THE DELTA APPAREL DISTRIBUTION
PARTIES TO THE DISTRIBUTION AGREEMENT
Delta Woodside
---------------
Delta Woodside is a South Carolina corporation with its principal executive
offices located at 233 North Main Street, Suite 200, Greenville, South Carolina
29601 (telephone number: 864-232-8301).
Prior to the Delta Apparel distribution, Delta Woodside and its
subsidiaries had three operating divisions: Delta Mills Marketing Company,
Delta Apparel Company and Duck Head Apparel Company.
- Delta Mills Marketing Company produces a range of cotton, synthetic
and blended finished and unfinished woven products that are sold for
the ultimate production of apparel, home furnishings and other
products. After the Delta Apparel distribution and the Duck Head
distribution, Delta Mills Marketing Company will remain the only
continuing Delta Woodside operation.
- Pursuant to the Delta Apparel distribution, Delta Woodside will
distribute to its stockholders all of the outstanding common stock of
Delta Apparel, which will continue the business formerly conducted by
the Delta Apparel Company division of various subsidiaries of Delta
Woodside. For a description of the business of the Delta Apparel
Company division, see the information under the heading "Business of
Delta Apparel".
- Simultaneously with the Delta Apparel distribution, Delta Woodside
will, pursuant to the Duck Head distribution, distribute to its
stockholders all of the outstanding stock of Duck Head, which will
continue the business formerly conducted by the Duck Head Apparel
Company division of Delta Woodside and various subsidiaries of Delta
Woodside. For a description of the business of the Duck Head Apparel
Company division, see the information below under the subheading "Duck
Head".
Delta Apparel
--------------
Delta Apparel is a Georgia corporation with its principal executive offices
located at 3355 Breckinridge Blvd., Suite 100, Duluth, Georgia 30096 (telephone
number: 770-806-6800).
Duck Head
----------
Duck Head is a Georgia corporation with its principal executive offices
located at 1020 Barrow Industrial Parkway, P.O. Box 688, Winder, Georgia 30680
(telephone number: 770-867-3111). Duck Head's business is designing, sourcing,
producing, marketing and distributing boys' and men's value-oriented casual
sportswear predominantly under the 134-year-old nationally recognized "Duck Head
" (Reg. Trademark) label.
BACKGROUND OF THE DELTA APPAREL DISTRIBUTION
Since the middle of its 1998 fiscal year, Delta Woodside's board of
directors has explored various means, in addition to effectively operating Delta
Woodside's businesses, and has taken various actions to enhance stockholder
value.
On March 9, 1998, Delta Woodside announced that it was withdrawing from the
circular knit fabrics business, which had operated under the name of Stevcoknit
Fabrics Company, and would be selling or closing and liquidating its two
knitting, dyeing and finishing plants in Wallace, North Carolina, and its yarn
spinning plant in Spartanburg, South Carolina. In the announcement, Delta
Woodside also stated that it had decided to sell its Nautilus International
fitness equipment division, and had retained an investment banking firm to
handle the sale.
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.
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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
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Apparel Company division and the Delta Apparel Company division by the Delta
Mills, Inc. subsidiary, or (2) a spin-off/recapitalization in which the apparel
divisions would be spun-off to the Delta Woodside stockholders as separate
public companies, and substantial cash would be paid out to stockholders from
new borrowings by the remaining Delta Woodside.
- Under the purchase of the Duck Head Apparel Company division and the Delta
Apparel Company division by Delta Mills, Inc. scenario, Delta Woodside,
through its wholly-owned subsidiary, Delta Mills, Inc., would have
continued to own the Duck Head Apparel Company division and the Delta
Apparel Company division. This internal ownership restructuring could,
however, have provided Delta Woodside with substantial cash, because Delta
Mills, Inc. then had a substantial cash position and its senior note
indenture would have permitted it to use cash for this purpose but not for
the purpose of making dividend payments to its parent company, Delta
Woodside. If this purchase scenario had been adopted, Delta Woodside could
have used the cash provided by Delta Mills, Inc. in the purchase to make
acquisitions of Delta Woodside common stock or other businesses, or for
other purposes.
- Under the spin-off/recapitalization scenario, Delta Woodside stockholders
would have received, for their Delta Woodside common shares, shares of each
of the new spun-off apparel companies, cash and stock in the remaining
Delta Woodside. Also, additional shares of the remaining Delta Woodside
(representing more than 20% of the then outstanding shares of the remaining
Delta Woodside) would have been sold to members of management of Delta
Mills Marketing Company. Consummation of the spin-off/recapitalization
transaction was to be conditioned upon receiving a favorable vote of the
Delta Woodside stockholders.
Following this announcement, Delta Woodside, with the assistance of
Prudential Securities, explored the possibility of Delta Mills, Inc. refinancing
its existing $150 million of 9-5/8% Senior Notes with a larger issue of
indebtedness in order to effect the proposed recapitalization. During the time
frame of this examination, however, the interest rates payable by issuers of new
senior debt in the textile and apparel industries became higher than were deemed
acceptable by the Delta Woodside board of directors.
On August 20, 1999, Delta Woodside announced that, due to weakness in the
bond market, Delta Woodside believed that its previously announced
recapitalization/spin-off strategy was not feasible at that time. Delta
Woodside further announced that, because Delta Woodside believed that its
stockholders would best be served by separating the operating companies, Delta
Woodside did not plan to pursue the acquisition of the two apparel divisions by
its textile subsidiary, Delta Mills, Inc., at that time. The announcement also
stated that Delta Woodside was continuing to explore strategic alternatives to
accomplish the separation of its operating companies, and would announce
specific plans in the upcoming months.
On October 4, 1999, Delta Woodside announced that it planned to spin off to
the Delta Woodside stockholders its two apparel businesses (Delta Apparel
Company and Duck Head Apparel Company) as two separate publicly-owned
corporations. The announcement further stated that Delta Woodside was in the
process of transferring various corporate functions to its three operating
divisions (Delta Mills Marketing Company, Delta Apparel Company and Duck Head
Apparel Company). The announcement stated that, upon the complete transfer of
these functions or at the time of the spin-offs (as appropriate), the functions
then being performed at the Delta Woodside level would no longer need to be
performed at that level, and the executive officers of Delta Woodside would
resign their positions with Delta Woodside. The announcement stated that, upon
consummation of the spin-offs, Delta Mills Marketing Company would be Delta
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 shareholder rights plan pursuant to which stock purchase rights
have been distributed as a dividend to the Delta Woodside stockholders at a rate
of one right for each Delta Woodside share held of record as of December 22,
1999. Delta Woodside stated that the rights plan is designed to enhance the
Delta Woodside board's ability to prevent any person interested in acquiring
control of Delta Woodside from depriving stockholders of the long-term value of
their investment and to protect shareholders against attempts to acquire Delta
Woodside by means of unfair or abusive takeover tactics. Delta Woodside stated
that its board had adopted the rights plan at that time because the Delta
Woodside shares were trading at their lowest levels in Delta Woodside's history.
At the same time, Delta Woodside announced that its board had approved a
plan to purchase from time to time up to an aggregate of 5,000,000 shares of
Delta Woodside's outstanding stock at prices and at times at the discretion of
Delta Woodside's top management. The announcement stated that this stock
repurchase plan replaces the 2,500,000 stock purchase plan announced by Delta
Woodside in September 1998.
On December 30, 1999, Delta Woodside announced that each of Duck Head and
Delta Apparel had filed a registration statement with the SEC to register the
subsidiary's stock under the Securities Exchange Act of 1934, and that these
filings were pursuant to the previously announced plan of Delta Woodside to spin
off to its stockholders the Delta Apparel Company division and the Duck Head
Apparel Company division as two separate publicly-owned corporations. Delta
Woodside also stated that, following completion of the spin-offs, Delta Woodside
intends to propose to its stockholders the adoption of a new Delta Woodside
stock option plan and a new Delta Woodside incentive stock award plan pursuant
to which significant equity incentives could be granted to the new management of
Delta Woodside.
REASONS FOR THE DELTA APPAREL DISTRIBUTION
The following discussion contains various "forward-looking statements".
Please refer to "Forward-Looking Statements May Not Be Accurate" for a
description of the uncertainties and risks associated with forward-looking
statements.
Since the summer of 1998, Delta Woodside's board of directors has been
engaged in the process of exploring various means to maximize stockholder value.
The alternatives that the Delta Woodside Board has examined have included:
(a) A potential sale of the Duck Head Apparel Company division;
(b) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a sale of
the remaining company;
(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;
<PAGE>
(h) A purchase by Delta Mills, Inc. of the Delta Apparel Company and the
Duck Head Apparel Company businesses; and
(i) Leaving Delta Woodside's three businesses in Delta Woodside in their
current corporate form.
During the course of this exploration, the Delta Woodside board witnessed a
deterioration of general market conditions in the textile and apparel
industries. This deterioration caused the market's perceived values of textile
and apparel businesses to decline significantly.
This decline, together with the information obtained by Delta Woodside in
the process of exploring the alternatives described above, led the Delta
Woodside board to conclude that:
(i) Any sale or liquidation at this time or in the near future of any of
Delta Woodside's businesses would, more likely than not, be at
depressed and unacceptable prices; and
(ii) Absent a change in circumstances, the interests of Delta Woodside and
its stockholders would be best served by not pursuing the sale or
liquidation of any of Delta Woodside's businesses at this time.
The Delta Woodside Board also determined that the best interests of Delta
Woodside and its stockholders would not be served by pursuing at this time any
of the additional alternatives described above other than a pro rata spin-off of
Delta Woodside's two apparel businesses to Delta Woodside's stockholders. The
major factors that led to this conclusion were the general market condition
deterioration described above and:
(1) Contractual constraints, which added significantly to the costs of
those alternatives that required additional financing to be incurred
by Delta Mills;
(2) Unfavorable debt market conditions, particularly for debt issuances by
textile and apparel companies;
(3) Insufficient buyer interest in any of Delta Woodside's businesses at
prices deemed sufficient by the Delta Woodside board;
(4) The Delta Woodside board's belief in the future enhanced stockholder
value available from separating Delta Woodside's businesses into
separate companies; and
(5) The Delta Woodside board's conclusion that the interests of Delta
Woodside and its stockholders would be adversely affected by any
decision of the Delta Woodside board to delay implementing the
separation of its businesses. The Board believes that continuing
uncertainty in the marketplace as to Delta Woodside's strategic plans
is likely to be damaging the relations of one or more of Delta
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:
<PAGE>
(a) Permit the grant of equity incentives to the separate management of
each business, which incentives would not be affected by the results
of the other businesses and, therefore, would have excellent potential
to align closely the interests of that management with those of the
stockholders;
(b) Permit the elimination of certain existing corporate overhead expenses
that result from the current need to coordinate the operations of
three distinct businesses that have separate modes of operation and
markets;
(c) As a reason to accomplish the Duck Head distribution, eliminate the
complaints of certain customers of Delta Mills Marketing Company
(which, as a supplier to those customers, has access to certain of
their competitive information) that a competitor of theirs (Duck Head
Apparel Company) is under common management with Delta Mills Marketing
Company;
(d) Permit each business to obtain, when needed, the best equity and debt
financing possible without being affected by the operational results
of the other businesses;
(e) Permit each business to establish long-range plans geared toward the
expected cyclicality, competitive conditions and market trends in its
own line of business, unaffected by the markets, needs and constraints
of the other businesses;
(f) Promote a more streamlined management structure for each of the three
businesses, better able to respond quickly to customer and market
demands; and
(g) Permit the value of each of the three divisions to be more accurately
reflected in the equity market by separating the results of each
business from the other two businesses.
In reaching its conclusion to effect the Delta Apparel distribution, the
Board also took into account the following additional factors:
- The opinion delivered to the Delta Woodside board by Houlihan Lokey
Howard & Zukin Financial Advisors, Inc. that is described below;
- The advice provided to the Delta Woodside board by Prudential
Securities that is described below;
- The financial information and statements of Delta Apparel set forth in
this document under the heading, "Unaudited Pro Forma Combined
Financial Statements", and at pages F-1 to F-20;
- The Delta Woodside board's knowledge of the business, operations,
assets and financial condition of Delta Apparel;
- Delta Apparel management's assessment of the prospects of Delta
Apparel;
- The current and prospective economic environment in which Delta
Apparel operates; and
- The terms of the distribution agreement and the tax sharing agreement.
All members of the Delta Woodside board (other than Bettis C. Rainsford)
voted in favor of effectuating the Delta Apparel distribution, the Duck Head
distribution and related transactions. See "Security Ownership of Significant
Beneficial Owners and Management."
This discussion of the information and factors considered by the Delta
Woodside board is not meant to be exhaustive but is believed to include the
material factors considered by the Delta Woodside board in authorizing the Delta
Apparel distribution. The Delta Woodside board did not quantify or attach any
particular weight to the various factors that it considered in reaching its
determination that the Delta Apparel distribution, the Duck Head distribution
and related transactions are advisable and in the best interests of Delta
Woodside and its stockholders. In reaching its determination, the Delta
Woodside board took the various factors into account collectively and the Delta
Woodside board did not perform a factor_by_factor analysis.
<PAGE>
Opinion of Houlihan Lokey
----------------------------
Delta Woodside engaged Houlihan Lokey to provide to the Delta Woodside
board and the Delta Apparel board an opinion as to the solvency of Delta Apparel
as of the time of the Delta Apparel distribution. Delta Woodside selected
Houlihan Lokey based on Houlihan Lokey's extensive experience in providing
solvency opinions.
In consideration of its services in connection with the opinion described
below and a similar opinion with respect to Duck Head and related services,
Houlihan Lokey will be paid a fee of $225,000 plus reasonable out-of-pocket
expenses. No portion of this fee is contingent upon the consummation of the
Delta Apparel distribution or the Duck Head distribution or the conclusions
reached in Houlihan Lokey's opinions. Delta Woodside has also agreed to provide
indemnification to Houlihan Lokey and certain other parties with respect to
certain matters. Houlihan Lokey has had no other material relationship with
Delta Woodside or its subsidiaries during the past two years.
The preparation of a solvency opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following is a brief summary and general description of the solvency analysis
and valuation methodologies utilized by Houlihan Lokey. Although the summary
sets forth all material facts respecting the opinion of Houlihan Lokey, the
summary does not purport to be a complete statement of the analyses and
procedures applied, the judgments made or the conclusion reached by Houlihan
Lokey or a complete description of its presentation to the Delta Woodside board
or the Delta Apparel board. Houlihan Lokey believes, and so advised the Delta
Woodside board and the Delta Apparel board, that its analyses must be considered
as a whole and that selecting portions of its analyses and of the factors
considered by it, without considering all factors and analyses, could create an
incomplete view of the process underlying its analyses and opinions.
The Delta Apparel distribution and other related transactions disclosed to
Houlihan Lokey are referred to collectively in this summary as the
"Transaction." For purposes of its opinion, Houlihan Lokey assumed that the
third party financing described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
has been entered into on or prior to the date of the Delta Apparel distribution
and that, prior to the Delta Apparel distribution, the intercompany
reorganization described in "Relationships Among Delta Apparel, Delta Woodside
and Duck Head - Distribution Agreement" has been completed.
Delta Woodside's board of directors has requested that Houlihan Lokey
render its written opinion to the Delta Woodside board and the Delta Apparel
board as to whether, assuming the Transaction has been consummated as proposed,
immediately after and giving effect to the Transaction: (a) on a pro forma
basis, the fair value and present fair saleable value of Delta Apparel would
exceed its stated liabilities and identified contingent liabilities, (b) Delta
Apparel should be able to pay its debts as they become absolute and mature; (c)
the capital remaining in Delta Apparel after the Transaction would not be
unreasonably small for the business in which Delta Apparel is engaged, as
management has indicated it is now conducted and is proposed to be conducted
following the consummation of the Transaction; and (d) the financial test for
distributions of the state of incorporation of Delta Apparel (i.e. Georgia) has
been satisfied.
Houlihan Lokey's opinion does not address Delta Woodside's underlying
business decision to effect the Transaction. Houlihan Lokey has not been
requested to, and did not, solicit third party indications of interest in
acquiring all or part of Delta Apparel.
In connection with the preparation of its opinion, Houlihan Lokey made such
reviews, analyses and inquiries as it deemed necessary and appropriate under the
circumstances. Among other things, Houlihan Lokey:
(i) reviewed Delta Apparel's annual financial statements for the 1997,
1998 and 1999 fiscal years and year-to-date statements for the first
nine months of fiscal year 2000, which Delta Apparel's and Delta
Woodside's managements have identified as the most current information
available;
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(ii) reviewed the proposal from the third party lender to provide Delta
Apparel revolving credit and term loan facilities;
(iii)spoke with certain members of the senior management of Delta Woodside
and Delta Apparel to discuss the operations, financial condition,
future prospects and projected operations and performance of Delta
Apparel;
(iv) toured the Edgefield, SC (Rainsford) and Maiden, NC manufacturing
facilities of Delta Apparel;
(v) reviewed budgets and forecasts prepared by Delta Apparel's management
with respect to the periods ended January 1, 2000 through fiscal year
2004;
(vi) reviewed marketing and promotional material relating to Delta Apparel;
(vii)reviewed the preliminary registration statement filed with the SEC
for Delta Apparel;
(viii) reviewed other publicly available financial data for Delta Apparel
and certain companies that Houlihan Lokey deems comparable to Delta
Apparel; and
(ix) conducted such other studies, analyses and investigations as Houlihan
Lokey has deemed appropriate.
In assessing the solvency of Delta Apparel immediately after and giving
effect to the Transaction, Houlihan Lokey:
(i) analyzed the fair value and present fair saleable value of Delta
Apparel's assets relative to Delta Apparel's stated liabilities and
identified contingent liabilities on a pro forma basis ("balance sheet
test");
(ii) assessed Delta Apparel's ability to pay its debts as they become
absolute and mature ("cash flow test"); and
(iii)assessed the capital remaining in Delta Apparel after the Transaction
so as not to be unreasonably small ("reasonable capital test").
Each of "fair value" and "present fair saleable value" is defined as the amount
that may be realized if Delta Apparel's aggregate assets (including goodwill)
are sold as an entirety with reasonable promptness in an arm's length
transaction under present conditions for the sale of comparable business
enterprises, as such conditions can be reasonably evaluated.
Balance Sheet Test
The Balance Sheet Test determines whether or not the fair value and present
fair saleable value of Delta Apparel's assets exceeds its stated liabilities and
identified contingent liabilities after giving effect to the Transaction. This
test requires an analysis of the fair market value of Delta Apparel as a
going-concern. As part of this analysis, Houlihan Lokey considered, among other
things,
(i) historical and projected financial performance for Delta Apparel as
prepared by Delta Apparel;
(ii) the business environment in which Delta Apparel competes;
(iii)performance of certain publicly traded companies deemed by Houlihan
Lokey to be comparable to Delta Apparel, in terms of, among other
things: lines of business, size, profitability, financial leverage and
growth;
<PAGE>
(iv) capitalization rates ("multiples") for certain publicly traded
companies deemed by Houlihan Lokey to be comparable to Delta Apparel,
including (a) Enterprise Value ("EV")/Revenue; (b) EV/earnings before
interest, taxes, depreciation and amortization ("EBITDA") and (c)
EV/earnings before interest and taxes ("EBIT");
(v) multiples derived from acquisitions of companies deemed by Houlihan
Lokey to be comparable to Delta Apparel;
(vi) the Discounted Cash Flow Approach;
(vii) the capital structure and debt obligations of Delta Apparel; and
(viii) non-operating assets and identified contingent liabilities.
"Enterprise Value" or "EV" is defined as total market value of equity plus net
interest bearing debt.
In determining the fair value and present fair saleable value of the
aggregate assets of Delta Apparel, the following methodologies were employed:
the Market Multiple Approach and the Discounted Cash Flow Approach.
Market Multiple Approach. The application of the Market Multiple Approach
involves the derivation of indication of value through the multiplication of
relevant performance fundamentals of the subject entity by appropriate
multiples. Multiples were determined through an analysis of: (i) publicly
traded companies that were determined by Houlihan Lokey to be comparable from an
investment standpoint to Delta Apparel ("Comparable Public Companies"); and (ii)
change of control transactions involving companies that were determined by
Houlihan Lokey to be comparable to Delta Apparel from an investment standpoint
("Comparable Transactions"). Houlihan Lokey selected four publicly traded
domestic companies that are engaged in the manufacturing and marketing of
private label apparel (Garan, Inc., Gildan Activewear, Inc., Russell Corporation
and Tarrant Apparel Group) for comparison to Delta Apparel. Observed market
pricing multiples of the Comparable Public Companies were as follows: (I)
EV/Latest Twelve Month ("LTM") Revenue ranging from 0.46x to 1.56x with a median
of 0.77x; (ii) EV/LTM EBIT ranging from 4.9x to 12.4x with a median of 8.0x and
(iii) EV/LTM EBITDA ranging from 4.1x to 10.7x with a median of 5.3x. A
comparative analysis between Delta Apparel and the Comparable Public Companies
formed the basis for the selection of appropriate multiples for Delta Apparel.
The comparative analysis incorporates both quantitative and qualitative factors
which relate to, among other things, the nature of the industry in which Delta
Apparel and the Comparable Public Companies are engaged and the relative
financial performance of Delta Apparel and the Comparable Public Companies. An
indicated Enterprise Value of $67.2 million was derived based on the application
of selected market multiples to the relevant fundamentals of Delta Apparel and
an adjustment for control through the application of a 25% control premium. The
selected control premium of 25% was based on change of control transactions of
publicly-traded apparel companies and available market studies. The indicated
Enterprise Value of $67.2 million reflects implied multiples for Delta Apparel
of 0.6x LTM Revenues of $114 million, 17.6x LTM EBIT of $3.8 million and 5.0x
LTM EBITDA of $13.5 million. The indicated Enterprise Value for Delta Apparel
based on the Comparable Public Companies analysis exceeded its stated
liabilities and identified contingent liabilities by $54 million.
For the Comparable Transactions, Houlihan Lokey analyzed apparel industry
merger and acquisition transactions between 1998 and 1999 where financial
information was publicly disclosed. Market multiples were developed from
sixteen comparable transactions, of which seven were 1999 transactions and
considered most relevant. The 1999 transactions included Alba-Waldenisan/Tefron
Ltd., Synthetic Industries/Investcorp, Authentic Fitness/Warnaco Group, Inc.
Concord Fabrics, Inc/Private Group, Segrets Inc./Liz Claiborne, St. Johns
Knits/Private Group and Koret of California/Kellwood Company. From the
application of market multiples, indications of value were developed through the
capitalization of the relevant performance fundamentals of Delta Apparel.
Relevant fundamentals considered were LTM Revenues, EBITDA and EBIT. Within the
seven most recent transactions, observed EV/Revenues multiples ranged from 0.4x
to 1.7x with a median of 1.0x, EV/EBITDA ranged from 6.2x to 8.5x with a median
of 6.4x and EV/EBIT ranged from 7.4x to 12.0x with a median of 8.7x. Based on
the Comparable Transactions analysis, an Enterprise Value of $59.5 million was
derived for Delta Apparel. The indicated Enterprise Value of $59.5 million
produced implied multiples of 0.8x LTM Revenue, 7.3x LTM EBITDA and 9.6x LTM
EBIT. The indicated Enterprise Value for Delta Apparel based on the Comparable
Transactions analysis exceeded its stated liabilities and identified contingent
liabilities by $46.2 million.
<PAGE>
Discounted Cash Flow Approach. The Discounted Cash Flow Approach involved
the development of Enterprise Value indications from the appraisal of projected
cash flows to be generated by Delta Apparel, which were based on fiscal years
2000 to 2004 financial forecasts prepared by the management of Delta Apparel.
The projected cash flows include interim cash flows over the forecast period and
a terminal year cash flow, which represents the value of Delta Apparel beyond
the forecast period. The interim cash flows reflect the cash available to all
capital providers (debt and equity) after accounting for required capital
investments. The terminal year cash flow reflects an estimate of the fair and
saleable value of Delta Apparel at the end of the forecast period, June 30,
2004. This estimation was developed from the application of the Market Multiple
Approach described above, wherein projected fundamentals were capitalized based
on selected market multiples. Indications of Enterprise Value were developed by
applying an appropriate discount rate or cost of capital to the projected cash
flows and terminal value. The concluded Enterprise Value, or sum of the
projected cash flows and terminal value, ranged between $119.8 and $130.0
million depending on the discount rate and terminal multiple selected. The
discount rate reflects the degree of risk inherent in the assets of Delta
Apparel and its ability to produce the projected cash flows. The ranges of
discount rates and terminal multiples considered were 12% to 13% and 4.0x to
4.5x, respectively. The concluded range of Enterprise Values for Delta Apparel
based on the Discounted Cash Flow approach exceeded its stated liabilities and
identified contingent liabilities by $106.5 million to $116.8 million.
Cash Flow Test
The Cash Flow Test focuses on whether or not Delta Apparel should be able
to repay its debts as they become absolute and mature (including the debts
incurred in the Transaction). This test involves a two-step analysis of Delta
Apparel's fiscal year 2000 to fiscal year 2004 financial projections: (i)
examines the financial projections relative to a variety of factors including:
historical performance, marketing plans and cost structure, and (ii) analyzes
the sensitivity of the projections to changes in key operating variables.
Delta Apparel has made changes to its management team, restructured its
operations, reduced certain costs and implemented certain marketing plans. As a
result of the changes implemented by Delta Apparel, management's forecast for
the business represents an improvement over Delta Apparel's recent financial
performance. Delta Apparel's financial performance for fiscal year 2000
reflects in part the changes implemented by Delta Apparel's management and
represents an improvement over financial results for fiscal year 1999.
The sensitivity analysis of Delta Apparel's projections involved testing a
number of underlying operating assumptions, including: revenue growth, operating
margins and capital investment requirements. Delta Apparel's ability to meet
its debt obligations was analyzed in the context of varying a number of the
operating assumptions. Based on the sensitivity analysis conducted on Delta
Apparel's financial forecast, Delta Apparel demonstrated an ability to meet its
obligations as they came due under a range of financial forecast scenarios.
Reasonable Capital Test
The Reasonable Capital Test follows from the Balance Sheet and Cash Flow
Tests. The determination as to whether the net assets remaining with Delta
Apparel constitute unreasonably small capital involves an analysis of various
factors, including (i) the degree of sensitivity demonstrated in the cash flow
test; (ii) historical and expected volatility in revenues, cash flow and capital
expenditures; (iii) the adequacy of working capital; (iv) historical and
expected volatility of going-concern asset values; (v) the maturity structure
and the ability to refinance Delta Apparel's obligations; (vi) the magnitude,
timing and nature of identified contingent liabilities; and (vii) the nature of
the business and the impact of financial leverage on its operations.
Solvency
Based upon the foregoing, and in reliance thereon, it is Houlihan Lokey's
opinion as of June 6, 2000 that, assuming the Transaction has been consummated
as proposed, immediately after and giving effect to the Transaction:
(i) on a pro forma basis, the fair value and present fair saleable value
of Delta Apparel's assets would exceed Delta Apparel's stated
liabilities and identified contingent liabilities;
<PAGE>
(ii) Delta Apparel should be able to pay its debts as they become absolute
and mature; and
(iii)the capital remaining in Delta Apparel after the Transaction would
not be unreasonably small for the business in which Delta Apparel is
engaged, as management has indicated it is now conducted and is
proposed to be conducted following the consummation of the
Transaction.
Assumptions and Limiting Conditions
Notwithstanding the use of the defined terms "fair value" and "present fair
saleable value", Houlihan Lokey has not been engaged to identify prospective
purchasers or to ascertain the actual prices at which and terms on which Delta
Apparel can currently be sold, and Houlihan Lokey knows of no such efforts by
others. Because the sale of any business enterprise involves numerous
assumptions and uncertainties, not all of which can be quantified or ascertained
prior to engaging in an actual selling effort, Houlihan Lokey expresses no
opinion as to whether Delta Apparel would actually be sold for the amount
Houlihan Lokey believes to be its fair value and present fair saleable value.
Houlihan Lokey has relied upon and assumed, without independent
verification, that the financial forecasts and projections provided to it have
been reasonably prepared and reflect the best currently available estimates of
the future financial results and condition of Delta Apparel, and that there has
been no material adverse change in the assets, financial condition, business or
prospects of Delta Apparel since the date of the most recent financial
statements made available to Houlihan Lokey.
Houlihan Lokey has not independently verified the accuracy and completeness
of the information supplied to it with respect to Delta Apparel, and does not
assume any responsibility with respect to it. Houlihan Lokey has not made any
physical inspection or independent appraisal of any of the properties or assets
of Delta Apparel. Houlihan Lokey's opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by
Houlihan Lokey at the date of its opinion.
Houlihan Lokey's opinion is furnished for the benefit of the Delta Woodside
board and the Delta Apparel board and may not be relied upon by any other person
without Houlihan Lokey's prior written consent. Houlihan Lokey's opinion is
delivered to each recipient subject to the conditions, scope of engagement,
limitations and understandings set forth in its opinion and Houlihan Lokey's
engagement letter with Delta Woodside.
Advice of Prudential Securities
----------------------------------
Delta Woodside's board of directors received financial advice from
Prudential Securities regarding the issues surrounding the separation of the
apparel and textile fabric businesses. The points described above under the
heading "The Delta Apparel Distribution - Reasons for the Delta Apparel
Distribution" include the material factors discussed by Prudential Securities.
Prudential Securities also advised the Delta Woodside board regarding the issues
surrounding various alternatives to the Delta Apparel distribution and the Duck
Head distribution, including a sale of either or both of Delta Apparel or Duck
Head and a liquidation of either or both of Delta Apparel or Duck Head.
Prudential Securities' financial advice was based on its analysis of the trading
prices and trading multiples of approximately 11 textile and apparel companies
which Prudential Securities believed provided relevant comparisons. In
addition, Prudential Securities reviewed recent acquisitions, also deemed to
provide relevant comparisons, in the textile and apparel industries, including
the prices paid and multiples of financial performance that those acquisitions
implied. Prudential Securities' advice regarding Delta Woodside's alternatives
with regard to Delta Apparel was also based on its review and understanding of
prevailing textile and apparel market conditions, as well as its review of Delta
Apparel's historical market performance.
Prudential Securities was not requested to, and did not, undertake the
types of analyses customary to deliver a financial opinion and did not deliver
any such opinion.
Pursuant to an engagement letter, Prudential Securities has been paid by
Delta Woodside an advisory fee of $500,000 for its services. Delta Woodside has
agreed to indemnify Prudential Securities for certain liabilities relating to or
arising from Prudential Securities' engagement by Delta Woodside. Prudential
Securities has also performed various investment banking services for Delta
Woodside in the past, and has received customary fees for those services.
<PAGE>
Prudential Securities is a nationally recognized investment banking firm
and, as a customary part of its investment banking activities, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements, and
valuations for corporate and other purposes. Delta Woodside selected Prudential
Securities because of its expertise, reputation and familiarity with Delta
Woodside. In the ordinary course of business, Prudential Securities and its
affiliates may actively trade or hold the securities and other instruments and
obligations of Delta Woodside for their own account and for the accounts of
customers and, accordingly, may at any time hold long or short positions in such
securities, instruments or obligations.
DESCRIPTION OF THE DELTA APPAREL DISTRIBUTION
The distribution agreement among Delta Woodside, Delta Apparel and Duck
Head sets forth the general terms and conditions relating to, and the
relationship of the three corporations after, the Delta Apparel distribution.
For an extensive description of the distribution agreement, see the section of
this document found under the heading "Relationship Among Delta Apparel, Delta
Woodside and Duck Head--Distribution Agreement".
Delta Woodside plans to effect the Delta Apparel distribution on or about
June 30, 2000 by distributing all of the issued and outstanding shares of Delta
Apparel common stock to the record holders of Delta Woodside common stock on the
record date for this transaction, which is June 19, 2000. Delta Woodside will
distribute one share of Delta Apparel common stock to each of those holders for
every ten shares of Delta Woodside common stock owned of record by that holder.
The actual total number of shares of Delta Apparel common stock that Delta
Woodside will distribute will depend on the number of shares of Delta Woodside
common stock outstanding on the record date. Based upon the one-for-ten Delta
Apparel distribution ratio, the number of shares of Delta Woodside common stock
outstanding on May 19, 2000 and the number of Delta Woodside shares to be issued
before the Delta Apparel record date as described in "Interests of Directors and
Executive Officers in the Delta Apparel Distribution - Payments in Connection
with Delta Apparel Distribution and Duck Head Distribution", Delta Woodside will
distribute approximately 2,400,000 shares of Delta Apparel common stock to
holders of Delta Woodside common stock, which will then constitute all of the
outstanding shares of Delta Apparel common stock. Delta Apparel common shares
will be fully paid and nonassessable, and the holders of those shares will not
be entitled to preemptive rights. For a further description of Delta Apparel
common stock and the rights of its holders, see the portion of this document
located under the heading "Description of Delta Apparel Capital Stock".
For those holders of Delta Woodside common stock who hold their shares of
Delta Woodside common stock through a stockbroker, bank or other nominee, Delta
Woodside's distribution agent, First Union National Bank, will transfer the
shares of Delta Apparel common stock to the registered holders of record who
will make arrangements to credit their customers' accounts with Delta Apparel
common stock. Delta Woodside anticipates that stockbrokers and banks generally
will credit their customers' accounts with Delta Apparel common stock on or
about June 30, 2000.
If a holder of Delta Woodside common stock owns a number of shares of Delta
Woodside common stock that is not a whole multiple of ten and therefore would be
entitled to receive a fraction of a whole share of Delta Apparel common stock,
that holder will receive cash instead of a fractional share of Delta Apparel
common stock. The distribution agent will aggregate into whole shares the
fractional shares to be cashed out and sell them as soon as practicable in the
open market at then prevailing prices on behalf of those registered holders who
would otherwise be entitled to receive less than whole shares. These registered
holders will receive a cash payment in the amount of their pro rata share of the
total proceeds of those sales, less any brokerage commissions. The distribution
agent will pay the net proceeds from sales of fractional shares based upon the
average selling price per share of Delta Apparel common stock of all of those
sales, less any brokerage commissions. Delta Apparel expects the distribution
agent to make sales on behalf of holders who would receive a fraction of a whole
Delta Apparel common share in the Delta Apparel distribution as soon as
practicable after the Delta Apparel distribution date. None of Delta Woodside,
Delta Apparel or the distribution agent guarantees any minimum sale price for
those fractional shares of Delta Apparel common stock, and no interest will be
paid on the sale proceeds of those shares.
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material US federal income tax
consequences generally applicable to a Delta Woodside stockholder who is a US
Holder. The term "US Holder" means a beneficial owner of Delta Woodside shares
that is (i) a citizen or resident of the United States, (ii) a corporation,
partnership (other than certain partnerships as may be provided in the
applicable provisions of the US Treasury Regulations), or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to US
federal income taxation regardless of its source, (iv) a trust if (a) a US court
is able to exercise primary supervision over the trust's administration and (b)
one or more US persons have the authority to control all of the trust's
substantial decisions, or (v) otherwise subject to US federal income taxation on
a net income basis in respect of the Delta Woodside shares.
The following description is for general purposes only and is based on the
US Internal Revenue Code of 1986, as amended from time to time (the "Code"), US
Treasury Regulations and judicial and administrative interpretations thereof,
all as in effect on the date of this document and all of which are subject to
change, possibly retroactively. The tax treatment of a US Holder may vary
depending upon the holder's particular situation. For instance, certain
holders, including, but not limited to, insurance companies, tax-exempt
organizations, financial institutions, persons subject to the alternative
minimum tax, dealers in securities or currencies, persons that have a
"functional currency" other than the US dollar or as part of a "hedging" or
"conversion" transaction for US federal income tax purposes and persons owning,
directly or indirectly, 5 percent or more of the Delta Woodside shares may be
subject to special rules not discussed below. The following summary is limited
to investors who hold the Delta Woodside shares as "capital assets" within the
meaning of Section 1221 of the Code. The discussion below does not address the
effect of any other laws (including other federal, state, local or foreign tax
laws) on a US Holder of Delta Woodside shares. As such, the summary does not
discuss US federal estate and gift tax considerations or US state and local tax
considerations.
Delta Woodside has structured the Delta Apparel distribution and the Duck
Head distribution to qualify as tax-free spin offs for federal income tax
purposes under Code Section 355. Code Section 355 treats a spin-off as tax free
if the conditions of that statute are satisfied.
Delta Woodside has not sought a ruling from the US Internal Revenue Service
("IRS") regarding the Delta Apparel distribution or the Duck Head distribution,
in part because neither distribution satisfies all the conditions imposed by the
IRS for such a ruling. The fact that Delta Woodside is not eligible to receive a
private letter ruling from the IRS on the issue does not, however, in and of
itself, mean that the distributions do not qualify as tax-free spin-offs under
Code Section 355. Whether the Delta Apparel distribution and the Duck Head
distribution qualify under Code Section 355 as tax-free spin-offs will depend on
whether the criteria in Code Section 355 and the relevant rules and regulations
of the IRS are satisfied.
Delta Woodside has obtained an opinion from KPMG LLP that it is more likely
than not that each of the Delta Apparel distribution and the Duck Head
distribution qualifies as tax-free under Code Section 355.
Material Federal Income Tax Consequences if the Delta Apparel Distribution
---------------------------------------------------------------------------
and the Duck Head Distribution Qualify as Tax-Free Spin-Offs under Code
---------------------------------------------------------------------------
Section 355
-----------
If the Delta Apparel distribution and the Duck Head distribution qualify as
tax-free spin-offs under Code Section 355, then:
1. The US Holders of Delta Woodside stock who receive Delta Apparel common
stock and Duck Head common stock in those distributions will not recognize
gain upon either of the distributions, except as described immediately
below with respect to fractional shares.
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.
<PAGE>
3. Each US Holder of Delta Woodside stock will be required to apportion his,
her or its tax basis in the US Holder's Delta Woodside shares between the
Delta Woodside shares retained and the Delta Apparel shares and Duck Head
shares received, with this apportionment to be made in proportion to the
shares' relative fair market values for federal income tax purposes
immediately after the distributions.
4. The holding period for the Delta Apparel shares and the Duck Head shares
received by a US Holder in the distributions will be the same as the US
Holder's holding period for the Delta Woodside shares with respect to which
the Delta Apparel distribution and the Duck Head distributions are made.
5. No gain or loss will be recognized by Delta Woodside with respect to the
Delta Apparel distribution or the Duck Head distribution, except to the
extent of any excess loss accounts or deferred intercompany gains.
Delta Woodside anticipates that in connection with the distributions Delta
Woodside will recognize gain as a result of deferred intercompany gains, but
that this gain will be offset by Delta Woodside's net operating losses.
US Treasury Regulations Section 1.355-5 requires that each US Holder that
receives Delta Apparel shares in the Delta Apparel distribution and Duck Head
shares in the Duck Head distribution attach a statement to his, her or its US
federal income tax return for the taxable year in which the distributions occur,
showing the applicability of Code Section 355 to the Delta Apparel distribution
and the Duck Head distribution. US Holders should consult their own tax
advisors regarding these disclosure requirements.
As noted above, Delta Woodside has not sought a ruling from the IRS
regarding the Delta Apparel distribution or the Duck Head distribution. The
fact that no ruling has been sought should not be construed as an indication
that the IRS would necessarily reach a different conclusion regarding the Delta
Apparel distribution or the Duck Head distribution than the conclusion set out
in the opinion of KPMG LLP. The opinion of KPMG LLP referred to in this
description is not binding upon the IRS, any other tax authority or any court,
and no assurance can be given that a position contrary to those expressed in the
opinion of KPMG LLP will be not asserted by a tax authority and ultimately
sustained by a court of law.
Material Federal Income Tax Consequences if the Delta Apparel Distribution
---------------------------------------------------------------------------
and the Duck Head Distribution Do Not Qualify as Tax-Free Spin-Offs under
---------------------------------------------------------------------------
Code Section 355
-----------------
If the Delta Apparel distribution and the Duck Head distribution do not
qualify as tax-free spin-offs under Code Section 355, then the following are the
material federal income tax consequences to each participating Delta Woodside
stockholder and to Delta Woodside:
1. Each Delta Woodside stockholder will recognize dividend income to the
extent of the lesser of (a) the value of the Delta Apparel shares and the
Duck Head shares received (together with any cash received for any
fractional share) or (b) the stockholder's pro rata share of the
accumulated earnings and profits of Delta Woodside for federal income tax
purposes through the end of fiscal year 2000. This dividend income will not
reduce any Delta Woodside stockholder's basis in his, her or its Delta
Woodside shares.
a. The fair market value for federal income tax purposes of the Delta
Apparel shares and the Duck Head shares received by the Delta Woodside
stockholders in the distributions will depend on the trading prices of
the Delta Apparel shares and the Duck Head shares around the time of
the distribution. Delta Woodside is not able at this time to predict
what those values will be.
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
<PAGE>
stockholder's basis in his, her or its Delta Woodside shares will be
reduced accordingly. Any remaining value of the Delta Apparel shares and
Duck Head shares (together with any cash received for any fractional share)
in excess of the Delta Woodside stockholder's basis in his, her or its
Delta Woodside shares will be taxable to the Delta Woodside stockholder as
gain, which will be capital gain if the Delta Woodside stock is held as a
capital asset. This capital gain will be taxable as either long term or
short term capital gain, depending upon the stockholder's holding period
for those Delta Woodside shares.
3. The Delta Woodside stockholder's tax basis in the Delta Apparel shares and
the Duck Head shares received in the distributions will be equal to the
fair market value for federal income tax purposes of those shares at the
time of the distributions. The stockholder's holding period for those
shares will begin on the date of the distributions.
4. The Delta Apparel distribution and the Duck Head distribution will also be
taxable as a gain to Delta Woodside, to the extent of the excess of the
value for federal income tax purposes of the Delta Apparel shares and the
Duck Head shares distributed over their tax bases to Delta Woodside. Delta
Woodside believes that any federal income tax liability to it resulting
from the Delta Apparel distribution and the Duck Head distribution will not
be material, because any applicable recognized income will be offset by
Delta Woodside's net operating losses. Any gain recognized by Delta
Woodside on the Delta Apparel distribution or the Duck Head distribution
will increase the fiscal year 2000 earnings and profits. Delta Woodside
cannot at this time calculate the amount of this gain because it is unable
to forecast what the initial trading prices will be for the Delta Apparel
shares or the Duck Head shares, which may be the federal income tax values
of the Delta Apparel shares and the Duck Head shares for purposes of this
calculation.
THE FOREGOING IS A GENERAL DISCUSSION AND IS NOT INTENDED TO SERVE AS
SPECIFIC ADVICE FOR ANY PARTICULAR DELTA WOODSIDE STOCKHOLDER, SINCE THE TAX
CONSEQUENCES OF THE DELTA APPAREL DISTRIBUTION AND THE DUCK HEAD DISTRIBUTION TO
EACH STOCKHOLDER WILL DEPEND UPON THAT STOCKHOLDER'S OWN PARTICULAR
CIRCUMSTANCES. EACH STOCKHOLDER SHOULD CONSULT HIS, HER OR ITS OWN ADVISORS AS
TO THE FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES TO THAT STOCKHOLDER OF
THE DELTA APPAREL DISTRIBUTION AND THE DUCK HEAD DISTRIBUTION.
KPMG LLP is an internationally recognized accounting, tax and consulting
firm and, as a customary part of its tax practice, is regularly engaged to
provide opinions on the federal income tax consequences of merger and
acquisition transactions. Delta Woodside selected KPMG LLP because of its
expertise and its familiarity with Delta Woodside, Delta Apparel and Duck Head.
KPMG LLP acts as the independent auditor of the financial statements of Delta
Woodside, Delta Apparel and Duck Head and as their respective tax advisors.
KPMG LLP has also provided various consulting services to Delta Woodside. KPMG
LLP receives and has received customary fees for those services.
Pursuant to an engagement letter, Delta Woodside has agreed to pay KPMG LLP
a fee of $250,000 in connection with the preparation and delivery of its opinion
on the federal income tax consequences of the Delta Apparel and Duck Head
distributions. Delta Woodside has agreed to indemnify KPMG LLP for certain
liabilities relating to KPMG LLP's engagement by Delta Woodside.
In connection with the opinion of KPMG LLP respecting the U.S. federal
income tax consequences of the Delta Apparel distribution and the Duck Head
distribution, each of E. Erwin Maddrey, II, Buck A. Mickel, Micco Corporation,
Minor H. Mickel, Minor M. Shaw and Charles C. Mickel will represent to KPMG LLP
that such greater than 5% beneficial owner of Delta Woodside shares has no
binding commitment to sell, exchange, transfer by gift or otherwise dispose of
any Delta Woodside shares, Delta Apparel shares or Duck Head shares after the
Delta Apparel and Duck Head distributions, that such shareholder has no present
plan or intention to sell, exchange, transfer by gift or otherwise dispose of
any Delta Woodside shares, Delta Apparel shares or Duck Head shares except when
paired with a proportionate disposition of shares in all three companies and
that such shareholder has no present plan or intention to acquire (directly or
indirectly) during the period ending 2 years from the date of the Delta Apparel
distribution and the Duck Head distribution additional Delta Woodside shares,
Delta Apparel shares or Duck Head shares that, when added to such shareholder's
existing stockholding, would represent a 50% or greater interest in Delta
Woodside, Delta Apparel or Duck Head. See "Security Ownership of Significant
Beneficial Owner and Management."
<PAGE>
Net Operating Loss Carry Forwards
-------------------------------------
As of July 3, 1999, Delta Woodside had net operating loss carry forwards,
for US consolidated federal income tax purposes, of approximately $68 million.
KPMG LLP has provided its opinion that it is more likely than not that,
following the Delta Apparel distribution and the Duck Head distribution, and
assuming that the distributions are tax-free pursuant to Code Section 355, (a)
Duck Head will retain as its attribute its allocable share of the Delta Woodside
US consolidated federal income tax net operating loss carry forward; (b) Delta
Apparel will retain as its attribute its allocable share of the Delta Woodside
US consolidated federal income tax net operating loss carry forward; and (c) the
Delta Woodside US consolidated federal income tax group will retain as its
attribute the balance of the Delta Woodside net operating loss not allocable to
Duck Head or Delta Apparel. Delta Woodside has estimated Duck Head's and Delta
Apparel's allocable shares of the US consolidated federal income tax net
operating loss carry forward as of July 3, 1999 at $3 million and $9 million,
respectively. Delta Woodside believes that these loss carry forwards will
expire at various dates in fiscal years 2011 through 2019.
Prior to the Delta Apparel distribution and the Duck Head distribution, the
Delta Apparel Company division and the Duck Head Apparel Company division were
part of the Delta Woodside consolidated group, and the net operating losses of
any member of the Delta Woodside consolidated group were generally available to
reduce the consolidated federal taxable income of the group. For financial
reporting purposes, prior to the Delta Apparel distribution and the Duck Head
distribution each of Delta Apparel and Duck Head carries "deferred tax assets"
on its balance sheet to reflect, among other matters, the financial impact of
their respective hypothetical separate company net operating loss carry
forwards. For federal income tax purposes, however, tax attributes, such as
net operating loss carry forwards, remain with the corporate entity, not the
division, that generated them. Therefore, with the Delta Apparel distribution
and the Duck Head distribution, tax attributes, including the Delta Woodside
consolidated federal net operating loss carry forward, will be allocated among
Delta Woodside, Delta Apparel and Duck Head in accordance with the federal
consolidated return regulations.
The pro forma balance sheet of Delta Apparel that is included under the
heading "Unaudited Pro Forma Combined Financial Statements" reflects Delta
Apparel's expected allocable portion of the pre-distribution Delta Woodside
consolidated federal net operating loss carry forward.
ACCOUNTING TREATMENT
The Delta Apparel distribution and the Duck Head distribution will be
accounted for in accordance with United States generally accepted accounting
principles. Accordingly, the Delta Apparel distribution will be accounted for
by Delta Woodside based on the recorded amounts of the net assets being
spun-off. Delta Woodside will charge directly to equity as a dividend the
historical cost carrying amount of the net assets of Delta Apparel.
<PAGE>
RELATIONSHIPS AMONG DELTA APPAREL,
DELTA WOODSIDE AND DUCK HEAD
This section describes the primary agreements among Delta Apparel, Delta
Woodside and Duck Head that will define the ongoing relationships among them and
their respective subsidiaries after the Delta Apparel distribution and the Duck
Head distribution and is expected to provide for the orderly separation of the
three companies. The following description of the distribution agreement and
the tax sharing agreement summarizes the material terms of those agreements.
Delta Apparel has filed those agreements as exhibits to its Registration
Statement on Form 10 filed with the Securities and Exchange Commission. This
document is a part of that registration statement.
DISTRIBUTION AGREEMENT
Delta Apparel has entered into a distribution agreement with Delta Woodside
and Duck Head as of March 15, 2000. The distribution agreement provides for the
procedures for effecting the Delta Apparel distribution and the Duck Head
distribution. For this purpose, as summarized below, the distribution agreement
provides for the principal corporate transactions and procedures for separating
the Delta Apparel Company division's business and the Duck Head Apparel Company
division's business from each other and the rest of Delta Woodside. Also, as
summarized below, the distribution agreement defines the relationships among
Delta Apparel, Delta Woodside and Duck Head after the Delta Apparel distribution
and the Duck Head distribution with respect to, among other things,
indemnification arrangements and employee benefit arrangements.
Intercompany reorganization
----------------------------
Pursuant to the distribution agreement, Delta Woodside, Delta Apparel and
Duck Head have caused the following to be effected:
(a) Delta Woodside and its subsidiaries (other than Delta Mills)
contributed, as contributions to capital, all net debt amounts owed to
any of them by the corporations that conducted the Delta Apparel
Company division's business and the Duck Head Apparel Company
division's business, with the exceptions of (i) the intercompany debt
that was attributable to the portion of the amounts borrowed since
January 1, 2000 for use by the Delta Apparel Company division's
business or the Duck Head Apparel Company division's business from
Delta Woodside's credit agreement lender that were repaid to that
lender or to Delta Woodside with borrowings under Delta Apparel's and
Duck Head's new credit facilities (which repayments cancelled such
intercompany debt) and (ii) any amounts owed by Delta Apparel to Delta
Mills for yarn sold by Delta Mills to Delta Apparel, which amounts
shall be paid in the ordinary course of business. These intercompany
contributions of debt did not, however, affect any obligation that
Delta Woodside, Delta Apparel or Duck Head may have under the
distribution agreement or the tax sharing agreement. Prior to
completion of the intercompany reorganization, the Delta Apparel
Company division's assets were owned by several of Delta Woodside's
wholly-owned subsidiaries, and the Duck Head Apparel Company
division's assets were owned by Delta Woodside and several of its
wholly-owned subsidiaries.
(b) All the assets used in the operations of the Delta Apparel Company
division's business were transferred to Delta Apparel or a subsidiary
of Delta Apparel to the extent not already owned by Delta Apparel or
its subsidiaries. This transfer included the sale by Delta Mills to
Delta Apparel of the Rainsford plant, located in Edgefield, SC, which
is described below under the subheading "Other Relationships".
(c) Delta Apparel assumed all of the liabilities of the Delta Apparel
Company division of Delta Woodside, and caused all holders of
indebtedness for borrowed money that were part of the assumed Delta
Apparel liabilities and all lessors of leases that were part of the
assumed Delta Apparel liabilities to agree to look only to Delta
Apparel or a subsidiary of Delta Apparel for payment of that
indebtedness or lease (except where Delta Woodside or Duck Head, as
applicable, consented to not being released from the obligations).
<PAGE>
(d) All the assets used in the operations of the Duck Head Apparel Company
division's business were transferred to Duck Head or a subsidiary of
Duck Head to the extent not already owned by Duck Head or its
subsidiaries.
(e) Duck Head assumed all of the liabilities of the Duck Head Apparel
Company division of Delta Woodside, and caused all holders of
indebtedness for borrowed money that were part of the assumed Duck
Head liabilities and all lessors of leases that were part of the
assumed Duck Head liabilities to agree to look only to Duck Head or a
subsidiary of Duck Head for payment of that indebtedness or lease
(except where Delta Woodside or Delta Apparel, as applicable,
consented to not being released from the obligations).
(f) Delta Woodside caused all holders of indebtedness for borrowed money
and all lessors of leases that were not part of the liabilities
assumed by Delta Apparel or the liabilities assumed by Duck Head to
agree to look only to Delta Woodside or a remaining subsidiary of
Delta Woodside for payment of that indebtedness or lease (except where
Delta Apparel or Duck Head, as applicable, consented to not being
released from the obligations).
Indemnification
---------------
Each of Delta Woodside, Delta Apparel and Duck Head has agreed to indemnify
each other and their respective directors, officers, employees and agents
against any and all liabilities and expenses incurred or suffered that arise out
of or pertain to:
(a) any breach of the representations and warranties made by it in the
distribution agreement;
(b) any breach by it of any obligation under the distribution agreement;
(c) the liabilities assumed or retained by it under the distribution
agreement; or
(d) any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission of a material fact contained in any of
its disclosure documents filed by it with the SEC, except insofar as
the misstatement or omission was based upon information furnished to
the indemnifying party by the indemnified party.
Employee Matters
-----------------
Delta Woodside has caused the employees of the Delta Apparel Company
division to become employees of Delta Apparel, Delta Apparel has assumed the
accrued employee benefits of these employees and Delta Woodside will cause the
account balance of each of these employees in any and all of Delta Woodside's
employee benefit plans (other than the Delta Woodside stock option plan, the
Delta Woodside incentive stock award plan and the Delta Woodside long term
incentive plan, if any) to be transferred to a comparable employee benefit plan
of Delta Apparel.
Intercompany Accounts
----------------------
Amounts owed by Delta Apparel to Delta Mills for yarn previously sold by
Delta Mills to Delta Apparel will be paid in the ordinary course of business.
As of April 1, 2000, these amounts aggregated approximately $2.8 million.
Other than any obligations described in or arising under the distribution
agreement or the tax sharing agreement, each of Delta Woodside, Delta Apparel
and Duck Head has represented to each other that it is not aware of any other
intercompany receivable, payable or loan balance that will exist as of the time
of the Delta Apparel distribution and the Duck Head distribution between any of
them.
Transaction Expenses
---------------------
<PAGE>
Generally, all costs and expenses incurred in connection with the Delta
Apparel distribution, the Duck Head distribution and related transactions shall
be paid by Delta Woodside, Duck Head and Delta Apparel proportionately in
accordance with the respective benefits received by Delta Woodside, Duck Head
and Delta Apparel as determined in good faith by the parties; provided that the
holders of the Delta Woodside shares shall pay their own expenses, if any,
incurred in connection with the Delta Apparel distribution and the Duck Head
distribution.
TAX SHARING AGREEMENT
Delta Apparel will enter into a tax sharing agreement with Delta Woodside
and Duck Head that will describe, among other things, each company's rights and
obligations relating to tax payments and refunds for periods before and after
the Delta Apparel distribution and related matters like the filing of tax
returns and the handling of audits and other tax proceedings. The tax sharing
agreement also describes the indemnification arrangements with respect to tax
matters among Delta Apparel and its subsidiaries (which this document refers to
as the Delta Apparel tax group), Delta Woodside and its subsidiaries after the
Delta Apparel distribution and the Duck Head distribution (which this document
refers to as the Delta Woodside tax group) and Duck Head and its subsidiaries
(which this document refers to as the Duck Head tax group).
Under the tax sharing agreement, the allocation of tax liabilities and
benefits is generally as follows:
- With respect to federal income taxes:
(a) For each taxable year that ends prior to the Delta Apparel
distribution, Delta Woodside shall be responsible for paying any
increase in federal income taxes, and shall be entitled to
receive the benefit of any refund of or saving in federal income
taxes, that results from any tax proceeding with respect to any
returns relating to federal income taxes of the Delta Woodside
consolidated federal income tax group.
(b) For the taxable period ending on the date of the Delta Apparel
distribution, Delta Woodside shall be responsible for paying any
federal income taxes, and shall be entitled to any refund of or
saving in federal income taxes, with respect to the Delta
Woodside consolidated federal income tax group.
- With respect to state income, franchise or similar taxes, for each
taxable period that ends prior to or on the date of the Delta Apparel
distribution, each corporation that is a member of the Delta Woodside
tax group, the Duck Head tax group or the Delta Apparel tax group
shall be responsible for paying any of those state taxes, and any
increase in those state taxes, and shall be entitled to receive the
benefit of any refund of or saving in those state taxes, with respect
to that corporation (or any predecessor by merger of that corporation)
or that results from any tax proceeding with respect to any returns
relating to those state taxes of that corporation (or any predecessor
by merger of that corporation).
- With respect to federal employment taxes:
(a) Delta Woodside shall be responsible for the federal employment
taxes payable with respect to the compensation paid, whether
before, on or after the date of the Delta Apparel distribution,
by any member of the Delta Woodside federal income tax
consolidated group for any period ending prior to or on the date
of the Delta Apparel distribution or by any member of the Delta
Woodside tax group for any period after that date to all
individuals who are past or present employees of any business of
Delta Woodside other than the business of Delta Apparel or the
business of Duck Head.
(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 and the Duck Head distribution. The Duck Head tax
group shall be responsible for all taxes, and shall receive the
benefit of all tax items, of any member of the Duck Head tax group
that relate to any taxable period after the Duck Head distribution.
The Delta Apparel tax group shall be responsible for all taxes, and
shall receive the benefit of all tax items, of any member of the Delta
Apparel tax group that relate to any taxable period after the Delta
Apparel distribution.
Under the tax sharing agreement, the Delta Apparel tax group and the Duck
Head tax group have irrevocably designated Delta Woodside as their agent for
purposes of taking a broad range of actions in connection with taxes for
pre-distribution periods. Those actions include the settlement of tax audits and
other tax proceedings. In addition, the tax sharing agreement provides that all
disagreements and disputes relating to the agreement are to be resolved by Delta
Woodside. These arrangements may result in conflicts of interest among Delta
Apparel, Delta Woodside and Duck Head concerning such matters as whether a tax
relates to the business of Delta Woodside, Delta Apparel or Duck Head. Delta
Woodside might determine that a tax was a liability of Delta Apparel even though
Delta Apparel disagreed with that determination.
Under the tax sharing agreement, the Delta Apparel tax group, the Delta
Woodside tax group and the Duck Head tax group have agreed to indemnify one
another against various tax liabilities, generally in accordance with the
allocation of tax liabilities and benefits described above.
OTHER RELATIONSHIPS
Boards of Directors of Delta Apparel, Delta Woodside and Duck Head
---------------------------------------------------------------------------
The following directors of Delta Apparel are also directors of Delta
Woodside and Duck Head: William F. Garrett, C. C. Guy, Dr. James F. Kane, Dr.
Max Lennon, E. Erwin Maddrey, II, Buck A. Mickel and Bettis C. Rainsford. In
the event that any material issue were to arise between Delta Apparel, on the
one hand, and either Delta Woodside or Duck Head, on the other hand, these
directors could be deemed to have a conflict of interest with respect to that
<PAGE>
issue. In that circumstance, Delta Apparel anticipates that it will proceed in
a manner that is determined by a majority of those members of Delta Apparel's
board of directors who are not also members of the board of directors of Delta
Woodside or the board of directors of Duck Head (as applicable).
Principal Stockholders
-----------------------
The Delta Apparel shares will be distributed in the Delta Apparel
distribution, and the Duck Head shares will be distributed in the Duck Head
distribution, to the Delta Woodside stockholders proportionately among the Delta
Woodside shares. Therefore, immediately following the Delta Apparel
distribution, Delta Woodside's principal stockholders will be the same
individuals and entities as Delta Apparel's and Duck Head's principal
stockholders, and those principal stockholders will have the same respective
percentages of outstanding beneficial ownership in each of Delta Woodside, Delta
Apparel and Duck Head (assuming no acquisitions or dispositions of shares by
those stockholders between the record date for the Delta Apparel distribution or
the Duck Head distribution and the completion of either distribution). See
"Security Ownership of Significant Beneficial Owners and Management".
Sales to and Purchases from Delta Woodside or Duck Head of Goods or
---------------------------------------------------------------------------
Manufacturing Services
-----------------------
In the ordinary course of Delta Apparel's business, Delta Apparel has
produced T-shirts for Duck Head, purchased T-shirts from Duck Head and purchased
yarn and fabrics from Delta Mills. The following table shows these transactions
for the last three fiscal years and for the first nine months of fiscal year
2000:
(in thousands of dollars)
Fiscal year First nine months
----------- -----------------
of
--
1997 1998 1999 Fiscal year 2000
---- ---- ---- ----------------
Sold to Duck Head 403 156 481 28
Purchased from Duck Head 653 132 - -
Purchased from Delta Mills(1) 26,456 17,683 - -
________________________________________
(1) For purposes of this table, yarn produced by the Rainsford plant and used
by Delta Apparel, prior to the transfer from Delta Mills to Delta Apparel
in April 1998 of operational control of the Rainsford plant, is treated as
sold by Delta Mills to Delta Apparel, and yarn produced by the Rainsford
plant and used by Delta Apparel, after that transfer, is not treated as
sold by Delta Mills to Delta Apparel.
Prior to the end of March 1997, all yarn sales between Delta Mills and
Delta Apparel were at a price equal to cost plus $0.01 per pound. Since March
1997, all of these yarn sales have been made at prices deemed by Delta Apparel
to approximate market value. In connection with these pricing policies on yarn
sales, through March 1997 Delta Apparel maintained with Delta Mills a
non-interest bearing deposit which aggregated $11.2 million at June 29, 1996.
Effective May 7, 1997, Delta Woodside adopted a written policy statement
governing the pricing of intercompany transactions. Among other things, this
policy statement provides that all intercompany sales and purchases will be
settled at market value and terms.
All of the T-shirt and fabric sales were made at prices deemed by Delta
Apparel to approximate market value.
Delta Apparel anticipates that any future sales or purchases to or from
Duck Head or Delta Woodside will not be material.
Purchase of Rainsford Plant
------------------------------
<PAGE>
The Rainsford plant in Edgefield, South Carolina, manufactures yarn for use
in knitting operations. In April 1998, control of the operations and management
of the Rainsford plant was transferred from Delta Mills to Delta Apparel, which
converted the assets to produce yarn products for use in Delta Apparel's
products.
Pursuant to the distribution agreement, Delta Mills sold to Delta Apparel
the Rainsford plant and related inventory effective as of May 6, 2000. Delta
Mills and Delta Apparel agreed that the purchase price for these assets would be
the assets' book value as of the effective date of the sale. The purchase price
for the real property, furniture, fixtures and equipment was approximately $12.0
million and the purchase price for the inventory and other tangible personal
property was approximately $1.4 million. This purchase price was paid in cash
in the amount of approximately $12.5 million and by the assumption by Delta
Apparel of certain liabilities aggregating approximately $0.9 million as of the
effective date of the sale. Delta Apparel paid the cash portion of the purchase
price with borrowings under its credit facility. In connection with the
closing, Delta Apparel agreed to assume any environmental liability that may
arise with respect to the Rainsford plant regardless of the time period with
respect to which that liability arises.
Until the effective date of the transfer of title from Delta Mills to Delta
Apparel of the Rainsford plant, all yarn produced by the Rainsford plant for use
in the Delta Apparel business was sold by Delta Mills to Delta Apparel. The
amounts owed by Delta Apparel to Delta Mills from these sales, which aggregated
$2.8 million at April 1, 2000, will be paid in the ordinary course of business.
The terms of the 9 5/8% Senior Notes of Delta Mills required that Delta
Mills provide to the holders of those Senior Notes an opinion of an investment
banking firm as to the fairness from a financial point of view to those holders
of the terms of the sale by Delta Mills to Delta Apparel of the Rainsford plant
(including the simultaneous sale of inventory). Delta Mills engaged The
Robinson-Humphrey Company, LLC to provide this opinion.
THE OPINION PROVIDED BY ROBINSON-HUMPHREY RESPECTING THE SALE OF THE
RAINSFORD PLANT ADDRESSED THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE
SALE TO THE HOLDERS OF THE SENIOR NOTES OF DELTA MILLS. THE OPINION DID NOT
ADDRESS THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE SALE TO DELTA APPAREL
OR DELTA APPAREL'S CREDITORS OR STOCKHOLDERS.
The following summarizes Robinson-Humphreys' analyses and the opinion that
Robinson-Humphreys provided to the indenture trustee for the Senior Notes of
Delta Mills with respect to the Rainsford plant sale.
Material and Information Considered by Robinson-Humphrey
In arriving at its opinion, Robinson-Humphrey:
- Reviewed a draft of the sale agreement respecting the Rainsford plant
sale;
- Reviewed certain internal financial statements and other financial and
operating data concerning the Rainsford plant;
- Conducted discussions with members of Delta Mills' and the Rainsford
plant's managements concerning the Rainsford plant's business,
operations, present condition and prospects;
- Compared the results of operations and present financial condition of
the Rainsford plant with those of certain publicly traded companies
that Robinson-Humphrey deemed to be reasonably similar to the
Rainsford plant;
- Reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions that
Robinson-Humphrey deemed relevant;
- Performed certain financial analyses with respect to the Rainsford
plant's projected future operating performance; and
<PAGE>
- Reviewed such other financial statistics and analyses and performed
such other investigations and took into account such other matters as
Robinson-Humphrey deemed appropriate.
Robinson-Humphrey relied upon the accuracy and completeness of the
financial and other information provided to it by Delta Mills in arriving at its
opinion without independent verification. With respect to the financial
forecasts of the Rainsford plant for the years 2000 through 2004,
Robinson-Humphrey assumed that the assumptions provided by management have been
reasonably prepared and reflect the best currently available estimates and
judgment of Delta Mills' management. In arriving at its opinion,
Robinson-Humphrey conducted only a limited physical inspection of the properties
and facilities of the Rainsford plant, and did not make appraisals of the
Rainsford plant or any of its assets. Robinson-Humphrey's opinion was
necessarily based upon market, economic and other conditions as they existed on,
and could be evaluated as of, the date of its letter.
In connection with the preparation of its fairness opinion,
Robinson-Humphrey performed certain financial and comparative analyses, the
material portions of which are summarized below. The following is a summary of
the material factors considered and principal financial analyses performed by
Robinson-Humphrey to arrive at its opinion, but does not purport to be a
complete description of the factors considered or the analyses performed by
Robinson-Humphrey in arriving at its opinion. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances, and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. In addition,
Robinson-Humphrey believes that its analyses must be considered as an integrated
whole, and that selecting portions of the analyses and the factors considered by
it, without considering all of the analyses and factors, could create a
misleading or an incomplete view of the process underlying its analyses set
forth in its opinion. In performing its analyses, Robinson-Humphrey made
numerous assumptions with respect to industry and economic conditions and other
matters, many of which are beyond the control of Delta Mills or management of
the Rainsford plant. Any estimates contained in such analyses are not
necessarily indicative of actual past or future results or values, which may be
significantly more or less favorable than as set forth in the opinion.
Estimates of values of companies do not purport to be appraisals or necessarily
to reflect the price at which those companies may actually be sold, and such
estimates are inherently subject to uncertainty. No public company utilized as
a comparison was identical to the Rainsford plant, and no merger and acquisition
transaction involved assets identical to the sale of the Rainsford plant. An
analysis of the results of such comparisons is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the comparable companies and
transactions and other factors that could affect the values of companies and
transactions to which the sale of the Rainsford plant was being compared.
Analysis of Selected Comparable Public Companies
Robinson-Humphrey reviewed and compared selected publicly available
financial data, market information and trading multiples for diversified textile
companies that Robinson-Humphrey deemed comparable to Delta Mills.
Robinson-Humphrey also reviewed and compared selected publicly available
financial data, market information and trading multiples for diversified textile
companies with revenues and firm values less than $1.0 billion that
Robinson-Humphrey deemed comparable to Delta Mills.
For the comparable companies in each category, Robinson-Humphrey compared,
among other things, firm value as a multiple of latest twelve months ("LTM")
revenues, firm value as a multiple of LTM earnings before interest, taxes,
depreciation and amortization ("EBITDA"), firm value as a multiple of LTM
earnings before interest and taxes ("EBIT"), equity value per share ("Price") as
a multiple of LTM earnings per share ("EPS") and equity value as a multiple of
book value for the comparable companies. All multiples were based on closing
stock prices as of May 11, 2000. Revenues, EBITDA, EBIT, EPS and book value for
the comparable companies were based on historical financial information
available in public filings of the comparable companies.
Analysis of Selected Merger & Acquisition Transactions
Robinson-Humphrey reviewed the financial terms, to the extent publicly
available, of 28 proposed, pending or completed merger and acquisition
transactions in the textile industry since 1995 involving companies that
Robinson-Humphrey deemed to be comparable based on operating characteristics of
the Rainsford plant. Robinson-Humphrey calculated various financial multiples
based on certain publicly available information for each of the compared
transactions and compared them to corresponding financial multiples for the
purchase price in the proposed sale of the Rainsford plant.
<PAGE>
With respect to each category of compared transactions, Robinson-Humphrey
compared, among other things, firm value as a multiple of LTM revenues, firm
value as a multiple of LTM EBIT, firm value as a multiple of LTM EBITDA, and
equity value as a multiple of LTM net income and book value for the comparable
merger and acquisition transactions.
Discounted Cash Flow Analysis
Robinson-Humphrey performed a discounted cash flow analysis using financial
projections for 2000 through 2004 to estimate the net present equity value for
the Rainsford plant. Robinson-Humphrey derived ranges of net present equity
value for the Rainsford plant on a stand-alone basis which were based upon the
discounted cash flows of the Rainsford plant from 2000 to 2004 plus a terminal
value calculated using a range of multiples of the Rainsford plant's projected
year 2004 EBITDA. Robinson-Humphrey applied discount rates ranging from 16% to
20% and multiples of 2004 EBITDA ranging from 3.0x to 5.0x.
Equipment Appraisal Value
Robinson-Humphrey examined a third party appraisal of the Rainsford plant
that was provided to Delta Mills in July 1999. The appraisal had been obtained
to arrive at a conclusion of orderly liquidation value and forced liquidation
value for the Rainsford plant's assets effective the date of inspection.
Fairness Opinion to Holders of Delta Mills' Senior Notes
Based on these analyses, Robinson-Humphrey delivered its written opinion
that, as of the date of its opinion, the sale of the Rainsford plant was fair,
from a financial point of view, to the holders of Delta Mills' 9 5/8% Senior
Notes due 2007.
Robinson-Humphrey based its analyses on assumptions that it deemed
reasonable, including assumptions concerning general business and economic
conditions and industry-specific factors. The preparation of fairness opinions
does not involve mathematical weighing of the results of the individual analyses
performed, but requires Robinson-Humphrey to exercise its professional
judgement, based on its experience and expertise, in considering a wide variety
of analyses taken as a whole. Each of the analyses conducted by
Robinson-Humphrey was carried out in order to provide a different perspective on
the transaction and to add to the total mix of information available.
Robinson-Humphrey did not form a conclusion as to whether any individual
analysis, considered in isolation, supported or failed to support an opinion as
to fairness. Rather, in reaching its conclusion, Robinson-Humphrey considered
the results of the analyses in light of each other and ultimately reached its
conclusion based on the results of all analyses taken as a whole.
Information Concerning Robinson-Humphrey
Robinson-Humphrey is a nationally recognized investment banking firm and,
as a customary part of its investment banking activities, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, private placements, and valuations
for corporate and other purposes. Delta Mills selected Robinson-Humphrey
because of its expertise, reputation in the textile industry and familiarity
with Delta Mills and the Rainsford plant, and because of Delta Woodside's
experience with Robinson-Humphrey's assistance in the proposed sale by Delta
Woodside of the Duck Head Apparel Company division during part of 1998 and 1999.
In the ordinary course of business, Robinson-Humphrey and its affiliates may
actively trade or hold the securities and other instruments and obligations of
Delta Woodside for their own account and for the accounts of customers and,
accordingly, may at any time hold long or short positions in such securities,
instruments or obligations.
Pursuant to an engagement letter, Delta Mills agreed to pay
Robinson-Humphrey a fee of $100,000 in connection with the preparation and
delivery of its fairness opinion. Delta Mills has agreed to indemnify
Robinson-Humphrey for certain liabilities related to, arising out of or in
connection with Robinson-Humphrey's engagement by Delta Mills.
Robinson-Humphrey has also performed various investment banking services for
Delta Woodside in the past, and has received customary fees for those services.
<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 nine months of fiscal year 2000, Delta
Woodside charged the Delta Apparel Company division $0 for these services.
Other
-----
For further information on transactions with affiliates by Delta Apparel,
see Notes 2 and 8 to the Combined Financial Statements of Delta Apparel under
"Index to Combined Financial Statements" in this document, which information is
incorporated into this section by reference.
Except as described above with respect to yarn sales, any transaction
entered into between Delta Apparel and any officer, director, principal
stockholder or any of their affiliates has been on terms that Delta Apparel
believes are comparable to those that would be available to Delta Apparel from
non_affiliated persons.
<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, on one or more dates during the first six months following the
Delta Apparel distribution, grants under the Delta Apparel stock option plan
covering an aggregate of approximately 162,500 Delta Apparel shares will be made
and awards under the Delta Apparel incentive stock award plan covering an
aggregate of approximately 59,200 Delta Apparel shares will be made, including
the following anticipated option and award grants to the following executive
officers of Delta Apparel:
Name and position Shares Covered by Options(1) Shares Covered by
----------------- --------------------------- -----------------
Awards(2)
---------
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
___________________________________
(1) The compensation grants committee of the Delta Apparel board of directors
anticipates that the stock options will be granted on one or more dates
during the six month period. The exercise price for any option will be the
stock's closing market value at the date of grant. The compensation grants
committee anticipates that the options will vest over a four year period.
(2) The compensation grants committee of the Delta Apparel board of directors
anticipates that 20% of each award will vest on a date early in fiscal year
2001 and at the end of each of fiscal year 2001 and fiscal year 2002 and up
to the remaining 40% will vest at the end of fiscal year 2002 to the extent
that certain performance criteria based on cumulative earnings before
interest and taxes are met.
For a description of the Delta Apparel stock option plan and the Delta
Apparel incentive stock award plan and the anticipated treatment under Section
162(m) of the Internal Revenue Code of grants of options and awards under these
plans, see "Management of Delta Apparel - Management Compensation."
PAYMENTS IN CONNECTION WITH DELTA APPAREL DISTRIBUTION AND DUCK HEAD
DISTRIBUTION
In 1997, the Delta Woodside board of directors adopted and the Delta
Woodside stockholders approved the Delta Woodside long term incentive plan.
Under that plan, award grants could be made to key executives and non-employee
directors of Delta Woodside that, depending on the attainment of certain
performance measurement goals over a three-year period, could translate into
stock options for Delta Woodside shares being granted to participants in the
plan. In connection with the exercise of any option granted under the plan,
Delta Woodside would pay cash to the participant to offset the income taxes
attributable to the option exercise and to such cash payment, using an assumed
38% income tax rate.
<PAGE>
No award grants complying with all the terms of the plan were made.
Around the time of adoption of the plan, however, Delta Woodside did identify
the individuals who would be plan participants, determined performance targets
for these individuals and communicated these actions to the affected
individuals. These communications also informed the participants that new
three-year performance goals would be established annually.
To take account of the communications previously made to the plan
participants, the fact that all three-year performance periods contemplated by
the plan would expire following the record date for the Delta Apparel and Duck
Head distributions and the efforts of the key executives and directors on behalf
of Delta Woodside leading up to the Delta Apparel distribution and the Duck Head
distribution, Delta Woodside's board (based on resolutions of its compensation
grants and compensation committees) has decided that, once the record date for
the Delta Apparel distribution and the Duck Head distribution is established,
Delta Woodside shares shall be issued and cash shall be paid prior to the Delta
Apparel and Duck Head record date to those individuals who were intended
participants in the plan. These actions, which have been reflected in an
amendment to the long term incentive plan, provide that (a) Delta Woodside would
issue Delta Woodside shares and make cash payments to the individuals identified
for participation in the plan, (b) as a condition to receipt of those Delta
Woodside shares and that cash, those individuals would surrender any rights they
may have under the plan and (c) no further awards, options or Delta Woodside
shares would be granted or issued under the plan.
The number of Delta Woodside shares to be issued and the cash amounts to be
paid have been determined by Delta Woodside's compensation grants and
compensation committees and the Delta Woodside board. In determining the number
of Delta Woodside shares to be issued to each participant, the Delta Woodside
compensation grants committee, compensation committee and board used the closing
sale price of the Delta Woodside common stock on March 15, 2000 ($1.50 per
share).
The table below sets forth the Delta Woodside shares that will thereby be
issued and the cash that will thereby be paid to the individuals who are
directors or executive officers of Delta Apparel. The Delta Woodside board
anticipates that these Delta Woodside shares will be issued and this cash will
be paid prior to the record date for the Delta Apparel distribution and the Duck
Head distribution.
Name Delta Woodside Shares(#) Cash ($)
---- ------------------------ ---------
William F. Garrett 126,480 116,280
C.C. Guy 13,485 12,398
Robert W. Humphreys 48,360 44,460
Dr. James F. Kane 13,485 12,398
Dr. Max Lennon 13,330 12,255
E. Erwin Maddrey, II 206,667 190,000
Buck A. Mickel 13,072 12,018
Bettis C. Rainsford 148,800 136,800
Shares will also be issued and cash will also be paid to Minor H. Mickel, as
personal representative of the estate of Buck Mickel (father of Buck A. Mickel).
Buck Mickel was a member of the Delta Woodside board of directors until his
death in 1998 and participated in the early stages of that board's strategic
planning.
<PAGE>
E. Erwin Maddrey, II is a participant in Delta Woodside's severance plan.
Upon the termination of Mr. Maddrey's services as an officer with Delta Woodside
(which is anticipated to occur on or about the time of the Delta Apparel
distribution and the Duck Head distribution), Delta Woodside will pay Mr.
Maddrey $147,115 of severance in accordance with the normal provisions of this
plan.
On or about the time of the Delta Apparel distribution and the Duck Head
distribution, William F. Garrett will become the President and Chief Executive
Officer of Delta Woodside. In recognition of Mr. Garrett's past service to
Delta Woodside and in order to provide him with an additional incentive to
remain with Delta Woodside, the Delta Woodside board has authorized the payment
to him of $100,000 in connection with the Delta Apparel distribution and the
Duck Head distribution and the payment to him of six additional annual payments
of $150,000 each, with the first of these annual payments to be made in October
2000. Mr. Garrett will forfeit any of these payments remaining to be made in
the event that he voluntarily leaves employment with Delta Woodside or such
employment is terminated by Delta Woodside for cause. Any remaining amounts
payable to him under the arrangement will be paid to him in the event of his
death or disability or in the event there is a change of control of Delta
Woodside and he does not remain with Delta Woodside. See also the information
below under the subheading "Early Exercisability and Other Amendments of Delta
Woodside Stock Options and Amendments to Deferred Compensation Plan".
Jane H. Greer is the Vice President and Secretary of Delta Woodside. On or
about the time of the Delta Apparel distribution and the Duck Head distribution,
Ms. Greer will resign from her officer positions with Delta Woodside and its
subsidiaries. In connection with this resignation, Delta Woodside will pay Ms.
Greer $53,846 of severance in accordance with the normal provisions of Delta
Woodside's severance plan and $400,000 of severance pursuant to the terms of an
employment agreement. Pursuant to amendments to Delta Woodside's stock option
plan and her stock options, all of Ms. Greer's outstanding stock options for
Delta Woodside shares (covering an aggregate of 22,500 Delta Woodside shares)
will remain exercisable until their stated expiration dates notwithstanding the
termination of Ms. Greer's employment with Delta Woodside.
David R. Palmer is the Controller of Delta Woodside. On or about the time
of the Delta Apparel distribution and the Duck Head distribution, Mr. Palmer
will resign from his officer positions with Delta Woodside and its subsidiaries.
In connection with this resignation, Delta Woodside will pay Mr. Palmer $61,250
of severance pursuant to the terms of an employment agreement. Pursuant to
amendments to Delta Woodside's stock option plan and his stock options, all of
Mr. Palmer's unexercisable stock options for Delta Woodside shares (covering an
aggregate of 1,250 Delta Woodside shares) will become exercisable in full no
later than 5 business days prior to the record date for the Delta Apparel and
Duck Head distributions, and all of Mr. Palmer's outstanding stock options for
Delta Woodside shares (covering an aggregate of 5,000 Delta Woodside shares)
will remain exercisable until their stated expiration dates notwithstanding the
termination of Mr. Palmer's employment with Delta Woodside.
Brenda L. Jones is the Assistant Secretary of Delta Woodside. On or about
the time of the Delta Apparel distribution and the Duck Head distribution, Ms.
Jones will resign from her officer positions with Delta Woodside and its
subsidiaries. In connection with this resignation, Delta Woodside will pay Ms.
Jones $37,019 of severance in accordance with the normal provisions of Delta
Woodside's severance plan and $37,019 pursuant to the terms of an employment
agreement. Pursuant to amendments to Delta Woodside's stock option plan and her
stock options, all of Ms. Jones' unexercisable stock options for Delta Woodside
shares (covering an aggregate of 375 Delta Woodside shares) will become
exercisable in full no later than 5 business days prior to the record date for
the Delta Apparel and Duck Head distributions, and all of Ms. Jones' outstanding
stock options for Delta Woodside shares (covering an aggregate of 1,375 Delta
Woodside shares) will remain exercisable until their stated expiration dates
notwithstanding the termination of Ms. Jones' employment with Delta Woodside.
EARLY EXERCISABILITY AND OTHER AMENDMENTS OF DELTA WOODSIDE STOCK OPTIONS AND
AMENDMENTS TO DEFERRED COMPENSATION PLAN
Pursuant to the distribution agreement, Delta Woodside is providing the
holders of outstanding options granted under the Delta Woodside stock option
plan, whether or not those options are currently exercisable, with the
opportunity to amend the terms of their Delta Woodside stock options. The
amendment being offered to each holder provides that:
<PAGE>
(i) all unexercisable portions of the holder's Delta Woodside stock options
become immediately exercisable in full on a date that is no later than five
(5) business days prior to the Delta Apparel record date and the Duck Head
record date, which will permit the holder to exercise all or part of the
holder's Delta Woodside stock options prior to the Delta Apparel record
date and the Duck Head record date (and thereby receive Delta Apparel
shares in the Delta Apparel distribution and Duck Head shares in the Duck
Head distribution); and
(ii) any Delta Woodside stock option that remains unexercised as of the
Delta Apparel record date and the Duck Head record date will remain
exercisable for only Delta Woodside shares, and for the same number of
Delta Woodside shares at the same exercise price, after the Delta Apparel
distribution and the Duck Head distribution as before the Delta Apparel
distribution and the Duck Head distribution (and not for a combination of
Delta Woodside shares, Delta Apparel shares and Duck Head shares).
Delta Woodside anticipates that all holders of outstanding Delta Woodside
stock options will probably enter into the proposed amendment.
As a result of these amendments, options for Delta Woodside shares will
become exercisable earlier than they otherwise would have for the following
Named Executives and members of the Delta Apparel board of directors for the
following number of Delta Woodside shares:
Number of Delta Woodside shares covered by
------------------------------------------------
portion of stock options the exercisability of which
----------------------------------------------------
Name will be accelerated
---- ---------------------
William F. Garrett 37,500
Herbert M. Mueller 4,500
Marjorie F. Rupp 3,000
Also, in connection with the Delta Apparel distribution, Delta Woodside has
added a provision to the Delta Woodside stock option plan that provides that, so
long as a Delta Apparel employee who holds Delta Woodside stock options remains
an employee of Delta Apparel or any of its subsidiaries, those Delta Woodside
stock options will remain outstanding until the end of their stated term. This
amendment will apply to all Delta Woodside stock options currently held by Mr.
Humphreys (under which he can acquire an aggregate of 22,500 Delta Woodside
shares), Mr. Mueller (under which he can acquire an aggregate of 6,000 Delta
Woodside shares) and Ms. Rupp (under which she can acquire an aggregate of 4,000
Delta Woodside shares).
In connection with the Delta Apparel and Duck Head distributions, each
participant in Delta Woodside's deferred compensation plan will be provided with
the opportunity to receive all or part of his or her vested deferred
compensation account in cash in exchange for consenting to an amendment to the
deferred compensation plan. Under the plan amendment, only the corporation that
employs the participant, and not any other member of Delta Woodside's current
group of corporations, will be responsible in the future for the participant's
deferred compensation. Delta Woodside anticipates that each director and
officer of Delta Apparel will consent to the proposed plan amendment and will
choose to continue to defer his or her vested deferred compensation account
under the amended plan.
LEASE TERMINATIONS
Delta Woodside has leased its principal corporate office space and space
for its benefits department, purchasing department and financial accounting
department from a corporation (233 North Main, Inc.), one-half of the stock of
which is owned by each of E. Erwin Maddrey, II (a director and significant
stockholder of Delta Apparel and Duck Head and President and Chief Executive
Officer (from which officer positions he will resign in connection with the
Delta Apparel distribution and the Duck Head distribution) and a director and
significant stockholder of Delta Woodside) and Jane H. Greer (Vice President and
Secretary of Delta Woodside (from which officer positions she will resign in
connection with the Delta Apparel distribution and the Duck Head distribution)).
Mr. Maddrey and Ms. Greer are also the directors and executive officers of 233
North Main, Inc. The lease of this space was executed effective September 1,
1998, covers approximately 9,662 square feet at a rental rate of $13.50 per
<PAGE>
square foot per year (plus certain other expenses) and had an expiration date of
August 2003. In connection with the Delta Apparel distribution and the Duck
Head distribution, 233 North Main, Inc. and Delta Woodside have agreed that this
lease will terminate on the Delta Apparel and Duck Head distribution date in
exchange for the payment by Delta Woodside to 233 North Main, Inc. of $135,268.
Following the Delta Apparel and Duck Head distribution date, Delta Woodside may
continue to use the space on an as needed month-to-month basis at the rental
rate of $14.00 per square foot per year (plus certain other expenses).
Delta Woodside has leased office space in Edgefield, South Carolina from
The Rainsford Development Corporation, a corporation wholly owned by Bettis C.
Rainsford (a director and significant stockholder of Delta Apparel, Duck Head
and Delta Woodside). Mr. Rainsford is a director and executive officer and
Brenda L. Jones (Assistant Secretary of Delta Woodside (from which officer
position she will resign in connection with the Delta Apparel distribution and
the Duck Head distribution)) is an executive officer of The Rainsford
Development Corporation. In connection with the Delta Apparel distribution and
the Duck Head distribution, The Rainsford Development Corporation and Delta
Woodside have agreed that this lease will terminate on the Delta Apparel and
Duck Head distribution date in exchange for the payment by Delta Woodside to The
Rainsford Development Corporation of $33,299.08.
LEASE OF STORE IN EDGEFIELD, SOUTH CAROLINA
Duck Head leases a building in Edgefield, South Carolina from Bettis C.
Rainsford (a director and significant stockholder of Delta Apparel, Duck Head
and Delta Woodside) pursuant to an agreement involving rental payments equal to
3% of gross sales of the Edgefield store, plus 1% of gross sales of the store
for utilities. Under this lease agreement, $9,944, $11,076 and $10,947 were
paid to Mr. Rainsford during fiscal 1997, 1998 and 1999, respectively.
TRANSFERS OF LIFE INSURANCE POLICIES
In February 1991, each of E. Erwin Maddrey, II (a director and significant
stockholder of Delta Apparel and Duck Head and President and Chief Executive
Officer (from which officer positions Mr. Maddrey will resign in connection with
the Delta Apparel distribution and the Duck Head distribution) and a director
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
<PAGE>
On or about the date of the Delta Apparel distribution, Delta Apparel
anticipates engaging Carolina Benefit Services, Inc. to provide payroll
processing and 401(k) plan administration services for Delta Apparel. Carolina
Benefit 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)). Mr. Maddrey and Ms. Greer are also directors and executive
officers of Carolina Benefit Services, Inc.
For the services to be provided by Carolina Benefit Services, Delta Apparel
anticipates paying fees based on the numbers of employees, 401(k) plan
participants and plan transactions and other items. Delta Apparel anticipates
that on an annual basis these fees will be approximately $84,000. The initial
term of the engagement will be one year. Delta Apparel elected to engage
Carolina Benefit Services to provide these services after receiving proposals
from other providers of similar services and determining that Carolina Benefit
Services' proposal was Delta Apparel's least costly alternative.
Carolina Benefit Services expects that it will provide similar payroll
processing and 401(k) plan administration services to Duck Head and 401(k) plan
administration services to Delta Woodside after the Delta Apparel distribution
and the Duck Head distribution.
<PAGE>
