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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549
 FORM 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For The Fiscal Year Ended July 3, 2004 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-15583 DELTA APPAREL, INC. (Exact name of registrant as specified in its charter)
 Georgia(State or other jurisdiction ofincorporation 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) Registrants telephone number, including area code: (678) 775-6900 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange
on Which RegisteredCommon Stock, par value $0.01
    
    American Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act:
None Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes o No x. As of December 27, 2003, the aggregate market value of the shares of common
stock held by nonaffiliates of the registrant (based on the closing price for
the common stock on the American Stock Exchange on December 26, 2003) was
approximately $50.3 million. As of August 20, 2004, there were outstanding 4,136,259 shares of the
registrants common stock, par value $0.01, which is the only class of
outstanding common or voting stock of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants definitive Proxy Statement to be filed pursuant to
Regulation 14A for the 2004 Annual Meeting of Shareholders to be held on
November 11, 2004 are incorporated by reference into Part III of this report.




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TABLE OF CONTENTS  PART IPART IIPART IIIPART IVSIGNATURESReport of Independent Registered Public Accounting FirmConsolidated Balance SheetsConsolidated Statements of IncomeConsolidated Statements of Shareholders EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsSCHEDULE II  CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTSEX-21 SUBSIDIARIES OF THE COMPANYEX-23.1 CONSENT OF ERNST AND YOUNG LLPEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO    Table of Contents  
 PART I ITEM 1. BUSINESS Delta Apparel and 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., a North Carolina corporation (M. J. Soffe, or
Soffe) and our other subsidiaries, as appropriate to the context. FORWARD LOOKING STATEMENTS 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 document 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. Many of these risks and uncertainties are described under the
subheading Risk Factors below and are beyond our control. Accordingly, any
forward-looking statements do not purport to be predictions of future events or
circumstances and may not be realized. We do not undertake publicly to update or revise the forward-looking statements
even if it becomes clear that any projected results will not be realized. OVERVIEW We are a vertically integrated marketer, manufacturer and distributor of high
quality branded and private label activewear apparel. We specialize in selling
a variety of branded casual and athletic activewear tops and bottoms,
embellished and unembellished T-shirts, and fleece products for the
ever-changing apparel market. Our products are sold to screen printers,
private label accounts and distributors, as well as being sold through
specialty sporting goods stores and department stores. In addition, certain
products are sold in college bookstores and to the U.S. Military. We were incorporated in Georgia in 1999 and our principal executive offices are
located at 2750 Premiere Parkway, Suite 100, Duluth, Georgia 30097 (telephone
number: 678-775-6900). Our common stock trades on the American Stock Exchange
under the symbol DLA. We operate on a 52-53 week fiscal year ending on the Saturday closest to June
30. The 2004 fiscal year was a 53-week year and ended on July 3, 2004. The
2003 and 2002 fiscal years were 52-week years and ended on June 28, 2003 and
June 29, 2002, respectively. ACQUISITIONS On October 3, 2003, we completed the acquisition of all of the outstanding
capital stock of M. J. Soffe Co., a North Carolina corporation. In connection
with the acquisition, we paid approximately $43.5 million in cash and issued a
promissory note to the selling individuals in the aggregate principal amount of
$8 million. Also, additional amounts are payable to the selling 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, we paid approximately $8.5 million to satisfy all outstanding bank
debt of M. J. Soffe Co. 2




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BUSINESS SEGMENTS 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. Our 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, we manufacture products under private labels for retailers,
corporate industry programs and sports licensed apparel marketers. Our Soffe
segment manufactures, markets and distributes embellished and unembellished
knit apparel under the Soffe® label. These products are sold through
specialty sporting goods stores and department stores. In addition to these
retail channels, our Soffe segment also supplies college bookstores and
produces activewear products for the U.S. Military. See Note 12 of the Notes to Financial Statements for financial information
regarding segment reporting, which information is incorporated herein by
reference. PRODUCTS We specialize in selling a variety of branded casual and athletic activewear
tops and bottoms, embellished and unembellished T-shirts, and fleece products
for the ever-changing apparel market. Our Delta segment markets high quality knit apparel garments for the entire
family. These garments are marketed under the Delta Pro Weight®, Delta Magnum
Weight, and Quail Hollow Sportswear brand names. The Pro-Weight line
represents a diverse selection of 5.5 oz 100% cotton silhouettes. Short
sleeve, long sleeve and Baseball Practice tees are available in both youth and
adult sizes in a variety of colors. Specialty items that are also available
for adults include pocket tees, tank tops, sleeveless tees, Pigment-Dyed tees,
and a wide variation of colors in Ringer tees. The Magnum Weight line is
designed to give our customer a variety of silhouettes in a heavier 6.1oz, 100%
cotton fabric. Programs in this category provide a consistent quality of short
sleeve and long sleeve products in a wide range of colors, available from a
2-Toddler to adult sizes, up to 5X. The Quail Hollow line includes adult golf
shirts, ladies and junior tees, Cheer shorts, adult and youth fleece styles,
and TieDyes. The ladies and juniors programs feature an assortment of styles
developed specifically for misses, plus sizes and young juniors. Adult golf
shirts are offered in heavy weight 100% cotton jersey styles with fashion
trims, or in solid color 7oz. Ringspun pique. Our newest addition to the Quail
Hollow line is the ladies and youth 7oz. Ringspun pique placket shirt. Our Soffe segment designs and produces shorts, T-shirts, jersey and fleece
active apparel that are available in a wide variety of colors and sizes,
including toddlers, boys, girls, mens, womens and big & tall. The shorts
that are branded with the Soffe® label enjoy a very loyal following among
teenage and adolescent girls, many of whom are involved in cheerleading and
dance teams. Soffe is also a leader in product innovation as demonstrated by
our introduction of Dri-release sportswear. Dri-release is a microblend
performance fiber that is engineered to offer cotton-like comfort with quick
dry properties to wick perspiration away from the skin. MARKETING Our marketing is performed by both employed sales personnel and independent
sales representatives located throughout the country. Our sales force
services the retail direct, sporting goods, military, private label, department
stores and college bookstore customer bases. During fiscal year 2004, we
served over 11,000 customers. No single customer accounted for more than 10%
of our sales in fiscal year 2004, 2003 or 2002. Part of our strategy is not
to become dependent on any single customer. Substantially all of our revenues
for the past three fiscal years have been generated from domestic sales, and we
expect this to be the case in fiscal year 2005. The majority of our knit apparel products are produced based on forecasts to
permit quick shipment and to level production schedules. Special knit apparel
products and private label knit apparel styles are generally made only to
order. Some customers place multi-month orders and request shipment at their
discretion. We offer same-day shipping and use third party carriers to ship
products to our customers. In order to better serve our customers, we allow
our customer to order products by the piece, by the dozen, or in full case
quantities. As a significant portion of our business consists of at-once EDI
orders and direct catalog orders, backlog order levels no longer give a general
indication of future sales. 3




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Our sales reflect some seasonality, with sales during our first and fourth
fiscal quarters generally being the highest, and sales during our second fiscal
quarter generally being the lowest. The apparel industry is characterized by
rapid shifts in fashion, consumer demand and competitive pressures, resulting
in both price and demand volatility. The demand for any particular product
varies from time to time based largely upon changes in consumer preferences and
general economic conditions affecting the apparel industry, such as consumer
expenditures for non-durable goods. MANUFACTURING As a vertically integrated operation, we primarily convert raw fibers into
finished apparel utilizing company-owned and leased facilities and our joint
venture partners. When demand exceeds production capacity or when it is cost
effective to do so, we source products from third party producers and use
outside contractors and general suppliers for textile and sewing production. The Delta segment spins approximately 80% of its yarn requirements in our
facility in Edgefield, South Carolina. The remaining yarn is sourced. We
knit, dye, finish and cut our fabric in company-owned plants located in Maiden,
North Carolina and Fayette, Alabama. We currently sew most of our garments in
two leased facilities in San Pedro Sula, Honduras and one leased facility in
Campeche, Mexico. At the 2004, 2003 and 2002 fiscal year ends, our long-lived
assets in Honduras and Mexico collectively comprised 7.9%, 8.5% and 7.7%,
respectively, of our total net property, plant and equipment. In addition to
our leased sewing facilities, we use outside contractors located in the
Caribbean basin to sew our products. The Soffe segment produces approximately 78% of its products at its
Company-owned facilities in North Carolina and in its joint venture in Costa
Rica, with the remainder sourced in full-package form through independent
sources. We knit, dye, finish and cut in our company-owned facilities in
Fayetteville, North Carolina. Sewing is performed in either company-owned
facilities in Fayetteville, Bladenboro or Rowland, North Carolina or in our
joint venture facility in Costa Rica. Our joint venture in Costa Rica is
comprised of a 50% equity ownership interest in SOHA, S.A. held by Soffes
subsidiary SAIM, LLC that is carried on our balance sheet under the equity
method of accounting. SOHAs management is independent from us, and the other
50% of SOHA S.A. is owned by a group of individual Costa Rican shareholders.
SOHA performed approximately 35% of the Soffe Segments sewing during fiscal
year 2004 and is expected to perform a similar percentage in fiscal year 2005.
SOHAs assets do not constitute a material portion of our long-lived assets. RAW MATERIALS Our principal raw materials are cotton and yarn, which are acquired from
several suppliers. We fix the price of cotton based upon our expected cotton
requirements and our forecast of future cotton prices. We use derivatives,
including cotton option contracts, to manage our exposure to movements in
cotton market prices. We have not designated our options as hedge instruments
upon inception, and therefore changes in the fair market value are marked to
market and are included in other expense (income) in the statements of income.
No single supplier of cotton or yarn accounts for a material portion of our
purchases or business and alternative competitive sources are available. To
the extent that cotton prices increase and we have not provided for our
requirements with fixed price contracts, we could be materially and adversely
affected, as there can be no assurance that we would be able to pass along our
own relatively higher costs to our customers. COMPETITION The apparel industry is highly competitive. We compete with many United States
and Canadian branded and private label manufacturers of apparel, some of which
are larger in size and have greater financial resources than we do.
Competition in the activewear apparel industry is generally based upon price,
service, delivery time, quality and flexibility, with the relative importance
of each factor depending upon the needs of particular customers and the
specific product offering. With respect to branded product lines, competition
is mainly based upon consumer recognition and preference. Our strategy with
respect to the Soffe segment is to sustain the strong reputation of the Soffe
label and continue to reinforce the Soffe quality and progressive image with
new color and product offerings. In addition, with respect to both the Delta
and Soffe segments, we want to provide the best overall value to our customers.
Our favorable competitive aspects include the leading consumer brand name of
Soffe, the relatively high quality of our products, our state of the art
information systems and our flexibility and process control, which leads to
product consistency. 4




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TRADEMARKS We own trademarks, which are important to our business. Soffe®, which has been
in existence since 1946, is our hallmark brand and has stood for quality and
value in the activewear market for more than fifty years. Soffe® has been a
registered trademark since 1992. In addition to the Soffe® trademark, we also
rely on the strength of our DELTA® and QUAIL HOLLOW brands. LICENSES We have the right to use trademarks under license agreements. Soffe is an
official licensee for over 800 colleges and universities. Although we are not
dependent on any single license, we believe our license agreements in aggregate
are of significant value to our business. EMPLOYEES As of July 3, 2004 we employed approximately 4,500 full time employees, of whom
approximately 2,040 were employed in the United States. Our employees are not
represented by unions, and we believe that our relations with our employees are
good. AVAILABLE INFORMATION Our Internet address is www.deltaapparel.com. There we make available, free of
charge, our annual report on Form 10K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to those reports, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the SEC. Our SEC reports can be accessed through the investor relations
section of our Web site. The information found on our Web site is not part of
this, or any other, report we file with or furnish to the SEC. In addition, we will provide, at no cost, paper or electronic copies of our
reports and other filings made with the SEC. Requests should be directed to: Investor Relations Department
Delta Apparel, Inc.
2750 Premiere Parkway, Suite 100
Duluth, Georgia 30097 ENVIRONMENTAL AND REGULATORY MATTERS We are subject to various federal, state and local environmental laws and
regulations concerning, among other things, wastewater discharges, storm water
flows, air emissions and solid waste disposal. Our plants generate very small
quantities of hazardous waste, which are either recycled or disposed of
off-site. Most of our plants are required to possess one or more discharge
permits. On May 27, 2002, we received a renewal of our National Pollution Discharge
Elimination System (NPDES) permit from the North Carolina Department of
Environment and Natural Resources, Division of Water Quality (DWQ) for our
Maiden, North Carolina textile plant. Among other things, the new permit
required us to reduce our effluent (waste discharge) color to specified color
concentration limits. We believed that the DWQ exceeded its authority and
acted arbitrarily in imposing the specific color concentration limitations
within the new permit and, on July 23, 2002 contested the permit by filing a
petition with the North Carolina Office of Administrative Hearings. We have
reached a settlement with the DWQ and have negotiated a permit modification.
Prior to becoming effective, the permit modification will be subject to a
45-day public notice and comment period during which time changes to the permit
may be suggested by the public. Once the permit modification becomes
effective, we will dismiss our contested case. The modified permit, as agreed by DWQ and us, provides that we will have
approximately one year to research and test alternative color removal
technologies and thereafter must select and implement a technology by October
2005 if we continue to require our NPDES discharge permit. In addition, we
must continue to monitor our color removal and will be subject to a gradual
lowering of our effluent color standard. Our NPDES permit will be subject to
renewal in the spring of 2006. 5




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We currently do not believe that the cost to comply with the modified permit,
if any, will be material to the results of operations or financial condition of
our Company. We incur capital and other expenditures each year that are aimed at
achieving compliance with current and future environmental standards.
Generally, the environmental rules applicable to us are becoming increasingly
stringent. We do not expect that the amount of these expenditures in the
future will have a material adverse effect on our operations, financial
condition or liquidity. There can be no assurance, however, that future changes
in federal, state, or local regulations, interpretations of existing
regulations or the discovery of currently unknown problems or conditions will
not require substantial additional expenditures. Similarly, the extent of our
liability, if any, for past failures to comply with laws, regulations and
permits applicable to our operations cannot be determined. RISK FACTORS AVAILABILITY OF CASH.Significant operating losses or significant uses of cash
in our operations could cause us to be unable to pay our debts as they become
due and to default on our credit facilities, which would have an adverse effect
on the value of our common shares. Our credit agreement contains covenants that restrict, among other things, the
ability of us and our subsidiaries to incur indebtedness, create liens,
consolidate, merge, sell assets or make investments. The credit agreements
also contain customary representations and warranties, funding conditions and
events of default. A breach of one or more covenants or any other event of
default under the credit agreements could result in an acceleration of our
obligations under those agreements, in the foreclosure on any assets subject to
liens in favor of the credit agreements lenders, and in the inability of us to
borrow additional amounts under the credit agreement. PRICING.Prices for our basic T-shirt products have generally been dropping
over the last several years, even though demand for our products has increased
since fiscal 1998. The price declines have resulted from factors largely
outside of our control, such as the industrys transfer of manufacturing out of
the United States, excess supply capacity, and declining raw material prices.
In addition, intense competition to gain market share may lead some competitors
to sell substantial amounts of goods at prices against which we cannot
profitably compete. Demand for our products is dependent on the general demand
for T-shirts and the availability of alternative sources of supply. Our
strategy in this market environment is to be a low cost producer and to
differentiate ourselves by providing quality service to our customers. Even if
this strategy is successful, its results may be offset by reductions in demand
or price declines. CYCLICAL RESULTS.The U.S. apparel industry and we are sensitive to the
business cycles of the national economy. Moreover, the popularity, supply and
demand for particular apparel products can change significantly from year to
year based on prevailing fashion trends and other factors. Reflecting the
cyclical nature of the apparel industry, many apparel producers tend to
increase capacity during years in which sales are strong. These increases in
capacity tend to accelerate a general economic downturn in the apparel markets
when demand weakens. These factors have historically contributed to
fluctuations in our results of operations. When these fluctuations occur in
the future, we may be unable to compete successfully in the industry downturn. MARKET PRICE OF DELTA APPAREL SHARES.Various investment banking firms have
informed us that public companies with relatively small market capitalizations
have difficulty generating institutional interest, research coverage or trading
volume. This illiquidity can translate into price discounts as compared to
industry peers or to the shares inherent value. We believe that the market
perceives us to have a relatively small market capitalization. This could lead
to our shares trading at prices that are significantly lower than our estimate
of their inherent value. As of August 20, 2004, we had outstanding 4,136,259 shares of common stock.
We believe that approximately 68.8% of our stock is beneficially owned by
persons who beneficially own more than 5% of the outstanding shares of our
common stock and related individuals, and that of this, approximately 40.1% of
the outstanding stock is beneficially owned by institutional investors who own
more than 5% of the outstanding shares. Sales of substantial amounts of our
common stock in the public market by any of these large holders could adversely
affect the market price of the common stock. PRINCIPAL SHAREHOLDERS EXERT SUBSTANTIAL INFLUENCE.As of August 20, 2004,
two members of our board of directors and related individuals had or share the
voting power with respect to approximately 28.7% of the outstanding shares of
our common stock. These individuals will exert substantial influence with
respect to all matters submitted to a vote of shareholders, including the
election of our directors. POLITICAL AND ECONOMIC UNCERTAINTY IN HONDURAS, MEXICO AND COSTA RICA.We have
two company-operated sewing facilities in Honduras, one company-operated sewing
facility in Mexico and a joint venture in 6




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Costa Rica. If the Honduran, Mexican or Costa Rican labor markets tighten, it
could have some adverse effects on the industries located in the applicable
country. In addition, we might be adversely affected if economic or legal
changes occur that affect the way in which we conduct our business in these
countries. For example, a growing economy could lower unemployment which could
increase wage rates or make it difficult to retain employees or employ enough
people to meet demand. The government could also decide to add additional
holidays or change employment law increasing our costs to operate in that
country. Domestic unrest or political instability in any of these countries
could also disrupt our operations. U.S. TRADE REGULATIONS.Our products are subject to foreign competition,
which in the past has been faced with significant U.S. government import
restrictions. Foreign producers of apparel often have significant labor cost
advantages. Given the number of these foreign producers, the substantial
elimination of import protections that protect domestic apparel producers could
materially adversely affect our business. The extent of import protection
afforded to domestic apparel producers has been, and is likely to remain,
subject to considerable political considerations. The North American Free Trade Agreement or NAFTA became effective on January
1, 1994 and has created a free-trade zone among Canada, Mexico and the United
States. NAFTA contains a rule of origin requirement that products be produced
in one of the three countries in order to benefit from the agreement. NAFTA
has phased out all trade restrictions and tariffs among the three countries on
apparel products competitive with ours. During fiscal 2001, we completed our
sewing expansion into Mexico in order to take advantage of the NAFTA benefits.
Subsequent repeal or alteration of NAFTA could seriously adversely affect our
results of operations. The Caribbean Basin Trade Partnership Act (often referred to as the CBI Parity
Bill) became effective on October 1, 2000. The provisions of the CBI Parity
Bill have the following effects most relevant to the apparel business:  
    
    Apparel assembled in most Caribbean nations (such as
Honduras and Costa Rica) from fabric formed and cut in the
United States of U.S. manufactured yarn can enter the United
States duty-free;
    
    Apparel cut and sewn in most Caribbean nations from
fabric formed in the United States of U.S. manufactured yarn
can enter the United States duty-free as long as it is sewn
with U.S. manufactured thread; and
    
    Certain limits of apparel made from fabric formed in
certain Caribbean nations of U.S. manufactured yarn and cut and
sewn in those nations can enter the United States duty-free. Apparel entering the United States under any of these three provisions is not
subject to any quotas that may exist for that specific category of goods. We
believe that the CBI Parity Bill gives us a competitive advantage relative to
apparel manufacturers outside of the Caribbean and improves our competitive
position relative to apparel manufacturers inside the non-NAFTA countries.
Subsequent repeal or adverse alteration of the CBI Parity Bill could put us at
a serious competitive disadvantage relative to such manufacturers. The World Trade Organization or WTO, a multilateral trade organization, was
formed in January 1995 and is the successor to the General Agreement on Tariffs
and Trade or GATT. This multilateral trade organization has set forth
mechanisms by which world trade in clothing is being progressively liberalized
by phasing-out quotas and reducing duties over a period of time that began in
January of 1995. As it implements the WTO mechanisms, the U.S. government is
negotiating bilateral trade agreements with developing countries (which are
generally exporters of textile and apparel products) that are members of the
WTO to get them to reduce their tariffs on imports of textiles and apparel in
exchange for reductions by the United States in tariffs on imports of textiles
and apparel. The remaining quotas are to be eliminated on January 1, 2005. At
that time, the competitiveness of many countries as apparel sourcing locations
will change significantly. The elimination of quotas and the reduction of
tariffs under the WTO may result in increased imports of certain apparel
products into North America. These factors could make our products less
competitive against low cost imports from developing countries. ENVIRONMENTAL RULES.Our operations must meet extensive federal, state and
local regulatory standards in the areas of safety, health and environmental
pollution controls. In addition, there can be no assurance that future changes
in federal, state or local regulations, interpretations of existing regulations
or the discovery of currently unknown problems or conditions will not require
substantial additional expenditures. Similarly, the extent of our liability,
if any, for past failures to comply with laws, regulations and permits
applicable to its operations cannot be determined. 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 7




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negotiated a permit modification. Prior to becoming effective, the permit
modification will be subject to a 45-day public notice and comment period
during which time changes to the permit may be suggested by the public. Once
the permit modification becomes effective, we will dismiss our contested case. The modified permit, as agreed by DWQ and us, provides that we will have
approximately one year to research and test alternative color removal
technologies and thereafter must select and implement a technology by October
2005 if we continue to require our NPDES discharge permit. In addition, we
must continue to monitor our color removal and will be subject to a gradual
lowering of our effluent color standard. Our NPDES permit will be subject to
renewal in the spring of 2006. We currently do not believe that the cost to comply with the modified permit,
if any, will be material to the results of operations or financial condition of
our Company. OUTSIDE PRODUCTION.We have historically relied upon third party suppliers for
up to 40% of our sewing production. Any shortage of supply or significant price
increases from our suppliers could adversely affect our results of operations. TRADEMARKS.We rely on the strength of our trademarks, including the Soffe®,
DELTA® and QUAIL HOLLOW brands. We have incurred legal costs in the past to
establish and protect these trademarks, but this cost has not been significant.
We may in the future be required to expend resources to protect these
trademarks. The loss or limitation of the exclusive right to use our
trademarks could adversely affect our sales and results of operations. KEY MANAGEMENT.Our success depends upon the talents and continued
contributions of our key management, many of which would be difficult to
replace. The loss or interruption of the services of these executives could
have a material adverse effect on our business, financial condition and results
of operations. Although we maintain employment agreements with certain members
of key management, we cannot be assured that the services of such personnel
will continue. We do not, however, maintain an employment agreement with
Robert W. Humphreys, President and Chief Executive Officer. We believe our
future success depends on our ability to retain and motivate our key
management, our ability to integrate new members of management into our
operations and the ability of all personnel to work together effectively as a
team. ITEM 2. PROPERTIES Our principal executive offices are located in a leased facility in Duluth,
Georgia. Our administrative, manufacturing and distribution functions are
conducted in both leased and owned facilities. In addition to our executive
office, we have one sales office in New York City, seven distribution centers,
nine manufacturing facilities, two administrative offices, two warehouses and
one other facility that combines manufacturing, distribution and administrative
offices. In addition, we utilize four additional distribution centers that are
either owned or leased, and operated by sales representatives. Location
    
    Utilization
    
    SegmentEdgefield Plant, Edgefield, SC
    
    Yarn
    
    DeltaMaiden Plant, Maiden, NC
    
    Knit/dye/finish/cut
    
    DeltaFayette Plant, Fayette, AL
    
    Knit/dye/finish/cut
    
    DeltaFayetteville Plant 1, Fayetteville, NC
    
    Cut/sew/decoration/distribution/administration
    
    SoffeFayetteville Plant 2, Fayetteville, NC
    
    Sew/distribution/administration
    
    SoffeRowland Plant, Rowland, NC
    
    Sew
    
    SoffeBladenboro Plant, Bladenboro, NC
    
    Sew
    
    SoffeHonduras Plant, San Pedro Sula, Honduras
    
    Sew
    
    DeltaHonduras Plant, San Pedro Sula, Honduras
    
    Sew
    
    DeltaMexico Plant, Campeche, Mexico
    
    Sew
    
    DeltaLumberton Warehouse, Lumberton, NC
    
    Warehouse
    
    SoffeShannon Drive Warehouse, Fayetteville, NC
    
    Warehouse
    
    SoffeDistribution Center, Knoxville, TN
    
    Distribution
    
    DeltaSales and Distribution Center, Buena Park, CA
    
    Sales and distribution
    
    DeltaDistribution Center, Miami, FL
    
    Distribution
    
    DeltaDC Annex, Fayetteville, NC
    
    Distribution
    
    SoffeDistribution Center, Kansas City, MO
    
    Distribution
    
    SoffeDistribution Center, El Monte, CA
    
    Distribution
    
    SoffeDistribution Center, Lansing, MI
    
    Distribution
    
    SoffeNew York Office, New York, NY
    
    Sales
    
    DeltaGreenville Office, Greenville, SC
    
    Administration
    
    Delta and SoffeGreenville Office, Greenville, SC
    
    Administration
    
    Delta and Soffe
 8




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##### Table of Contents



Soffe also has a 50% interest in SOHA, S.A. that performs sewing in Grecia,
Costa Rica for the Soffe segment. During fiscal year 2004 our manufacturing facilities were operating at less
than full capacity. We expect our existing manufacturing facilities to have
adequate manufacturing capacity in fiscal year 2005. In fiscal year 2005, we
expect to add an additional distribution center in the New England area to
serve our customers and also expect to finalize the purchase of a new building
in the Knoxville, Tennessee area to replace the old multi-story building we are
currently using. We believe our facilities are highly suitable for the
purposes for which they are designed and are generally adequate to allow us to
remain competitive with our principal competitors. Substantially all of our assets are subject to liens in favor of our credit
agreement lender. Substantially all of the assets of the Soffe segment are
subject to liens in favor of the former Soffe shareholders that are second in
priority to the liens in favor of our credit agreement lender. ITEM 3. LEGAL PROCEEDINGS On May 27, 2002, we received a renewal of our National Pollution Discharge
Elimination System (NPDES) permit from the North Carolina Department of
Environment and Natural Resources, Division of Water Quality (DWQ) for our
Maiden, North Carolina textile plant. Among other things, the new permit
required us to reduce our effluent (waste discharge) color to specified color
concentration limits. We believed that the DWQ exceeded its authority and
acted arbitrarily in imposing the specific color concentration limitations
within the new permit and, on July 23, 2002 contested the permit by filing a
petition with the North Carolina Office of Administrative Hearings. We have
reached a settlement with the DWQ and have negotiated a permit modification.
Prior to becoming effective, the permit modification will be subject to a
45-day public notice and comment period during which time changes to the permit
may be suggested by the public. Once the permit modification becomes
effective, we will dismiss our contested case. The modified permit, as agreed by DWQ and us, provides that we will have
approximately one year to research and test alternative color removal
technologies and thereafter must select and implement a technology by October
2005 if we continue to require our NPDES discharge permit. In addition, we
must continue to monitor our color removal and will be subject to a gradual
lowering of our effluent color standard. Our NPDES permit will be subject to
renewal in the spring of 2006. We currently do not believe that the cost to comply with the modified permit,
if any, will be material to the results of operations or financial condition of
our Company. All other pending litigation to which we are a party is litigation arising in
the ordinary course of business. We believe that, as a result of legal
defenses, insurance arrangements, and indemnification provisions with parties
believed to be financially capable, any such actions should not have a material
effect on our operations, financial condition, or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter
of our 2004 fiscal year. 
 PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES. Market Information for Common Stock:Our Common Stock is listed and traded on
the American Stock Exchange under the symbol DLA. As of August 12, 2004,
there were approximately 1,301 record holders of our Common Stock. The following table sets forth, for each of the periods indicated below, the
high and low sales prices per share of our Common Stock. Fiscal Year 2004
    
    Fiscal Year 2003High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    16.65
    
    
    $
    14.90
    
    
    $
    15.20
    *
    
    $
    11.45
    *Second Quarter
    
    
    17.80
    
    
    
    15.00
    
    
    
    15.69
    
    
    
    13.30Third Quarter
    
    
    20.24
    
    
    
    17.60
    
    
    
    16.45
    
    
    
    14.86Fourth Quarter
    
    
    24.80
    
    
    
    19.75
    
    
    
    16.95
    
    
    
    15.45*     Adjusted to reflect 2-for-1 stock split effective as of September 20, 2002
 9




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Dividends:On April 18, 2002, our Board of Directors adopted a quarterly
dividend program. We paid $1.0 million and $0.9 million in dividends during
fiscal year 2004 and 2003, respectively. Dividends declared per common share are as follows: First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth QuarterFiscal Year 2004
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.07Fiscal Year 2003
    
    $
    0.05
    *
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.06
  *
    
    Adjusted to reflect 2-for-1 stock split effective as of September 20, 2002 The Board may terminate or amend the dividend program at any time. We
currently expect to continue the quarterly dividend program. Subject to the provisions of any outstanding blank check preferred stock, the
holders of our Common Stock are entitled to receive whatever dividends, if any,
may be declared from time to time by our Board of Directors in its discretion
from funds legally available for that purpose. Our credit agreement permits
the payment of cash dividends in an amount up to 25% of cumulative net income
(excluding extraordinary or unusual non-cash items), provided that no event of
default exists or would result from that payment and after the payment at least
$6.0 million remains available to borrow under the revolving credit facility.
At July 3, 2004, the total amount permitted for payment of cash dividends under
our credit agreement was $6.9 million. Any future cash dividend payments will depend upon our earnings, financial
condition, capital requirements, compliance with loan covenants and other
relevant factors. Purchases of our Own Shares of Common Stock:During the fourth quarter of
fiscal year 2004, we did not repurchase any shares of our Common Stock. Stock Split:On August 15, 2002, our Board of Directors approved a 2-for-1
stock split of our common stock. The stock split took the form of a 100% stock
dividend that was paid on September 20, 2002 to each shareholder of record as
of September 6, 2002. 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. Securities Authorized for Issuance Under Equity Compensation Plans:The
information required by Item 201(d) of Regulation S-K is set forth under Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters of this Annual Report, which information is incorporated
herein by reference. ITEM 6. SELECTED FINANCIAL DATA We operated as a stand-alone company during the fiscal years ended July 3,
2004, June 28, 2003, June 29, 2002 and June 30, 2001. For the fiscal year
ended July 1, 2000, our consolidated financial statements include the
operations and accounts of the Delta Apparel Company division of Delta Woodside
Industries, Inc. (which we refer to in this annual report as Delta Woodside)
and the Edgefield Yarn Mill, which consisted of operations and accounts
included in various subsidiaries of Delta Woodside. On October 3, 2003, we
completed our acquisition of the M. J. Soffe Co. Our consolidated financial
statements include the operations and accounts of the M. J. Soffe Co. since the
acquisition date. The consolidated statement of income data for the years
ended July 1, 2000 and June 30, 2001, and the consolidated balance sheet data
as of July 1, 2000, June 30, 2001 and June 29, 2002 are derived from, and are
qualified by reference to, our audited consolidated financial statements not
included in this document. The consolidated statement of income data for the
years ended June 29, 2002, June 28, 2003 and July 3, 2004, and the consolidated
balance sheet data as of June 28, 2003 and July 3, 2004 are derived from, and
are qualified by reference to, our audited consolidated financial statements
included elsewhere in this document. We operate on a 52-53 week fiscal year
ending on the Saturday closest to June 30. The 2004 fiscal year was a 53-week
year. The 2003, 2002, 2001 and 2000 fiscal years were 52-week years.
Historical results are not necessarily indicative of results to be expected in
the future. The selected financial data should be read in conjunction with the
Consolidated Financial Statements 10




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and the related notes as indexed on page F-1 and Managements Discussion and
Analysis of Financial Condition and Results of Operations in Item 7. Fiscal Year EndedJuly 3,
    
    June 28,
    
    June 29,
    
    June 30,
    
    July 1,2004
    
    2003
    
    2002
    
    2001
    
    2000(In thousands, except share amounts)Statement of Income Data:Net sales
    
    $
    208,113
    
    
    $
    129,521
    
    
    $
    131,601
    
    
    $
    120,400
    
    
    $
    114,466Cost of goods sold
    
    
    (159,852
    )
    
    
    (105,552
    )
    
    
    (110,273
    )
    
    
    (97,101
    )
    
    
    (94,144
    )Selling, general and administrative expenses
    
    
    (31,043
    )
    
    
    (13,220
    )
    
    
    (11,807
    )
    
    
    (11,024
    )
    
    
    (8,099
    )Other income (loss)
    
    
    (192
    )
    
    
    (194
    )
    
    
    816
    
    
    
    28
    
    
    
    (17
    )Operating income
    
    
    17,026
    
    
    
    10,555
    
    
    
    10,337
    
    
    
    12,303
    
    
    
    12,206Interest expense, net
    
    
    (2,622
    )
    
    
    (732
    )
    
    
    (677
    )
    
    
    (1,339
    )
    
    
    (7,417
    )Income before taxes
    
    
    14,404
    
    
    
    9,823
    
    
    
    9,660
    
    
    
    10,964
    
    
    
    4,789Income tax expense
    
    
    4,674
    
    
    
    3,760
    
    
    
    3,188
    
    
    
    987
    
    
    
    60Net income
    
    $
    9,730
    
    
    $
    6,063
    
    
    $
    6,472
    
    
    $
    9,977
    
    
    $
    4,729Net Income Per Common Share *:Basic
    
    $
    2.39
    
    
    $
    1.50
    
    
    $
    1.48
    
    
    $
    2.08
    
    
    $
    1.00Diluted
    
    $
    2.32
    
    
    $
    1.45
    
    
    $
    1.42
    
    
    $
    2.02
    
    
    $
    1.00Dividends Declared per Common Share*
    
    $
    0.25
    
    
    $
    0.21
    
    
    $
    0.05
    
    
    
    
    
    
    
    Balance Sheet Data (at year end):Working capital
    
    $
    94,408
    
    
    $
    54,283
    
    
    $
    43,773
    
    
    $
    46,372
    
    
    $
    34,807Total assets
    
    
    169,379
    
    
    
    94,447
    
    
    
    88,346
    
    
    
    91,323
    
    
    
    79,107Total long-term debt
    
    
    29,246
    
    
    
    7,865
    
    
    
    3,667
    
    
    
    5,667
    
    
    
    7,667Shareholders equity
    
    
    75,492
    
    
    
    65,969
    
    
    
    61,278
    
    
    
    63,483
    
    
    
    53,802*     Adjusted to reflect 2-for-1 stock split effective as of September 20, 2002
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OUTLOOK Fiscal year 2004 was a very exciting year for us because of the Soffe
acquisition and we are looking forward to the upcoming year. We will have the
Soffe sales and profits for the full twelve months of the year, as compared to
only nine months in fiscal year 2004. In addition, we have sales and marketing
strategies in place that we expect will drive organic growth in both business
segments in fiscal year 2005. In the Delta business we have a number of new products that we will be rolling
out to the marketplace. Weve had great success over the last several years
growing our customer base. During fiscal year 2004, the Delta segment shipped
over three thousand accounts, up sixty eight percent from the prior year. In
fiscal year 2005, we will continue to focus on opening new accounts. We set
new records for shipments out of our Florida and West Coast distribution
centers during the past year. We believe that having product in close
proximity to our customer base enhances our customer service and has proven to
be an effective strategy for us. In fiscal year 2005, we expect to add an
additional distribution center in the New England area to serve our customers
and also expect to finalize the purchase of a new building in the Knoxville,
Tennessee area to replace the old multi-story building we are currently using. We also have high expectations for the Soffe business in fiscal year 2005.
Soffes Dry-Release T just won the best T-shirt in America by Readers Digest as
a part of their 100 Best Discoveries. This product has also been well received
by our military accounts and should help drive growth in this distribution
channel. A number of new products have also been developed and introduced for
our retail and sporting goods channels. Soffe will continue to focus on college
bookstores, and now has access to low cost T-shirt manufacturing which should
allow us to be more aggressive in this channel. We have implemented a number
of cost reduction initiatives that should continue to improve margins at Soffe
in fiscal 2005 and we will continue to expand Soffes product sourcing horizon
which should further drive down Soffes product costs. Cotton prices have been very volatile over the past several quarters. During
the first quarter of fiscal year 2005, we will be shipping product containing
our highest cost cotton. Our cotton cost through cost of sales should then
decrease sequentially through the remaining quarters of the fiscal year. 11




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In the upcoming year, we will also be evaluating our long-term strategy to
continue to obtain low cost yarn. Our current yarn facility is still producing
yarn at competitive prices, and we expect it to continue to produce quality
yarn at competitive prices for a number of years. We continue to evaluate our
long-term options, which could include an expansion of our facility, a joint
venture, a supply agreement with a yarn vendor, or continued purchase of our
additional yarn requirements in the open market. On a consolidated basis we expect to spend approximately $7.0 million on
capital expenditures in the upcoming year, excluding the new Knoxville
distribution center for which we are exploring alternative financing packages.
We expect our total investment in this new distribution facility to be in the
$4.5 to $5.0 million range. RESULTS OF OPERATIONS Overview The most significant factor impacting our results of operations for the fiscal
year ending July 3, 2004 was the completion of the acquisition of M. J. Soffe
Co. on October 3, 2003, which now operates as our Soffe segment. The
acquisition of Soffe was an important part of our expansion strategy. The
addition of the Soffe business allows us to participate in four additional
distinct channels of distribution for activewear products. We believe 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 Soffes operations have been included in the
consolidated financial statements since the acquisition date. Although we were not pleased with our results in the beginning of fiscal year
2004, business improved in the second half of the year and results met our
expectations in the last two quarters. In the Delta segment, selling prices
continued to improve throughout the year and, on most basic products, prices
were higher in the fourth quarter than in the second and third quarters of the
fiscal year. The improving trend on pricing, combined with higher sales volume
in our non commodity products, drove solid sales results in the Delta segment.
Sales in the Soffe segment exceeded our expectations in the second half of the
year, driven by higher branded sales in the retail and military channels.
During the year, we operated our textile facilities at less than full capacity
in order to manage our inventory levels and avoid purchasing high cost raw
materials. We expensed the unabsorbed fixed cost created by this strategy
during the year. While this hurt our short-term results, we believe this helps
position us to take advantage of the opportunities we see in the future. During the fourth fiscal quarter we made considerable progress on lowering our
debt and reducing our inventories. Debt has been reduced by over $15 million
since we closed on the Soffe acquisition, and we exceeded our inventory
reduction targets for the fourth quarter. Quarterly Financial Data For information regarding quarterly financial data, refer to Note 15 Quarterly
Financial Information (Unaudited) to the consolidated financial statements. Fiscal Year 2004 versus Fiscal Year 2003 Net sales for fiscal year 2004 were $208.1 million, an increase of $78.6
million, or 60.7%, from net sales of $129.5 million in fiscal year 2003. Net
sales in the Delta segment were $138.0 million, an increase of $8.4 million, or
6.5%, from net sales of $129.5 million in fiscal year 2003. Higher fiscal year
2004 net sales in the Delta segment were the result of increased unit sales (up
10.3%, accounting for $13.3 million), partially offset by lower average unit
prices (down 3.4%, accounting for $4.9 million). The Soffe segment contributed
$71.8 million in net sales for the last nine months of the fiscal year. Gross margins for the year ended July 3, 2004 improved to 23.2% compared to
18.5% in the prior year as a result of the higher gross margins associated with
the Soffe business, which was included in the results for the last nine months
of the 2004 fiscal year. The gross margin on basic tee shirts declined during
the year compared to the prior year principally due to lower average selling
prices and higher raw material costs, offset partially by lower conversion
costs. Fiscal year 2004 included 53 weeks of operations compared to the 52
weeks of operations in the prior fiscal year. Selling, general and administrative expenses for fiscal year 2004 were $31.0
million, or 14.9% of net sales, an increase of $17.8 million from $13.2
million, or 10.2% of net sales, in fiscal year 2003. The increase in selling,
general and administrative expenses was primarily the result of the addition of
the Soffe business, which was included in our results for the last nine months
of the 2004 fiscal year. Selling costs increased as a percentage of sales
primarily as a result of the higher selling costs associated with branded
apparel products. During fiscal 2004 we had a recovery of bad debt expense of
$0.2 12




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##### Table of Contents



million compared to a provision for bad debt expense of $0.7 million during
fiscal 2003. The recovery of bad debt expense was due to improved accounts
receivable agings. In addition, in the fourth quarter of fiscal year 2003, we
incurred higher bad debt expenses resulting from the slower payments from
customers due to the depressed retail climate and the bankruptcy filing of a
customer. Other expense for fiscal year 2004 was $0.2 million, consistent with fiscal
2003. In both fiscal years, we recorded $0.1 million in net losses related to
cotton options. In fiscal years 2004 and 2003, we recorded a net loss of $0.2
million and $0.1 million, respectively, related to the sale or disposal of
certain machinery and equipment. Operating income for fiscal year 2004 was $17.0 million, an increase of $6.5
million, or 61.3%, from $10.6 million in fiscal year 2003. The increase is the
result of the higher gross profit described above, partially offset by higher
selling, general and administrative expenses. The Delta and Soffe segments
contributed $7.6 million and $9.6 million in operating income, respectively.
Delta segment operating income was lower in fiscal 2004 than in
fiscal 2003 primarily because of the decline in gross margin on basic
tee shirts described above. Net interest expense for fiscal year 2004 was $2.6 million, an increase of $1.9
million from fiscal year 2003. The increase in interest expense resulted
primarily from the increase in average debt outstanding, resulting from the M.
J. Soffe acquisition. Our effective tax rate for the year ended July 3, 2004 was 32.4% compared to
38.3% for the year ended June 28, 2003. During the fiscal year ending June 30,
2001, we created a tax liability in the amount of approximately $0.9 million
with respect to our tax sharing agreement between Delta Woodside Industries,
Inc. (our former parent company) and the Company. During the current fiscal
year, 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 at that time. Net income for fiscal year 2004 was $9.7 million, an increase of $3.7 million,
or 60.5%, from net income of $6.1 million for fiscal year 2003, due to the
factors described above. Inventories increased $58.7 million from June 28, 2003 to $105.9 million on
July 3, 2004. The acquisition of M. J. Soffe Co. resulted in an increase of
$52.0 million in inventory compared to the prior year. The increase in
inventory in the Delta business is primarily the result of the higher raw
material prices in inventory. We continue to focus on managing our inventory
levels while maintaining the inventory necessary to achieve our expected sales
growth in the upcoming fiscal year. Fiscal Year 2003 versus Fiscal Year 2002 Net sales for fiscal year 2003 were $129.5 million, a decrease of $2.1 million,
or 1.6%, from net sales of $131.6 million in fiscal year 2002. Lower fiscal
year 2003 net sales were the result of lower average unit prices (down 5.8%,
accounting for $8.0 million) offset partially by increased unit sales (up 4.5%,
accounting for $5.9 million). Throughout fiscal year 2003, pricing in the
marketplace continued to decrease, primarily in the basic white and colored
tees. We did not fully participate in many of the pricing promotions in the
industry, resulting in decreased sales volumes in these products. The
increase in unit sales for fiscal year 2003 is the result of increased sales in
our heavyweight and specialty products, slightly offset by decreases in our
basic tees. Gross profit as a percentage of net sales increased to 18.5% in fiscal year
2003 from 16.2% in fiscal year 2002 primarily as a result of lower raw material
costs, partially offset by lower average selling prices, throughout fiscal year
2003. We also achieved significant cost reductions and increased production
efficiencies in our textile and sewing operations during the year. The gross
profit for the year ended June 29, 2002 includes an expense of $0.4 million
related to the training and start-up of the Fayette textile facility. Selling, general and administrative expenses for fiscal year 2003 were $13.2
million, or 10.2% of net sales, an increase of $1.4 million from $11.8 million,
or 9.0% of net sales, in fiscal year 2002. The increase was primarily driven
by an increase of $0.7 million in distribution costs, an increase of $0.3
million in selling expenses and an increase of $0.4 million in bad debt
expense. The increase in distribution expenses mainly relates to the Florida
Distribution Center that we opened in February 2003. Selling expenses for
fiscal year 2003 were higher due to higher salaries and commission expense,
resulting from the increased sales of specialty tees, and higher advertising
costs, resulting from direct marketing campaigns. During fiscal year 2003, we
incurred higher bad debt expenses resulting from the slower payments from
customers due to the depressed retail climate. Other expense for fiscal year 2003 was $0.2 million compared to other income of
$0.8 million for fiscal 2002. In fiscal year 2003, we recorded $0.1 million in
net losses related to cotton options. We also recorded a net loss of $0.1
million related to the sale or disposal of certain machinery and equipment.
During fiscal year 2002, we recorded a $0.3 million gain related to our cotton
options. In fiscal year 2002, we also sold our facility located in Washington,
Georgia, resulting in a gain of $0.2 13




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million and received the final payment on an installment sale of a previously
idled manufacturing facility, resulting in a gain of $0.3 million. Operating income for fiscal year 2003 was $10.6 million, an increase of $0.2
million, or 2.1%, from $10.3 million in fiscal year 2002. The increase is the
result of the higher gross profit, partially offset by higher selling, general
and administrative expenses and higher other expense. Net interest expense for fiscal year 2003 was $0.7 million, which is consistent
with fiscal year 2002. During fiscal year 2003, we had an increase in average
borrowings that was offset by a decrease in interest rates. Our effective tax rate for the year ended June 28, 2003 was 38.3% compared to
33.0% for the year ended June 29, 2002. In fiscal year 2002, we reversed a
valuation allowance related to our state net operating loss carryforwards,
resulting in the effective tax rate of 33.0%. Net income for fiscal year 2003 was $6.1 million, a decrease of $0.4 million,
or 6.3%, from net income of $6.5 million for fiscal year 2002, due to the
factors described above. Inventories at June 28, 2003 totaled $47.2 million compared to $35.5 million at
June 29, 2002. The increase in inventory is related to an increase of $7.4
million in finished goods, an increase of $6.1 million in work in process and a
decrease of $1.8 million in raw materials. We built higher levels of inventory
in the first half of the year in expectation of increased sales over the prior
year. We did not meet sales volume expectations during the fourth quarter,
resulting in the increased finished goods inventory at June 28, 2003. Textile
and apparel production levels were also increased to support the expected sales
growth resulting in increased work in process inventory. Our raw material
inventory decreased to $2.9 million at June 28, 2003. Beginning in the fourth
quarter of fiscal year 2002, we had begun increasing our raw material inventory
to take advantage of lower cotton prices and to support our increased textile
capacity. LIQUIDITY AND CAPITAL RESOURCES In conjunction with the acquisition of M. J. Soffe Co., on October 3, 2003 we
entered into an Amended and Restated Loan and Security Agreement with Congress
Financial Corporation (Southern), as lender and as agent for the financial
institutions named as lenders, pursuant to which our existing line of credit
(the Delta Facility) was increased to $40 million, which represents a $5
million increase in our predecessor credit facility. 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. The Delta Facility and the Soffe Facility are secured by a first
priority lien on all of the assets of Delta Apparel and M. J. Soffe Co. Delta
Apparel is a guarantor of the Soffe Facility, and M. J. Soffe Co. is a
guarantor of the Delta Facility. M. J. Soffe Co has the option to increase the
Soffe Facility from $38.5 million to $41.0 million, provided that no event of
default exists under the facility. The Soffe Facility contains
both a subjective acceleration clause and a lockbox arrangement,
whereby remittances from customers reduce the current outstanding
borrowings. Pursuant to Emerging Issues Task Force
(EITF) 95-22 we are classifying borrowings under the
Soffe Facility as current debt. The Delta Facility contains a
subjective acceleration clause and a springing lockbox
arrangement (as defined in EITF 95-22), whereby remittances from
customers are forwarded to 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, 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. Within each of the credit facilities, there is a Fixed Asset Loan Amortization
Amount requiring monthly installment payments, which reduce the amount of
availability under each credit facility. The Fixed Asset Loan Amortization
Amount for the Delta Facility was $10.0 million initially and $8.5 million at
July 3, 2004. The Fixed Asset Loan Amortization Amount for the Soffe Facility
was $8.5 million initially and $7.4 million at July 3, 2004. During each of
fiscal years 2005, 2006 and 2007, we will make payments related to the Fixed
Asset Loan Amortizations totaling $3.4 million. Under the combined credit facilities, after subtracting the Fixed Asset Loan
Amortization Amounts, we are able to borrow up to $60.0 million subject to
borrowing base limitations based on the accounts receivable and inventory
levels. Annual facility fees are .25% of the amount by which $60.0 million
exceeds the average daily principal balance of the outstanding loans and letter
of credit accommodations during the immediately preceding month. At July 3,
2004, we had $43.3 million outstanding under our credit facilities at an
average interest rate of 3.39%. At July 3, 2004, we had the ability to borrow
an additional $31.7 million under the combined credit facilities. In addition to the credit facilities with Congress Financial Corporation
(Southern), the Company has a seller note payable to the former Soffe
shareholders pursuant to the Stock Purchase Agreement dated as of October 3,
2003. The $8.0 million seller note is payable in equal quarterly payments
through September 30, 2006. At July 3, 2004, we had $6.8 million outstanding
under the note at an interest rate of 8.0%. 14




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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. Operating Cash Flows In fiscal year 2004, net cash provided by operating activities was $13.3
million compared to $0.1 million of net cash used by operating activities in
fiscal year 2003. Our cash flow from operating activities in fiscal year 2004
is primarily due to net income and changes in working capital. Changes in
working capital are primarily monitored by analysis of the investment in
accounts receivable and inventories and by the amount of accounts payable.
During fiscal year 2004, our cash flow provided by operating activities was
primarily from net income and noncash charges. The cash used in fiscal year
2003 was primarily due to an increase in inventory and a decrease in income
taxes payable, offset by net income plus depreciation. Investing Cash Flows During fiscal year 2004, investing activities used $53.7 million in cash and
principally represented the acquisition of M. J. Soffe Co. We spent $2.2
million in capital expenditures in the year ended July 3, 2004 and $4.7 million
in the year ended June 28, 2003. Capital expenditures in fiscal 2004 primarily
related to increasing capacity and lowering costs in our Edgefield yarn and
Fayette textile facilities. In fiscal year 2003, we opened a distribution
facility in Florida and spent $0.4 million in capital expenditures related to
this facility. In addition, we spent $1.2 million to increase production and
decrease costs in our Fayette textile facility. Additional capital
expenditures were made in fiscal year 2003 to increase capacity and lower costs
in our existing textile and apparel facilities. Financing Activities In fiscal year 2004, financing activities provided $40.5 million in cash
compared to $1.7 million during fiscal year 2003. The cash provided in fiscal
year 2004 principally came from our credit facilities and related to the
acquisition of M. J. Soffe Co. We paid dividends to our shareholders totaling
$1.0 million and $0.9 million in fiscal years 2004 and 2003, respectively. The Delta Facility contains limitations on, or prohibitions of, cash dividends,
stock purchases, related party transactions, mergers, acquisitions, sales of
assets, indebtedness and investments. We are allowed under the Delta Facility
to make purchases of our own stock up to an aggregate of $23.0 million provided
that no event of default exists or would result from that action and after the
purchase at least $3.0 million remains available to borrow under the facility.
We used $0.1 million, $1.9 million and $9.1 million in fiscal years 2004, 2003
and 2002 respectively, for share repurchases. The Soffe Facility and the $8.0 million seller note and related documents (the
Seller Note) contain limitations on, or prohibitions of, cash dividends,
stock purchases, related party transactions, mergers, acquisitions, sales of
assets, indebtedness and investments. The terms of the Soffe Facility prohibit M. J. Soffe Co. from making any cash
dividends or other distributions or similar payments to us, except for the
following: payments for federal and state taxes that are attributable to its
income or assets, provided that no event of default exists or would result from
the payment; payments for reasonable, ordinary-course expenses relating to
legal and accounting, insurance, marketing, payroll, information systems and
similar types of services attributable to M. J. Soffe Co.; payments in
connection with arms-length transactions made in the ordinary course of
business; and an annual payment of management fees not to exceed $400,000,
provided that no event of default exists or would result from the payment and
further provided that, for a period of 90 days prior to the payment and
immediately after the payment, at least $4.0 million remains available to
borrow under the facility. The Soffe Facility also limits the ability of M.J.
Soffe Co. to make loans to us. The terms of the Seller Note also prohibit M. J. Soffe Co. from making any cash
dividends or distributions, loans or extraordinary payments to us, except for
the following: payments relating to taxes permitted under the Soffe Facility,
payments for services permitted under the Soffe Facility, subject to the
reasonable approval of certain of the sellers; an annual payment of management
fees not to exceed $370,000; payments for goods in the ordinary course of
business; and additional dividends or other distributions up to an aggregate of
10% of M. J. Soffe Co.s cumulative net after-tax income, provided that no
payment default on the Seller Note has occurred or would result from the
dividend or distribution (however, those additional dividends or distributions
are not currently permitted under the Soffe Facility). Future Liquidity and Capital Resources Based on our expectations, we believe that our 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 lines
should be sufficient to 15




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service our debt payment requirements, to satisfy our day-to-day working
capital needs, to fund our planned capital expenditures and to pay dividends
under our dividend program. Any material deterioration in our results of
operations, however, may result in us losing our ability to borrow under our
revolving credit facilities and to issue letters of credit to suppliers or may
cause the borrowing availability under these facilities to be insufficient for
our needs. The following table summarizes our contractual cash obligations, as of July 3,
2004, by future period. Payments Due by PeriodTotal
    
    Less than 1 year
    
    1 - 3 years
    
    3  5 years
    
    After 5 years(In thousands)Contractual ObligationsLong-term debt
    
    $
    50,056
    
    
    $
    20,810
    
    
    $
    24,746
    
    
    $
    4,500
    
    
    $
    Operating leases
    
    
    13,745
    
    
    
    3,547
    
    
    
    4,640
    
    
    
    2,528
    
    
    
    3,030Letters of credit
    
    
    1,476
    
    
    
    1,476
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations
    
    
    21,145
    
    
    
    21,145
    
    
    
    
    
    
    
    
    
    
    
    Contingent purchase price
    
    
    7,143
    
    
    
    1,228
    
    
    
    5,915
    
    
    
    
    
    
    
    Total
    
    $
    93,565
    
    
    $
    48,206
    
    
    $
    35,301
    
    
    $
    7,028
    
    
    $
    3,030
 Dividends and Purchases of our Own Shares Our ability to pay cash dividends or purchase our own shares will largely be
dependent on our earnings, financial condition, capital requirements,
compliance with loan covenants and other relevant factors. Our Delta Facility
permits the payment of cash dividends in an amount up to 25% of cumulative net
income (excluding extraordinary or unusual non-cash items), provided that no
event of default exists or would result from that payment and after the payment
at least $6.0 million remains available under the revolving credit facility.
At July 3, 2004, the total amount permitted for payment of cash dividends under
our credit agreement was $6.9 million. Purchases of our own stock are
permitted provided that no event of default exists or would result from that
action and after the purchase at least $3.0 million remains available to borrow
under the revolving credit facility. The Delta Facility, as amended, allows
for an aggregate of $23.0 million in share repurchases. During the fiscal year ended July 3, 2004, we purchased 7,853 shares of our
Common Stock pursuant to our Stock Repurchase Program for an aggregate of $0.1
million. Since the inception of the program, weve purchased 368,057 shares of
our stock under the program for a total cost of $4.2 million. We have
authorization from our Board of Directors to spend up to $6.0 million for share
repurchases under the Stock Repurchase Program. All purchases were made at the
discretion of our management. In fiscal year 2002, we purchased 676,286 shares of our stock (adjusted to
reflect the 2-for-1 stock split effective as of September 20, 2002) at an
aggregate cost, including offering expenses, of $7.6 million, pursuant to our
Dutch Tender Offer. Dividend Program On April 18, 2002, our Board of Directors adopted a quarterly dividend program.
We paid $1.0 million and $0.9 million in dividends during fiscal year 2004 and
2003, respectively. The Board may terminate or amend the dividend program at
any time. We currently expect to continue the quarterly dividend program. Stock Split On August 15, 2002, our Board of Directors approved a 2-for-1 stock split of
our common stock. The stock split took the form of a 100% stock dividend that
was paid on September 20, 2002 to each shareholder of record as of September 6,
2002. 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. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which were
prepared in accordance with U.S. generally accepted accounting principles
(GAAP). 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 16




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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. Note 1 to our Consolidated Financial Statements includes a summary of the
significant accounting policies or methods used in the preparation of our
Consolidated Financial Statements. Revenue Recognition and Accounts Receivable We consider revenue realized or realizable and earned when the following
criteria are met: persuasive evidence of an agreement exists, delivery has
occurred, the price is fixed and determinable and the collectibility is
reasonably assured. Sales are recorded net of discounts and provisions for
estimated returns and allowances. We estimate returns and allowances on an
ongoing basis by considering historical and current trends. We record these
costs as a reduction to net revenue. 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. As of July 3, 2004, we had
operating loss carryforwards of approximately $8.2 million for State purposes.
The valuation allowance against the operating loss carryfowards was $58
thousand at July 3, 2004. These carryforwards expire at various intervals
through 2019. RECENT ACCOUNTING STANDARDS In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46). FIN 46 requires that if an entity has a controlling financial
interest in a variable interest entity, the assets, liabilities and results of
activities of the variable interest entity should be included in the
consolidated financial statements of the entity. In December 2003, the FASB
published a revision to FIN 46 (hereafter referred to as FIN 46R) to clarify
some of the provisions of FIN 46, and to exempt certain entities from its
requirements. We determined that we had no interests in variable interest
entities. Accordingly the adoption of FIN 46 did not have a material impact on
our financial position, results of operations or liquidity. 17




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Commodity Risk Sensitivity We purchase cotton from approximately eight established merchants with whom we
have long-standing relationships. The majority of our purchases are executed
using on-call contracts. These on-call arrangements are used to insure that
we have available an adequate supply of cotton for our requirements. Under
on-call contracts, we agree to purchase specific quantities for delivery on
specific dates, with pricing to be determined at a later time. Prices are set
according to prevailing prices, as reported by the New York Cotton Exchange, at
the time we elect to fix specific contracts. Cotton on-call with a fixed price at July 3, 2004 was valued at $15.7 million,
and is scheduled for delivery between July 2004 and March 2005. At July 3,
2004, we had unpriced contracts for deliveries between October 2004 and June
2005. Based on the prevailing price at July 3, 2004, the value of these
commitments was approximately $5.7 million. At July 3, 2004, a 10% decline in
the market price of the cotton covered by our fixed price contracts would have
had a negative impact of approximately $1.6 million 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 our fixed price contracts would have had a negative impact of
approximately $0.7 million on the value of the contracts. The effect of a 10%
decline in the market price of cotton on our fixed price contracts would have
been more at July 3, 2004 than at June 28, 2003 because the value of our fixed
price cotton on-call contracts was more on July 3, 2004. Cotton price
movements could result in unfavorable pricing of cotton for us. We also
purchase yarn from third party vendors. The price of yarn is primarily
impacted by the price of cotton, as discussed above. We 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 on July 3, 2004. Interest Rate Sensitivity Our credit agreements provide that the outstanding amounts owed shall bear
interest at variable rates. If the amount of outstanding indebtedness at July
3, 2004 under the revolving credit facilities had been outstanding during the
entire year and the interest rate on this outstanding indebtedness were
increased by 100 basis points, our expense would have increased by
approximately $433,000, or 9.3%, for the fiscal year. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements for each of the fiscal years in the
three-year period ended July 3, 2004, together with the Report
of Independent Registered Public Accounting Firm thereon, are included in
this report commencing on page F-1 and are
listed under Part IV, Item 15 in this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as of July 3, 2004 and, based on their evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that these
controls and procedures are effective. Disclosure controls and procedures are our controls and other procedures that
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. 18




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Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information that we are required to disclose
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. There was no change in our internal control over financial reporting during the
fourth quarter of fiscal year 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. 
 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference from
the portions of the definitive Proxy Statement to be filed with the Securities
and Exchange Commission on or prior to 120 days following the end of our fiscal
year under the headings Election of Directors, Executive Officers and
Section 16(a) Beneficial Ownership Reporting Compliance. All of our employees, including our Chief Executive Officer and Chief Financial
Officer (who is also our principal accounting officer), are required to abide
by our business conduct policies to ensure that our business is conducted in a
consistently legal and ethical manner. We adopted a code of business conduct
and ethics known as the Ethics Policy Statement. The Ethics Policy Statement
is available on our website. In the event that we amend or waive any of the
provisions of the Ethics Policy Statement applicable to our Chief Executive
Officer or Chief Financial Officer, we intend to disclose the same on our
website at www.deltaapparel.com. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference from
the portions of the definitive Proxy Statement to be filed with the Securities
and Exchange Commission on or prior to 120 days following the end of our fiscal
year under the headings Management Compensation and Compensation Committee
Interlocks and Insider Participation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS The information relating to security ownership by certain beneficial owners and
management is incorporated herein by reference from the portion of the
definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or prior to 120 days following the end of our fiscal year under
the heading Stock Ownership of Principal Shareholders and Management. Set forth in the table below is certain information about securities issuable
under our equity compensation plans as of July 3, 2004. Number of securitiesWeighted-average
    
    remaining available forNumber of securities to
    
    exercise price of
    
    future issuance under equitybe issued upon exercise
    
    outstanding
    
    compensation plansof outstanding options,
    
    options, warrants and
    
    (excluding securitiesPlan Category
    
    warrants and rights *
    
    rights *
    
    reflected in column (a)) *(a)
    
    (b)
    
    (c)Equity compensation plans
approved by security
holders
    
    
    
    
    
    
    
    
    
    
    Equity compensation plans
not approved by security
holders
    
    
    156,571
    
    
    $
    3.33
    
    
    
    858,999Total
    
    
    156,571
    
    
    $
    3.33
    
    
    
    858,999*     Adjusted to reflect 2-for-1 stock split effective as of September 20, 2002
 19




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Under the Stock Option Plan, options may be granted covering up to 1,000,000
shares of common stock. Options are granted by the compensation grants
committee of our board of directors to key and middle level executives for the
purchase of our stock at prices not less than the fair market value of the
shares on the dates of grant. Under the Incentive Stock Award Plan, the compensation grants committee of our
board of directors has the discretion to grant awards for up to an aggregate
maximum of 400,000 common shares. The Award Plan authorizes the committee to
grant to our officers and key and middle level executives rights to acquire
common shares at a cash purchase price of $0.01 per share. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference from
the portion of the definitive Proxy Statement to be filed with the Securities
and Exchange Commission on or prior to 120 days following the end of our fiscal
year under the heading Related Party Transactions. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated herein by reference from
the portion of the definitive Proxy Statement to be filed with the Securities
and Exchange Commission on or prior to 120 days following the end of our fiscal
year under the heading Audit and Non-Audit Fees. 
 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K (a)(1) and (2) Financial Statements and Financial Statement Schedules  
    
    Report of Independent Registered Public Accounting Firm.
    
    Consolidated Balance Sheets as of July 3, 2004 and June 28, 2003.
    
    Consolidated Statements of Income for the years ended July 3, 2004, June 28, 2003 and June 29, 2002.
    
    Consolidated Statements of Shareholders Equity for the years ended July 3, 2004, June 28, 2003 and June 29, 2002.
    
    Consolidated Statements of Cash Flows for the years ended July 3, 2004, June 28, 2003 and June 29, 2002.
    
    Notes to Consolidated Financial Statements. The following consolidated financial statement schedule of Delta Apparel,
Inc. and subsidiaries is included in Item 15(d): Schedule II  Consolidated Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
Columns omitted from schedules filed have been omitted because the information
is not applicable. (a)(3) Listing of Exhibits* 2.1 Distribution Agreement by and among Delta Woodside Industries, Inc, DH
Apparel Company, Inc. (subsequently renamed Duck Head Apparel Company, Inc.)
and the Company (excluding schedules and exhibits): Incorporated by reference
to Exhibit 2.1 to the Companys Form 10. 2.2 Amended and Restated Stock Purchase Agreement dated as of October 3,
2003 among Delta Apparel, Inc., MJS Acquisition Company, M. J. Soffe Co., James
F. Soffe, John D. Soffe, and Anthony M. Cimaglia (excluding schedules and
exhibits): Incorporated by reference to Exhibit 2.1 to the Companys Form
8-K/A filed on October 17, 2003. 3.1.1 Articles of Incorporation of the Company: Incorporated by reference
to Exhibit 3.1 to the Companys Form 10. 20




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3.1.2 Amendment to Articles of Incorporation of the Company dated
September 18, 2003: Incorporated by reference to exhibit 3.1.2 to the
Companys Form 10-Q filed on November 5, 2003. 3.2.1 Bylaws of the Company: Incorporated by reference to Exhibit 3.2.1 to the Companys Form 10. 3.2.2 Amendment to Bylaws of the Company adopted January 20, 2000:
Incorporated by reference to Exhibit 3.2.2 to the Companys Form 10. 3.2.3 Amendment to Bylaws of the Company adopted February 17, 2000:
Incorporated by reference to Exhibit 3.2.3 to the Companys Form 10. 3.2.4 Amendment to Bylaws of the Company adopted June 6, 2000:
Incorporated by reference to Exhibit 3.2.4 to the Companys Form 10. 4.1. See Exhibits 3.1.1, 3.1.2, 3.2.1, 3.2.2, 3.2.3, 3.2.4, and 10.2
through 10.17, inclusive. 4.2. Specimen certificate for common stock, par value $0.01 per share, of
the Company: Incorporated by reference to Exhibit 4.2 to the Companys Form 10. 10.1. See Exhibits 2.1 and 2.2. 10.2 Amended and Restated Loan and Security Agreement dated as of October
3, 2003 among Delta Apparel, Inc., Congress Financial Corporation (Southern),
as Agent, and certain financial institutions named therein, as Lenders:
Incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed on
October 17, 2003. 10.3 Loan and Security Agreement dated as of October 3, 2003 among MJS
Acquisition Company, Congress Financial Corporation (Southern), as Agent, and
certain financial institutions named therein, as Lenders: Incorporated by
reference to Exhibit 10.2 to the Companys Form 8-K filed on October 17, 2003. 10.4 General Security Agreement of MJS Acquisition Company and SAIM, LLC
in favor of Congress Financial Corporation (Southern), as Agent, dated as of
October 3, 2003: Incorporated by reference to Exhibit 10.3 to the Companys
Form 8-K filed on October 17, 2003. 10.5 General Security Agreement of Delta Apparel, Inc. and SAIM, LLC in
favor of Congress Financial Corporation (Southern), as Agent, dated as of
October 3, 2003: Incorporated by reference to Exhibit 10.4 to the Companys
Form 8-K filed on October 17, 2003. 10.6 Trademark Security Agreement dated as of October 3, 2003 between MJS
Acquisition Company and Congress Financial Corporation (Southern), as Agent:
Incorporated by reference to Exhibit 10.5 to the Companys Form 8-K filed on
October 17, 2003. 10.7 Form of Deed of Trust of M. J. Soffe Co. in favor of Congress
Financial Corporation (Southern), as Agent, dated as of October 3, 2003:
Incorporated by reference to Exhibit 10.6 to the Companys Form 8-K filed on
October 17, 2003. 10.8 Stock Pledge Agreement dated as of October 3, 2003 by and among Delta
Apparel, Inc., MJS Acquisition Company, and Congress Financial Corporation
(Southern), as Agent: Incorporated by reference to Exhibit 10.7 to the
Companys Form 8-K filed on October 17, 2003. 10.9 Guarantee of MJS Acquisition Company and SAIM, LLC in favor of
Congress Financial Corporation (Southern), as Agent, dated as of October 3,
2003: Incorporated by reference to Exhibit 10.8 to the Companys Form 8-K
filed on October 17, 2003. 10.10 Guarantee of Delta Apparel, Inc. and SAIM, LLC in favor of Congress
Financial Corporation (Southern), as Agent, dated as of October 3, 2003:
Incorporated by reference to Exhibit 10.9 to the Companys Form 8-K filed on
October 17, 2003. 10.11 Collateral Assignment of Purchase Agreements dated as of October 3,
2003 by and among Delta Apparel, Inc., MJS Acquisition Company, and Congress
Financial Corporation (Southern), as Agent: Incorporated by reference to
Exhibit 10.10 to the Companys Form 8-K filed on October 17, 2003. 21




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10.12 Subordination Agreement dated as of October 3, 2003 by and among
Delta Apparel, Inc., MJS Acquisition Company, James F. Soffe, John D. Soffe,
Anthony M. Cimaglia, and Congress Financial Corporation (Southern), as Agent:
Incorporated by reference to Exhibit 10.11 to the Companys Form 8-K filed on
October 17, 2003. 10.13 Promissory Note of MJS Acquisition Company issued to James F. Soffe,
John D. Soffe, and Anthony M. Cimaglia dated as of October 3, 2003:
Incorporated by reference to Exhibit 10.12 to the Companys Form 8-K filed on
October 17, 2003. 10.14 Security Agreement of MJS Acquisition Company in favor of James F.
Soffe, John D. Soffe, and Anthony M. Cimaglia dated as of October 3, 2003:
Incorporated by reference to Exhibit 10.13 to the Companys Form 8-K filed on
October 17, 2003. 10.15 Form of Deed of Trust, Assignment of Rents and Security Agreement of
M. J. Soffe Co. in favor of James F. Soffe, John D. Soffe, and Anthony M.
Cimaglia dated as of October 3, 2003: Incorporated by reference to Exhibit
10.14 to the Companys Form 8-K filed on October 17, 2003. 10.16 Guaranty of Delta Apparel, Inc. in favor of James F. Soffe, John D.
Soffe, and Anthony M. Cimaglia dated as of October 3, 2003: Incorporated by
reference to Exhibit 10.15 to the Companys Form 8-K filed on October 17, 2003. 10.17 Pledge Agreement of Delta Apparel, Inc. in favor of James F. Soffe,
John D. Soffe, and Anthony M. Cimaglia dated as of October 3, 2003:
Incorporated by reference to Exhibit 10.16 to the Companys Form 8-K filed on
October 17, 2003. 10.18 Employment and Non-Solicitation Agreement dated as of October 3,
2003 among Delta Apparel, Inc., M. J. Soffe Co., and James F. Soffe:
Incorporated by reference to Exhibit 10.17 to the Companys Form 8-K filed on
October 17, 2003. 10.19 Employment and Non-Solicitation Agreement dated as of October 3,
2003 among Delta Apparel, Inc., M. J. Soffe Co., and John D. Soffe:
Incorporated by reference to Exhibit 10.18 to the Companys Form 8-K filed on
October 17, 2003. 10.20 Employment and Non-Solicitation Agreement dated as of October 3,
2003 among Delta Apparel, Inc., M. J. Soffe Co., and Anthony M. Cimaglia:
Incorporated by reference to Exhibit 10.19 to the Companys Form 8-K filed on
October 17, 2003. 10.21 Real Estate Exchange Contract dated as of October 3, 2003 between
MJS Acquisition Company and Middle Road Properties, LLC: Incorporated by
reference to Exhibit 10.20 to the Companys Form 8-K filed on October 17, 2003. 10.22 Industrial Lease Agreement dated as of October 3, 2003 between M. J.
Soffe Co. and Middle Road Properties, LLC: Incorporated by reference to
Exhibit 10.21 to the Companys Form 8-K filed on October 17, 2003. 10.23 Employment Agreement between Delta Apparel, Inc. and Herbert M.
Mueller dated September 30, 2003: Incorporated by reference to Exhibit 10.22
to the Companys Form 10-Q filed on November 5, 2003.** 10.24 Employment Agreement between Delta Apparel, Inc. and Martha M.
Watson dated September 30, 2003: Incorporated by reference to Exhibit 10.23 to
the Companys Form 10-Q filed on November 5, 2003.** 10.25.1 Tax Sharing Agreement by and among Delta Woodside Industries,
Inc., Duck Head Apparel Company, Inc. and the Company: Incorporated by
reference to Exhibit 2.2 to the Report on Form 8-K of Delta Woodside
Industries, Inc. (File No. 1-10095) with date of June 30, 2000. 10.25.2 Amendment to Tax Sharing Agreement dated August 6, 2001 by and
among Delta Woodside Industries, Inc., Duck Head Apparel Company, Inc. and the
Company: Incorporated by reference to Exhibit 10.2.2 to the Companys Annual
Report on Form 10-K for the fiscal year ended June 30, 2001. 10.26 Delta Apparel, Inc. 2000 Stock Option Plan, Effective as of February
15, 2000, Amended & Restated March 15, 2000: Incorporated by reference to
Exhibit 10.4 to the Companys Form 10.** 10.27 Delta Apparel, Inc. Incentive Stock Award Plan, Effective February
15, 2000, Amended & Restated March 15, 2000: Incorporated by reference to
Exhibit 10.5 to the Companys Form 10.** 22




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##### Table of Contents



10.28 Delta Apparel, Inc. Deferred Compensation Plan for Key Managers:
Incorporated by reference to Exhibit 10.6 to the Companys Form 10.** 21 Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP, independent auditors. 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. * All reports previously filed by the Company with the Commission pursuant
to the Securities Exchange Act, and the rules and regulations promulgated
thereunder, exhibits of which are incorporated to this Report by reference
thereto, were filed under Commission File Number 1-15583. ** This is a management contract or compensatory plan or arrangement. The registrant agrees to furnish supplementally to the Securities and Exchange
Commission a copy of any omitted schedule or exhibit to any of the above filed
exhibits upon request of the Commission. (b) Reports on Form 8-K On April 29, 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 Operations and Financial
Condition). (c) Exhibits See Item 15(a) above. (d) Schedules See information under (a)(1) and (2) of Item 15. 23




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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)September 8, 2004
    
    By: /s/ Herbert M. MuellerDate
    
    Herbert M. MuellerVice President, Chief Financial Officer and Treasurer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and as of the dates indicated. /s/ David S. Fraser
    
    9-3-04
    
    /s/ Philip J. Mazzilli, Jr.
    
    9-3-04David S. Fraser
    
    Date
    
    Philip J. Mazzilli, Jr.
    
    DateDirector
    
    
    
    Director/s/ William F. Garrett
    
    9-8-04
    
    /s/ Buck A. Mickel
    
    9-2-04William F. Garrett
    
    Date
    
    Buck A. Mickel
    
    DateDirector
    
    
    
    Director/s/ Robert W. Humphreys
    
    9-1-04
    
    /s/ Herbert M. Mueller
    
    9-8-04Robert W. Humphreys
    
    
    
    Herbert M. Mueller
    
    DatePresident, Chief
Executive Officer
and Director
    
    
    
    Vice President, Chief Financial
Officer & Treasurer (principal
financial officer and principal
accounting officer)/s/ Max Lennon
    
    9-8-04
    
    /s/ David Peterson
    
    9-8-04Max Lennon
    
    Date
    
    David Peterson
    
    DateDirector
    
    
    
    Director/s/ E. Erwin Maddrey, II
    
    9-1-04E. Erwin Maddrey, II
    
    DateDirector
 24




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##### Table of Contents



Delta Apparel, Inc and Subsidiaries Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of July 3, 2004 and June 28, 2003
    
    
    F-3Consolidated Statements of Income for the years ended July 3, 2004, June 28, 2003 and June 29, 2002
    
    
    F-4Consolidated Statements of Shareholders Equity for the years ended July 3, 2004, June 28, 2003 and
June 29, 2002
    
    
    F-5Consolidated Statements of Cash Flows for the years ended July 3, 2004, June 28, 2003 and June 29, 2002
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Delta Apparel, Inc. We have audited the accompanying consolidated balance sheets of Delta Apparel,
Inc. and subsidiaries (the Company) as of July 3, 2004 and June 28, 2003, and
the related consolidated statements of income, shareholders equity and cash
flows for each of the three years in the period ended July 3, 2004. Our audits
also included the financial statement schedule listed in the index of Item 15
(a). These financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
July 3, 2004 and June 28, 2003, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended July 3,
2004, in conformity with U.S. generally accepted accounting principles. Also
in our opinion, the related financial statement schedule for the three years
ended July 3, 2004, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein. /s/ ERNST & YOUNG LLP Atlanta, Georgia
August 12, 2004 F-2




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##### Table of Contents



Delta Apparel, Inc. and
SubsidiariesConsolidated Balance
Sheets
(Amounts in thousands, except share amounts) July 3, 2004
    
    June 28, 2003AssetsCurrent assets:Cash
    
    $
    333
    
    
    $
    203Accounts receivable, less allowances of $1,166 in 2004 and
$1,523 in 2003
    
    
    37,302
    
    
    
    21,216Other receivables
    
    
    1,308
    
    
    
    980Inventories
    
    
    105,888
    
    
    
    47,174Prepaid expenses and other current assets
    
    
    1,616
    
    
    
    1,689Deferred income taxes
    
    
    1,075
    
    
    
    620Income taxes receivable
    
    
    
    
    
    
    434Total current assets
    
    
    147,522
    
    
    
    72,316Property, plant and equipment, net
    
    
    19,529
    
    
    
    22,077Deferred income taxes
    
    
    178
    
    
    
    Other assets
    
    
    2,150
    
    
    
    54$
    169,379
    
    
    $
    94,447Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    16,036
    
    
    $
    8,929Accrued expenses
    
    
    14,475
    
    
    
    7,104Current portion of long-term debt
    
    
    20,810
    
    
    
    2,000Income taxes payable
    
    
    1,793
    
    
    
    Total current liabilities
    
    
    53,114
    
    
    
    18,033Long-term debt
    
    
    29,246
    
    
    
    7,865Deferred income taxes
    
    
    
    
    
    
    1,162Other liabilities
    
    
    11,527
    
    
    
    1,418Total liabilities
    
    
    93,887
    
    
    
    28,478Commitments and contingenciesShareholders 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 4,136,259 and 4,037,080 shares
outstanding as of July 3, 2004 and June 28, 2003, respectively.
    
    
    48
    
    
    
    48Additional paid-in capital
    
    
    53,867
    
    
    
    53,889Retained earnings
    
    
    29,473
    
    
    
    21,007Treasury stock687,227 and 786,406 shares as of July 3, 2004 and
June 28, 2003, respectively.
    
    
    (7,896
    )
    
    
    (8,975
    )Total shareholders equity
    
    
    75,492
    
    
    
    65,969$
    169,379
    
    
    $
    94,447
 See accompanying notes to consolidated financial statements. F-3




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##### Table of Contents



Delta Apparel, Inc. and
SubsidiariesConsolidated Statements of Income
(Amounts in thousands, except share amounts) Year EndedJuly 3, 2004
    
    June 28, 2003
    
    June 29, 2002Net sales
    
    $
    208,113
    
    
    $
    129,521
    
    
    $
    131,601Cost of goods sold
    
    
    159,852
    
    
    
    105,552
    
    
    
    110,273Gross profit
    
    
    48,261
    
    
    
    23,969
    
    
    
    21,328Selling, general and administrative expenses
    
    
    31,043
    
    
    
    13,220
    
    
    
    11,807Other expense (income)
    
    
    192
    
    
    
    194
    
    
    
    (816
    )Operating income
    
    
    17,026
    
    
    
    10,555
    
    
    
    10,337Interest expense, net
    
    
    2,622
    
    
    
    732
    
    
    
    677Income before income taxes
    
    
    14,404
    
    
    
    9,823
    
    
    
    9,660Income tax expense
    
    
    4,674
    
    
    
    3,760
    
    
    
    3,188Net income
    
    $
    9,730
    
    
    $
    6,063
    
    
    $
    6,472Earnings per share *Basic
    
    $
    2.39
    
    
    $
    1.50
    
    
    $
    1.48Diluted
    
    $
    2.32
    
    
    $
    1.45
    
    
    $
    1.42Weighted average number of shares outstanding *
    
    
    4,078
    
    
    
    4,045
    
    
    
    4,368Dilutive effect of stock options *
    
    
    110
    
    
    
    131
    
    
    
    192Weighted average number of shares assuming dilution *
    
    
    4,188
    
    
    
    4,176
    
    
    
    4,560
 *     Adjusted to reflect 2-for-1 stock split effective as of September 20, 2002 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



Delta Apparel, Inc. and
Subsidiaries 
 Consolidated Statements of Shareholders
Equity
  Common Stock
    
    AdditionalPaid-In
    
    Retained
    
    Treasury StockShares
    
    Amount
    
    Capital
    
    Earnings
    
    Shares
    
    Amount
    
    TotalBalance at June 30, 2001
    
    
    2,411,743
    
    
    
    24
    
    
    
    53,889
    
    
    
    9,971
    
    
    
    22,920
    
    
    
    (401
    )
    
    
    63,483Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,472
    
    
    
    
    
    
    
    
    
    
    
    6,472Treasury stock acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    418,443
    
    
    
    (9,114
    )
    
    
    (9,114
    )Stock grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1,366
    )
    
    
    26
    
    
    
    25Stock options exercised under Awards Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62
    
    
    
    (11,780
    )
    
    
    254
    
    
    
    316Stock options exercised under Option Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (368
    )
    
    
    (31,125
    )
    
    
    664
    
    
    
    296Cash dividend ($.10 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (200
    )
    
    
    
    
    
    
    
    
    
    
    (200
    )2-for-1 stock split (See Note 13)
    
    
    2,411,743
    
    
    
    24
    
    
    
    
    
    
    
    (24
    )
    
    
    397,092
    
    
    
    
    
    
    
    Balance at June 29, 2002
    
    
    4,823,486
    
    
    
    48
    
    
    
    53,889
    
    
    
    15,912
    
    
    
    794,184
    
    
    
    (8,571
    )
    
    
    61,278Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,063
    
    
    
    
    
    
    
    
    
    
    
    6,063Treasury stock acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,204
    
    
    
    (1,919
    )
    
    
    (1,919
    )Stock grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    (2,012
    )
    
    
    22
    
    
    
    29Stock options exercised under Awards Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    281
    
    
    
    (71,720
    )
    
    
    791
    
    
    
    1,072Stock options exercised under Option Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (403
    )
    
    
    (64,250
    )
    
    
    702
    
    
    
    299Cash dividend ($.21 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (853
    )
    
    
    
    
    
    
    
    
    
    
    (853
    )Balance at June 28, 2003
    
    
    4,823,486
    
    
    
    48
    
    
    
    53,889
    
    
    
    21,007
    
    
    
    786,406
    
    
    
    (8,975
    )
    
    
    65,969Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,730
    
    
    
    
    
    
    
    
    
    
    
    9,730Treasury stock acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,853
    
    
    
    (148
    )
    
    
    (148
    )Stock grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    (2,422
    )
    
    
    27
    
    
    
    37Stock options exercised under Awards Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    294
    
    
    
    (24,360
    )
    
    
    280
    
    
    
    574Stock options exercised under Option Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (547
    )
    
    
    (80,250
    )
    
    
    920
    
    
    
    373Stock exchange share listing fees
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22
    )Cash dividend ($.25 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,021
    )
    
    
    
    
    
    
    
    
    
    
    (1,021
    )Balance at July 3, 2004
    
    
    4,823,486
    
    
    $
    48
    
    
    $
    53,867
    
    
    $
    29,473
    
    
    
    687,227
    
    
    $
    (7,896
    )
    
    $
    75,492
 See accompanying notes to consolidated financial statements. F-5




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##### Table of Contents



Delta Apparel, Inc. and
Subsidiaries 
 Consolidated Statements of Cash Flows
  Year EndedJuly 3, 2004
    
    June 28, 2003
    
    June 29, 2002Operating activities:Net income
    
    $
    9,730
    
    
    $
    6,063
    
    
    $
    6,472Adjustments to reconcile net income
to net cash (used in) provided by operating activities:Depreciation
    
    
    4,561
    
    
    
    5,506
    
    
    
    6,390Provision for (benefit from) deferred income taxes
    
    
    (1,224
    )
    
    
    961
    
    
    
    (733
    )Provision for
allowances on accounts receivable, net
    
    
    (1,104
    )
    
    
    11
    
    
    
    (300
    )Noncash compensation
    
    
    1,835
    
    
    
    1,251
    
    
    
    1,195Loss (gain) on sale of property and equipment
    
    
    192
    
    
    
    78
    
    
    
    (95
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,258
    )
    
    
    605
    
    
    
    (470
    )Inventories
    
    
    (6,850
    )
    
    
    (11,691
    )
    
    
    6,136Prepaid expenses and other current assets
    
    
    291
    
    
    
    146
    
    
    
    (684
    )Other noncurrent assets
    
    
    1,992
    
    
    
    (51
    )
    
    
    136Accounts payable
    
    
    2,153
    
    
    
    (456
    )
    
    
    4,439Accrued expenses
    
    
    1,724
    
    
    
    (1,380
    )
    
    
    (203
    )Income taxes
    
    
    2,722
    
    
    
    (2,294
    )
    
    
    3,810Other liabilities
    
    
    (447
    )
    
    
    295
    
    
    
    387Net cash provided by (used in) operating activities
    
    
    13,317
    
    
    
    (956
    )
    
    
    26,480Investing activities:Purchases of property, plant and equipment
    
    
    (2,209
    )
    
    
    (4,704
    )
    
    
    (5,254
    )Proceeds from sale of property, plant and equipment
    
    
    4
    
    
    
    35
    
    
    
    164Cash paid for business, net of cash received
    
    
    (51,520
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (53,725
    )
    
    
    (4,669
    )
    
    
    (5,090
    )Financing activities:Proceeds from (repayment of) revolving credit facility, net
    
    
    34,555
    
    
    
    6,199
    
    
    
    (6,435
    )Proceeds from (repayment of) long-term debt
    
    
    6,800
    
    
    
    (2,000
    )
    
    
    (2,000
    )Dividends paid
    
    
    (1,021
    )
    
    
    (853
    )
    
    
    (200
    )Stock exchange listing fees
    
    
    (22
    )
    
    
    
    
    
    
    Treasury stock acquired
    
    
    (148
    )
    
    
    (1,919
    )
    
    
    (9,114
    )Proceeds from exercise of stock options
    
    
    374
    
    
    
    299
    
    
    
    296Net cash provided by (used in) financing activities
    
    
    40,538
    
    
    
    1,726
    
    
    
    (17,453
    )Increase (decrease) in cash
    
    
    130
    
    
    
    (3,899
    )
    
    
    3,937Cash at beginning of year
    
    
    203
    
    
    
    4,102
    
    
    
    165Cash at end of year
    
    $
    333
    
    
    $
    203
    
    
    $
    4,102Supplemental cash flow information:Cash paid during the year for interest
    
    $
    2,133
    
    
    $
    512
    
    
    $
    512Cash paid during the year for income taxes
    
    $
    3,177
    
    
    $
    5,102
    
    
    $
    1,312Noncash financing activityissuance of common stock
    
    $
    610
    
    
    $
    1,101
    
    
    $
    340
 See accompanying notes to consolidated financial statements. F-6




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##### Table of Contents



Delta Apparel, Inc. and
Subsidiaries 
 Notes to Consolidated Financial
Statements
 (Amounts in thousands)
 NOTE 1THE COMPANY We are a vertically integrated marketer, manufacturer and distributor of high
quality branded and private label activewear apparel. We specialize in selling
a variety of branded casual and athletic activewear tops and bottoms,
embellished and unembellished T-shirts, and fleece products for the
ever-changing apparel market. Our products are sold to screen printers,
private label accounts and distributors, as well as being sold through
specialty sporting goods stores and department stores. In addition, certain
products are sold in college bookstores and to the U.S. Military. We operate
manufacturing facilities in the Southeastern United States, Honduras, Mexico
and Costa Rica. In addition, we use foreign and domestic contractors as
additional sources of production. Our distribution facilities are located
throughout the United States. We were incorporated in Georgia in 1999 and our principal executive offices are
located at 2750 Premiere Parkway, Suite 100, Duluth, Georgia 30097 (telephone
number: 678-775-6900). Our common stock trades on the American Stock Exchange
under the symbol DLA. NOTE 2SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation:Our consolidated financial statements include the
accounts of Delta Apparel and its wholly owned domestic and foreign
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. The equity method of accounting is used for
investments in companies where we have a 20% to 50% ownership interest. We do
not exercise control over these companies, nor do we have substantive
participating rights. Accordingly, they are not variable interest entities and
these investments are accounted for under the equity method of accounting. We manage 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. (b) Fiscal Year:We operate on a 52-53 week fiscal year ending on the
Saturday closest to June 30. The 2004 fiscal year was a 53-week year and ended
on July 3, 2004. The 2003 and 2002 fiscal years were 52-week years and ended
on June 28, 2003 and June 29, 2002, respectively. (c) Use of Estimates:The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts and
disclosures of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Estimates are adjusted to reflect actual experience when necessary.
Significant estimates and assumptions affect many items in our financial
statements, for example: allowance for doubtful trade receivables, sales
returns and allowances, inventory obsolescence, income tax assets and
liabilities and related valuation allowances, and self-insurance reserves. Our
actual results may differ from our estimates. (d) Revenue Recognition:We recognize sales when the following criteria are
met: persuasive evidence of an agreement exists, shipment has occurred, the
price to the buyer is fixed and determinable and collectibility is reasonably
assured. Shipping and handling charges billed to our customers are included in
net revenue, and the related shipping and handling costs are included in cost
of goods sold. (e) Cash:Cash consists of cash and temporary investments with original
maturities of three months or less. (f) Accounts Receivable:Accounts receivable consists primarily of
receivables from our customers. We generally do not require collateral. We
provide allowances for merchandise returns, claims and markdowns, and bad debts
based on historical credits issued as a percentage of sales and periodic
evaluations of the aging of accounts receivable. We actively monitor our
exposure to credit risk through the use of credit approvals and credit limits. F-7




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(g) Inventories:We state inventories at the lower of cost (first-in,
first-out method) or market. Estimated losses on
inventories represent reserves for obsolescence, excess quantities, irregulars
and slow moving inventory. We estimate the losses on the basis of our
assessment of the inventorys net realizable value based upon current market
conditions and historical experience. The majority of our raw materials are
readily available, and thus we are not dependent on a single supplier. (h) Property, Plant and Equipment:Property, plant and equipment are stated
at cost. Depreciation and amortization is recorded following the straight-line
method over the estimated useful lives of the assets, which range from three to
twenty years. Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful life of the improvements. Assets that we
acquire under non-cancelable leases that meet the criteria of capital leases
are capitalized in property, plant and equipment and depreciated over the
useful life of the related assets. When we retire or dispose of assets, the
costs and accumulated depreciation or amortization are removed from the
respective accounts and we recognize any related gain or loss. Repairs and
maintenance are charged to expense when incurred. (i) Impairment of Long-Lived Assets:We account for long-lived assets in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to undiscounted
future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, impairment is measured by comparing the carrying
amount to the fair value or discounted cash flow. (j) Income Taxes:We account for income taxes under the liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. (k) Costs of Goods Sold:We include in cost of goods sold all manufacturing
and sourcing costs incurred prior to the receipt of finished goods at our
distribution facilities. The costs of goods sold principally include product
cost, purchasing costs, inbound freight charges, insurance, and inventory
write-downs. (l) 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. 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. (m) Advertising Costs:All costs associated with advertising and promoting
our products are expensed during the year in which they are incurred. Costs
associated with cooperative advertising programs under which we agree to share
costs of customers advertising activities are expensed when the related
revenues are recognized. Advertising expenses are included in selling, general
and administrative expenses in the consolidated statements of income.
Advertising costs total $2,961, $977 and $904 in fiscal year 2004, 2003 and
2002, respectively. (n) Foreign Currency Translation:Our functional currency for our owned
foreign manufacturing facilities is the United States dollar. We remeasure
those assets and liabilities denominated in foreign currencies using exchange
rates in effect on the balance sheet date. Fixed assets and the related
depreciation or amortization charges are recorded at the exchange rates in
effect on the date we acquired the assets. Revenues and expenses denominated
in foreign currencies are remeasured using average exchange rates for all
periods presented. We recognize the resulting foreign exchange gains and
losses as a component of other income and expense in the consolidated
statements of income. These gains and losses are immaterial for all periods
presented. (o) Earnings Per Share:We compute basic earnings per share by dividing net
income by the weighted average number of common shares outstanding during the
year. The computation of diluted earnings per share includes the dilutive
effect of stock options and non-vested stock awards. The weighted-average
shares do not include securities that would be anti-dilutive for each of the
periods presented. (p) Cotton Procurements:We contract to buy cotton with future delivery dates
at fixed prices in order to reduce the effects of fluctuations in the prices of
cotton used in the manufacture of our products. These contracts permit
settlement by delivery and are not used for trading purposes. We commit to
fixed prices on a percentage of our cotton requirements up to eighteen F-8




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months
in the future. The contracts are considered a normal purchase and
the fair value of
the contracts are not recorded on the balance sheet. If market prices for cotton fall below our committed fixed
costs and we estimate that the costs of cotton are not recoverable in future
sales of finished goods, the differential is charged to income at that time. (q) Stock Option and Incentive Award Plans:We apply the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations, in accounting for our fixed plan stock options. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. The Award
Plan contains certain provisions that require it to be accounted for as a
variable plan under APB 25. The pro forma information regarding net income and earnings per share is
required by SFAS 123 to be determined as if we had accounted for our employee
stock options under the fair value method of that Statement. For purposes of
pro forma disclosures, the estimated fair value of the options under the Option
Plan and the Award Plan are amortized to expense over the options vesting
period. Our pro forma information follows (in thousands, except per share
amounts): Year EndedJuly 3, 2004
    
    June 28, 2003
    
    June 29, 2002Net income, as reported
    
    $
    9,730
    
    
    $
    6,063
    
    
    $
    6,472Add: Stock-based
employee compensation
expense included in
reported net income,
net of related tax
effects
    
    
    702
    
    
    
    458
    
    
    
    416Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all options and
awards, net of related
tax effects
    
    
    (532
    )
    
    
    (322
    )
    
    
    (229
    )Pro forma net income
    
    $
    9,900
    
    
    $
    6,199
    
    
    $
    6,659Earnings per share:Basicas reported
    
    $
    2.39
    
    
    $
    1.50
    
    
    $
    1.48Basicpro forma
    
    $
    2.43
    
    
    $
    1.53
    
    
    $
    1.52Dilutedas reported
    
    $
    2.32
    
    
    $
    1.45
    
    
    $
    1.42Dilutedpro forma
    
    $
    2.36
    
    
    $
    1.48
    
    
    $
    1.46
 (r) Comprehensive Income:We do not have any items of Other Comprehensive
Income in fiscal years 2004, 2003 or 2002. (s) Fair Value of Financial Instruments:We use financial instruments in the
normal course of our business. The carrying values approximate fair value for
financial instruments that are short-term in nature, such as cash, accounts
receivable, accounts payable and accrued expenses. We estimate that the
carrying value of our long-term debt approximates fair value based on the
current rates offered to us for debt of the same remaining maturities. (t) Derivatives:From time to time, we enter into forward contracts, option
agreements or other instruments to limit our exposure to fluctuations in raw
material prices with respect to cotton purchases. We determine at inception
whether the derivative instruments will be accounted for as hedges. All option
agreements purchased during fiscal years 2004, 2003 and 2002 are derivative
instruments but were not accounted for as hedges. As such, on a quarterly
basis we marked to market the option agreements. Adjustments to the fair
market value were recorded as a component of other income and expense in the
statements of income. The fair value of these derivative instruments was $138
and $445 at June 28, 2003 and June 29, 2002, respectively, and was included in
other current assets in the accompanying balance sheet. (u) Reclassifications:We have made certain reclassifications to the
presentation of prior year results in order to conform to the current period
presentation. F-9




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(v) Recent Accounting Pronouncements:In January 2003, the Financial
Accounting Standards Board (FASB) issued Financial Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires that
if an entity has a controlling financial interest in a variable interest
entity, the assets, liabilities and results of activities of the variable
interest
entity should be included in the consolidated financial statements of the
entity. In December 2003, the FASB published a revision to FIN 46 (hereafter
referred to as FIN 46R) to clarify some of the provisions of FIN 46, and to
exempt certain entities from its requirements. We determined that we had no
interests in variable interest entities. Accordingly the adoption of FIN 46
did not have a material impact on our financial position, results of operations
or liquidity. NOTE 3ACQUISITION On October 3, 2003, we acquired all of the outstanding capital stock of M. J.
Soffe Co., a North Carolina corporation (the Acquisition). Prior to the
Acquisition, we formed a wholly owned subsidiary, MJS Acquisition Company
(MJS), a North Carolina corporation. MJS acquired all of the outstanding
capital stock of M. J. Soffe Co. from the shareholders of M. J. Soffe Co.,
pursuant to an Amended and Restated Stock Purchase Agreement dated as of
October 3, 2003. Immediately following the Acquisition, M. J. Soffe Co. was
merged with and into MJS, with MJS as the surviving corporation, and MJSs name
was changed to M. J. Soffe Co. The purchase price for the Acquisition consisted of aggregate cash payments of
approximately $43.5 million and the issuance of a promissory note to the
Individuals in the aggregate principal amount of $8.0 million (the Shareholder
Note). Also, additional amounts are payable to the Individuals in cash during
each of fiscal years 2005, 2006, and 2007 if specified financial performance
targets are met by M. J. Soffe Co. during annual periods beginning on September
28, 2003 and ending on September 30, 2006 (the Earnout Amounts). The Earnout
Amounts are capped at a maximum aggregate amount of $4 million per year. To
the extent that the Earnout Amounts are paid, they are treated as additional
costs of the Acquisition. In addition, pursuant to the Stock Purchase
Agreement, MJS paid approximately $8.5 million to satisfy all outstanding bank
debt of M. J. Soffe Co. The M. J. Soffe Co.s results of operations from
October 3, 2003 through July 3, 2004 are included in our consolidated
statements of earnings in the Consolidated Financial Statements. M. J. Soffe Co. manufactures, markets, and sells casual and athletic apparel.
It has a textile and sewing facility in Fayetteville, North Carolina, as well
as two additional sewing plants, one each in Bladenboro and Rowland, North
Carolina. In addition, M. J. Soffe Co. contracts approximately 30% of its
sewing requirements from two 50% owned facilities in Costa Rica. M. J. Soffe
Co. leases its primary distribution center in Fayetteville, North Carolina (see
Note 14) and also leases space for satellite distribution facilities in other
parts of the United States. In conjunction with the Acquisition, on October 3, 2003 we entered into an
Amended and Restated Loan and Security Agreement with Congress Financial
Corporation (Southern), as lender and as agent for the financial institutions
named as lenders, pursuant to which our existing line of credit (the Delta
Facility) was increased to $40 million, which represents a $5 million increase
in our predecessor credit facility. Also on October 3, 2003, MJS entered into a Loan and Security Agreement with
Congress Financial Corporation (Southern), as lender and as agent for the
financial institutions named as lenders, which provides M. J. Soffe Co. with a
$38.5 million line of credit (the Soffe Facility). Together, the Delta
Facility and the Soffe Facility provide for lines of credit in an aggregate
amount of $78.5 million. The Delta Facility and the Soffe Facility are secured
by a first priority lien on all of the assets of Delta Apparel and M. J. Soffe
Co. Delta Apparel is a guarantor of the Soffe Facility, and M. J. Soffe Co. is
a guarantor of the Delta Facility. M. J. Soffe Co has the option to increase
the Soffe Facility from $38.5 million to $41.0 million, provided that no event
of default exists under the facility. The purchase price was allocated to the net assets of M. J. Soffe Co. based on
their estimated fair values. As the fair value of the identifiable assets
acquired and liabilities assumed exceeded the purchase price, the excess amount
over the purchase price is recognized as a liability until the Earnout amounts
are determined. F-10




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The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of the Acquisition. Cash consideration paid
    
    $
    52,000Promissory note issued
    
    
    8,000Direct merger costs
    
    
    1,470Total purchase price
    
    $
    61,470Cash
    
    $
    1,630Accounts receivable
    
    
    13,052Inventories
    
    
    51,864Other current assets
    
    
    218Other assets
    
    
    4,088Tax receivable and deferred taxes
    
    
    9,386Current liabilities
    
    
    (8,212
    )Noncurrent liabilities
    
    
    (3,413
    )Earnout liability
    
    
    (7,143
    )Fair value of net assets acquired
    
    $
    61,470
 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. July 3,
    
    June 28,2004
    
    2003Net sales
    
    $
    233,442
    
    
    $
    223,321Net income
    
    
    11,810
    
    
    
    13,834Net income, per shareBasic
    
    $
    2.90
    
    
    $
    3.42Diluted
    
    $
    2.82
    
    
    $
    3.31
 NOTE 4INVENTORIES Inventories consist of the following: July 3,
    
    June 28,2004
    
    2003Raw materials
    
    $
    5,406
    
    
    $
    2,894Work in process
    
    
    26,540
    
    
    
    16,580Finished goods
    
    
    73,942
    
    
    
    27,699$
    105,888
    
    
    $
    47,174
 NOTE 5PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: Estimated
    
    July 3,
    
    June 28,Useful Life
    
    2004
    
    2003Land and land improvements
    
    
    N/A
    
    
    $
    1,356
    
    
    $
    1,356Buildings
    
    10-20 years
    
    
    9,560
    
    
    
    9,377Machinery and equipment
    
    5-15 years
    
    
    43,831
    
    
    
    43,466Computers and software
    
    3 years
    
    
    4,894
    
    
    
    4,286Furniture and fixtures
    
    7 years
    
    
    1,057
    
    
    
    600Leasehold improvements
    
    3-10 years
    
    
    862
    
    
    
    857Automobiles
    
    5 years
    
    
    234
    
    
    
    185Construction in progress
    
    
    N/A
    
    
    
    814
    
    
    
    90462,608
    
    
    
    61,031Less accumulated depreciation and amortization
    
    
    
    
    
    
    (43,079
    )
    
    
    (38,954
    )$
    19,529
    
    
    $
    22,077
 F-11




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NOTE 6ACCRUED EXPENSES Accrued expenses consist of the following: July 3,
    
    June 28,2004
    
    2003Accrued employee compensation and benefits
    
    $
    8,742
    
    
    $
    4,860Taxes accrued and withheld
    
    
    263
    
    
    
    333Accrued insurance
    
    
    1,442
    
    
    
    527Accrued advertising
    
    
    527
    
    
    
    34Accrued contingent earnout payments
    
    
    1,228
    
    
    
    Other
    
    
    2,273
    
    
    
    1,350$
    14,475
    
    
    $
    7,104
 NOTE 7LONG-TERM DEBT Long-term debt consists of the following: July 3,
    
    June 28,2004
    
    2003Revolving credit facilities secured by
receivables, inventory and property and
equipment, interest at prime rate or LIBOR
rate plus an applicable margin (3.696% at
July 3, 2004) due October 3, 2006
    
    $
    43,256
    
    
    $
    6,198Term loan facility secured by property and
equipment, interest at prime rate or 2% over
LIBOR rate payable monthly. Debt was
satisfied in conjunction with the Amended and
Restated Loan and Security Agreement dated
October 3, 2003.
    
    
    
    
    
    
    3,667Seller note, interest at 8% payable monthly,
principal amounts due in quarterly
installments of $400 with final payment due
October 1, 2008
    
    
    6,800
    
    
    
    50,056
    
    
    
    9,865Less current installments
    
    
    20,810
    
    
    
    2,000Long-term debt, excluding current installments
    
    $
    29,246
    
    
    $
    7,865
 On October 3, 2003, we entered into an Amended and Restated Loan and Security
Agreement with Congress Financial Corporation (Southern), pursuant to which our
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 Delta Facility contains limitations on, or prohibitions of, cash dividends,
stock purchases, related party transactions, mergers, acquisitions, sales of
assets, indebtedness and investments. We are allowed under the Delta Facility
to make purchases of our own stock up to an aggregate of $23.0 million provided
that no event of default exists or would result from that action and after the
purchase at least $3.0 million remains available to borrow under the facility. The Soffe Facility and the $8.0 million seller note described below contain
limitations on, or prohibitions of, cash dividends, stock purchases, related
party transactions, mergers, acquisitions, sales of assets, indebtedness and
investments. The terms of the Soffe Facility prohibit M. J. Soffe Co. from making any cash
dividends or other distributions or similar payments to us, except for the
following: payments for federal and state taxes that are attributable to its
income or assets, F-12




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provided that no event of default exists or would result from
the payment; payments for reasonable, ordinary-course expenses relating to
legal and accounting, insurance, marketing, payroll, information systems and
similar types of services attributable to M. J. Soffe Co.; payments in
connection with arms-length transactions made in the ordinary course of
business; and an annual payment of management fees not to exceed $400,000,
provided that no event of default exists or would result from the payment and
further provided that, for a period of 90 days prior to the payment and
immediately after the payment, at least $4.0 million remains available to
borrow under the facility. The Soffe Facility also limits the ability of M.J.
Soffe Co. to
make loans to us. Within each of the credit facilities, there is a Fixed Asset Loan Amortization
Amount requiring monthly installment payments, which reduce the amount of
availability under each credit facility. The Fixed Asset Loan Amortization
Amount for the Delta Facility was $10.0 million initially and $8.5 million at
July 3, 2004. The Fixed Asset Loan Amortization Amount for the Soffe Facility
was $8.5 million initially and $7.4 million at July 3, 2004. During each of
fiscal years 2005, 2006 and 2007, we will make payments related to the Fixed
Asset Loan Amortizations totaling $3.4 million. Under the combined credit facilities, after subtracting the Fixed Asset Loan
Amortization Amounts, we are able to borrow up to $60.0 million subject to
borrowing base limitations based on the accounts receivable and inventory
levels. Annual facility fees are .25% of the amount by which $60.0 million
exceeds the average daily principal balance of the outstanding loans and letter
of credit accommodations during the immediately preceding month. At July 3,
2004 we had the ability to borrow an additional $31.7 million under the
combined credit facilities. 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 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, we are 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 the former Soffe
shareholders pursuant to the Stock Purchase Agreement dated as of October 3,
2003. The $8.0 million seller note is payable in equal quarterly payments
through September 30, 2006. At July 3, 2004, we had $6.8 million outstanding
under the note at an interest rate of 8.0%. The terms of the Seller Note prohibit M. J. Soffe Co. from making any cash
dividends or distributions, loans or extraordinary payments to us, except for
the following: payments relating to taxes permitted under the Soffe Facility,
payments for services permitted under the Soffe Facility, subject to the
reasonable approval of certain of the sellers; an annual payment of management
fees not to exceed $370,000; payments for goods in the ordinary course of
business; and additional dividends or other distributions up to an aggregate of
10% of M. J. Soffe Co.s cumulative net after-tax income, provided that no
payment default on the Seller Note has occurred or would result from the
dividend or distribution (however, those additional dividends or distributions
are not currently permitted under the Soffe Facility). NOTE 8INCOME TAXES The provision for income taxes consisted of: Year endedJuly 3,
    
    June 28,
    
    June 29,2004
    
    2003
    
    2002Current:Federal
    
    $
    5,049
    
    
    $
    2,405
    
    
    $
    3,526State
    
    
    658
    
    
    
    304
    
    
    
    326Foreign
    
    
    191
    
    
    
    90
    
    
    
    69Total current
    
    
    5,898
    
    
    
    2,799
    
    
    
    3,921Deferred:Federal
    
    
    (1,221
    )
    
    
    811
    
    
    
    (212
    )State
    
    
    (3
    )
    
    
    150
    
    
    
    (521
    )Total deferred
    
    
    (1,224
    )
    
    
    961
    
    
    
    (733
    )Income tax expense
    
    $
    4,674
    
    
    $
    3,760
    
    
    $
    3,188
 F-13




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A reconciliation between actual income tax expense and the income tax expense
computed using the Federal statutory income tax rate of 35% is as follows: Year endedJuly 3,
    
    June 28,
    
    June 29,2004
    
    2003
    
    2002Income tax expense at the statutory rate
    
    $
    5,041
    
    
    $
    3,340
    
    
    $
    3,284State income tax expense net of federal income tax effect
    
    
    426
    
    
    
    200
    
    
    
    215Nondeductible items in foreign jurisdictions
    
    
    139
    
    
    
    
    
    
    
    Reversal of liability associated with tax sharing agreement
    
    
    (940
    )
    
    
    
    
    
    
    Valuation allowance adjustments
    
    
    
    
    
    
    
    
    
    
    (631
    )Nondeductible amortization and other permanent differences
    
    
    79
    
    
    
    (71
    )
    
    
    (71
    )Other
    
    
    (71
    )
    
    
    291
    
    
    
    391Income tax expense
    
    $
    4,674
    
    
    $
    3,760
    
    
    $
    3,188
 Significant components of our deferred tax assets and liabilities are as
follows: July 3,
    
    June 28,2004
    
    2003Deferred tax assets:State net operating loss carryforward
    
    $
    487
    
    
    $
    513Deferred compensation
    
    
    2,160
    
    
    
    546Currently nondeductible accruals
    
    
    2,071
    
    
    
    1,571Gross deferred tax assets
    
    
    4,718
    
    
    
    2,630Less valuation allowance
    
    
    (58
    )
    
    
    (58
    )Net deferred tax assets
    
    
    4,660
    
    
    
    2,572Deferred tax liabilities:Depreciation
    
    
    (1,510
    )
    
    
    (1,232
    )Undistributed earnings in foreign subsidiaries
    
    
    (684
    )
    
    
    (611
    )Other
    
    
    (1,213
    )
    
    
    (1,271
    )Gross deferred tax liabilities
    
    
    (3,407
    )
    
    
    (3,114
    )Net deferred tax asset (liability)
    
    $
    1,253
    
    
    $
    (542
    )
 Our deferred tax asset related to state net operating loss carryforwards is
reduced by a valuation allowance to result in deferred tax assets we consider
more likely than not to be realized. The net change in the total valuation
allowance for the year ended June 29, 2002 was a decrease of $631. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Undistributed earnings of our foreign subsidiaries amounted to approximately
$2.4 million. A portion of those earnings is considered to be indefinitely
reinvested and, accordingly, no provision for U. S. federal and state income
taxes has been provided thereon. With respect to the portion of earnings that
is not considered to be indefinitely reinvested, a deferred tax liability of
approximately $0.7 million has been created with respect to the U. S. and state
tax ramifications of repatriating these earnings. As of July 3, 2004, we had operating loss carryforwards of approximately $8.2
million for state purposes. These carryforwards expire at various intervals
through 2019. During the fiscal year ending 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 current fiscal year, 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 at that time. NOTE 9LEASES We have several non-cancelable operating leases primarily related to buildings,
office equipment, machinery and equipment, and computer systems. Certain land
and building leases have renewal options generally for periods ranging from 5
to 10 years. F-14




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Future minimum lease payments under non-cancelable operating leases as of July
3, 2004 were as follows: Fiscal Year2005
    
    $
    3,5472006
    
    
    2,7332007
    
    
    1,9072008
    
    
    1,4752009
    
    
    1,053Thereafter
    
    
    3,030$
    13,745
 Rent expense for all operating leases was approximately $2,955, $1,727 and
$1,548 for fiscal years 2004, 2003, and 2002, respectively. NOTE 10EMPLOYEE BENEFIT PLANS We sponsor and maintain 401(k) retirement savings plans (the 401(k) Plans)
for our employees who meet certain service and age requirements. The 401(k)
Plans permit participants to make pre-tax contributions by salary reduction
pursuant to Section 401(k) of the Internal Revenue Code. The 401(k) Plans
provide for us to make a guaranteed match of the employees contributions. We
contributed approximately $323, $257 and $217 to the 401(k) Plans during fiscal
years 2004, 2003 and 2002, respectively. Deferred compensation plans are maintained that permit certain management
employees to defer a portion of their compensation. Benefits are paid upon
separation, death or retirement of the participating employees. Under the
deferred compensation plan available to the Delta employees, deferred
compensation accounts are credited with interest at a fixed interest rate.
Under the deferred compensation plan available for the Soffe employees, deemed
investment earnings based upon the stock market are added to each participants
account. Both plans are unfunded and benefits are paid from our general
assets. We expensed approximately $383, $122 and $96 to the deferred
compensation plans during fiscal years 2004, 2003 and 2002, respectively. We provide postretirement life insurance benefits for certain retired
employees. The plan is noncontributory and is unfunded. Benefits and
expenses are paid from our general assets as they are incurred. All of the
employees in the plan are fully vested and the plan was closed to new employees
in 1990. The discount rate used in determining the liability was 7.25%. The
following table presents the benefit obligation for these benefits, which is
included in Accrued Expenses in the accompanying balance sheet. July 3,
    
    June 28,
    
    June 29,2004
    
    2003
    
    2002Change in benefit obligations:Balance at beginning of year
    
    $
    956
    
    
    $
    1,125
    
    
    $
    1,167Interest cost
    
    
    74
    
    
    
    74
    
    
    
    74Benefits paid
    
    
    (97
    )
    
    
    (118
    )
    
    
    (100
    )Actuarial adjustment
    
    
    6
    
    
    
    (125
    )
    
    
    (16
    )Balance at end of year
    
    $
    939
    
    
    $
    956
    
    
    $
    1,125
 NOTE 11STOCK OPTIONS AND INCENTIVE STOCK AWARDS Effective in June 2000, we established the Delta Apparel Stock Option Plan (the
Option Plan) and the Delta Apparel Incentive Stock Award Plan (the Award
Plan). Information included in this footnote has been adjusted to reflect the
2-for-1 stock split effective as of September 20, 2002. We have elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for our employee stock options because, as
discussed below, 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. F-15




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##### Table of Contents



Under the Option Plan, we authorized the grant of options of up to 1,000,000
shares of common stock. Options are granted by the compensation grants
committee of our board of directors to key and middle level executives for the
purchase of our stock at prices not less than the fair market value of the
shares on the dates of grant. Under APB 25, we do not recognize compensation
expense as the exercise price of our employee stock options equals the market
price of the underlying stock on the date of grant. Under the Award Plan, the compensation grants committee of our board of
directors has the discretion to grant awards for up to an aggregate maximum of
400,000 common shares. The Award Plan authorizes the compensation grants
committee to
grant to our officers and key and middle level executives rights to acquire
common shares at a cash purchase price of $0.01 per share. As of July 3, 2004,
awards covering 218,001 shares have been granted and awards covering 166,760
shares have been exercised under the Award Plan. The Award Plan contains
certain provisions that require it to be accounted for as a variable plan under
APB 25. Accordingly, we recognize compensation expense as the market value of
the stock increases and decreases from the grant date. Compensation expense
recorded under the Award Plan was $1,835, $1,251 and $1,195 in fiscal years
2004, 2003 and 2002, respectively. A summary of our stock option activity under the Option Plan and the Award Plan
and related information is as follows: 2004
    
    2003
    
    2002Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageShares
    
    Exercise Price
    
    Shares
    
    Exercise Price
    
    Shares
    
    Exercise PriceOutstanding at beginning of year
    
    
    241,700
    
    
    $
    3.78
    
    
    
    307,870
    
    
    $
    4.00
    
    
    
    393,680
    
    
    $
    3.88Granted
    
    
    25,801
    
    
    $
    0.01
    
    
    
    74,400
    
    
    $
    0.01
    
    
    
    
    
    
    
    Exercised
    
    
    (104,610
    )
    
    $
    3.57
    
    
    
    (135,970
    )
    
    $
    2.21
    
    
    
    (85,810
    )
    
    $
    3.45Forfeited
    
    
    (6,320
    )
    
    $
    2.95
    
    
    
    (4,600
    )
    
    $
    4.05
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    156,571
    
    
    $
    3.33
    
    
    
    241,700
    
    
    $
    3.78
    
    
    
    307,870
    
    
    $
    4.00Exercisable at end of year
    
    
    32,500
    
    
    
    
    
    
    
    35,000
    
    
    
    
    
    
    
    18,500Weighted-average fair value of
options granted during the year
    
    $
    15.93
    
    
    
    
    
    
    $
    12.77
    
    
    
    
    
    
    
    Shares available for future grants
    
    
    858,999
    
    
    
    
    
    
    
    884,800
    
    
    
    
    
    
    
    959,200
 Exercise prices for options outstanding as of July 3, 2004 ranged from
approximately $4.66 to $6.13, except for 48,321 shares covered by awards
outstanding under the Award Plan for which the exercise price was $0.01. The
weighted average remaining contractual life of those options is approximately 1
year. The pro forma information regarding net income and earnings per share disclosed
in Note 1 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. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 1.3% and 5.5% in 2004 and 2003,
respectively, dividend yield of 1.5% and 1.7% in 2004 and 2003, respectively,
volatility factor of the expected market price of our common stock of .233
and .394 in 2004 and 2003, respectively, and expected lives of one to four years.
No shares were granted in fiscal year 2002. The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because our employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options. F-16




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##### Table of Contents



NOTE 12SEGMENT REPORTING We operate our business in two distinct segments: Delta and Soffe. Although
the two segments are similar in their production processes and regulatory
environment, they are distinct in their economic characteristics, products and
distribution methods. The Delta segment manufactures, markets and distributes unembellished knit
apparel under the brands of Delta Pro Weight®, Delta Magnum Weight and
Quail Hollow. The products are primarily sold to screen printing companies
and distributors. In addition, products are manufactured under private labels
for retailers, corporate industry programs and sports licensed apparel
marketers. The Soffe segment manufactures, markets and distributes embellished and
unembellished knit apparel under the Soffe® label. The products are sold
through specialty sporting goods stores and department stores. In addition to
these retail channels, Soffe also supplies college bookstores and produces
activewear products for the U.S. Military. Corporate and Unallocated is a reconciling category for reporting purposes and
includes intercompany eliminations and other costs that are not allocated to
the operating segments. Our management evaluates performance and allocates resources based on profit or
loss from operations before interest, income taxes and special charges
(Segment Operating Income). Our Segment Operating Income may not be
comparable to similarly titled measures used by other companies. The
accounting policies of our reportable segments are the same as those described
in Note 1. Intercompany transfers between operating segments are transacted at
cost and eliminated in consolidation. CorporateandDelta
    
    Soffe
    
    Unallocated
    
    ConsolidatedFiscal Year 2004:Net sales
    
    $
    137,965
    
    
    $
    71,792
    
    
    $
    (1,644
    )
    
    $
    208,113Segment operating income
    
    
    7,638
    
    
    
    9,631
    
    
    
    (243
    )
    
    
    17,026Segment assets
    
    
    95,691
    
    
    
    73,688
    
    
    
    
    
    
    
    169,379Purchases of property, plant and equipment
    
    
    1,968
    
    
    
    241
    
    
    
    
    
    
    
    2,209Fiscal Year 2003:Net sales
    
    $
    129,521
    
    
    
    
    
    
    
    
    
    
    $
    129,521Segment operating income
    
    
    10,555
    
    
    
    
    
    
    
    
    
    
    
    10,555Segment assets
    
    
    94,447
    
    
    
    
    
    
    
    
    
    
    
    94,447Purchases of property, plant and equipment
    
    
    4,704
    
    
    
    
    
    
    
    
    
    
    
    4,704Fiscal Year 2002:Net sales
    
    $
    131,601
    
    
    
    
    
    
    
    
    
    
    $
    131,601Segment operating income
    
    
    10,337
    
    
    
    
    
    
    
    
    
    
    
    10,337Segment assets
    
    
    88,346
    
    
    
    
    
    
    
    
    
    
    
    88,346Purchases of property, plant and equipment
    
    
    5,254
    
    
    
    
    
    
    
    
    
    
    
    5,254
 The following reconciles the Segment Operating Income to the consolidated
income before income taxes. Year EndedJuly 3,
    
    June 28,
    
    June 29,2004
    
    2003
    
    2002Segment operating income
    
    $
    17,026
    
    
    $
    10,555
    
    
    $
    10,337Unallocated interest expense
    
    
    2,622
    
    
    
    732
    
    
    
    677Consolidated income before taxes
    
    $
    14,404
    
    
    $
    9,823
    
    
    $
    9,660
 F-17




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##### Table of Contents



NOTE 13COMMITMENTS AND CONTINGENCIES (a) Litigation At times, we are a party to various legal claims, actions and complaints. We
believe that, as a result of legal defenses, insurance arrangements, and
indemnification provisions with parties believed to be financially capable, any
such actions should not have a material effect on our operations, financial
condition, or liquidity. (b) Purchase Contracts We have entered into agreements, and have fixed prices, to purchase natural
gas, cotton, yarn, finished fabric and finished apparel products for use in our
manufacturing operations. At July 3, 2004, minimum payments under these
contracts were as
follows: Natural gas
    
    $
    139Cotton
    
    
    15,699Yarn
    
    
    4,695Finished fabric
    
    
    203Finished apparel products
    
    
    409$
    21,145
 (c) Letters of Credit As of July 3, 2004, we had outstanding letters of credit totaling $1,476. NOTE 14RELATED PARTY TRANSACTIONS On October 3, 2004, we entered into a lease agreement by and between M. J.
Soffe Co. and Middle Road Properties, LLC to lease the distribution center that
was used by M. J. Soffe Co. prior to the Acquisition. The previous
shareholders of M. J. Soffe Co. own Middle Road Properties, LLC. The lease
commenced on October 3, 2003 and expires on October 2, 2008, with an option to
extend the lease for an additional five years. The annual base rent on the
building is $565 per year. NOTE 15QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Presented below is a summary of the unaudited consolidated quarterly financial
information for the years ended July 3, 2004 and June 28, 2003. 2004 Quarter Ended
    
    2003 Quarter EndedSeptember 27
    
    December 27
    
    March 27
    
    July 3
    
    September 28
    
    December 28
    
    March 29
    
    June 28Net sales
    
    $
    30,802
    
    
    $
    45,623
    
    
    $
    58,805
    
    
    $
    72,883
    
    
    $
    28,883
    
    
    $
    30,002
    
    
    $
    33,870
    
    
    $
    36,766Gross profit
    
    
    4,082
    
    
    
    8,909
    
    
    
    14,431
    
    
    
    20,839
    
    
    
    6,004
    
    
    
    5,121
    
    
    
    6,115
    
    
    
    6,729Operating income
    
    
    1,104
    
    
    
    730
    
    
    
    5,532
    
    
    
    9,659
    
    
    
    3,061
    
    
    
    2,055
    
    
    
    2,617
    
    
    
    2,822Net income (loss)
    
    
    589
    
    
    
    (91
    )
    
    
    3,813
    
    
    
    5,419
    
    
    
    1,791
    
    
    
    1,155
    
    
    
    1,485
    
    
    
    1,632Basic EPS *
    
    $
    0.15
    
    
    
    ($0.02
    )
    
    $
    0.93
    
    
    $
    1.32
    
    
    $
    0.44
    
    
    $
    0.28
    
    
    $
    0.37
    
    
    $
    0.41Diluted EPS *
    
    $
    0.14
    
    
    
    ($0.02
    )
    
    $
    0.91
    
    
    $
    1.28
    
    
    $
    0.43
    
    
    $
    0.27
    
    
    $
    0.35
    
    
    $
    0.39
 *Adjusted for 2-for-1 stock split effective as of September 20, 2002 NOTE 16STOCK SPLIT On September 20, 2002, shareholders of record on September 6, 2002 received one
additional share of common stock for each one 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. F-18




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##### Table of Contents



SCHEDULE II  CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS DELTA APPAREL, INC. AND SUBSIDIARIES
(In thousands) ALLOWANCE FOR DOUBTFUL ACCOUNTS Beginning
    
    Purchase
    
    
    
    
    
    
    
    
    
    EndingBalance
    
    Accounting *
    
    Expense
    
    Write-Offs
    
    Balance2004
    
    $
    1,307
    
    
    $
    378
    
    
    $
    (153
    )
    
    $
    (1003
    )
    
    $
    5292003
    
    
    969
    
    
    
    
    
    
    
    722
    
    
    
    (384
    )
    
    
    1,3072002
    
    
    1,344
    
    
    
    
    
    
    
    339
    
    
    
    (714
    )
    
    
    969
 RETURNS AND ALLOWANCES Beginning
    
    Purchase
    
    
    
    
    
    
    
    
    
    EndingBalance
    
    Accounting *
    
    Expense
    
    Credits Issued
    
    Balance2004
    
    $
    216
    
    
    $
    369
    
    
    $
    3,942
    
    
    $
    (3,890
    )
    
    $
    6372003
    
    
    543
    
    
    
    
    
    
    
    3,195
    
    
    
    (3,522
    )
    
    
    2162002
    
    
    468
    
    
    
    
    
    
    
    4,175
    
    
    
    (4,100
    )
    
    
    543
 TOTAL Beginning
    
    Purchase
    
    
    
    
    
    Write-Offs/
    
    EndingBalance
    
    Accounting *
    
    Expense
    
    Credits Issued
    
    Balance2004
    
    $
    1,523
    
    
    $
    747
    
    
    $
    3,789
    
    
    $
    (4,893
    )
    
    $
    1,1662003
    
    
    1,512
    
    
    
    
    
    
    
    3,917
    
    
    
    (3,906
    )
    
    
    1,5232002
    
    
    1,812
    
    
    
    
    
    
    
    4,514
    
    
    
    (4,814
    )
    
    
    1,512
 MARKET AND OBSOLESCENCE RESERVE Beginning
    
    Purchase
    
    
    
    
    
    
    
    EndingBalance
    
    Accounting *
    
    Expense **
    
    Deductions
    
    Balance2004
    
    $
    648
    
    
    $
    2,762
    
    
    $
    (590
    )
    
    $
    
    
    
    $
    2,8202003
    
    
    677
    
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    6482002
    
    
    1,171
    
    
    
    
    
    
    
    (494
    )
    
    
    
    
    
    
    677
  *
    
    Represents the allowance provided for as a result of the acquisition of M.
J. Soffe Co. on October 3, 2003.**
    
    Net change F-19