##### 



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 1934For the quarterly period ended March 27, 2004ORo   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. x o
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). o x
 As of March 30, 2004, there were outstanding 4,111,399 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
March 27, 2004 and June 28, 2003
    
    
    3Condensed Consolidated Statements of Income
Three months and nine months ended March 27, 2004 and March 29, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows
Nine months ended March 27, 2004 and March 29, 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    10-13Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    13-14Item 4.
    
    Controls and Procedures
    
    
    14PART II.
    
    Other InformationItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    14Signatures
    
    
    
    
    15Exhibits
    
    
    
    
    16-19
 2




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##### 



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)March 27,
    
    June 28,2004
    
    2003AssetsCurrent assets:Cash
    
    $
    328
    
    
    $
    203Accounts receivable, net
    
    
    36,569
    
    
    
    22,196Inventories
    
    
    109,809
    
    
    
    47,174Prepaid expenses and other current assets
    
    
    1,059
    
    
    
    1,689Deferred income taxes
    
    
    1,175
    
    
    
    620Income taxes receivable
    
    
    
    
    
    
    434Total current assets
    
    
    148,940
    
    
    
    72,316Property, plant and equipment, net
    
    
    20,041
    
    
    
    22,077Deferred income taxes
    
    
    102
    
    
    
    Other assets
    
    
    2,209
    
    
    
    54Total assets
    
    $
    171,292
    
    
    $
    94,447Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    25,002
    
    
    $
    16,033Income taxes payable
    
    
    1,346
    
    
    
    Current portion of long-term debt
    
    
    28,343
    
    
    
    2,000Total current liabilities
    
    
    54,691
    
    
    
    18,033Long-term debt
    
    
    33,847
    
    
    
    7,865Deferred income taxes
    
    
    
    
    
    
    1,162Other liabilities
    
    
    12,948
    
    
    
    1,418Total liabilities
    
    
    101,486
    
    
    
    28,478Stockholders 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 4,111,399 and 4,037,080
shares outstanding as of March 27, 2004 and June 28, 2003,
respectively.
    
    
    48
    
    
    
    48Additional paid-in capital
    
    
    53,889
    
    
    
    53,889Retained earnings
    
    
    24,051
    
    
    
    21,007Treasury stock712,087 and 786,406 shares as of March 27, 2004
and June 28, 2003, respectively.
    
    
    (8,182
    )
    
    
    (8,975
    )Total stockholders equity
    
    
    69,806
    
    
    
    65,969Total liabilities and stockholders equity
    
    $
    171,292
    
    
    $
    94,447
 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 EndedMarch 27,2004
    
    March 29,2003
    
    March 27,2004
    
    March 29,2003Net sales
    
    $
    58,805
    
    
    $
    33,870
    
    
    $
    135,230
    
    
    $
    92,755Cost of goods sold
    
    
    44,374
    
    
    
    27,755
    
    
    
    107,807
    
    
    
    75,515Gross profit
    
    
    14,431
    
    
    
    6,115
    
    
    
    27,423
    
    
    
    17,240Selling, general and administrative expenses
    
    
    8,771
    
    
    
    3,311
    
    
    
    20,049
    
    
    
    9,147Provision for bad debts
    
    
    108
    
    
    
    175
    
    
    
    36
    
    
    
    207Other expense (income)
    
    
    20
    
    
    
    12
    
    
    
    (29
    )
    
    
    154Operating income
    
    
    5,532
    
    
    
    2,617
    
    
    
    7,367
    
    
    
    7,732Interest expense, net
    
    
    799
    
    
    
    209
    
    
    
    1,846
    
    
    
    527Income before income taxes
    
    
    4,733
    
    
    
    2,408
    
    
    
    5,521
    
    
    
    7,205Income tax expense
    
    
    920
    
    
    
    923
    
    
    
    1,211
    
    
    
    2,774Net income
    
    $
    3,813
    
    
    $
    1,485
    
    
    $
    4,310
    
    
    $
    4,431Earnings per shareBasic
    
    $
    0.93
    
    
    $
    0.37
    
    
    $
    1.06
    
    
    $
    1.09Diluted
    
    $
    0.91
    
    
    $
    0.35
    
    
    $
    1.04
    
    
    $
    1.05Weighted average number of shares outstanding
    
    
    4,089
    
    
    
    4,053
    
    
    
    4,065
    
    
    
    4,056Dilutive effect of stock options
    
    
    99
    
    
    
    154
    
    
    
    97
    
    
    
    149Weighted average number of shares assuming dilution
    
    
    4,188
    
    
    
    4,207
    
    
    
    4,162
    
    
    
    4,205
 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) Nine Months EndedMarch 27,
    
    March 29,2004
    
    2003Operating activities:Net income
    
    $
    4,310
    
    
    $
    4,431Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation
    
    
    3,367
    
    
    
    4,425Deferred income taxes
    
    
    (1,443
    )
    
    
    446Loss on sale of property and equipment
    
    
    10
    
    
    
    34Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,008
    )
    
    
    2,574Inventories
    
    
    (10,679
    )
    
    
    (14,890
    )Prepaid expenses and other current assets
    
    
    815
    
    
    
    90Other noncurrent assets
    
    
    1,923
    
    
    
    (65
    )Accounts payable and accrued expenses
    
    
    1,168
    
    
    
    979Income taxes
    
    
    1,779
    
    
    
    (2,527
    )Other liabilities
    
    
    659
    
    
    
    248Net cash provided by (used in) operating activities
    
    
    901
    
    
    
    (4,255
    )Investing activities:Purchases of property, plant and equipment
    
    
    (1,345
    )
    
    
    (3,659
    )Proceeds from sale of property, plant and equipment
    
    
    4
    
    
    
    35Cash paid for business, net of cash received
    
    
    (51,250
    )
    
    
    Net cash used in investing activities
    
    
    (52,591
    )
    
    
    (3,624
    )Financing activities:Proceeds from credit facilities, net
    
    
    45,579
    
    
    
    7,742Proceeds from long-term financing
    
    
    6,746
    
    
    
    (1,500
    )Repurchase of common stock
    
    
    (148
    )
    
    
    (1,919
    )Proceeds from exercise of stock options
    
    
    371
    
    
    
    299Dividends paid
    
    
    (733
    )
    
    
    (617
    )Net cash provided by financing activities
    
    
    51,815
    
    
    
    4,005Increase (decrease) in cash
    
    
    125
    
    
    
    (3,874
    )Cash at beginning of period
    
    
    203
    
    
    
    4,102Cash at end of period
    
    $
    328
    
    
    $
    228Supplemental cash flow information:Cash paid during the period for interest
    
    $
    1,306
    
    
    $
    364Cash paid during the period for income taxes
    
    $
    874
    
    
    $
    4,788Noncash financing activityissuance of common stock
    
    $
    37
    
    
    $
    710
 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 The interim condensed consolidated financial statements for the three and nine
months ended March 27, 2004 and March 29, 2003, included herein, have been
prepared 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 accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and nine months ended March 27, 2004 are not necessarily indicative
of the results that may be expected for the year ending July 3, 2004. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Companys annual report on Form 10-K for the
year ended June 28, 2003, filed with the Securities and Exchange Commission. Note BInventories Inventories consist of the following: March 27,
    
    June 28,2004
    
    2003Raw materials
    
    $
    5,223
    
    
    $
    2,895Work in process
    
    
    29,499
    
    
    
    16,580Finished goods
    
    
    75,087
    
    
    
    27,699$
    109,809
    
    
    $
    47,174
 Note CAcquisition On October 3, 2003, Delta Apparel completed the acquisition of all of the
outstanding capital stock of M. J. Soffe Co., a North Carolina corporation (the
Acquisition). The Acquisition was consummated by means of a stock purchase
transaction pursuant to which MJS Acquisition Company, a North Carolina
corporation and newly-formed, wholly-owned subsidiary of Delta Apparel (MJS),
acquired all of the outstanding capital stock of M. J. Soffe Co. from the
shareholders of M. J. Soffe Co., James F. Soffe, John D. Soffe, and Anthony M.
Cimaglia (collectively, the Individuals), pursuant to an Amended and Restated
Stock Purchase Agreement (the Stock Purchase Agreement) dated as of October
3, 2003 by and among Delta Apparel, MJS, M. J. Soffe Co., and the Individuals.
Immediately following the Acquisition, M. J. Soffe Co. was merged with and into
MJS (the Merger), with MJS as the surviving corporation in the Merger, and
MJSs name was changed to M. J. Soffe Co. The aggregate consideration paid to the Individuals for all of the outstanding
capital stock of M. J. Soffe Co. consisted of (i) aggregate cash payments of
approximately $43.5 million; and (ii) the issuance of a promissory note to the
Individuals in the aggregate principal amount of $8 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 $12 million. 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. 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 requirement from two 50% owned facilities 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 Delta Apparel 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 Deltas existing line of
credit (the Delta Facility) was increased to $40 million, which represents a
$5 million increase in Delta Apparels predecessor credit facility. 6




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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 acquisition of the M. J. Soffe Co. is an important part of Delta Apparels
expansion strategy. The addition of the Soffe business to Delta Apparel
represents an opportunity to participate in four additional distinct channels
of distribution for activewear products. The Company believes the
manufacturing, distribution, and marketing synergies between the companies will
allow both operations to expand at a faster pace than would be possible on a
stand-alone basis. The results of M. J. Soffe Co.s operations have been included in the
consolidated financial statements since the acquisition date. The consolidated
balance sheet reflects the initial purchase price allocation of the assets
acquired and the liabilities assumed. The initial purchase price allocation
does not result in goodwill being recorded by the Company. The Company is
currently in the process of finalizing the valuations of the assets acquired
and liabilities assumed and thus the initial allocation of the purchase price
is subject to change. The purchase price allocation will be finalized upon
refinement of certain preliminary estimates. 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 and fiscal year 2003. 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. Three Months Ended
    
    Nine Months EndedMarch 27,2004
    
    March 29,2003
    
    March 27,2004
    
    March 29,2003Net sales
    
    $
    58,805
    
    
    $
    55,406
    
    
    $
    160,559
    
    
    $
    156,754Net income
    
    
    3,813
    
    
    
    1,994
    
    
    
    6,273
    
    
    
    8,422Net income, per shareBasic
    
    $
    0.93
    
    
    $
    0.49
    
    
    $
    1.54
    
    
    $
    2.08Diluted
    
    $
    0.91
    
    
    $
    0.47
    
    
    $
    1.51
    
    
    $
    2.00
 Note E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,
the Company is 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 the
customers are forwarded to the Companys 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, the Company is classifying borrowings under
the Delta Facility as noncurrent debt. Note FIncome Taxes The effective income tax rate for the nine months ended March 27, 2004 was
21.9%, compared to 38.3% for the fiscal year ended June 28, 2003. During the
quarter ended March 27, 2004, the statute of limitations expired on the tax
years covered by the tax sharing agreement between the Company and Delta
Woodside Industries, Inc. As a result, the Company reversed its $0.9 million
tax liability associated with the tax sharing agreement, resulting in the lower
effective tax rate. Note GStock Options and Incentive Stock Awards The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under
FASB 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. 7




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##### 



The following table illustrates the effect on net income and earnings per share
as if the fair value based method had been applied to all outstanding and
unvested options and awards in each period. Three Months Ended
    
    Nine Months EndedMarch 27,2004
    
    March 29,2003
    
    March 27,2004
    
    March 29,2003Net income, as reported
    
    $
    3,813
    
    
    $
    1,485
    
    
    $
    4,310
    
    
    $
    4,431Add: Stock-based
employee compensation
expense included in
reported net income, net
of related tax effects
    
    
    218
    
    
    
    110
    
    
    
    504
    
    
    
    374Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all options and awards,
net of related tax
effects
    
    
    (112
    )
    
    
    (81
    )
    
    
    (326
    )
    
    
    (244
    )Pro forma net income
    
    $
    3,919
    
    
    $
    1,514
    
    
    $
    4,488
    
    
    $
    4,561(Loss) earnings per share:Basicas reported
    
    $
    0.93
    
    
    $
    0.37
    
    
    $
    1.06
    
    
    $
    1.09Basicpro forma
    
    $
    0.96
    
    
    $
    0.37
    
    
    $
    1.10
    
    
    $
    1.12Dilutedas reported
    
    $
    0.91
    
    
    $
    0.35
    
    
    $
    1.04
    
    
    $
    1.05Dilutedpro forma
    
    $
    0.94
    
    
    $
    0.36
    
    
    $
    1.08
    
    
    $
    1.08
 Note HPurchase Contracts The Company has entered into agreements, and has fixed prices, to purchase
cotton, yarn and finished apparel products for use in its manufacturing
operations. At March 27, 2004, minimum payments under these contracts to
purchase cotton, yarn and finished apparel products with non-cancelable
contract terms were $18.1 million, $2.4 million and $1.9 million, respectively. Note IComputation of Basic and Diluted Net Earnings per Share (EPS) Basic net earnings per share is computed 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 the Companys Stock Option Plan and the
Companys Incentive Stock Award Plan. The weighted average shares do not include securities that would be
anti-dilutive for each of the periods presented. Note JStockholders Equity Stock Repurchase Program
The Company has authorization from the 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 management. The Company
did not purchase shares of Delta Apparel common stock during the three months
ended March 27, 2004. Since the inception of the Stock Repurchase Program, the
Company has purchased 368,057 shares of Delta Apparel common stock pursuant to
the program for an aggregate of $4.2 million. Quarterly Dividend Program
On January 28, 2004, the Board declared a cash dividend pursuant to the
Companys quarterly dividend program of six cents per share of common stock.
The dividend was paid on February 23, 2004 to shareholders of record as of the
close of business on February 11, 2004. On April 28, 2004, the Board approved a
17% increase in its regular quarterly dividend. The Board declared a cash
dividend of seven cents per share of common stock payable May 24, 2004 to
shareholders of record as of the close of business on May 12, 2004. Although
the Board may terminate or amend the program at any time, the Company currently
expects to continue the quarterly dividend program. 8




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##### 



Note KSegment Reporting

The Company operates its 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. The Companys management evaluates performance and allocates resources based on
profit or loss from operations before interest, income taxes and special
charges (Segment Operating Income). Segment Operating Income as presented by
Delta Apparel may not be comparable to similarly titled measures used by other
companies. The accounting policies of the reportable segments are the same as
those described in Note 1 to the consolidated financial statements in the
Annual Report on Form 10-K for the year ended June 28, 2003. Intercompany
transfers between operating segments were not material. Information about the Companys operations as of and for the three months ended
March 27, 2004 and March 29, 2003, by operating segment, is as follows (in
thousands): Corporate andDelta
    
    Soffe
    
    Unallocated
    
    ConsolidatedFiscal 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
    
    
    
    
    
    
    
    171,292Fiscal Year 2003:Net sales
    
    $
    33,870
    
    
    
    
    
    
    
    
    
    
    $
    33,870Segment operating income
    
    
    2,617
    
    
    
    
    
    
    
    
    
    
    
    2,617Segment assets
    
    
    96,171
    
    
    
    
    
    
    
    
    
    
    
    96,171
 Information about the Companys operations for the nine months ended March 27,
2004 and March 29, 2003, by operating segment, is as follows (in thousands): Corporate andDelta
    
    Soffe
    
    Unallocated
    
    ConsolidatedFiscal Year 2004:Net sales
    
    $
    95,701
    
    
    $
    39,633
    
    
    $
    (104
    )
    
    $
    135,230Segment operating income
    
    
    3,743
    
    
    
    3,539
    
    
    
    85
    
    
    
    7,367Fiscal Year 2003:Net sales
    
    $
    92,755
    
    
    
    
    
    
    
    
    
    
    $
    92,755Segment operating income
    
    
    7,732
    
    
    
    
    
    
    
    
    
    
    
    7,732
 The following reconciles the Segment Operating Income to the consolidated
income before income taxes for the three and nine months ended March 27, 2004
and March 29, 2003. Three Months Ended
    
    Nine Months EndedMarch 27,2004
    
    March 29,2003
    
    March 27,2004
    
    March 29,2003Segment operating income
    
    $
    5,532
    
    
    $
    2,617
    
    
    $
    7,367
    
    
    $
    7,732Unallocated interest expense
    
    
    799
    
    
    
    209
    
    
    
    1,846
    
    
    
    527Consolidated income before taxes
    
    $
    4,733
    
    
    $
    2,408
    
    
    $
    5,521
    
    
    $
    7,205
 9




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains various forward-looking statements. All
statements, other than statements of historical fact, that address activities,
events or developments that the Company expects or anticipates 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 the
Companys expectations and are necessarily dependent upon assumptions,
estimates and data that the Company believes 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 the Companys 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. The Company does 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 Delta Apparel (which refers to the consolidated operations of the Delta
business and Soffe business) achieved record sales of $58.8 million for the
quarter ended March 27, 2004, an increase of $24.9 million, or 73.6%, from the
prior year third fiscal quarter due primarily to the acquisition of M. J. Soffe
Co. Record sales of $36.3 million for the third quarter were achieved in the
Delta business, an increase of $2.5 million, or 7.2% from the prior year
quarter. Sales for M. J. Soffe Co. were $22.6 million for the third quarter, a
record for M. J. Soffe Co. and an increase of $1.0 million, or 4.8%, from its
sales as a stand alone business for the quarter ended March 31, 2003. Record operating earnings of $5.5 million were also achieved by Delta Apparel
for the quarter ended March 27, 2004. Operating earnings in the Delta business
were up slightly from the third quarter of the prior year and M. J. Soffe
achieved record operating earnings of $2.8 million for the quarter. The Delta business had higher pricing in its third quarter than in the first
and second quarter of this year. While prices on most products were still
slightly lower than in the third quarter of the prior year, pricing continues
to improve into the spring selling season. There can be, however, no assurance
that pricing on tee shirts will remain at current levels. The business
continued to grow its catalog direct sales, which accounted for 83% of total
sales for the quarter. Private label goods accounted for 12% of total sales,
with distributor sales representing less than 5% of sales. During the current
competitive conditions, the Delta business continued to grow its business by
remaining focused on opening new accounts and has shipped to 75% more customers
during the nine months ended March 27, 2004 than in the first nine months of
the prior year. While growing the account base will remain a core marketing
strategy, it is encouraging that existing customers are reporting improving
business conditions, which is expected to generate additional growth
opportunities for Delta. The Delta business is expected to achieve record unit
and dollar sales during fiscal year 2004. Significant declines in tee shirt
pricing, if they were to occur, could have a material effect on the results in
the fourth quarter of fiscal year 2004. The M. J. Soffe business also had solid results in the third quarter. Record
sales were achieved, driven by increased branded sales in the retail segment.
Demand for the Soffe product line continues to remain strong. Several new
products have been introduced and are being well accepted by the marketplace.
During the quarter ended March 27, 2004, the Soffe business continued to run
reduced production schedules to better manage its inventory levels. The solid
results achieved in the Soffe business during the third quarter are expected to
continue in the fourth quarter of fiscal year 2004. The Company continued its integration of the two businesses during the quarter.
The Delta business began marketing shorts under its Quail Hollow brand and
will have a fleece product line in the fall. These products are being produced
in Soffe manufacturing facilities. The Company is also currently considering
having the two businesses share satellite distribution centers. As the Company
continues to evaluate the manufacturing process, product sourcing and the
purchasing of goods, it expects to continue to find cost reduction
opportunities on both sides of the business. Delta Apparels operations reflect some seasonality, with sales during the
first and fourth fiscal quarters generally being the highest and sales
during the second and third fiscal quarters generally being the lowest.
Therefore, the results in the quarter ended March 27, 2004 may not be
reflective of the results for the other quarters within the fiscal year. RESULTS OF OPERATIONS Net sales for the third quarter of fiscal year 2004 were $58.8 million, an
increase of 73.6% from net sales of $33.9 million for the third quarter of the
prior year. The sales increase of $24.9 million was primarily the result of
the acquisition of M. J. Soffe Co., which accounted for $22.6 million in sales
in the quarter. The higher net sales in the Delta business were primarily the
result of an 11.0% increase in unit volume, offset 10




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##### 



slightly by lower average
selling prices of tee shirts. Lower average selling prices were primarily the
result of price promotions on the basic adult short sleeve white and colored
tees driven by competition in the marketplace. Net sales for the nine months
of fiscal year 2004 were $135.2 million, an increase of $42.5 million, or
45.8%, from net sales of $92.8 million for the first nine months of the prior
year. The increase in net sales was primarily the result of the acquisition of
the M. J. Soffe Co. in the second fiscal quarter, accounting for $39.6 million. Gross profit as a percentage of net sales increased to 24.5% in the third
quarter of fiscal year 2004 from 18.1% in the third 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 third fiscal quarter compared to the prior year quarter
primarily due to lower average selling prices, higher raw material costs and
lower absorption of fixed cost, offset partially by lower conversion costs.
For the first nine months of fiscal year 2004, gross profit as a percentage of
net sales increased to 20.3% from 18.6% for the first nine months of the prior
year. The $10.2 million increase in gross profit was primarily the result of
the acquisition of the M. J. Soffe Co. in the second quarter of fiscal year
2004, offset partially by lower average selling costs on basic tees. The
Company expects gross margin percentages in its fourth fiscal quarter to be
similar to those achieved in the quarter ended March 27, 2004 as higher prices
and lower manufacturing costs are offset by higher raw material costs flowing
through cost of sales. Selling, general and administrative expenses, including the provision for bad
debts, for the third quarter of fiscal year 2004 were $8.9 million, or 15.1% of
sales, an increase of $5.4 million from $3.5 million, or 10.3% of sales, in the
third 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.
Selling, general and administrative expenses, including the provision for bad
debts, for the first nine months of fiscal year 2004 were $20.1 million, or
14.9% of net sales, an increase of $10.7 million from $9.4 million, or 10.1% of
net sales, in the first nine months of the prior year primarily as the result
of the addition of the M. J. Soffe Co. in the second quarter of fiscal year
2004. Other income for the first nine months of fiscal year 2004 was $29 thousand
compared with other expense of $154 thousand for the first nine months of the
prior year. Other expense in the nine months ended March 29, 2003 primarily
related to a net loss on the sale of cotton options. Operating income for the third quarter of fiscal year 2004 was $5.5 million, an
increase of $2.9 million, or 111.4%, from $2.6 million for the third quarter of
the prior year. The increase in operating income was the result of the higher
gross profit, offset partially by increased selling, general and administrative
expenses. Operating income for the first nine months of fiscal year 2004 was
$7.4 million, a decrease of $0.4 million, or 4.7%, from $7.7 million for the
first nine months of the prior year. The decrease in operating income was the
result of the higher selling, general and administrative expenses, offset
partially by the higher gross profit. Net interest expense for the third quarter of fiscal year 2004 was $0.8
million, an increase of $0.6 million from the third quarter of the prior year.
Net interest expense for the first nine months of fiscal year 2004 was $1.8
million, an increase of $1.3 million from the first nine months 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. The effective tax rate for the third quarter of fiscal year 2004 was 19.4%
compared to 38.3% for the third quarter of the prior year and 38.3% for the
fiscal year ended June 28, 2003. During the quarter ended March 27, 2004, the
statute of limitations expired on the tax years covered by the tax sharing
agreement between the Company and Delta Woodside Industries, Inc. As a result,
the Company reversed its $0.9 million tax liability associated with the tax
sharing agreement, resulting in the lower effective tax rate during the
quarter. Net income for the third quarter of fiscal year 2004 was $3.8 million, an
increase of $2.3 million compared to net income of $1.5 million in the prior
year third fiscal quarter. Net income for the first nine months of fiscal year
2004 was $4.3 million, a decrease of $0.1 million from net income of $4.4
million for the first nine months of the prior year. Accounts receivable increased $14.4 million from June 28, 2003 to $36.6 million
on March 27, 2004. The increase was primarily the result of the addition of
the M. J. Soffe Co. Through improved cash collections the Company was able to
lower its days sales outstanding from 55 days at June 28, 2003 to 48 days at
March 27, 2004. Inventories at March 27, 2004 were $109.8 million, an increase of $62.6
million, compared to $47.2 million at June 28, 2003. The
acquisition of M. J. Soffe Co. resulted in an increase of $55.8 million in
inventory compared to June 28, 2003. During the quarter, the Company adjusted
its production schedules to optimize its inventory mix as it remained focused
on managing its inventory levels while maintaining the inventory necessary to
achieve its expected sales growth. Delta Apparel expects to lower inventory
levels by approximately $4 million by July 3, 2004. Other liabilities increased $11.5 million from June 28, 2003 to $12.9 million
on March 27, 2004. The increase was primarily the result of the addition of
the M. J. Soffe Co. As part of the Stock Purchase Agreement, additional
Earnout Amounts are payable in cash during each of fiscal years 2005, 2006, and
2007 if specified financial performance targets are met by M. J. Soffe Co. The
Earnout Amounts are capped at a maximum aggregate amount of $12 million. Based
on the preliminary allocation of purchase price, the Company has included in
other liabilities $7.5 million related to the Earnout Amounts. The remaining
increase in other liabilities primarily relates to the M. J. Soffe deferred
compensation plan. Capital expenditures in the third quarter of fiscal year 2004 were $0.3 million
compared to $1.6 million in the third quarter of the prior year. Capital
expenditures in the first nine months of fiscal year 2004 were $1.3 million
compared to $3.7 million in the first nine months of the 11




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##### 



prior year. The
expenditures during fiscal year 2004 primarily related to increasing capacity
and lowering costs in the Companys Edgefield and Fayette facilities. The
expenditures during fiscal year 2003 primarily related to increasing capacity
and lowering costs in its Edgefield, Maiden and Fayette facilities. Capital
expenditures for fiscal year 2004 are expected to total approximately $3.0
million. LIQUIDITY AND CAPITAL RESOURCES The Companys primary cash needs are for working capital and capital
expenditures. In addition, the Company uses cash to pay dividends and fund its
share repurchases under its Stock Repurchase Program. The Company has financed
these uses through its operating profits and its credit agreements with
Congress Financial Corporation (Southern). On October 3, 2003, Delta Apparel entered into an Amended and Restated Loan and
Security Agreement with Congress Financial Corporation (Southern), pursuant to
which Delta Apparels existing line of credit (the Delta Facility) was
increased to $40 million. 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 $78.5 million. 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. 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 the customers reduce the current
outstanding borrowings. Pursuant to Emerging Issues Task Force (EITF) 95-22,
the Company is 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 the
customers are forwarded to the Companys 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, the Company is classifying borrowings under
the Delta Facility as noncurrent debt. In addition to the credit facilities with Congress Financial Corporation
(Southern), the Company has a seller note payable to James F. Soffe, John D.
Soffe, and Anthony M. Cimaglia pursuant the Stock Purchase Agreement dated as
of October 3, 2003. At March 27, 2004, the Company had a $7.6 million
outstanding balance under the note at an interest rate of 8.0%. Delta Apparels operating activities provided cash of $0.9 million in the first
nine months of fiscal year 2004 and used cash of $4.3 million in the first nine
months of fiscal year 2003. The cash provided in the first nine months of
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. The cash used in the first
nine months of the prior year was primarily the result of increases in
inventory, offset partially by net income plus depreciation and a reduction in
accounts receivable. At March 27, 2004, the Company had a $54.6 million outstanding balance under
its credit facilities with Congress Financial Corporation (Southern) at an
average interest rate of 3.4%. Based on its expectations, Delta Apparel believes that its $78.5 million credit
facilities should be sufficient to satisfy its foreseeable working capital
needs, and that the cash flow generated by its operations and funds available
under its credit facilities should be sufficient to service its debt payment
requirements, to satisfy its day-to-day working capital needs, to fund its
planned capital expenditures, to fund purchases of its stock as described below
and to fund the payment of dividends as described below. Any material
deterioration in Delta Apparels results of operations, however, may result in
Delta Apparel 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 Companys needs. Purchases by Delta Apparel of its Own Shares The Company did not purchase shares of Delta Apparel common stock during the
three months ended March 27, 2004. Since the inception of the program, the
Company has purchased 368,057 shares of its stock pursuant to the Stock
Repurchase Program for a total cost of $4.2 million. The Company has
authorization from the 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 management. Dividend Program On January 28, 2004, the Board declared a cash dividend pursuant to the
Companys quarterly dividend program of six cents per share of common stock.
The dividend was paid on February 23, 2004 to shareholders of record as of the
close of business on February 11, 2004. On April 28, 2004, the Board approved a
17% increase in its regular quarterly dividend. The Board declared a cash
dividend of seven cents per share of common stock payable on May 24, 2004 to
shareholders of record as of the close of business on May 12, 2004. Although
the Board may terminate or amend the program at any time, the Company currently
expects to continue the quarterly dividend program. 12




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##### 



CRITICAL ACCOUNTING POLICIES 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 June 28, 2003. NEW ACCOUNTING STANDARDS In December 2003, the FASB issued FASB Interpretation No. 46 (Revised) (FIN
46), Consolidation of Variable Interest Entities, which addresses consolidation
of variable interest entities. FIN 46 expands the criteria for consideration
in determining whether a variable interest entity should be consolidated by a
business entity, and requires existing unconsolidated variable interest
entities (which include, but are not limited to, Special Purpose Entities, or
SPEs) to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. The Company adopted FIN 46
in its third quarter of fiscal year 2004. The adoption of FIN 46 had no impact
on the Companys financial statements. ENVIRONMENTAL AND REGULATORY MATTERS On May 27, 2002, the Company received a renewal of its National Pollution
Discharge Elimination System (NPDES) permit from the North Carolina
Department of Environment and Natural Resources, Division of Water Quality
(DWQ) for its Maiden, North Carolina textile plant. Among other things, the
new permit requires the Company to reduce its effluent (waste discharge) color
to specified color concentration limits. The Company 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. The Company and the DWQ have reached a tentative
settlement and have stayed the contested case. The tentative settlement
provides that Delta Apparel will have one year to research and test alternative
color removal technologies and thereafter must select and implement a
technology. In addition, Delta Apparel must continue to monitor its color
removal. The Company does not currently have an estimate of the amount of additional
annual expenses, if any, that the Company may incur in the future in order to
comply with the new permit, and there can be no assurance that the cost of
compliance will not be material to the financial condition of the Company. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk COMMODITY RISK SENSITIVITY The Company purchases cotton from approximately eight established merchants
with whom it has long-standing relationships. The majority of the Companys
purchases are executed using on-call contracts. These on-call arrangements
are used to ensure that an adequate supply of cotton is available for the
Companys requirements. Under on-call contracts, the Company agrees 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 of the Companys election
to fix specific contracts. Cotton on-call with a fixed price at March 27, 2004 was valued at $18.1
million, and is scheduled for delivery between April 2004 and December 2004.
At March 27, 2004, the Company had unpriced contracts for deliveries between
July 2004 and March 2005. Based on the prevailing price at March 27, 2004, the
value of these unpriced commitments is approximately $11.7 million. At March
27, 2004, a 10% decline in the market price of the cotton covered by Delta
Apparels fixed price contracts would have had a negative impact of
approximately
$1.8 million on the value of the contracts. At June 28, 2003, cotton on-call
with a fixed price was valued at $7.2 million. At June 28, 2003, a 10% decline
in the market price of the cotton covered by Delta Apparels fixed price
contracts would have had a negative impact of approximately $0.7 million. The
effect of a 10% decline in the market price of cotton on Delta Apparels fixed
price contracts would have been more at March 27, 2004 than at June 28, 2003
because the value of Delta Apparels fixed price cotton on-call contracts was
more on March 27, 2004. Daily price fluctuations are minimal, yet long-term
trends in price movement can result in unfavorable pricing of cotton for Delta
Apparel. The Company also purchases yarn from third party vendors. The price
of yarn is primarily impacted by the price of cotton, as discussed above. The Company uses derivatives, including cotton option contracts, to manage its
exposure to movements in commodity prices. The Company did not designate its
options as hedge instrument upon inception. Accordingly, changes in the fair
market value are marked to market. The Company did not own any cotton options
contracts on March 27, 2004. INTEREST RATE SENSITIVITY Delta Apparels credit agreements provide that the interest rates on
outstanding amounts owed shall bear interest at variable rates. If the amount
of outstanding indebtedness at March 27, 2004 under the revolving credit
facilities had been the amount outstanding during the entire three months ended
March 27, 2004 and the interest rate on this outstanding indebtedness had been
increased by 100 basis points, Delta Apparels interest expense would have been
approximately $136,000, or 17.1%, higher during the quarter. This compares to
an increase of 13




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##### 



$99,000 or 13.5% for the 2003 fiscal year, or an average of
$24,750 per quarter, based on the outstanding indebtedness at June 28, 2003.
The increase is due to the amount outstanding under the Companys revolving
credit facilities being higher at March 27, 2004 than at June 28, 2003
primarily as the result of the acquisition of M. J. Soffe Co. 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 March 27, 2004, and, based on 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.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.(b)
    
    Reports on Form 8-K.  On January 30, 2004, the Company furnished a Current Report on Form 8-K
reporting information under Item 7 (Financial Statements and Exhibits), Item
9 (Regulation F-D Disclosure), and Item 12 (Results of Operation and
Financial Condition). 14




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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 6, 2004
    By:
    /s/ Herbert M. MuellerDate
    Herbert M. MuellerVice President, Chief Financial Officer and Treasurer 15