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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended April 2, 2005 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(State or other jurisdiction of
Incorporation or organization)
    
    58-2508794(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 þ 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 þ. As of April 26, 2005, there were outstanding 4,230,931 shares of the registrants common stock
(prior to adjustment to reflect the 2-for-1 stock split that will be effective as of May 31, 2005),
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 I. Financial InformationItem 1. Financial StatementsInterim Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets
April 2, 2005 and July 3, 2004
    
    
    3Condensed Consolidated Statements of Income
Three months and nine months ended April 2, 2005 and March 27, 2004
    
    
    4Condensed Consolidated Statements of Cash Flows
Nine months ended April 2, 2005 and March 27, 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-10Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    10-16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    17PART II. Other InformationItem 6. Exhibits and Reports on Form 8-K
    
    
    17Signatures
    
    
    18EX-10.30 2004 NON-EMPLOYEE DIRECTOR STOCK PLANEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF 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)April 2,
    
    
    July 3,2005
    
    
    2004AssetsCurrent assets:Cash
    
    $
    225
    
    
    $
    333Accounts receivable, net
    
    
    35,386
    
    
    
    38,610Inventories
    
    
    105,204
    
    
    
    105,888Prepaid expenses and other current assets
    
    
    4,400
    
    
    
    1,616Deferred income taxes
    
    
    2,208
    
    
    
    1,075Total current assets
    
    
    147,423
    
    
    
    147,522Property, plant and equipment, net
    
    
    18,965
    
    
    
    19,529Deferred income taxes
    
    
    2,170
    
    
    
    178Other assets
    
    
    418
    
    
    
    2,150Total assets
    
    $
    168,976
    
    
    $
    169,379Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    42,059
    
    
    $
    30,511Income taxes payable
    
    
    4,729
    
    
    
    1,793Current portion of long-term debt
    
    
    18,803
    
    
    
    20,810Total current liabilities
    
    
    65,591
    
    
    
    53,114Long-term debt
    
    
    17,288
    
    
    
    29,246Other liabilities
    
    
    2,930
    
    
    
    11,527Total liabilities
    
    
    85,809
    
    
    
    93,887Stockholders equity:Preferred stock2,000,000 shares authorized; none issued
and outstanding.
    
    
    
    
    
    
    Common stock *par value $.01 a share, 15,000,000 shares authorized,
9,646,972 shares issued, and 8,461,862 and 8,272,518
shares outstanding as of April 2, 2005 and July 3, 2004,
respectively.
    
    
    96
    
    
    
    96Additional paid-in capital
    
    
    53,867
    
    
    
    53,867Retained earnings
    
    
    36,012
    
    
    
    29,425Treasury stock *1,185,110 and 1,374,454 shares as of April 2, 2005
and July 3, 2004, respectively.
    
    
    (6,808
    )
    
    
    (7,896
    )Total stockholders equity
    
    
    83,167
    
    
    
    75,492Total liabilities and stockholders equity
    
    $
    168,976
    
    
    $
    169,379
   *
    
    Adjusted to reflect 2-for-1 stock split effective as of May 31, 2005 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 Ended
    
    
    Nine Months EndedApril 2,
    
    
    March 27,
    
    
    April 2,
    
    
    March 27,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    58,272
    
    
    $
    58,805
    
    
    $
    161,767
    
    
    $
    135,230Cost of goods sold
    
    
    43,528
    
    
    
    44,374
    
    
    
    124,631
    
    
    
    107,807Gross profit
    
    
    14,744
    
    
    
    14,431
    
    
    
    37,136
    
    
    
    27,423Selling, general and administrative expenses
    
    
    10,392
    
    
    
    8,879
    
    
    
    26,932
    
    
    
    20,085Other (income) expense
    
    
    (3,616
    )
    
    
    20
    
    
    
    (3,612
    )
    
    
    (29
    )Operating income
    
    
    7,968
    
    
    
    5,532
    
    
    
    13,816
    
    
    
    7,367Interest expense, net
    
    
    679
    
    
    
    799
    
    
    
    2,217
    
    
    
    1,846Income before income taxes
    
    
    7,289
    
    
    
    4,733
    
    
    
    11,599
    
    
    
    5,521Income tax expense
    
    
    1,844
    
    
    
    920
    
    
    
    3,556
    
    
    
    1,211Net income
    
    $
    5,445
    
    
    $
    3,813
    
    
    $
    8,043
    
    
    $
    4,310Earnings per share *Basic
    
    $
    0.65
    
    
    $
    0.47
    
    
    $
    0.97
    
    
    $
    0.53Diluted
    
    $
    0.64
    
    
    $
    0.46
    
    
    $
    0.95
    
    
    $
    0.52Weighted average number of shares outstanding *
    
    
    8,376
    
    
    
    8,178
    
    
    
    8,316
    
    
    
    8,130Dilutive effect of stock options *
    
    
    182
    
    
    
    198
    
    
    
    164
    
    
    
    194Weighted average number of shares assuming dilution *
    
    
    8,558
    
    
    
    8,376
    
    
    
    8,480
    
    
    
    8,324Cash dividends declared per common share *
    
    $
    0.035
    
    
    $
    0.030
    
    
    $
    0.105
    
    
    $
    0.090
   *
    
    Adjusted to reflect 2-for-1 stock split effective as of May 31, 2005 See accompanying notes to condensed consolidated financial statements. 4




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DELTA APPAREL, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Cash Flows (in thousands)
 (Unaudited)
 Nine Months EndedApril 2,
    
    
    March 27,2005
    
    
    2004Operating activities:Net income
    
    $
    8,043
    
    
    $
    4,310Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    3,285
    
    
    
    3,367Deferred income taxes
    
    
    (3,125
    )
    
    
    (1,443
    )Gain (loss) on sale of property and equipment
    
    
    (3,538
    )
    
    
    10Noncash compensation
    
    
    1,742
    
    
    
    1,144Changes in operating assets and liabilities:Accounts receivable
    
    
    3,224
    
    
    
    (1,008
    )Inventories
    
    
    684
    
    
    
    (10,679
    )Prepaid expenses and other current assets
    
    
    (2,784
    )
    
    
    815Other noncurrent assets
    
    
    1,732
    
    
    
    1,923Accounts payable and accrued expenses
    
    
    9,865
    
    
    
    24Income taxes
    
    
    2,936
    
    
    
    1,779Other liabilities
    
    
    (8,597
    )
    
    
    659Net cash provided by operating activities
    
    
    13,467
    
    
    
    901Investing activities:Purchases of property, plant and equipment
    
    
    (8,979
    )
    
    
    (1,345
    )Proceeds from sale of property, plant and equipment
    
    
    9,796
    
    
    
    4Cash paid for business, net of cash received
    
    
    
    
    
    
    (51,250
    )Net cash provided by (used in) investing activities
    
    
    817
    
    
    
    (52,591
    )Financing activities:(Repayment of) proceeds from Soffe revolving credit facility, net
    
    
    (2,190
    )
    
    
    24,743Proceeds from long-term debt
    
    
    41,302
    
    
    
    36,099Repayment of long-term debt
    
    
    (53,077
    )
    
    
    (8,517
    )Repurchase of common stock
    
    
    
    
    
    
    (148
    )Proceeds from exercise of stock options
    
    
    447
    
    
    
    371Dividends paid
    
    
    (874
    )
    
    
    (733
    )Net cash (used in) provided by financing activities
    
    
    (14,392
    )
    
    
    51,815(Decrease) increase in cash
    
    
    (108
    )
    
    
    125Cash at beginning of period
    
    
    333
    
    
    
    203Cash at end of period
    
    $
    225
    
    
    $
    328Supplemental cash flow information:Cash paid during the period for interest
    
    $
    1,829
    
    
    $
    1,306Cash paid during the period for income taxes
    
    $
    4,917
    
    
    $
    874Noncash financing activityissuance of common stock
    
    $
    59
    
    
    $
    37
 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 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 and nine months ended April 2, 2005 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 for the year ended July 3, 2004 filed with the Securities and
Exchange Commission. Note CNew Accounting Standards On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123
(revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123® supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95, Statements of Cash Flows. Generally, the
approach in Statement 123® is similar to the approach described in Statement 123. However,
Statement 123® requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values. Pro forma disclosure
is no longer an alternative. Statement 123® must be adopted for annual periods beginning after June 15, 2005. Statement
123® applies to new awards and to awards modified, repurchased, or cancelled after the required
effective date, as well as to the unvested portion of awards outstanding as of the required
effective date (modified prospective application). We expect to adopt Statement 123® on July 3,
2005. We are currently evaluating the effect that the adoption of Statement 123® will have on
our financial position and results of operations (see Note H). In March 2005, the Securities and Exchange Commission released SEC Staff Accounting Bulletin
(SAB) No. 107, Share-Based Payment. SAB No. 107 provides the SEC staffs position regarding the
implementation of Statement 123®. SAB No. 107 contains interpretive guidance related to the
interaction between Statement 123® and certain SEC rules and regulations, as well as provides the
staffs views regarding the valuation of share-based payment transactions. We are currently
evaluating the effects that the adoption of SAB No. 107 will have on our financial position and
will be incorporating it as part of our adoption of Statement 123®. Note DSelling, General and Administrative Expense We include in selling, general and administrative expenses, costs incurred subsequent to the
receipt of finished goods at our distribution facilities, such as the cost of stocking,
warehousing, picking and packing, and shipping goods for delivery to our customers. For the third
quarter of fiscal years 2005 and 2004, distribution costs included in selling, general and
administrative expenses totaled $2.3 million and $2.0 million, respectively. For the first nine
months of fiscal years 2005 and 2004, distribution costs included in selling, general and
administrative expenses totaled $6.2 million and $5.2 million, respectively. The Soffe segment was
included in our results beginning on October 3, 2004. In addition, selling, general and
administrative expenses include costs related to sales associates, administrative personnel cost,
advertising and marketing expenses and general and administrative expenses. 6




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Note EInventories Inventories consist of the following: April 2,
    
    
    July 3,2005
    
    
    2004Raw materials
    
    $
    4,578
    
    
    $
    5,406Work in process
    
    
    23,485
    
    
    
    26,540Finished goods
    
    
    77,141
    
    
    
    73,942$
    105,204
    
    
    $
    105,888
 Raw materials at July 3, 2004 included raw cotton for the Delta segment and finished yarn for the
Soffe segment. In addition, it included direct materials for both segments. On December 27, 2004,
we sold our entire inventory located at our yarn manufacturing facility in Edgefield, South
Carolina to Parkdale (see Note M). Prior to the sale, raw cotton was the primary raw material in
the Delta segment. Subsequent to the sale, finished yarn became our primary raw material in both
the Delta and Soffe segments. Therefore, raw materials at April 2, 2005 included finished yarn and
direct materials for both the Delta and Soffe segments. 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. Borrowings under the Soffe Facility classified as current debt at April 2, 2005
and July 3, 2004 were $15.0 million and $17.2 million, respectively. 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. In conjunction with the sale of our Edgefield yarn manufacturing plant, on January 6, 2005, we
amended our Delta Facility to lower the Fixed Asset Loan Limit Amount from $10.0 million to $5.0
million. Note GIncome Taxes Our effective income tax rate for the nine months ended April 2, 2005 was 30.7%, compared to 32.4%
for the fiscal year ended July 3, 2004. During the quarter ended April 2, 2005, we decided to
permanently reinvest our foreign earnings in Honduras. Therefore, we reversed a $0.7 million tax
liability associated with the foreign earnings, resulting in the lower effective tax rate during
the quarter ended April 2, 2005, which increased diluted earnings per share by approximately $0.08
(adjusted to reflect the 2-for-1 stock split effective as of May 31, 2005). During the fiscal year
ended June 30, 2001, we recorded 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 32.4%
effective tax rate during fiscal year 2004, which increased diluted earnings per share by
approximately $0.11 (adjusted to reflect the 2-for-1 stock split effective as of May 31, 2005). We acquired the stock of M. J. Soffe Co. on October 3, 2003. Soffe made an election under Section
338(g) of the Internal Revenue Code with respect to the purchase to treat the stock purchase as an
asset purchase for Federal income tax purposes. Following the filing of our consolidated income
tax return for the fiscal year ended 2004, which includes the initial year of Soffe, we identified
certain adjustments to the Soffe opening balance sheet tax basis of assets and liabilities and
pursuant to Emerging Issues Task Force (EITF) 93-7, Uncertainties Related to Income Taxes in a
Purchase Combination, upon resolution of the uncertainties related to income taxes in a business
combination, we appropriately recorded the adjustments related to the tax assets and liabilities in
the quarter ended April 2, 2005. These adjustments resulted in an increase in deferred tax assets
of $1.9 million, an increase in taxes payable of $2.6 million and a reduction in other liabilities
of $0.7 million. 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 7




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models that were not developed for use in valuing employee stock options. 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 Ended
    
    
    Nine Months EndedApril 2,
    
    
    March 27,
    
    
    April 2,
    
    
    March 27,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    5,445
    
    
    $
    3,813
    
    
    $
    8,043
    
    
    $
    4,310Add: Stock-based
employee compensation
expense included in
reported net income,
net of related tax
effects
    
    
    391
    
    
    
    218
    
    
    
    695
    
    
    
    504Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all options and awards,
net of related tax
effects
    
    
    (263
    )
    
    
    (112
    )
    
    
    (730
    )
    
    
    (326
    )Pro forma net income
    
    $
    5,573
    
    
    $
    3,919
    
    
    $
    8,008
    
    
    $
    4,488Earnings per share *:Basicas reported
    
    $
    0.65
    
    
    $
    0.47
    
    
    $
    0.97
    
    
    $
    0.53Basicpro forma
    
    $
    0.67
    
    
    $
    0.48
    
    
    $
    0.96
    
    
    $
    0.55Dilutedas reported
    
    $
    0.64
    
    
    $
    0.46
    
    
    $
    0.95
    
    
    $
    0.52Dilutedpro forma
    
    $
    0.65
    
    
    $
    0.47
    
    
    $
    0.94
    
    
    $
    0.54
   *
    
    Adjusted to reflect 2-for-1 stock split effective as of May 31, 2005 Note IPurchase Contracts We have entered into agreements, and have fixed prices, to purchase yarn and finished apparel
products for use in our manufacturing operations. At April 2, 2005, minimum payments under these
contracts to purchase yarn and finished apparel products with non-cancelable contract terms were
$28.2 million and $1.6 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. Note KStockholders Equity Stock Repurchase Program 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 April
2, 2005. Since the inception of the Stock Repurchase Program, we have purchased 736,114 shares
(adjusted to reflect the 2-for-1 stock split effective as of May 31, 2005) of our common stock
pursuant to the program for an aggregate purchase price of $4.2 million. Quarterly Dividend Program On January 20, 2005, our Board of Directors declared a cash dividend of seven cents per share of
common stock (prior to adjustment to reflect the 2-for-1 stock split effective as of May 31, 2005)
pursuant to our quarterly dividend program. We paid the dividend on February 28, 2005 to 8




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shareholders of record as of the close of business on February 16, 2005. On April 21, 2005, our
Board declared a cash dividend of four cents per share of common stock payable after the stock
split (eight cents per share of common stock prior to the 2-for-1 stock split) on May 31, 2005 to
shareholders of record as of the close of business on May 18, 2005. Although the Board may
terminate or amend the program at any time, we currently expect to continue the 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. 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 April 2, 2005 and March 27,
2004, by operating segment, is as follows (in thousands): Corporate andDelta
    
    
    Soffe
    
    
    Unallocated
    
    
    ConsolidatedFiscal Year 2005:Net sales
    
    $
    36,037
    
    
    $
    22,921
    
    
    $
    (686
    )
    
    $
    58,272Segment operating income
    
    
    6,051
    
    
    
    2,057
    
    
    
    (140
    )
    
    
    7,968Segment assets
    
    
    96,645
    
    
    
    70,508
    
    
    
    (75
    )
    
    
    167,078Fiscal Year 2004:Net sales
    
    $
    36,325
    
    
    $
    22,568
    
    
    $
    (88
    )
    
    $
    58,805Segment operating income
    
    
    2,629
    
    
    
    2,845
    
    
    
    58
    
    
    
    5,532Segment assets
    
    
    96,769
    
    
    
    74,523
    
    
    
    
    
    
    
    171,292
 Information about our operations as of and for the nine months ended April 2, 2005 and March 27,
2004, by operating segment, is as follows (in thousands). The results for the nine months ended
March 27, 2004 include six months of operations from M. J. Soffe Co., which was acquired on October
3, 2003. Corporate andDelta
    
    
    Soffe
    
    
    Unallocated
    
    
    ConsolidatedFiscal Year 2005:Net sales
    
    $
    103,488
    
    
    $
    60,597
    
    
    $
    (2,318
    )
    
    $
    161,767Segment operating income
    
    
    7,997
    
    
    
    6,055
    
    
    
    (236
    )
    
    
    13,816Fiscal Year 2004:Net sales
    
    $
    95,701
    
    
    $
    39,633
    
    
    $
    (104
    )
    
    $
    135,230Segment operating income
    
    
    3,743
    
    
    
    3,539
    
    
    
    85
    
    
    
    7,367
 9




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The following reconciles the Segment Operating Income to the consolidated income before income
taxes for the three and nine months ended April 2, 2005 and March 27, 2004. Three Months Ended
    
    
    Nine Months EndedApril 2,
    
    
    March 27,
    
    
    April 2,
    
    
    March 27,2005
    
    
    2004
    
    
    2005
    
    
    2004Segment operating income
    
    $
    7,968
    
    
    $
    5,532
    
    
    $
    13,816
    
    
    $
    7,367Unallocated interest expense
    
    
    679
    
    
    
    799
    
    
    
    2,217
    
    
    
    1,846Consolidated income before taxes
    
    $
    7,289
    
    
    $
    4,733
    
    
    $
    11,599
    
    
    $
    5,521
 Note MSale of Yarn Manufacturing Plant On January 5, 2005, we completed the sale of our yarn manufacturing plant in Edgefield, South
Carolina to Parkdale America, LLC for $10 million in cash. In conjunction with the sale
transaction, we entered into a five-year agreement with Parkdale to supply our yarn requirements.
During this five-year period, we will purchase exclusively from Parkdale all yarn required by Delta
Apparel and our wholly owned subsidiary, M. J. Soffe Co., for use in our manufacturing operations
(excluding yarns that Parkdale does not manufacture as of the date of the agreement in the ordinary
course of its business). The purchase price of yarn will be based upon the cost of cotton plus a
fixed conversion cost. The sale of the Edgefield Plant resulted in a pre-tax financial gain of $3.6 million, or estimated
after-tax gain of $0.26 per diluted share (adjusted to reflect 2-for-1 stock split effective as of
May 31, 2005). This gain was recorded in the fiscal quarter ended April 2, 2005. In conjunction with the sale of the yarn manufacturing plant, on January 6, 2005, we amended our
Delta Facility to lower the Fixed Asset Loan Limit Amount from $10.0 million to $5.0 million. Note NTermination of Non-Qualified Deferred Compensation Program Our Board of Directors resolved to terminate our nonqualified deferred compensation plans pursuant
to the exit strategy guidelines of the American Jobs Creation Act of 2004. We expect to terminate
the plans by fiscal year-end. During the quarter ended April 2, 2005, we reclassified $2.0 million
of cash surrender value of life insurance from Other Noncurrent Assets to Prepaid Expenses and
Other Current Assets and $6.2 million of nonqualified deferred compensation liability from Other
Noncurrent Liabilities to Accounts Payable and Accrued Expenses. Note OSubsequent Event On April 21, 2005, the Board of Directors approved a 2-for-1 stock split of our common stock. On
May 31, 2005, shareholders of record on May 18, 2005 will receive one additional share of common
stock for each share held of record. All references in the financial statements with regard to the
number of shares or average number of shares of common stock and related prices, dividends and per
share amounts have been restated to reflect the 2-for-1 stock split. 
 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. 10




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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 Sales for our third quarter were $58.3 million compared to $58.8 million in the third quarter of
last year. While net sales were down slightly compared to the prior year, we had a 330 basis point
improvement in our gross margins from our second quarter of fiscal 2005. We achieved the gross
margin improvement through price increases in our core fashion apparel styles, a more favorable
sales mix of higher margin goods, and through several key improvements to our manufacturing
process, including running our facilities at a higher capacity and decreasing our off-quality
production. Revenue in the Delta business was $36.0 million compared to $36.3 million in the third quarter of
the prior year. This slight decrease was primarily the result of a temporary reduction in
distribution capacity due to the transition of our primary distribution center in Knoxville,
Tennessee to a new facility in Clinton, Tennessee. In response to the lower capacity during the
quarter, we curtailed sales of basic commodity tees, while we continued to grow sales of higher
margin products. In addition, we increased our private label sales to 25% of our sales, from 12% of
our sales in the prior year quarter. Operating income in the Delta business increased to $6.1
million, or 16.8% of sales. Included in these results was the $3.6 million gain on the sale of our
yarn manufacturing facility in Edgefield, South Carolina. We closed on the sale of the Edgefield
plant in January of this year. While the transition to our new distribution center limited our shipping capacity during the third
quarter, we are now fully functional and are seeing improvements in our distribution process. Our
new distribution center in Clinton, Tennessee is a modern facility that should enable us to improve
customer service and lower our variable distribution cost. Additionally, we are now shipping from
our newest distribution center located in Cranbury, N.J. This facility will be shipping both Delta
and Soffe products. This joint Delta-Soffe facility is a key enhancement to our operations and
will provide our customers with a higher level of service, which we expect to result in an
expansion of our customer base in the northeast United States. Revenues in the Soffe business for the third quarter increased approximately 2% to $22.9 million
compared to the prior year quarter. In the quarter, we shipped approximately $1 million of
close-out products. While this impacted our gross margins for the quarter, it should improve our
inventory utilization. Demand appears good for our expanded and improved Spring and Fall product
offerings, and we will continue to focus on the growth of our Soffe brand. In February 2005 we announced the closing of our Soffe sewing facility in Bladenboro, North
Carolina, which ceased sewing production in April 2005. In addition, we have recently announced
reductions to our sewing production in our Fayetteville, North Carolina facility, as we continue to
transition our domestic sewing production to offshore facilities. We will, however, maintain
appropriate levels of sewing production in the United States to support our military programs,
which require domestic manufacturing. We will continue to evaluate opportunities to lower our
manufacturing costs to improve our gross margins. During the quarter, we increased our
manufacturing production in both the Delta and Soffe businesses. We expect to continue to increase
our production levels through fiscal year 2006. We are encouraged by the growth opportunities in all key segments of our business. With our new
distribution centers now fully operational, we are able to provide improved service to our
customers and offer one day shipping to an expanded portion of the U.S. population base. We are
concentrating on expanding our distribution at higher price points with new product. Our
management team is focused on making Soffe a leaner, more profitable operation and we are
encouraged by initial sales demands for our new Spring and Fall products. Our manufacturing and
process improvement teams continue to make strides in improving our manufacturing efficiencies and
in lowering our production of off-quality merchandise. We believe that these initiatives will
continue to make Delta Apparel a more competitive player in the global marketplace for activewear
apparel. RESULTS OF OPERATIONS Net sales for the third quarter of fiscal year 2005 decreased 0.9% to $58.3 million compared to
$58.8 million for the third quarter of the prior year. The sales decrease primarily resulted from
a decrease in the Delta business, resulting from a 7.5% decrease in unit sales, partially offset by
higher average selling prices. During the quarter, we transitioned from our primary distribution
center in Knoxville, Tennessee to a new facilty in Clinton, Tennessee. This transition temporarily
reduced our distribution capacity during the quarter, resulting in our decreased unit sales.
Although pricing is still competitive in the marketplace, pricing on most styles was higher than in
the prior year quarter reflecting increased raw material cost. The Soffe business contributed
$22.9 million in sales, a 1.6% increase from sales in the prior years quarter. For the nine
months ended April 2, 2005, net sales increased 19.6% to $161.8 million compared to $135.2 million
in the prior year. The increase in sales was primarily the result of the Soffe sales in the first
quarter of fiscal 2005, which accounted for $22.0 million, as the acquisition of Soffe was
completed on October 3, 2003. Gross profit as a percentage of net sales increased to 25.3% in the third quarter of fiscal year
2005 from 24.5% in the third quarter of the prior year. The 80 basis point improvement in gross
margins is primarily driven by higher prices in our core fashion apparel styles, increased volume 11




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of higher margin goods, and improvements to our manufacturing process. These improvements were
partially offset by higher cost raw materials flowing through cost of sales, negatively impacting
the quarter by approximately $1.5 million compared to the prior year quarter. Gross margins in the
Delta business improved as a result of a focused shift from sales of basic commodity tees to sales
of higher margin products, in a response to our lower distribution capacity during the quarter.
Gross margins in the Soffe business declined during the quarter. We shipped approximately $1
million of close-out products from our Soffe business as a step to improve our inventory
utilization, which impacted our gross margins during the quarter. Gross profit as a percentage of
net sales increased to 23.0% in the first nine months of fiscal year 2005 from 20.3% in the same
period of the prior year, resulting primarily from the higher gross profits associated with M. J.
Soffe Co., which were included for six months in the first nine months of fiscal year 2004. Gross
margins as a percentage of sales are higher in the Soffe segment than the Delta segment due to the
higher average selling prices achieved on the branded products, partially offset by higher
manufacturing costs. Our gross margins may not be comparable to other companies, since some
entities include costs related to their distribution network in cost of goods sold and we exclude a
portion of them from gross margin, including them in selling, general and administrative expenses. Selling, general and administrative expenses, including the provision for bad debts, for the third
quarter of fiscal year 2005 were $10.4 million, or 17.8% of sales, compared to $8.9 million, or
15.1% of sales for the same period in the prior year. The 270 basis point increase in selling,
general and administrative expenses was primarily the result of increased general and
administrative expenses. General and administrative expenses increased primarily as a result of
costs associated with the sale of our Edgefield facility during the quarter and increased incentive
compensation costs resulting from the increase in the price of our common stock. In addition,
distribution expenses increased primarily as a result of the startup costs associated with the new
Clinton, Tennessee and Cranbury, New Jersey distribution facilities. We expect distribution costs
to increase approximately $1.5 million annually as a result of our New Jersey Distribution center.
Selling, general and administrative expenses, including the provision for bad debts, for the first
nine months of fiscal year 2005 were $26.9 million, or 16.6% of sales, compared to $20.1 million,
or 14.9% of sales for the same period in the prior year. The increase as a percentage of sales
primarily relates to the inclusion of the Soffe operations in our results for the full nine month
period during fiscal year 2005. Selling costs as a percentage of net sales are higher in the
Soffe segment primarily due to the additional staffing, higher commissions and increased
advertising expenses associated with selling branded apparel products. Other income for the first nine months of fiscal year 2005 was $3.6 million compared to $29
thousand for the first nine months of the prior year. On January 5, 2005, we completed the sale of
our yarn manufacturing plant in Edgefield, South Carolina to Parkdale America, LLC for $10 million
in cash. The sale of the Edgefield Plant resulted in a pre-tax financial gain of $3.6 million, or
estimated after-tax gain of $0.26 per diluted share (adjusted to reflect 2-for-1 stock split
effective as of May 31, 2005). Operating income for the third quarter of fiscal year 2005 increased to $8.0 million, an increase
of $2.4 million, or 44.0%, from $5.5 million for the third quarter of the prior year. This
increase was the result of the $3.6 million gain on the sale of our yarn plant, partially offset by
the higher selling, general and administrative expenses. Operating income for the first nine
months of fiscal year 2005 was $13.8 million, an increase of $6.4 million, or 87.5%, from $7.4
million for the first nine months of the prior year. The increase in operating income for the nine
months ended April 2, 2005 was primarily the result of the $3.6 million gain on the sale of our
yarn plant in our third fiscal quarter. In addition, the Soffe business was included in our
operating results for the full nine months of fiscal year 2005. The prior year results included
the operations of Soffe for six months, as M. J. Soffe Co. was acquired on October 3, 2003. Net interest expense for the third quarter of fiscal year 2005 was $0.7 million compared to $0.8
million in the third quarter of the prior year. The decrease in interest expense resulted from
lower debt levels, partially offset by higher interest rates. Interest expense for the first nine
months of fiscal year 2005 was $2.2 million, an increase of $0.4 million, or 20.1%, from $1.8

million for the first nine months of the prior year. The higher debt levels in the first quarter
of fiscal year 2005, as compared to the first quarter of fiscal year 2004, resulting from the
acquisition of M. J. Soffe Co. on October 3, 2003, drove the higher interest expense. Our effective income tax rate for the nine months ended April 2, 2005 was 30.7%, compared to 32.4%
for the fiscal year ended July 3, 2004. During the quarter ended April 2, 2005, we decided to
permanently reinvest our foreign earnings in Honduras and therefore reversed a $0.7 million tax
liability associated with the foreign earnings, resulting in the lower effective tax rate during
fiscal year 2005. During the fiscal year ended June 30, 2001, we recorded 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 32.4% effective tax rate during fiscal year 2004. Net income for the third quarter of fiscal year 2005 was $5.4 million, an increase of $1.6 million,
or 42.8%, compared to $3.8 million in the prior year third fiscal quarter. Net income for the
first nine months of fiscal year 2005 was $8.0 million, an increase of $3.7 million, or 86.6%, from
net income of $4.3 million for the first nine months of the prior year. The prior year results
included the operations of Soffe for six months, as M. J. Soffe Co. was acquired on October 3,
2003. Accounts receivable decreased $3.2 million from July 3, 2004 to $35.4 million on April 2, 2005.
The decrease was primarily the result of lower sales during the quarter ended April 2, 2005
compared to the quarter ended July 3, 2004. 12




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Inventories at April 2, 2005 were $105.2 million, consistent with the inventory at July 3, 2004.
In the first six months of fiscal year 2005, we adjusted production schedules to manage our overall
inventory levels. During the quarter ended April 2, 2005, we increased our manufacturing
production in both the Delta and Soffe businesses. Although we are not yet at maximum capacity, we
expect to continue to increase our production levels through fiscal year 2006. Although we expect
to increase production over the next several quarters, we expect our inventory levels will trend
downward as we improve our inventory utilization. Capital expenditures in the third quarter of fiscal year 2005 were $3.5 million compared to $0.3
million in the third quarter of the prior year. Capital expenditures for the quarter ended April
2, 2005 primarily related to the opening of our two distribution facilities in Clinton, Tennessee
and Cranbury, New Jersey. Capital expenditures in the first nine months of fiscal year 2005
totaled $9.0 million compared to $1.3 million in the first nine months of the prior year. The
expenditures during fiscal year 2005 primarily related to the two new distribution centers, and
$1.8 million related to the Edgefield yarn spinning facility, in addition to increasing capacity
and lowering costs in our existing facilities. The expenditures during fiscal year 2004 primarily
related to increasing capacity and lowering costs in our existing textile facilities. Capital
expenditures for fiscal year 2005 are expected to total approximately $10 million, of which
approximately $5 million will be related to the new distribution centers. We expect to spend
approximately $4 million annually to continue increasing capacity and lowering costs in our
existing facilities. In addition, we may spend additional capital in fiscal year 2006 expanding
our distribution network and manufacturing operations. 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. On October 3, 2003, we entered into an Amended and Restated Loan and Security Agreement with
Wachovia Bank, N. A. (successor by merger to 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. 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 our Clinton, Tennessee
distribution center. In conjunction with the sale of the yarn manufacturing plant, on January 6,
2005, we amended our Delta Facility to lower the Fixed Asset Loan Limit Amount from $10.0 million
to $5.0 million. Also on October 3, 2003, M. J. Soffe Co. entered into a Loan and Security Agreement with Wachovia
Bank, N. A. (successor by merger to 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 restricted net assets of M. J. Soffe Co. do not exceed 25%
of the consolidated net assets as of July 3, 2004. 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 April 2, 2005, we had
$30.5 million outstanding under our credit facilities at an average interest rate of 5.1%. In addition to the credit facilities with Wachovia Bank, N. A., we have a seller note payable to
the former Soffe shareholders pursuant to the Stock Purchase Agreement dated as of October 3, 2003.
At April 2, 2005, we had $5.6 million outstanding under the note at an interest rate of 8.0%. During the quarter ended January 1, 2005, we paid the former Soffe shareholders $1.0 million
pursuant to the First Amendment to the Amended and Restated Stock Purchase Agreement and Agreement
regarding Earnout Amounts for Bonus Year 2004. Additional amounts are payable to the former
shareholders of M. J. Soffe if specified financial performance targets are met by M. J. Soffe Co.
during annual periods beginning on September 28, 2004 and ending on September 30, 2006 (the
Earnout Amounts.) The Earnout Amounts are capped at a maximum aggregate amount of $4.0 million
per year and are payable five business days subsequent to the filing of the Form 10-Q for the first
fiscal quarter of fiscal years 2006 and 2007. Based on current projections, we anticipate paying
approximately $2.0 million in Earnout Amount in November 2005. The decrease in the estimated
Earnout Amount is based upon our current outlook for the twelve months ending October 1, 2005. Operating Cash Flows Net cash provided by operating activities was $13.4 million and $0.9 million for the first nine
months of fiscal years 2005 and 2004, 13




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respectively. Our cash flow from operating activities is primarily due to net income plus
depreciation and changes in working capital. We monitor changes in working capital by analyzing
our 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 plus
depreciation and an increase in accounts payable and accrued expenses, offset partially by a
decrease in other liabilities. Accounts payable and accrued expenses increased $9.9 million during
the nine months ended April 2, 2005, primarily as a result of the decision to terminate our
non-qualified deferred compensation plans. This decision was made primarily as a result of the new
restrictions put in place by the American Jobs Creation Act of 2004. As a result, we reclassified
$6.2 million of long-term deferred compensation liability to current accrued liabilities from other
noncurrent liabilities. In addition, accounts payable increased primarily as a result of having
longer terms for our yarn purchases compared to buying cotton for the Edgefield plant, which we
sold in January 2005. We are also being more aggressive on terms with our other vendors. The cash
provided by operating activities in fiscal year 2004 was primarily the result of net income plus
depreciation, a decrease in noncurrent assets and an increase in income taxes, offset partially by
increases in inventory and accounts receivable. In December 2003, we received a net $7.7 million
cash refund of federal taxes, resulting from a tax loss generated as a result of no value being
allocated in the purchase price allocation to the property, plant and equipment of M. J. Soffe Co. Investing Cash Flows During the nine months ended April 2, 2005, we used $9.0 million in cash for capital expenditures
and received $9.8 million in proceeds for the sales of property, plant and equipment. The
expenditures during fiscal year 2005 primarily related to the two new distribution centers, and
$1.8 million related to the Edgefield yarn spinning facility, in addition to increasing capacity
and lowering costs in our existing facilities. The proceeds from the sale of property, plant and
equipment primarily related to the sale of our Edgefield plant which we sold in January 2005.
During the nine months ended March 27, 2004, investing activities used $52.6 million in cash and
principally represented the acquisition of M. J. Soffe Co. We spent $1.3 million in capital
expenditures during the first nine months of fiscal 2004, 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, of which approximately $5 million will be related to
the new distribution centers. We expect to spend approximately $4 million annually to continue
increasing capacity and lowering costs in our existing facilities. In addition, we may spend
additional capital in fiscal year 2006 expanding our distribution network and manufacturing
operations. Financing Activities For the first nine months of fiscal 2005 we used $14.4 million in cash in financing activities,
primarily related to the repayment of long-term debt. For the first nine months of fiscal 2004,
financing activities provided $51.8 million principally from our credit facilities and primarily
related to the acquisition of M. J. Soffe Co. We paid dividends to our shareholders totaling $0.9
million and $0.7 million in the first nine months of 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 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 April
2, 2005. Since the inception of the Stock Repurchase Program, we have purchased 736,114 shares
(adjusted to reflect the 2-for-1 stock split effective as of May 31, 2005) of our common stock
pursuant to the program for an aggregate of $4.2 million. Dividend Program On January 20, 2005, our Board of Directors declared a cash dividend of seven cents per share of
common stock (prior to adjustment to reflect the 2-for-1 stock split effective as of May 31, 2005)
pursuant to our quarterly dividend program. We paid the dividend on February 28, 2005 to
shareholders of record as of the close of business on February 16, 2005. On April 21, 2005, our
Board declared a cash dividend of four cents per share of common stock payable after the stock
split (eight cents per share of common stock prior to the 2-for-1 stock split) on May 31, 2005 to
shareholders of record as of the close of business on May 18, 2005. Although the Board may
terminate or amend the program at any time, we currently expect to continue the quarterly dividend
program. Stock Split On April 21, 2005, the Board of Directors approved a 2-for-1 stock split of our common stock. On
May 31, 2005, shareholders of record on May 18, 2005 will receive one additional share of common
stock for each share held of record. All references in the financial statements with 14




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regard to the number of shares or average number of shares of common stock and related prices,
dividends and per share amounts have been restated to reflect the 2-for-1 stock split. 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 our Annual Report on Form
10-K for our fiscal year ended July 3, 2004. There have been no changes in our critical accounting
policies since the filing of that Annual Report. 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, shipment 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. NEW ACCOUNTING STANDARDS On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123
(revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123® supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95, Statements of Cash Flows. Generally, the
approach in Statement 123® is similar to the approach described in Statement 123. However,
Statement 123® requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values. Pro forma disclosure
is no longer an alternative. 15




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Statement 123® must be adopted for annual periods beginning after June 15, 2005. Statement
123® applies to new awards and to awards modified, repurchased, or cancelled after the required
effective date, as well as to the unvested portion of awards outstanding as of the required
effective date (modified prospective application). We expect to adopt Statement 123® on July 3,
2005. We are currently evaluating the effect that the adoption of Statement 123® will have on
our financial position and results of operations (see Note H). In March 2005, the Securities and Exchange Commission released SEC Staff Accounting Bulletin
(SAB) No. 107, Share-Based Payment. SAB No. 107 provides the SEC staffs position regarding the
implementation of Statement 123®. SAB No. 107 contains interpretive guidance related to the
interaction between Statement 123® and certain SEC rules and regulations, as well as provides the
staffs views regarding the valuation of share-based payment transactions. We are currently
evaluating the effects that the adoption of SAB No. 107 will have on our financial position and
will be incorporating it as part of our adoption of Statement 123®. 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. The permit
modification became effective February 1, 2005. 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. We are currently in compliance with the effluent color standard that the
permit requires as of October 2005. Our NPDES permit will be subject to renewal in the spring of
2006. We are currently evaluating the future cost to comply with the modified permit. Although we do not
believe that the cost to comply with the modified permit will be material to the financial
condition of the Company, there can be no assurance of this. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk COMMODITY RISK SENSITIVITY On January 5, 2005, in conjunction with the sale of our yarn spinning facility in Edgefield, South
Carolina, we entered into a five-year agreement with Parkdale to supply our yarn requirements.
During this five-year period, we will purchase from Parkdale all yarn required by Delta Apparel and
our wholly owned subsidiary, M. J. Soffe Co., for use in our manufacturing operations (excluding
yarns that Parkdale does not manufacture as of the date of the agreement in the ordinary course of
its business and temporary Parkdale capacity restraints). The purchase price of yarn will be
based upon the cost of cotton plus a fixed conversion cost. Thus, we are subject to the commodity
risk of cotton prices and cotton price movements which could result in unfavorable yarn pricing for
us. We fix the cotton prices as a component of the purchase price of yarn with Parkdale, pursuant
to the supply agreement, in advance of the shipment of finished yarn from Parkdale. Prices are set
according to prevailing prices, as reported by the New York Cotton Exchange, at the time we elect
to fix specific cotton prices. Yarn with respect to which we have fixed cotton prices at April 2, 2005 was valued at $28.2
million, and is scheduled for delivery between April 2005 and December 2005. At April 2, 2005, a
10% decline in the market price of the cotton covered by our fixed price yarn would have had a
negative impact of approximately $2.8 million on the value of the yarn. We may 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 April 2,
2005. INTEREST RATE SENSITIVITY Our credit agreements provide that outstanding amounts bear interest at variable rates. If the
amount of outstanding indebtedness at April 2, 2005 under the revolving credit facilities had been
outstanding during the entire three months ended April 2, 2005 and the interest rate on this
outstanding indebtedness were increased by 100 basis points, our interest expense would have
increased by approximately $76,000, or 11.2%, 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 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. 16




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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 April 2, 2005, and, based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these
controls and procedures were effective at the evaluation date. During our third fiscal quarter,
there were no changes to our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, that control. Our disclosure controls and procedures are designed to provide reasonable assurance 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 provide reasonable assurance 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  (a)
    Exhibits.  10.30*
    Delta Apparel, Inc. 2004 Non-Employee Director Stock Plan.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. * We are filing Exhibit 10.30 to replace Exhibit 10.30 that we filed in our Quarterly Report on
Form 10-Q for the period ended January 1, 2005. 17




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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)May 10, 2005
    
    
    
    By: /s/ Herbert M. MuellerDate
    
    
    
    Herbert M. MuellerVice President, Chief Financial Officer and Treasurer
 18