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 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
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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
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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 boy's 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 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") 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
respecting a possible sale of the remaining Delta Woodside--- to nineteen
companies. 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 would have been provided with substantial
cash 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, 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.
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) 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 conclusion to be delivered to the Delta Woodside Board by a third
party as to the solvency of Delta Apparel at the time of the Delta
Apparel distribution;
- The financial 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-19;
- 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.
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
March __, 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 February __, 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 and the number of shares of Delta
Woodside common stock outstanding on January __, 2000, Delta Woodside will
distribute approximately 2,386,000 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 March __, 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 instead 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
Delta Woodside has attempted to structure 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.
One of these conditions is that the transaction is "not used principally as a
device for the distribution of the earnings and profits" of Delta Woodside,
Delta Apparel or Duck Head.
Upon the request of a corporation that desires to effect a spin-off, the
IRS will issue a private letter ruling that the proposed spin-off will be
treated as tax-free under Section 355 so long as various conditions specified by
the IRS are satisfied. Delta Woodside believes that, with the exception of one
condition, the Delta Apparel distribution and the Duck Head distribution satisfy
all the conditions for Delta Woodside to be able to obtain a private letter
ruling from the IRS that the distributions are tax-free spin-offs under Section
355.
The one IRS private letter ruling condition that Delta Woodside is unable
to satisfy relates to the statutory requirement mentioned above that the
transaction not be used principally as a device for the distribution of earnings
and profits. The IRS private letter ruling condition is that each
non-institutional beneficial owner of at least 5% of the outstanding Delta
Woodside shares represent to the IRS that he, she or it has no plan or intention
to sell, exchange, transfer by gift or otherwise dispose of any stock in Delta
Woodside, Delta Apparel or Duck Head after the Delta Apparel distribution and
the Duck Head distribution.
Each of the non-institutional beneficial owners of at least 5% of the
outstanding Delta Woodside shares, other than Xxxxxx X. Xxxxxxxxx (a director of
Delta Woodside, Delta Apparel and Duck Head), has informed Delta Woodside that
he, she or it is willing to provide the necessary representation to the IRS.
Xx. Xxxxxxxxx, however, has informed Delta Woodside that he is unwilling to
provide the required representation.
As a result, Delta Woodside is not eligible to receive a private letter
ruling from the IRS that the Delta Apparel distribution and the Duck Head
distribution qualify as tax-free spin-offs under Section 355.
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 believes, based on the information currently available to
it, that the only Section 355 condition that the IRS may view as not satisfied
by the Delta Apparel distribution and the Duck Head distribution is the one
mentioned above that the distributions not be "used principally as a device for
the distribution of the earnings and profits" of Delta Woodside, Delta Apparel
or Duck Head. Whether or not the distributions satisfy this condition will
depend primarily on events and circumstances that may or may not occur after the
Delta Apparel distribution and the Duck Head distribution and over which Delta
Woodside, Delta Apparel and Duck Head will have no control. In particular, in
some circumstances one or more sales or other dispositions by any greater than
5% beneficial owner of Delta Woodside, Delta Apparel or Duck Head shares after
the distributions may indicate to the IRS that the distributions were "used
principally as a device for the distribution of the earnings and profits" of
Delta Woodside, Delta Apparel or Duck Head, whereas in other circumstances any
sales or dispositions of this nature may not. Delta Woodside cannot at this
time predict what all of its 5% or greater beneficial owners will do with
respect to their Delta Woodside shares, Delta Apparel shares or Duck Head shares
after the distributions and, therefore, is not in a position now to inform its
stockholders as to the federal income tax consequences of the Delta Apparel
distribution and the Duck Head distribution.
Notwithstanding this uncertainty, Delta Woodside will make a good faith
determination, as soon as practicable and in any event prior to January 31,
2001, on the basis of all of the facts then known to it, and advise all of its
stockholders who receive Delta Apparel shares in the Delta Apparel distribution
and Duck Head shares in the Duck Head distribution whether or not in Delta
Woodside's opinion the Delta Apparel distribution and the Duck Head distribution
should be treated as tax-free spin-offs under Section 355.
Each holder of Delta Woodside shares that receives Delta Apparel shares and
Duck Head shares in the distribution must attach a descriptive statement about
the distributions to his, her or its federal income tax return for the year in
which the distributions occur. Delta Woodside will provide the required
information to each holder of Delta Woodside shares as of the record date for
the distributions.
Material Federal Income Tax Consequences if the Delta Apparel Distribution
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and the Duck Head Distribution Qualify as Tax-Free Spin-Offs under Section
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355
If the Delta Apparel distribution and the Duck Head distribution qualify as
tax-free spin-offs under Section 355, then:
1. The Delta Woodside stockholders 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 Delta Woodside stockholder 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
stockholder 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 Delta Woodside stockholder will be required to apportion his, her or
its tax basis in the stockholder's Delta Woodside shares between the Delta
Woodside shares retained and the Duck Head shares and Delta Apparel shares
received, with this apportionment to be made in proportion to the shares'
relative fair market values for federal income tax purposes at the date of
the distributions.
4. The Delta Woodside stockholder's holding period for the Delta Apparel
shares and the Duck Head shares received in the distributions will be the
same as the stockholder'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 excess loss accounts or
deferred intercompany gains, but that this gain will be offset by Delta
Woodside's net operating losses.
Material Federal Income Tax Consequences if the Delta Apparel Distribution
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and the Duck Head Distribution Do Not Qualify as Tax-Free Spin-Offs under
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Section 355
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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. Delta Woodside will advise each Delta Woodside stockholder, as soon as
practicable and in any event prior to January 31, 2001, of the fair
market value for federal income tax purposes of the Delta Apparel
shares and the Duck Head shares received by them in the distributions.
Because those values for federal income tax purposes 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 $18.2 million (approximately $0.76 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. Delta
Woodside will advise each Delta Woodside stockholder, as soon as
practicable and in any event prior to January 31, 2001, of that
stockholder's pro rata share of Delta Woodside's accumulated earnings
and profits through fiscal year 2000.
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.
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. Delta Woodside
believes that, following the Delta Apparel distribution and the Duck Head
distribution, approximately $56 million of this net operating loss carry forward
will remain as a tax attribute of Delta Woodside ($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 and approximately $3 million
will be a tax attribute of Duck Head.
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, 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.
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.
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
after reduction, if appropriate, for any indicated impairment of value. 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 subsidiaries and affiliates 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. If there is a
discrepancy between this summary and those agreements, you should rely on the
information in 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 January __, 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 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 previously had
conducted the Delta Apparel Company division's business and the Duck
Head Apparel Company division's business.
(b) All the assets used in the operations of the Delta Apparel Company
division's business will have become owned by Delta Apparel or a
subsidiary of Delta Apparel, including the sale by Delta Xxxxx to
Delta Apparel of the Rainsford Plant, located in Edgefield, SC, to
Delta Apparel as 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 release all obligors
(other than Delta Apparel or any of its subsidiaries) of that
indebtedness and under those leases.
(d) All the assets used in the operations of the Duck Head Apparel Company
division's business will have become owned by Duck Head or a
subsidiary of Duck Head.
(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 release all obligors (other
than Duck Head or any of its subsidiaries) of that indebtedness and
under those leases.
(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 release all obligors (other than Delta Woodside or its
remaining subsidiaries) of that indebtedness and under those leases.
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 those individuals who are employed by the Delta
Apparel 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 October 2, 1999, these amounts aggregated approximately $5.5 million.
Other than any amounts owed under the tax sharing 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 and 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; 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:
(a) For each taxable year that ends prior to 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 increase in those
state taxes, and shall be entitled to receive the benefit of any
refund of or saving in those state taxes, 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).
(b) For the taxable period ending 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 shall be entitled to any refund of or saving in those
state taxes, with respect to 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 part of the period ending 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 Delta Apparel distribution, by any
member of the Delta Woodside federal income tax consolidated
group for any part of the period ending 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 employee 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 part of the period ending 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 employee 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,
other tax proceedings and disputes arising out of the interpretation of the tax
sharing agreement. These arrangements may result in conflicts of interest among
Delta Apparel, Delta Woodside and Duck Head.
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).
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 three months of fiscal year
2000:
(in thousands of dollars)
Fiscal year
----------- First quarter 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 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 manufactures yarn for use in knitting operations. In
April 1998, control of the operations and management of the Rainsford Plant in
Edgefield, South Carolina 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 Apparel anticipates that the purchase price for these assets
will be cash equal to the assets' net book value. As required by the terms of
the 9 5/8% Senior Notes of Delta Xxxxx, Delta Xxxxx will 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.
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 payroll,
accounting, internal audit, employee benefits and services, 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.
Other
-----
For further information on transactions with affiliates by Delta Apparel,
see Note 8 to the Combined Financial Statements of Delta Apparel under "Index
to 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 or compensation 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 and awards under the Delta Apparel incentive stock award plan will
be made to the following executive officers of Delta Apparel:
Name and position Shares Covered by Options(1) Shares Covered by Awards
---------------------------------------- ---------------------------- ------------------------
Xxxxxx X. Xxxxxxxxx [to be determined] [to be determined]
President and Chief Executive Officer
Xxxxxxx X. Xxxxxxx [to be determined] [to be determined]
Vice President, Chief Financial Officer
and Treasurer
Xxxxxxxx X. Xxxx [to be determined] [to be determined]
Vice President and Secretary
___________________________________
(1) The compensation grants committee or the compensation 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.
PAYMENTS IN CONNECTION WITH DELTA APPAREL DISTRIBUTION AND DUCK HEAD
DISTRIBUTION
The Delta Woodside board of directors currently anticipates that, in
connection with the Delta Apparel distribution and the Duck Head distribution,
special cash bonuses may be awarded by Delta Woodside to the following
individuals who are members of the Delta Apparel board of directors:
Name Cash bonus ($)
-------------------- --------------
Xxxxxxx X. Xxxxxxx 306,000
C.C. Guy 32,625
Xxxxxx X. Xxxxxxxxx 117,000
Xx. Xxxxx X. Xxxx 32,625
Xx. Xxx Xxxxxx 32,250
E. Xxxxx Xxxxxxx, XX 500,000
Xxxx X. Xxxxxx 31,625
Xxxxxx X. Xxxxxxxxx 360,000
These bonuses would be made in consideration of these individuals' efforts on
behalf of Delta Woodside leading up to the Delta Apparel distribution and the
Duck Head distribution.
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 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
a director 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)). 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 distribution date in exchange for the payment by Delta Woodside to
Xxxxxxx Square, Ltd. of $135,268. Following the Delta Apparel distribution
date, Delta Woodside may continue to use the space on an as needed
month-to-month basis at the rental rate of $14.00 per square foot per year (plus
certain other expenses).
Delta Woodside has leased office space in Edgefield, South Carolina from
The Rainsford Development Corporation, a corporation wholly owned by Xxxxxx X.
Xxxxxxxxx (a director 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 positions she will resign in
connection with the Delta Apparel 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 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 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 was 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 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 a director of Delta Woodside) and Xxxxxx X. Xxxxxxxxx (a
director 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 dates in January and February, 2000 (the dates
through which the applicable insurance premiums have been paid), that
individual's First Refusal Agreement will terminate and 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.
