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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 2, 2004 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ____________ Commission File Number 1-15583 DELTA APPAREL, INC. (Exact name of registrant as specified in its charter)
 GEORGIA
    
    58-2508794(State or other jurisdiction of
Incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 2750 Premiere Parkway, Suite 100
Duluth, Georgia 30097 (Address of principal executive offices) (Zip Code)
 (678) 775-6900 (Registrants telephone number, including area code)
 (Not Applicable) (Former name, former address and former fiscal year, if changed since last report.)
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x     No o. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o     No x. As of October 29, 2004, there were outstanding 4,146,181 shares of the
registrants common stock, par value of $0.01, which is the only class of the
outstanding common or voting stock of the registrant.




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INDEX  
 PagePART 1.
    
    Financial InformationItem 1.
    
    Financial StatementsInterim Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets October 2, 2004 and July 3, 2004
    
    
    3Condensed Consolidated Statements of Income Three months ended October 2, 2004 and September 27, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows Three months ended October 2, 2004 and September 27, 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-10Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10-14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    14-15Item 4.
    
    Controls and Procedures
    
    
    15PART II.
    
    Other InformationItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    15Signatures
    
    
    
    
    16Exhibits
    
    
    
    
    17-28EX-10.2.1 SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENTEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements (Unaudited) 
 DELTA APPAREL, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets
(in thousands, except shares and per share amounts)
(Unaudited) (Unaudited)October 2,
    
    July 3,2004
    
    2004AssetsCurrent assets:Cash
    
    $
    208
    
    
    $
    333Accounts receivable, net
    
    
    29,397
    
    
    
    38,610Inventories
    
    
    105,901
    
    
    
    105,888Prepaid expenses and other current assets
    
    
    1,328
    
    
    
    1,616Deferred income taxes
    
    
    1,269
    
    
    
    1,075Total current assets
    
    
    138,103
    
    
    
    147,522Property, plant and equipment, net
    
    
    20,626
    
    
    
    19,529Deferred income taxes
    
    
    252
    
    
    
    178Other assets
    
    
    2,225
    
    
    
    2,150Total assets
    
    $
    161,206
    
    
    $
    169,379Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    27,201
    
    
    $
    30,511Income taxes payable
    
    
    584
    
    
    
    1,793Current portion of long-term debt
    
    
    15,497
    
    
    
    20,810Total current liabilities
    
    
    43,282
    
    
    
    53,114Long-term debt
    
    
    29,627
    
    
    
    29,246Other liabilities
    
    
    11,557
    
    
    
    11,527Total liabilities
    
    
    84,466
    
    
    
    93,887Stockholders equity:Preferred stock2,000,000 shares authorized; none issued
and outstanding.
    
    
    
    
    
    
    Common stockpar value $.01 a share, 7,500,000 shares authorized,
4,823,486 shares issued, and 4,146,181 and 4,136,259
shares outstanding as of October 2, 2004 and July 3, 2004,
respectively.
    
    
    48
    
    
    
    48Additional paid-in capital
    
    
    53,867
    
    
    
    53,867Retained earnings
    
    
    30,607
    
    
    
    29,473Treasury stock677,305 and 687,227 shares as of October 2, 2004
and July 3, 2004, respectively.
    
    
    (7,782
    )
    
    
    (7,896
    )Total stockholders equity
    
    
    76,740
    
    
    
    75,492Total liabilities and stockholders equity
    
    $
    161,206
    
    
    $
    169,379
 See accompanying notes to condensed consolidated financial statements. 3




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DELTA APPAREL, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(Unaudited) Three Months EndedOctober 2,
    
    September 27,2004
    
    2003Net sales
    
    $
    54,300
    
    
    $
    30,802Cost of goods sold
    
    
    42,723
    
    
    
    26,720Gross profit
    
    
    11,577
    
    
    
    4,082Selling, general and administrative expenses
    
    
    8,446
    
    
    
    3,059Other income
    
    
    10
    
    
    
    81Operating income
    
    
    3,141
    
    
    
    1,104Interest expense, net
    
    
    703
    
    
    
    154Income before income taxes
    
    
    2,438
    
    
    
    950Income tax expense
    
    
    994
    
    
    
    361Net income
    
    $
    1,444
    
    
    $
    589Earnings per shareBasic
    
    $
    0.35
    
    
    $
    0.15Diluted
    
    $
    0.34
    
    
    $
    0.14Weighted average number of shares outstanding
    
    
    4,141
    
    
    
    4,044Dilutive effect of stock options
    
    
    133
    
    
    
    124Weighted average number of shares assuming dilution
    
    
    4,274
    
    
    
    4,168
 See accompanying notes to condensed consolidated financial statements. 4




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DELTA APPAREL, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited) Three Months EndedOctober 2,
    
    September 27,2004
    
    2003Operating activities:Net income
    
    $
    1,444
    
    
    $
    589Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    1,170
    
    
    
    1,110Deferred income taxes
    
    
    (268
    )
    
    
    176Loss on sale of property and equipment
    
    
    2
    
    
    
    Noncash compensation
    
    
    400
    
    
    
    240Changes in operating assets and liabilities:Accounts receivable
    
    
    9,213
    
    
    
    4,826Inventories
    
    
    (13
    )
    
    
    (3,036
    )Prepaid expenses and other current assets
    
    
    288
    
    
    
    205Other noncurrent assets
    
    
    (75
    )
    
    
    15Accounts payable and accrued expenses
    
    
    (3,651
    )
    
    
    878Income taxes
    
    
    (1,209
    )
    
    
    18Other liabilities
    
    
    30
    
    
    
    149Net cash provided by operating activities
    
    
    7,331
    
    
    
    5,170Investing activities:Purchases of property, plant and equipment
    
    
    (2,269
    )
    
    
    (495
    )Net cash used in investing activities
    
    
    (2,269
    )
    
    
    (495
    )Financing activities:Repayment of revolving credit facilities, net
    
    
    (4,532
    )
    
    
    (4,544
    )Repayment of long-term debt
    
    
    (400
    )
    
    
    Proceeds from exercise of stock options
    
    
    35
    
    
    
    98Dividends paid
    
    
    (290
    )
    
    
    (243
    )Net cash used in financing activities
    
    
    (5,187
    )
    
    
    (4,689
    )Decrease in cash
    
    
    (125
    )
    
    
    (14
    )Cash at beginning of period
    
    
    333
    
    
    
    203Cash at end of period
    
    $
    208
    
    
    $
    189Supplemental cash flow information:Cash paid during the period for interest
    
    $
    583
    
    
    $
    91Cash paid during the period for income taxes
    
    $
    2,840
    
    
    $
    167Noncash financing activityissuance of common stock
    
    $
    59
    
    
    $
    38
 See accompanying notes to condensed consolidated financial statements. 5




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DELTA APPAREL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note ABasis of Presentation We prepared the accompanying interim condensed consolidated financial
statements for the three months ended October 2, 2004 in accordance with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. We believe
these condensed consolidated financial statements reflect all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation. Operating results for the three months ended October 2, 2004 are
not necessarily indicative of the results that may be expected for the year
ending July 2, 2005. For more information regarding our results of operations
and financial position refer to the consolidated financial statements and
footnotes included in our Form 10-K for the year ended July 3, 2004, filed with
the Securities and Exchange Commission. Delta Apparel, the Company, and we, us and our are used
interchangeably to refer to Delta Apparel, Inc. together with our wholly-owned
subsidiary, M. J. Soffe Co. (M. J. Soffe, or Soffe), and our other
subsidiaries, as appropriate to the context. Note BAccounting Policies Our accounting policies are consistent with those described in our Summary of
Significant Accounting Policies in our Form 10-K filed for the year ended July
3, 2004 filed with the Securities and Exchange Commission. Note CAcquisition On October 3, 2003, we acquired all of the outstanding capital stock of M. J.
Soffe Co., a North Carolina corporation (the Acquisition). Prior to the
Acquisition, we formed a wholly owned subsidiary, MJS Acquisition Company
(MJS), a North Carolina corporation. MJS acquired all of the outstanding
capital stock of M. J. Soffe Co. from the shareholders of M. J. Soffe Co. (the
Individuals), pursuant to an Amended and Restated Stock Purchase Agreement
dated as of October 3, 2003. Immediately following the Acquisition, M. J.
Soffe Co. was merged with and into MJS, with MJS as the surviving corporation,
and MJSs name was changed to M. J. Soffe Co. The purchase price for the Acquisition consisted of aggregate cash payments of
approximately $43.5 million and the issuance of a promissory note to the
Individuals in the aggregate principal amount of $8.0 million (the Shareholder
Note). Also, additional amounts are payable to the Individuals in cash during
each of fiscal years 2005, 2006, and 2007 if specified financial performance
targets are met by M. J. Soffe Co. during annual periods beginning on September
28, 2003 and ending on September 30, 2006 (the Earnout Amounts). The Earnout
Amounts are capped at a maximum aggregate amount of $4 million per year. To
the extent that the Earnout Amounts are paid, they are treated as additional
costs of the Acquisition. In addition, pursuant to the Stock Purchase
Agreement, MJS paid approximately $8.5 million to satisfy all outstanding bank
debt of M. J. Soffe Co. The M. J. Soffe Co.s results of operations for the
three months ended October 2, 2004 are included in our consolidated statements
of earnings. M. J. Soffe Co. manufactures, markets, and sells casual and athletic apparel.
It has a textile and sewing facility in Fayetteville, North Carolina, as well
as two additional sewing plants, one each in Bladenboro and Rowland, North
Carolina. In addition, M. J. Soffe Co. contracts approximately 30% of its
sewing requirements from a 50% owned facility in Costa Rica. M. J. Soffe Co.
leases its primary distribution center in Fayetteville, North Carolina and also
leases space for satellite distribution facilities in other parts of the United
States. In conjunction with the Acquisition, on October 3, 2003, we entered into an
Amended and Restated Loan and Security Agreement with Congress Financial
Corporation (Southern), as lender and as agent for the financial institutions
named as lenders, pursuant to which our existing line of credit (the Delta
Facility) was increased to $40 million, which represented a $5 million
increase in our predecessor credit facility. Also on October 3, 2003, MJS entered into a Loan and Security Agreement with
Congress Financial Corporation (Southern), as lender and as agent for the
financial institutions named as lenders, which provides M. J. Soffe Co. with a
$38.5 million line of credit (the Soffe Facility). Together, the Delta
Facility and the Soffe Facility provide for lines of credit in an aggregate
amount of $78.5 million. The Delta Facility and the Soffe Facility are secured
by a first priority lien on all of the assets of Delta Apparel and M. J. Soffe
Co. Delta Apparel is a guarantor of the Soffe Facility, and M. J. Soffe Co. is
a guarantor of the Delta Facility. M. J. Soffe Co has the option to increase
the Soffe Facility from $38.5 million to $41.0 million, provided that no event
of default exists under the facility. The purchase price was allocated to the net assets of M. J. Soffe Co. based on
their estimated fair values. As the fair value of the identifiable assets
acquired and liabilities assumed exceeded the purchase price, the excess amount
over the purchase price is recognized as a liability until the Earnout Amounts
are determined. The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of the Acquisition. 6




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Cash consideration paid
    
    $
    52,000Promissory note issued
    
    
    8,000Direct merger costs
    
    
    1,470Total purchase price
    
    $
    61,470Cash
    
    $
    1,630Accounts receivable
    
    
    13,052Inventories
    
    
    51,864Other current assets
    
    
    218Other assets
    
    
    4,088Tax receivable and deferred taxes
    
    
    9,386Current liabilities
    
    
    (8,212
    )Noncurrent liabilities
    
    
    (3,413
    )Earnout liability
    
    
    (7,143
    )Fair value of net assets acquired
    
    $
    61,470
 Note DPro Forma Financial Information The pro forma financial information presented below gives effect to the M. J.
Soffe Co. acquisition as if it had occurred as of the beginning of fiscal year
2004. Amounts are in thousands, except per share amounts. The information
presented below is for illustrative purposes only and is not indicative of
results that would have been achieved or results that may be achieved in the
future. October 2,
    
    September 27,2004
    
    2003Net sales
    
    $
    54,300
    
    
    $
    56,131Net income
    
    
    1,444
    
    
    
    2,664Net income, per shareBasic
    
    $
    0.35
    
    
    $
    0.66Diluted
    
    $
    0.34
    
    
    $
    0.64
 Note EInventories Inventories consist of the following: October 2,
    
    July 3,2004
    
    2004Raw materials
    
    $
    6,504
    
    
    $
    5,406Work in process
    
    
    23,759
    
    
    
    26,540Finished goods
    
    
    75,638
    
    
    
    73,942$
    105,901
    
    
    $
    105,888
 Note FDebt The Soffe Facility contains both a subjective acceleration clause and a lockbox
arrangement, whereby remittances from the customers reduce the current
outstanding borrowings. Pursuant to Emerging Issues Task Force (EITF) 95-22,
we are classifying borrowings under the Soffe Facility as current debt. The Delta Facility contains a subjective acceleration clause and a springing
lockbox arrangement (as defined in EITF 95-22), whereby remittances from
customers are forwarded to our general bank account and do not reduce the
outstanding debt until and unless a specified event or an event of default
occurs. Pursuant to EITF 95-22, we are classifying borrowings under the Delta
Facility as noncurrent debt. On November 8, 2004, we amended the Delta Facility to increase our line of
credit by an additional $2.75 million to $42.75 million. 7




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Note GIncome Taxes Our effective income tax rate for the three months ended October 2, 2004 was
40.8%, compared to 32.4% for the fiscal year ended July 3, 2004. During the
fiscal year ended June 30, 2001, we created a tax liability in the amount of
approximately $0.9 million with respect to our tax sharing agreement between
Delta Woodside Industries, Inc. (our former parent company) and the Company.
During the fiscal year ended July 3, 2004, we determined that it was no longer
probable that a tax liability might occur as a result of this tax sharing
agreement. Therefore, we reversed the $0.9 million tax liability that had been
created, resulting in the lower effective tax rate during fiscal year 2004. Note HStock Options and Incentive Stock Awards We have elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related Interpretations in
accounting for our employee stock options because the alternative fair value
accounting provided for under Financial Accounting Standards Board Statement
No. 123, Accounting for Stock-Based Compensation (SFAS 123), requires use
of option valuation models that were not developed for use in valuing employee
stock options. The pro forma information regarding net income and earnings per share is
required by SFAS 123 to be determined as if we had accounted for our employee
stock options under the fair value method of that Statement. For purposes of
pro forma disclosures, the estimated fair value of the options under the Option
Plan and the Award Plan are amortized to expense over the options vesting
period. Our pro forma information follows (in thousands, except per share
amounts): Three Months EndedOctober 2,
    
    September 27,2004
    
    2003Net income, as reported
    
    $
    1,444
    
    
    $
    589Add: Stock-based employee
compensation expense included in
reported net income, net of
related tax effects
    
    
    135
    
    
    
    87Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all options and awards,
net of related tax effects
    
    
    (212
    )
    
    
    (87
    )Pro forma net income
    
    $
    1,367
    
    
    $
    589(Loss) earnings per share:Basicas reported
    
    $
    0.35
    
    
    $
    0.15Basicpro forma
    
    $
    0.33
    
    
    $
    0.15Dilutedas reported
    
    $
    0.34
    
    
    $
    0.14Dilutedpro forma
    
    $
    0.32
    
    
    $
    0.14
 Note IPurchase Contracts We have entered into agreements, and have fixed prices, to purchase cotton,
yarn and finished apparel products for use in our manufacturing operations. At
October 2, 2004, minimum payments under these contracts to purchase cotton,
yarn and finished apparel products with non-cancelable contract terms were $6.4
million, $1.9 million and $1.4 million, respectively. Note JComputation of Basic and Diluted Net Earnings per Share (EPS) We compute basic net earnings per share by dividing net income by the weighted
average number of common shares outstanding during the period. The computation
of diluted earnings per share includes the dilutive effect of stock options and
non-vested stock awards granted under our Stock Option Plan and our Incentive
Stock Award Plan. The weighted average shares do not include securities that would be
anti-dilutive for each of the periods presented. 8




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Note KStockholders Equity Stock Repurchase Program  Quarterly Dividend Program  Note LSegment Reporting We operate our business in two distinct segments: Delta and Soffe. Although
the two segments are similar in their production processes and regulatory
environment, they are distinct in their economic characteristics, products and
distribution methods. The Delta segment manufactures, markets and distributes unembellished knit
apparel under the brands of Delta Pro Weight®, Delta Magnum Weight and
Quail Hollow. The products are primarily sold to screen printing companies
and distributors. In addition, products are manufactured under private labels
for retailers, corporate industry programs and sports licensed apparel
marketers. The Soffe segment manufactures, markets and distributes embellished and
unembellished knit apparel under the Soffe® label. The products are sold
through specialty sporting goods stores and department stores. In addition to
these retail channels, Soffe also supplies college bookstores and produces
activewear products for the U.S. Military. Corporate and Unallocated is a reconciling category for reporting purposes and
includes intercompany eliminations and other costs that are not allocated to
the operating segments. Our management evaluates performance and allocates resources based on profit or
loss from operations before interest, income taxes and special charges
(Segment Operating Income). Our Segment Operating Income may not be
comparable to similarly titled measures used by other companies. The
accounting policies of our reportable segments are the same as those described
in Note A. Intercompany transfers between operating segments are transacted at
cost and eliminated in consolidation. Information about our operations as of and for the three months ended October
2, 2004 and September 27, 2003, by operating segment, is as follows (in
thousands): CorporateandDelta
    
    Soffe
    
    Unallocated
    
    ConsolidatedFiscal Year 2005:Net sales
    
    $
    33,417
    
    
    $
    21,969
    
    
    $
    (1,086
    )
    
    $
    54,300Segment operating income
    
    
    9
    
    
    
    3,133
    
    
    
    (1
    )
    
    
    3,141Segment assets
    
    
    93,769
    
    
    
    67,437
    
    
    
    
    
    
    
    161,206Fiscal Year 2004:Net sales
    
    $
    30,802
    
    
    
    
    
    
    
    
    
    
    $
    30,802Segment operating income
    
    
    1,104
    
    
    
    
    
    
    
    
    
    
    
    1,104Segment assets
    
    
    91,674
    
    
    
    
    
    
    
    
    
    
    
    91,674
 The following reconciles the Segment Operating Income to the consolidated
income before income taxes for the three months ended October 2, 2004 and
September 27, 2003. Three Months EndedOctober 2,
    
    September 27,2004
    
    2003Segment operating income
    
    $
    3,141
    
    
    $
    1,104Unallocated interest expense
    
    
    703
    
    
    
    154Consolidated income before taxes
    
    $
    2,438
    
    
    $
    950
 9




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The following discussion contains various forward-looking statements. All
statements, other than statements of historical fact, that address activities,
events or developments that we expect or anticipate will or may occur in the
future are forward-looking statements. Examples are statements that concern
future revenues, future costs, future capital expenditures, business strategy,
competitive strengths, competitive weaknesses, goals, plans, references to
future success or difficulties and other similar information. The words
estimate, project, forecast, anticipate, expect, intend, believe
and similar expressions, and discussions of strategy or intentions, are
intended to identify forward-looking statements. The forward-looking statements in this Quarterly Report are based on our
expectations and are necessarily dependent upon assumptions, estimates and data
that we believe are reasonable and accurate but may be incorrect, incomplete or
imprecise. Forward-looking statements are also subject to a number of business
risks and uncertainties, any of which could cause actual results to differ
materially from those set forth in or implied by the forward-looking
statements. The risks and uncertainties include, among others, changes in the
retail demand for apparel products, the cost of raw materials, competitive
conditions in the apparel and textile industries, the relative strength of the
United States dollar as against other currencies, changes in United States
trade regulations and the discovery of unknown conditions (such as with respect
to environmental matters and similar items) and other risks described from time
to time in our reports filed with the Securities and Exchange Commission.
Accordingly, any forward-looking statements do not purport to be predictions of
future events or circumstances and may not be realized. We do not undertake publicly to update or revise the forward-looking statements
even if it becomes clear that any projected results will not be realized. BUSINESS OUTLOOK Our sales for the first quarter of fiscal year 2005 increased over the prior
quarter by 76.3%, meeting our expectations. Pricing remains volatile in the
tee shirt business, with the higher prices we saw in June 2004 continuing
through August and then declining in September 2004 and partially rebounding in
October. Pricing was higher than in the prior year quarter reflecting the
increased cost of raw materials, helping to drive the average selling prices in
the Delta business to $18.08 per dozen, the highest level achieved in two
years. In addition, by reducing the sale of white product to approximately 30%
of our catalog sales and increasing specialty products in our product mix, we
achieved increased average selling prices. Sales in the Soffe business met our
expectations, although we could have shipped additional product had we entered
the quarter with higher inventory levels of fall merchandise. Sales in our
military segment were strong and we now believe will exceed our original
expectations for the year. We are concentrating on expanding our product
offering of fall merchandise for next fiscal year. Our manufacturing team in the Delta business continued to reduce cost during
the quarter with further improvements in material utilization and reductions in
off-quality cost. We are also making progress in our cost reduction efforts in
the Soffe business. During the quarter, we installed new screen printing
equipment and altered our shift arrangements in our decorating department,
which reduced labor cost. We are in the process of eliminating a leased
warehouse facility which we expect will result in an annual cost savings of
approximately $0.4 million. We have begun cost reduction efforts in the
textile and cutting operations and we expect to realize further product savings
in the sourcing area. During the quarter, we continued to run our
manufacturing facilities in both businesses at less than full capacity to
manage our overall inventory levels. We believe business conditions will remain positive for the remainder of our
2005 fiscal year. We anticipate increasing output in our manufacturing
facilities later this year, which should improve our absorption of fixed cost.
Lower raw material cost and cost reduction efforts should improve margins in
the upcoming quarters if pricing on tee shirts remains consistent with current
levels. Our focus on product distribution should drive continued customer growth during
the year. During the upcoming quarter, we will be moving our Knoxville
distribution center to a more modern facility. In addition, we have finalized
a lease on a new distribution center to service the
Northeast market and expect to serve customers out of this center by spring.
This new distribution center will help us continue to expand our customer base
in that region, driving additional sales for our company. Other marketing
strategies are currently in place to expand our customer base in other parts of
the country. We are expanding our spring product offerings in both business
segments, which should also result in additional sales. In the Delta business, we manufacture approximately 80% of our yarn
requirements and purchase the remaining yarn from third party sources. We are
currently evaluating our long-term strategy to obtain low cost yarn and expect
to finalize our strategy by the end of the calendar year. During the quarter, we paid down our debt by approximately $5 million, bringing
our total debt reduction to over $20 million since our acquisition of Soffe.
We expect that our debt will be higher during our second fiscal quarter, as we
purchase our new distribution center in Tennessee. Debt should also increase
during the third fiscal quarter, as our working capital needs increase with our
strong spring shipping season, and then should be reduced to current levels by
our fiscal year-end. 10




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RESULTS OF OPERATIONS Net sales for the first quarter of fiscal year 2005 were $54.3 million, an
increase of 76.3% from net sales of $30.8 million for the first quarter of the
prior year. The sales increase of $23.5 million was primarily the result of
the acquisition of M. J. Soffe Co., which accounted for $22.0 million in sales
in the quarter. The 8.5% increase in net sales in the Delta business was
primarily the result of increased average selling prices of tee shirts.
Pricing pressure continued in the marketplace; however, pricing most styles was
higher than in the prior year quarter reflecting increased raw material cost.
In addition, increased sales of dyed and specialty products drove an improved
product mix, which also contributed to higher average selling prices. Gross profit as a percentage of net sales increased to 21.3% in the first
quarter of fiscal year 2005 from 13.3% in the first quarter of the prior year.
The improvement in gross margin was primarily the result of the higher gross
profits associated with M. J. Soffe Co., offset partially by lower gross
profits in the Delta basic tee shirt business. The gross margin on basic tee
shirts declined in the first fiscal quarter compared to the prior year quarter
primarily due to higher raw material costs and lower absorption of fixed cost,
offset partially by higher average selling prices. Raw material costs
negatively impacted gross margin by $4.1 million in the first quarter of fiscal
year 2005. Selling, general and administrative expenses, including the provision for bad
debts, for the first quarter of fiscal year 2005 were $8.4 million, or 15.6% of
sales, an increase of $5.4 million from $3.1 million, or 9.9% of sales, in the
first quarter of the prior year primarily as the result of the addition of the
M. J. Soffe Co. Selling costs increased as a percentage of sales primarily as
a result of the higher selling costs associated with branded apparel products. Other income for the first three months of fiscal year 2005 was $10 thousand, a
decrease of $71 thousand compared with other income of $81 thousand for the
first three months of the prior year. Other income in the three months ended
September 27, 2003 was primarily the result of gains on cotton options that
were marked to market. Operating income for the first quarter of fiscal year 2005 was $3.1 million, an
increase of $2.0 million, or 184.5%, from $1.1 million for the first quarter of
the prior year. The increase in operating income was the result of higher gross
profit, offset partially by increased selling, general and administrative
expenses, both primarily the result of the higher gross profits and higher
selling costs associated with Soffes branded apparel products. Net interest expense for the first quarter of fiscal year 2005 was $0.7
million, an increase of $0.5 million from the first quarter of the prior year.
The increase in interest expense resulted primarily from the increase in
average debt outstanding, resulting from the M. J. Soffe acquisition. Our effective income tax rate for the first quarter of fiscal year 2005 was
40.8% compared to 38.0% for the first quarter of the prior year and 32.4% for
the fiscal year ended July 3, 2004. During the fiscal year ending June 30,
2001, we created a tax liability in the amount of approximately $0.9 million
with respect to our tax sharing agreement between Delta Woodside Industries,
Inc. (our former parent company) and the Company. During the fiscal year ended
July 3, 2004, we determined that it was no longer probable that a tax liability
might occur as a result of this tax sharing agreement. Therefore, we reversed
the $0.9 million tax liability that had been created, resulting in the lower
effective tax rate during fiscal year 2004. We expect our annual effective tax
rate to be in the 38% to 39% range for fiscal year 2005. Net income for the first quarter of fiscal year 2005 was $1.4 million, an
increase of $0.9 million compared to net income of $0.6 million in the prior
year first fiscal quarter. Accounts receivable decreased $9.2 million from July 3, 2004 to $29.4 million
on October 2, 2004. The decrease was a result of lower sales during the
quarter ended October 2, 2004 compared to the quarter ended July 3, 2004. Inventories at October 2, 2004 were $105.9 million, consistent with the
inventory at July 3, 2004. During the first fiscal quarter, we adjusted
production schedules to manage our overall inventory levels. We expect to
maintain this level of inventory over the next several quarters. Capital expenditures in the first quarter of fiscal year 2005 were $2.3 million
compared to $0.5 million in the first quarter of the prior year. The
expenditures during fiscal year 2005 primarily related to upgrading the air
filtration system and adding an additional spinning frame at our Edgefield yarn
plant. The expenditures during the first quarter of fiscal year 2004 primarily
related to increasing capacity and lowering costs in the Companys existing
textile facilities. Capital expenditures for fiscal year 2005 are expected to
total approximately $10 million, which includes the capital expenditure of
approximately $4 million related to the acquisition of a more modern
distribution center in Tennessee. LIQUIDITY AND CAPITAL RESOURCES Our primary cash needs are for working capital and capital expenditures. In
addition, we use cash to fund our dividend payments and share repurchases under
our Stock Repurchase Program. In conjunction with the acquisition of M. J. Soffe Co., on October 3, 2003, we
entered into an Amended and Restated Loan and Security Agreement with Congress
Financial Corporation (Southern), as lender and as agent for the financial
institutions named as lenders, pursuant to which our existing line of credit
(the Delta Facility) was increased to $40 million, which represented a $5
million increase in our predecessor 11




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credit facility. On November 8, 2004, we
amended the Delta Facility to increase our line of credit by an additional
$2.75 million to $42.75 million. The purpose of the amendment was to provide
funds for our acquisition of a more modern distribution center in Tennessee. Also on October 3, 2003, MJS Acquisition Company, which changed its name to M.
J. Soffe Co., entered into a Loan and Security Agreement with Congress
Financial Corporation (Southern) which provides M. J. Soffe Co. with a $38.5
million line of credit (the Soffe Facility). Together, the Delta Facility and
the Soffe Facility provide for lines of credit in an aggregate amount of $81.25
million. The Delta Facility and the Soffe Facility are secured by a first
priority lien on all of the assets of Delta Apparel and M. J. Soffe Co. Delta
Apparel is a guarantor of the Soffe Facility, and M. J. Soffe Co. is a
guarantor of the Delta Facility. M. J. Soffe Co. has the option to increase
the Soffe Facility from $38.5 million to $41.0 million, provided that no event
of default exists under the facility. The Soffe Facility contains both a subjective acceleration clause and a lockbox
arrangement, whereby remittances from customers reduce the current outstanding
borrowings. Pursuant to Emerging Issues Task Force (EITF) 95-22, we are
classifying borrowings under the Soffe Facility as current debt. The Delta
Facility contains a subjective acceleration clause and a springing lockbox
arrangement (as defined in EITF 95-22), whereby remittances from customers are
forwarded to our general bank account and do not reduce the outstanding debt
until and unless a specified event or an event of default occurs. Pursuant to
EITF 95-22, we are classifying borrowings under the Delta Facility as
noncurrent debt. All loans under the credit agreements bear interest at rates based on an
adjusted LIBOR rate plus an applicable margin or a banks prime rate plus an
applicable margin. At October 2, 2004, we had $38.7 million outstanding under
our credit facilities at an average interest rate of 4.3%. In addition to the credit facilities with Congress Financial Corporation
(Southern), we have a seller note payable to the former Soffe shareholders
pursuant to the Stock Purchase Agreement dated as of October 3, 2003. At
October 2, 2004, we had $6.4 million outstanding under the note at an interest
rate of 8.0%. Operating Cash Flows Net cash provided by operating activities was $7.3 million and $5.2 million for
the first three months of fiscal year 2005 and 2004, respectively. Our cash
flow from operating activities is primarily due to net income and changes in
working capital. We monitor changes in working capital by analyzing our
investment in accounts receivable and inventories and by the amount of accounts
payable. During fiscal year 2005, our cash flow provided by operating
activities was primarily from net income and a reduction in accounts
receivable. The cash provided by operating activities in fiscal year 2004 was
primarily due to net income plus depreciation and a reduction in accounts
receivable partially offset by an increase in inventory. Investing Cash Flows During the three months ended October 2, 2004, investing activities used $2.3
million in cash for capital expenditures. The expenditures during fiscal year
2005 primarily related to upgrading the air filtration system and adding an
additional spinning frame at our Edgefield yarn plant. Investing activities
used $0.5 million in the first fiscal quarter of 2004 for capital expenditures
primarily related to increasing capacity and lowering costs in our textile
facilities. Capital expenditures for fiscal year 2005 are expected to total
approximately $10 million, which includes the capital expenditure of
approximately $4 million related to the acquisition of a more modern
distribution center in Tennessee. Financing Activities Cash used in financing activities was $5.2 million and $4.7 million for the
first three months of fiscal year 2005 and 2004, respectively. Repayment of
debt was the primary use of cash in both fiscal years. We paid dividends to
our shareholders totaling $0.3 million and $0.2 million in fiscal years 2005
and 2004, respectively. Based on our expectations, we believe that our $81.25 million credit facilities
should be sufficient to satisfy our foreseeable working capital needs, and that
the cash flow generated by our operations and funds available under our credit
facilities should be sufficient to service our debt payment requirements, to
satisfy our day-to-day working capital needs, to fund our planned capital
expenditures, to fund purchases of our stock as described below and to fund the
payment of dividends as described below. Any material deterioration in our
results of operations, however, may result in the Company losing its ability to
borrow under its credit facilities and to issue letters of credit to suppliers
or may cause the borrowing availability under the facilities to be insufficient
for the our needs. Purchases by Delta Apparel of its Own Shares We have authorization from our Board of Directors to spend up to an aggregate
of $6.0 million for share repurchases under the Stock Repurchase Program. All
purchases are made at the discretion of our management. We did not purchase
shares of our common stock during the three months ended October 2, 2004.
Since the inception of the Stock Repurchase Program, weve purchased 368,057
shares of our common stock pursuant to the program for an aggregate of $4.2
million. 12




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Dividend Program On August 19, 2004, our Board of Directors declared a cash dividend of seven
cents per share of common stock pursuant to our quarterly dividend program. We
paid the dividend on September 13, 2004 to shareholders of record as of the
close of business on September 1, 2004. On October 28, 2004, our Board declared
a cash dividend of seven cents per share of common stock payable on November
29, 2004 to shareholders of record as of the close of business on November 17,
2004. Although the Board may terminate or amend the program at any time, we
currently expect to continue the quarterly dividend program. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of our consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. We base our estimates and judgments on
historical experience and various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most significant
estimates and assumptions relate to the adequacy of receivable and inventory
reserves, self-insurance accruals and the accounting for income taxes. The detailed Summary of Significant Accounting Policies is included in Note B
to the Condensed Consolidated Financial Statements. Revenue Recognition and Accounts Receivable We consider revenue realized or realizable and earned when the following
criteria are met: persuasive evidence of an agreement exists, delivery has
occurred, the price is fixed and determinable and the collectibility is
reasonably assured. Sales are recorded net of discounts and provisions for
estimated returns and allowances. We estimate returns and allowances on an
ongoing basis by considering historical and current trends. We record these
costs as a reduction to net sales and cost of sales. We estimate the net
collectibility of our accounts receivable and establish an allowance for
doubtful accounts based upon this assessment. Specifically, we analyze the
aging of accounts receivable balances, historical bad debts, customer
concentrations, customer credit-worthiness, current economic trends and changes
in customer payment terms. Significant changes in customer concentration or
payment terms, deterioration of customer credit-worthiness or weakening in
economic trends could have a significant impact on the collectibility of
receivables and our operating results. Inventories Our inventory is carried at the lower of FIFO cost or market. We regularly
review inventory quantities on hand and record a provision for damaged, excess
and out of style or otherwise obsolete inventory based primarily on our
historical selling prices for these products and our estimated forecast of
product demand for the next twelve months. If actual market conditions are
less favorable than those projected, or if liquidation of the inventory is more
difficult than anticipated, additional inventory write-downs may be required. Self Insurance Our medical, prescription and dental care benefits are self-insured. Our
self-insurance accruals are based on claims filed and estimates of claims
incurred but not reported. We develop estimates of claims incurred but not
reported based upon the historical time it takes for a claim to be reported and
historical claim amounts. While the time it takes for a claim to be reported
has been declining, if claims are greater than we originally estimate, or if
costs increase beyond what we have anticipated, our recorded reserves may not
be sufficient, and it could have a significant impact on our operating results. Income Taxes We use the liability method of accounting for income taxes, which requires
recognition of temporary differences between financial statement and income tax
basis of assets and liabilities measured by enacted tax rates. We have
recorded deferred tax assets for certain state operating loss carryforwards and
nondeductible accruals. We established a valuation allowance related to
certain of the state operating loss carryforward amounts in accordance with the
provisions of FASB Statement No. 109, Accounting for Income Taxes. We
continually review the adequacy of the valuation allowance and recognize the
benefits of deferred tax assets if reassessment indicates that it is more
likely than not that the deferred tax assets will be realized based on earnings
forecasts in the respective tax locations. There have been no changes in our critical accounting policies since the filing
of our Annual Report on Form 10-K for the year ended July 3, 2004. NEW ACCOUNTING STANDARDS In October 2004, the Financial Accounting Standards Board concluded that
Statement 123R, Share-Based Payment, which would require all 13




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companies to
measure compensation cost for all share-based payments (including employee
stock options) at fair value, would be effective for public companies (except
small business issuer as defined in SEC Regulation S-B) for interim or annual
periods beginning after June 15, 2005. We are currently evaluating the effect
that the adoption of Statement 123R will have on our financial position and
results of operations. ENVIRONMENTAL AND REGULATORY MATTERS On May 27, 2002, we received a renewal of our National Pollution Discharge
Elimination System (NPDES) permit from the North Carolina Department of
Environment and Natural Resources, Division of Water Quality (DWQ) for our
Maiden, North Carolina textile plant. Among other things, the new permit
required us to reduce our effluent (waste discharge) color to specified color
concentration limits. We believed that the DWQ exceeded its authority and
acted arbitrarily in imposing the specific color concentration limitations
within the new permit and, on July 23, 2002 contested the permit by filing a
petition with the North Carolina Office of Administrative Hearings. We have
reached a settlement with the DWQ and have negotiated a permit modification.
Prior to becoming effective, the permit modification will be subject to a
45-day public notice and comment period during which time changes to the permit
may be suggested by the public. Once the permit modification becomes
effective, we will dismiss our contested case. The modified permit, as agreed by DWQ and us, provides that we will have
approximately one year to research and test alternative color removal
technologies and thereafter must select and implement a technology by October
2005 if we continue to require our NPDES discharge permit. In addition, we
must continue to monitor our color removal and will be subject to a gradual
lowering of our effluent color standard. Our NPDES permit will be subject to
renewal in the spring of 2006. We currently do not believe that the cost to comply with the modified permit,
if any, will be material to the results of operations or financial condition of
our Company. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk COMMODITY RISK SENSITIVITY We purchase cotton from approximately eight established merchants with whom we
have long-standing relationships. The majority of our purchases are executed
using on-call contracts. These on-call arrangements are used to ensure that
an adequate supply of cotton is available for our requirements. Under on-call
contracts, we agree to purchase specific quantities for delivery on specific
dates, with pricing to be determined at a later time. Prices are set according
to prevailing prices, as reported by the New York Cotton Exchange, at the time
we elect to fix specific contracts. Cotton on-call with a fixed price at October 2, 2004 was valued at $6.4
million, and is scheduled for delivery between October 2004 and March 2005. At
October 2, 2004, we had unpriced contracts for deliveries between October 2004
and June 2005. Based on the prevailing price at October 2, 2004, the value of
these unpriced commitments is approximately $11.1 million. At October 2, 2004,
a 10% decline in the market price of the cotton covered by our fixed price
contracts would have had a negative impact of approximately $0.6 million on the
value of the contracts. At July 3, 2004, cotton on-call with a fixed price was
valued at $15.7 million. At July 3, 2004, a 10% decline in the market price of
the cotton covered by our fixed price contracts would have had a negative
impact of approximately $1.6 million. The effect of a 10% decline in the
market price of cotton on our fixed price contracts would have been less at
October 2, 2004 than at July 3, 2004 because the value of our fixed price
cotton on-call contracts was less on October 2, 2004. Cotton price movements
could result in unfavorable pricing of cotton for us. We also purchase yarn
from third party vendors. The price of yarn is primarily impacted by the price
of cotton, as discussed above. We occasionally use derivatives, including cotton option contracts, to manage
our exposure to movements in commodity prices. We do not designate our options
as hedge instruments upon inception. Accordingly, we mark to market changes in
the fair market value of the options as other expense (income) in the
statements of income. We did not own any cotton options contracts on October
2, 2004. INTEREST RATE SENSITIVITY Our credit agreements provide that outstanding amounts bear interest at
variable rates. If the amount of outstanding indebtedness at October 2, 2004
under the revolving credit facilities had been outstanding during the entire
three months ended October 2, 2004 and the interest rate on this outstanding
indebtedness were increased by 100 basis points, our interest expense would
have increased by approximately $97,000, or 13.8%, during the quarter. This
compares to an increase of $433,000, or 9.3%, for the 2004 fiscal year, or an
average of $108,250 per quarter, based on the outstanding indebtedness at July
3, 2004. The decrease is due to the amount outstanding under our revolving
credit facilities being lower at October 2, 2004 than at July 3, 2004. The
actual increase in interest expense resulting from a change in interest rates
would depend on the magnitude of the increase in rates and the average
principal balance outstanding. 
 Item 4: Controls and Procedures Under the supervision and with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of October 2, 2004, and, based on 14




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their evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that these
controls and procedures are effective. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation. Our disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us
in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. 
 PART II. OTHER INFORMATION 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits.  10.2.1
    
    Second Amendment to Amended and Restate Loan and Security Agreement
dated as of November 8, 2004 among Delta Apparel, Inc., Congress
Financial Corporation (Southern), as Agent, and certain financial
institutions named therein, as Lenders.31.1
    
    Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. 15




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized. DELTA APPAREL, INC.
(Registrant)November 8, 2004
    By:
    /s/ Herbert M. MuellerDate
    
    Herbert M. MuellerVice President, Chief Financial
Officer and Treasurer 16