THE DUCK HEAD DISTRIBUTION
PARTIES TO THE DISTRIBUTION AGREEMENT
Delta Woodside
---------------
Delta Woodside is a South Carolina corporation with its principal executive
offices located at 000 Xxxxx Xxxx Xxxxxx, Xxxxx 000, Xxxxxxxxxx, Xxxxx Xxxxxxxx
00000 (telephone number: 000-000-0000).
Prior to the Duck Head distribution, Delta Woodside and its subsidiaries
had three operating divisions: Delta Xxxxx Marketing Company, Duck Head Apparel
Company and Delta Apparel Company.
- Delta Xxxxx Marketing Company produces a range of cotton, synthetic and
blended finished and unfinished woven products that are sold for the
ultimate production of apparel, home furnishings and other products. After
the Duck Head distribution and the Delta Apparel distribution, Delta Xxxxx
Marketing Company will remain the only continuing Delta Woodside operation.
- Pursuant to the Duck Head distribution, Delta Woodside will distribute to
its stockholders all of the outstanding common stock of Duck Head, which
will continue the business formerly conducted by the Duck Head Apparel
Company division of various subsidiaries of Delta Woodside. For a
description of the business of the Duck Head Apparel Company division, see
the information under the heading "Business of Duck Head".
- Simultaneously with the Duck Head distribution, Delta Woodside will,
pursuant to the Delta Apparel distribution, distribute to its stockholders
all of the outstanding stock of Delta Apparel, which will continue the
business formerly conducted by the Delta Apparel Company division of
various subsidiaries of Delta Woodside. For a description of the business
of the Delta Apparel Company division, see the information below under the
subheading "Delta Apparel".
Duck Head
----------
Duck Head is a Georgia corporation with its principal executive offices
located at 0000 Xxxxxx Xxxxxxxxxx Xxxxxxx, X.X. Xxx 000, Xxxxxx, Xxxxxxx 00000
(telephone number: 000-000-0000).
Delta Apparel
--------------
Delta Apparel is a Georgia corporation with its principal executive offices
located at 0000 Xxxxxxxxxxxx Xxxx., Xxxxx 000, Xxxxxx, Xxxxxxx 00000 (telephone
number: 000-000-0000). Delta Apparel is a vertically integrated supplier of
knit apparel, particularly T-shirts, sportswear and fleece goods and sells its
products to distributors, screen printers and private label accounts.
BACKGROUND OF THE DUCK HEAD DISTRIBUTION
Since the middle of its 1998 fiscal year, Delta Woodside's board of
directors has explored various means, in addition to effectively operating Delta
Woodside's businesses, to enhance stockholder value.
On March 9, 1998, Delta Woodside announced that it was withdrawing from the
circular knit fabrics business, which had operated under the name of Stevcoknit
Fabrics Company, and would be selling or closing and liquidating its two
knitting, dyeing and finishing plants in Wallace, North Carolina, and its yarn
spinning plant in Spartanburg, South Carolina. In the announcement, Delta
Woodside also stated that it had decided to sell its Nautilus International
fitness equipment division, and had retained an investment banking firm to
handle the sale.
Delta Woodside completed most of the liquidation and sale of the Stevcoknit
Fabrics Company division during its 1998 fiscal year. The Nautilus
International sale was consummated in January 1999.
On September 15, 1998, Delta Woodside announced that its board of directors
had approved a plan to purchase from time to time up to 2,500,000 outstanding
Delta Woodside common shares at prices and at times at the discretion of Delta
Woodside's top management. The announcement stated that Delta Woodside believed
that, at times, its stock price was undervalued and that these purchases would
enhance stockholder value.
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 Xxxxx, Inc. subsidiary, and its operating division, Delta Xxxxx 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 Xxxxx,
Inc. subsidiary to the Delta Apparel Company division, the Duck Head Apparel
Company division and the Delta Apparel Company division would have been
separated into two corporations, and the stock of each of the Duck Head
corporation and the Delta Apparel corporation would have been distributed to all
of the Delta Woodside stockholders. The Delta Woodside board of directors
decided that Delta Woodside would promptly begin the process of soliciting
offers for the purchase of the post spin-off Delta Woodside common stock, and
that Delta Woodside would retain an investment banking firm to assist in the
implementation of this restructuring plan.
On March 16, 1999, Delta Woodside announced that Xxxxxx Xxxxxx 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, Xx. Xxxxxx 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 Xxxxxx X. Xxxxxxxxx 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, Xx. Xxxxxxxxx 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 Xxxxx Marketing Company in line with its
previously-announced plan, because it had not received any satisfactory offer
for the business. The Board determined to continue to explore other strategies
to enhance stockholder value, including: (1) the purchase of the Delta Apparel
Company division and the Duck Head Apparel Company division by the Delta Xxxxx,
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 Xxxxx, Inc. scenario, Delta
Woodside, through its wholly-owned subsidiary, Delta Xxxxx, 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 Xxxxx, 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 Xxxxx, 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 Xxxxx 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 Xxxxx, 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 Xxxxx, Inc., at that time. The announcement also
stated that Delta Woodside was continuing to explore strategic alternatives to
accomplish the separation of its operating companies, and would announce
specific plans in the upcoming months.
On October 4, 1999, Delta Woodside announced that it planned to spin off to
the Delta Woodside stockholders its two apparel businesses (Duck Head Apparel
Company and Delta Apparel Company) as two separate publicly-owned corporations.
The announcement further stated that Delta Woodside was in the process of
transferring various corporate functions to its three operating divisions (Delta
Xxxxx Marketing Company, Duck Head Apparel Company and Delta Apparel Company).
The announcement stated that, upon the complete transfer of these functions or
at the time of the spin-offs (as appropriate), the functions then being
performed at the Delta Woodside level would no longer need to be performed at
that level, and the executive officers of Delta Woodside would resign their
positions with Delta Woodside. The announcement stated that, upon consummation
of the spin-offs, Delta Xxxxx Marketing Company would be Delta Woodside's sole
remaining business, and Xxxxxxx Xxxxxxx, the head of the Delta Xxxxx Marketing
Company division, would become President and Chief Executive Officer of the
remaining Delta Woodside. The announcement stated that, in connection with the
proposed spin-offs, significant equity incentives, in the form of stock options
and incentive stock awards for the new public companies' stock, would be granted
to the managements of the new companies. The announcement stated that Delta
Woodside could not determine at that time whether the receipt of the apparel
companies' stock would, or would not, be taxable to the Delta Woodside
stockholders for Federal income tax purposes, but that, at the time that Delta
Woodside had sufficient information to determine the appropriate Federal income
tax treatment of the spin-offs, it would promptly provide the necessary income
tax information to the Delta Woodside stockholders. The announcement stated
that Delta Woodside believed that, even if the spin-offs were determined to be
taxable for Federal income tax purposes, the spin-offs would still be in the
best interests of Delta Woodside's stockholders.
On December 13, 1999, Delta Woodside announced that its board of directors
had adopted a shareholders rights plan pursuant to which stock purchase rights
have been distributed as a dividend to the Delta Woodside stockholders at a rate
of one right for each Delta Woodside share held of record as of December 22,
1999. Delta Woodside stated that the rights plan is designed to enhance the
Delta Woodside board's ability to prevent any person interested in acquiring
control of Delta Woodside from depriving stockholders of the long-term value of
their investment and to protect shareholders against attempts to acquire Delta
Woodside by means of unfair or abusive takeover tactics. Delta Woodside stated
that its board had adopted the rights plan at that time because the Delta
Woodside shares were trading at their lowest levels in Delta Woodside's history.
At the same time, Delta Woodside announced that its board had approved a
plan to purchase from time to time up to an aggregate of 5,000,000 shares of
Delta Woodside's outstanding stock at prices and at times at the discretion of
Delta Woodside's top management. The announcement stated that this stock
repurchase plan replaces the 2,500,000 stock purchase plan announced by Delta
Woodside in September 1998.
On December 30, 1999, Delta Woodside announced that each of Duck Head and
Delta Apparel had filed a registration statement with the SEC to register the
subsidiary's stock under the Securities Exchange Act of 1934, and that these
filings were pursuant to the previously announced plan of Delta Woodside to spin
off to its stockholders the Delta Apparel Company division and the Duck Head
Apparel Company division as two separate publicly-owned corporations. Delta
Woodside also stated that, following completion of the spin-offs, Delta Woodside
intends to propose to its stockholders the adoption of a new Delta Woodside
stock option plan and a new Delta Woodside incentive stock award plan pursuant
to which significant equity incentives could be granted to the new management of
Delta Woodside.
REASONS FOR THE DUCK HEAD DISTRIBUTION
Since the summer of 1998, Delta Woodside's board of directors has been
engaged in the process of exploring various means to maximize stockholder value.
The alternatives that the Delta Woodside Board has examined have included:
(a) A potential sale of the Duck Head Apparel Company division;
(b) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a sale of
the remaining company;
(c) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a
recapitalization of the remaining company that would involve a cash
distribution to Delta Woodside's stockholders by that remaining
company;
(d) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders;
(e) A pro rata taxable spin-off of Delta Woodside's two apparel businesses
to Delta Woodside's stockholders;
(f) A disproportionate tax-free spin-off of one of Delta Woodside's
apparel businesses to one of Delta Woodside's major stockholders
accompanied by a pro rata tax-free spin-off of the other apparel
business to all the other stockholders;
(g) A potential sale of the Delta Apparel Company business or assets;
(h) A purchase by Delta Xxxxx, Inc. of the Duck Head Apparel Company and
the Delta Apparel Company businesses; and
(i) Leaving Delta Woodside's three businesses in Delta Woodside in their
current corporate form.
During the course of this exploration, the Delta Woodside board witnessed a
deterioration of general market conditions in the textile and apparel
industries. This deterioration caused the market's perceived values of textile
and apparel businesses to decline significantly.
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 Xxxxx;
(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 Xxxxx Marketing Company, Delta
Apparel Company and Duck Head Apparel Company), and that the best
method to accomplish this separation and thereby enhance stockholder
value that is available to Delta Woodside at this time is to effect a
pro rata spin-off to Delta Woodside's stockholders of each of Delta
Woodside's apparel businesses, whether that spin-off is tax-free or
taxable for federal income tax purposes.
In reaching this determination, the Delta Woodside Board took into account
its belief that the separation of Delta Woodside's three businesses will further
the following objectives, among others, and thereby enhance stockholder value:
(a) Permit the grant of equity incentives to the separate management of
each business, which incentives would not be affected by the results
of the other businesses and, therefore, would have excellent potential
to align closely the interests of that management with those of the
stockholders;
(b) Permit the elimination of certain existing corporate overhead expenses
that result from the current need to coordinate the operations of
three distinct businesses that have separate modes of operation and
markets;
(c) Eliminate the complaints of certain customers of Delta Xxxxx 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
Xxxxx Marketing Company;
(d) Permit each business to obtain, when needed, the best equity and debt
financing possible without being affected by the operational results
of the other businesses;
(e) Permit each business to establish long-range plans geared toward the
expected cyclicality, competitive conditions and market trends in its
own line of business, unaffected by the markets, needs and constraints
of the other businesses;
(f) Promote a more streamlined management structure for each of the three
businesses, better able to respond quickly to customer and market
demands; and
(g) Permit the value of each of the three divisions to be more accurately
reflected in the equity market by separating the results of each
business from the other two businesses.
In reaching its conclusion, the Board also took into account the following
additional factors:
- The opinion delivered to the Delta Woodside board by Xxxxxxxx Xxxxx
Xxxxxx & Xxxxx Financial Advisors, Inc. that is described below;
- The advice provided to the Delta Woodside board by Prudential
Securities that is described below;
- The financial information and statements of Duck Head set forth in
this document under the heading, "Unaudited Pro Forma Combined
Financial Statements", and at pages F-1 to F-23;
- The Delta Woodside board's knowledge of the business, operations,
assets and financial condition of Duck Head;
- Duck Head management's assessment of the prospects of Duck Head;
- The current and prospective economic environment in which Duck Head
operates; and
- The terms of the distribution agreement and the tax sharing agreement.
This discussion of the information and factors considered by the Delta
Woodside board is not meant to be exhaustive but is believed to include the
material factors considered by the Delta Woodside board in authorizing the Duck
Head distribution. The Delta Woodside board did not quantify or attach any
particular weight to the various factors that it considered in reaching its
determination that the Duck Head distribution, the Delta Apparel distribution
and related transactions are advisable and in the best interests of Delta
Woodside and its stockholders. In reaching its determination, the Delta
Woodside board took the various factors into account collectively and the Delta
Woodside board did not perform a factor_by_factor analysis.
Opinion of Xxxxxxxx Xxxxx
----------------------------
Delta Woodside engaged Xxxxxxxx Xxxxx to provide to the Delta Woodside
board and the Duck Head board an opinion as to the solvency of Duck Head as of
the time of the Duck Head distribution. Delta Woodside selected Xxxxxxxx Xxxxx
based on Xxxxxxxx Lokey's extensive experience in providing solvency opinions.
In consideration of its services in connection with the opinion described
below and a similar opinion with respect to Delta Apparel, Xxxxxxxx Xxxxx will
be paid a fee of $200,000 plus reasonable out-of-pocket expenses. No portion of
this fee is contingent upon the consummation of the Duck Head distribution or
the Delta Apparel distribution or the conclusions reached in Xxxxxxxx Lokey's
opinions. Delta Woodside has also agreed to provide indemnification to Xxxxxxxx
Xxxxx and certain other parties with respect to certain matters. Xxxxxxxx Xxxxx
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 Xxxxxxxx Xxxxx. Although the summary
sets forth all material facts respecting the opinion of Xxxxxxxx Xxxxx, the
summary does not purport to be a complete statement of the analyses and
procedures applied, the judgments made or the conclusion reached by Xxxxxxxx
Xxxxx or a complete description of its presentation to the Delta Woodside board
or the Duck Head board. Xxxxxxxx Xxxxx believes, and so advised the Delta
Woodside board and the Duck Head board, that its analyses must be considered as
a whole and that selecting portions of its analyses and of the factors
considered by it, without considering all factors and analyses, could create an
incomplete view of the process underlying its analyses and opinions.
The Duck Head distribution and other related transactions disclosed to
Xxxxxxxx Xxxxx are referred to collectively in this summary as the
"Transaction." For purposes of its opinion, Xxxxxxxx Xxxxx assumed that the
third party financing described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
will be entered into on or about the date of the Duck Head distribution and
that, prior to the Duck Head distribution, the intercompany reorganization
described in "Relationships Among Duck Head, Delta Woodside and Delta Apparel -
Distribution Agreement" will be completed.
Delta Woodside's board of directors has requested that Xxxxxxxx Xxxxx
render its written opinion to the Delta Woodside board and the Duck Head board
as to whether, assuming the Transaction has been consummated as proposed,
immediately after and giving effect to the Transaction: (a) on a pro forma
basis, the fair value and present fair saleable value of Duck Head would exceed
its respective stated liabilities and identified contingent liabilities, (b)
Duck Head should be able to pay its debts as they become absolute and mature;
(c) the capital remaining in Duck Head after the Transaction would not be
unreasonably small for the business in which Duck Head is engaged, as management
has indicated it is now conducted and is proposed to be conducted following the
consummation of the Transaction; and (d) the financial test for distributions of
the state of incorporation of Duck Head (i.e. Georgia) has been satisfied.
Xxxxxxxx Lokey's opinion does not address Delta Woodside's underlying
business decision to effect the Transaction. Xxxxxxxx Xxxxx has not been
requested to, and did not, solicit third party indications of interest in
acquiring all or part of Duck Head.
In connection with the preparation of its opinion, Xxxxxxxx Xxxxx made such
reviews, analyses and inquiries as it deemed necessary and appropriate under the
circumstances. Among other things, Xxxxxxxx Xxxxx:
(i) reviewed Duck Head's annual financial statements for the 1997, 1998
and 1999 fiscal years and year-to-date statements for the first six
months of fiscal year 2000, which Duck Head's and Delta Woodside's
managements have identified as the most current information available;
(ii) reviewed the proposal from the third party lender to provide Duck Head
revolving credit and term loan facilities;
(iii)spoke with certain members of the senior management of Delta Woodside
and Duck Head to discuss the operations, financial condition, future
prospects and projected operations and performance of Duck Head;
(iv) reviewed forecasts and projections prepared by Duck Head's management
with respect to the periods ended January 1, 2000 through fiscal year
2004;
(v) reviewed marketing and promotional material relating to Duck Head;
(vi) reviewed the preliminary registration statement filed with the SEC for
Duck Head;
(vii)reviewed other publicly available financial data for Duck Head and
certain companies that Xxxxxxxx Xxxxx deems comparable to Duck Head;
and
(viii) conducted such other studies, analyses and investigations as
Xxxxxxxx Xxxxx has deemed appropriate.
In assessing the solvency of Duck Head immediately after and giving effect
to the Transaction, Xxxxxxxx Xxxxx:
(i) analyzed the fair value and present fair saleable value of Duck Head's
assets relative to Duck Head's stated liabilities and identified
contingent liabilities on a pro forma basis ("balance sheet test");
(ii) assessed Duck Head's ability to pay its debts as they become absolute
and mature ("cash flow test"); and
(iii)assessed the capital remaining in Duck Head after the Transaction so
as not to be unreasonably small ("reasonable capital test").
Balance Sheet Test
The Balance Sheet Test determines whether or not the fair value and present
fair salable value of Duck Head's assets exceeds its stated liabilities and
identified contingent liabilities after giving effect to the Transaction. This
test requires an analysis of the fair market value of Duck Head as a
going-concern. As part of this analysis, Xxxxxxxx Xxxxx considered, among other
things,
(i) historical and projected financial performance for Duck Head as
prepared by Duck Head;
(ii) the business environment in which Duck Head competes;
(iii)performance of certain publicly traded companies deemed by Xxxxxxxx
Xxxxx to be comparable to Duck Head, in terms of, among other things:
size, profitability, financial leverage and growth;
(iv) capitalization rates ("multiples") for certain publicly traded
companies deemed by Xxxxxxxx Xxxxx to be comparable to Duck Head
(including (a) Enterprise Value ("EV")/Revenue; (b) EV/EBITDA; and,
(c) EV/EBIT);
(v) multiples derived from acquisitions of companies deemed by Xxxxxxxx
Xxxxx to be comparable to Duck Head;
(vi) discounted cash flow approaches;
(vii) the capital structure and debt obligations of Duck Head; and
(viii) non-operating assets and identified contingent liabilities.
In determining the fair value and present fair saleable value of the
aggregate assets of Duck Head, the following three methodologies were employed:
comparable public company, comparable transaction and discounted cash flow.
Market Multiple Approach. This approach involved the multiplication of
various earnings and cash flow measures by appropriate risk-adjusted multiples.
Multiples were determined through an analysis of: (i) publicly traded companies
that were determined by Xxxxxxxx Xxxxx to be comparable from an investment
standpoint to Duck Head ("Comparable Public Companies"); and, (ii) change of
control transactions involving companies that were determined by Xxxxxxxx Xxxxx
to be comparable to Duck Head from an investment standpoint ("Comparable
Transactions"). Xxxxxxxx Xxxxx selected five publicly traded domestic companies
for comparison to Duck Head. These companies are involved in branded apparel
manufacturing and/or apparel marketing businesses. A comparative risk analysis
between Duck Head and the Comparable Public Companies formed the basis for the
selection of appropriate risk adjusted multiples for Duck Head. The risk
analysis incorporates both quantitative and qualitative risk factors which
relate to, among other things, the nature of the industry in which Duck Head and
the Comparable Public Companies are engaged. The value indications derived from
capitalization of the relevant performance fundamentals for Duck Head were
adjusted to reflect control value indications for Duck Head consistent with the
required standard of value. For the Comparable Transactions, Xxxxxxxx Xxxxx
analyzed apparel industry merger and acquisition transactions between 1998 and
1999 where financial information was publicly disclosed. Market multiples were
developed from sixteen comparable transactions, of which seven were 1999
transactions. From the application of market multiples, indications of value
were developed through the capitalization of the relevant performance
fundamentals of Duck Head. The derived value indications reflect control values
for Duck Head consistent with the fair values present and fair salable value
standard.
Discounted Cash Flow Approach. The Discounted Cash Flow Approach involved
an estimation of the present value of projected cash flows to be generated by
Duck Head. The projected debt-free cash flows were developed from forecasts
prepared by management of Duck Head. In addition to the respective cash flows
for the projected period 2000 to 2004, a determination of terminal values as of
June 30, 2004 was made based on the anticipated fair and salable values of Duck
Head at that time. In this case, the estimation of terminal values involved
using the market multiple approach already described above, where projected
fundamentals were capitalized based on selected multiples. Indications of value
were developed by applying an appropriate discount rate or cost of capital to
the projected cash flows and terminal value. The discount rate reflects the
degree of risk inherent in the assets of Duck Head and their ability to produce
the projected cash flows.
Cash Flow Test
The Cash Flow Test focuses on whether or not Duck Head should be able to
repay its debts as they become absolute and mature (including the debts incurred
in the Transaction). This test involves a two-step analysis of Duck Head's
financial projections, (i) examines the consistency of the projections with
historical performance, current marketing strategies and operating cost
structure; and (ii) tests the sensitivity of the projections to changes in key
variables, including revenue growth, operating margins and capital expenditures.
In testing cash flows, Xxxxxxxx Xxxxx performs sensitivity analyses to determine
the "safety margin" available to deal with unexpected downturns in Duck Head's
ability to generate operating cash flow.
Reasonable Capital Test
The Reasonable Capital Test follows from the Balance Sheet and Cash Flow
Tests. A company may have assets that exceed liabilities, but if the amount is
too small to provide some downside protection, the capital amount may not be
deemed to be adequate and, in such a situation, the business would fail the
Reasonable Capital Test. The determination as to whether the net assets
remaining with Duck Head constitute unreasonably small capital involves an
analysis of various factors, including, (i) the degree of sensitivity
demonstrated in the cash flow test; (ii) historical and expected volatility in
revenues, cash flow and capital expenditures; (iii) the adequacy of working
capital; (iv) historical and expected volatility of going-concern asset values;
(v) the maturity structure and the ability to refinance Duck Head's obligations;
(vi) the magnitude, timing and nature of identified contingent liabilities; and
(vii) the nature of the business and the impact of financial leverage on its
operations.
Solvency
Based upon the foregoing, and in reliance thereon, it is Xxxxxxxx Lokey's
opinion as of March 15, 2000 that, assuming the Transaction has been consummated
as proposed, immediately after and giving effect to the Transaction:
(i) on a pro forma basis, the fair value and present fair saleable value
of Duck Head's assets would exceed Duck Head's stated liabilities and
identified contingent liabilities;
(ii) Duck Head should be able to pay its debts as they become absolute and
mature; and
(iii)the capital remaining in Duck Head after the Transaction would not be
unreasonably small for the business in which Duck Head is engaged, as
management has indicated it is now conducted and is proposed to be
conducted following the consummation of the Transaction.
Assumptions and Limiting Conditions
Notwithstanding the use of the defined terms "fair value" and "present fair
saleable value", Xxxxxxxx Xxxxx has not been engaged to identify prospective
purchasers or to ascertain the actual prices at which and terms on which Duck
Head can currently be sold, and Xxxxxxxx Xxxxx 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, Xxxxxxxx Xxxxx expresses no
opinion as to whether Duck Head would actually be sold for the amount Xxxxxxxx
Xxxxx believes to be its fair value and present fair saleable value.
Xxxxxxxx Xxxxx has relied upon and assumed, without independent
verification, that the financial forecasts and projections provided to it have
been reasonably prepared and reflect the best currently available estimates of
the future financial results and condition of Duck Head, and that there has been
no material adverse change in the assets, financial condition, business or
prospects of Duck Head since the date of the most recent financial statements
made available to Xxxxxxxx Xxxxx.
Xxxxxxxx Xxxxx has not independently verified the accuracy and completeness
of the information supplied to it with respect to Duck Head, and does not assume
any responsibility with respect to it. Xxxxxxxx Xxxxx has not made any physical
inspection or independent appraisal of any of the properties or assets of Duck
Head. Xxxxxxxx Lokey's opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by Xxxxxxxx Xxxxx
at the date of its opinion.
Xxxxxxxx Lokey's opinion is furnished solely for the benefit of the Delta
Woodside board and the Duck Head board and may not be relied upon by any other
person without Xxxxxxxx Lokey's prior written consent. Xxxxxxxx Lokey's opinion
is delivered to each recipient subject to the conditions, scope of engagement,
limitations and understandings set forth in its opinion and Xxxxxxxx Lokey's
engagement letter with Delta Woodside.
Advice of Prudential Securities
----------------------------------
Delta Woodside's board of directors received financial advice from
Prudential Securities regarding the issues surrounding the separation of the
apparel and textile fabric businesses. The points described above under the
heading "The Duck Head Distribution - Reasons for the Duck Head Distribution"
include the material factors discussed by Prudential Securities. Prudential
Securities also advised the Delta Woodside board regarding the issues
surrounding various alternatives to the Duck Head distribution and the Delta
Apparel distribution, including a sale of either or both of Duck Head or Delta
Apparel and a liquidation of either or both of Duck Head or Delta Apparel.
Prudential Securities' financial advice was based on its analysis of the trading
prices and trading multiples of approximately 14 textile and apparel companies
which Prudential Securities believed provided relevant comparisons. In
addition, Prudential Securities reviewed recent acquisitions, also deemed to
provide relevant comparisons, in the textile and apparel industries including
the prices paid and multiples of financial performance that those acquisitions
implied. Prudential Securities' advice regarding Delta Woodside's alternatives
with regard to Duck Head was also based on its review and understanding of
prevailing textile and apparel market conditions, as well as its review of Duck
Head's historical market performance.
Prudential Securities was not requested to, and did not, undertake the
types of analyses customary to deliver a financial opinion and did not deliver
any such opinion.
Pursuant to an engagement letter, Prudential Securities has been paid by
Delta Woodside an advisory fee of $500,000 for its services. Delta Woodside has
agreed to indemnify Prudential Securities for certain liabilities relating to or
arising from Prudential Securities' engagement by Delta Woodside. Prudential
Securities has also performed various investment banking services for Delta
Woodside in the past, and has received customary fees for those services.
Prudential Securities is a nationally recognized investment banking firm
and, as a customary part of its investment banking activities, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements, and
valuations for corporate and other purposes. Delta Woodside selected Prudential
Securities because of its expertise, reputation and familiarity with Delta
Woodside. In the ordinary course of business, Prudential Securities and its
affiliates may actively trade or hold the securities and other instruments and
obligations of Delta Woodside for their own account and for the accounts of
customers and, accordingly, may at any time hold long or short positions in such
securities, instruments or obligations.
DESCRIPTION OF THE DUCK HEAD DISTRIBUTION
The distribution agreement among Delta Woodside, Duck Head and Delta
Apparel sets forth the general terms and conditions relating to, and the
relationship of the three corporations after, the Duck Head distribution. For
an extensive description of the distribution agreement, see the section of this
document found under the heading "Relationship Among Duck Head, Delta Woodside
and Delta Apparel--Distribution Agreement".
Delta Woodside plans to effect the Duck Head distribution on or about May
12, 2000 by distributing all of the issued and outstanding shares of Duck Head
common stock to the record holders of Delta Woodside common stock on the record
date for this transaction, which is April 28, 2000. Delta Woodside will
distribute one share of Duck Head common stock to each of those holders for
every ten shares of Delta Woodside common stock owned of record by that holder.
The actual total number of shares of Duck Head common stock that Delta Woodside
will distribute will depend on the number of shares of Delta Woodside common
stock outstanding on the record date. Based upon the one-for-ten Duck Head
distribution ratio, the number of shares of Delta Woodside common stock
outstanding on March 3, 2000 and the number of Delta Woodside shares to be
issued as described in "Interests of Directors and Executive Officers in the
Duck Head Distribution - Payments in Connection with Duck Head Distribution and
Delta Apparel Distribution", Delta Woodside will distribute approximately
2,400,000 shares of Duck Head common stock to holders of Delta Woodside common
stock, which will then constitute all of the outstanding shares of Duck Head
common stock. Duck Head common shares will be fully paid and nonassessable, and
the holders of those shares will not be entitled to preemptive rights. For a
further description of Duck Head common stock and the rights of its holders, see
the portion of this document located under the heading "Description of Duck Head
Capital Stock".
For those holders of Delta Woodside common stock who hold their shares of
Delta Woodside common stock through a stockbroker, bank or other nominee, Delta
Woodside's distribution agent, First Union National Bank, will transfer the
shares of Duck Head common stock to the registered holders of record who will
make arrangements to credit their customers' accounts with Duck Head common
stock. Delta Woodside anticipates that stockbrokers and banks generally will
credit their customers' accounts with Duck Head common stock on or about May 12,
2000.
If a holder of Delta Woodside common stock owns a number of shares of Delta
Woodside common stock that is not a whole multiple of ten and therefore would be
entitled to receive a fraction of a whole share of Duck Head common stock, that
holder will receive cash instead of a fractional share of Duck Head common
stock. The distribution agent will aggregate into whole shares the fractional
shares to be cashed out and sell them as soon as practicable in the open market
at then prevailing prices on behalf of those registered holders who would
otherwise be entitled to receive less than whole shares. These registered
holders will receive a cash payment in the amount of their pro rata share of the
total proceeds of those sales, less any brokerage commissions. The distribution
agent will pay the net proceeds from sales of fractional shares based upon the
average selling price per share of Duck Head common stock of all of those sales,
less any brokerage commissions. Duck Head expects the distribution agent to
make sales on behalf of holders who would receive a fraction of a whole Duck
Head common share in the Duck Head distribution as soon as practicable after the
Duck Head distribution date. None of Delta Woodside, Duck Head or the
distribution agent guarantees any minimum sale price for those fractional shares
of Duck Head common stock, and no interest will be paid on the sale proceeds of
those shares.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material US federal income tax
consequences generally applicable to a Delta Woodside stockholder who is a US
Holder. The term "US Holder" means a beneficial owner of Delta Woodside shares
that is (i) a citizen or resident of the United States, (ii) a corporation,
partnership (other than certain partnerships as may be provided in the
applicable provisions of the US Treasury Regulations), or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to US
federal income taxation regardless of its source, (iv) a trust if (a) a US court
is able to exercise primary supervision over the trust's administration and (b)
one or more US persons have the authority to control all of the trust's
substantial decisions, or (v) otherwise subject to US federal income taxation on
a net income basis in respect of the Delta Woodside shares.
The following description is for general purposes only and is based on the
Internal Revenue Code of 1986, as amended from time to time (the "Code"), US
Treasury Regulations and judicial and administrative interpretations thereof,
all as in effect on the date of this document and all of which are subject to
change, possibly retroactively. The tax treatment of a US Holder may vary
depending upon the holder's particular situation. For instance, certain
holders, including, but not limited to, insurance companies, tax-exempt
organizations, financial institutions, persons subject to the alternative
minimum tax, dealers in securities or currencies, persons that have a
"functional currency" other than the US dollar or as part of a "hedging" or
"conversion" transaction for US federal income tax purposes and persons owning,
directly or indirectly, 5 percent or more of the Delta Woodside shares may be
subject to special rules not discussed below. The following summary is limited
to investors who hold the Delta Woodside shares as "capital assets" within the
meaning of Section 1221 of the Internal Revenue Code. The discussion below does
not address the effect of any other laws (including other federal, state, local
or foreign tax laws) on a US Holder of Delta Woodside shares. As such, the
summary does not discuss US federal estate and gift tax considerations or US
state and local tax considerations.
Delta Woodside has structured the Duck Head distribution and the Delta
Apparel distribution to qualify as tax-free spin offs for federal income tax
purposes under Section 355 of the Internal Revenue Code. Section 355 treats a
spin-off as tax free if the conditions of that statute are satisfied.
Delta Woodside has not sought a ruling from the US Internal Revenue Service
("IRS") regarding the Duck Head distribution or the Delta Apparel distribution,
in part because neither distribution satisfies all the conditions imposed by the
IRS for such a ruling. The fact that Delta Woodside is not eligible to receive a
private letter ruling from the IRS on the issue does not, however, in and of
itself, mean that the distributions do not qualify as tax-free spin-offs under
Section 355. Whether the Duck Head distribution and the Delta Apparel
distribution qualify under Section 355 as tax-free spin-offs will depend on
whether the criteria in Section 355 and the relevant rules and regulations of
the IRS are satisfied.
Delta Woodside has obtained an opinion from KPMG LLP that it is more likely
than not that the each of the Duck Head distribution and the Delta Apparel
distribution qualifies as tax-free under Code Section 355.
Material Federal Income Tax Consequences if the Duck Head Distribution and the
--------------------------------------------------------------------------------
Delta Apparel Distribution Qualify as Tax-Free Spin-Offs under Code Section 355
--------------------------------------------------------------------------------
If the Duck Head distribution and the Delta Apparel distribution qualify as
tax-free spin-offs under Code Section 355, then:
1. The US Holders of Delta Woodside stock who receive those shares will not
recognize gain upon either of the distributions, except as described
immediately below with respect to fractional shares.
2. Cash, if any, received by a US Holder of Delta Woodside stock instead of a
fractional share of Duck Head common stock or Delta Apparel common stock
will be treated as received in exchange for that fractional share. That US
Holder will recognize gain or loss to the extent of the difference between
his, her or its tax basis in that fractional share and the amount received
for that fractional share, and, provided that fractional share is held as a
capital asset, the gain or loss will be capital gain or loss.
3. Each US Holder of Delta Woodside stock will be required to apportion his,
her or its tax basis in the US Holder's Delta Woodside shares between the
Delta Woodside shares retained and the Duck Head shares and Delta Apparel
shares received, with this apportionment to be made in proportion to the
shares' relative fair market values for federal income tax purposes
immediately after the distributions.
4. The holding period for the Duck Head shares and the Delta Apparel shares
received by a US Holder in the distributions will be the same as the US
Holder's holding period for the Delta Woodside shares with respect to which
the Duck Head distribution and the Delta Apparel distributions are made.
5. No gain or loss will be recognized by Delta Woodside with respect to the
Duck Head distribution or the Delta Apparel distribution, except to the
extent of any excess loss accounts or deferred intercompany gains.
Delta Woodside anticipates that in connection with the distributions Delta
Woodside will recognize gain as a result of deferred intercompany gains, but
that this gain will be offset by Delta Woodside's net operating losses.
US Treasury Regulations Section 1.355-5 requires that each US Holder that
receives Duck Head shares in the Duck Head distribution and Delta Apparel shares
pursuant to the Delta Apparel distribution attach a statement to his, her or its
US federal income tax return for the taxable year in which the distributions
occur, showing the applicability of Code Section 355 to the Duck Head
distribution and the Delta Apparel distribution. US Holders should consult
their own tax advisors regarding these disclosure requirements.
As noted above, Delta Woodside has not sought a ruling from the IRS
regarding the Duck Head distribution or the Delta Apparel distribution. The
fact that no ruling has been sought should not be construed as an indication
that the IRS would necessarily reach a different conclusion regarding the Duck
Head distribution or the Delta Apparel distribution than the conclusion set out
in the opinion of KPMG LLP. The opinion of KPMG LLP referred to in this
description is not binding upon the IRS, any other tax authority or any court,
and no assurance can be given that a position contrary to those expressed in the
opinion of KPMG LLP will be not asserted by the tax authority and ultimately
sustained by a court of law.
Material Federal Income Tax Consequences if the Duck Head Distribution and the
--------------------------------------------------------------------------------
Delta Apparel Distribution Do Not Qualify as Tax-Free Spin-Offs under Section
--------------------------------------------------------------------------------
355
---
If the Duck Head distribution and the Delta Apparel distribution do not
qualify as tax-free spin-offs under Section 355, then the following are the
material federal income tax consequences to each participating Delta Woodside
stockholder and to Delta Woodside:
1. Each Delta Woodside stockholder will recognize dividend income to the
extent of the lesser of (a) the value of the Duck Head shares and the Delta
Apparel shares received (together with any cash received for any fractional
share) or (b) the stockholder's pro rata share of the accumulated earnings
and profits of Delta Woodside for federal income tax purposes through the
end of fiscal year 2000. This dividend income will not reduce any Delta
Woodside stockholder's basis in his, her or its Delta Woodside shares.
a. The fair market value for federal income tax purposes of the Duck Head
shares and the Delta Apparel shares received by the Delta Woodside
stockholders in the distributions will depend on the trading prices of
the Duck Head shares and the Delta Apparel shares around the time of
the distribution. Delta Woodside is not able at this time to predict
what those values will be.
b. Delta Woodside's accumulated earnings and profits through fiscal year
1999 were approximately $15.4 million (approximately $0.64 per Delta
Woodside share). The amount, if any, of Delta Woodside's earnings and
profits for fiscal year 2000 cannot be determined at this time.
2. Any value of the Duck Head shares and Delta Apparel shares (together with
any cash received for any fractional share) that exceeds the Delta Woodside
stockholder's pro rata share of Delta Woodside's accumulated earnings and
profits through fiscal year 2000 will constitute a return of capital to
that stockholder (i.e. the stockholder will not be taxed on that value) up
to the stockholder's basis in his, her or its Delta Woodside shares, and
the stockholder's basis in his, her or its Delta Woodside shares will be
reduced accordingly. Any remaining value of the Duck Head shares and Delta
Apparel shares (together with any cash received for any fractional share)
in excess of the Delta Woodside stockholder's basis in his, her or its
Delta Woodside shares will be taxable to the Delta Woodside stockholder as
gain, which will be capital gain if the Delta Woodside stock is held as a
capital asset. This capital gain will be taxable as either long-term or
short-term capital gain, depending upon the stockholder's holding period
for those Delta Woodside shares.
3. The Delta Woodside stockholder's tax basis in the Duck Head shares and the
Delta Apparel shares received in the distributions will be equal to the
fair market value for federal income tax purposes of those shares at the
time of the distributions. The stockholder's holding period for those
shares will begin on the date of the distributions.
4. The Duck Head distribution and the Delta Apparel distribution will also be
taxable as a gain to Delta Woodside, to the extent of the excess of the
value for federal income tax purposes of the Duck Head shares and the Delta
Apparel shares distributed over their tax bases to Delta Woodside. Delta
Woodside believes that any federal income tax liability to it resulting
from the Duck Head distribution and the Delta Apparel distribution will not
be material, because any applicable recognized income will be offset by
Delta Woodside's net operating losses. Any gain recognized by Delta
Woodside on the Duck Head distribution or the Delta Apparel distribution
will increase the fiscal year 2000 earnings and profits. Delta Woodside
cannot at this time calculate the amount of this gain because it is unable
to forecast what the initial trading prices will be for the Duck Head
shares or the Delta Apparel shares, which will be the federal income tax
values of the Duck Head shares and the Delta Apparel shares for purposes of
this calculation.
THE FOREGOING IS A GENERAL DISCUSSION AND IS NOT INTENDED TO SERVE AS
SPECIFIC ADVICE FOR ANY PARTICULAR DELTA WOODSIDE STOCKHOLDER, SINCE THE TAX
CONSEQUENCES OF THE DUCK HEAD DISTRIBUTION AND THE DELTA APPAREL DISTRIBUTION TO
EACH STOCKHOLDER WILL DEPEND UPON THAT STOCKHOLDER'S OWN PARTICULAR
CIRCUMSTANCES. EACH STOCKHOLDER SHOULD CONSULT HIS, HER OR ITS OWN ADVISORS AS
TO THE FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES TO THAT STOCKHOLDER OF
THE DUCK HEAD DISTRIBUTION AND THE DELTA APPAREL DISTRIBUTION.
KPMG LLP is an internationally recognized accounting, tax and consulting
firm and, as a customary part of its tax practice, is regularly engaged to
provide opinions on the federal income tax consequences of merger and
acquisition transactions. Delta Woodside selected KPMG LLP because of its
expertise and its familiarity with Delta Woodside, Duck Head and Delta Apparel.
In the past, KPMG LLP has acted as the independent auditor of Delta Woodside's
financial statements and as its tax advisor. KPMG LLP has also provided various
consulting services to Delta Woodside. KPMG LLP has received customary fees for
those services.
Pursuant to an engagement letter, Delta Woodside has agreed to pay KPMG LLP
a fee of $250,000 in connection with the preparation and delivery of its opinion
on the federal income tax consequences of the Duck Head and Delta Apparel
distributions. Delta Woodside has agreed to indemnify KPMG LLP for certain
liabilities related to, arising out of or in connection with KPMG LLP's
engagement by Delta Woodside.
Net Operating Loss Carry Forwards
-------------------------------------
As of July 3, 1999, Delta Woodside had net operating loss carry forwards,
for federal income tax purposes, of approximately $68 million. Following the
Duck Head distribution and the Delta Apparel distribution and assuming the
distributions are tax-free pursuant to Section 355, approximately $56 million of
this net operating loss carry forward will remain as a tax attribute of Delta
Woodside as of July 3, 1999 ($10 million of which will be subject to limitation
under the separate return limitation rules), approximately $3 million will be a
tax attribute of Duck Head as of July 3, 1999 and approximately $9 million will
be a tax attribute of Delta Apparel as of July 3, 1999. Duck Head's and Delta
Apparel's Federal net operating losses will expire at various dates in fiscal
years 2011 through 2019.
Prior to the Duck Head distribution and the Delta Apparel distribution, the
Duck Head Apparel Company division and the Delta Apparel Company division were
part of the Delta Woodside consolidated group, and the net operating losses of
any member of the Delta Woodside consolidated group were generally available to
reduce the consolidated federal taxable income of the group. For financial
reporting purposes, prior to the Duck Head distribution and the Delta Apparel
distribution each of Duck Head and Delta Apparel carries "deferred tax assets"
on its balance sheet to reflect, among other matters, the financial impact of
their respective hypothetical separate company net operating loss carry
forwards. For federal income tax purposes, however, tax attributes, such as
net operating loss carry forwards, remain with the corporate entity, not the
division, that generated them. Therefore, with the Duck Head distribution and
the Delta Apparel distribution, tax attributes, including the Delta Woodside
consolidated federal net operating loss carry forward, will be allocated among
Delta Woodside, Duck Head and Delta Apparel in accordance with the federal
consolidated return regulations.
The pro forma balance sheet of Duck Head that is included under the heading
"Unaudited Pro Forma Combined Financial Statements" reflects Duck Head's
expected allocable portion of the pre-distribution Delta Woodside consolidated
federal net operating loss carry forward.
ACCOUNTING TREATMENT
The Duck Head distribution and the Delta Apparel distribution will be
accounted for in accordance with United States generally accepted accounting
principles. Accordingly, the Duck Head distribution will be accounted for by
Delta Woodside based on the recorded amounts of the net assets being spun-off.
Delta Woodside will charge directly to equity as a dividend the historical cost
carrying amount of the net assets of Duck Head.
RELATIONSHIPS AMONG DUCK HEAD,DELTA WOODSIDE AND DELTA APPAREL
This section describes the primary agreements among Duck Head, Delta
Woodside and Delta Apparel that will define the ongoing relationships among them
and their respective subsidiaries after the Duck Head distribution and is
expected to provide for the orderly separation of the three companies. The
following description of the distribution agreement and the tax sharing
agreement summarizes the material terms of those agreements. Duck Head has
filed those agreements as exhibits to its Registration Statement on Form 10
filed with the Securities and Exchange Commission. This document is a part of
that registration statement.
DISTRIBUTION AGREEMENT
Duck Head has entered into a distribution agreement with Delta Woodside and
Delta Apparel as of March 15, 2000. The distribution agreement provides for the
procedures for effecting the Duck Head distribution and the Delta Apparel
distribution. For this purpose, as summarized below, the distribution agreement
provides for the principal corporate transactions and procedures for separating
the Duck Head Apparel Company division's business and the Delta Apparel Company
division's business from each other and the rest of Delta Woodside. Also, as
summarized below, the distribution agreement defines the relationships among
Duck Head, Delta Woodside and Delta Apparel after the Duck Head distribution
with respect to, among other things, indemnification arrangements and employee
benefit arrangements.
Intercompany reorganization
----------------------------
The distribution agreement provides, that, no later than the time the Duck
Head distribution occurs, Delta Woodside, Duck Head and Delta Apparel will have
caused the following to have been effected:
(a) Delta Woodside will have contributed, as contributions to capital, all
net debt amounts owed to it by the corporations that currently conduct
the Duck Head Apparel Company division's business and the Delta
Apparel Company division's business. The Duck Head Apparel Company
division's assets are currently owned by Delta Woodside and several of
its wholly-owned subsidiaries. The Delta Apparel Company division's
assets are currently owned by several of Delta Woodside's wholly-owned
subsidiaries.
(b) All the assets used in the operations of the Duck Head Apparel Company
division's business will have been transferred to Duck Head or a
subsidiary of Duck Head to the extent not already owned by Duck Head
or its subsidiaries.
(c) Duck Head will have assumed all of the liabilities of the Duck Head
Apparel Company division of Delta Woodside, and will have caused all
holders of indebtedness for borrowed money that are part of the
assumed Duck Head liabilities and all lessors of leases that are part
of the assumed Duck Head liabilities to agree to look only to Duck
Head or a subsidiary of Duck Head for payment of that indebtedness or
lease (except where Delta Woodside or Delta Apparel, as applicable,
consents to not being released from the obligations).
(d) All the assets used in the operations of the Delta Apparel Company
division's business will have been transferred to Delta Apparel or a
subsidiary of Delta Apparel to the extent not already owned by Delta
Apparel or its subsidiaries. This transfer will include the sale by
Delta Xxxxx to Delta Apparel of the Rainsford Plant, located in
Edgefield, SC.
(e) Delta Apparel will have assumed all of the liabilities of the Delta
Apparel Company division of Delta Woodside, and will have caused all
holders of indebtedness for borrowed money that are part of the
assumed Delta Apparel liabilities and all lessors of leases that are
part of the assumed Delta Apparel liabilities to agree to look only to
Delta Apparel or a subsidiary of Delta Apparel for payment of that
indebtedness or lease (except where Delta Woodside or Duck Head, as
applicable, consents to not being released from the obligations).
(f) Delta Woodside will have caused all holders of indebtedness for
borrowed money and all lessors of leases that are not part of the
liabilities assumed by Duck Head or the liabilities assumed by Delta
Apparel to agree to look only to Delta Woodside or a remaining
subsidiary of Delta Woodside for payment of that indebtedness or lease
(except where Duck Head or Delta Apparel, as applicable, consents to
not being released from the obligations).
Indemnification
---------------
Each of Delta Woodside, Duck Head and Delta Apparel has agreed to indemnify
each other and their respective directors, officers, employees and agents
against any and all liabilities and expenses incurred or suffered that arise out
of or pertain to:
(a) any breach of the representations and warranties made by it in the
distribution agreement;
(b) any breach by it of any obligation under the distribution agreement;
(c) the liabilities assumed or retained by it under the distribution
agreement; or
(d) any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission of a material fact contained in any of
its disclosure documents filed by it with the SEC, except insofar as
the misstatement or omission was based upon information furnished to
the indemnifying party by the indemnified party.
Employee Matters
-----------------
Delta Woodside will cause the employees of the Duck Head Apparel Company
division to become employees of Duck Head, Duck Head will assume the accrued
employee benefits of these employees and Delta Woodside will cause the account
balance of each of these employees in any and all of Delta Woodside's employee
benefit plans (other than the Delta Woodside stock option plan) to be
transferred to a comparable employee benefit plan of Duck Head.
Intercompany Accounts
----------------------
Other than any amounts owed under the tax sharing agreement and except as
provided in the distribution agreement, generally all intercompany receivable,
payable and loan balances existing as of the time of the Duck Head distribution
between Duck Head, on the one hand, and Delta Apparel or Delta Woodside, on the
other hand, will be deemed to have been paid in full by the party or parties
owing the relevant obligation.
Transaction Expenses
---------------------
Generally, all costs and expenses incurred in connection with the Duck Head
distribution, the Delta Apparel distribution and related transactions shall be
paid by Delta Woodside, Duck Head and Delta Apparel proportionately in
accordance with the respective benefits received by Delta Woodside, Duck Head
and Delta Apparel as determined in good faith by the parties; provided that the
holders of the Delta Woodside shares shall pay their own expenses, if any,
incurred in connection with the Duck Head distribution and the Delta Apparel
distribution.
TAX SHARING AGREEMENT
Duck Head will enter into a tax sharing agreement with Delta Woodside and
Delta Apparel that will describe, among other things, each company's rights and
obligations relating to tax payments and refunds for periods before and after
the Duck Head distribution and related matters like the filing of tax returns
and the handling of audits and other tax proceedings. The tax sharing agreement
also describes the indemnification arrangements with respect to tax matters
among Duck Head and its subsidiaries (which this document refers to as the Duck
Head tax group), Delta Woodside and its subsidiaries after the Duck Head
distribution and the Delta Apparel distribution (which this document refers to
as the Delta Woodside tax group) and Delta Apparel and its subsidiaries (which
this document refers to as the Delta Apparel tax group).
Under the tax sharing agreement, the allocation of tax liabilities and
benefits is generally as follows:
- With respect to federal income taxes:
(a) For each taxable year that ends prior to the Duck Head
distribution, Delta Woodside shall be responsible for paying any
increase in federal income taxes, and shall be entitled to
receive the benefit of any refund of or saving in federal income
taxes, that results from any tax proceeding with respect to any
returns relating to federal income taxes of the Delta Woodside
consolidated federal income tax group.
(b) For the taxable period ending on the date of the Duck Head
distribution, Delta Woodside shall be responsible for paying any
federal income taxes, and shall be entitled to any refund of or
saving in federal income taxes, with respect to the Delta
Woodside consolidated federal income tax group.
- With respect to state income, franchise or similar taxes, for each
taxable period that ends prior to or on the date of the Duck Head
distribution, each corporation that is a member of the Delta Woodside
tax group, the Delta Apparel tax group or the Duck Head tax group
shall be responsible for paying any of those state taxes, and any
increase in those state taxes, and shall be entitled to receive the
benefit of any refund of or saving in those state taxes, with respect
to that corporation (or any predecessor by merger of that corporation)
or that results from any tax proceeding with respect to any returns
relating to those state taxes of that corporation (or any predecessor
by merger of that corporation).
- With respect to federal employment taxes:
(a) Delta Woodside shall be responsible for the federal employment
taxes payable with respect to the compensation paid, whether
before, on or after the date of the Duck Head distribution, by
any member of the Delta Woodside federal income tax consolidated
group for any period ending prior to or on the date of the Duck
Head distribution or by any member of the Delta Woodside tax
group for any period after that date to all individuals who are
past or present employees of any business of Delta Woodside other
than the business of Duck Head or the business of Delta Apparel.
(b) Delta Apparel shall be responsible for the federal employment
taxes payable with respect to the compensation paid, whether
before, on or after the date of the Delta Apparel distribution,
by any member of the Delta Woodside federal income tax
consolidated group for any period ending prior to or on the date
of the Delta Apparel distribution or by any member of the Delta
Apparel tax group for any period after that date to all
individuals who are past or present employees of the business of
Delta Apparel.
(c) Duck Head shall be responsible for the federal employment taxes
payable with respect to the compensation paid, whether before, on
or after the date of the Duck Head distribution, by any member of
the Delta Woodside federal income tax consolidated group for any
period ending prior to or on the date of the Duck Head
distribution or by any member of the Duck Head tax group for any
period after that date to all individuals who are past or present
employees of the business of Duck Head.
- With respect to any taxes, other than federal employment taxes,
federal income taxes and state income, franchise or similar taxes:
(a) Delta Woodside shall be responsible for any of these taxes,
regardless of the time period or circumstance with respect to
which the taxes are payable, arising from or attributable to any
business of Delta Woodside other than the business of Duck Head
or the business of Delta Apparel;
(b) Delta Apparel shall be responsible for any of these taxes,
regardless of the time period or circumstance with respect to
which the taxes are payable, arising from or attributable to the
business of Delta Apparel; and
(c) Duck Head shall be responsible for any of these taxes, regardless
of the time period or circumstance with respect to which the
taxes are payable, arising from or attributable to the business
of Duck Head.
- The Delta Woodside tax group shall be responsible for all taxes, and
shall receive the benefit of all tax items, of any member of the Delta
Woodside tax group that relate to any taxable period after the Duck
Head distribution. The DeltaApparel tax group shall be responsible for
all taxes, and shall receive the benefit of all tax items, of any
member of the Delta Apparel tax group that relate to any taxable
period after the Delta Apparel distribution. The Duck Head tax group
shall be responsible for all taxes, and shall receive the benefit of
all tax items, of any member of the Duck Head tax group that relate to
any taxable period after the Duck Head distribution.
Under the tax sharing agreement, the Duck Head tax group and the Delta
Apparel tax group have irrevocably designated Delta Woodside as their agent for
purposes of taking a broad range of actions in connection with taxes for
pre-distribution periods. Those actions include the settlement of tax audits and
other tax proceedings. In addition, the tax sharing agreement provides that all
disagreements and disputes relating to the agreement are to be resolved by Delta
Woodside. These arrangements may result in conflicts of interest among Duck
Head, Delta Woodside and Delta Apparel concerning such matters as whether a tax
relates to the business of Delta Woodside, Duck Head or Delta Apparel. Delta
Woodside might determine that a tax was a liability of Duck Head even though
Duck Head disagreed with that determination.
Under the tax sharing agreement, the Duck Head tax group, the Delta
Woodside tax group and the Delta Apparel tax group have agreed to indemnify one
another against various tax liabilities, generally in accordance with the
allocation of tax liabilities and benefits described above.
OTHER RELATIONSHIPS
Boards of Directors of Duck Head, Delta Woodside and Delta Apparel
---------------------------------------------------------------------------
The following directors of Duck Head are also directors of Delta Woodside
and Delta Apparel: Xxxxxxx X. Xxxxxxx, C. C. Guy, Xx. Xxxxx X. Xxxx, Xx. Xxx
Xxxxxx, E. Xxxxx Xxxxxxx, XX, Xxxx X. Xxxxxx and Xxxxxx X. Xxxxxxxxx. In the
event that any material issue were to arise between Duck Head, on the one hand,
and either Delta Woodside or Delta Apparel, on the other hand, these directors
could be deemed to have a conflict of interest with respect to that issue. In
that circumstance, Duck Head anticipates that it will proceed in a manner that
is determined by a majority of those members of Duck Head's board of directors
who are not also members of the board of directors of Delta Woodside or the
board of directors of Delta Apparel (as applicable).
Principal Stockholders
-----------------------
The Duck Head shares will be distributed in the Duck Head distribution, and
the Delta Apparel shares will be distributed in the Delta Apparel distribution,
to the Delta Woodside stockholders proportionately among the Delta Woodside
shares. Therefore, immediately following the Duck Head distribution, Delta
Woodside's principal stockholders will be the same individuals and entities as
Duck Head's and Delta Apparel's principal stockholders, and those principal
stockholders will have the same respective percentages of outstanding beneficial
ownership in each of Delta Woodside, Duck Head and Delta Apparel (assuming no
acquisitions or dispositions of shares by those stockholders between the record
date for the Duck Head distribution or the Delta Apparel distribution and the
completion of either distribution). See "Security Ownership of Significant
Beneficial Owners and Management".
Sales to and Purchases from Delta Woodside or Delta Apparel of Goods or
--------------------------------------------------------------------------------
Manufacturing Services
-----------------------
In the ordinary course of Duck Head's business, Duck Head has produced
T-shirts for Delta Apparel, purchased T-shirts from Delta Apparel and purchased
fabrics from Delta Xxxxx. The following table shows these transactions for the
last three fiscal years and for the first six months of fiscal year 2000:
(in thousands of dollars)
Fiscal year First six months
----------- ----------------
Of
--
1997 1998 1999 Fiscal year 2000
----- ----- ---- ----------------
Sold to Delta Apparel 653 132 -- --
Purchased from Delta Apparel 403 156 481 6
Purchased from Delta Xxxxx 3,338 1,824 662 -
All of these T-shirt and fabric sales were made at prices deemed by Duck
Head to approximate market value.
Duck Head anticipates that any future sales or purchases to or from Delta
Woodside or Delta Apparel in the future will not be material.
Management Services
--------------------
Delta Woodside has provided various services to the operating divisions of
its subsidiaries, including the Delta Xxxxx Marketing Company, Duck Head Apparel
Company and Delta Apparel Company divisions. These services include financial
planning, SEC reporting, payroll, accounting, internal audit, employee benefits
and services, stockholder services, insurance, treasury, purchasing, management
information services and tax accounting. These services have been charged on
the basis of Delta Woodside's cost and allocated to the various divisions based
on employee headcount, computer time, projected sales and other criteria.
During fiscal years 1997, 1998, and 1999, Delta Woodside charged the Duck
Head Apparel Company division $772,000, $882,000 and $777,000, respectively, for
these services. During the first six months of fiscal year 2000, Delta Woodside
charged the Duck Head Apparel Company division $0 for these services.
Other
-----
For further information on transactions with affiliates by Duck Head, see
Notes 2 and 8 to the Combined Financial Statements of Duck Head under "Index to
Combined Financial Statements" in this document, which information is
incorporated into this section by reference.
Any transaction entered into between Duck Head and any officer, director,
principal stockholder or any of their affiliates has been on terms that Duck
Head believes are comparable to those that would be available to Duck Head from
non_affiliated persons.
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN
THE DUCK HEAD DISTRIBUTION
One or more executive officers of Duck Head and one or more members of the
Duck Head board of directors will receive economic benefits as a result of the
Duck Head distribution and the Delta Apparel distribution and may have other
interests in the Duck Head distribution and the Delta Apparel distribution in
addition to their interests as Delta Woodside stockholders. Some of these
executive officers and directors will also be the beneficial owners of more than
5% of the outstanding shares of common stock of Duck Head immediately following
the Duck Head distribution. See "Security Ownership of Significant Beneficial
Owners and Management." The Delta Woodside board of directors was aware of
these interests and considered them along with the other matters described above
under "The Duck Head Distribution __ Background of the Duck Head Distribution"
and "The Duck Head Distribution __ Reasons for the Duck Head Distribution."
RIGHT OF XXXXXX X. XXXXXX, XX. TO ACQUIRE DUCK HEAD SHARES
Pursuant to the letter agreement pursuant to which Xxxxxx X. Xxxxxx, Xx.
became Chairman, President and Chief Executive Officer of Duck Head, he has the
right to acquire from Duck Head up to 1,000,000 Duck Head shares on the date
that is six months after the Duck Head distribution. If this right is
exercised, the price for the shares will be the average daily closing stock
price for the Duck Head common stock for the six-month period following the Duck
Head distribution. By reason of Section 162(m) of the Internal Revenue Code
(which limits the corporate income tax deduction of certain compensation paid to
an executive officer in excess of $1 million), Duck Head does not believe that
it will be able to deduct any expense attributable to this right for federal
income tax purposes. See "Management of Duck Head - Management Compensation".
RECEIPT OF DUCK HEAD STOCK OPTIONS AND DUCK HEAD INCENTIVE STOCK AWARDS
The compensation grants committee of the Duck Head board of directors
anticipates that, during the first six months following the Duck Head
distribution, grants under the Duck Head stock option plan covering an aggregate
of approximately 202,500 Duck Head shares will be made and awards under the Duck
Head incentive stock award plan covering up to an aggregate of approximately
111,750 Duck Head shares will be made, including the following anticipated
option and award grants to the following executive officers of Duck Head:
Name and position Shares Covered by Options(1) Shares Covered by Awards(2)
---------------------------------------- ---------------------------- ---------------------------
Xxxxxx X. Xxxxxx, Xx. 125,000 (3)
Chairman, President and Chief
Executive Officer
Xxxxxxx X. Xxxxxxxxxxx 20,000 10,000
Senior Vice President-Sales
K. Xxxxx Xxxxxxxxx 20,000 10,000
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
Xxxxxxx X. Xxxxxxxx, Xx. 20,000 10,000
Senior Vice President-Merchandising
___________________________________
(1) The compensation grants committee of the Duck Head board of directors
anticipates that the stock options will be granted at various dates during
the six month period. The exercise price for any option will be the stock's
closing market value at the date of grant. The compensation grants
committee anticipates that the options, other than the options anticipated
to be granted to Xx. Xxxxxx, will vest over a four year period. The
compensation grants committee anticipates that the options granted to Xx.
Xxxxxx will vest over a period ending March 8, 2001.
(2) The compensation grants committee of the Duck Head board of directors
anticipates that, except for the anticipated award to Xx. Xxxxxx, 20% of
each award will vest at the end of each of fiscal year 2000, fiscal year
2001 and fiscal year 2002 and up to the remaining 40% will vest at the end
of fiscal year 2002 to the extent that certain performance criteria based
on cumulative earnings before interest and taxes are met.
(3) The compensation grants committee anticipates that Xx. Xxxxxx will be
granted incentive stock awards under the Duck Head incentive stock award
plan covering the lesser of (a) 75,000 Duck Head shares or (b) Duck Head
shares with a value on the date of grant of $200,000. These awards would
vest to the extent of 60% of the shares covered thereby on March 8, 2001 if
he is still then employed by Duck Head and to the extent of up to the
remaining 40% of the shares covered thereby if specified performance
criteria based on cumulative earnings before interest and taxes through
March 8, 2001 are satisfied. The compensation committee of the Duck Head
board of directors anticipates that, if the number of Duck Head shares
covered by the award have a value less than $200,000 on the date of grant,
the difference between that value and $200,000, plus a gross-up income tax
amount, would be paid in cash by Duck Head to Xx. Xxxxxx.
For a description of the Duck Head stock option plan and the Duck Head
incentive stock award plan and the anticipated treatment under Section 162(m) of
the Internal Revenue Code of grants of options and awards under these plans, see
"Management of Duck Head - Management Compensation".
PAYMENTS IN CONNECTION WITH DUCK HEAD DISTRIBUTION AND DELTA APPAREL
DISTRIBUTION
In 1997, the Delta Woodside board of directors adopted and the Delta
Woodside stockholders approved the Delta Woodside long term incentive plan.
Under that plan, grants could have been made to key executives and non-employee
directors of Delta Woodside that, depending on the attainment of certain
performance measurement goals over a three-year period, might have translated
into stock options for Delta Woodside shares being awarded to participants in
the plan. No grants complying with the terms of the plan, however, were made,
although the individuals who were Delta Woodside's intended participants in the
plan, and the target awards for those individuals, were identified.
In consideration of the identified participants giving up any rights they
may have under or in connection with the long term incentive plan and in
consideration of the efforts of the key executives and directors on behalf of
Delta Woodside leading up to the Duck Head distribution and the Delta Apparel
distribution, Delta Woodside's board (based on the recommendation of its
compensation committee) has decided that, if the Duck Head distribution and the
Delta Apparel distribution occur, Delta Woodside shares shall be issued prior to
the Duck Head and Delta Apparel record date, in amounts that have been
determined by the Board (on the basis of the recommendation of the compensation
committee), and cash shall be paid, in amounts that have been determined by the
Board (on the basis of the recommendation of the compensation committee), to
those individuals who were intended participants in the plan. The table below
sets forth the Delta Woodside shares that would thereby be issued and the cash
that would thereby be paid to the individuals who are directors or executive
officers of Duck Head. In determining the number of Delta Woodside shares to be
issued to each participant, the Delta Woodside board (and the Delta Woodside
compensation committee) used the closing sale price of the Delta Woodside common
stock on March 15, 2000 ($1.50 per share). The Delta Woodside board anticipates
that these Delta Woodside shares would be issued and this cash would be paid
prior to the record date for the Duck Head distribution and the Delta Apparel
distribution.
Name Delta Woodside Shares(#) Cash ($)
-------------------- ------------------------ --------
Xxxxxxx X. Xxxxxxx 126,480 116,280
C.C. Guy 13,485 12,398
Xx. Xxxxx X. Xxxx 13,485 12,398
Xx. Xxx Xxxxxx 13,330 12,255
E. Xxxxx Xxxxxxx, XX 206,667 190,000
Xxxx X. Xxxxxx 13,072 12,018
Xxxxxx X. Xxxxxxxxx 148,800 136,800
Shares would also be issued and cash would also be paid to the estate of Xxxx
Xxxxxx (father of Xxxx X. Xxxxxx), a member of the Delta Woodside board of
directors until his death in 1998, who participated in the early stages of that
board's strategic planning.
E. Xxxxx Xxxxxxx, XX is a participant in Delta Woodside's severance plan.
Upon the termination of Xx. Xxxxxxx'x services with Delta Woodside (which is
anticipated to occur on or about the time of the Duck Head distribution and the
Delta Apparel distribution), Delta Woodside will pay Xx. Xxxxxxx $147,115 of
severance in accordance with the normal provisions of this plan.
EARLY EXERCISABILITY OF DELTA WOODSIDE STOCK OPTIONS
Pursuant to the distribution agreement, Delta Woodside has provided the
holders of outstanding options granted under the Delta Woodside stock option
plan, whether or not those options were then exercisable, with the opportunity
to amend the terms of their Delta Woodside stock options. The amendment offered
to each holder provided that:
(i) all unexercisable portions of the holder's Delta Woodside stock options
became immediately exercisable in full five (5) business days prior to the
Duck Head record date, which permitted the holder to exercise all or part
of the holder's Delta Woodside stock option prior to the Duck Head record
date (and thereby receive Duck Head shares in the Duck Head distribution
and Delta Apparel shares in the Delta Apparel distribution); and
(ii) any Delta Woodside stock options that remained unexercised as of the
Duck Head record date remain exercisable for only Delta Woodside common
shares, and for the same number of Delta Woodside common shares at the same
exercise price, after the Duck Head distribution and the Delta Apparel
distribution as before the Duck Head distribution and the Delta Apparel
distribution (and not for a combination of Delta Woodside shares, Duck Head
shares and Delta Apparel shares).
All holders of outstanding options under the Delta Woodside stock option
plan entered into the proposed amendment.
As a result of these amendments, options for Delta Woodside shares became
exercisable earlier than they otherwise would have for the following Named
Executives and members of the Duck Head board of directors for the following
number of shares of Delta Woodside common stock:
Name Number of Delta Woodside common shares covered by portion
---------------------------------------------------------
of stock options the exercisability of which was accelerated
------------------------------------------------------------
Xxxxxxx X. Xxxxxxx 37,500
Xxxxxxx X. Xxxxxxxxxxx 6,000
K. Xxxxx Xxxxxxxxx 8,000
LEASE TERMINATIONS
Delta Woodside has leased its principal corporate office space and space
for its benefits department, purchasing department and financial accounting
department from a corporation (Xxxxxxx Square, Ltd.), one-half of the stock of
which is owned by each of E. Xxxxx Xxxxxxx, XX (a director and significant
stockholder of Duck Head and Delta Apparel and President and Chief Executive
Officer (from which officer positions he will resign in connection with the Duck
Head distribution and the Delta Apparel distribution) and a director and
significant stockholder of Delta Woodside) and Xxxx X. Xxxxx (Vice President and
Secretary of Delta Woodside (from which officer positions she will resign in
connection with the Duck Head distribution and the Delta Apparel distribution)).
Xx. Xxxxxxx and Xx. Xxxxx are also the directors and executive officers of
Xxxxxxx Square, Ltd. The lease of this space was executed effective September
1, 1998, covers approximately 9,662 square feet at a rental rate of $13.50 per
square foot per year (plus certain other expenses) and had an expiration date of
August 2003. In connection with the Duck Head distribution and the Delta
Apparel distribution, Xxxxxxx Square, Ltd. and Delta Woodside have agreed that
this lease will terminate on the Duck Head and Delta Apparel distribution date
in exchange for the payment by Delta Woodside to Xxxxxxx Square, Ltd. of
$135,268. Following the Duck Head and Delta Apparel distribution date, Delta
Woodside may continue to use the space on an as needed month-to-month basis at
the rental rate of $14.00 per square foot per year (plus certain other
expenses).
Delta Woodside has leased office space in Edgefield, South Carolina from
The Rainsford Development Corporation, a corporation wholly owned by Xxxxxx X.
Xxxxxxxxx (a director and significant stockholder of Duck Head, Delta Apparel
and Delta Woodside). Xx. Xxxxxxxxx is a director and executive officer and
Xxxxxx X. Xxxxx (Assistant Secretary of Delta Woodside (from which officer
position she will resign in connection with the Duck Head distribution and the
Delta Apparel distribution)) is an executive officer of The Rainsford
Development Corporation. In connection with the Duck Head distribution and the
Delta Apparel distribution, The Rainsford Development Corporation and Delta
Woodside have agreed that this lease will terminate on the Duck Head and Delta
Apparel distribution date in exchange for the payment by Delta Woodside to The
Rainsford Development Corporation of $33,299.08.
LEASE OF STORE IN EDGEFIELD, SOUTH CAROLINA
Duck Head leases a building in Edgefield, South Carolina from Xxxxxx X.
Xxxxxxxxx (a director and significant stockholder of Duck Head, Delta Apparel
and Delta Woodside) pursuant to an agreement involving rental payments equal to
3% of gross sales of the Edgefield store, plus 1% of gross sales of the store
for utilities. Under this lease agreement, $9,944, $11,076 and $10,947 were
paid to Xx. Xxxxxxxxx during fiscal 1997, 1998 and 1999, respectively.
TRANSFERS OF LIFE INSURANCE POLICIES
In February 1991, each of E. Xxxxx Xxxxxxx, XX (a director and significant
stockholder of Duck Head and Delta Apparel and President and Chief Executive
Officer (from which officer positions Xx. Xxxxxxx will resign in connection with
the Duck Head distribution and the Delta Apparel distribution) and a director
and significant stockholder of Delta Woodside) and Xxxxxx X. Xxxxxxxxx (a
director and significant stockholder of Duck Head, Delta Apparel and Delta
Woodside) entered into a stock transfer restrictions and right of first refusal
agreement (which this document refers to as a "First Refusal Agreement") with
Delta Woodside. Pursuant to each First Refusal Agreement, Xx. Xxxxxxx or Xx.
Xxxxxxxxx, 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 Xx. Xxxxxxx and Xx. Xxxxxxxxx. 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 Xx. Xxxxxxx
or Xx. Xxxxxxxxx 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
Xx. Xxxxxxx'x or Xx. Xxxxxxxxx'x life. A First Refusal Agreement terminates if
the life insurance policies payable to the applicable individual's beneficiaries
for $10 million are canceled by reason of Delta Woodside's failure to pay the
premiums on those policies.
In connection with the Duck Head distribution and the Delta Apparel
distribution, Delta Woodside has agreed with each of Xx. Xxxxxxx and Xx.
Xxxxxxxxx that, effective as of a date on or about the date the Duck Head
distribution and the Delta Apparel distribution occur, that individual's First
Refusal Agreement will terminate and, if the individual desires, Delta Woodside
will transfer to the individual the $10 million life insurance policies on his
life the proceeds of which are payable to the beneficiary or beneficiaries he
selects. After this transfer, the recipient individual will be responsible for
payment the premiums on these life insurance policies. Delta Woodside will
allow the remaining $30 million of life insurance payable to Delta Woodside to
lapse.
EMPLOYEE BENEFIT SERVICES
On or about the date of the Duck Head distribution, Duck Head anticipates
engaging Carolina Benefits Services, Inc. to provide payroll processing and
401(k) plan administration services for Duck Head. Carolina Benefits Services,
Inc. is owned by E. Xxxxx Xxxxxxx, XX (a director and significant stockholder of
Duck Head and Delta Apparel and President and Chief Executive Officer (from
which officer positions Xx. Xxxxxxx will resign in connection with the Duck Head
distribution and the Delta Apparel distribution) and a director and significant
stockholder of Delta Woodside) and Xxxx X. Xxxxx (Vice President and Secretary
of Delta Woodside (from which officer positions she will resign in connection
with the Duck Head distribution and the Delta Apparel distribution)). Xx. Xxxxx
is also an executive officer of Carolina Benefits Services, Inc.
For the services to be provided by Carolina Benefits Services, Duck Head
anticipates paying fees based on the numbers of employees, 401(k) plan
participants and plan transactions and other items. Duck Head anticipates that
on an annual basis these fees will be approximately $46,000. Duck Head elected
to engage Carolina Benefits Services to provide these services after receiving
proposals from other providers of similar services and determining that Carolina
Benefits Services' proposal was Duck Head's least costly alternative.
