication of value through the multiplication of
relevant performance fundamentals of the subject entity by appropriate
multiples. Multiples were determined through an analysis of: (i) publicly
traded companies that were determined by Houlihan Lokey to be comparable from an
investment standpoint to Duck Head ("Comparable Public Companies"); and (ii)
change of control transactions involving companies that were determined by
Houlihan Lokey to be comparable to Duck Head from an investment standpoint
("Comparable Transactions"). Houlihan Lokey selected five publicly traded
domestic companies for comparison to Duck Head (Ashworth, Inc., Perry Ellis
International, Inc., Haggar Corporation, Nautica Enterprises, Inc. and Tropical
Sportswear International). These companies are involved in the branded apparel
businesses. Observed market pricing of the Comparable Public Companies
reflected EV/Latest Twelve Months ("LTM") Revenue ratios ranging from 0.25x to
0.94x with a median of 0.64x and EV/Projected Fiscal Year 2000 EBITDA ("2000
EBITDA") ratios ranging from 3.0x to 5.9x with a median of 4.7x. A comparative
analysis between Duck Head and the Comparable Public Companies formed the basis
for the selection of appropriate multiples for Duck Head. The comparative
analysis incorporates both quantitative and qualitative factors which relate to,
among other things, the nature of the industry in which Duck Head and the
Comparable Public Companies are engaged and the relative financial performance
of Duck Head and the Comparable Public Companies. An indicated Enterprise Value
of $13.7 million was derived based on the application of selected market
multiples to the relevant fundamentals of Duck Head and an adjustment for
control through the application of a 30% control premium. The selected control
premium of 30% was based on change of control transactions of publicly-traded
apparel companies and available market studies. The indicated Enterprise Value
of $13.7 million reflects implied multiples for Duck Head of 0.22x LTM Revenues
and 5.2x Forecasted Fiscal Year 2000 EBITDA ("FY2000 EBITDA"). The indicated
Enterprise Value for Duck Head based on the Comparable Public Companies analysis
exceeded its stated liabilities and identified contingent liabilities by $6.7
million.
For the Comparable Transactions, Houlihan Lokey analyzed apparel industry
merger and acquisition transactions between 1998 and 1999 where financial
information was publicly disclosed. Market multiples were developed from nine
comparable transactions, of which three were 1999 transactions and considered
most relevant. The 1999 transactions included Podell Industries/Liz Claiborne,
Penobscot Shoes/Riedman Corp. and Tahiti Apparel/Signal Apparel Corp.
Enterprise Value indications were developed through the capitalization of the
relevant performance fundamentals of Duck Head. Relevant fundamentals
considered were LTM Revenues and FY2000 EBITDA. Observed multiples of revenues
(EV/Revenues) ranged from 0.27x to 0.66x with a median of 0.5x and EBITDA
(EV/EBITDA) ranged from 3.2x to 10.7x with a median of 3.8x. Of the nine
Comparable Transactions analyzed, four of the acquired companies had EBITDA
fundamentals which were negative or not meaningful. Based on the analysis
conducted, an indicated Enterprise Value of $23.9 million was derived for Duck
Head. The indicated Enterprise Value of $23.9 million produced implied
multiples of 0.39x LTM Revenue and 9.1x Forecasted Fiscal Year 2000 EBITDA. The
indicated Enterprise Values for Duck Head based on the Comparable Transactions
analysis exceeded its stated liabilities and identified contingent liabilities
by $16.7 million.
Discounted Cash Flow Approach. The Discounted Cash Flow Approach involved
the development of Enterprise Value indications from the appraisal of projected
cash flows to be generated by Duck Head, which were based on fiscal years 2000
to 2004 financial forecasts prepared by the management of Duck Head. The
projected cash flows include interim cash flows over the forecast period and a
<PAGE>
terminal year cash flow, which represents the value of Duck Head beyond the
forecast period. The interim cash flows reflect the cash available to all
capital providers (debt and equity) after accounting for required capital
investments. The terminal year cash flow reflects an estimate of the fair and
saleable value of Duck Head at the end of the forecast period, June 30, 2004.
This estimation was developed from the application of the Market Multiple
Approach described above, wherein projected fundamentals were capitalized based
on selected market multiples. Indications of Enterprise Value were developed
by applying an appropriate discount rate or cost of capital to the projected
cash flows and terminal value. The concluded Enterprise Value, or sum of the
projected cash flows and terminal value, ranged between $28.5 and $35.8 million
depending on the discount rate and terminal multiple selected. The discount
rate reflects the degree of risk inherent in the assets of Duck Head and its
ability to produce the projected cash flows. The range of discount rates and
terminal multiples selected were 14% to 16% and 3.0x to 4.0x, respectively. The
indicated range of Enterprise Values for Duck Head based on the Discounted Cash
Flow approach exceeded its stated liabilities and identified contingent
liabilities by $21.5 million to $28.8 million.
Cash Flow Test
The Cash Flow Test focuses on whether or not Duck Head should be able to
repay its debts as they become absolute and mature (including the debts incurred
in the Transaction). This test involves a two-step analysis of Duck Head's
fiscal year 2000 to fiscal year 2004 financial projections: (i) examines the
financial projections relative to a variety of factors including: historical
performance, marketing plans and cost structure, and (ii) analyzes the
sensitivity of the projections to changes in key operating variables.
Over the past twelve months, Duck Head has made significant changes to its
management team, restructured its operations, reduced certain costs and
implemented certain marketing plans. As a result of the changes implemented by
Duck Head, management's forecast for the business represents an improvement over
Duck Head's financial performance over the past several years. Duck Head's
financial performance for fiscal year 2000 reflects in part the changes
implemented by Duck Head's management and represents an improvement over
financial results for fiscal years 1998 and 1999.
The sensitivity analysis of Duck Head's projections involved testing a
number of underlying operating assumptions, including: revenue growth, operating
margins and capital investment requirements. Duck Head's ability to meet its
debt obligations was analyzed in the context of varying a number of the
operating assumptions. Based on the sensitivity analysis conducted on Duck
Head's financial forecast, Duck Head demonstrated an ability to meet its
obligations as they came due under a range of financial forecast scenarios.
Reasonable Capital Test
The Reasonable Capital Test follows from the Balance Sheet and Cash Flow
Tests. The determination as to whether the net assets remaining with Duck Head
constitute unreasonably small capital involves an analysis of various factors,
including (i) the degree of sensitivity demonstrated in the cash flow test; (ii)
historical and expected volatility in revenues, cash flow and capital
expenditures; (iii) the adequacy of working capital; (iv) historical and
expected volatility of going-concern asset values; (v) the maturity structure
and the ability to refinance Duck Head's obligations; (vi) the magnitude, timing
and nature of identified contingent liabilities; and (vii) the nature of the
business and the impact of financial leverage on its operations.
Solvency
Based upon the foregoing, and in reliance thereon, it is Houlihan Lokey's
opinion as of June 1, 2000 that, assuming the Transaction has been consummated
as proposed, immediately after and giving effect to the Transaction:
(i) on a pro forma basis, the fair value and present fair saleable value
of Duck Head's assets would exceed Duck Head's stated liabilities and
identified contingent liabilities;
(ii) Duck Head should be able to pay its debts as they become absolute and
mature; and
(iii)the capital remaining in Duck Head after the Transaction would not be
unreasonably small for the business in which Duck Head is engaged, as
management has indicated it is now conducted and is proposed to be
conducted following the consummation of the Transaction.
<PAGE>
Assumptions and Limiting Conditions
Notwithstanding the use of the defined terms "fair value" and "present fair
saleable value", Houlihan Lokey has not been engaged to identify prospective
purchasers or to ascertain the actual prices at which and terms on which Duck
Head can currently be sold, and Houlihan Lokey knows of no such efforts by
others. Because the sale of any business enterprise involves numerous
assumptions and uncertainties, not all of which can be quantified or ascertained
prior to engaging in an actual selling effort, Houlihan Lokey expresses no
opinion as to whether Duck Head would actually be sold for the amount Houlihan
Lokey believes to be its fair value and present fair saleable value.
Houlihan Lokey has relied upon and assumed, without independent
verification, that the financial forecasts and projections provided to it have
been reasonably prepared and reflect the best currently available estimates of
the future financial results and condition of Duck Head, and that there has been
no material adverse change in the assets, financial condition, business or
prospects of Duck Head since the date of the most recent financial statements
made available to Houlihan Lokey.
Houlihan Lokey has not independently verified the accuracy and completeness
of the information supplied to it with respect to Duck Head, and does not assume
any responsibility with respect to it. Houlihan Lokey has not made any physical
inspection or independent appraisal of any of the properties or assets of Duck
Head. Houlihan Lokey's opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by Houlihan Lokey
at the date of its opinion.
Houlihan Lokey's opinion is furnished for the benefit of the Delta Woodside
board and the Duck Head board and may not be relied upon by any other person
without Houlihan Lokey's prior written consent. Houlihan Lokey's opinion is
delivered to each recipient subject to the conditions, scope of engagement,
limitations and understandings set forth in its opinion and Houlihan Lokey's
engagement letter with Delta Woodside.
Advice of Prudential Securities
----------------------------------
Delta Woodside's board of directors received financial advice from
Prudential Securities regarding the issues surrounding the separation of the
apparel and textile fabric businesses. The points described above under the
heading "The Duck Head Distribution - Reasons for the Duck Head Distribution"
include the material factors discussed by Prudential Securities. Prudential
Securities also advised the Delta Woodside board regarding the issues
surrounding various alternatives to the Duck Head distribution and the Delta
Apparel distribution, including a sale of either or both of Duck Head or Delta
Apparel and a liquidation of either or both of Duck Head or Delta Apparel.
Prudential Securities' financial advice was based on its analysis of the trading
prices and trading multiples of approximately 14 textile and apparel companies
which Prudential Securities believed provided relevant comparisons. In
addition, Prudential Securities reviewed recent acquisitions, also deemed to
provide relevant comparisons, in the textile and apparel industries, including
the prices paid and multiples of financial performance that those acquisitions
implied. Prudential Securities' advice regarding Delta Woodside's alternatives
with regard to Duck Head was also based on its review and understanding of
prevailing textile and apparel market conditions, as well as its review of Duck
Head's historical market performance.
Prudential Securities was not requested to, and did not, undertake the
types of analyses customary to deliver a financial opinion and did not deliver
any such opinion.
Pursuant to an engagement letter, Prudential Securities has been paid by
Delta Woodside an advisory fee of $500,000 for its services. Delta Woodside has
agreed to indemnify Prudential Securities for certain liabilities relating to or
arising from Prudential Securities' engagement by Delta Woodside. Prudential
Securities has also performed various investment banking services for Delta
Woodside in the past, and has received customary fees for those services.
Prudential Securities is a nationally recognized investment banking firm
and, as a customary part of its investment banking activities, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements, and
<PAGE>
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 DUCK HEAD DISTRIBUTION
The distribution agreement among Delta Woodside, Duck Head and Delta
Apparel sets forth the general terms and conditions relating to, and the
relationship of the three corporations after, the Duck Head distribution. For
an extensive description of the distribution agreement, see the section of this
document found under the heading "Relationship Among Duck Head, Delta Woodside
and Delta Apparel--Distribution Agreement".
Delta Woodside plans to effect the Duck Head distribution on or about June
30, 2000 by distributing all of the issued and outstanding shares of Duck Head
common stock to the record holders of Delta Woodside common stock on the record
date for this transaction, which is June 16, 2000. Delta Woodside will
distribute one share of Duck Head common stock to each of those holders for
every ten shares of Delta Woodside common stock owned of record by that holder.
The actual total number of shares of Duck Head common stock that Delta Woodside
will distribute will depend on the number of shares of Delta Woodside common
stock outstanding on the record date. Based upon the one-for-ten Duck Head
distribution ratio, the number of shares of Delta Woodside common stock
outstanding on May 19, 2000 and the number of Delta Woodside shares to be issued
before the Duck Head record date as described in "Interests of Directors and
Executive Officers in the Duck Head Distribution - Payments in Connection with
Duck Head Distribution and Delta Apparel Distribution", Delta Woodside will
distribute approximately 2,400,000 shares of Duck Head common stock to holders
of Delta Woodside common stock, which will then constitute all of the
outstanding shares of Duck Head common stock. Duck Head common shares will be
fully paid and nonassessable, and the holders of those shares will not be
entitled to preemptive rights. For a further description of Duck Head common
stock and the rights of its holders, see the portion of this document located
under the heading "Description of Duck Head Capital Stock".
For those holders of Delta Woodside common stock who hold their shares of
Delta Woodside common stock through a stockbroker, bank or other nominee, Delta
Woodside's distribution agent, First Union National Bank, will transfer the
shares of Duck Head common stock to the registered holders of record who will
make arrangements to credit their customers' accounts with Duck Head common
stock. Delta Woodside anticipates that stockbrokers and banks generally will
credit their customers' accounts with Duck Head common stock on or about June
30, 2000.
If a holder of Delta Woodside common stock owns a number of shares of Delta
Woodside common stock that is not a whole multiple of ten and therefore would be
entitled to receive a fraction of a whole share of Duck Head common stock, that
holder will receive cash instead of a fractional share of Duck Head common
stock. The distribution agent will aggregate into whole shares the fractional
shares to be cashed out and sell them as soon as practicable in the open market
at then prevailing prices on behalf of those registered holders who would
otherwise be entitled to receive less than whole shares. These registered
holders will receive a cash payment in the amount of their pro rata share of the
total proceeds of those sales, less any brokerage commissions. The distribution
agent will pay the net proceeds from sales of fractional shares based upon the
average selling price per share of Duck Head common stock of all of those sales,
less any brokerage commissions. Duck Head expects the distribution agent to
make sales on behalf of holders who would receive a fraction of a whole Duck
Head common share in the Duck Head distribution as soon as practicable after the
Duck Head distribution date. None of Delta Woodside, Duck Head or the
distribution agent guarantees any minimum sale price for those fractional shares
of Duck Head common stock, and no interest will be paid on the sale proceeds of
those shares.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material US federal income tax
consequences generally applicable to a Delta Woodside stockholder who is a US
Holder. The term "US Holder" means a beneficial owner of Delta Woodside shares
that is (i) a citizen or resident of the United States, (ii) a corporation,
partnership (other than certain partnerships as may be provided in the
applicable provisions of the US Treasury Regulations), or other entity created
<PAGE>
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
Internal Revenue Code of 1986, as amended from time to time (the "Code"), US
Treasury Regulations and judicial and administrative interpretations thereof,
all as in effect on the date of this document and all of which are subject to
change, possibly retroactively. The tax treatment of a US Holder may vary
depending upon the holder's particular situation. For instance, certain
holders, including, but not limited to, insurance companies, tax-exempt
organizations, financial institutions, persons subject to the alternative
minimum tax, dealers in securities or currencies, persons that have a
"functional currency" other than the US dollar or as part of a "hedging" or
"conversion" transaction for US federal income tax purposes and persons owning,
directly or indirectly, 5 percent or more of the Delta Woodside shares may be
subject to special rules not discussed below. The following summary is limited
to investors who hold the Delta Woodside shares as "capital assets" within the
meaning of Section 1221 of the Code. The discussion below does not address the
effect of any other laws (including other federal, state, local or foreign tax
laws) on a US Holder of Delta Woodside shares. As such, the summary does not
discuss US federal estate and gift tax considerations or US state and local tax
considerations.
Delta Woodside has structured the Duck Head distribution and the Delta
Apparel distribution to qualify as tax-free spin offs for federal income tax
purposes under Section 355 of the Internal Revenue Code. Code Section 355
treats a spin-off as tax free if the conditions of that statute are satisfied.
Delta Woodside has not sought a ruling from the US Internal Revenue Service
("IRS") regarding the Duck Head distribution or the Delta Apparel distribution,
in part because neither distribution satisfies all the conditions imposed by the
IRS for such a ruling. The fact that Delta Woodside is not eligible to receive a
private letter ruling from the IRS on the issue does not, however, in and of
itself, mean that the distributions do not qualify as tax-free spin-offs under
Code Section 355. Whether the Duck Head distribution and the Delta Apparel
distribution qualify under Code Section 355 as tax-free spin-offs will depend on
whether the criteria in Code Section 355 and the relevant rules and regulations
of the IRS are satisfied.
Delta Woodside has obtained an opinion from KPMG LLP that it is more likely
than not that each of the Duck Head distribution and the Delta Apparel
distribution qualifies as tax-free under Code Section 355.
Material Federal Income Tax Consequences if the Duck Head Distribution and
---------------------------------------------------------------------------
the Delta Apparel Distribution Qualify as Tax-Free Spin-Offs under Code
---------------------------------------------------------------------------
Section 355
-----------
If the Duck Head distribution and the Delta Apparel distribution qualify as
tax-free spin-offs under Code Section 355, then:
1. The US Holders of Delta Woodside stock who receive Duck Head common stock
and Delta Apparel common stock in those distributions will not recognize
gain upon either of the distributions, except as described immediately
below with respect to fractional shares.
2. Cash, if any, received by a US Holder of Delta Woodside stock instead of a
fractional share of Duck Head common stock or Delta Apparel common stock
will be treated as received in exchange for that fractional share. That US
Holder will recognize gain or loss to the extent of the difference between
his, her or its tax basis in that fractional share and the amount received
for that fractional share, and, provided that fractional share is held as a
capital asset, the gain or loss will be capital gain or loss.
3. Each US Holder of Delta Woodside stock will be required to apportion his,
her or its tax basis in the US Holder's Delta Woodside shares between the
Delta Woodside shares retained and the Duck Head shares and Delta Apparel
shares received, with this apportionment to be made in proportion to the
shares' relative fair market values for federal income tax purposes
immediately after the distributions.
<PAGE>
4. The holding period for the Duck Head shares and the Delta Apparel shares
received by a US Holder in the distributions will be the same as the US
Holder's holding period for the Delta Woodside shares with respect to which
the Duck Head distribution and the Delta Apparel distributions are made.
5. No gain or loss will be recognized by Delta Woodside with respect to the
Duck Head distribution or the Delta Apparel distribution, except to the
extent of any excess loss accounts or deferred intercompany gains.
Delta Woodside anticipates that in connection with the distributions Delta
Woodside will recognize gain as a result of deferred intercompany gains, but
that this gain will be offset by Delta Woodside's net operating losses.
US Treasury Regulations Section 1.355-5 requires that each US Holder that
receives Duck Head shares in the Duck Head distribution and Delta Apparel shares
in the Delta Apparel distribution attach a statement to his, her or its US
federal income tax return for the taxable year in which the distributions occur,
showing the applicability of Code Section 355 to the Duck Head distribution and
the Delta Apparel distribution. US Holders should consult their own tax
advisors regarding these disclosure requirements.
As noted above, Delta Woodside has not sought a ruling from the IRS
regarding the Duck Head distribution or the Delta Apparel distribution. The
fact that no ruling has been sought should not be construed as an indication
that the IRS would necessarily reach a different conclusion regarding the Duck
Head distribution or the Delta Apparel distribution than the conclusion set out
in the opinion of KPMG LLP. The opinion of KPMG LLP referred to in this
description is not binding upon the IRS, any other tax authority or any court,
and no assurance can be given that a position contrary to those expressed in the
opinion of KPMG LLP will be not asserted by a tax authority and ultimately
sustained by a court of law.
<PAGE>
Material Federal Income Tax Consequences if the Duck Head Distribution and
---------------------------------------------------------------------------
the Delta Apparel Distribution Do Not Qualify as Tax-Free Spin-Offs under
---------------------------------------------------------------------------
Code Section 355
-----------------
If the Duck Head distribution and the Delta Apparel distribution do not
qualify as tax-free spin-offs under Code Section 355, then the following are the
material federal income tax consequences to each participating Delta Woodside
stockholder and to Delta Woodside:
1. Each Delta Woodside stockholder will recognize dividend income to the
extent of the lesser of (a) the value of the Duck Head shares and the Delta
Apparel shares received (together with any cash received for any fractional
share) or (b) the stockholder's pro rata share of the accumulated earnings
and profits of Delta Woodside for federal income tax purposes through the
end of fiscal year 2000. This dividend income will not reduce any Delta
Woodside stockholder's basis in his, her or its Delta Woodside shares.
a. The fair market value for federal income tax purposes of the Duck Head
shares and the Delta Apparel shares received by the Delta Woodside
stockholders in the distributions will depend on the trading prices of
the Duck Head shares and the Delta Apparel shares around the time of
the distribution. Delta Woodside is not able at this time to predict
what those values will be.
b. Delta Woodside's accumulated earnings and profits through fiscal year
1999 were approximately $15.4 million (approximately $0.64 per Delta
Woodside share). The amount, if any, of Delta Woodside's earnings and
profits for fiscal year 2000 cannot be determined at this time.
2. Any value of the Duck Head shares and Delta Apparel shares (together with
any cash received for any fractional share) that exceeds the Delta Woodside
stockholder's pro rata share of Delta Woodside's accumulated earnings and
profits through fiscal year 2000 will constitute a return of capital to
that stockholder (i.e. the stockholder will not be taxed on that value) up
to the stockholder's basis in his, her or its Delta Woodside shares, and
the stockholder's basis in his, her or its Delta Woodside shares will be
reduced accordingly. Any remaining value of the Duck Head shares and Delta
Apparel shares (together with any cash received for any fractional share)
in excess of the Delta Woodside stockholder's basis in his, her or its
Delta Woodside shares will be taxable to the Delta Woodside stockholder as
gain, which will be capital gain if the Delta Woodside stock is held as a
capital asset. This capital gain will be taxable as either long-term or
short-term capital gain, depending upon the stockholder's holding period
for those Delta Woodside shares.
3. The Delta Woodside stockholder's tax basis in the Duck Head shares and the
Delta Apparel shares received in the distributions will be equal to the
fair market value for federal income tax purposes of those shares at the
time of the distributions. The stockholder's holding period for those
shares will begin on the date of the distributions.
4. The Duck Head distribution and the Delta Apparel distribution will also be
taxable as a gain to Delta Woodside, to the extent of the excess of the
value for federal income tax purposes of the Duck Head shares and the Delta
Apparel shares distributed over their tax bases to Delta Woodside. Delta
Woodside believes that any federal income tax liability to it resulting
from the Duck Head distribution and the Delta Apparel distribution will not
be material, because any applicable recognized income will be offset by
Delta Woodside's net operating losses. Any gain recognized by Delta
Woodside on the Duck Head distribution or the Delta Apparel distribution
will increase the fiscal year 2000 earnings and profits. Delta Woodside
cannot at this time calculate the amount of this gain because it is unable
to forecast what the initial trading prices will be for the Duck Head
shares or the Delta Apparel shares, which may be the federal income tax
values of the Duck Head shares and the Delta Apparel shares for purposes of
this calculation.
THE FOREGOING IS A GENERAL DISCUSSION AND IS NOT INTENDED TO SERVE AS
SPECIFIC ADVICE FOR ANY PARTICULAR DELTA WOODSIDE STOCKHOLDER, SINCE THE TAX
CONSEQUENCES OF THE DUCK HEAD DISTRIBUTION AND THE DELTA APPAREL DISTRIBUTION TO
EACH STOCKHOLDER WILL DEPEND UPON THAT STOCKHOLDER'S OWN PARTICULAR
CIRCUMSTANCES. EACH STOCKHOLDER SHOULD CONSULT HIS, HER OR ITS OWN ADVISORS AS
TO THE FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES TO THAT STOCKHOLDER OF
THE DUCK HEAD DISTRIBUTION AND THE DELTA APPAREL DISTRIBUTION.
<PAGE>
KPMG LLP is an internationally recognized accounting, tax and consulting
firm and, as a customary part of its tax practice, is regularly engaged to
provide opinions on the federal income tax consequences of merger and
acquisition transactions. Delta Woodside selected KPMG LLP because of its
expertise and its familiarity with Delta Woodside, Duck Head and Delta Apparel.
KPMG LLP acts as the independent auditor of the financial statements of Delta
Woodside, Duck Head and Delta Apparel and as their respective tax advisors.
KPMG LLP has also provided various consulting services to Delta Woodside. KPMG
LLP receives and has received customary fees for those services.
Pursuant to an engagement letter, Delta Woodside has agreed to pay KPMG LLP
a fee of $250,000 in connection with the preparation and delivery of its opinion
on the federal income tax consequences of the Duck Head and Delta Apparel
distributions. Delta Woodside has agreed to indemnify KPMG LLP for certain
liabilities relating to KPMG LLP's engagement by Delta Woodside.
In connection with the opinion of KPMG LLP respecting the U.S. federal
income tax consequences of the Duck Head distribution and the Delta Apparel
distribution, each of E. Erwin Maddrey, II, Buck A. Mickel, Micco Corporation,
Minor H. Mickel, Minor M. Shaw and Charles C. Mickel will represent to KPMG LLP
that such greater than 5% beneficial owner of Delta Woodside shares has no
binding commitment to sell, exchange, transfer by gift or otherwise dispose of
any Delta Woodside shares, Duck Head shares or Delta Apparel shares after the
Duck Head and Delta Apparel distributions, that such shareholder has no present
plan or intention to sell, exchange, transfer by gift or otherwise dispose of
any Delta Woodside shares, Duck Head shares or Delta Apparel shares except when
paired with a proportionate disposition of shares in all three companies and
that such shareholder has no present plan or intention to acquire (directly or
indirectly) during the period ending 2 years from the date of the Duck Head
distribution and the Delta Apparel distribution additional Delta Woodside
shares, Duck Head shares or Delta Apparel shares that, when added to such
shareholder's existing stockholding, would represent a 50% or greater interest
in Delta Woodside, Duck Head or Delta Apparel. See "Security Ownership of
Significant Beneficial Owner and Management."
Net Operating Loss Carry Forwards
-------------------------------------
As of July 3, 1999, Delta Woodside had net operating loss carry forwards,
for US consolidated federal income tax purposes, of approximately $68 million.
KPMG LLP has provided its opinion that it is more likely than not that (a) Duck
Head will retain as its attribute its allocable share of the Delta Woodside US
consolidated federal income tax net operating loss carry forward; (b) Delta
Apparel will retain as its attribute its allocable share of the Delta Woodside
US consolidated federal income tax net operating loss carry forward; and (c) the
Delta Woodside US consolidated federal income tax group will retain as its
attribute the balance of the Delta Woodside net operating loss not allocable to
Duck Head or Delta Apparel. Delta Woodside has estimated Duck Head's and Delta
Apparel's allocable shares of the US consolidated federal income tax net
operating loss carry forward as of July 3, 1999 at $3 million and $9 million,
respectively. Delta Woodside believes that these loss carry forwards will
expire at various dates in fiscal years 2011 through 2019.
Prior to the Duck Head distribution and the Delta Apparel distribution, the
Duck Head Apparel Company division and the Delta Apparel Company division were
part of the Delta Woodside consolidated group, and the net operating losses of
any member of the Delta Woodside consolidated group were generally available to
reduce the consolidated federal taxable income of the group. For financial
reporting purposes, prior to the Duck Head distribution and the Delta Apparel
distribution each of Duck Head and Delta Apparel carries "deferred tax assets"
on its balance sheet to reflect, among other matters, the financial impact of
their respective hypothetical separate company net operating loss carry
forwards. For federal income tax purposes, however, tax attributes, such as
net operating loss carry forwards, remain with the corporate entity, not the
division, that generated them. Therefore, with the Duck Head distribution and
the Delta Apparel distribution, tax attributes, including the Delta Woodside
consolidated federal net operating loss carry forward, will be allocated among
Delta Woodside, Duck Head and Delta Apparel in accordance with the federal
consolidated return regulations.
The pro forma balance sheet of Duck Head that is included under the heading
"Unaudited Pro Forma Combined Financial Statements" reflects Duck Head's
expected allocable portion of the pre-distribution Delta Woodside consolidated
federal net operating loss carry forward.
<PAGE>
ACCOUNTING TREATMENT
The Duck Head distribution and the Delta Apparel distribution will be
accounted for in accordance with United States generally accepted accounting
principles. Accordingly, the Duck Head distribution will be accounted for by
Delta Woodside based on the recorded amounts of the net assets being spun-off.
Delta Woodside will charge directly to equity as a dividend the historical cost
carrying amount of the net assets of Duck Head.
<PAGE>
RELATIONSHIPS AMONG DUCK HEAD,
DELTA WOODSIDE AND DELTA APPAREL
This section describes the primary agreements among Duck Head, Delta
Woodside and Delta Apparel that will define the ongoing relationships among them
and their respective subsidiaries after the Duck Head distribution and the Delta
Apparel distribution and is expected to provide for the orderly separation of
the three companies. The following description of the distribution agreement
and the tax sharing agreement summarizes the material terms of those agreements.
Duck Head has filed those agreements as exhibits to its Registration Statement
on Form 10 filed with the Securities and Exchange Commission. This document is
a part of that registration statement.
DISTRIBUTION AGREEMENT
Duck Head has entered into a distribution agreement with Delta Woodside and
Delta Apparel as of March 15, 2000. The distribution agreement provides for the
procedures for effecting the Duck Head distribution and the Delta Apparel
distribution. For this purpose, as summarized below, the distribution agreement
provides for the principal corporate transactions and procedures for separating
the Duck Head Apparel Company division's business and the Delta Apparel Company
division's business from each other and the rest of Delta Woodside. Also, as
summarized below, the distribution agreement defines the relationships among
Duck Head, Delta Woodside and Delta Apparel after the Duck Head distribution and
the Delta Apparel distribution with respect to, among other things,
indemnification arrangements and employee benefit arrangements.
Intercompany reorganization
----------------------------
Pursuant to the distribution agreement, Delta Woodside, Duck Head and Delta
Apparel have caused the following to be effected:
(a) Delta Woodside and its subsidiaries (other than Delta Mills)
contributed, as contributions to capital, all net debt amounts owed to
any of them by the corporations that conducted the Duck Head Apparel
Company division's business and the Delta Apparel Company division's
business, with the exceptions of (i) the intercompany debt that was
attributable to the portion of the amounts borrowed since January 1,
2000 for use by the Duck Head Apparel Company division's business or
the Delta Apparel Company division's business from Delta Woodside's
credit agreement lender that were repaid to that lender or to Delta
Woodside with borrowings under Duck Head's and Delta Apparel's new
credit facilities (which repayments cancelled such intercompany debt)
and (ii) any amounts owed by Delta Apparel to Delta Mills for yarn
sold by Delta Mills to Delta Apparel, which amounts shall be paid in
the ordinary course of business. These intercompany contributions of
debt did not, however, affect any obligation that Delta Woodside, Duck
Head or Delta Apparel may have under the distribution agreement or the
tax sharing agreement. Prior to completion of the intercompany
reorganization, the Duck Head Apparel Company division's assets were
owned by Delta Woodside and several of its wholly-owned subsidiaries,
and the Delta Apparel Company division's assets were owned by several
of Delta Woodside's wholly-owned subsidiaries.
(b) All the assets used in the operations of the Duck Head Apparel Company
division's business were transferred to Duck Head or a subsidiary of
Duck Head to the extent not already owned by Duck Head or its
subsidiaries.
(c) Duck Head assumed all of the liabilities of the Duck Head Apparel
Company division of Delta Woodside, and caused all holders of
indebtedness for borrowed money that were part of the assumed Duck
Head liabilities and all lessors of leases that were part of the
assumed Duck Head liabilities to agree to look only to Duck Head or a
subsidiary of Duck Head for payment of that indebtedness or lease
(except where Delta Woodside or Delta Apparel, as applicable,
consented to not being released from the obligations).
(d) All the assets used in the operations of the Delta Apparel Company
division's business were transferred to Delta Apparel or a subsidiary
of Delta Apparel to the extent not already owned by Delta Apparel or
its subsidiaries. This transfer included the sale by Delta Mills to
Delta Apparel of the Rainsford plant, located in Edgefield, SC.
<PAGE>
(e) Delta Apparel assumed all of the liabilities of the Delta Apparel
Company division of Delta Woodside, and caused all holders of
indebtedness for borrowed money that were part of the assumed Delta
Apparel liabilities and all lessors of leases that were part of the
assumed Delta Apparel liabilities to agree to look only to Delta
Apparel or a subsidiary of Delta Apparel for payment of that
indebtedness or lease (except where Delta Woodside or Duck Head, as
applicable, consented to not being released from the obligations).
(f) Delta Woodside caused all holders of indebtedness for borrowed money
and all lessors of leases that were not part of the liabilities
assumed by Duck Head or the liabilities assumed by Delta Apparel to
agree to look only to Delta Woodside or a remaining subsidiary of
Delta Woodside for payment of that indebtedness or lease (except where
Duck Head or Delta Apparel, as applicable, consented to not being
released from the obligations).
Indemnification
---------------
Each of Delta Woodside, Duck Head and Delta Apparel has agreed to indemnify
each other and their respective directors, officers, employees and agents
against any and all liabilities and expenses incurred or suffered that arise out
of or pertain to:
(a) any breach of the representations and warranties made by it in the
distribution agreement;
(b) any breach by it of any obligation under the distribution agreement;
(c) the liabilities assumed or retained by it under the distribution
agreement; or
(d) any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission of a material fact contained in any of
its disclosure documents filed by it with the SEC, except insofar as
the misstatement or omission was based upon information furnished to
the indemnifying party by the indemnified party.
Employee Matters
-----------------
Delta Woodside has caused the employees of the Duck Head Apparel Company
division to become employees of Duck Head, Duck Head has assumed the accrued
employee benefits of these employees and Delta Woodside will cause the account
balance of each of these employees in any and all of Delta Woodside's employee
benefit plans (other than the Delta Woodside stock option plan, the Delta
Woodside incentive stock award plan and the Delta Woodside long term incentive
plan, if any) to be transferred to a comparable employee benefit plan of Duck
Head.
Intercompany Accounts
----------------------
Other than any obligations described in or arising under the distribution
agreement or the tax sharing agreement, each of Delta Woodside, Duck Head and
Delta Apparel has represented to each other that it is not aware of any
intercompany receivable, payable or loan balance that will exist as of the time
of the Duck Head distribution and the Delta Apparel distribution between any of
them.
Transaction Expenses
---------------------
Generally, all costs and expenses incurred in connection with the Duck Head
distribution, the Delta Apparel distribution and related transactions shall be
paid by Delta Woodside, Duck Head and Delta Apparel proportionately in
accordance with the respective benefits received by Delta Woodside, Duck Head
and Delta Apparel as determined in good faith by the parties; provided that the
holders of the Delta Woodside shares shall pay their own expenses, if any,
incurred in connection with the Duck Head distribution and the Delta Apparel
distribution.
<PAGE>
TAX SHARING AGREEMENT
Duck Head will enter into a tax sharing agreement with Delta Woodside and
Delta Apparel that will describe, among other things, each company's rights and
obligations relating to tax payments and refunds for periods before and after
the Duck Head distribution and related matters like the filing of tax returns
and the handling of audits and other tax proceedings. The tax sharing agreement
also describes the indemnification arrangements with respect to tax matters
among Duck Head and its subsidiaries (which this document refers to as the Duck
Head tax group), Delta Woodside and its subsidiaries after the Duck Head
distribution and the Delta Apparel distribution (which this document refers to
as the Delta Woodside tax group) and Delta Apparel and its subsidiaries (which
this document refers to as the Delta Apparel tax group).
Under the tax sharing agreement, the allocation of tax liabilities and
benefits is generally as follows:
- With respect to federal income taxes:
(a) For each taxable year that ends prior to the Duck Head
distribution, Delta Woodside shall be responsible for paying any
increase in federal income taxes, and shall be entitled to
receive the benefit of any refund of or saving in federal income
taxes, that results from any tax proceeding with respect to any
returns relating to federal income taxes of the Delta Woodside
consolidated federal income tax group.
(b) For the taxable period ending on the date of the Duck Head
distribution, Delta Woodside shall be responsible for paying any
federal income taxes, and shall be entitled to any refund of or
saving in federal income taxes, with respect to the Delta
Woodside consolidated federal income tax group.
- With respect to state income, franchise or similar taxes, for each
taxable period that ends prior to or on the date of the Duck Head
distribution, each corporation that is a member of the Delta Woodside
tax group, the Delta Apparel tax group or the Duck Head tax group
shall be responsible for paying any of those state taxes, and any
increase in those state taxes, and shall be entitled to receive the
benefit of any refund of or saving in those state taxes, with respect
to that corporation (or any predecessor by merger of that corporation)
or that results from any tax proceeding with respect to any returns
relating to those state taxes of that corporation (or any predecessor
by merger of that corporation).
- With respect to federal employment taxes:
(a) Delta Woodside shall be responsible for the federal employment
taxes payable with respect to the compensation paid, whether
before, on or after the date of the Duck Head distribution, by
any member of the Delta Woodside federal income tax consolidated
group for any period ending prior to or on the date of the Duck
Head distribution or by any member of the Delta Woodside tax
group for any period after that date to all individuals who are
past or present employees of any business of Delta Woodside other
than the business of Duck Head or the business of Delta Apparel.
(b) Delta Apparel shall be responsible for the federal employment
taxes payable with respect to the compensation paid, whether
before, on or after the date of the Delta Apparel distribution,
by any member of the Delta Woodside federal income tax
consolidated group for any period ending prior to or on the date
of the Delta Apparel distribution or by any member of the Delta
Apparel tax group for any period after that date to all
individuals who are past or present employees of the business of
Delta Apparel.
(c) Duck Head shall be responsible for the federal employment taxes
payable with respect to the compensation paid, whether before, on
or after the date of
<PAGE>
the Duck Head distribution, by any member of the Delta Woodside
federal income tax consolidated group for any period ending prior
to or on the date of the Duck Head distribution or by any member
of the Duck Head tax group for any period after that date to all
individuals who are past or present employees of the business of
Duck Head.
- With respect to any taxes, other than federal employment taxes,
federal income taxes and state income, franchise or similar taxes:
(a) Delta Woodside shall be responsible for any of these taxes,
regardless of the time period or circumstance with respect to
which the taxes are payable, arising from or attributable to any
business of Delta Woodside other than the business of Duck Head
or the business of Delta Apparel;
(b) Delta Apparel shall be responsible for any of these taxes,
regardless of the time period or circumstance with respect to
which the taxes are payable, arising from or attributable to the
business of Delta Apparel; and
(c) Duck Head shall be responsible for any of these taxes, regardless
of the time period or circumstance with respect to which the
taxes are payable, arising from or attributable to the business
of Duck Head.
- The Delta Woodside tax group shall be responsible for all taxes, and
shall receive the benefit of all tax items, of any member of the Delta
Woodside tax group that relate to any taxable period after the Duck
Head distribution and the Delta Apparel distribution. The Delta
Apparel tax group shall be responsible for all taxes, and shall
receive the benefit of all tax items, of any member of the Delta
Apparel tax group that relate to any taxable period after the Delta
Apparel distribution. The Duck Head tax group shall be responsible for
all taxes, and shall receive the benefit of all tax items, of any
member of the Duck Head tax group that relate to any taxable period
after the Duck Head distribution.
Under the tax sharing agreement, the Duck Head tax group and the Delta
Apparel tax group have irrevocably designated Delta Woodside as their agent for
purposes of taking a broad range of actions in connection with taxes for
pre-distribution periods. Those actions include the settlement of tax audits and
other tax proceedings. In addition, the tax sharing agreement provides that all
disagreements and disputes relating to the agreement are to be resolved by Delta
Woodside. These arrangements may result in conflicts of interest among Duck
Head, Delta Woodside and Delta Apparel concerning such matters as whether a tax
relates to the business of Delta Woodside, Duck Head or Delta Apparel. Delta
Woodside might determine that a tax was a liability of Duck Head even though
Duck Head disagreed with that determination.
Under the tax sharing agreement, the Duck Head tax group, the Delta
Woodside tax group and the Delta Apparel tax group have agreed to indemnify one
another against various tax liabilities, generally in accordance with the
allocation of tax liabilities and benefits described above.
OTHER RELATIONSHIPS
Boards of Directors of Duck Head, Delta Woodside and Delta Apparel
---------------------------------------------------------------------------
The following directors of Duck Head are also directors of Delta Woodside
and Delta Apparel: William F. Garrett, C. C. Guy, Dr. James F. Kane, Dr. Max
Lennon, E. Erwin Maddrey, II, Buck A. Mickel and Bettis C. Rainsford. In the
event that any material issue were to arise between Duck Head, on the one hand,
and either Delta Woodside or Delta Apparel, on the other hand, these directors
could be deemed to have a conflict of interest with respect to that issue. In
that circumstance, Duck Head anticipates that it will proceed in a manner that
is determined by a majority of those members of Duck Head's board of directors
who are not also members of the board of directors of Delta Woodside or the
board of directors of Delta Apparel (as applicable).
Principal Stockholders
-----------------------
<PAGE>
The Duck Head shares will be distributed in the Duck Head distribution, and
the Delta Apparel shares will be distributed in the Delta Apparel distribution,
to the Delta Woodside stockholders proportionately among the Delta Woodside
shares. Therefore, immediately following the Duck Head distribution, Delta
Woodside's principal stockholders will be the same individuals and entities as
Duck Head's and Delta Apparel's principal stockholders, and those principal
stockholders will have the same respective percentages of outstanding beneficial
ownership in each of Delta Woodside, Duck Head and Delta Apparel (assuming no
acquisitions or dispositions of shares by those stockholders between the record
date for the Duck Head distribution or the Delta Apparel distribution and the
completion of either distribution). See "Security Ownership of Significant
Beneficial Owners and Management".
Sales to and Purchases from Delta Woodside or Delta Apparel of Goods or
---------------------------------------------------------------------------
Manufacturing Services
-----------------------
In the ordinary course of Duck Head's business, Duck Head has produced
T-shirts for Delta Apparel, purchased T-shirts from Delta Apparel and purchased
fabrics from Delta Mills. The following table shows these transactions for the
last three fiscal years and for the first nine months of fiscal year 2000:
(in thousands of dollars)
Fiscal year First nine months
----------- -----------------
of
--
1997 1998 1999 Fiscal year 2000
---- ---- ---- ------------------
Sold to Delta Apparel 653 132 -- --
Purchased from Delta Apparel 403 156 481 28
Purchased from Delta Mills 3,338 1,824 662 --
All of these T-shirt and fabric sales were made at prices deemed by Duck
Head to approximate market value.
Duck Head anticipates that any future sales or purchases to or from Delta
Woodside or Delta Apparel will not be material.
Management Services
--------------------
Delta Woodside has provided various services to the operating divisions of
its subsidiaries, including the Delta Mills Marketing Company, Duck Head Apparel
Company and Delta Apparel Company divisions. These services include financial
planning, SEC reporting, payroll, accounting, internal audit, employee benefits
and services, stockholder services, insurance, treasury, purchasing, management
information services and tax accounting. These services have been charged on
the basis of Delta Woodside's cost and allocated to the various divisions based
on employee headcount, computer time, projected sales and other criteria.
During fiscal years 1997, 1998, and 1999, Delta Woodside charged the Duck
Head Apparel Company division $772,000, $882,000 and $777,000, respectively, for
these services. During the first nine months of fiscal year 2000, Delta
Woodside charged the Duck Head Apparel Company division $0 for these services.
Other
-----
For further information on transactions with affiliates by Duck Head, see
Notes 2 and 8 to the Combined Financial Statements of Duck Head under "Index to
Combined Financial Statements" in this document, which information is
incorporated into this section by reference.
Any transaction entered into between Duck Head and any officer, director,
principal stockholder or any of their affiliates has been on terms that Duck
Head believes are comparable to those that would be available to Duck Head from
non_affiliated persons.
<PAGE>
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN
THE DUCK HEAD DISTRIBUTION
One or more executive officers of Duck Head and one or more members of the
Duck Head board of directors will receive economic benefits as a result of the
Duck Head distribution and the Delta Apparel distribution and may have other
interests in the Duck Head distribution and the Delta Apparel distribution in
addition to their interests as Delta Woodside stockholders. Some of these
executive officers and directors will also be the beneficial owners of more than
5% of the outstanding shares of common stock of Duck Head immediately following
the Duck Head distribution. See "Security Ownership of Significant Beneficial
Owners and Management." The Delta Woodside board of directors was aware of
these interests and considered them along with the other matters described above
under "The Duck Head Distribution __ Background of the Duck Head Distribution"
and "The Duck Head Distribution __ Reasons for the Duck Head Distribution."
RIGHT OF ROBERT D. ROCKEY, JR. TO ACQUIRE DUCK HEAD SHARES
Pursuant to the letter agreement, as amended, pursuant to which Robert D.
Rockey, Jr. became Chairman, President and Chief Executive Officer of Duck Head,
he has the right to acquire from Duck Head up to 1,000,000 Duck Head shares on
the date that is six months after the Duck Head distribution. If this right is
exercised, the price for the shares will be the average daily closing stock
price for the Duck Head common stock for the six-month period following the Duck
Head distribution. By reason of Section 162(m) of the Internal Revenue Code
(which limits the corporate income tax deduction of certain executive officer
compensation paid in excess of $1 million), Duck Head does not believe that it
will be able to deduct any expense attributable to this right for federal income
tax purposes. See "Management of Duck Head - Management Compensation".
RECEIPT OF DUCK HEAD STOCK OPTIONS AND DUCK HEAD INCENTIVE STOCK AWARDS
The compensation grants committee of the Duck Head board of directors
anticipates that, on one or more dates during the first six months following the
Duck Head distribution, grants under the Duck Head stock option plan covering an
aggregate of approximately 202,500 Duck Head shares will be made and awards
under the Duck Head incentive stock award plan covering up to an aggregate of
approximately 111,750 Duck Head shares will be made, including the following
anticipated option and award grants to the following executive officers of Duck
Head:
<TABLE>
<CAPTION>
Name and position Shares Covered by Options(1) Shares Covered by Awards(2)
----------------- ---------------------------------------------------------
<S> <C> <C>
Robert D. Rockey, Jr. 125,000 (3)
Chairman, President and Chief
Executive Officer
Michael H. Prendergast 20,000 10,000
Senior Vice President-Sales
K. Scott Grassmyer 20,000 10,000
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
William B. Mattison, Jr. 20,000 10,000
Senior Vice President-Merchandising
___________________________________
<FN>
(1) The compensation grants committee of the Duck Head board of directors
anticipates that the stock options will be granted on one or more dates
during the six month period. The exercise price for any option will be the
stock's closing market value at the date of grant. The compensation grants
committee anticipates that the options, other than the options anticipated
to be granted to Mr. Rockey, will vest over a four year period. The
compensation grants committee anticipates that the options granted to Mr.
Rockey will vest over a period ending March 8, 2001.
<PAGE>
(2) The compensation grants committee of the Duck Head board of directors
anticipates that, except for the anticipated award to Mr. Rockey, 20% of
each award will vest at the end of each of fiscal year 2000, fiscal year
2001 and fiscal year 2002 and up to the remaining 40% will vest at the end
of fiscal year 2002 to the extent that certain performance criteria based
on cumulative earnings before interest and taxes are met.
(3) The compensation grants committee anticipates that Mr. Rockey will be
granted incentive stock awards under the Duck Head incentive stock award
plan covering the lesser of (a) 75,000 Duck Head shares or (b) Duck Head
shares with a value on the date of grant of $200,000. These awards would
vest to the extent of 60% of the shares covered thereby on March 8, 2001 if
he is still then employed by Duck Head and to the extent of up to the
remaining 40% of the shares covered thereby if specified performance
criteria based on cumulative earnings before interest and taxes through
March 8, 2001 are satisfied. The compensation committee of the Duck Head
board of directors anticipates that, if the number of Duck Head shares
covered by the award have a value less than $200,000 on the date of grant,
the difference between that value and $200,000, plus a gross-up income tax
amount, would be paid in cash by Duck Head to Mr. Rockey.
</TABLE>
For a description of the Duck Head stock option plan and the Duck Head
incentive stock award plan and the anticipated treatment under Section 162(m) of
the Internal Revenue Code of grants of options and awards under these plans, see
"Management of Duck Head - Management Compensation".
PAYMENTS IN CONNECTION WITH DUCK HEAD DISTRIBUTION AND DELTA APPAREL
DISTRIBUTION
In 1997, the Delta Woodside board of directors adopted and the Delta
Woodside stockholders approved the Delta Woodside long term incentive plan.
Under that plan, award grants could be made to key executives and non-employee
directors of Delta Woodside that, depending on the attainment of certain
performance measurement goals over a three-year period, could translate into
stock options for Delta Woodside shares being granted to participants in the
plan. In connection with the exercise of any option granted under the plan,
Delta Woodside would pay cash to the participant to offset the income taxes
attributable to the option exercise and to such cash payment, using an assumed
38% income tax rate.
No award grants complying with all the terms of the plan were made.
Around the time of adoption of the plan, however, Delta Woodside did identify
the individuals who would be plan participants, determined performance targets
for these individuals and communicated these actions to the affected
individuals. These communications also informed the participants that new
three-year performance goals would be established annually.
To take account of the communications previously made to the plan
participants, the fact that all three-year performance periods contemplated by
the plan would expire following the record date for the Delta Apparel and Duck
Head distributions and the efforts of the key executives and directors on behalf
of Delta Woodside leading up to the Duck Head distribution and the Delta Apparel
distribution, Delta Woodside's board (based on resolutions of its compensation
grants and compensation committees) has decided that, once the record date for
the Duck Head distribution and the Delta Apparel distribution is established,
Delta Woodside shares shall be issued and cash shall be paid prior to the Duck
Head and Delta Apparel record date to those individuals who were intended
participants in the plan. These actions, which have been reflected in an
amendment to the long term incentive plan, provide that (a) Delta Woodside would
issue Delta Woodside shares and make cash payments to the individuals identified
for participation in the plan, (b) as a condition to receipt of those Delta
Woodside shares and that cash, those individuals would surrender any rights they
may have under the plan and (c) no further awards, options or Delta Woodside
shares would be granted or issued under the plan.
The number of Delta Woodside shares to be issued and the cash amounts to be
paid have been determined by Delta Woodside's compensation grants and
compensation committees and the Delta Woodside board. In determining the number
of Delta Woodside shares to be issued to each participant, the Delta Woodside
compensation grants committee, compensation committee and board used the closing
sale price of the Delta Woodside common stock on March 15, 2000 ($1.50 per
share).
The table below sets forth the Delta Woodside shares that will thereby be
issued and the cash that will thereby be paid to the individuals who are
directors or executive officers of Duck Head. The Delta Woodside board
anticipates that these Delta Woodside shares will be issued and this cash will
be paid prior to the record date for the Duck Head distribution and the Delta
Apparel distribution.
<PAGE>
Name Delta Woodside Shares(#) Cash ($)
---- -------------------------- ---------
William F. Garrett 126,480 116,280
C.C. Guy 13,485 12,398
Dr. James F. Kane 13,485 12,398
Dr. Max Lennon 13,330 12,255
E. Erwin Maddrey, II 206,667 190,000
Buck A. Mickel 13,072 12,018
Bettis C. Rainsford 148,800 136,800
Shares will also be issued and cash will also be paid to Minor H. Mickel, as
personal representative of the estate of Buck Mickel (father of Buck A. Mickel).
Buck Mickel was a member of the Delta Woodside board of directors until his
death in 1998 and participated in the early stages of that board's strategic
planning.
E. Erwin Maddrey, II is a participant in Delta Woodside's severance plan.
Upon the termination of Mr. Maddrey's services as an officer with Delta Woodside
(which is anticipated to occur on or about the time of the Duck Head
distribution and the Delta Apparel distribution), Delta Woodside will pay Mr.
Maddrey $147,115 of severance in accordance with the normal provisions of this
plan.
On or about the time of the Duck Head distribution and the Delta Apparel
distribution, William F. Garrett will become the President and Chief Executive
Officer of Delta Woodside. In recognition of Mr. Garrett's past service to
Delta Woodside and in order to provide him with an additional incentive to
remain with Delta Woodside, the Delta Woodside board has authorized the payment
to him of $100,000 in connection with the Duck Head distribution and the Delta
Apparel distribution and the payment to him of six additional annual payments of
$150,000 each, with the first of these annual payments to be made in October
2000. Mr. Garrett will forfeit any of these payments remaining to be made in
the event that he voluntarily leaves employment with Delta Woodside or such
employment is terminated by Delta Woodside for cause. Any remaining amounts
payable to him under the arrangement will be paid to him in the event of his
death or disability or in the event there is a change of control of Delta
Woodside and he does not remain with Delta Woodside. See also the information
below under the subheading "Early Exercisability and Other Amendments of Delta
Woodside Stock Options and Amendments to Deferred Compensation Plan".
Jane H. Greer is the Vice President and Secretary of Delta Woodside. On or
about the time of the Duck Head distribution and the Delta Apparel distribution,
Ms. Greer will resign from her officer positions with Delta Woodside and its
subsidiaries. In connection with this resignation, Delta Woodside will pay Ms.
Greer $53,846 of severance in accordance with the normal provisions of Delta
Woodside's severance plan and $400,000 of severance pursuant to the terms of an
employment agreement. Pursuant to amendments to Delta Woodside's stock option
plan and her stock options, all of Ms. Greer's outstanding stock options for
Delta Woodside shares (covering an aggregate of 22,500 Delta Woodside shares)
will remain exercisable until their stated expiration dates notwithstanding the
termination of Ms. Greer's employment with Delta Woodside.
David R. Palmer is the Controller of Delta Woodside. On or about the time
of the Duck Head distribution and the Delta Apparel distribution, Mr. Palmer
will resign from his officer positions with Delta Woodside and its subsidiaries.
In connection with this resignation, Delta Woodside will pay Mr. Palmer $61,250
of severance pursuant to the terms of an employment agreement. Pursuant to
amendments to Delta Woodside's stock option plan and his stock options, all of
Mr. Palmer's unexercisable stock options for Delta Woodside shares (covering an
aggregate of 1,250 Delta Woodside shares) will become exercisable in full no
later than 5 business days prior to the record date for the Duck Head and Delta
Apparel distributions, and all of Mr. Palmer's outstanding stock options for
<PAGE>
Delta Woodside shares (covering an aggregate of 5,000 Delta Woodside shares)
will remain exercisable until their stated expiration dates notwithstanding the
termination of Mr. Palmer's employment with Delta Woodside.
Brenda L. Jones is the Assistant Secretary of Delta Woodside. On or about
the time of the Duck Head distribution and the Delta Apparel distribution, Ms.
Jones will resign from her officer positions with Delta Woodside and its
subsidiaries. In connection with this resignation, Delta Woodside will pay Ms.
Jones $37,019 of severance in accordance with the normal provisions of Delta
Woodside's severance plan and $37,019 pursuant to the terms of an employment
agreement. Pursuant to amendments to Delta Woodside's stock option plan and her
stock options, all of Ms. Jones' unexercisable stock options for Delta Woodside
shares (covering an aggregate of 375 Delta Woodside shares) will become
exercisable in full no later than 5 business days prior to the record date for
the Duck Head and Delta Apparel distributions, and all of Ms. Jones' outstanding
stock options for Delta Woodside shares (covering an aggregate of 1,375 Delta
Woodside shares) will remain exercisable until their stated expiration dates
notwithstanding the termination of Ms. Jones' employment with Delta Woodside.
EARLY EXERCISABILITY AND OTHER AMENDMENTS OF DELTA WOODSIDE STOCK OPTIONS AND
AMENDMENTS TO DEFERRED COMPENSATION PLAN
Pursuant to the distribution agreement, Delta Woodside is providing the
holders of outstanding options granted under the Delta Woodside stock option
plan, whether or not those options are currently exercisable, with the
opportunity to amend the terms of their Delta Woodside stock options. The
amendment offered to each holder provides that:
(i) all unexercisable portions of the holder's Delta Woodside stock options
become immediately exercisable in full on a date that is no later than five
(5) business days prior to the Duck Head record date and the Delta Apparel
record date, which will permit the holder to exercise all or part of the
holder's Delta Woodside stock option prior to the Duck Head record date and
the Delta Apparel record date (and thereby receive Duck Head shares in the
Duck Head distribution and Delta Apparel shares in the Delta Apparel
distribution); and
(ii) any Delta Woodside stock option that remains unexercised as of the
Duck Head record date and the Delta Apparel record date will remain
exercisable for only Delta Woodside shares, and for the same number of
Delta Woodside shares at the same exercise price, after the Duck Head
distribution and the Delta Apparel distribution as before the Duck Head
distribution and the Delta Apparel distribution (and not for a combination
of Delta Woodside shares, Duck Head shares and Delta Apparel shares).
Delta Woodside anticipates that all holders of outstanding Delta Woodside
stock options will probably enter into the proposed amendment.
As a result of these amendments, options for Delta Woodside shares will
become exercisable earlier than they otherwise would have for the following
Named Executives and members of the Duck Head board of directors for the
following number of Delta Woodside shares:
<PAGE>
<TABLE>
<CAPTION>
Name Number of Delta Woodside shares covered by portion of stock options the
---- -----------------------------------------------------------------------
exercisability of which will be accelerated
-------------------------------------------
<S> <C>
William F. Garrett 37,500
Michael H. Prendergast 6,000
K. Scott Grassmyer 9,000
</TABLE>
Also, in connection with the Duck Head distribution, Delta Woodside has
added a provision to the Delta Woodside stock option plan that provides that, so
long as a Duck Head employee who holds Delta Woodside stock options remains an
employee of Duck Head or any of its subsidiaries, those Delta Woodside stock
options will remain outstanding until the end of their stated term. This
amendment will apply to all Delta Woodside stock options currently held by Mr.
Prendergast (under which he can acquire an aggregate of 9,000 Delta Woodside
shares) and Mr. Grassmyer (under which he can acquire an aggregate of 12,000
Delta Woodside shares).
In connection with the Duck Head and Delta Apparel distributions, each
participant in Delta Woodside's deferred compensation plan will be provided with
the opportunity to receive all or part of his or her vested deferred
compensation account in cash in exchange for consenting to an amendment to the
deferred compensation plan. Under the plan amendment, only the corporation that
employs the participant, and not any other member of Delta Woodside's current
group of corporations, will be responsible in the future for the participant's
deferred compensation. Delta Woodside anticipates that each director and
officer of Duck Head will consent to the proposed plan amendment and will choose
to continue to defer his or her vested deferred compensation account under the
amended plan.
LEASE TERMINATIONS
Delta Woodside has leased its principal corporate office space and space
for its benefits department, purchasing department and financial accounting
department from a corporation (233 North Main, Inc.), one-half of the stock of
which is owned by each of E. Erwin Maddrey, II (a director and significant
stockholder of Duck Head and Delta Apparel and President and Chief Executive
Officer (from which officer positions he will resign in connection with the Duck
Head distribution and the Delta Apparel distribution) and a director and
significant stockholder of Delta Woodside) and Jane H. Greer (Vice President and
Secretary of Delta Woodside (from which officer positions she will resign in
connection with the Duck Head distribution and the Delta Apparel distribution)).
Mr. Maddrey and Ms. Greer are also the directors and executive officers of 233
North Main, Inc. The lease of this space was executed effective September 1,
1998, covers approximately 9,662 square feet at a rental rate of $13.50 per
square foot per year (plus certain other expenses) and had an expiration date of
August 2003. In connection with the Duck Head distribution and the Delta
Apparel distribution, 233 North Main, Inc. and Delta Woodside have agreed that
this lease will terminate on the Duck Head and Delta Apparel distribution date
in exchange for the payment by Delta Woodside to 233 North Main, Inc. of
$135,268. Following the Duck Head and Delta Apparel distribution date, Delta
Woodside may continue to use the space on an as needed month-to-month basis at
the rental rate of $14.00 per square foot per year (plus certain other
expenses).
Delta Woodside has leased office space in Edgefield, South Carolina from
The Rainsford Development Corporation, a corporation wholly owned by Bettis C.
Rainsford (a director and significant stockholder of Duck Head, Delta Apparel
and Delta Woodside). Mr. Rainsford is a director and executive officer and
Brenda L. Jones (Assistant Secretary of Delta Woodside (from which officer
position she will resign in connection with the Duck Head distribution and the
Delta Apparel distribution)) is an executive officer of The Rainsford
Development Corporation. In connection with the Duck Head distribution and the
Delta Apparel distribution, The Rainsford Development Corporation and Delta
Woodside have agreed that this lease will terminate on the Duck Head and Delta
Apparel distribution date in exchange for the payment by Delta Woodside to The
Rainsford Development Corporation of $33,299.08.
<PAGE>
LEASE OF STORE IN EDGEFIELD, SOUTH CAROLINA
Duck Head leases a building in Edgefield, South Carolina from Bettis C.
Rainsford (a director and significant stockholder of Duck Head, Delta Apparel
and Delta Woodside) pursuant to an agreement involving rental payments equal to
3% of gross sales of the Edgefield store, plus 1% of gross sales of the store
for utilities. Under this lease agreement, $9,944, $11,076 and $10,947 were
paid to Mr. Rainsford during fiscal 1997, 1998 and 1999, respectively.
TRANSFERS OF LIFE INSURANCE POLICIES
In February 1991, each of E. Erwin Maddrey, II (a director and significant
stockholder of Duck Head and Delta Apparel and President and Chief Executive
Officer (from which officer positions Mr. Maddrey will resign in connection with
the Duck Head distribution and the Delta Apparel distribution) and a director
and significant stockholder of Delta Woodside) and Bettis C. Rainsford (a
director and significant stockholder of Duck Head, Delta Apparel and Delta
Woodside) entered into a stock transfer restrictions and right of first refusal
agreement (which this document refers to as a "First Refusal Agreement") with
Delta Woodside. Pursuant to each First Refusal Agreement, Mr. Maddrey or Mr.
Rainsford, as the case may be, granted Delta Woodside a specified right of first
refusal with respect to any sale of that individual's Delta Woodside shares
owned at death for five years after the individual's death. In connection with
the First Refusal Agreements, life insurance policies were established on the
lives of Mr. Maddrey and Mr. Rainsford. Under the life insurance policies on
the life of each of them, $30 million is payable to Delta Woodside and $10
million is payable to the beneficiary or beneficiaries chosen by the individual.
Nothing in either First Refusal Agreement restricts the freedom of Mr. Maddrey
or Mr. Rainsford to sell or otherwise dispose of any or all of his Delta
Woodside shares at any time prior to his death or prevents Delta Woodside from
canceling the life insurance policies payable to it for $30 million on either
Mr. Maddrey's or Mr. Rainsford's life. A First Refusal Agreement terminates if
the life insurance policies payable to the applicable individual's beneficiaries
for $10 million are canceled by reason of Delta Woodside's failure to pay the
premiums on those policies.
In connection with the Duck Head distribution and the Delta Apparel
distribution, Delta Woodside has agreed with each of Mr. Maddrey and Mr.
Rainsford that, effective as of a date on or about the date the Duck Head
distribution and the Delta Apparel distribution occur, that individual's First
Refusal Agreement will terminate and, if the individual desires, Delta Woodside
will transfer to the individual the $10 million life insurance policies on his
life the proceeds of which are payable to the beneficiary or beneficiaries he
selects. After this transfer, the recipient individual will be responsible for
payment the premiums on these life insurance policies. Delta Woodside will
allow the remaining $30 million of life insurance payable to Delta Woodside to
lapse.
EMPLOYEE BENEFIT SERVICES
On or about the date of the Duck Head distribution, Duck Head anticipates
engaging Carolina Benefits Services, Inc. to provide payroll processing and
401(k) plan administration services for Duck Head. Carolina Benefits Services,
Inc. is owned by E. Erwin Maddrey, II (a director and significant stockholder of
Duck Head and Delta Apparel and President and Chief Executive Officer (from
which officer positions Mr. Maddrey will resign in connection with the Duck Head
distribution and the Delta Apparel distribution) and a director and significant
stockholder of Delta Woodside) and Jane H. Greer (Vice President and Secretary
of Delta Woodside (from which officer positions she will resign in connection
with the Duck Head distribution and the Delta Apparel distribution)). Ms. Greer
is also an executive officer of Carolina Benefits Services, Inc.
For the services to be provided by Carolina Benefits Services, Duck Head
anticipates paying fees based on the numbers of employees, 401(k) plan
participants and plan transactions and other items. Duck Head anticipates that
on an annual basis these fees will be approximately $46,000. The initial term
of the engagement will be one year. Duck Head elected to engage Carolina
Benefits Services to provide these services after receiving proposals from other
providers of similar services and determining that Carolina Benefits Services'
proposal was Duck Head's least costly alternative.
Carolina Benefits Services expects that it will provide similar payroll
processing and 401(k) plan administration services to Delta Apparel and 401(k)
plan administration services to Delta Woodside after the Duck Head distribution
and the Delta Apparel distribution.
<PAGE>
