UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the transition period from ______________ to ____________

Commission File Number 1-15583

DELTA APPAREL, INC.

2750 Premiere Parkway, Suite 100
Duluth, Georgia 30097

(678) 775-6900

(Not Applicable)

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

As of March 30, 2004, there were outstanding 4,111,399 shares of the registrant’s common stock, par value of $0.01, which is the only class of the outstanding common or voting stock of the registrant.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

DELTA APPAREL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(in thousands, except shares and per share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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DELTA APPAREL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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DELTA APPAREL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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DELTA APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note A—Basis of Presentation

The interim condensed consolidated financial statements for the three and nine months ended March 27, 2004 and March 29, 2003, included herein, have been prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended March 27, 2004 are not necessarily indicative of the results that may be expected for the year ending July 3, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended June 28, 2003, filed with the Securities and Exchange Commission.

Note B—Inventories

Inventories consist of the following:

Note C—Acquisition

On October 3, 2003, Delta Apparel completed the acquisition of all of the outstanding capital stock of M. J. Soffe Co., a North Carolina corporation (the “Acquisition”). The Acquisition was consummated by means of a stock purchase transaction pursuant to which MJS Acquisition Company, a North Carolina corporation and newly-formed, wholly-owned subsidiary of Delta Apparel (“MJS”), acquired all of the outstanding capital stock of M. J. Soffe Co. from the shareholders of M. J. Soffe Co., James F. Soffe, John D. Soffe, and Anthony M. Cimaglia (collectively, the “Individuals”), pursuant to an Amended and Restated Stock Purchase Agreement (the “Stock Purchase Agreement”) dated as of October 3, 2003 by and among Delta Apparel, MJS, M. J. Soffe Co., and the Individuals. Immediately following the Acquisition, M. J. Soffe Co. was merged with and into MJS (the “Merger”), with MJS as the surviving corporation in the Merger, and MJS’s name was changed to M. J. Soffe Co.

The aggregate consideration paid to the Individuals for all of the outstanding capital stock of M. J. Soffe Co. consisted of (i) aggregate cash payments of approximately $43.5 million; and (ii) the issuance of a promissory note to the Individuals in the aggregate principal amount of $8 million (the “Shareholder Note”). Also, additional amounts are payable to the Individuals in cash during each of fiscal years 2005, 2006, and 2007 if specified financial performance targets are met by M. J. Soffe Co. during annual periods beginning on September 28, 2003 and ending on September 30, 2006 (the “Earnout Amounts”). The Earnout Amounts are capped at a maximum aggregate amount of $12 million. To the extent that the Earnout Amounts are paid, they are treated as additional costs of the acquisition. In addition, pursuant to the Stock Purchase Agreement, MJS paid approximately $8.5 million to satisfy all outstanding bank debt of M. J. Soffe Co.

M. J. Soffe Co. manufactures, markets, and sells casual and athletic apparel. It has a textile and sewing facility in Fayetteville, North Carolina, as well as two additional sewing plants, one each in Bladenboro and Rowland, North Carolina. In addition, M. J. Soffe Co. contracts approximately 30% of its sewing requirement from two 50% owned facilities in Costa Rica. M. J. Soffe Co. leases its primary distribution center in Fayetteville, North Carolina and also leases space for satellite distribution facilities in other parts of the United States.

In conjunction with the Acquisition, on October 3, 2003 Delta Apparel entered into an Amended and Restated Loan and Security Agreement with Congress Financial Corporation (Southern), as lender and as agent for the financial institutions named as lenders, pursuant to which Delta’s existing line of credit (the “Delta Facility”) was increased to $40 million, which represents a $5 million increase in Delta Apparel’s predecessor credit facility.

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Also on October 3, 2003, MJS entered into a Loan and Security Agreement with Congress Financial Corporation (Southern), as lender and as agent for the financial institutions named as lenders, which provides M. J. Soffe Co. with a $38.5 million line of credit (the “Soffe Facility”). Together, the Delta Facility and the Soffe Facility provide for lines of credit in an aggregate amount of $78.5 million. The Delta Facility and the Soffe Facility are secured by a first priority lien on all of the assets of Delta Apparel and M. J. Soffe Co. Delta Apparel is a guarantor of the Soffe Facility, and M. J. Soffe Co. is a guarantor of the Delta Facility. M. J. Soffe Co has the option to increase the Soffe Facility from $38.5 million to $41.0 million, provided that no event of default exists under the facility.

The acquisition of the M. J. Soffe Co. is an important part of Delta Apparel’s expansion strategy. The addition of the Soffe business to Delta Apparel represents an opportunity to participate in four additional distinct channels of distribution for activewear products. The Company believes the manufacturing, distribution, and marketing synergies between the companies will allow both operations to expand at a faster pace than would be possible on a stand-alone basis.

The results of M. J. Soffe Co.’s operations have been included in the consolidated financial statements since the acquisition date. The consolidated balance sheet reflects the initial purchase price allocation of the assets acquired and the liabilities assumed. The initial purchase price allocation does not result in goodwill being recorded by the Company. The Company is currently in the process of finalizing the valuations of the assets acquired and liabilities assumed and thus the initial allocation of the purchase price is subject to change. The purchase price allocation will be finalized upon refinement of certain preliminary estimates.

Note D—Pro Forma Financial Information

The pro forma financial information presented below gives effect to the M. J. Soffe Co. acquisition as if it had occurred as of the beginning of fiscal year 2004 and fiscal year 2003. Amounts are in thousands, except per share amounts. The information presented below is for illustrative purposes only and is not indicative of results that would have been achieved or results that may be achieved in the future.

Note E—Debt

The Soffe Facility contains both a subjective acceleration clause and a lockbox arrangement, whereby remittances from the customers reduce the current outstanding borrowings. Pursuant to Emerging Issues Task Force (“EITF”) 95-22, the Company is classifying borrowings under the Soffe Facility as current debt.

The Delta Facility contains a subjective acceleration clause and a “springing” lockbox arrangement [as defined in EITF 95-22], whereby remittances from the customers are forwarded to the Company’s general bank account and do not reduce the outstanding debt until and unless a specified event or an event of default occurs. Pursuant to EITF 95-22, the Company is classifying borrowings under the Delta Facility as noncurrent debt.

Note F—Income Taxes

The effective income tax rate for the nine months ended March 27, 2004 was 21.9%, compared to 38.3% for the fiscal year ended June 28, 2003. During the quarter ended March 27, 2004, the statute of limitations expired on the tax years covered by the tax sharing agreement between the Company and Delta Woodside Industries, Inc. As a result, the Company reversed its $0.9 million tax liability associated with the tax sharing agreement, resulting in the lower effective tax rate.

Note G—Stock Options and Incentive Stock Awards

The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), requires use of option valuation models that were not developed for use in valuing employee stock options.

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The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested options and awards in each period.

Note H—Purchase Contracts

The Company has entered into agreements, and has fixed prices, to purchase cotton, yarn and finished apparel products for use in its manufacturing operations. At March 27, 2004, minimum payments under these contracts to purchase cotton, yarn and finished apparel products with non-cancelable contract terms were $18.1 million, $2.4 million and $1.9 million, respectively.

Note I—Computation of Basic and Diluted Net Earnings per Share (EPS)

Basic net earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of stock options and non-vested stock awards granted under the Company’s Stock Option Plan and the Company’s Incentive Stock Award Plan.

The weighted average shares do not include securities that would be anti-dilutive for each of the periods presented.

Note J—Stockholders’ Equity

Stock Repurchase Program
The Company has authorization from the Board of Directors to spend up to an aggregate of $6.0 million for share repurchases under the Stock Repurchase Program. All purchases are made at the discretion of management. The Company did not purchase shares of Delta Apparel common stock during the three months ended March 27, 2004. Since the inception of the Stock Repurchase Program, the Company has purchased 368,057 shares of Delta Apparel common stock pursuant to the program for an aggregate of $4.2 million.

Quarterly Dividend Program
On January 28, 2004, the Board declared a cash dividend pursuant to the Company’s quarterly dividend program of six cents per share of common stock. The dividend was paid on February 23, 2004 to shareholders of record as of the close of business on February 11, 2004. On April 28, 2004, the Board approved a 17% increase in its regular quarterly dividend. The Board declared a cash dividend of seven cents per share of common stock payable May 24, 2004 to shareholders of record as of the close of business on May 12, 2004. Although the Board may terminate or amend the program at any time, the Company currently expects to continue the quarterly dividend program.

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The Delta segment manufactures, markets and distributes unembellished knit apparel under the brands of “Delta Pro-Weight”, “Delta Magnum Weight” and “Quail Hollow.” The products are primarily sold to screen printing companies and distributors. In addition, products are manufactured under private labels for retailers, corporate industry programs and sports licensed apparel marketers.

The Soffe segment manufactures, markets and distributes embellished and unembellished knit apparel under the “Soffe” label. The products are sold through specialty sporting goods stores and department stores. In addition to these retail channels, Soffe also supplies college bookstores and produces activewear products for the U.S. Military.

The Company’s management evaluates performance and allocates resources based on profit or loss from operations before interest, income taxes and special charges (“Segment Operating Income”). Segment Operating Income as presented by Delta Apparel may not be comparable to similarly titled measures used by other companies. The accounting policies of the reportable segments are the same as those described in Note 1 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 28, 2003. Intercompany transfers between operating segments were not material.

Information about the Company’s operations as of and for the three months ended March 27, 2004 and March 29, 2003, by operating segment, is as follows (in thousands):

Information about the Company’s operations for the nine months ended March 27, 2004 and March 29, 2003, by operating segment, is as follows (in thousands):

The following reconciles the Segment Operating Income to the consolidated income before income taxes for the three and nine months ended March 27, 2004 and March 29, 2003.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains various “forward-looking statements”. All statements, other than statements of historical fact, that address activities, events or developments that the Company expects or anticipates will or may occur in the future are forward-looking statements.

Examples are statements that concern future revenues, future costs, future capital expenditures, business strategy, competitive strengths, competitive weaknesses, goals, plans, references to future success or difficulties and other similar information. The words “estimate”, “project”, “forecast”, “anticipate”, “expect”, “intend”, “believe” and similar expressions, and discussions of strategy or intentions, are intended to identify forward-looking statements.

The forward-looking statements in this Quarterly Report are based on the Company’s expectations and are necessarily dependent upon assumptions, estimates and data that the Company believes are reasonable and accurate but may be incorrect, incomplete or imprecise. Forward-looking statements are also subject to a number of business risks and uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. The risks and uncertainties include, among others, changes in the retail demand for apparel products, the cost of raw materials, competitive conditions in the apparel and textile industries, the relative strength of the United States dollar as against other currencies, changes in United States trade regulations and the discovery of unknown conditions (such as with respect to environmental matters and similar items) and other risks described from time to time in the Company’s reports filed with the Securities and Exchange Commission. Accordingly, any forward-looking statements do not purport to be predictions of future events or circumstances and may not be realized.

The Company does not undertake publicly to update or revise the forward-looking statements even if it becomes clear that any projected results will not be realized.

BUSINESS OUTLOOK

Delta Apparel (which refers to the consolidated operations of the Delta business and Soffe business) achieved record sales of $58.8 million for the quarter ended March 27, 2004, an increase of $24.9 million, or 73.6%, from the prior year third fiscal quarter due primarily to the acquisition of M. J. Soffe Co. Record sales of $36.3 million for the third quarter were achieved in the Delta business, an increase of $2.5 million, or 7.2% from the prior year quarter. Sales for M. J. Soffe Co. were $22.6 million for the third quarter, a record for M. J. Soffe Co. and an increase of $1.0 million, or 4.8%, from its sales as a stand alone business for the quarter ended March 31, 2003.

Record operating earnings of $5.5 million were also achieved by Delta Apparel for the quarter ended March 27, 2004. Operating earnings in the Delta business were up slightly from the third quarter of the prior year and M. J. Soffe achieved record operating earnings of $2.8 million for the quarter.

The Delta business had higher pricing in its third quarter than in the first and second quarter of this year. While prices on most products were still slightly lower than in the third quarter of the prior year, pricing continues to improve into the spring selling season. There can be, however, no assurance that pricing on tee shirts will remain at current levels. The business continued to grow its catalog direct sales, which accounted for 83% of total sales for the quarter. Private label goods accounted for 12% of total sales, with distributor sales representing less than 5% of sales. During the current competitive conditions, the Delta business continued to grow its business by remaining focused on opening new accounts and has shipped to 75% more customers during the nine months ended March 27, 2004 than in the first nine months of the prior year. While growing the account base will remain a core marketing strategy, it is encouraging that existing customers are reporting improving business conditions, which is expected to generate additional growth opportunities for Delta. The Delta business is expected to achieve record unit and dollar sales during fiscal year 2004. Significant declines in tee shirt pricing, if they were to occur, could have a material effect on the results in the fourth quarter of fiscal year 2004.

The M. J. Soffe business also had solid results in the third quarter. Record sales were achieved, driven by increased branded sales in the retail segment. Demand for the Soffe product line continues to remain strong. Several new products have been introduced and are being well accepted by the marketplace. During the quarter ended March 27, 2004, the Soffe business continued to run reduced production schedules to better manage its inventory levels. The solid results achieved in the Soffe business during the third quarter are expected to continue in the fourth quarter of fiscal year 2004.

The Company continued its integration of the two businesses during the quarter. The Delta business began marketing shorts under its Quail Hollow brand and will have a fleece product line in the fall. These products are being produced in Soffe manufacturing facilities. The Company is also currently considering having the two businesses share satellite distribution centers. As the Company continues to evaluate the manufacturing process, product sourcing and the purchasing of goods, it expects to continue to find cost reduction opportunities on both sides of the business.

Delta Apparel’s operations reflect some seasonality, with sales during the first and fourth fiscal quarters generally being the highest and sales during the second and third fiscal quarters generally being the lowest. Therefore, the results in the quarter ended March 27, 2004 may not be reflective of the results for the other quarters within the fiscal year.

RESULTS OF OPERATIONS

Net sales for the third quarter of fiscal year 2004 were $58.8 million, an increase of 73.6% from net sales of $33.9 million for the third quarter of the prior year. The sales increase of $24.9 million was primarily the result of the acquisition of M. J. Soffe Co., which accounted for $22.6 million in sales in the quarter. The higher net sales in the Delta business were primarily the result of an 11.0% increase in unit volume, offset

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slightly by lower average selling prices of tee shirts. Lower average selling prices were primarily the result of price promotions on the basic adult short sleeve white and colored tees driven by competition in the marketplace. Net sales for the nine months of fiscal year 2004 were $135.2 million, an increase of $42.5 million, or 45.8%, from net sales of $92.8 million for the first nine months of the prior year. The increase in net sales was primarily the result of the acquisition of the M. J. Soffe Co. in the second fiscal quarter, accounting for $39.6 million.

Gross profit as a percentage of net sales increased to 24.5% in the third quarter of fiscal year 2004 from 18.1% in the third quarter of the prior year. The improvement in gross margin was primarily the result of the higher gross profits associated with M. J. Soffe Co., offset partially by lower gross profits in the Delta basic tee shirt business. The gross margin on basic tee shirts declined in the third fiscal quarter compared to the prior year quarter primarily due to lower average selling prices, higher raw material costs and lower absorption of fixed cost, offset partially by lower conversion costs. For the first nine months of fiscal year 2004, gross profit as a percentage of net sales increased to 20.3% from 18.6% for the first nine months of the prior year. The $10.2 million increase in gross profit was primarily the result of the acquisition of the M. J. Soffe Co. in the second quarter of fiscal year 2004, offset partially by lower average selling costs on basic tees. The Company expects gross margin percentages in its fourth fiscal quarter to be similar to those achieved in the quarter ended March 27, 2004 as higher prices and lower manufacturing costs are offset by higher raw material costs flowing through cost of sales.

Selling, general and administrative expenses, including the provision for bad debts, for the third quarter of fiscal year 2004 were $8.9 million, or 15.1% of sales, an increase of $5.4 million from $3.5 million, or 10.3% of sales, in the third quarter of the prior year primarily as the result of the addition of the M. J. Soffe Co. Selling costs increased as a percentage of sales primarily as a result of the higher selling costs associated with branded apparel products. Selling, general and administrative expenses, including the provision for bad debts, for the first nine months of fiscal year 2004 were $20.1 million, or 14.9% of net sales, an increase of $10.7 million from $9.4 million, or 10.1% of net sales, in the first nine months of the prior year primarily as the result of the addition of the M. J. Soffe Co. in the second quarter of fiscal year 2004.

Other income for the first nine months of fiscal year 2004 was $29 thousand compared with other expense of $154 thousand for the first nine months of the prior year. Other expense in the nine months ended March 29, 2003 primarily related to a net loss on the sale of cotton options.

Operating income for the third quarter of fiscal year 2004 was $5.5 million, an increase of $2.9 million, or 111.4%, from $2.6 million for the third quarter of the prior year. The increase in operating income was the result of the higher gross profit, offset partially by increased selling, general and administrative expenses. Operating income for the first nine months of fiscal year 2004 was $7.4 million, a decrease of $0.4 million, or 4.7%, from $7.7 million for the first nine months of the prior year. The decrease in operating income was the result of the higher selling, general and administrative expenses, offset partially by the higher gross profit.

Net interest expense for the third quarter of fiscal year 2004 was $0.8 million, an increase of $0.6 million from the third quarter of the prior year. Net interest expense for the first nine months of fiscal year 2004 was $1.8 million, an increase of $1.3 million from the first nine months of the prior year. The increase in interest expense resulted primarily from the increase in average debt outstanding, resulting from the M. J. Soffe acquisition.

The effective tax rate for the third quarter of fiscal year 2004 was 19.4% compared to 38.3% for the third quarter of the prior year and 38.3% for the fiscal year ended June 28, 2003. During the quarter ended March 27, 2004, the statute of limitations expired on the tax years covered by the tax sharing agreement between the Company and Delta Woodside Industries, Inc. As a result, the Company reversed its $0.9 million tax liability associated with the tax sharing agreement, resulting in the lower effective tax rate during the quarter.

Net income for the third quarter of fiscal year 2004 was $3.8 million, an increase of $2.3 million compared to net income of $1.5 million in the prior year third fiscal quarter. Net income for the first nine months of fiscal year 2004 was $4.3 million, a decreas