THE DELTA APPAREL DISTRIBUTION
PARTIES TO THE DISTRIBUTION AGREEMENT
Delta Woodside
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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 Delta Apparel distribution, Delta Woodside and its
subsidiaries had three operating divisions: Delta Xxxxx Marketing Company,
Delta Apparel Company and Duck Head 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 Delta Apparel distribution and the Duck Head
distribution, Delta Xxxxx Marketing Company will remain the only
continuing Delta Woodside operation.
- Pursuant to the Delta Apparel distribution, Delta Woodside will
distribute to its stockholders all of the outstanding common stock of
Delta Apparel, which will continue the business formerly conducted by
the Delta Apparel Company division of various subsidiaries of Delta
Woodside. For a description of the business of the Delta Apparel
Company division, see the information under the heading "Business of
Delta Apparel".
- Simultaneously with the Delta Apparel distribution, Delta Woodside
will, pursuant to the Duck Head distribution, distribute to its
stockholders all of the outstanding stock of Duck Head, which will
continue the business formerly conducted by the Duck Head Apparel
Company division of various subsidiaries of Delta Woodside. For a
description of the business of the Duck Head Apparel Company division,
see the information below under the subheading "Duck Head".
Delta Apparel
--------------
Delta Apparel is a Georgia corporation with its principal executive offices
located at 0000 Xxxxxxxxxxxx Xxxx., Xxxxx 000, Xxxxxx, Xxxxxxx 00000 (telephone
number: 000-000-0000).
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). Duck Head's business is designing, sourcing,
producing, marketing and distributing boys' and men's value-oriented casual
sportswear predominantly under the 134-year-old nationally recognized "Duck
Head" (Reg. Trademark) label.
BACKGROUND OF THE DELTA APPAREL DISTRIBUTION
Since the middle of its 1998 fiscal year, Delta Woodside's board of
directors has explored various means, in addition to effectively operating Delta
Woodside's businesses, to enhance stockholder value.
On March 9, 1998, Delta Woodside announced that it was withdrawing from the
circular knit fabrics business, which had operated under the name of Stevcoknit
Fabrics Company, and would be selling or closing and liquidating its two
knitting, dyeing and finishing plants in Wallace, North Carolina, and its yarn
spinning plant in Spartanburg, South Carolina. In the announcement, Delta
Woodside also stated that it had decided to sell its Nautilus International
fitness equipment division, and had retained an investment banking firm to
handle the sale.
Delta Woodside completed most of the liquidation and sale of the Stevcoknit
Fabrics Company division during its 1998 fiscal year. The Nautilus
International sale was consummated in January 1999.
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 Delta Apparel Company
division and the Duck Head Apparel Company division would have been separated
into two corporations, and the stock of each of the Delta Apparel corporation
and the Duck Head corporation would have been distributed to all of the Delta
Woodside stockholders. The Delta Woodside board of directors decided that Delta
Woodside would promptly begin the process of soliciting offers for the purchase
of the post spin-off Delta Woodside common stock, and that Delta Woodside would
retain an investment banking firm to assist in the implementation of this
restructuring plan.
On March 16, 1999, Delta Woodside announced that 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 Duck Head
Apparel Company division and the Delta 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 (Delta Apparel
Company and Duck Head Apparel Company) as two separate publicly-owned
corporations. The announcement further stated that Delta Woodside was in the
process of transferring various corporate functions to its three operating
divisions (Delta Xxxxx Marketing Company, Delta Apparel Company and Duck Head
Apparel Company). The announcement stated that, upon the complete transfer of
these functions or at the time of the spin-offs (as appropriate), the functions
then being performed at the Delta Woodside level would no longer need to be
performed at that level, and the executive officers of Delta Woodside would
resign their positions with Delta Woodside. The announcement stated that, upon
consummation of the spin-offs, Delta 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 DELTA APPAREL DISTRIBUTION
Since the summer of 1998, Delta Woodside's board of directors has been
engaged in the process of exploring various means to maximize stockholder value.
The alternatives that the Delta Woodside Board has examined have included:
(a) A potential sale of the Duck Head Apparel Company division;
(b) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a sale
of the remaining company;
(c) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a
recapitalization of the remaining company that would involve a
cash distribution to Delta Woodside's stockholders by that
remaining company;
(d) A pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders;
(e) A pro rata taxable spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders;
(f) A disproportionate tax-free spin-off of one of Delta Woodside's
apparel businesses to one of Delta Woodside's major stockholders
accompanied by a pro rata tax-free spin-off of the other apparel
business to all the other stockholders;
(g) A potential sale of the Delta Apparel Company business or assets;
(h) A purchase by Delta Xxxxx, Inc. of the Delta Apparel Company and
the Duck Head Apparel Company businesses; and
(i) Leaving Delta Woodside's three businesses in Delta Woodside in
their current corporate form.
During the course of this exploration, the Delta Woodside board witnessed a
deterioration of general market conditions in the textile and apparel
industries. This deterioration caused the market's perceived values of textile
and apparel businesses to decline significantly.
This decline, together with the information obtained by Delta Woodside in
the process of exploring the alternatives described above, led the Delta
Woodside board to conclude that:
(i) Any sale or liquidation at this time or in the near future of any
of Delta Woodside's businesses would, more likely than not, be at
depressed and unacceptable prices; and
(ii) Absent a change in circumstances, the interests of Delta Woodside
and its stockholders would be best served by not pursuing the sale
or liquidation of any of Delta Woodside's businesses at this time.
The Delta Woodside Board also determined that the best interests of Delta
Woodside and its stockholders would not be served by pursuing at this time any
of the additional alternatives described above other than a pro rata spin-off of
Delta Woodside's two apparel businesses to Delta Woodside's stockholders. The
major factors that led to this conclusion were the general market condition
deterioration described above and:
(1) Contractual constraints, which added significantly to the costs of
those alternatives that required additional financing to be
incurred by Delta 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, Duck Head Apparel Company and Delta Apparel Company), and
that the best method to accomplish this separation and thereby enhance
stockholder value that is available to Delta Woodside at this time is to effect
a pro rata spin-off to Delta Woodside's stockholders of each of Delta Woodside's
apparel businesses, whether that spin-off is tax-free or taxable for federal
income tax purposes.
In reaching this determination, the Delta Woodside Board took into account
its belief that the separation of Delta Woodside's three businesses will further
the following objectives, among others, and thereby enhance stockholder value:
(a) Permit the grant of equity incentives to the separate management of
each business, which incentives would not be affected by the results
of the other businesses and, therefore, would have excellent potential
to align closely the interests of that management with those of the
stockholders;
(b) Permit the elimination of certain existing corporate overhead expenses
that result from the current need to coordinate the operations of
three distinct businesses that have separate modes of operation and
markets;
(c) As a reason to accomplish the Duck Head distribution, eliminate the
complaints of certain customers of Delta 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 Delta Apparel set forth in
this document under the heading, "Unaudited Pro Forma Combined
Financial Statements", and at pages F-1 to F-22;
- The Delta Woodside board's knowledge of the business, operations,
assets and financial condition of Delta Apparel;
- Delta Apparel management's assessment of the prospects of Delta
Apparel;
- The current and prospective economic environment in which Delta
Apparel operates; and
- The terms of the distribution agreement and the tax sharing agreement.
This discussion of the information and factors considered by the Delta
Woodside board is not meant to be exhaustive but is believed to include the
material factors considered by the Delta Woodside board in authorizing the Delta
Apparel distribution. The Delta Woodside board did not quantify or attach any
particular weight to the various factors that it considered in reaching its
determination that the Delta Apparel distribution, the Duck Head distribution
and related transactions are advisable and in the best interests of Delta
Woodside and its stockholders. In reaching its determination, the Delta
Woodside board took the various factors into account collectively and the Delta
Woodside board did not perform a factor_by_factor analysis.
Opinion of Xxxxxxxx Xxxxx
----------------------------
Delta Woodside engaged Xxxxxxxx Xxxxx to provide to the Delta Woodside
board and the Delta Apparel board an opinion as to the solvency of Delta Apparel
as of the time of the Delta Apparel distribution. Delta Woodside selected
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 Duck Head, 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 Delta Apparel distribution
or the Duck Head 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 Delta Apparel board. Xxxxxxxx Xxxxx believes, and so advised the Delta
Woodside board and the Delta Apparel board, that its analyses must be considered
as a whole and that selecting portions of its analyses and of the factors
considered by it, without considering all factors and analyses, could create an
incomplete view of the process underlying its analyses and opinions.
The Delta Apparel distribution and other related transactions disclosed to
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 Delta Apparel distribution and
that, prior to the Delta Apparel distribution, the intercompany reorganization
described in "Relationships Among Delta Apparel, Delta Woodside and Duck Head -
Distribution Agreement" will be completed.
Delta Woodside's board of directors has requested that Xxxxxxxx Xxxxx
render its written opinion to the Delta Woodside board and the Delta Apparel
board as to whether, assuming the Transaction has been consummated as proposed,
immediately after and giving effect to the Transaction: (a) on a pro forma
basis, the fair value and present fair saleable value of Delta Apparel would
exceed its respective stated liabilities and identified contingent liabilities,
(b) Delta Apparel should be able to pay its debts as they become absolute and
mature; (c) the capital remaining in Delta Apparel after the Transaction would
not be unreasonably small for the business in which Delta Apparel is engaged, as
management has indicated it is now conducted and is proposed to be conducted
following the consummation of the Transaction; and (d) the financial test for
distributions of the state of incorporation of Delta Apparel (i.e. Georgia) has
been satisfied.
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 Delta Apparel.
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 Delta Apparel's annual financial statements for the 1997,
1998 and 1999 fiscal years and year-to-date statements for the first
six months of fiscal year 2000, which Delta Apparel's and Delta
Woodside's managements have identified as the most current information
available;
(ii) reviewed the proposal from the third party lender to provide Delta
Apparel revolving credit and term loan facilities;
(iii)spoke with certain members of the senior management of Delta Woodside
and Delta Apparel to discuss the operations, financial condition,
future prospects and projected operations and performance of Delta
Apparel;
(iv) toured the Edgefield, SC (Rainsford) and Maiden, NC manufacturing
facilities of Delta Apparel;
(v) reviewed forecasts and projections prepared by Delta Apparel's
management with respect to the periods ended January 1, 2000 through
fiscal year 2004;
(vi) reviewed marketing and promotional material relating to Delta Apparel;
(vii)reviewed the preliminary registration statement filed with the SEC for
Delta Apparel;
(viii) reviewed other publicly available financial data for Delta Apparel
and certain companies that Xxxxxxxx Xxxxx deems comparable to Delta
Apparel; and
(ix) conducted such other studies, analyses and investigations as Xxxxxxxx
Xxxxx has deemed appropriate.
In assessing the solvency of Delta Apparel immediately after and giving
effect to the Transaction, Xxxxxxxx Xxxxx:
(i) analyzed the fair value and present fair saleable value of Delta
Apparel's assets relative to Delta Apparel's stated liabilities and
identified contingent liabilities on a pro forma basis ("balance sheet
test");
(ii) assessed Delta Apparel's ability to pay its debts as they become
absolute and mature ("cash flow test"); and
(iii)assessed the capital remaining in Delta Apparel after the Transaction
so as not to be unreasonably small ("reasonable capital test").
Balance Sheet Test
The Balance Sheet Test determines whether or not the fair value and present
fair salable value of Delta Apparel's assets exceeds its stated liabilities and
identified contingent liabilities after giving effect to the Transaction. This
test requires an analysis of the fair market value of Delta Apparel as a
going-concern. As part of this analysis, Xxxxxxxx Xxxxx considered, among other
things,
(i) historical and projected financial performance for Delta Apparel as
prepared by Delta Apparel;
(ii) the business environment in which Delta Apparel competes;
(iii)performance of certain publicly traded companies deemed by Xxxxxxxx
Xxxxx to be comparable to Delta Apparel, in terms of, among other
things: size, profitability, financial leverage and growth;
(iv) capitalization rates ("multiples") for certain publicly traded
companies deemed by Xxxxxxxx Xxxxx to be comparable to Delta Apparel
(including (a) Enterprise Value ("EV")/Revenue; (b) EV/EBITDA; and,
(c) EV/EBIT);
(v) multiples derived from acquisitions of companies deemed by Xxxxxxxx
Xxxxx to be comparable to Delta Apparel;
(vi) discounted cash flow approaches;
(vii) the capital structure and debt obligations of Delta Apparel; and
(viii) non-operating assets and identified contingent liabilities.
In determining the fair value and present fair saleable value of the
aggregate assets of Delta Apparel, the following three methodologies were
employed: comparable public company, comparable transaction and discounted cash
flow.
Market Multiple Approach. This approach involved the multiplication of
various earnings and cash flow measures by appropriate risk-adjusted multiples.
Multiples were determined through an analysis of: (i) publicly traded companies
that were determined by Xxxxxxxx Xxxxx to be comparable from an investment
standpoint to Delta Apparel ("Comparable Public Companies"); and, (ii) change of
control transactions involving companies that were determined by Xxxxxxxx Xxxxx
to be comparable to Delta Apparel from an investment standpoint ("Comparable
Transactions"). For Delta Apparel, Xxxxxxxx Xxxxx selected four publicly traded
domestic companies that are engaged in the manufacturing and marketing of
private label and branded apparel. A comparative risk analysis between Delta
Apparel and the Comparable Public Companies formed the basis for the selection
of appropriate risk adjusted multiples for Delta Apparel. The risk analysis
incorporates both quantitative and qualitative risk factors which relate to,
among other things, the nature of the industry in which Delta Apparel and the
Comparable Public Companies are engaged. The value indications derived from
capitalization of the relevant performance fundamentals for Delta Apparel were
adjusted to reflect control value indications for Delta Apparel consistent with
the required standard of value. For the Comparable Transactions, 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 Delta Apparel. The derived value indications reflect control
values for Delta Apparel consistent with the fair values present and fair
salable value standard.
Discounted Cash Flow Approach. The Discounted Cash Flow Approach involved
an estimation of the present value of projected cash flows to be generated by
Delta Apparel. The projected debt-free cash flows were developed from forecasts
prepared by management of Delta Apparel. In addition to the respective cash
flows for the projected period 2000 to 2004, a determination of terminal values
as of June 30, 2004 was made based on the anticipated fair and salable values of
Delta Apparel at that time. In this case, the estimation of terminal values
involved using the market multiple approach already described above, where
projected fundamentals were capitalized based on selected multiples.
Indications of value were developed by applying an appropriate discount rate or
cost of capital to the projected cash flows and terminal value. The discount
rate reflects the degree of risk inherent in the assets of Delta Apparel and
their ability to produce the projected cash flows.
Cash Flow Test
The Cash Flow Test focuses on whether or not Delta Apparel should be able
to repay its debts as they become absolute and mature (including the debts
incurred in the Transaction). This test involves a two-step analysis of Delta
Apparel's financial projections, (i) examines the consistency of the projections
with historical performance, current marketing strategies and operating cost
structure; and (ii) tests the sensitivity of the projections to changes in key
variables, including revenue growth, operating margins and capital expenditures.
In testing cash flows, Xxxxxxxx Xxxxx performs sensitivity analyses to determine
the "safety margin" available to deal with unexpected downturns in Delta
Apparel's ability to generate operating cash flow.
Reasonable Capital Test
The Reasonable Capital Test follows from the Balance Sheet and Cash Flow
Tests. A company may have assets that exceed liabilities, but if the amount is
too small to provide some downside protection, the capital amount may not be
deemed to be adequate and, in such a situation, the business would fail the
Reasonable Capital Test. The determination as to whether the net assets
remaining with Delta Apparel constitute unreasonably small capital involves an
analysis of various factors, including, (i) the degree of sensitivity
demonstrated in the cash flow test; (ii) historical and expected volatility in
revenues, cash flow and capital expenditures; (iii) the adequacy of working
capital; (iv) historical and expected volatility of going-concern asset values;
(v) the maturity structure and the ability to refinance Delta Apparel's
obligations; (vi) the magnitude, timing and nature of identified contingent
liabilities; and (vii) the nature of the business and the impact of financial
leverage on its operations.
Solvency
Based upon the foregoing, and in reliance thereon, it is 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 Delta Apparel's assets would exceed Delta Apparel's stated
liabilities and identified contingent liabilities;
(ii) Delta Apparel should be able to pay its debts as they become absolute
and mature; and
(iii)the capital remaining in Delta Apparel after the Transaction would
not be unreasonably small for the business in which Delta Apparel is
engaged, as management has indicated it is now conducted and is
proposed to be conducted following the consummation of the
Transaction.
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 Delta
Apparel 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 Delta Apparel 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 Delta Apparel, and that there has
been no material adverse change in the assets, financial condition, business or
prospects of Delta Apparel since the date of the most recent financial
statements made available to Xxxxxxxx Xxxxx.
Xxxxxxxx Xxxxx has not independently verified the accuracy and completeness
of the information supplied to it with respect to Delta Apparel, and does not
assume any responsibility with respect to it. Xxxxxxxx Xxxxx has not made any
physical inspection or independent appraisal of any of the properties or assets
of Delta Apparel. 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 Delta Apparel 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 Delta Apparel Distribution - Reasons for the Delta Apparel
Distribution" include the material factors discussed by Prudential Securities.
Prudential Securities also advised the Delta Woodside board regarding the issues
surrounding various alternatives to the Delta Apparel distribution and the Duck
Head distribution, including a sale of either or both of Delta Apparel or Duck
Head and a liquidation of either or both of Delta Apparel or Duck Head.
Prudential Securities' financial advice was based on its analysis of the trading
prices and trading multiples of approximately 11 textile and apparel companies
which Prudential Securities believed provided relevant comparisons. In
addition, Prudential Securities reviewed recent acquisitions, also deemed to
provide relevant comparisons, in the textile and apparel industries including
the prices paid and multiples of financial performance that those acquisitions
implied. Prudential Securities' advice regarding Delta Woodside's alternatives
with regard to Delta Apparel was also based on its review and understanding of
prevailing textile and apparel market conditions, as well as its review of Delta
Apparel's historical market performance.
Prudential Securities was not requested to, and did not, undertake the
types of analyses customary to deliver a financial opinion and did not deliver
any such opinion.
Pursuant to an engagement letter, Prudential Securities has been paid by
Delta Woodside an advisory fee of $500,000 for its services. Delta Woodside has
agreed to indemnify Prudential Securities for certain liabilities relating to or
arising from Prudential Securities' engagement by Delta Woodside. Prudential
Securities has also performed various investment banking services for Delta
Woodside in the past, and has received customary fees for those services.
Prudential Securities is a nationally recognized investment banking firm
and, as a customary part of its investment banking activities, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements, and
valuations for corporate and other purposes. Delta Woodside selected Prudential
Securities because of its expertise, reputation and familiarity with Delta
Woodside. In the ordinary course of business, Prudential Securities and its
affiliates may actively trade or hold the securities and other instruments and
obligations of Delta Woodside for their own account and for the accounts of
customers and, accordingly, may at any time hold long or short positions in such
securities, instruments or obligations.
DESCRIPTION OF THE DELTA APPAREL DISTRIBUTION
The distribution agreement among Delta Woodside, Delta Apparel and Duck
Head sets forth the general terms and conditions relating to, and the
relationship of the three corporations after, the Delta Apparel distribution.
For an extensive description of the distribution agreement, see the section of
this document found under the heading "Relationship Among Delta Apparel, Delta
Woodside and Duck Head--Distribution Agreement".
Delta Woodside plans to effect the Delta Apparel distribution on or about
May 12, 2000 by distributing all of the issued and outstanding shares of Delta
Apparel common stock to the record holders of Delta Woodside common stock on the
record date for this transaction, which is April 28, 2000. Delta Woodside will
distribute one share of Delta Apparel common stock to each of those holders for
every ten shares of Delta Woodside common stock owned of record by that holder.
The actual total number of shares of Delta Apparel common stock that Delta
Woodside will distribute will depend on the number of shares of Delta Woodside
common stock outstanding on the record date. Based upon the one-for-ten Delta
Apparel distribution ratio, the number of shares of Delta Woodside common stock
outstanding on March 3, 2000 and the number of Delta Woodside shares to be
issued as described in "Interests of Directors and Executive Officers in the
Delta Apparel Distribution - Payments in Connection with Delta Apparel
Distribution and Duck Head Distribution", Delta Woodside will distribute
approximately 2,400,000 shares of Delta Apparel common stock to holders of Delta
Woodside common stock, which will then constitute all of the outstanding shares
of Delta Apparel common stock. Delta Apparel common shares will be fully paid
and nonassessable, and the holders of those shares will not be entitled to
preemptive rights. For a further description of Delta Apparel common stock and
the rights of its holders, see the portion of this document located under the
heading "Description of Delta Apparel Capital Stock".
For those holders of Delta Woodside common stock who hold their shares of
Delta Woodside common stock through a stockbroker, bank or other nominee, Delta
Woodside's distribution agent, First Union National Bank, will transfer the
shares of Delta Apparel common stock to the registered holders of record who
will make arrangements to credit their customers' accounts with Delta Apparel
common stock. Delta Woodside anticipates that stockbrokers and banks generally
will credit their customers' accounts with Delta Apparel common stock on or
about May 12, 2000.
If a holder of Delta Woodside common stock owns a number of shares of Delta
Woodside common stock that is not a whole multiple of ten and therefore would be
entitled to receive a fraction of a whole share of Delta Apparel common stock,
that holder will receive cash instead of a fractional share of Delta Apparel
common stock. The distribution agent will aggregate into whole shares the
fractional shares to be cashed out and sell them as soon as practicable in the
open market at then prevailing prices on behalf of those registered holders who
would otherwise be entitled to receive less than whole shares. These registered
holders will receive a cash payment in the amount of their pro rata share of the
total proceeds of those sales, less any brokerage commissions. The distribution
agent will pay the net proceeds from sales of fractional shares based upon the
average selling price per share of Delta Apparel common stock of all of those
sales, less any brokerage commissions. Delta Apparel expects the distribution
agent to make sales on behalf of holders who would receive a fraction of a whole
Delta Apparel common share in the Delta Apparel distribution as soon as
practicable after the Delta Apparel distribution date. None of Delta Woodside,
Delta Apparel or the distribution agent guarantees any minimum sale price for
those fractional shares of Delta Apparel common stock, and no interest will be
paid on the sale proceeds of those shares.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material US federal income tax
consequences generally applicable to a Delta Woodside stockholder who is a US
Holder. The term "US Holder" means a beneficial owner of Delta Woodside shares
that is (i) a citizen or resident of the United States, (ii) a corporation,
partnership (other than certain partnerships as may be provided in the
applicable provisions of the US Treasury Regulations), or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to US
federal income taxation regardless of its source, (iv) a trust if (a) a US court
is able to exercise primary supervision over the trust's administration and (b)
one or more US persons have the authority to control all of the trust's
substantial decisions, or (v) otherwise subject to US federal income taxation on
a net income basis in respect of the Delta Woodside shares.
The following description is for general purposes only and is based on the
Internal Revenue Code of 1986, as amended from time to time (the "Code"), US
Treasury Regulations and judicial and administrative interpretations thereof,
all as in effect on the date of this document and all of which are subject to
change, possibly retroactively. The tax treatment of a US Holder may vary
depending upon the holder's particular situation. For instance, certain
holders, including, but not limited to, insurance companies, tax-exempt
organizations, financial institutions, persons subject to the alternative
minimum tax, dealers in securities or currencies, persons that have a
"functional currency" other than the US dollar or as part of a "hedging" or
"conversion" transaction for US federal income tax purposes and persons owning,
directly or indirectly, 5 percent or more of the Delta Woodside shares may be
subject to special rules not discussed below. The following summary is limited
to investors who hold the Delta Woodside shares as "capital assets" within the
meaning of Section 1221 of the Internal Revenue Code. The discussion below does
not address the effect of any other laws (including other federal, state, local
or foreign tax laws) on a US Holder of Delta Woodside shares. As such, the
summary does not discuss US federal estate and gift tax considerations or US
state and local tax considerations.
Delta Woodside has structured the Delta Apparel distribution and the Duck
Head distribution to qualify as tax-free spin offs for federal income tax
purposes under Section 355 of the Internal Revenue Code. Section 355 treats a
spin-off as tax free if the conditions of that statute are satisfied.
Delta Woodside has not sought a ruling from the US Internal Revenue Service
("IRS") regarding the Delta Apparel distribution or the Duck Head distribution,
in part because neither distribution satisfies all the conditions imposed by the
IRS for such a ruling. The fact that Delta Woodside is not eligible to receive a
private letter ruling from the IRS on the issue does not, however, in and of
itself, mean that the distributions do not qualify as tax-free spin-offs under
Section 355. Whether the Delta Apparel distribution and the Duck Head
distribution qualify under Section 355 as tax-free spin-offs will depend on
whether the criteria in Section 355 and the relevant rules and regulations of
the IRS are satisfied.
Delta Woodside has obtained an opinion from KPMG LLP that it is more likely
than not that the each of the Delta Apparel distribution and the Duck Head
distribution qualifies as tax-free under Code Section 355.
Material Federa Income Tax Consequences if the Delta Apparel Distribution
---------------------------------------------------------------------------
and the Duck Head Distribution Qualify as Tax-Free Spin-Offs under Code
---------------------------------------------------------------------------
Section 355
---------------------------------------------------------------------------
If the Delta Apparel distribution and the Duck Head distribution qualify as
tax-free spin-offs under Code Section 355, then:
1. The US Holders of Delta Woodside stock who receive those shares will not
recognize gain upon either of the distributions, except as described
immediately below with respect to fractional shares.
2. Cash, if any, received by a US Holder of Delta Woodside stock instead of a
fractional share of Delta Apparel common stock or Duck Head common stock
will be treated as received in exchange for that fractional share. That US
Holder will recognize gain or loss to the extent of the difference between
his, her or its tax basis in that fractional share and the amount received
for that fractional share, and, provided that fractional share is held as a
capital asset, the gain or loss will be capital gain or loss.
3. Each US Holder of Delta Woodside stock will be required to apportion his,
her or its tax basis in the US Holder's Delta Woodside shares between the
Delta Woodside shares retained and the Delta Apparel shares and Duck Head
shares received, with this apportionment to be made in proportion to the
shares' relative fair market values for federal income tax purposes
immediately after the distributions.
4. The holding period for the Delta Apparel shares and the Duck Head shares
received by a US Holder in the distributions will be the same as the US
Holder's holding period for the Delta Woodside shares with respect to which
the Delta Apparel distribution and the Duck Head distributions are made.
5. No gain or loss will be recognized by Delta Woodside with respect to the
Delta Apparel distribution or the Duck Head distribution, except to the
extent of any excess loss accounts or deferred intercompany gains.
Delta Woodside anticipates that in connection with the distributions Delta
Woodside will recognize gain as a result of deferred intercompany gains, but
that this gain will be offset by Delta Woodside's net operating losses.
US Treasury Regulations Section 1.355-5 requires that each US Holder that
receives Delta Apparel shares in the Delta Apparel distribution and Duck Head
shares in the Duck Head distribution attach a statement to his, her or its US
federal income tax return for the taxable year in which the distributions occur,
showing the applicability of Code Section 355 to the Delta Apparel distribution
and the Duck Head distribution. US Holders should consult their own tax
advisors regarding these disclosure requirements.
As noted above, Delta Woodside has not sought a ruling from the IRS
regarding the Delta Apparel distribution or the Duck Head distribution. The
fact that no ruling has been sought should not be construed as an indication
that the IRS would necessarily reach a different conclusion regarding the Delta
Apparel distribution or the Duck Head distribution than the conclusion set out
in the opinion of KPMG LLP. The opinion of KPMG LLP referred to in this
description is not binding upon the IRS, any other tax authority or any court,
and no assurance can be given that a position contrary to those expressed in the
opinion of KPMG LLP will be not asserted by the tax authority and ultimately
sustained by a court of law.
Material Federal Income Tax Consequences if the Delta Apparel Distribution
---------------------------------------------------------------------------
and the Duck Head Distribution Do Not Qualify as Tax-Free Spin-Offs under
---------------------------------------------------------------------------
Section 355
-----------
If the Delta Apparel distribution and the Duck Head distribution do not
qualify as tax-free spin-offs under Section 355, then the following are the
material federal income tax consequences to each participating Delta Woodside
stockholder and to Delta Woodside:
1. Each Delta Woodside stockholder will recognize dividend income to the
extent of the lesser of (a) the value of the Delta Apparel shares and the
Duck Head shares received (together with any cash received for any
fractional share) or (b) the stockholder's pro rata share of the
accumulated earnings and profits of Delta Woodside for federal income tax
purposes through the end of fiscal year 2000. This dividend income will not
reduce any Delta Woodside stockholder's basis in his, her or its Delta
Woodside shares.
a. The fair market value for federal income tax purposes of the Delta
Apparel shares and the Duck Head shares received by the Delta Woodside
stockholders in the distributions will depend on the trading prices of
the Delta Apparel shares and the Duck Head shares around the time of
the distribution. Delta Woodside is not able at this time to predict
what those values will be.
b. Delta Woodside's accumulated earnings and profits through fiscal year
1999 were approximately $15.4 million (approximately $0.64 per Delta
Woodside share). The amount, if any, of Delta Woodside's earnings and
profits for fiscal year 2000 cannot be determined at this time.
2. Any value of the Delta Apparel shares and Duck Head shares (together with
any cash received for any fractional share) that exceeds the Delta Woodside
stockholder's pro rata share of Delta Woodside's accumulated earnings and
profits through fiscal year 2000 will constitute a return of capital to
that stockholder (i.e. the stockholder will not be taxed on that value) up
to the stockholder's basis in his, her or its Delta Woodside shares, and
the stockholder's basis in his, her or its Delta Woodside shares will be
reduced accordingly. Any remaining value of the Delta Apparel shares and
Duck Head shares (together with any cash received for any fractional share)
in excess of the Delta Woodside stockholder's basis in his, her or its
Delta Woodside shares will be taxable to the Delta Woodside stockholder as
gain, which will be capital gain if the Delta Woodside stock is held as a
capital asset. This capital gain will be taxable as either long term or
short term capital gain, depending upon the stockholder's holding period
for those Delta Woodside shares.
3. The Delta Woodside stockholder's tax basis in the Delta Apparel shares and
the Duck Head shares received in the distributions will be equal to the
fair market value for federal income tax purposes of those shares at the
time of the distributions. The stockholder's holding period for those
shares will begin on the date of the distributions.
4. The Delta Apparel distribution and the Duck Head distribution will also be
taxable as a gain to Delta Woodside, to the extent of the excess of the
value for federal income tax purposes of the Delta Apparel shares and the
Duck Head shares distributed over their tax bases to Delta Woodside. Delta
Woodside believes that any federal income tax liability to it resulting
from the Delta Apparel distribution and the Duck Head distribution will not
be material, because any applicable recognized income will be offset by
Delta Woodside's net operating losses. Any gain recognized by Delta
Woodside on the Delta Apparel distribution or the Duck Head distribution
will increase the fiscal year 2000 earnings and profits. Delta Woodside
cannot at this time calculate the amount of this gain because it is unable
to forecast what the initial trading prices will be for the Delta Apparel
shares or the Duck Head shares, which will be the federal income tax values
of the Delta Apparel shares and the Duck Head shares for purposes of this
calculation.
THE FOREGOING IS A GENERAL DISCUSSION AND IS NOT INTENDED TO SERVE AS
SPECIFIC ADVICE FOR ANY PARTICULAR DELTA WOODSIDE STOCKHOLDER, SINCE THE TAX
CONSEQUENCES OF THE DELTA APPAREL DISTRIBUTION AND THE DUCK HEAD DISTRIBUTION TO
EACH STOCKHOLDER WILL DEPEND UPON THAT STOCKHOLDER'S OWN PARTICULAR
CIRCUMSTANCES. EACH STOCKHOLDER SHOULD CONSULT HIS, HER OR ITS OWN ADVISORS AS
TO THE FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES TO THAT STOCKHOLDER OF
THE DELTA APPAREL DISTRIBUTION AND THE DUCK HEAD DISTRIBUTION.
KPMG LLP is an internationally recognized accounting, tax and consulting
firm and, as a customary part of its tax practice, is regularly engaged to
provide opinions on the federal income tax consequences of merger and
acquisition transactions. Delta Woodside selected KPMG LLP because of its
expertise and its familiarity with Delta Woodside, Delta Apparel and Duck Head.
In the past, KPMG LLP has acted as the independent auditor of Delta Woodside's
financial statements and as its tax advisor. KPMG LLP has also provided various
consulting services to Delta Woodside. KPMG LLP has received customary fees for
those services.
Pursuant to an engagement letter, Delta Woodside has agreed to pay KPMG LLP
a fee of $250,000 in connection with the preparation and delivery of its opinion
on the federal income tax consequences of the Delta Apparel and Duck Head
distributions. Delta Woodside has agreed to indemnify KPMG LLP for certain
liabilities related to, arising out of or in connection with KPMG LLP's
engagement by Delta Woodside.
Net Operating Loss Carry Forwards
-------------------------------------
As of July 3, 1999, Delta Woodside had net operating loss carry forwards,
for federal income tax purposes, of approximately $68 million. Following the
Delta Apparel distribution and the Duck Head distribution, and assuming the
distributions are tax-free pursuant to Code Section 355, approximately $56
million of this net operating loss carry forward will remain as a tax attribute
of Delta Woodside as of July 3, 1999 ($10 million of which will be subject to
limitation under the separate return limitation rules), approximately $9 million
will be a tax attribute of Delta Apparel as of July 3, 1999 and approximately $3
million will be a tax attribute of Duck Head as of July 3, 1999. Delta
Apparel's and Duck Head's Federal net operating losses will expire at various
dates in fiscal years 2011 through 2019.
Prior to the Delta Apparel distribution and the Duck Head distribution, the
Delta Apparel Company division and the Duck Head Apparel Company division were
part of the Delta Woodside consolidated group, and the net operating losses of
any member of the Delta Woodside consolidated group were generally available to
reduce the consolidated federal taxable income of the group. For financial
reporting purposes, prior to the Delta Apparel distribution and the Duck Head
distribution each of Delta Apparel and Duck Head carries "deferred tax assets"
on its balance sheet to reflect, among other matters, the financial impact of
their respective hypothetical separate company net operating loss carry
forwards. For federal income tax purposes, however, tax attributes, such as
net operating loss carry forwards, remain with the corporate entity, not the
division, that generated them. Therefore, with the Delta Apparel distribution
and the Duck Head distribution, tax attributes, including the Delta Woodside
consolidated federal net operating loss carry forward, will be allocated among
Delta Woodside, Delta Apparel and Duck Head in accordance with the federal
consolidated return regulations.
The pro forma balance sheet of Delta Apparel that is included under the
heading "Unaudited Pro Forma Combined Financial Statements" reflects Delta
Apparel's expected allocable portion of the pre-distribution Delta Woodside
consolidated federal net operating loss carry forward.
ACCOUNTING TREATMENT
The Delta Apparel distribution and the Duck Head distribution will be
accounted for in accordance with United States generally accepted accounting
principles. Accordingly, the Delta Apparel distribution will be accounted for
by Delta Woodside based on the recorded amounts of the net assets being
spun-off. Delta Woodside will charge directly to equity as a dividend the
historical cost carrying amount of the net assets of Delta Apparel.
RELATIONSHIPS AMONG DELTA APPAREL,
DELTA WOODSIDE AND DUCK HEAD
This section describes the primary agreements among Delta Apparel, Delta
Woodside and Duck Head that will define the ongoing relationships among them and
their respective subsidiaries after the Delta Apparel distribution and is
expected to provide for the orderly separation of the three companies. The
following description of the distribution agreement and the tax sharing
agreement summarizes the material terms of those agreements. Delta Apparel has
filed those agreements as exhibits to its Registration Statement on Form 10
filed with the Securities and Exchange Commission. This document is a part of
that registration statement.
DISTRIBUTION AGREEMENT
Delta Apparel has entered into a distribution agreement with Delta Woodside
and Duck Head as of March 15, 2000. The distribution agreement provides for the
procedures for effecting the Delta Apparel distribution and the Duck Head
distribution. For this purpose, as summarized below, the distribution agreement
provides for the principal corporate transactions and procedures for separating
the Delta Apparel Company division's business and the Duck Head Apparel Company
division's business from each other and the rest of Delta Woodside. Also, as
summarized below, the distribution agreement defines the relationships among
Delta Apparel, Delta Woodside and Duck Head after the Delta Apparel distribution
with respect to, among other things, indemnification arrangements and employee
benefit arrangements.
Intercompany reorganization
----------------------------
The distribution agreement provides, that, no later than the time the Delta
Apparel distribution occurs, Delta Woodside, Delta Apparel and Duck Head will
have caused the following to have been effected:
(a) Delta Woodside will have contributed, as contributions to capital, all
net debt amounts owed to it by the corporations that currently conduct
the Delta Apparel Company division's business and the Duck Head
Apparel Company division's business. The Delta Apparel Company
division's assets are currently owned by several of Delta Woodside's
wholly-owned subsidiaries. The Duck Head Apparel Company division's
assets are currently owned by Delta Woodside and several of its
wholly-owned subsidiaries.
(b) All the assets used in the operations of the Delta Apparel Company
division's business will have been transferred to Delta Apparel or a
subsidiary of Delta Apparel to the extent not already owned by Delta
Apparel or its subsidiaries. This transfer will include the sale by
Delta Xxxxx to Delta Apparel of the Rainsford plant, located in
Edgefield, SC, which is described below under the subheading "Other
Relationships".
(c) Delta Apparel will have assumed all of the liabilities of the Delta
Apparel Company division of Delta Woodside, and will have caused all
holders of indebtedness for borrowed money that are part of the
assumed Delta Apparel liabilities and all lessors of leases that are
part of the assumed Delta Apparel liabilities to agree to look only to
Delta Apparel or a subsidiary of Delta Apparel for payment of that
indebtedness or lease (except where Delta Woodside or Duck Head, as
applicable, consents to not being released from the obligations).
(d) All the assets used in the operations of the Duck Head Apparel Company
division's business will have been transferred to Duck Head or a
subsidiary of Duck Head to the extent not already owned by Duck Head
or its subsidiaries.
(e) Duck Head will have assumed all of the liabilities of the Duck Head
Apparel Company division of Delta Woodside, and will have caused all
holders of indebtedness for borrowed money that are part of the
assumed Duck Head liabilities and all lessors of leases that are part
of the assumed Duck Head liabilities to agree to look only to Duck
Head or a subsidiary of Duck Head for payment of that indebtedness or
lease (except where Delta Woodside or Delta Apparel, as applicable,
consents to not being released from the obligations).
(f) Delta Woodside will have caused all holders of indebtedness for
borrowed money and all lessors of leases that are not part of the
liabilities assumed by Delta Apparel or the liabilities assumed by
Duck Head to agree to look only to Delta Woodside or a remaining
subsidiary of Delta Woodside for payment of that indebtedness or lease
(except where Delta Apparel or Duck Head, as applicable, consents to
not being released from the obligations).
Indemnification
---------------
Each of Delta Woodside, Delta Apparel and Duck Head has agreed to indemnify
each other and their respective directors, officers, employees and agents
against any and all liabilities and expenses incurred or suffered that arise out
of or pertain to:
(a) any breach of the representations and warranties made by it in the
distribution agreement;
(b) any breach by it of any obligation under the distribution agreement;
(c) the liabilities assumed or retained by it under the distribution
agreement; or
(d) any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission of a material fact contained in any of
its disclosure documents filed by it with the SEC, except insofar as
the misstatement or omission was based upon information furnished to
the indemnifying party by the indemnified party.
Employee Matters
-----------------
Delta Woodside will cause the employees of the Delta Apparel Company
division to become employees of Delta Apparel, Delta Apparel will assume the
accrued employee benefits of these employees and Delta Woodside will cause the
account balance of each of these employees in any and all of Delta Woodside's
employee benefit plans (other than the Delta Woodside stock option plan) to be
transferred to a comparable employee benefit plan of Delta Apparel.
Intercompany Accounts
----------------------
Amounts owed by Delta Apparel to Delta Xxxxx for yarn previously sold by
Delta Xxxxx to Delta Apparel will be paid in the ordinary course of business.
As of January 1, 2000, these amounts aggregated approximately $3.1 million.
Other than any amounts owed under the tax sharing agreement and except as
provided in the distribution agreement, generally all other intercompany
receivable, payable and loan balances existing as of the time of the Delta
Apparel distribution between Delta Apparel, on the one hand, and Duck Head or
Delta Woodside, on the other hand, will be deemed to have been paid in full by
the party or parties owing the relevant obligation.
Transaction Expenses
---------------------
Generally, all costs and expenses incurred in connection with the Delta
Apparel distribution, the Duck Head distribution and related transactions shall
be paid by Delta Woodside, Duck Head and Delta Apparel proportionately in
accordance with the respective benefits received by Delta Woodside, Duck Head
and Delta Apparel as determined in good faith by the parties; provided that the
holders of the Delta Woodside shares shall pay their own expenses, if any,
incurred in connection with the Delta Apparel distribution and the Duck Head
distribution.
TAX SHARING AGREEMENT
Delta Apparel will enter into a tax sharing agreement with Delta Woodside
and Duck Head that will describe, among other things, each company's rights and
obligations relating to tax payments and refunds for periods before and after
the Delta Apparel distribution and related matters like the filing of tax
returns and the handling of audits and other tax proceedings. The tax sharing
agreement also describes the indemnification arrangements with respect to tax
matters among Delta Apparel and its subsidiaries (which this document refers to
as the Delta Apparel tax group), Delta Woodside and its subsidiaries after the
Delta Apparel distribution and the Duck Head distribution (which this document
refers to as the Delta Woodside tax group) and Duck Head and its subsidiaries
(which this document refers to as the Duck Head tax group).
Under the tax sharing agreement, the allocation of tax liabilities and
benefits is generally as follows:
- With respect to federal income taxes:
(a) For each taxable year that ends prior to the Delta Apparel
distribution, Delta Woodside shall be responsible for paying any
increase in federal income taxes, and shall be entitled to
receive the benefit of any refund of or saving in federal income
taxes, that results from any tax proceeding with respect to any
returns relating to federal income taxes of the Delta Woodside
consolidated federal income tax group.
(b) For the taxable period ending on the date of the Delta Apparel
distribution, Delta Woodside shall be responsible for paying any
federal income taxes, and shall be entitled to any refund of or
saving in federal income taxes, with respect to the Delta
Woodside consolidated federal income tax group.
- With respect to state income, franchise or similar taxes, for each
taxable period that ends prior to or on the date of the Delta Apparel
distribution, each corporation that is a member of the Delta Woodside
tax group, the Duck Head tax group or the Delta Apparel tax group
shall be responsible for paying any of those state taxes, and any
increase in those state taxes, and shall be entitled to receive the
benefit of any refund of or saving in those state taxes, with respect
to that corporation (or any predecessor by merger to that corporation)
or that results from any tax proceeding with respect to any returns
relating to those state taxes of that corporation (or any predecessor
by merger of that corporation).
- With respect to federal employment taxes
(a) Delta Woodside shall be responsible for the federal employment
taxes payable with respect to the compensation paid, whether
before, on or after the date of the Delta Apparel distribution,
by any member of the Delta Woodside federal income tax
consolidated group for any period ending prior to or on the date
of the Delta Apparel distribution or by any member of the Delta
Woodside tax group for any period after that date to all
individuals who are past or present employees of any business of
Delta Woodside other than the business of Delta Apparel or the
business of Duck Head.
(b) Duck Head shall be responsible for the federal employment taxes
payable with respect to the compensation paid, whether before, on
or after the date of the Duck Head distribution, by any member of
the Delta Woodside
federal income tax consolidated group for any period ending prior
to or on the date of the Duck Head distribution or by any member
of the Duck Head tax group for any period after that date to all
individuals who are past or present employees of the business of
Duck Head.
(c) Delta Apparel shall be responsible for the federal employment
taxes payable with respect to the compensation paid, whether
before, on or after the date of the Delta Apparel distribution,
by any member of the Delta Woodside federal income tax
consolidated group for any period ending prior to or on the date
of the Delta Apparel distribution or by any member of the Delta
Apparel tax group for any period after that date to all
individuals who are past or present employees of the business of
Delta Apparel.
- With respect to any taxes, other than federal employment taxes,
federal income taxes and state income, franchise or similar taxes:
(a) Delta Woodside shall be responsible for any of these taxes,
regardless of the time period or circumstance with respect to
which the taxes are payable, arising from or attributable to any
business of Delta Woodside other than the business of Delta
Apparel or the business of Duck Head;
(b) Duck Head shall be responsible for any of these taxes, regardless
of the time period or circumstance with respect to which the
taxes are payable, arising from or attributable to the business
of Duck Head; and
(c) Delta Apparel shall be responsible for any of these taxes,
regardless of the time period or circumstance with respect to
which the taxes are payable, arising from or attributable to the
business of Delta Apparel.
- The Delta Woodside tax group shall be responsible for all taxes, and
shall receive the benefit of all tax items, of any member of the Delta
Woodside tax group that relate to any taxable period after the Delta
Apparel distribution. The Duck Head tax group shall be responsible for
all taxes, and shall receive the benefit of all tax items, of any
member of the Duck Head tax group that relate to any taxable period
after the Duck Head distribution. The Delta Apparel tax group shall be
responsible for all taxes, and shall receive the benefit of all tax
items, of any member of the Delta Apparel tax group that relate to any
taxable period after the Delta Apparel distribution.
Under the tax sharing agreement, the Delta Apparel tax group and the Duck
Head tax group have irrevocably designated Delta Woodside as their agent for
purposes of taking a broad range of actions in connection with taxes for
pre-distribution periods. Those actions include the settlement of tax audits and
other tax proceedings. In addition, the tax sharing agreement provides that all
disagreements and disputes relating to the agreement are to be resolved by Delta
Woodside. These arrangements may result in conflicts of interest among Delta
Apparel, Delta Woodside and Duck Head concerning such matters as whether a tax
relates to the business of Delta Woodside, Delta Apparel or Duck Head. Delta
Woodside might determine that a tax was a liability of Delta Apparel even though
Delta Apparel disagreed with that determination.
Under the tax sharing agreement, the Delta Apparel tax group, the Delta
Woodside tax group and the Duck Head tax group have agreed to indemnify one
another against various tax liabilities, generally in accordance with the
allocation of tax liabilities and benefits described above.
OTHER RELATIONSHIPS
Boards of Directors of Delta Apparel, Delta Woodside and Duck Head
---------------------------------------------------------------------------
The following directors of Delta Apparel are also directors of Delta
Woodside and Duck Head: 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 Delta Apparel, on the
one hand, and either Delta Woodside or Duck Head, on the other hand, these
directors could be deemed to have a conflict of interest with respect to that
issue. In that circumstance, Delta Apparel anticipates that it will proceed in
a manner that is determined by a majority of those members of Delta Apparel's
board of directors who are not also members of the board of directors of Delta
Woodside or the board of directors of Duck Head (as applicable).
Principal Stockholders
-----------------------
The Delta Apparel shares will be distributed in the Delta Apparel
distribution, and the Duck Head shares will be distributed in the Duck Head
distribution, to the Delta Woodside stockholders proportionately among the Delta
Woodside shares. Therefore, immediately following the Delta Apparel
distribution, Delta Woodside's principal stockholders will be the same
individuals and entities as Delta Apparel's and Duck Head's principal
stockholders, and those principal stockholders will have the same respective
percentages of outstanding beneficial ownership in each of Delta Woodside, Delta
Apparel and Duck Head (assuming no acquisitions or dispositions of shares by
those stockholders between the record date for the Delta Apparel distribution or
the Duck Head distribution and the completion of either distribution). See
"Security Ownership of Significant Beneficial Owners and Management".
Sales to and Purchases from Delta Woodside or Duck Head of Goods or
---------------------------------------------------------------------------
Manufacturing Services
-----------------------
In the ordinary course of Delta Apparel's business, Delta Apparel has
produced T-shirts for Duck Head, purchased T-shirts from Duck Head and purchased
yarn and fabrics from Delta 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 Duck Head 403 156 481 6
Purchased from Duck Head 653 132 0 0
Purchased from Delta Xxxxx(1) 26,456 17,683 0 0
--------------------------------
(1) For purposes of this table, yarn produced by the Rainsford plant and used
by Delta Apparel, prior to the transfer from Delta Xxxxx to Delta Apparel
in April 1998 of operational control of the Rainsford plant, is treated as
sold by Delta Xxxxx to Delta Apparel.
Prior to the end of March 1997, all yarn sales between Delta Xxxxx and
Delta Apparel were at a price equal to cost plus $0.01 per pound. Since March
1997, all of these yarn sales have been made at prices deemed by Delta Apparel
to approximate market value. In connection with these pricing policies on yarn
sales, through March 1997 Delta Apparel maintained with Delta Xxxxx a
non-interest bearing deposit which aggregated $11.2 million at June 29, 1996.
Effective May 7, 1997, Delta Woodside adopted a written policy statement
governing the pricing of intercompany transactions. Among other things, this
policy statement provides that all intercompany sales and purchases will be
settled at market value and terms.
All of the T-shirt and fabric sales were made at prices deemed by Delta
Apparel to approximate market value.
Delta Apparel anticipates that any future sales or purchases to or from
Duck Head or Delta Woodside in the future will not be material.
Purchase of Rainsford Plant
------------------------------
The Rainsford plant in Edgefield, South Carolina, manufactures yarn for use
in knitting operations. In April 1998, control of the operations and management
of the Rainsford plant was transferred from Delta Xxxxx to Delta Apparel, which
converted the assets to produce yarn products for use in Delta Apparel's
products.
A condition to consummation of the Delta Apparel distribution is the sale
by Delta Xxxxx to Delta Apparel of the Rainsford plant and related inventory.
Delta Xxxxx and Delta Apparel have agreed that the purchase price for these
assets will be the assets' book value. This purchase price will be paid in cash
and by the assumption of certain liabilities. Delta Apparel estimates that the
purchase price for the real property, furniture, fixtures and equipment will be
approximately $12.2 million and the purchase price for the inventory will be
approximately $2.5 million. Delta Apparel will pay the cash portion of the
purchase price with borrowings under its credit facility.
The terms of the 9 5/8% Senior Notes of Delta Xxxxx require that Delta
Xxxxx provide to the holders of those Senior Notes an opinion of an investment
banking firm as to the fairness from a financial point of view to those holders
of the terms of this sale. Delta Xxxxx has engaged The Xxxxxxxx-Xxxxxxxx
Company, LLC to provide this opinion.
THE OPINION TO BE PROVIDED BY XXXXXXXX-XXXXXXXX RESPECTING THE SALE OF THE
RAINSFORD PLANT ADDRESSES THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE
SALE TO THE HOLDERS OF THE SENIOR NOTES OF DELTA XXXXX. THE OPINION DOES NOT
ADDRESS THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE SALE TO DELTA APPAREL
OR DELTA APPAREL'S CREDITORS OR STOCKHOLDERS.
The following summarizes Xxxxxxxx-Xxxxxxxxx' analyses and the opinion that
Xxxxxxxx-Xxxxxxxxx anticipates providing to the indenture trustee for the Senior
Notes of Delta Xxxxx with respect to the Rainsford plant sale.
Material and Information Considered by Xxxxxxxx-Xxxxxxxx
In arriving at its opinion, Xxxxxxxx-Xxxxxxxx:
- Reviewed the sale agreement respecting the Rainsford plant sale;
- Reviewed certain internal financial statements and other financial and
operating data concerning the Rainsford plant;
- Conducted discussions with members of Delta Xxxxx' and the Rainsford
plant's managements concerning the Rainsford plant's business,
operations, present condition and prospects;
- Compared the results of operations and present financial condition of
the Rainsford plant with those of certain publicly traded companies
that Xxxxxxxx-Xxxxxxxx deemed to be reasonably similar to the
Rainsford plant;
- Reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions that
Xxxxxxxx-Xxxxxxxx deemed relevant;
- Performed certain financial analyses with respect to the Rainsford
plant's projected future operating performance; and
- Reviewed such other financial statistics and analyses and performed
such other investigations and took into account such other matters as
Xxxxxxxx-Xxxxxxxx deemed appropriate.
Xxxxxxxx-Xxxxxxxx has relied upon the accuracy and completeness of the
financial and other information provided to it by Delta Xxxxx in arriving at its
opinion without independent verification. With respect to the financial
forecasts of the Rainsford plant for the years 2000 through 2004,
Xxxxxxxx-Xxxxxxxx has assumed that the assumptions provided by management have
been reasonably prepared and reflect the best currently available estimates and
judgment of Delta Xxxxx' management. In arriving at its opinion,
Xxxxxxxx-Xxxxxxxx conducted only a limited physical inspection of the properties
and facilities of the Rainsford plant, and did not make appraisals of the
Rainsford plant or any of its assets. Xxxxxxxx-Xxxxxxxx'x opinion is
necessarily based upon market, economic and other conditions as they exist on,
and can be evaluated as of, the date of its letter.
In connection with the preparation of its fairness opinion,
Xxxxxxxx-Xxxxxxxx performed certain financial and comparative analyses, the
material portions of which are summarized below. The following is a summary of
the material factors considered and principal financial analyses performed by
Xxxxxxxx-Xxxxxxxx to arrive at its opinion, but does not purport to be a
complete description of the factors considered or the analyses performed by
Xxxxxxxx-Xxxxxxxx in arriving at its opinion. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances, and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. In addition,
Xxxxxxxx-Xxxxxxxx believes that its analyses must be considered as an integrated
whole, and that selecting portions of the analyses and the factors considered by
it, without considering all of the analyses and factors, could create a
misleading or an incomplete view of the process underlying its analyses set
forth in its opinion. In performing its analyses, Xxxxxxxx-Xxxxxxxx made
numerous assumptions with respect to industry and economic conditions and other
matters, many of which are beyond the control of Delta Xxxxx or management of
the Rainsford plant. Any estimates contained in such analyses are not
necessarily indicative of actual past or future results or values, which may be
significantly more or less favorable than as set forth in the opinion.
Estimates of values or companies do not purport to be appraisals or necessarily
to reflect the price at which those companies may actually be sold, and such
estimates are inherently subject to uncertainty. No public company utilized as
a comparison is identical to the Rainsford plant, and no merger and acquisition
transaction involved assets identical to the sale of the Rainsford plant. An
analysis of the results of such comparisons is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the comparable companies and
transactions and other factors that could affect the values of companies and
transactions to which the sale of the Rainsford plant is being compared.
Analysis of Selected Comparable Public Companies
Xxxxxxxx-Xxxxxxxx reviewed and compared selected publicly available
financial data, market information and trading multiples for diversified textile
companies that Xxxxxxxx-Xxxxxxxx deemed comparable to Delta Xxxxx.
Xxxxxxxx-Xxxxxxxx also reviewed and compared selected publicly available
financial data, market information and trading multiples for diversified textile
companies with revenues and firm values less than $1.0 billion that
Xxxxxxxx-Xxxxxxxx deemed comparable to Delta Xxxxx.
For the comparable companies in each category, Xxxxxxxx-Xxxxxxxx compared,
among other things, firm value as a multiple of latest twelve months ("LTM")
revenues, firm value as a multiple of LTM earnings before interest, taxes,
depreciation and amortization ("EBITDA"), firm value as a multiple of LTM
earnings before interest and taxes ("EBIT"), equity value per share ("Price") as
a multiple of LTM earnings per share ("EPS") and equity value as a multiple of
book value for the comparable companies. All multiples were based on closing
stock prices as of December 7, 1999. Revenues, EBITDA, EBIT, EPS and book value
for the comparable companies were based on historical financial information
available in public filings of the comparable companies.
Analysis of Selected Merger & Acquisition Transactions
Xxxxxxxx-Xxxxxxxx reviewed the financial terms, to the extent publicly
available, of 54 proposed, pending or completed merger and acquisition
transactions in the textile industry since 1991 involving companies that
Xxxxxxxx-Xxxxxxxx deemed to be comparable based on operating characteristics of
the Rainsford plant. Xxxxxxxx-Xxxxxxxx also reviewed the financial terms, to
the extent publicly available, of completed merger and acquisition transactions
in the textile industry occurring between 1980 and 1990 involving companies that
Xxxxxxxx-Xxxxxxxx deemed to be comparable based on operating characteristics of
the Rainsford plant. Xxxxxxxx-Xxxxxxxx calculated various financial multiples
based on certain publicly available information for each of the compared
transactions and compared them to corresponding financial multiples for the
purchase price in the proposed sale of the Rainsford plant.
With respect to each category of compared transactions, Xxxxxxxx-Xxxxxxxx
compared, among other things, firm value as a multiple of LTM revenues, firm
value as a multiple of LTM EBIT, firm value as a multiple of LTM EBITDA, equity
value as a multiple of LTM net income and book value for the comparable merger
and acquisition transactions.
Discounted Cash Flow Analysis
Xxxxxxxx-Xxxxxxxx performed a discounted cash flow analysis using financial
projections for 2000 through 2004 to estimate the net present equity value for
the Rainsford plant. Xxxxxxxx-Xxxxxxxx derived ranges of net present equity
value for the Rainsford plant on a stand-alone basis which were based upon the
discounted cash flows of the Rainsford plant from 2000 to 2004 plus a terminal
value calculated using a range of multiples of the Rainsford plant's projected
year 2004 EBITDA. Xxxxxxxx-Xxxxxxxx applied discount rates ranging from 14% to
18% and multiples of 2004 EBITDA ranging from 3.0x to 5.0x.
Equipment Appraisal Value
Xxxxxxxx-Xxxxxxxx examined a third party appraisal of the Rainsford plant
that was provided to Delta Xxxxx in July 1999. The appraisal had been obtained
to arrive at a conclusion of orderly liquidation value and forced liquidation
value for the Rainsford plant's assets effective the date of inspection.
Fairness Opinion to Holders of Delta Xxxxx' Senior Notes
Based on these analyses, Xxxxxxxx-Xxxxxxxx anticipates delivering a written
opinion that, as of the date of its opinion, the proposed sale of the Rainsford
plant is fair, from a financial point of view, to the holders of Delta Xxxxx' 9
5/8% Senior Notes due 2007.
Xxxxxxxx-Xxxxxxxx based its analyses on assumptions that it deemed
reasonable, including assumptions concerning general business and economic
conditions and industry-specific factors. The preparation of fairness opinions
does not involve mathematical weighing of the results of the individual analyses
performed, but requires Xxxxxxxx-Xxxxxxxx to exercise its professional
judgement, based on its experience and expertise, in considering a wide variety
of analyses taken as a whole. Each of the analyses conducted by
Xxxxxxxx-Xxxxxxxx was carried out in order to provide a different perspective on
the transaction and to add to the total mix of information available.
Xxxxxxxx-Xxxxxxxx did not form a conclusion as to whether any individual
analysis, considered in isolation, supported or failed to support an opinion as
to fairness. Rather, in reaching its conclusion, Xxxxxxxx-Xxxxxxxx considered
the results of the analyses in light of each other and ultimately reached its
conclusion based on the results of all analyses taken as a whole.
Information Concerning Xxxxxxxx-Xxxxxxxx
Xxxxxxxx-Xxxxxxxx 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 Xxxxx selected Xxxxxxxx-Xxxxxxxx
because of its expertise, reputation in the textile industry and familiarity
with Delta Xxxxx and the Rainsford plant, and because of Delta Woodside's
experience with Xxxxxxxx-Xxxxxxxx'x assistance in the proposed sale by Delta
Woodside of the Duck Head Apparel Company division during part of 1998 and 1999.
In the ordinary course of business, Xxxxxxxx-Xxxxxxxx and its affiliates may
actively trade or hold the securities and other instruments and obligations of
Delta Woodside for their own account and for the accounts of customers and,
accordingly, may at any time hold long or short positions in such securities,
instruments or obligations.
Pursuant to an engagement letter, Delta Xxxxx agreed to pay
Xxxxxxxx-Xxxxxxxx a fee of $100,000 in connection with the preparation and
delivery of its fairness opinion. Delta Xxxxx has agreed to indemnify
Xxxxxxxx-Xxxxxxxx for certain liabilities related to, arising out of or in
connection with Xxxxxxxx-Xxxxxxxx'x engagement by Delta Xxxxx.
Xxxxxxxx-Xxxxxxxx has also performed various investment banking services for
Delta Woodside in the past, and has received customary fees for those services.
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, cotton
procurement, management information services and tax accounting. These services
have been charged on the basis of Delta Woodside's cost and allocated to the
various divisions based on employee headcount, computer time, projected sales
and other criteria.
During fiscal years 1997, 1998, and 1999, Delta Woodside charged the Delta
Apparel Company division $1,138,000, $1,048,000 and $1,135,000, respectively,
for these services. During the first six months of fiscal year 2000, Delta
Woodside charged the Delta Apparel Company division $0 for these services.
Other
-----
For further information on transactions with affiliates by Delta Apparel,
see Notes 2 and 8 to the Combined Financial Statements of Delta Apparel under
"Index to Combined Financial Statements" in this document, which information is
incorporated into this section by reference.
Except as described above with respect to yarn sales, any transaction
entered into between Delta Apparel and any officer, director, principal
stockholder or any of their affiliates has been on terms that Delta Apparel
believes are comparable to those that would be available to Delta Apparel from
non_affiliated persons.
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN
THE DELTA APPAREL DISTRIBUTION
One or more executive officers of Delta Apparel and one or more members of
the Delta Apparel board of directors will receive economic benefits as a result
of the Delta Apparel distribution and the Duck Head distribution and may have
other interests in the Delta Apparel distribution and the Duck Head distribution
in addition to their interests as Delta Woodside stockholders. Some of these
executive officers and directors will also be the beneficial owners of more than
5% of the outstanding shares of common stock of Delta Apparel immediately
following the Delta Apparel distribution. See "Security Ownership of
Significant Beneficial Owners and Management." The Delta Woodside board of
directors was aware of these interests and considered them along with the other
matters described above under "The Delta Apparel Distribution __ Background of
the Delta Apparel Distribution" and "The Delta Apparel Distribution __ Reasons
for the Delta Apparel Distribution."
RECEIPT OF DELTA APPAREL STOCK OPTIONS AND DELTA APPAREL INCENTIVE STOCK AWARDS
The compensation grants committee of the Delta Apparel board of directors
anticipates that, during the first six months following the Delta Apparel
distribution, grants under the Delta Apparel stock option plan covering an
aggregate of approximately 162,500 Delta Apparel shares will be made and awards
under the Delta Apparel incentive stock award plan covering an aggregate of
approximately 59,200 Delta Apparel shares will be made, including the following
anticipated option and award grants to the following executive officers of Delta
Apparel:
Name and position Shares Covered by Shares Covered by
------------------- -------------------- -------------------
Options(1) Awards(2)
--------------------
Xxxxxx X. Xxxxxxxxx 62,500 20,000
President and Chief Executive Officer
Xxxxxxx X. Xxxxxxx 14,000 6,000
Vice President, Chief Financial Officer
and Treasurer
Xxxxxxxx X. Xxxx 8,000 4,000
Vice President and Secretary
---------------------------------
(1) The compensation grants committee of the Delta Apparel board of directors
anticipates that the stock options will be granted at various dates during
the six month period. The exercise price for any option will be the stock's
closing market value at the date of grant. The compensation grants
committee anticipates that the options will vest over a four year period.
(2) The compensation grants committee of the Delta Apparel board of directors
anticipates that 20% of each award will vest at the end of each of fiscal
year 2000, fiscal year 2001 and fiscal year 2002 and up to the remaining
40% will vest at the end of fiscal year 2002 to the extent that certain
performance criteria based on cumulative earnings before interest and taxes
are met.
For a description of the Delta Apparel stock option plan and the Delta
Apparel incentive stock award plan and the anticipated treatment under Section
162(m) of the Internal Revenue Code of grants of options and awards under these
plans, see "Management of Delta Apparel - Management Compensation."
PAYMENTS IN CONNECTION WITH DELTA APPAREL DISTRIBUTION AND DUCK HEAD
DISTRIBUTION
In 1997, the Delta Woodside board of directors adopted and the Delta
Woodside stockholders approved the Delta Woodside long term incentive plan.
Under that plan, grants could have been made to key executives and non-employee
directors of Delta Woodside that, depending on the attainment of certain
performance measurement goals over a three-year period, might have translated
into stock options for Delta Woodside shares being awarded to participants in
the plan. No grants complying with the terms of the plan, however, were made,
although the individuals who were Delta Woodside's intended participants in the
plan, and the target awards for those individuals, were identified.
In consideration of the identified participants giving up any rights they
may have under or in connection with the long term incentive plan and in
consideration of the efforts of the key executives and directors on behalf of
Delta Woodside leading up to the Duck Head distribution and the Delta Apparel
distribution, Delta Woodside's board (based on the recommendation of its
compensation committee) has decided that, if the Duck Head distribution and the
Delta Apparel distribution occur, Delta Woodside shares shall be issued prior to
the Delta Apparel and Duck Head record date, in amounts that have been
determined by the Board (on the basis of the recommendation of the compensation
committee), and cash shall be paid, in amounts that have been determined by the
Board (on the basis of the recommendation of the compensation committee), to
those individuals who were intended participants in the plan. The table below
sets forth the Delta Woodside shares that would thereby be issued and the cash
that would thereby be paid to the individuals who are directors or executive
officers of Delta Apparel. In determining the number of Delta Woodside shares
to be issued to each participant, the Delta Woodside board (and the Delta
Woodside compensation committee) used the closing sale price of the Delta
Woodside common stock on March 15, 2000 ($1.50 per share). The Delta Woodside
board anticipates that these Delta Woodside shares would be issued and this cash
would be paid prior to the record date for the Duck Head distribution and the
Delta Apparel distribution.
Name Delta Woodside Shares(#) Cash ($)
---- -------------------------- ---------
Xxxxxxx X. Xxxxxxx 126,480 116,280
C.C. Guy 13,485 12,398
Xxxxxx X. Xxxxxxxxx 48,360 44,460
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 Delta Apparel distribution and
the Duck Head 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 Delta
Apparel record date, which permitted the holder to exercise all or part of the
holder's Delta Woodside stock option prior to the Delta Apparel record date (and
thereby receive Delta Apparel shares in the Delta Apparel distribution and Duck
Head shares in the Duck Head distribution); and
(ii) any Delta Woodside stock options that remained unexercised as of the Delta
Apparel record date remain exercisable for only Delta Woodside common shares,
and for the same number of Delta Woodside common shares at the same exercise
price, after the Delta Apparel distribution and the Duck Head distribution as
before the Delta Apparel distribution and the Duck Head distribution (and not
for a combination of Delta Woodside shares, Delta Apparel shares and Duck Head
shares).
All holders of outstanding options under the Delta Woodside stock option
plan entered into the proposed amendment.
As a result of these amendments, options for Delta Woodside shares became
exercisable earlier than they otherwise would have for the following Named
Executives and members of the Delta Apparel board of directors for the following
number of shares of Delta Woodside common stock:
Name Number of Delta Woodside common shares covered by portion of
---- -------------------------------------------------------------
stock options the exercisability of which was accelerated
-------------------------------------------------------------
Xxxxxxx X. Xxxxxxx 37,500
Xxxxxxx X. Xxxxxxx 4,500
Xxxxxxxx X. Xxxx 3,000
LEASE TERMINATIONS
Delta Woodside has leased its principal corporate office space and space
for its benefits department, purchasing department and financial accounting
department from a corporation (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 Delta Apparel and Duck Head and President and Chief Executive
Officer (from which officer positions he will resign in connection with the
Delta Apparel distribution and the Duck Head distribution) and a director and
significant stockholder of Delta Woodside) and Xxxx X. Xxxxx (Vice President and
Secretary of Delta Woodside (from which officer positions she will resign in
connection with the Delta Apparel distribution and the Duck Head distribution)).
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 Delta Apparel distribution and the Duck
Head distribution, Xxxxxxx Square, Ltd. and Delta Woodside have agreed that this
lease will terminate on the Delta Apparel and Duck Head distribution date in
exchange for the payment by Delta Woodside to Xxxxxxx Square, Ltd. of $135,268.
Following the Delta Apparel and Duck Head distribution date, Delta Woodside may
continue to use the space on an as needed month-to-month basis at the rental
rate of $14.00 per square foot per year (plus certain other expenses).
Delta Woodside has leased office space in Edgefield, South Carolina from
The Rainsford Development Corporation, a corporation wholly owned by Xxxxxx X.
Xxxxxxxxx (a director and significant stockholder of Delta Apparel, Duck Head
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 Delta Apparel distribution and
the Duck Head distribution)) is an executive officer of The Rainsford
Development Corporation. In connection with the Delta Apparel distribution and
the Duck Head distribution, The Rainsford Development Corporation and Delta
Woodside have agreed that this lease will terminate on the Delta Apparel and
Duck Head distribution date in exchange for the payment by Delta Woodside to The
Rainsford Development Corporation of $33,299.08.
LEASE OF STORE IN EDGEFIELD, SOUTH CAROLINA
Duck Head leases a building in Edgefield, South Carolina from Xxxxxx X.
Xxxxxxxxx (a director and significant stockholder of Delta Apparel, Duck Head
and Delta Woodside) pursuant to an agreement involving rental payments equal to
3% of gross sales of the Edgefield store, plus 1% of gross sales of the store
for utilities. Under this lease agreement, $9,944, $11,076 and $10,947 were
paid to 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 Delta Apparel and Duck Head and President and Chief Executive
Officer (from which officer positions Xx. Xxxxxxx will resign in connection with
the Delta Apparel distribution and the Duck Head distribution) and a director
and significant stockholder of Delta Woodside) and Xxxxxx X. Xxxxxxxxx (a
director and significant stockholder of Delta Apparel, Duck Head and Delta
Woodside) entered into a stock transfer restrictions and right of first refusal
agreement (which this document refers to as a "First Refusal Agreement") with
Delta Woodside. Pursuant to each First Refusal Agreement, 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 Delta Apparel distribution and the Duck Head
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 Delta Apparel
distribution and the Duck Head distribution occur, that individual's First
Refusal Agreement will terminate and, if the individual desires, Delta Woodside
will transfer to the individual the $10 million life insurance policies on his
life the proceeds of which are payable to the beneficiary or beneficiaries he
selects. After this transfer, the recipient individual will be responsible for
payment the premiums on these life insurance policies. Delta Woodside will
allow the remaining $30 million of life insurance payable to Delta Woodside to
lapse.
EMPLOYEE BENEFIT SERVICES
On or about the date of the Delta Apparel distribution, Delta Apparel
anticipates engaging Carolina Benefits Services, Inc. to provide payroll
processing and 401(k) plan administration services for Delta Apparel. Carolina
Benefits Services, Inc. is owned by E. Xxxxx Xxxxxxx, XX (a director and
significant stockholder of Delta Apparel and Duck Head and President and Chief
Executive Officer (from which officer positions Xx. Xxxxxxx will resign in
connection with the Delta Apparel distribution and the Duck Head 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 Delta Apparel distribution and the Duck
Head distribution)). Xx. Xxxxx is also an executive officer of Carolina
Benefits Services, Inc.
For the services to be provided by Carolina Benefits Services, Delta
Apparel anticipates paying fees based on the numbers of employees, 401(k) plan
participants and plan transactions and other items. Delta Apparel anticipates
that on an annual basis these fees will be approximately $84,000. Delta Apparel
elected to engage Carolina Benefits Services to provide these services after
receiving proposals from other providers of similar services and determining
that Carolina Benefits Services' proposal was Delta Apparel's least costly
alternative.
