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): March 15, 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 March 30, 2000:
- Delta Apparel, Inc. ("Delta Apparel"), an indirect 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"),
a 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
- DH Apparel Company, Inc. (to be renamed Duck Head Apparel Company,
Inc.) ("Duck Head"), an indirect wholly-owned subsidiary of Delta
Woodside, filed with the SEC under the Exchange Act a 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 in April 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 a date near the
end of April 2000, and that each distribution will occur on a date in May 2000.
<PAGE>
Delta Woodside anticipates that the Delta Apparel distribution will occur as
soon as reasonably practicable following the record date for the Delta Apparel
distribution and that the Duck Head distribution will occur as soon as
reasonably practicable following the record date for the Duck Head distribution.
Completion of the Delta Apparel distribution is conditioned on several
matters, including:
- Delta Apparel entering into credit facilities satisfactory to it; and
- Delta Mills, Inc. (an indirect wholly-owned subsidiary of Delta
Woodside) receiving an opinion satisfactory to it that the sale by it
to Delta Apparel of the Rainsford yarn plant in Edgefield, South
Carolina and related inventory is fair from a financial point of view
to the holders of Delta Mills, Inc.'s 9-5/8% Senior Notes in the
original principal amount of $150 million.
Completion of the Duck Head distribution is conditioned on several matters,
including:
- Duck Head entering into credit facilities satisfactory to it.
On March 15, 2000, the Delta Woodside Board of Directors adopted
resolutions amending the Shareholders Rights Agreement dated December 10, 1999
(the "Rights Agreement") between Delta Woodside and First Union National Bank,
as Rights Agent. A "Right" governed by the Rights Agreement is attached to each
outstanding share of Delta Woodside's common stock (the "Common Stock"), and,
subject to the terms of the Rights Agreement, each Right entitles the registered
holder thereof to purchase from Delta Woodside one quarter share of Common Stock
at a cash exercise price of $5.00 per quarter share, subject to adjustment as
provided in the Rights Agreement.
Paragraph 11(c) of the Rights Agreement provides that the exercise price of
the Rights is subject to adjustment in the event that Delta Woodside makes
certain types of distributions with respect to the Common Stock. Paragraph
11(c), however, also originally contained a "carve-out" intended to prevent any
such adjustment from being made if the proposed spin-offs of Delta Woodside's
Duck Head Apparel Company and Delta Apparel Company divisions are consummated
prior to March 31, 2000. Delta Woodside does not expect the spin-offs to be
consummated by that date, but does believe that it is in the best interest of
its shareholders that no adjustment to the exercise price of the Rights occur if
the spin-offs are consummated after such date. Consequently, Delta Woodside and
the Rights Agent have amended the Rights Agreement to extend the March 31, 2000
deadline with respect to the spin-offs until July 31, 2000. A copy of Amendment
No. 1 to the Rights Agreement is included as Exhibit 4.1.2 hereto.
<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
six months ended January 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
January 1, 2000:
- The contribution to equity of net intercompany debt owed by Delta
Apparel to its parents, the contribution to equity 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 refinancing of current existing debt 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 six months ended January 1, 2000
give effect to the following transactions as if they had occurred at the
beginning of the fiscal year ended July 3, 1999:
- The 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.
These pro forma condensed consolidated financial statements should not be
<PAGE>
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 JANUARY 1, 2000
(IN THOUSANDS)
Pro Forma Pro Forma
Historical Adjustments As Adjusted
----------- ------------------------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $39,350 $7,469 (1) $46,819
Accounts receivable
Factor 52,796 52,796
Customer 257 3,198 (2) 3,455
----------- ------------- ---------
53,053 3,198 56,251
Less allowances for doubtful accounts and returns 120 120
----------- ------------- ---------
52,933 3,198 56,131
Inventories:
Finished goods 10,782 10,782
Work in process 26,430 26,430
Raw material and supplies 7,063 7,063
----------- ------------- ---------
44,275 0 44,275
Net current assets of discontinued operations 49,054 (48,412) (3) 642
Deferred income taxes 2,186 (2,186) (5) 0
Prepaid expenses and other current assets 969 969
----------- ------------- ---------
Total current assets 188,767 (39,931) 148,836
Property, plant and equipment
Cost 166,857 166,857
Accumulated depreciation 71,192 71,192
----------- ------------- ---------
95,665 0 95,665
Noncurrent assets of discontinued operations 39,526 (39,264) (3) 262
Other assets 7,300 7,300
----------- ------------- ---------
Total Assets $331,258 ($79,195) $252,063
=========== ============= =========
=========== ============= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELTA WOODSIDE INDUSTRIES, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS AT JANUARY 1, 2000
(IN THOUSANDS)
Pro Forma Pro Forma
Historical Adjustments As Adjusted
------------ --------------------------------
<S> <C> <C> <C>
LIABILITIES
Current liabilities
Trade accounts payable 11,691 11,691
Accrued and sundry liabilities 18,173 18,173
Current portion of long-term debt 6,564 (6,564) (4) 0
------------ ------------- ---------
Total current liabilities 36,428 (6,564) 29,864
Long-term debt (less current portion) 150,028 (28) (4) 150,000
Deferred income taxes 4,295 (4,295) (5) 0
Other liabilities and deferred credits 8,523 (1,310) (3) 7,213
SHAREHOLDERS EQUITY
Common Stock, par value $.01 - Authorized
50,000,000 shares issued and outstanding
23,864,000 shares at January 1, 2000 239 239
Additional paid in capital 161,098 (66,998) (3) 94,100
Accumulated deficit (29,353) (29,353)
------------ ------------- ---------
131,984 (66,998) 64,986
------------ ------------- ---------
Total Liabilities and Equity $331,258 ($79,195) $252,063
============ ============= =========
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JANUARY 1, 2000
(in thousands of dollars, unless otherwise noted)
The following is a summary of the adjustments reflected in the unaudited pro
forma condensed consolidated balance sheet:
(1) To reflect the transfer of cash to Delta Apparel and Duck Head in
conjunction with the transaction ($248), the contribution of cash to Duck Head
to fund primarily the repayment of its existing mortgage debt ($6,800), 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 ($14,517).
(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 the assumption or payoff of Delta Woodside debt by Delta Apparel
and Duck Head.
(5) 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
SIX MONTHS ENDED JANUARY 1, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
Pro Forma Pro Forma
Historical Adjustments As Adjusted
------------ ------------- ------------
<S> <C> <C> <C>
Net sales $115,388 $115,388
Cost of goods sold 102,948 102,948
Gross profit on sales 12,440 0 12,440
Selling, general, and administrative expense 8,914 (696) (1) 8,218
Other income (expense) 103 103
Operating profit 3,629 696 4,325
Interest expense 9,137 (114) (2) 9,023
Interest (income) (542) (326) (3) (868)
Net interest expense 8,595 (440) 8,155
Income (loss) from continuing operations
before income taxes (4,966) 1,136 (3,830)
Income tax expense (benefit) 409 (94) (4) 315
Income (loss) from continuing operations (5,375) 1,230 (4,145)
Income from operations of discontinued
operations less applicable income taxes 3,143 (3,143) (5) 0
Net income (loss) ($2,232) ($1,913) ($4,145)
Basic and diluted earnings (loss) per share:
Continuing operations ($0.22) $0.05 ($0.17)
Discontinued operations $ 0.13 ($0.13) $ 0.00
Net income ($0.09) ($0.08) ($0.17)
Weighted average shares outstanding 23,832 23,832 23,832
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 3, 1999 AND THE SIX MONTHS ENDED JANUARY 1, 2000
(in thousands of dollars, unless otherwise noted)
The following is a summary of the adjustments reflected in the unaudited pro
forma 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
$696 for the six months ended January 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
4.1.2 Amendment No. 1 to Shareholder Rights Agreement between
Delta Woodside and First Union National Bank as Rights
Agent, effective as of March 16, 2000.
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 DH 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: March 28, 2000
<PAGE>
EXHIBIT INDEX
4.1.2 Amendment No. 1 to Shareholder Rights Agreement between Delta Woodside
and First Union National Bank as Rights Agent, effective as of March
16, 2000.
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>
AMENDMENT NO. 1
TO
SHAREHOLDER RIGHTS AGREEMENT
The Amendment No. 1 (the "Amendment") to the Shareholder Rights Agreement
---------
dated December 10, 1999 (the "Rights Agreement") by and between Delta Woodside
----------------
Industries, Inc., a South Carolina corporation (the "Company"), and First Union
-------
National Bank as Rights Agent (the "Rights Agent") is entered into by and
-------------
between the Company and the Rights Agent. Capitalized terms used in this
Amendment and not otherwise defined herein have the same meaning ascribed to
such terms in the Rights Agreement.
RECITALS
A. Paragraph 11(c) of the Rights Agreement generally provides in part that
there shall be no adjustment or alteration to the Exercise Price of the
Rights in connection with any distribution to the holders of the Company's
Common Stock of capital stock of any subsidiary of the Company owning a
majority of assets of the Duck Head Apparel Company division or the Delta
Apparel Company division of the Company provided that such distribution is
consummated prior to March 31, 2000.
B. The Company expects to consummate one or more such distributions but not
prior to March 31, 2000. The Company has determined that no such adjustment
or alteration to the Exercise Price should occur if any such distribution
occurs on or before July 31, 2000.
C. Section 27 of the Rights Agreement generally provides in part that, prior
to the Distribution Date, the Rights Agent and the Company shall, if so
directed by the Company, amend the Rights Agreement without the approval of
any holders of certificates representing the Company's Common Stock,
provided that the Rights Agent must consent to any such amendment changing
the rights and duties of the Rights Agent.
AGREEMENT
In consideration for the mutual covenants contained herein and other good
and valuable consideration, the sufficiency of which is hereby acknowledged, the
Company and the Rights Agent hereby agree as follows:
1. Paragraph 11(c) of the Rights Agreement is hereby amended by deleting the
date "March 31, 2000" in the last sentence of such paragraph 11(c) and
replacing it with the date "July 31, 2000."
2. Except as explicitly provided in this Amendment, the Rights Agreement shall
remain in full force and effect and unamended hereby.
3. This Amendment shall be deemed to be a contract made under the laws of the
State of South Carolina and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts
to be made and to be performed entirely within South Carolina.
<PAGE>
4. This Agreement may be executed in any number of counterparts and each of
such counterparts shall for all purposes be deemed to be an original, and
all such counterparts shall together constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and attested, to be effective as of March 16, 2000.
ATTEST: DELTA WOODSIDE INDUSTRIES, INC.
By: /s/ Jane H. Greer By: /s/ E. Erwin Maddrey II
------------------------ -----------------------------
Name: Jane H. Greer Name: E. Erwin Maddrey II
--------------------- ---------------------------
Title: V.P./Secty Title: President
--------------------- --------------------------
ATTEST: FIRST UNION NATIONAL BANK
By: /s/ Johnnie H. Coble By: /s/ Patrick J. Edwards
-------------------------- ---------------------------
Name: Johnnie H. Coble Name: Patrick J. Edwards
----------------------- ------------------------
Title: Corp. Trust Officer Title: Vice President
----------------------- -----------------------
<PAGE>
THE DELTA APPAREL DISTRIBUTION
PARTIES TO THE DISTRIBUTION AGREEMENT
Delta Woodside
---------------
Delta Woodside is a South Carolina corporation with its principal executive
offices located at 233 North Main Street, Suite 200, Greenville, South Carolina
29601 (telephone number: 864-232-8301).
Prior to the Delta Apparel distribution, Delta Woodside and its
subsidiaries had three operating divisions: Delta Mills Marketing Company,
Delta Apparel Company and Duck Head Apparel Company.
- Delta Mills Marketing Company produces a range of cotton, synthetic
and blended finished and unfinished woven products that are sold for
the ultimate production of apparel, home furnishings and other
products. After the Delta Apparel distribution and the Duck Head
distribution, Delta Mills Marketing Company will remain the only
continuing Delta Woodside operation.
- Pursuant to the Delta Apparel distribution, Delta Woodside will
distribute to its stockholders all of the outstanding common stock of
Delta Apparel, which will continue the business formerly conducted by
the Delta Apparel Company division of various subsidiaries of Delta
Woodside. For a description of the business of the Delta Apparel
Company division, see the information under the heading "Business of
Delta Apparel".
- Simultaneously with the Delta Apparel distribution, Delta Woodside
will, pursuant to the Duck Head distribution, distribute to its
stockholders all of the outstanding stock of Duck Head, which will
continue the business formerly conducted by the Duck Head Apparel
Company division of various subsidiaries of Delta Woodside. For a
description of the business of the Duck Head Apparel Company division,
see the information below under the subheading "Duck Head".
Delta Apparel
--------------
Delta Apparel is a Georgia corporation with its principal executive offices
located at 3355 Breckinridge Blvd., Suite 100, Duluth, Georgia 30096 (telephone
number: 770-806-6800).
Duck Head
----------
Duck Head is a Georgia corporation with its principal executive offices
located at 1020 Barrow Industrial Parkway, P.O. Box 688, Winder, Georgia 30680
(telephone number: 770-867-3111). Duck Head's business is designing, sourcing,
producing, marketing and distributing boys' and men's value-oriented casual
sportswear predominantly under the 134-year-old nationally recognized "Duck
Head" (Reg. Trademark) label.
BACKGROUND OF THE DELTA APPAREL DISTRIBUTION
Since the middle of its 1998 fiscal year, Delta Woodside's board of
directors has explored various means, in addition to effectively operating Delta
Woodside's businesses, 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 Delta Apparel Company
division and the Duck Head Apparel Company division would have been separated
into two corporations, and the stock of each of the Delta Apparel corporation
and the Duck Head corporation would have been distributed to all of the Delta
Woodside stockholders. The Delta Woodside board of directors decided that Delta
Woodside would promptly begin the process of soliciting offers for the purchase
of the post spin-off Delta Woodside common stock, and that Delta Woodside would
retain an investment banking firm to assist in the implementation of this
restructuring plan.
On March 16, 1999, Delta Woodside announced that Robert Rockey was assuming
the position of chief executive officer of the Duck Head Apparel Company
division, effective immediately. The announcement stated that, after the
planned spin-off of the Duck Head Apparel Company operation, Mr. Rockey would
serve as chairman and chief executive officer of that new separate corporation.
On March 23, 1999, Delta Woodside announced that it had engaged Prudential
Securities Incorporated (which this document refers to as "Prudential
Securities") to advise the Delta Woodside board of directors with respect to the
previously announced plan to sell the portion of Delta Woodside remaining after
the distribution to the Delta Woodside stockholders of the shares of stock of
Delta Woodside's apparel businesses. The announcement also stated that the Duck
Head Apparel Company division was no longer for sale.
Following this announcement, Delta Woodside provided information--- to
nineteen companies respecting a possible sale of the remaining Delta Woodside.
None of these potential purchasers, however, made an offer for the remaining
Delta Woodside that Delta Woodside considered to be satisfactory.
On April 21, 1999, Delta Woodside announced that Robert W. Humphreys was
assuming the position of president and chief executive officer of the Delta
Apparel Company division. The announcement stated that, after the planned
spin-off of the Delta Apparel Company operation, Mr. Humphreys would serve as
the president and chief executive officer of that new separate corporation.
At a meeting on June 24, 1999, the Delta Woodside board of directors
decided to terminate the process of attempting to sell a post-spin-off Delta
Woodside comprised solely of Delta Mills Marketing Company in line with its
previously-announced plan, because it had not received any satisfactory offer
for the business. The Board determined to continue to explore other strategies
to enhance stockholder value, including: (1) the purchase of the Duck Head
Apparel Company division and the Delta Apparel Company division by the Delta
Mills, Inc. subsidiary, or (2) a spin-off/recapitalization in which the apparel
divisions would be spun-off to the Delta Woodside stockholders as separate
public companies, and substantial cash would be paid out to stockholders from
new borrowings by the remaining Delta Woodside.
<PAGE>
- - Under the purchase of the Duck Head Apparel Company division and the
Delta Apparel Company division by Delta Mills, Inc. scenario, Delta
Woodside, through its wholly-owned subsidiary, Delta Mills, Inc.,
would have continued to own the Duck Head Apparel Company division and
the Delta Apparel Company division. This internal ownership
restructuring could, however, have provided Delta Woodside with
substantial cash, because Delta Mills, Inc. then had a substantial
cash position and its senior note indenture would have permitted it to
use cash for this purpose but not for the purpose of making dividend
payments to its parent company, Delta Woodside. If this purchase
scenario had been adopted, Delta Woodside could have used the cash
provided by Delta Mills, Inc. in the purchase to make acquisitions of
Delta Woodside common stock or other businesses, or for other
purposes.
- - Under the spin-off/recapitalization scenario, Delta Woodside
stockholders would have received, for their Delta Woodside common
shares, shares of each of the new spun-off apparel companies, cash and
stock in the remaining Delta Woodside. Also, additional shares of the
remaining Delta Woodside (representing more than 20% of the then
outstanding shares of the remaining Delta Woodside) would have been
sold to members of management of Delta Mills Marketing Company.
Consummation of the spin-off/recapitalization transaction was to be
conditioned upon receiving a favorable vote of the Delta Woodside
stockholders.
Following this announcement, Delta Woodside, with the assistance of
Prudential Securities, explored the possibility of Delta Mills, Inc. refinancing
its existing $150 million of 9-5/8% Senior Notes with a larger issue of
indebtedness in order to effect the proposed recapitalization. During the time
frame of this examination, however, the interest rates payable by issuers of new
senior debt in the textile and apparel industries became higher than were deemed
acceptable by the Delta Woodside board of directors.
On August 20, 1999, Delta Woodside announced that, due to weakness in the
bond market, Delta Woodside believed that its previously announced
recapitalization/spin-off strategy was not feasible at that time. Delta
Woodside further announced that, because Delta Woodside believed that its
stockholders would best be served by separating the operating companies, Delta
Woodside did not plan to pursue the acquisition of the two apparel divisions by
its textile subsidiary, Delta Mills, Inc., at that time. The announcement also
stated that Delta Woodside was continuing to explore strategic alternatives to
accomplish the separation of its operating companies, and would announce
specific plans in the upcoming months.
On October 4, 1999, Delta Woodside announced that it planned to spin off to
the Delta Woodside stockholders its two apparel businesses (Delta Apparel
Company and Duck Head Apparel Company) as two separate publicly-owned
corporations. The announcement further stated that Delta Woodside was in the
process of transferring various corporate functions to its three operating
divisions (Delta Mills Marketing Company, Delta Apparel Company and Duck Head
Apparel Company). The announcement stated that, upon the complete transfer of
these functions or at the time of the spin-offs (as appropriate), the functions
then being performed at the Delta Woodside level would no longer need to be
performed at that level, and the executive officers of Delta Woodside would
resign their positions with Delta Woodside. The announcement stated that, upon
consummation of the spin-offs, Delta Mills Marketing Company would be Delta
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 DELTA APPAREL DISTRIBUTION
Since the summer of 1998, Delta Woodside's board of directors has been
engaged in the process of exploring various means to maximize stockholder value.
The alternatives that the Delta Woodside Board has examined have included:
(a) A potential sale of the Duck Head Apparel Company division;
(b) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a sale
of the remaining company;
(c) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a
recapitalization of the remaining company that would involve a
cash distribution to Delta Woodside's stockholders by that
remaining company;
(d) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders;
(e) A pro rata taxable spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders;
(f) A disproportionate tax-free spin-off of one of Delta Woodside's
apparel businesses to one of Delta Woodside's major stockholders
accompanied by a pro rata tax-free spin-off of the other apparel
business to all the other stockholders;
(g) A potential sale of the Delta Apparel Company business or assets;
(h) A purchase by Delta Mills, Inc. of the Delta Apparel Company and
the Duck Head Apparel Company businesses; and
(i) Leaving Delta Woodside's three businesses in Delta Woodside in
their current corporate form.
<PAGE>
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, Duck Head Apparel Company and Delta Apparel Company), and
that the best method to accomplish this separation and thereby enhance
stockholder value that is available to Delta Woodside at this time is to effect
a pro rata spin-off to Delta Woodside's stockholders of each of Delta Woodside's
apparel businesses, whether that spin-off is tax-free or taxable for federal
income tax purposes.
In reaching this determination, the Delta Woodside Board took into account
its belief that the separation of Delta Woodside's three businesses will further
the following objectives, among others, and thereby enhance stockholder value:
(a) Permit the grant of equity incentives to the separate management of
each business, which incentives would not be affected by the results
of the other businesses and, therefore, would have excellent potential
to align closely the interests of that management with those of the
stockholders;
(b) Permit the elimination of certain existing corporate overhead expenses
that result from the current need to coordinate the operations of
three distinct businesses that have separate modes of operation and
markets;
<PAGE>
(c) As a reason to accomplish the Duck Head distribution, eliminate the
complaints of certain customers of Delta Mills Marketing Company
(which, as a supplier to those customers, has access to certain of
their competitive information) that a competitor of theirs (Duck Head
Apparel Company) is under common management with Delta Mills Marketing
Company;
(d) Permit each business to obtain, when needed, the best equity and debt
financing possible without being affected by the operational results
of the other businesses;
(e) Permit each business to establish long-range plans geared toward the
expected cyclicality, competitive conditions and market trends in its
own line of business, unaffected by the markets, needs and constraints
of the other businesses;
(f) Promote a more streamlined management structure for each of the three
businesses, better able to respond quickly to customer and market
demands; and
(g) Permit the value of each of the three divisions to be more accurately
reflected in the equity market by separating the results of each
business from the other two businesses.
In reaching its conclusion, the Board also took into account the following
additional factors:
- The opinion delivered to the Delta Woodside board by Houlihan Lokey
Howard & Zukin Financial Advisors, Inc. that is described below;
- The advice provided to the Delta Woodside board by Prudential
Securities that is described below;
- The financial information and statements of Delta Apparel set forth in
this document under the heading, "Unaudited Pro Forma Combined
Financial Statements", and at pages F-1 to F-22;
- The Delta Woodside board's knowledge of the business, operations,
assets and financial condition of Delta Apparel;
- Delta Apparel management's assessment of the prospects of Delta
Apparel;
- The current and prospective economic environment in which Delta
Apparel operates; and
- The terms of the distribution agreement and the tax sharing agreement.
This discussion of the information and factors considered by the Delta
Woodside board is not meant to be exhaustive but is believed to include the
material factors considered by the Delta Woodside board in authorizing the Delta
Apparel distribution. The Delta Woodside board did not quantify or attach any
particular weight to the various factors that it considered in reaching its
determination that the Delta Apparel distribution, the Duck Head distribution
and related transactions are advisable and in the best interests of Delta
Woodside and its stockholders. In reaching its determination, the Delta
Woodside board took the various factors into account collectively and the Delta
Woodside board did not perform a factor_by_factor analysis.
Opinion of Houlihan Lokey
----------------------------
Delta Woodside engaged Houlihan Lokey to provide to the Delta Woodside
board and the Delta Apparel board an opinion as to the solvency of Delta Apparel
as of the time of the Delta Apparel distribution. Delta Woodside selected
Houlihan Lokey based on Houlihan Lokey's extensive experience in providing
solvency opinions.
In consideration of its services in connection with the opinion described
below and a similar opinion with respect to Duck Head, Houlihan Lokey will be
paid a fee of $200,000 plus reasonable out-of-pocket expenses. No portion of
<PAGE>
this fee is contingent upon the consummation of the Delta Apparel distribution
or the Duck Head distribution or the conclusions reached in Houlihan Lokey's
opinions. Delta Woodside has also agreed to provide indemnification to Houlihan
Lokey and certain other parties with respect to certain matters. Houlihan Lokey
has had no other material relationship with Delta Woodside or its subsidiaries
during the past two years.
The preparation of a solvency opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following is a brief summary and general description of the solvency analysis
and valuation methodologies utilized by Houlihan Lokey. Although the summary
sets forth all material facts respecting the opinion of Houlihan Lokey, the
summary does not purport to be a complete statement of the analyses and
procedures applied, the judgments made or the conclusion reached by Houlihan
Lokey or a complete description of its presentation to the Delta Woodside board
or the Delta Apparel board. Houlihan Lokey believes, and so advised the Delta
Woodside board and the Delta Apparel board, that its analyses must be considered
as a whole and that selecting portions of its analyses and of the factors
considered by it, without considering all factors and analyses, could create an
incomplete view of the process underlying its analyses and opinions.
The Delta Apparel distribution and other related transactions disclosed to
Houlihan Lokey are referred to collectively in this summary as the
"Transaction." For purposes of its opinion, Houlihan Lokey assumed that the
third party financing described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
will be entered into on or about the date of the Delta Apparel distribution and
that, prior to the Delta Apparel distribution, the intercompany reorganization
described in "Relationships Among Delta Apparel, Delta Woodside and Duck Head -
Distribution Agreement" will be completed.
Delta Woodside's board of directors has requested that Houlihan Lokey
render its written opinion to the Delta Woodside board and the Delta Apparel
board as to whether, assuming the Transaction has been consummated as proposed,
immediately after and giving effect to the Transaction: (a) on a pro forma
basis, the fair value and present fair saleable value of Delta Apparel would
exceed its respective stated liabilities and identified contingent liabilities,
(b) Delta Apparel should be able to pay its debts as they become absolute and
mature; (c) the capital remaining in Delta Apparel after the Transaction would
not be unreasonably small for the business in which Delta Apparel is engaged, as
management has indicated it is now conducted and is proposed to be conducted
following the consummation of the Transaction; and (d) the financial test for
distributions of the state of incorporation of Delta Apparel (i.e. Georgia) has
been satisfied.
Houlihan Lokey's opinion does not address Delta Woodside's underlying
business decision to effect the Transaction. Houlihan Lokey has not been
requested to, and did not, solicit third party indications of interest in
acquiring all or part of Delta Apparel.
In connection with the preparation of its opinion, Houlihan Lokey made such
reviews, analyses and inquiries as it deemed necessary and appropriate under the
circumstances. Among other things, Houlihan Lokey:
(i) reviewed Delta Apparel's annual financial statements for the 1997,
1998 and 1999 fiscal years and year-to-date statements for the first
six months of fiscal year 2000, which Delta Apparel's and Delta
Woodside's managements have identified as the most current information
available;
(ii) reviewed the proposal from the third party lender to provide Delta
Apparel revolving credit and term loan facilities;
(iii)spoke with certain members of the senior management of Delta Woodside
and Delta Apparel to discuss the operations, financial condition,
future prospects and projected operations and performance of Delta
Apparel;
(iv) toured the Edgefield, SC (Rainsford) and Maiden, NC manufacturing
facilities of Delta Apparel;
(v) reviewed forecasts and projections prepared by Delta Apparel's
management with respect to the periods ended January 1, 2000 through
fiscal year 2004;
<PAGE>
(vi) reviewed marketing and promotional material relating to Delta Apparel;
(vii)reviewed the preliminary registration statement filed with the SEC for
Delta Apparel;
(viii) reviewed other publicly available financial data for Delta Apparel
and certain companies that Houlihan Lokey deems comparable to Delta
Apparel; and
(ix) conducted such other studies, analyses and investigations as Houlihan
Lokey has deemed appropriate.
In assessing the solvency of Delta Apparel immediately after and giving
effect to the Transaction, Houlihan Lokey:
(i) analyzed the fair value and present fair saleable value of Delta
Apparel's assets relative to Delta Apparel's stated liabilities and
identified contingent liabilities on a pro forma basis ("balance sheet
test");
(ii) assessed Delta Apparel's ability to pay its debts as they become
absolute and mature ("cash flow test"); and
(iii)assessed the capital remaining in Delta Apparel after the Transaction
so as not to be unreasonably small ("reasonable capital test").
Balance Sheet Test
The Balance Sheet Test determines whether or not the fair value and present
fair salable value of Delta Apparel's assets exceeds its stated liabilities and
identified contingent liabilities after giving effect to the Transaction. This
test requires an analysis of the fair market value of Delta Apparel as a
going-concern. As part of this analysis, Houlihan Lokey considered, among other
things,
(i) historical and projected financial performance for Delta Apparel as
prepared by Delta Apparel;
(ii) the business environment in which Delta Apparel competes;
(iii)performance of certain publicly traded companies deemed by Houlihan
Lokey to be comparable to Delta Apparel, in terms of, among other
things: size, profitability, financial leverage and growth;
(iv) capitalization rates ("multiples") for certain publicly traded
companies deemed by Houlihan Lokey to be comparable to Delta Apparel
(including (a) Enterprise Value ("EV")/Revenue; (b) EV/EBITDA; and,
(c) EV/EBIT);
(v) multiples derived from acquisitions of companies deemed by Houlihan
Lokey to be comparable to Delta Apparel;
(vi) discounted cash flow approaches;
(vii) the capital structure and debt obligations of Delta Apparel; and
(viii) non-operating assets and identified contingent liabilities.
In determining the fair value and present fair saleable value of the
aggregate assets of Delta Apparel, the following three methodologies were
employed: comparable public company, comparable transaction and discounted cash
flow.
Market Multiple Approach. This approach involved the multiplication of
various earnings and cash flow measures by appropriate risk-adjusted multiples.
Multiples were determined through an analysis of: (i) publicly traded companies
<PAGE>
that were determined by Houlihan Lokey to be comparable from an investment
standpoint to Delta Apparel ("Comparable Public Companies"); and, (ii) change of
control transactions involving companies that were determined by Houlihan Lokey
to be comparable to Delta Apparel from an investment standpoint ("Comparable
Transactions"). For Delta Apparel, Houlihan Lokey selected four publicly traded
domestic companies that are engaged in the manufacturing and marketing of
private label and branded apparel. A comparative risk analysis between Delta
Apparel and the Comparable Public Companies formed the basis for the selection
of appropriate risk adjusted multiples for Delta Apparel. The risk analysis
incorporates both quantitative and qualitative risk factors which relate to,
among other things, the nature of the industry in which Delta Apparel and the
Comparable Public Companies are engaged. The value indications derived from
capitalization of the relevant performance fundamentals for Delta Apparel were
adjusted to reflect control value indications for Delta Apparel consistent with
the required standard of value. For the Comparable Transactions, Houlihan Lokey
analyzed apparel industry merger and acquisition transactions between 1998 and
1999 where financial information was publicly disclosed. Market multiples were
developed from sixteen comparable transactions, of which seven were 1999
transactions. From the application of market multiples, indications of value
were developed through the capitalization of the relevant performance
fundamentals of Delta Apparel. The derived value indications reflect control
values for Delta Apparel consistent with the fair values present and fair
salable value standard.
Discounted Cash Flow Approach. The Discounted Cash Flow Approach involved
an estimation of the present value of projected cash flows to be generated by
Delta Apparel. The projected debt-free cash flows were developed from forecasts
prepared by management of Delta Apparel. In addition to the respective cash
flows for the projected period 2000 to 2004, a determination of terminal values
as of June 30, 2004 was made based on the anticipated fair and salable values of
Delta Apparel at that time. In this case, the estimation of terminal values
involved using the market multiple approach already described above, where
projected fundamentals were capitalized based on selected multiples.
Indications of value were developed by applying an appropriate discount rate or
cost of capital to the projected cash flows and terminal value. The discount
rate reflects the degree of risk inherent in the assets of Delta Apparel and
their ability to produce the projected cash flows.
Cash Flow Test
The Cash Flow Test focuses on whether or not Delta Apparel should be able
to repay its debts as they become absolute and mature (including the debts
incurred in the Transaction). This test involves a two-step analysis of Delta
Apparel's financial projections, (i) examines the consistency of the projections
with historical performance, current marketing strategies and operating cost
structure; and (ii) tests the sensitivity of the projections to changes in key
variables, including revenue growth, operating margins and capital expenditures.
In testing cash flows, Houlihan Lokey performs sensitivity analyses to determine
the "safety margin" available to deal with unexpected downturns in Delta
Apparel's ability to generate operating cash flow.
Reasonable Capital Test
The Reasonable Capital Test follows from the Balance Sheet and Cash Flow
Tests. A company may have assets that exceed liabilities, but if the amount is
too small to provide some downside protection, the capital amount may not be
deemed to be adequate and, in such a situation, the business would fail the
Reasonable Capital Test. The determination as to whether the net assets
remaining with Delta Apparel constitute unreasonably small capital involves an
analysis of various factors, including, (i) the degree of sensitivity
demonstrated in the cash flow test; (ii) historical and expected volatility in
revenues, cash flow and capital expenditures; (iii) the adequacy of working
capital; (iv) historical and expected volatility of going-concern asset values;
(v) the maturity structure and the ability to refinance Delta Apparel's
obligations; (vi) the magnitude, timing and nature of identified contingent
liabilities; and (vii) the nature of the business and the impact of financial
leverage on its operations.
Solvency
Based upon the foregoing, and in reliance thereon, it is Houlihan Lokey's
opinion as of March 15, 2000 that, assuming the Transaction has been consummated
as proposed, immediately after and giving effect to the Transaction:
<PAGE>
(i) on a pro forma basis, the fair value and present fair saleable value
of Delta Apparel's assets would exceed Delta Apparel's stated
liabilities and identified contingent liabilities;
(ii) Delta Apparel should be able to pay its debts as they become absolute
and mature; and
(iii)the capital remaining in Delta Apparel after the Transaction would
not be unreasonably small for the business in which Delta Apparel is
engaged, as management has indicated it is now conducted and is
proposed to be conducted following the consummation of the
Transaction.
<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 Delta
Apparel can currently be sold, and Houlihan Lokey knows of no such efforts by
others. Because the sale of any business enterprise involves numerous
assumptions and uncertainties, not all of which can be quantified or ascertained
prior to engaging in an actual selling effort, Houlihan Lokey expresses no
opinion as to whether Delta Apparel would actually be sold for the amount
Houlihan Lokey believes to be its fair value and present fair saleable value.
Houlihan Lokey has relied upon and assumed, without independent
verification, that the financial forecasts and projections provided to it have
been reasonably prepared and reflect the best currently available estimates of
the future financial results and condition of Delta Apparel, and that there has
been no material adverse change in the assets, financial condition, business or
prospects of Delta Apparel since the date of the most recent financial
statements made available to Houlihan Lokey.
Houlihan Lokey has not independently verified the accuracy and completeness
of the information supplied to it with respect to Delta Apparel, and does not
assume any responsibility with respect to it. Houlihan Lokey has not made any
physical inspection or independent appraisal of any of the properties or assets
of Delta Apparel. Houlihan Lokey's opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by
Houlihan Lokey at the date of its opinion.
Houlihan Lokey's opinion is furnished solely for the benefit of the Delta
Woodside board and the Delta Apparel board and may not be relied upon by any
other person without Houlihan Lokey's prior written consent. Houlihan Lokey's
opinion is delivered to each recipient subject to the conditions, scope of
engagement, limitations and understandings set forth in its opinion and Houlihan
Lokey's engagement letter with Delta Woodside.
Advice of Prudential Securities
----------------------------------
Delta Woodside's board of directors received financial advice from
Prudential Securities regarding the issues surrounding the separation of the
apparel and textile fabric businesses. The points described above under the
heading "The Delta Apparel Distribution - Reasons for the Delta Apparel
Distribution" include the material factors discussed by Prudential Securities.
Prudential Securities also advised the Delta Woodside board regarding the issues
surrounding various alternatives to the Delta Apparel distribution and the Duck
Head distribution, including a sale of either or both of Delta Apparel or Duck
Head and a liquidation of either or both of Delta Apparel or Duck Head.
Prudential Securities' financial advice was based on its analysis of the trading
prices and trading multiples of approximately 11 textile and apparel companies
which Prudential Securities believed provided relevant comparisons. In
addition, Prudential Securities reviewed recent acquisitions, also deemed to
provide relevant comparisons, in the textile and apparel industries including
the prices paid and multiples of financial performance that those acquisitions
implied. Prudential Securities' advice regarding Delta Woodside's alternatives
with regard to Delta Apparel was also based on its review and understanding of
prevailing textile and apparel market conditions, as well as its review of Delta
Apparel's historical market performance.
Prudential Securities was not requested to, and did not, undertake the
types of analyses customary to deliver a financial opinion and did not deliver
any such opinion.
Pursuant to an engagement letter, Prudential Securities has been paid by
Delta Woodside an advisory fee of $500,000 for its services. Delta Woodside has
agreed to indemnify Prudential Securities for certain liabilities relating to or
arising from Prudential Securities' engagement by Delta Woodside. Prudential
Securities has also performed various investment banking services for Delta
Woodside in the past, and has received customary fees for those services.
Prudential Securities is a nationally recognized investment banking firm
and, as a customary part of its investment banking activities, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements, and
valuations for corporate and other purposes. Delta Woodside selected Prudential
Securities because of its expertise, reputation and familiarity with Delta
Woodside. In the ordinary course of business, Prudential Securities and its
affiliates may actively trade or hold the securities and other instruments and
obligations of Delta Woodside for their own account and for the accounts of
customers and, accordingly, may at any time hold long or short positions in such
securities, instruments or obligations.
<PAGE>
DESCRIPTION OF THE DELTA APPAREL DISTRIBUTION
The distribution agreement among Delta Woodside, Delta Apparel and Duck
Head sets forth the general terms and conditions relating to, and the
relationship of the three corporations after, the Delta Apparel distribution.
For an extensive description of the distribution agreement, see the section of
this document found under the heading "Relationship Among Delta Apparel, Delta
Woodside and Duck Head--Distribution Agreement".
Delta Woodside plans to effect the Delta Apparel distribution on or about
May 12, 2000 by distributing all of the issued and outstanding shares of Delta
Apparel common stock to the record holders of Delta Woodside common stock on the
record date for this transaction, which is April 28, 2000. Delta Woodside will
distribute one share of Delta Apparel common stock to each of those holders for
every ten shares of Delta Woodside common stock owned of record by that holder.
The actual total number of shares of Delta Apparel common stock that Delta
Woodside will distribute will depend on the number of shares of Delta Woodside
common stock outstanding on the record date. Based upon the one-for-ten Delta
Apparel distribution ratio, the number of shares of Delta Woodside common stock
outstanding on March 3, 2000 and the number of Delta Woodside shares to be
issued as described in "Interests of Directors and Executive Officers in the
Delta Apparel Distribution - Payments in Connection with Delta Apparel
Distribution and Duck Head Distribution", Delta Woodside will distribute
approximately 2,400,000 shares of Delta Apparel common stock to holders of Delta
Woodside common stock, which will then constitute all of the outstanding shares
of Delta Apparel common stock. Delta Apparel common shares will be fully paid
and nonassessable, and the holders of those shares will not be entitled to
preemptive rights. For a further description of Delta Apparel common stock and
the rights of its holders, see the portion of this document located under the
heading "Description of Delta Apparel Capital Stock".
For those holders of Delta Woodside common stock who hold their shares of
Delta Woodside common stock through a stockbroker, bank or other nominee, Delta
Woodside's distribution agent, First Union National Bank, will transfer the
shares of Delta Apparel common stock to the registered holders of record who
will make arrangements to credit their customers' accounts with Delta Apparel
common stock. Delta Woodside anticipates that stockbrokers and banks generally
will credit their customers' accounts with Delta Apparel common stock on or
about May 12, 2000.
If a holder of Delta Woodside common stock owns a number of shares of Delta
Woodside common stock that is not a whole multiple of ten and therefore would be
entitled to receive a fraction of a whole share of Delta Apparel common stock,
that holder will receive cash instead of a fractional share of Delta Apparel
common stock. The distribution agent will aggregate into whole shares the
fractional shares to be cashed out and sell them as soon as practicable in the
open market at then prevailing prices on behalf of those registered holders who
would otherwise be entitled to receive less than whole shares. These registered
holders will receive a cash payment in the amount of their pro rata share of the
total proceeds of those sales, less any brokerage commissions. The distribution
agent will pay the net proceeds from sales of fractional shares based upon the
average selling price per share of Delta Apparel common stock of all of those
sales, less any brokerage commissions. Delta Apparel expects the distribution
agent to make sales on behalf of holders who would receive a fraction of a whole
Delta Apparel common share in the Delta Apparel distribution as soon as
practicable after the Delta Apparel distribution date. None of Delta Woodside,
Delta Apparel or the distribution agent guarantees any minimum sale price for
those fractional shares of Delta Apparel common stock, and no interest will be
paid on the sale proceeds of those shares.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material US federal income tax
consequences generally applicable to a Delta Woodside stockholder who is a US
Holder. The term "US Holder" means a beneficial owner of Delta Woodside shares
that is (i) a citizen or resident of the United States, (ii) a corporation,
partnership (other than certain partnerships as may be provided in the
applicable provisions of the US Treasury Regulations), or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to US
<PAGE>
federal income taxation regardless of its source, (iv) a trust if (a) a US court
is able to exercise primary supervision over the trust's administration and (b)
one or more US persons have the authority to control all of the trust's
substantial decisions, or (v) otherwise subject to US federal income taxation on
a net income basis in respect of the Delta Woodside shares.
The following description is for general purposes only and is based on the
Internal Revenue Code of 1986, as amended from time to time (the "Code"), US
Treasury Regulations and judicial and administrative interpretations thereof,
all as in effect on the date of this document and all of which are subject to
change, possibly retroactively. The tax treatment of a US Holder may vary
depending upon the holder's particular situation. For instance, certain
holders, including, but not limited to, insurance companies, tax-exempt
organizations, financial institutions, persons subject to the alternative
minimum tax, dealers in securities or currencies, persons that have a
"functional currency" other than the US dollar or as part of a "hedging" or
"conversion" transaction for US federal income tax purposes and persons owning,
directly or indirectly, 5 percent or more of the Delta Woodside shares may be
subject to special rules not discussed below. The following summary is limited
to investors who hold the Delta Woodside shares as "capital assets" within the
meaning of Section 1221 of the Internal Revenue Code. The discussion below does
not address the effect of any other laws (including other federal, state, local
or foreign tax laws) on a US Holder of Delta Woodside shares. As such, the
summary does not discuss US federal estate and gift tax considerations or US
state and local tax considerations.
Delta Woodside has structured the Delta Apparel distribution and the Duck
Head distribution to qualify as tax-free spin offs for federal income tax
purposes under Section 355 of the Internal Revenue Code. Section 355 treats a
spin-off as tax free if the conditions of that statute are satisfied.
Delta Woodside has not sought a ruling from the US Internal Revenue Service
("IRS") regarding the Delta Apparel distribution or the Duck Head distribution,
in part because neither distribution satisfies all the conditions imposed by the
IRS for such a ruling. The fact that Delta Woodside is not eligible to receive a
private letter ruling from the IRS on the issue does not, however, in and of
itself, mean that the distributions do not qualify as tax-free spin-offs under
Section 355. Whether the Delta Apparel distribution and the Duck Head
distribution qualify under Section 355 as tax-free spin-offs will depend on
whether the criteria in Section 355 and the relevant rules and regulations of
the IRS are satisfied.
Delta Woodside has obtained an opinion from KPMG LLP that it is more likely
than not that the each of the Delta Apparel distribution and the Duck Head
distribution qualifies as tax-free under Code Section 355.
Material Federa Income Tax Consequences if the Delta Apparel Distribution
---------------------------------------------------------------------------
and the Duck Head Distribution Qualify as Tax-Free Spin-Offs under Code
---------------------------------------------------------------------------
Section 355
---------------------------------------------------------------------------
If the Delta Apparel distribution and the Duck Head distribution qualify as
tax-free spin-offs under Code Section 355, then:
1. The US Holders of Delta Woodside stock who receive those shares will not
recognize gain upon either of the distributions, except as described
immediately below with respect to fractional shares.
2. Cash, if any, received by a US Holder of Delta Woodside stock instead of a
fractional share of Delta Apparel common stock or Duck Head common stock
will be treated as received in exchange for that fractional share. That US
Holder will recognize gain or loss to the extent of the difference between
his, her or its tax basis in that fractional share and the amount received
for that fractional share, and, provided that fractional share is held as a
capital asset, the gain or loss will be capital gain or loss.
3. Each US Holder of Delta Woodside stock will be required to apportion his,
her or its tax basis in the US Holder's Delta Woodside shares between the
Delta Woodside shares retained and the Delta Apparel shares and Duck Head
shares received, with this apportionment to be made in proportion to the
shares' relative fair market values for federal income tax purposes
immediately after the distributions.
4. The holding period for the Delta Apparel shares and the Duck Head shares
received by a US Holder in the distributions will be the same as the US
Holder's holding period for the Delta Woodside shares with respect to which
the Delta Apparel distribution and the Duck Head distributions are made.
<PAGE>
5. No gain or loss will be recognized by Delta Woodside with respect to the
Delta Apparel distribution or the Duck Head distribution, except to the
extent of any excess loss accounts or deferred intercompany gains.
Delta Woodside anticipates that in connection with the distributions Delta
Woodside will recognize gain as a result of deferred intercompany gains, but
that this gain will be offset by Delta Woodside's net operating losses.
US Treasury Regulations Section 1.355-5 requires that each US Holder that
receives Delta Apparel shares in the Delta Apparel distribution and Duck Head
shares in the Duck Head distribution attach a statement to his, her or its US
federal income tax return for the taxable year in which the distributions occur,
showing the applicability of Code Section 355 to the Delta Apparel distribution
and the Duck Head distribution. US Holders should consult their own tax
advisors regarding these disclosure requirements.
As noted above, Delta Woodside has not sought a ruling from the IRS
regarding the Delta Apparel distribution or the Duck Head distribution. The
fact that no ruling has been sought should not be construed as an indication
that the IRS would necessarily reach a different conclusion regarding the Delta
Apparel distribution or the Duck Head distribution than the conclusion set out
in the opinion of KPMG LLP. The opinion of KPMG LLP referred to in this
description is not binding upon the IRS, any other tax authority or any court,
and no assurance can be given that a position contrary to those expressed in the
opinion of KPMG LLP will be not asserted by the tax authority and ultimately
sustained by a court of law.
Material Federal Income Tax Consequences if the Delta Apparel Distribution
---------------------------------------------------------------------------
and the Duck Head Distribution Do Not Qualify as Tax-Free Spin-Offs under
---------------------------------------------------------------------------
Section 355
-----------
If the Delta Apparel distribution and the Duck Head distribution do not
qualify as tax-free spin-offs under Section 355, then the following are the
material federal income tax consequences to each participating Delta Woodside
stockholder and to Delta Woodside:
1. Each Delta Woodside stockholder will recognize dividend income to the
extent of the lesser of (a) the value of the Delta Apparel shares and the
Duck Head shares received (together with any cash received for any
fractional share) or (b) the stockholder's pro rata share of the
accumulated earnings and profits of Delta Woodside for federal income tax
purposes through the end of fiscal year 2000. This dividend income will not
reduce any Delta Woodside stockholder's basis in his, her or its Delta
Woodside shares.
a. The fair market value for federal income tax purposes of the Delta
Apparel shares and the Duck Head shares received by the Delta Woodside
stockholders in the distributions will depend on the trading prices of
the Delta Apparel shares and the Duck Head shares around the time of
the distribution. Delta Woodside is not able at this time to predict
what those values will be.
b. Delta Woodside's accumulated earnings and profits through fiscal year
1999 were approximately $15.4 million (approximately $0.64 per Delta
Woodside share). The amount, if any, of Delta Woodside's earnings and
profits for fiscal year 2000 cannot be determined at this time.
2. Any value of the Delta Apparel shares and Duck Head shares (together with
any cash received for any fractional share) that exceeds the Delta Woodside
stockholder's pro rata share of Delta Woodside's accumulated earnings and
profits through fiscal year 2000 will constitute a return of capital to
that stockholder (i.e. the stockholder will not be taxed on that value) up
to the stockholder's basis in his, her or its Delta Woodside shares, and
the stockholder's basis in his, her or its Delta Woodside shares will be
reduced accordingly. Any remaining value of the Delta Apparel shares and
Duck Head shares (together with any cash received for any fractional share)
in excess of the Delta Woodside stockholder's basis in his, her or its
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.
<PAGE>
3. The Delta Woodside stockholder's tax basis in the Delta Apparel shares and
the Duck Head shares received in the distributions will be equal to the
fair market value for federal income tax purposes of those shares at the
time of the distributions. The stockholder's holding period for those
shares will begin on the date of the distributions.
4. The Delta Apparel distribution and the Duck Head distribution will also be
taxable as a gain to Delta Woodside, to the extent of the excess of the
value for federal income tax purposes of the Delta Apparel shares and the
Duck Head shares distributed over their tax bases to Delta Woodside. Delta
Woodside believes that any federal income tax liability to it resulting
from the Delta Apparel distribution and the Duck Head distribution will not
be material, because any applicable recognized income will be offset by
Delta Woodside's net operating losses. Any gain recognized by Delta
Woodside on the Delta Apparel distribution or the Duck Head distribution
will increase the fiscal year 2000 earnings and profits. Delta Woodside
cannot at this time calculate the amount of this gain because it is unable
to forecast what the initial trading prices will be for the Delta Apparel
shares or the Duck Head shares, which will be the federal income tax values
of the Delta Apparel shares and the Duck Head shares for purposes of this
calculation.
THE FOREGOING IS A GENERAL DISCUSSION AND IS NOT INTENDED TO SERVE AS
SPECIFIC ADVICE FOR ANY PARTICULAR DELTA WOODSIDE STOCKHOLDER, SINCE THE TAX
CONSEQUENCES OF THE DELTA APPAREL DISTRIBUTION AND THE DUCK HEAD DISTRIBUTION TO
EACH STOCKHOLDER WILL DEPEND UPON THAT STOCKHOLDER'S OWN PARTICULAR
CIRCUMSTANCES. EACH STOCKHOLDER SHOULD CONSULT HIS, HER OR ITS OWN ADVISORS AS
TO THE FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES TO THAT STOCKHOLDER OF
THE DELTA APPAREL DISTRIBUTION AND THE DUCK HEAD DISTRIBUTION.
KPMG LLP is an internationally recognized accounting, tax and consulting
firm and, as a customary part of its tax practice, is regularly engaged to
provide opinions on the federal income tax consequences of merger and
acquisition transactions. Delta Woodside selected KPMG LLP because of its
expertise and its familiarity with Delta Woodside, Delta Apparel and Duck Head.
In the past, KPMG LLP has acted as the independent auditor of Delta Woodside's
financial statements and as its tax advisor. KPMG LLP has also provided various
consulting services to Delta Woodside. KPMG LLP has received customary fees for
those services.
Pursuant to an engagement letter, Delta Woodside has agreed to pay KPMG LLP
a fee of $250,000 in connection with the preparation and delivery of its opinion
on the federal income tax consequences of the Delta Apparel and Duck Head
distributions. Delta Woodside has agreed to indemnify KPMG LLP for certain
liabilities related to, arising out of or in connection with KPMG LLP's
engagement by Delta Woodside.
Net Operating Loss Carry Forwards
-------------------------------------
As of July 3, 1999, Delta Woodside had net operating loss carry forwards,
for federal income tax purposes, of approximately $68 million. Following the
Delta Apparel distribution and the Duck Head distribution, and assuming the
distributions are tax-free pursuant to Code Section 355, approximately $56
million of this net operating loss carry forward will remain as a tax attribute
of Delta Woodside as of July 3, 1999 ($10 million of which will be subject to
limitation under the separate return limitation rules), approximately $9 million
will be a tax attribute of Delta Apparel as of July 3, 1999 and approximately $3
million will be a tax attribute of Duck Head as of July 3, 1999. Delta
Apparel's and Duck Head's Federal net operating losses will expire at various
dates in fiscal years 2011 through 2019.
Prior to the Delta Apparel distribution and the Duck Head distribution, the
Delta Apparel Company division and the Duck Head Apparel Company division were
part of the Delta Woodside consolidated group, and the net operating losses of
any member of the Delta Woodside consolidated group were generally available to
reduce the consolidated federal taxable income of the group. For financial
reporting purposes, prior to the Delta Apparel distribution and the Duck Head
distribution each of Delta Apparel and Duck Head carries "deferred tax assets"
on its balance sheet to reflect, among other matters, the financial impact of
their respective hypothetical separate company net operating loss carry
forwards. For federal income tax purposes, however, tax attributes, such as
net operating loss carry forwards, remain with the corporate entity, not the
division, that generated them. Therefore, with the Delta Apparel distribution
and the Duck Head distribution, tax attributes, including the Delta Woodside
consolidated federal net operating loss carry forward, will be allocated among
Delta Woodside, Delta Apparel and Duck Head in accordance with the federal
consolidated return regulations.
<PAGE>
The pro forma balance sheet of Delta Apparel that is included under the
heading "Unaudited Pro Forma Combined Financial Statements" reflects Delta
Apparel's expected allocable portion of the pre-distribution Delta Woodside
consolidated federal net operating loss carry forward.
ACCOUNTING TREATMENT
The Delta Apparel distribution and the Duck Head distribution will be
accounted for in accordance with United States generally accepted accounting
principles. Accordingly, the Delta Apparel distribution will be accounted for
by Delta Woodside based on the recorded amounts of the net assets being
spun-off. Delta Woodside will charge directly to equity as a dividend the
historical cost carrying amount of the net assets of Delta Apparel.
<PAGE>
RELATIONSHIPS AMONG DELTA APPAREL,
DELTA WOODSIDE AND DUCK HEAD
This section describes the primary agreements among Delta Apparel, Delta
Woodside and Duck Head that will define the ongoing relationships among them and
their respective subsidiaries after the Delta Apparel distribution and is
expected to provide for the orderly separation of the three companies. The
following description of the distribution agreement and the tax sharing
agreement summarizes the material terms of those agreements. Delta Apparel has
filed those agreements as exhibits to its Registration Statement on Form 10
filed with the Securities and Exchange Commission. This document is a part of
that registration statement.
DISTRIBUTION AGREEMENT
Delta Apparel has entered into a distribution agreement with Delta Woodside
and Duck Head as of March 15, 2000. The distribution agreement provides for the
procedures for effecting the Delta Apparel distribution and the Duck Head
distribution. For this purpose, as summarized below, the distribution agreement
provides for the principal corporate transactions and procedures for separating
the Delta Apparel Company division's business and the Duck Head Apparel Company
division's business from each other and the rest of Delta Woodside. Also, as
summarized below, the distribution agreement defines the relationships among
Delta Apparel, Delta Woodside and Duck Head after the Delta Apparel distribution
with respect to, among other things, indemnification arrangements and employee
benefit arrangements.
Intercompany reorganization
----------------------------
The distribution agreement provides, that, no later than the time the Delta
Apparel distribution occurs, Delta Woodside, Delta Apparel and Duck Head will
have caused the following to have been effected:
(a) Delta Woodside will have contributed, as contributions to capital, all
net debt amounts owed to it by the corporations that currently conduct
the Delta Apparel Company division's business and the Duck Head
Apparel Company division's business. The Delta Apparel Company
division's assets are currently owned by several of Delta Woodside's
wholly-owned subsidiaries. The Duck Head Apparel Company division's
assets are currently owned by Delta Woodside and several of its
wholly-owned subsidiaries.
(b) All the assets used in the operations of the Delta Apparel Company
division's business will have been transferred to Delta Apparel or a
subsidiary of Delta Apparel to the extent not already owned by Delta
Apparel or its subsidiaries. This transfer will include the sale by
Delta Mills to Delta Apparel of the Rainsford plant, located in
Edgefield, SC, which is described below under the subheading "Other
Relationships".
(c) Delta Apparel will have assumed all of the liabilities of the Delta
Apparel Company division of Delta Woodside, and will have caused all
holders of indebtedness for borrowed money that are part of the
assumed Delta Apparel liabilities and all lessors of leases that are
part of the assumed Delta Apparel liabilities to agree to look only to
Delta Apparel or a subsidiary of Delta Apparel for payment of that
indebtedness or lease (except where Delta Woodside or Duck Head, as
applicable, consents to not being released from the obligations).
(d) All the assets used in the operations of the Duck Head Apparel Company
division's business will have been transferred to Duck Head or a
subsidiary of Duck Head to the extent not already owned by Duck Head
or its subsidiaries.
(e) Duck Head will have assumed all of the liabilities of the Duck Head
Apparel Company division of Delta Woodside, and will have caused all
holders of indebtedness for borrowed money that are part of the
assumed Duck Head liabilities and all lessors of leases that are part
of the assumed Duck Head liabilities to agree to look only to Duck
Head or a subsidiary of Duck Head for payment of that indebtedness or
lease (except where Delta Woodside or Delta Apparel, as applicable,
consents to not being released from the obligations).
<PAGE>
(f) Delta Woodside will have caused all holders of indebtedness for
borrowed money and all lessors of leases that are not part of the
liabilities assumed by Delta Apparel or the liabilities assumed by
Duck Head to agree to look only to Delta Woodside or a remaining
subsidiary of Delta Woodside for payment of that indebtedness or lease
(except where Delta Apparel or Duck Head, as applicable, consents to
not being released from the obligations).
Indemnification
---------------
Each of Delta Woodside, Delta Apparel and Duck Head has agreed to indemnify
each other and their respective directors, officers, employees and agents
against any and all liabilities and expenses incurred or suffered that arise out
of or pertain to:
(a) any breach of the representations and warranties made by it in the
distribution agreement;
(b) any breach by it of any obligation under the distribution agreement;
(c) the liabilities assumed or retained by it under the distribution
agreement; or
(d) any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission of a material fact contained in any of
its disclosure documents filed by it with the SEC, except insofar as
the misstatement or omission was based upon information furnished to
the indemnifying party by the indemnified party.
Employee Matters
-----------------
Delta Woodside will cause the employees of the Delta Apparel Company
division to become employees of Delta Apparel, Delta Apparel will assume the
accrued employee benefits of these employees and Delta Woodside will cause the
account balance of each of these employees in any and all of Delta Woodside's
employee benefit plans (other than the Delta Woodside stock option plan) to be
transferred to a comparable employee benefit plan of Delta Apparel.
Intercompany Accounts
----------------------
Amounts owed by Delta Apparel to Delta Mills for yarn previously sold by
Delta Mills to Delta Apparel will be paid in the ordinary course of business.
As of January 1, 2000, these amounts aggregated approximately $3.1 million.
Other than any amounts owed under the tax sharing agreement and except as
provided in the distribution agreement, generally all other intercompany
receivable, payable and loan balances existing as of the time of the Delta
Apparel distribution between Delta Apparel, on the one hand, and Duck Head or
Delta Woodside, on the other hand, will be deemed to have been paid in full by
the party or parties owing the relevant obligation.
<PAGE>
Transaction Expenses
---------------------
Generally, all costs and expenses incurred in connection with the Delta
Apparel distribution, the Duck Head distribution and related transactions shall
be paid by Delta Woodside, Duck Head and Delta Apparel proportionately in
accordance with the respective benefits received by Delta Woodside, Duck Head
and Delta Apparel as determined in good faith by the parties; provided that the
holders of the Delta Woodside shares shall pay their own expenses, if any,
incurred in connection with the Delta Apparel distribution and the Duck Head
distribution.
TAX SHARING AGREEMENT
Delta Apparel will enter into a tax sharing agreement with Delta Woodside
and Duck Head that will describe, among other things, each company's rights and
obligations relating to tax payments and refunds for periods before and after
the Delta Apparel distribution and related matters like the filing of tax
returns and the handling of audits and other tax proceedings. The tax sharing
agreement also describes the indemnification arrangements with respect to tax
matters among Delta Apparel and its subsidiaries (which this document refers to
as the Delta Apparel tax group), Delta Woodside and its subsidiaries after the
Delta Apparel distribution and the Duck Head distribution (which this document
refers to as the Delta Woodside tax group) and Duck Head and its subsidiaries
(which this document refers to as the Duck Head tax group).
Under the tax sharing agreement, the allocation of tax liabilities and
benefits is generally as follows:
- With respect to federal income taxes:
(a) For each taxable year that ends prior to the Delta Apparel
distribution, Delta Woodside shall be responsible for paying any
increase in federal income taxes, and shall be entitled to
receive the benefit of any refund of or saving in federal income
taxes, that results from any tax proceeding with respect to any
returns relating to federal income taxes of the Delta Woodside
consolidated federal income tax group.
(b) For the taxable period ending on the date of the Delta Apparel
distribution, Delta Woodside shall be responsible for paying any
federal income taxes, and shall be entitled to any refund of or
saving in federal income taxes, with respect to the Delta
Woodside consolidated federal income tax group.
- With respect to state income, franchise or similar taxes, for each
taxable period that ends prior to or on the date of the Delta Apparel
distribution, each corporation that is a member of the Delta Woodside
tax group, the Duck Head tax group or the Delta Apparel tax group
shall be responsible for paying any of those state taxes, and any
increase in those state taxes, and shall be entitled to receive the
benefit of any refund of or saving in those state taxes, with respect
to that corporation (or any predecessor by merger to that corporation)
or that results from any tax proceeding with respect to any returns
relating to those state taxes of that corporation (or any predecessor
by merger of that corporation).
- With respect to federal employment taxes
(a) Delta Woodside shall be responsible for the federal employment
taxes payable with respect to the compensation paid, whether
before, on or after the date of the Delta Apparel distribution,
by any member of the Delta Woodside federal income tax
consolidated group for any period ending prior to or on the date
of the Delta Apparel distribution or by any member of the Delta
Woodside tax group for any period after that date to all
individuals who are past or present employees of any business of
Delta Woodside other than the business of Delta Apparel or the
business of Duck Head.
(b) Duck Head shall be responsible for the federal employment taxes
payable with respect to the compensation paid, whether before, on
or after the date of the Duck Head distribution, by any member of
the Delta Woodside
<PAGE>
federal income tax consolidated group for any period ending prior
to or on the date of the Duck Head distribution or by any member
of the Duck Head tax group for any period after that date to all
individuals who are past or present employees of the business of
Duck Head.
(c) Delta Apparel shall be responsible for the federal employment
taxes payable with respect to the compensation paid, whether
before, on or after the date of the Delta Apparel distribution,
by any member of the Delta Woodside federal income tax
consolidated group for any period ending prior to or on the date
of the Delta Apparel distribution or by any member of the Delta
Apparel tax group for any period after that date to all
individuals who are past or present employees of the business of
Delta Apparel.
- With respect to any taxes, other than federal employment taxes,
federal income taxes and state income, franchise or similar taxes:
(a) Delta Woodside shall be responsible for any of these taxes,
regardless of the time period or circumstance with respect to
which the taxes are payable, arising from or attributable to any
business of Delta Woodside other than the business of Delta
Apparel or the business of Duck Head;
(b) Duck Head shall be responsible for any of these taxes, regardless
of the time period or circumstance with respect to which the
taxes are payable, arising from or attributable to the business
of Duck Head; and
(c) Delta Apparel shall be responsible for any of these taxes,
regardless of the time period or circumstance with respect to
which the taxes are payable, arising from or attributable to the
business of Delta Apparel.
- The Delta Woodside tax group shall be responsible for all taxes, and
shall receive the benefit of all tax items, of any member of the Delta
Woodside tax group that relate to any taxable period after the Delta
Apparel distribution. The Duck Head tax group shall be responsible for
all taxes, and shall receive the benefit of all tax items, of any
member of the Duck Head tax group that relate to any taxable period
after the Duck Head distribution. The Delta Apparel tax group shall be
responsible for all taxes, and shall receive the benefit of all tax
items, of any member of the Delta Apparel tax group that relate to any
taxable period after the Delta Apparel distribution.
Under the tax sharing agreement, the Delta Apparel tax group and the Duck
Head tax group have irrevocably designated Delta Woodside as their agent for
purposes of taking a broad range of actions in connection with taxes for
pre-distribution periods. Those actions include the settlement of tax audits and
other tax proceedings. In addition, the tax sharing agreement provides that all
disagreements and disputes relating to the agreement are to be resolved by Delta
Woodside. These arrangements may result in conflicts of interest among Delta
Apparel, Delta Woodside and Duck Head concerning such matters as whether a tax
relates to the business of Delta Woodside, Delta Apparel or Duck Head. Delta
Woodside might determine that a tax was a liability of Delta Apparel even though
Delta Apparel disagreed with that determination.
Under the tax sharing agreement, the Delta Apparel tax group, the Delta
Woodside tax group and the Duck Head tax group have agreed to indemnify one
another against various tax liabilities, generally in accordance with the
allocation of tax liabilities and benefits described above.
OTHER RELATIONSHIPS
Boards of Directors of Delta Apparel, Delta Woodside and Duck Head
---------------------------------------------------------------------------
The following directors of Delta Apparel are also directors of Delta
Woodside and Duck Head: William F. Garrett, C. C. Guy, Dr. James F. Kane, Dr.
Max Lennon, E. Erwin Maddrey, II, Buck A. Mickel and Bettis C. Rainsford. In
the event that any material issue were to arise between Delta Apparel, on the
one hand, and either Delta Woodside or Duck Head, on the other hand, these
<PAGE>
directors could be deemed to have a conflict of interest with respect to that
issue. In that circumstance, Delta Apparel anticipates that it will proceed in
a manner that is determined by a majority of those members of Delta Apparel's
board of directors who are not also members of the board of directors of Delta
Woodside or the board of directors of Duck Head (as applicable).
Principal Stockholders
-----------------------
The Delta Apparel shares will be distributed in the Delta Apparel
distribution, and the Duck Head shares will be distributed in the Duck Head
distribution, to the Delta Woodside stockholders proportionately among the Delta
Woodside shares. Therefore, immediately following the Delta Apparel
distribution, Delta Woodside's principal stockholders will be the same
individuals and entities as Delta Apparel's and Duck Head's principal
stockholders, and those principal stockholders will have the same respective
percentages of outstanding beneficial ownership in each of Delta Woodside, Delta
Apparel and Duck Head (assuming no acquisitions or dispositions of shares by
those stockholders between the record date for the Delta Apparel distribution or
the Duck Head distribution and the completion of either distribution). See
"Security Ownership of Significant Beneficial Owners and Management".
Sales to and Purchases from Delta Woodside or Duck Head of Goods or
---------------------------------------------------------------------------
Manufacturing Services
-----------------------
In the ordinary course of Delta Apparel's business, Delta Apparel has
produced T-shirts for Duck Head, purchased T-shirts from Duck Head and purchased
yarn and fabrics from Delta Mills. The following table shows these transactions
for the last three fiscal years and for the first six months of fiscal year
2000:
<TABLE>
<CAPTION>
(in thousands of dollars)
Fiscal year First six months
------------ ----------------
of
--
1997 1998 1999 Fiscal year 2000
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
Sold to Duck Head 403 156 481 6
Purchased from Duck Head 653 132 0 0
Purchased from Delta Mills(1) 26,456 17,683 0 0
<FN>
- --------------------------------
(1) For purposes of this table, yarn produced by the Rainsford plant and used
by Delta Apparel, prior to the transfer from Delta Mills to Delta Apparel
in April 1998 of operational control of the Rainsford plant, is treated as
sold by Delta Mills to Delta Apparel.
</TABLE>
Prior to the end of March 1997, all yarn sales between Delta Mills and
Delta Apparel were at a price equal to cost plus $0.01 per pound. Since March
1997, all of these yarn sales have been made at prices deemed by Delta Apparel
to approximate market value. In connection with these pricing policies on yarn
sales, through March 1997 Delta Apparel maintained with Delta Mills a
non-interest bearing deposit which aggregated $11.2 million at June 29, 1996.
Effective May 7, 1997, Delta Woodside adopted a written policy statement
governing the pricing of intercompany transactions. Among other things, this
policy statement provides that all intercompany sales and purchases will be
settled at market value and terms.
All of the T-shirt and fabric sales were made at prices deemed by Delta
Apparel to approximate market value.
Delta Apparel anticipates that any future sales or purchases to or from
Duck Head or Delta Woodside in the future will not be material.
<PAGE>
Purchase of Rainsford Plant
------------------------------
The Rainsford plant in Edgefield, South Carolina, manufactures yarn for use
in knitting operations. In April 1998, control of the operations and management
of the Rainsford plant was transferred from Delta Mills to Delta Apparel, which
converted the assets to produce yarn products for use in Delta Apparel's
products.
A condition to consummation of the Delta Apparel distribution is the sale
by Delta Mills to Delta Apparel of the Rainsford plant and related inventory.
Delta Mills and Delta Apparel have agreed that the purchase price for these
assets will be the assets' book value. This purchase price will be paid in cash
and by the assumption of certain liabilities. Delta Apparel estimates that the
purchase price for the real property, furniture, fixtures and equipment will be
approximately $12.2 million and the purchase price for the inventory will be
approximately $2.5 million. Delta Apparel will pay the cash portion of the
purchase price with borrowings under its credit facility.
The terms of the 9 5/8% Senior Notes of Delta Mills require that Delta
Mills provide to the holders of those Senior Notes an opinion of an investment
banking firm as to the fairness from a financial point of view to those holders
of the terms of this sale. Delta Mills has engaged The Robinson-Humphrey
Company, LLC to provide this opinion.
THE OPINION TO BE PROVIDED BY ROBINSON-HUMPHREY RESPECTING THE SALE OF THE
RAINSFORD PLANT ADDRESSES THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE
SALE TO THE HOLDERS OF THE SENIOR NOTES OF DELTA MILLS. THE OPINION DOES NOT
ADDRESS THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE SALE TO DELTA APPAREL
OR DELTA APPAREL'S CREDITORS OR STOCKHOLDERS.
The following summarizes Robinson-Humphreys' analyses and the opinion that
Robinson-Humphreys anticipates providing to the indenture trustee for the Senior
Notes of Delta Mills with respect to the Rainsford plant sale.
Material and Information Considered by Robinson-Humphrey
In arriving at its opinion, Robinson-Humphrey:
- Reviewed the sale agreement respecting the Rainsford plant sale;
- Reviewed certain internal financial statements and other financial and
operating data concerning the Rainsford plant;
- Conducted discussions with members of Delta Mills' and the Rainsford
plant's managements concerning the Rainsford plant's business,
operations, present condition and prospects;
- Compared the results of operations and present financial condition of
the Rainsford plant with those of certain publicly traded companies
that Robinson-Humphrey deemed to be reasonably similar to the
Rainsford plant;
- Reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions that
Robinson-Humphrey deemed relevant;
- Performed certain financial analyses with respect to the Rainsford
plant's projected future operating performance; and
- Reviewed such other financial statistics and analyses and performed
such other investigations and took into account such other matters as
Robinson-Humphrey deemed appropriate.
Robinson-Humphrey has relied upon the accuracy and completeness of the
financial and other information provided to it by Delta Mills in arriving at its
opinion without independent verification. With respect to the financial
forecasts of the Rainsford plant for the years 2000 through 2004,
Robinson-Humphrey has assumed that the assumptions provided by management have
been reasonably prepared and reflect the best currently available estimates and
judgment of Delta Mills' management. In arriving at its opinion,
Robinson-Humphrey conducted only a limited physical inspection of the properties
<PAGE>
and facilities of the Rainsford plant, and did not make appraisals of the
Rainsford plant or any of its assets. Robinson-Humphrey's opinion is
necessarily based upon market, economic and other conditions as they exist on,
and can be evaluated as of, the date of its letter.
In connection with the preparation of its fairness opinion,
Robinson-Humphrey performed certain financial and comparative analyses, the
material portions of which are summarized below. The following is a summary of
the material factors considered and principal financial analyses performed by
Robinson-Humphrey to arrive at its opinion, but does not purport to be a
complete description of the factors considered or the analyses performed by
Robinson-Humphrey in arriving at its opinion. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances, and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. In addition,
Robinson-Humphrey believes that its analyses must be considered as an integrated
whole, and that selecting portions of the analyses and the factors considered by
it, without considering all of the analyses and factors, could create a
misleading or an incomplete view of the process underlying its analyses set
forth in its opinion. In performing its analyses, Robinson-Humphrey made
numerous assumptions with respect to industry and economic conditions and other
matters, many of which are beyond the control of Delta Mills or management of
the Rainsford plant. Any estimates contained in such analyses are not
necessarily indicative of actual past or future results or values, which may be
significantly more or less favorable than as set forth in the opinion.
Estimates of values or companies do not purport to be appraisals or necessarily
to reflect the price at which those companies may actually be sold, and such
estimates are inherently subject to uncertainty. No public company utilized as
a comparison is identical to the Rainsford plant, and no merger and acquisition
transaction involved assets identical to the sale of the Rainsford plant. An
analysis of the results of such comparisons is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the comparable companies and
transactions and other factors that could affect the values of companies and
transactions to which the sale of the Rainsford plant is being compared.
Analysis of Selected Comparable Public Companies
Robinson-Humphrey reviewed and compared selected publicly available
financial data, market information and trading multiples for diversified textile
companies that Robinson-Humphrey deemed comparable to Delta Mills.
Robinson-Humphrey also reviewed and compared selected publicly available
financial data, market information and trading multiples for diversified textile
companies with revenues and firm values less than $1.0 billion that
Robinson-Humphrey deemed comparable to Delta Mills.
For the comparable companies in each category, Robinson-Humphrey compared,
among other things, firm value as a multiple of latest twelve months ("LTM")
revenues, firm value as a multiple of LTM earnings before interest, taxes,
depreciation and amortization ("EBITDA"), firm value as a multiple of LTM
earnings before interest and taxes ("EBIT"), equity value per share ("Price") as
a multiple of LTM earnings per share ("EPS") and equity value as a multiple of
book value for the comparable companies. All multiples were based on closing
stock prices as of December 7, 1999. Revenues, EBITDA, EBIT, EPS and book value
for the comparable companies were based on historical financial information
available in public filings of the comparable companies.
Analysis of Selected Merger & Acquisition Transactions
Robinson-Humphrey reviewed the financial terms, to the extent publicly
available, of 54 proposed, pending or completed merger and acquisition
transactions in the textile industry since 1991 involving companies that
Robinson-Humphrey deemed to be comparable based on operating characteristics of
the Rainsford plant. Robinson-Humphrey also reviewed the financial terms, to
the extent publicly available, of completed merger and acquisition transactions
in the textile industry occurring between 1980 and 1990 involving companies that
Robinson-Humphrey deemed to be comparable based on operating characteristics of
the Rainsford plant. Robinson-Humphrey calculated various financial multiples
based on certain publicly available information for each of the compared
transactions and compared them to corresponding financial multiples for the
purchase price in the proposed sale of the Rainsford plant.
With respect to each category of compared transactions, Robinson-Humphrey
compared, among other things, firm value as a multiple of LTM revenues, firm
<PAGE>
value as a multiple of LTM EBIT, firm value as a multiple of LTM EBITDA, equity
value as a multiple of LTM net income and book value for the comparable merger
and acquisition transactions.
Discounted Cash Flow Analysis
Robinson-Humphrey performed a discounted cash flow analysis using financial
projections for 2000 through 2004 to estimate the net present equity value for
the Rainsford plant. Robinson-Humphrey derived ranges of net present equity
value for the Rainsford plant on a stand-alone basis which were based upon the
discounted cash flows of the Rainsford plant from 2000 to 2004 plus a terminal
value calculated using a range of multiples of the Rainsford plant's projected
year 2004 EBITDA. Robinson-Humphrey applied discount rates ranging from 14% to
18% and multiples of 2004 EBITDA ranging from 3.0x to 5.0x.
Equipment Appraisal Value
Robinson-Humphrey examined a third party appraisal of the Rainsford plant
that was provided to Delta Mills in July 1999. The appraisal had been obtained
to arrive at a conclusion of orderly liquidation value and forced liquidation
value for the Rainsford plant's assets effective the date of inspection.
Fairness Opinion to Holders of Delta Mills' Senior Notes
Based on these analyses, Robinson-Humphrey anticipates delivering a written
opinion that, as of the date of its opinion, the proposed sale of the Rainsford
plant is fair, from a financial point of view, to the holders of Delta Mills' 9
5/8% Senior Notes due 2007.
Robinson-Humphrey based its analyses on assumptions that it deemed
reasonable, including assumptions concerning general business and economic
conditions and industry-specific factors. The preparation of fairness opinions
does not involve mathematical weighing of the results of the individual analyses
performed, but requires Robinson-Humphrey to exercise its professional
judgement, based on its experience and expertise, in considering a wide variety
of analyses taken as a whole. Each of the analyses conducted by
Robinson-Humphrey was carried out in order to provide a different perspective on
the transaction and to add to the total mix of information available.
Robinson-Humphrey did not form a conclusion as to whether any individual
analysis, considered in isolation, supported or failed to support an opinion as
to fairness. Rather, in reaching its conclusion, Robinson-Humphrey considered
the results of the analyses in light of each other and ultimately reached its
conclusion based on the results of all analyses taken as a whole.
Information Concerning Robinson-Humphrey
Robinson-Humphrey is a nationally recognized investment banking firm and,
as a customary part of its investment banking activities, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, private placements, and valuations
for corporate and other purposes. Delta Mills selected Robinson-Humphrey
because of its expertise, reputation in the textile industry and familiarity
with Delta Mills and the Rainsford plant, and because of Delta Woodside's
experience with Robinson-Humphrey's assistance in the proposed sale by Delta
Woodside of the Duck Head Apparel Company division during part of 1998 and 1999.
In the ordinary course of business, Robinson-Humphrey and its affiliates may
actively trade or hold the securities and other instruments and obligations of
Delta Woodside for their own account and for the accounts of customers and,
accordingly, may at any time hold long or short positions in such securities,
instruments or obligations.
Pursuant to an engagement letter, Delta Mills agreed to pay
Robinson-Humphrey a fee of $100,000 in connection with the preparation and
delivery of its fairness opinion. Delta Mills has agreed to indemnify
Robinson-Humphrey for certain liabilities related to, arising out of or in
connection with Robinson-Humphrey's engagement by Delta Mills.
Robinson-Humphrey has also performed various investment banking services for
Delta Woodside in the past, and has received customary fees for those services.
<PAGE>
Management Services
--------------------
Delta Woodside has provided various services to the operating divisions of
its subsidiaries, including the Delta Mills Marketing Company, Duck Head Apparel
Company and Delta Apparel Company divisions. These services include financial
planning, SEC reporting, payroll, accounting, internal audit, employee benefits
and services, stockholder services, insurance, treasury, purchasing, cotton
procurement, management information services and tax accounting. These services
have been charged on the basis of Delta Woodside's cost and allocated to the
various divisions based on employee headcount, computer time, projected sales
and other criteria.
During fiscal years 1997, 1998, and 1999, Delta Woodside charged the Delta
Apparel Company division $1,138,000, $1,048,000 and $1,135,000, respectively,
for these services. During the first six months of fiscal year 2000, Delta
Woodside charged the Delta Apparel Company division $0 for these services.
Other
-----
For further information on transactions with affiliates by Delta Apparel,
see Notes 2 and 8 to the Combined Financial Statements of Delta Apparel under
"Index to Combined Financial Statements" in this document, which information is
incorporated into this section by reference.
Except as described above with respect to yarn sales, any transaction
entered into between Delta Apparel and any officer, director, principal
stockholder or any of their affiliates has been on terms that Delta Apparel
believes are comparable to those that would be available to Delta Apparel from
non_affiliated persons.
<PAGE>
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN
THE DELTA APPAREL DISTRIBUTION
One or more executive officers of Delta Apparel and one or more members of
the Delta Apparel board of directors will receive economic benefits as a result
of the Delta Apparel distribution and the Duck Head distribution and may have
other interests in the Delta Apparel distribution and the Duck Head distribution
in addition to their interests as Delta Woodside stockholders. Some of these
executive officers and directors will also be the beneficial owners of more than
5% of the outstanding shares of common stock of Delta Apparel immediately
following the Delta Apparel distribution. See "Security Ownership of
Significant Beneficial Owners and Management." The Delta Woodside board of
directors was aware of these interests and considered them along with the other
matters described above under "The Delta Apparel Distribution __ Background of
the Delta Apparel Distribution" and "The Delta Apparel Distribution __ Reasons
for the Delta Apparel Distribution."
RECEIPT OF DELTA APPAREL STOCK OPTIONS AND DELTA APPAREL INCENTIVE STOCK AWARDS
The compensation grants committee of the Delta Apparel board of directors
anticipates that, during the first six months following the Delta Apparel
distribution, grants under the Delta Apparel stock option plan covering an
aggregate of approximately 162,500 Delta Apparel shares will be made and awards
under the Delta Apparel incentive stock award plan covering an aggregate of
approximately 59,200 Delta Apparel shares will be made, including the following
anticipated option and award grants to the following executive officers of Delta
Apparel:
<TABLE>
<CAPTION>
Name and position Shares Covered by Shares Covered by
------------------- -------------------- -------------------
Options(1) Awards(2)
--------------------
<S> <C> <C>
Robert W. Humphreys 62,500 20,000
President and Chief Executive Officer
Herbert M. Mueller 14,000 6,000
Vice President, Chief Financial Officer
and Treasurer
Marjorie F. Rupp 8,000 4,000
Vice President and Secretary
<FN>
- ---------------------------------
(1) The compensation grants committee of the Delta Apparel board of directors
anticipates that the stock options will be granted at various dates during
the six month period. The exercise price for any option will be the stock's
closing market value at the date of grant. The compensation grants
committee anticipates that the options will vest over a four year period.
(2) The compensation grants committee of the Delta Apparel board of directors
anticipates that 20% of each award will vest at the end of each of fiscal
year 2000, fiscal year 2001 and fiscal year 2002 and up to the remaining
40% will vest at the end of fiscal year 2002 to the extent that certain
performance criteria based on cumulative earnings before interest and taxes
are met.
</TABLE>
For a description of the Delta Apparel stock option plan and the Delta
Apparel incentive stock award plan and the anticipated treatment under Section
162(m) of the Internal Revenue Code of grants of options and awards under these
plans, see "Management of Delta Apparel - Management Compensation."
<PAGE>
PAYMENTS IN CONNECTION WITH DELTA APPAREL DISTRIBUTION AND DUCK HEAD
DISTRIBUTION
In 1997, the Delta Woodside board of directors adopted and the Delta
Woodside stockholders approved the Delta Woodside long term incentive plan.
Under that plan, grants could have been 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, might have translated
into stock options for Delta Woodside shares being awarded to participants in
the plan. No grants complying with the terms of the plan, however, were made,
although the individuals who were Delta Woodside's intended participants in the
plan, and the target awards for those individuals, were identified.
In consideration of the identified participants giving up any rights they
may have under or in connection with the long term incentive plan and in
consideration of 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 the recommendation of its
compensation committee) has decided that, if the Duck Head distribution and the
Delta Apparel distribution occur, Delta Woodside shares shall be issued prior to
the Delta Apparel and Duck Head record date, in amounts that have been
determined by the Board (on the basis of the recommendation of the compensation
committee), and cash shall be paid, in amounts that have been determined by the
Board (on the basis of the recommendation of the compensation committee), to
those individuals who were intended participants in the plan. The table below
sets forth the Delta Woodside shares that would thereby be issued and the cash
that would thereby be paid to the individuals who are directors or executive
officers of Delta Apparel. In determining the number of Delta Woodside shares
to be issued to each participant, the Delta Woodside board (and the Delta
Woodside compensation committee) used the closing sale price of the Delta
Woodside common stock on March 15, 2000 ($1.50 per share). The Delta Woodside
board anticipates that these Delta Woodside shares would be issued and this cash
would be paid prior to the record date for the Duck Head distribution and the
Delta Apparel distribution.
Name Delta Woodside Shares(#) Cash ($)
- ---- -------------------------- ---------
William F. Garrett 126,480 116,280
C.C. Guy 13,485 12,398
Robert W. Humphreys 48,360 44,460
Dr. James F. Kane 13,485 12,398
Dr. Max Lennon 13,330 12,255
E. Erwin Maddrey, II 206,667 190,000
Buck A. Mickel 13,072 12,018
Bettis C. Rainsford 148,800 136,800
Shares would also be issued and cash would also be paid to the estate of Buck
Mickel (father of Buck A. Mickel), a member of the Delta Woodside board of
directors until his death in 1998, who participated in the early stages of that
board's strategic planning.
E. Erwin Maddrey, II is a participant in Delta Woodside's severance plan.
Upon the termination of Mr. Maddrey's services with Delta Woodside (which is
anticipated to occur on or about the time of the Delta Apparel distribution and
the Duck Head distribution), Delta Woodside will pay Mr. Maddrey $147,115 of
severance in accordance with the normal provisions of this plan.
<PAGE>
EARLY EXERCISABILITY OF DELTA WOODSIDE STOCK OPTIONS
Pursuant to the distribution agreement, Delta Woodside has provided the
holders of outstanding options granted under the Delta Woodside stock option
plan, whether or not those options were then exercisable, with the opportunity
to amend the terms of their Delta Woodside stock options. The amendment offered
to each holder provided that:
(i) all unexercisable portions of the holder's Delta Woodside stock options
became immediately exercisable in full five (5) business days prior to the Delta
Apparel record date, which permitted the holder to exercise all or part of the
holder's Delta Woodside stock option prior to the Delta Apparel record date (and
thereby receive Delta Apparel shares in the Delta Apparel distribution and Duck
Head shares in the Duck Head distribution); and
(ii) any Delta Woodside stock options that remained unexercised as of the Delta
Apparel record date remain exercisable for only Delta Woodside common shares,
and for the same number of Delta Woodside common shares at the same exercise
price, after the Delta Apparel distribution and the Duck Head distribution as
before the Delta Apparel distribution and the Duck Head distribution (and not
for a combination of Delta Woodside shares, Delta Apparel shares and Duck Head
shares).
All holders of outstanding options under the Delta Woodside stock option
plan entered into the proposed amendment.
As a result of these amendments, options for Delta Woodside shares became
exercisable earlier than they otherwise would have for the following Named
Executives and members of the Delta Apparel board of directors for the following
number of shares of Delta Woodside common stock:
Name Number of Delta Woodside common shares covered by portion of
- ---- -------------------------------------------------------------
stock options the exercisability of which was accelerated
-------------------------------------------------------------
William F. Garrett 37,500
Herbert M. Mueller 4,500
Marjorie F. Rupp 3,000
LEASE TERMINATIONS
Delta Woodside has leased its principal corporate office space and space
for its benefits department, purchasing department and financial accounting
department from a corporation (Hammond Square, Ltd.), one-half of the stock of
which is owned by each of E. Erwin Maddrey, II (a director and significant
stockholder of Delta Apparel and Duck Head and President and Chief Executive
Officer (from which officer positions he will resign in connection with the
Delta Apparel distribution and the Duck Head distribution) and a director and
significant stockholder of Delta Woodside) and Jane H. Greer (Vice President and
Secretary of Delta Woodside (from which officer positions she will resign in
connection with the Delta Apparel distribution and the Duck Head distribution)).
Mr. Maddrey and Ms. Greer are also the directors and executive officers of
Hammond Square, Ltd. The lease of this space was executed effective September
1, 1998, covers approximately 9,662 square feet at a rental rate of $13.50 per
square foot per year (plus certain other expenses) and had an expiration date of
August 2003. In connection with the Delta Apparel distribution and the Duck
Head distribution, Hammond Square, Ltd. and Delta Woodside have agreed that this
lease will terminate on the Delta Apparel and Duck Head distribution date in
exchange for the payment by Delta Woodside to Hammond Square, Ltd. of $135,268.
Following the Delta Apparel and Duck Head distribution date, Delta Woodside may
continue to use the space on an as needed month-to-month basis at the rental
rate of $14.00 per square foot per year (plus certain other expenses).
Delta Woodside has leased office space in Edgefield, South Carolina from
The Rainsford Development Corporation, a corporation wholly owned by Bettis C.
Rainsford (a director and significant stockholder of Delta Apparel, Duck Head
and Delta Woodside). Mr. Rainsford is a director and executive officer and
Brenda L. Jones (Assistant Secretary of Delta Woodside (from which officer
position she will resign in connection with the Delta Apparel distribution and
the Duck Head distribution)) is an executive officer of The Rainsford
<PAGE>
Development Corporation. In connection with the Delta Apparel distribution and
the Duck Head distribution, The Rainsford Development Corporation and Delta
Woodside have agreed that this lease will terminate on the Delta Apparel and
Duck Head distribution date in exchange for the payment by Delta Woodside to The
Rainsford Development Corporation of $33,299.08.
LEASE OF STORE IN EDGEFIELD, SOUTH CAROLINA
Duck Head leases a building in Edgefield, South Carolina from Bettis C.
Rainsford (a director and significant stockholder of Delta Apparel, Duck Head
and Delta Woodside) pursuant to an agreement involving rental payments equal to
3% of gross sales of the Edgefield store, plus 1% of gross sales of the store
for utilities. Under this lease agreement, $9,944, $11,076 and $10,947 were
paid to Mr. Rainsford during fiscal 1997, 1998 and 1999, respectively.
TRANSFERS OF LIFE INSURANCE POLICIES
In February 1991, each of E. Erwin Maddrey, II (a director and significant
stockholder of Delta Apparel and Duck Head and President and Chief Executive
Officer (from which officer positions Mr. Maddrey will resign in connection with
the Delta Apparel distribution and the Duck Head distribution) and a director
and significant stockholder of Delta Woodside) and Bettis C. Rainsford (a
director and significant stockholder of Delta Apparel, Duck Head and Delta
Woodside) entered into a stock transfer restrictions and right of first refusal
agreement (which this document refers to as a "First Refusal Agreement") with
Delta Woodside. Pursuant to each First Refusal Agreement, Mr. Maddrey or Mr.
Rainsford, as the case may be, granted Delta Woodside a specified right of first
refusal with respect to any sale of that individual's Delta Woodside shares
owned at death for five years after the individual's death. In connection with
the First Refusal Agreements, life insurance policies were established on the
lives of Mr. Maddrey and Mr. Rainsford. Under the life insurance policies on
the life of each of them, $30 million is payable to Delta Woodside and $10
million is payable to the beneficiary or beneficiaries chosen by the individual.
Nothing in either First Refusal Agreement restricts the freedom of Mr. Maddrey
or Mr. Rainsford to sell or otherwise dispose of any or all of his Delta
Woodside shares at any time prior to his death or prevents Delta Woodside from
canceling the life insurance policies payable to it for $30 million on either
Mr. Maddrey's or Mr. Rainsford's life. A First Refusal Agreement terminates if
the life insurance policies payable to the applicable individual's beneficiaries
for $10 million are canceled by reason of Delta Woodside's failure to pay the
premiums on those policies.
In connection with the Delta Apparel distribution and the Duck Head
distribution, Delta Woodside has agreed with each of Mr. Maddrey and Mr.
Rainsford that, effective as of a date on or about the date the Delta Apparel
distribution and the Duck Head distribution occur, that individual's First
Refusal Agreement will terminate and, if the individual desires, Delta Woodside
will transfer to the individual the $10 million life insurance policies on his
life the proceeds of which are payable to the beneficiary or beneficiaries he
selects. After this transfer, the recipient individual will be responsible for
payment the premiums on these life insurance policies. Delta Woodside will
allow the remaining $30 million of life insurance payable to Delta Woodside to
lapse.
EMPLOYEE BENEFIT SERVICES
On or about the date of the Delta Apparel distribution, Delta Apparel
anticipates engaging Carolina Benefits Services, Inc. to provide payroll
processing and 401(k) plan administration services for Delta Apparel. Carolina
Benefits Services, Inc. is owned by E. Erwin Maddrey, II (a director and
significant stockholder of Delta Apparel and Duck Head and President and Chief
Executive Officer (from which officer positions Mr. Maddrey will resign in
connection with the Delta Apparel distribution and the Duck Head distribution)
and a director and significant stockholder of Delta Woodside) and Jane H. Greer
(Vice President and Secretary of Delta Woodside (from which officer positions
she will resign in connection with the Delta Apparel distribution and the Duck
Head distribution)). Ms. Greer is also an executive officer of Carolina
Benefits Services, Inc.
For the services to be provided by Carolina Benefits Services, Delta
Apparel anticipates paying fees based on the numbers of employees, 401(k) plan
participants and plan transactions and other items. Delta Apparel anticipates
that on an annual basis these fees will be approximately $84,000. Delta Apparel
elected to engage Carolina Benefits Services to provide these services after
receiving proposals from other providers of similar services and determining
that Carolina Benefits Services' proposal was Delta Apparel's least costly
alternative.
<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 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, 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.
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.
<PAGE>
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,
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.
<PAGE>
- 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.
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,
<PAGE>
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
Since the summer of 1998, Delta Woodside's board of directors has been
engaged in the process of exploring various means to maximize stockholder value.
The alternatives that the Delta Woodside Board has examined have included:
(a) A potential sale of the Duck Head Apparel Company division;
(b) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a sale of
the remaining company;
(c) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a
recapitalization of the remaining company that would involve a cash
distribution to Delta Woodside's stockholders by that remaining
company;
(d) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders;
(e) A pro rata taxable spin-off of Delta Woodside's two apparel businesses
to Delta Woodside's stockholders;
(f) A disproportionate tax-free spin-off of one of Delta Woodside's
apparel businesses to one of Delta Woodside's major stockholders
accompanied by a pro rata tax-free spin-off of the other apparel
business to all the other stockholders;
(g) A potential sale of the Delta Apparel Company business or assets;
(h) A purchase by Delta Mills, Inc. of the Duck Head Apparel Company and
the Delta Apparel Company businesses; and
(i) Leaving Delta Woodside's three businesses in Delta Woodside in their
current corporate form.
During the course of this exploration, the Delta Woodside board witnessed a
deterioration of general market conditions in the textile and apparel
industries. This deterioration caused the market's perceived values of textile
and apparel businesses to decline significantly.
<PAGE>
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;
(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;
<PAGE>
(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, 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-23;
- 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.
This discussion of the information and factors considered by the Delta
Woodside board is not meant to be exhaustive but is believed to include the
material factors considered by the Delta Woodside board in authorizing the Duck
Head distribution. The Delta Woodside board did not quantify or attach any
particular weight to the various factors that it considered in reaching its
determination that the Duck Head distribution, the Delta Apparel distribution
and related transactions are advisable and in the best interests of Delta
Woodside and its stockholders. In reaching its determination, the Delta
Woodside board took the various factors into account collectively and the Delta
Woodside board did not perform a factor_by_factor analysis.
Opinion of Houlihan Lokey
----------------------------
Delta Woodside engaged Houlihan Lokey to provide to the Delta Woodside
board and the Duck Head board an opinion as to the solvency of Duck Head as of
the time of the Duck Head distribution. Delta Woodside selected Houlihan Lokey
based on Houlihan Lokey's extensive experience in providing solvency opinions.
In consideration of its services in connection with the opinion described
below and a similar opinion with respect to Delta Apparel, Houlihan Lokey will
be paid a fee of $200,000 plus reasonable out-of-pocket expenses. No portion of
this fee is contingent upon the consummation of the 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.
<PAGE>
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"
will be entered into on or about 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" will be 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 respective 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 six
months of fiscal year 2000, which Duck Head's and Delta Woodside's
managements have identified as the most current information available;
(ii) reviewed the proposal from the third party lender to provide Duck Head
revolving credit and term loan facilities;
(iii)spoke with certain members of the senior management of Delta Woodside
and Duck Head to discuss the operations, financial condition, future
prospects and projected operations and performance of Duck Head;
(iv) reviewed forecasts and projections 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;
<PAGE>
(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").
Balance Sheet Test
The Balance Sheet Test determines whether or not the fair value and present
fair salable 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:
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; (b) EV/EBITDA; and,
(c) EV/EBIT);
(v) multiples derived from acquisitions of companies deemed by Houlihan
Lokey to be comparable to Duck Head;
(vi) discounted cash flow approaches;
(vii) the capital structure and debt obligations of Duck Head; and
(viii) non-operating assets and identified contingent liabilities.
In determining the fair value and present fair saleable value of the
aggregate assets of Duck Head, the following three methodologies were employed:
comparable public company, comparable transaction and discounted cash flow.
Market Multiple Approach. This approach involved the multiplication of
various earnings and cash flow measures by appropriate risk-adjusted 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. These companies are involved in branded apparel
<PAGE>
manufacturing and/or apparel marketing businesses. A comparative risk analysis
between Duck Head and the Comparable Public Companies formed the basis for the
selection of appropriate risk adjusted multiples for Duck Head. The risk
analysis incorporates both quantitative and qualitative risk factors which
relate to, among other things, the nature of the industry in which Duck Head and
the Comparable Public Companies are engaged. The value indications derived from
capitalization of the relevant performance fundamentals for Duck Head were
adjusted to reflect control value indications for Duck Head consistent with the
required standard of value. For the Comparable Transactions, Houlihan Lokey
analyzed apparel industry merger and acquisition transactions between 1998 and
1999 where financial information was publicly disclosed. Market multiples were
developed from sixteen comparable transactions, of which seven were 1999
transactions. From the application of market multiples, indications of value
were developed through the capitalization of the relevant performance
fundamentals of Duck Head. The derived value indications reflect control values
for Duck Head consistent with the fair values present and fair salable value
standard.
Discounted Cash Flow Approach. The Discounted Cash Flow Approach involved
an estimation of the present value of projected cash flows to be generated by
Duck Head. The projected debt-free cash flows were developed from forecasts
prepared by management of Duck Head. In addition to the respective cash flows
for the projected period 2000 to 2004, a determination of terminal values as of
June 30, 2004 was made based on the anticipated fair and salable values of Duck
Head at that time. In this case, the estimation of terminal values involved
using the market multiple approach already described above, where projected
fundamentals were capitalized based on selected multiples. Indications of value
were developed by applying an appropriate discount rate or cost of capital to
the projected cash flows and terminal value. The discount rate reflects the
degree of risk inherent in the assets of Duck Head and their ability to produce
the projected cash flows.
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
financial projections, (i) examines the consistency of the projections with
historical performance, current marketing strategies and operating cost
structure; and (ii) tests the sensitivity of the projections to changes in key
variables, including revenue growth, operating margins and capital expenditures.
In testing cash flows, Houlihan Lokey performs sensitivity analyses to determine
the "safety margin" available to deal with unexpected downturns in Duck Head's
ability to generate operating cash flow.
Reasonable Capital Test
The Reasonable Capital Test follows from the Balance Sheet and Cash Flow
Tests. A company may have assets that exceed liabilities, but if the amount is
too small to provide some downside protection, the capital amount may not be
deemed to be adequate and, in such a situation, the business would fail the
Reasonable Capital Test. 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 March 15, 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 solely for the benefit of the Delta
Woodside board and the Duck Head board and may not be relied upon by any other
person without Houlihan Lokey's prior written consent. Houlihan Lokey's opinion
is delivered to each recipient subject to the conditions, scope of engagement,
limitations and understandings set forth in its opinion and Houlihan Lokey's
engagement letter with Delta Woodside.
Advice of Prudential Securities
----------------------------------
Delta Woodside's board of directors received financial advice from
Prudential Securities regarding the issues surrounding the separation of the
apparel and textile fabric businesses. The points described above under the
heading "The Duck Head Distribution - Reasons for the Duck Head Distribution"
include the material factors discussed by Prudential Securities. Prudential
Securities also advised the Delta Woodside board regarding the issues
surrounding various alternatives to the Duck Head distribution and the Delta
Apparel distribution, including a sale of either or both of Duck Head or Delta
Apparel and a liquidation of either or both of Duck Head or Delta Apparel.
Prudential Securities' financial advice was based on its analysis of the trading
prices and trading multiples of approximately 14 textile and apparel companies
which Prudential Securities believed provided relevant comparisons. In
addition, Prudential Securities reviewed recent acquisitions, also deemed to
provide relevant comparisons, in the textile and apparel industries including
the prices paid and multiples of financial performance that those acquisitions
implied. Prudential Securities' advice regarding Delta Woodside's alternatives
with regard to Duck Head was also based on its review and understanding of
prevailing textile and apparel market conditions, as well as its review of Duck
Head's historical market performance.
Prudential Securities was not requested to, and did not, undertake the
types of analyses customary to deliver a financial opinion and did not deliver
any such opinion.
Pursuant to an engagement letter, Prudential Securities has been paid by
Delta Woodside an advisory fee of $500,000 for its services. Delta Woodside has
agreed to indemnify Prudential Securities for certain liabilities relating to or
arising from Prudential Securities' engagement by Delta Woodside. Prudential
Securities has also performed various investment banking services for Delta
Woodside in the past, and has received customary fees for those services.
Prudential Securities is a nationally recognized investment banking firm
and, as a customary part of its investment banking activities, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements, and
valuations for corporate and other purposes. Delta Woodside selected Prudential
<PAGE>
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 May
12, 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 April 28, 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 March 3, 2000 and the number of Delta Woodside shares to be
issued 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 May 12,
2000.
If a holder of Delta Woodside common stock owns a number of shares of Delta
Woodside common stock that is not a whole multiple of ten and therefore would be
entitled to receive a fraction of a whole share of Duck Head common stock, that
holder will receive cash instead of a fractional share of Duck Head common
stock. The distribution agent will aggregate into whole shares the fractional
shares to be cashed out and sell them as soon as practicable in the open market
at then prevailing prices on behalf of those registered holders who would
otherwise be entitled to receive less than whole shares. These registered
holders will receive a cash payment in the amount of their pro rata share of the
total proceeds of those sales, less any brokerage commissions. The distribution
agent will pay the net proceeds from sales of fractional shares based upon the
average selling price per share of Duck Head common stock of all of those sales,
less any brokerage commissions. Duck Head expects the distribution agent to
make sales on behalf of holders who would receive a fraction of a whole Duck
Head common share in the Duck Head distribution as soon as practicable after the
Duck Head distribution date. None of Delta Woodside, Duck Head or the
distribution agent guarantees any minimum sale price for those fractional shares
of Duck Head common stock, and no interest will be paid on the sale proceeds of
those shares.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material US federal income tax
consequences generally applicable to a Delta Woodside stockholder who is a US
Holder. The term "US Holder" means a beneficial owner of Delta Woodside shares
that is (i) a citizen or resident of the United States, (ii) a corporation,
partnership (other than certain partnerships as may be provided in the
applicable provisions of the US Treasury Regulations), or other entity created
or organized in or under the laws of the United States or of any political
<PAGE>
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 Internal Revenue 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. 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
Section 355. Whether the Duck Head distribution and the Delta Apparel
distribution qualify under Section 355 as tax-free spin-offs will depend on
whether the criteria in Section 355 and the relevant rules and regulations of
the IRS are satisfied.
Delta Woodside has obtained an opinion from KPMG LLP that it is more likely
than not that the 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 those shares will not
recognize gain upon either of the distributions, except as described
immediately below with respect to fractional shares.
2. Cash, if any, received by a US Holder of Delta Woodside stock instead of a
fractional share of 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.
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.
<PAGE>
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
pursuant to 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 the tax authority and ultimately
sustained by a court of law.
Material Federal Income Tax Consequences if the Duck Head Distribution and the
- --------------------------------------------------------------------------------
Delta Apparel Distribution Do Not Qualify as Tax-Free Spin-Offs under Section
- --------------------------------------------------------------------------------
355
- ---
If the Duck Head distribution and the Delta Apparel distribution do not
qualify as tax-free spin-offs under Section 355, then the following are the
material federal income tax consequences to each participating Delta Woodside
stockholder and to Delta Woodside:
1. Each Delta Woodside stockholder will recognize dividend income to the
extent of the lesser of (a) the value of the 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.
<PAGE>
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 will be the federal income tax
values of the Duck Head shares and the Delta Apparel shares for purposes of
this calculation.
THE FOREGOING IS A GENERAL DISCUSSION AND IS NOT INTENDED TO SERVE AS
SPECIFIC ADVICE FOR ANY PARTICULAR DELTA WOODSIDE STOCKHOLDER, SINCE THE TAX
CONSEQUENCES OF THE DUCK HEAD DISTRIBUTION AND THE DELTA APPAREL DISTRIBUTION TO
EACH STOCKHOLDER WILL DEPEND UPON THAT STOCKHOLDER'S OWN PARTICULAR
CIRCUMSTANCES. EACH STOCKHOLDER SHOULD CONSULT HIS, HER OR ITS OWN ADVISORS AS
TO THE FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES TO THAT STOCKHOLDER OF
THE DUCK HEAD DISTRIBUTION AND THE DELTA APPAREL DISTRIBUTION.
KPMG LLP is an internationally recognized accounting, tax and consulting
firm and, as a customary part of its tax practice, is regularly engaged to
provide opinions on the federal income tax consequences of merger and
acquisition transactions. Delta Woodside selected KPMG LLP because of its
expertise and its familiarity with Delta Woodside, Duck Head and Delta Apparel.
In the past, KPMG LLP has acted as the independent auditor of Delta Woodside's
financial statements and as its tax advisor. KPMG LLP has also provided various
consulting services to Delta Woodside. KPMG LLP 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 related to, arising out of or in connection with KPMG LLP's
engagement by Delta Woodside.
Net Operating Loss Carry Forwards
-------------------------------------
As of July 3, 1999, Delta Woodside had net operating loss carry forwards,
for federal income tax purposes, of approximately $68 million. Following the
Duck Head distribution and the Delta Apparel distribution and assuming the
distributions are tax-free pursuant to Section 355, approximately $56 million of
this net operating loss carry forward will remain as a tax attribute of Delta
Woodside as of July 3, 1999 ($10 million of which will be subject to limitation
under the separate return limitation rules), approximately $3 million will be a
tax attribute of Duck Head as of July 3, 1999 and approximately $9 million will
be a tax attribute of Delta Apparel as of July 3, 1999. Duck Head's and Delta
Apparel's Federal net operating losses 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.
<PAGE>
The pro forma balance sheet of Duck Head that is included under the heading
"Unaudited Pro Forma Combined Financial Statements" reflects Duck Head's
expected allocable portion of the pre-distribution Delta Woodside consolidated
federal net operating loss carry forward.
ACCOUNTING TREATMENT
The Duck Head distribution and the Delta Apparel distribution will be
accounted for in accordance with United States generally accepted accounting
principles. Accordingly, the Duck Head distribution will be accounted for by
Delta Woodside based on the recorded amounts of the net assets being spun-off.
Delta Woodside will charge directly to equity as a dividend the historical cost
carrying amount of the net assets of Duck Head.
<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 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
with respect to, among other things, indemnification arrangements and employee
benefit arrangements.
Intercompany reorganization
----------------------------
The distribution agreement provides, that, no later than the time the Duck
Head distribution occurs, Delta Woodside, Duck Head and Delta Apparel will have
caused the following to have been effected:
(a) Delta Woodside will have contributed, as contributions to capital, all
net debt amounts owed to it by the corporations that currently conduct
the Duck Head Apparel Company division's business and the Delta
Apparel Company division's business. The Duck Head Apparel Company
division's assets are currently owned by Delta Woodside and several of
its wholly-owned subsidiaries. The Delta Apparel Company division's
assets are currently 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 will have been transferred to Duck Head or a
subsidiary of Duck Head to the extent not already owned by Duck Head
or its subsidiaries.
(c) Duck Head will have assumed all of the liabilities of the Duck Head
Apparel Company division of Delta Woodside, and will have caused all
holders of indebtedness for borrowed money that are part of the
assumed Duck Head liabilities and all lessors of leases that are part
of the assumed Duck Head liabilities to agree to look only to Duck
Head or a subsidiary of Duck Head for payment of that indebtedness or
lease (except where Delta Woodside or Delta Apparel, as applicable,
consents to not being released from the obligations).
(d) All the assets used in the operations of the Delta Apparel Company
division's business will have been transferred to Delta Apparel or a
subsidiary of Delta Apparel to the extent not already owned by Delta
Apparel or its subsidiaries. This transfer will include the sale by
Delta Mills to Delta Apparel of the Rainsford Plant, located in
Edgefield, SC.
<PAGE>
(e) Delta Apparel will have assumed all of the liabilities of the Delta
Apparel Company division of Delta Woodside, and will have caused all
holders of indebtedness for borrowed money that are part of the
assumed Delta Apparel liabilities and all lessors of leases that are
part of the assumed Delta Apparel liabilities to agree to look only to
Delta Apparel or a subsidiary of Delta Apparel for payment of that
indebtedness or lease (except where Delta Woodside or Duck Head, as
applicable, consents to not being released from the obligations).
(f) Delta Woodside will have caused all holders of indebtedness for
borrowed money and all lessors of leases that are not part of the
liabilities assumed by 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, consents 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 will cause the employees of the Duck Head Apparel Company
division to become employees of Duck Head, Duck Head will assume the accrued
employee benefits of these employees and Delta Woodside will cause the account
balance of each of these employees in any and all of Delta Woodside's employee
benefit plans (other than the Delta Woodside stock option plan) to be
transferred to a comparable employee benefit plan of Duck Head.
Intercompany Accounts
----------------------
Other than any amounts owed under the tax sharing agreement and except as
provided in the distribution agreement, generally all intercompany receivable,
payable and loan balances existing as of the time of the Duck Head distribution
between Duck Head, on the one hand, and Delta Apparel or Delta Woodside, on the
other hand, will be deemed to have been paid in full by the party or parties
owing the relevant obligation.
Transaction Expenses
---------------------
Generally, all costs and expenses incurred in connection with the Duck Head
distribution, the Delta Apparel distribution and related transactions shall be
paid by Delta Woodside, Duck Head and Delta Apparel proportionately in
accordance with the respective benefits received by Delta Woodside, Duck Head
and Delta Apparel as determined in good faith by the parties; provided that the
holders of the Delta Woodside shares shall pay their own expenses, if any,
incurred in connection with the Duck Head distribution and the Delta Apparel
distribution.
TAX SHARING AGREEMENT
Duck Head will enter into a tax sharing agreement with Delta Woodside and
Delta Apparel that will describe, among other things, each company's rights and
obligations relating to tax payments and refunds for periods before and after
the Duck Head distribution and related matters like the filing of tax returns
and the handling of audits and other tax proceedings. The tax sharing agreement
<PAGE>
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 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;
<PAGE>
(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. The DeltaApparel 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.
<PAGE>
OTHER RELATIONSHIPS
Boards of Directors of Duck Head, Delta Woodside and Delta Apparel
---------------------------------------------------------------------------
The following directors of Duck Head are also directors of Delta Woodside
and Delta Apparel: William F. Garrett, C. C. Guy, Dr. James F. Kane, Dr. Max
Lennon, E. Erwin Maddrey, II, Buck A. Mickel and Bettis C. Rainsford. In the
event that any material issue were to arise between Duck Head, on the one hand,
and either Delta Woodside or Delta Apparel, on the other hand, these directors
could be deemed to have a conflict of interest with respect to that issue. In
that circumstance, Duck Head anticipates that it will proceed in a manner that
is determined by a majority of those members of Duck Head's board of directors
who are not also members of the board of directors of Delta Woodside or the
board of directors of Delta Apparel (as applicable).
Principal Stockholders
-----------------------
The Duck Head shares will be distributed in the Duck Head distribution, and
the Delta Apparel shares will be distributed in the Delta Apparel distribution,
to the Delta Woodside stockholders proportionately among the Delta Woodside
shares. Therefore, immediately following the Duck Head distribution, Delta
Woodside's principal stockholders will be the same individuals and entities as
Duck Head's and Delta Apparel's principal stockholders, and those principal
stockholders will have the same respective percentages of outstanding beneficial
ownership in each of Delta Woodside, Duck Head and Delta Apparel (assuming no
acquisitions or dispositions of shares by those stockholders between the record
date for the Duck Head distribution or the Delta Apparel distribution and the
completion of either distribution). See "Security Ownership of Significant
Beneficial Owners and Management".
Sales to and Purchases from Delta Woodside or Delta Apparel of Goods or
- --------------------------------------------------------------------------------
Manufacturing Services
- -----------------------
In the ordinary course of Duck Head's business, Duck Head has produced
T-shirts for Delta Apparel, purchased T-shirts from Delta Apparel and purchased
fabrics from Delta Mills. The following table shows these transactions for the
last three fiscal years and for the first six months of fiscal year 2000:
<TABLE>
<CAPTION>
(in thousands of dollars)
Fiscal year First six months
----------- ----------------
Of
--
1997 1998 1999 Fiscal year 2000
----- ----- ---- ----------------
<S> <C> <C> <C> <C>
Sold to Delta Apparel 653 132 -- --
Purchased from Delta Apparel 403 156 481 6
Purchased from Delta Mills 3,338 1,824 662 -
</TABLE>
All of these T-shirt and fabric sales were made at prices deemed by Duck
Head to approximate market value.
Duck Head anticipates that any future sales or purchases to or from Delta
Woodside or Delta Apparel in the future 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.
<PAGE>
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 six 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 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 compensation paid to
an executive officer 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, 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 at various dates during
the six month period. The exercise price for any option will be the stock's
closing market value at the date of grant. The compensation grants
committee anticipates that the options, 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, grants could have been 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, might have translated
into stock options for Delta Woodside shares being awarded to participants in
the plan. No grants complying with the terms of the plan, however, were made,
although the individuals who were Delta Woodside's intended participants in the
plan, and the target awards for those individuals, were identified.
In consideration of the identified participants giving up any rights they
may have under or in connection with the long term incentive plan and in
consideration of 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 the recommendation of its
compensation committee) has decided that, if the Duck Head distribution and the
Delta Apparel distribution occur, Delta Woodside shares shall be issued prior to
the Duck Head and Delta Apparel record date, in amounts that have been
determined by the Board (on the basis of the recommendation of the compensation
committee), and cash shall be paid, in amounts that have been determined by the
Board (on the basis of the recommendation of the compensation committee), to
those individuals who were intended participants in the plan. The table below
sets forth the Delta Woodside shares that would thereby be issued and the cash
that would thereby be paid to the individuals who are directors or executive
officers of Duck Head. In determining the number of Delta Woodside shares to be
issued to each participant, the Delta Woodside board (and the Delta Woodside
compensation committee) used the closing sale price of the Delta Woodside common
stock on March 15, 2000 ($1.50 per share). The Delta Woodside board anticipates
that these Delta Woodside shares would be issued and this cash would be paid
prior to the record date for the Duck Head distribution and the Delta Apparel
distribution.
<PAGE>
<TABLE>
<CAPTION>
Name Delta Woodside Shares(#) Cash ($)
- -------------------- ------------------------ --------
<S> <C> <C>
William F. Garrett 126,480 116,280
C.C. Guy 13,485 12,398
Dr. James F. Kane 13,485 12,398
Dr. Max Lennon 13,330 12,255
E. Erwin Maddrey, II 206,667 190,000
Buck A. Mickel 13,072 12,018
Bettis C. Rainsford 148,800 136,800
</TABLE>
Shares would also be issued and cash would also be paid to the estate of Buck
Mickel (father of Buck A. Mickel), a member of the Delta Woodside board of
directors until his death in 1998, who participated in the early stages of that
board's strategic planning.
E. Erwin Maddrey, II is a participant in Delta Woodside's severance plan.
Upon the termination of Mr. Maddrey's services with Delta Woodside (which is
anticipated to occur on or about the time of the 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.
EARLY EXERCISABILITY OF DELTA WOODSIDE STOCK OPTIONS
Pursuant to the distribution agreement, Delta Woodside has provided the
holders of outstanding options granted under the Delta Woodside stock option
plan, whether or not those options were then exercisable, with the opportunity
to amend the terms of their Delta Woodside stock options. The amendment offered
to each holder provided that:
(i) all unexercisable portions of the holder's Delta Woodside stock options
became immediately exercisable in full five (5) business days prior to the
Duck Head record date, which permitted the holder to exercise all or part
of the holder's Delta Woodside stock option prior to the Duck Head 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 options that remained unexercised as of the
Duck Head record date remain exercisable for only Delta Woodside common
shares, and for the same number of Delta Woodside common shares at the same
exercise price, after the 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).
All holders of outstanding options under the Delta Woodside stock option
plan entered into the proposed amendment.
As a result of these amendments, options for Delta Woodside shares became
exercisable earlier than they otherwise would have for the following Named
Executives and members of the Duck Head board of directors for the following
number of shares of Delta Woodside common stock:
<TABLE>
<CAPTION>
Name Number of Delta Woodside common shares covered by portion
---------------------------------------------------------
of stock options the exercisability of which was accelerated
------------------------------------------------------------
<S> <C>
William F. Garrett 37,500
Michael H. Prendergast 6,000
K. Scott Grassmyer 8,000
</TABLE>
<PAGE>
LEASE TERMINATIONS
Delta Woodside has leased its principal corporate office space and space
for its benefits department, purchasing department and financial accounting
department from a corporation (Hammond Square, Ltd.), one-half of the stock of
which is owned by each of E. Erwin Maddrey, II (a director 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
Hammond Square, Ltd. The lease of this space was executed effective September
1, 1998, covers approximately 9,662 square feet at a rental rate of $13.50 per
square foot per year (plus certain other expenses) and had an expiration date of
August 2003. In connection with the Duck Head distribution and the Delta
Apparel distribution, Hammond Square, Ltd. 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 Hammond Square, Ltd. 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.
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.
<PAGE>
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. 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.
<PAGE>
