UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

x

For the quarterly period ended January 1,April 2, 2005

OR

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.

Yesxþ Noo.

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

Yeso Noxþ.

As of January 31,April 26, 2005, there were outstanding 4,150,1814,230,931 shares of the registrant’s common stock (prior to adjustment to reflect the 2-for-1 stock split that will be effective as of May 31, 2005), par value of $0.01, which is the only class of the outstanding common or voting stock of the registrant.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

DELTA APPAREL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

DELTA APPAREL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

See accompanying notes to condensed consolidated financial statements.

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DELTA APPAREL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

DELTA APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note A—Basis of Presentation

We prepared the accompanying interim condensed consolidated financial statements in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. We believe these condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation. Operating results for the three and sixnine months ended January 1,April 2, 2005 are not necessarily indicative of the results that may be expected for the year ending July 2, 2005. For more information regarding our results of operations and financial position refer to the consolidated financial statements and footnotes included in our Form 10-K for the year ended July 3, 2004, filed with the Securities and Exchange Commission.

“Delta Apparel,” the “Company,” and “we,” “us” and “our” are used interchangeably to refer to Delta Apparel, Inc. together with our wholly-owned subsidiary, M. J. Soffe Co. (“M. J. Soffe”, or “Soffe”), and our other subsidiaries, as appropriate to the context.

Note B—Accounting Policies

Our accounting policies are consistent with those described in our Summary of Significant Accounting Policies in our Form 10-K for the year ended July 3, 2004 filed with the Securities and Exchange Commission.

Note C—New Accounting Standards

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004),Share-Based Payment, which is a revision of FASB Statement No. 123,Accounting for Stock-Based Compensation. Statement 123(R)123® supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,Statements of Cash Flows. Generally, the approach in Statement 123(R)123® is similar to the approach described in Statement 123. However, Statement 123(R)123® requiresall share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

Statement 123(R)123® must be adopted for annual periods beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued.Statement 123® applies to new awards and to awards modified, repurchased, or cancelled after the required effective date, as well as to the unvested portion of awards outstanding as of the required effective date (“modified prospective application”). We expect to adopt Statement 123(R)123® on July 3, 2005. We are currently evaluating the effect that the adoption of Statement 123(R)123® will have on our financial position and results of operations.operations (see Note H).

In March 2005, the Securities and Exchange Commission released SEC Staff Accounting Bulletin (“SAB”) No. 107,Share-Based Payment. SAB No. 107 provides the SEC staff’s position regarding the implementation of Statement 123®. SAB No. 107 contains interpretive guidance related to the interaction between Statement 123® and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment transactions. We are currently evaluating the effects that the adoption of SAB No. 107 will have on our financial position and will be incorporating it as part of our adoption of Statement 123®.

Note D—Selling, General and Administrative Expense

We include in selling, general and administrative expenses, costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as the cost of stocking, warehousing, picking and packing, and shipping goods for delivery to our customers. For the secondthird quarter of fiscal years 2005 and 2004, distribution costs included in selling, general and administrative expenses totaled $1.9$2.3 million and $2.1$2.0 million, respectively. For the first sixnine months of fiscal years 2005 and 2004, distribution costs included in selling, general and administrative expenses totaled $3.8$6.2 million and $3.2$5.2 million, respectively. The Soffe segment was included in our results beginning on October 3, 2004. In addition, selling, general and administrative expenses include costs related to sales associates, administrative personnel cost, advertising and marketing expenses and general and administrative expenses.

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Note E—Inventories

Inventories consist of the following:

models that were not developed for use in valuing employee stock options.

Pro forma information regarding net income and earnings per share is required by SFAS 123 to be determined as if we had accounted for our employee stock options under the fair value method of that Statement. For purposes of pro forma disclosures, the estimated fair value of the options under the Option Plan and the Award Plan are amortized to expense over the options’ vesting period. Our pro forma information follows (in thousands, except per share amounts):

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Information about our operations as of and for the sixnine months ended January 1,April 2, 2005 and DecemberMarch 27, 2003,2004, by operating segment, is as follows (in thousands):. The results for the nine months ended March 27, 2004 include six months of operations from M. J. Soffe Co., which was acquired on October 3, 2003.

The following reconciles the Segment Operating Income to the consolidated income before income taxes for the three and sixnine months ended January 1,April 2, 2005 and DecemberMarch 27, 2003.2004.

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

BUSINESS OUTLOOK

OurSales for our third quarter were $58.3 million compared to $58.8 million in the third quarter of last year. While net sales forwere down slightly compared to the prior year, we had a 330 basis point improvement in our gross margins from our second quarter of fiscal year 2005 increased over2005. We achieved the prior quarter by 7.8%gross margin improvement through price increases in our core fashion apparel styles, a more favorable sales mix of higher margin goods, and through several key improvements to record revenue of $49.2 million. The increase was primarily due to organic growth in the core Delta business. While the apparel business remains competitive, overall demand for our products appears strong. manufacturing process, including running our facilities at a higher capacity and decreasing our off-quality production.

Revenue in the Delta business grew 19.1%was $36.0 million compared to the prior year’s quarter, resulting from increased unit sales and higher average selling prices. We continued to grow the customer base$36.3 million in the Delta segment during the quarter, shipping to approximately 18% more accounts year to date than in the prior year, now servicing over 3,400 accounts. Our average selling price was $18.30 per dozen versus $18.08 per dozen in the first quarter and up $1.64, or 9.8% from the secondthird quarter of the prior year. The percentageThis slight decrease was primarily the result of a temporary reduction in distribution capacity due to the transition of our primary distribution center in Knoxville, Tennessee to a new facility in Clinton, Tennessee. In response to the lower capacity during the quarter, we curtailed sales of basic white tee shirts decreasedcommodity tees, while we continued to grow sales of higher margin products. In addition, we increased our private label sales to 25% of our sales, from 12% of our sales in the second quarter to 27% of total sales compared to 42% in the same quarter of the lastprior year and our first quarter level of 31%. We have adjusted our manufacturing mix in an effort to maintain this lower percentage level of white shirts. We continue to have success selling higher-margin, higher quality goodsquarter. Operating income in the Delta business. Inbusiness increased to $6.1 million, or 16.8% of sales. Included in these results was the Soffe business, our revenue decreased 8% to $15.7$3.6 million forgain on the second quarter of fiscal year 2005 compared to the prior year. Our sales were impacted by a conservative inventory position in fashion fleece. We recently introduced our expanded product offerings for spring and fall of 2005. Our core products and additional ladies styles in our Soffe business are booking well and we expect sales growth during the second half of fiscal year 2005.

In response to increased demand for our products, we are increasing the outputsale of our yarn manufacturing locations to support the demand.facility in Edgefield, South Carolina. We are going into the spring selling season with lean tee shirt inventories and expect to run our Delta facilities at high levels of capacity utilization into next fall as we service our customer demand and rebuild inventories for next year. We have recently started producing tee shirt fabric in the Soffe textile facility to supplement our needs. We expect that this will allow us to continue to grow our business vertically without

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of higher margin products, includinggoods, and improvements to our Quail Hollow line and our magnum weight styles. Lower textile and sewing manufacturing costs also contributed to the improved gross margins in the second quarter of fiscal year 2005 compared to the prior year.process. These improvements were partially offset by unfavorable absorptionhigher cost raw materials flowing through cost of fixed costssales, negatively impacting the quarter by approximately $1.5 million compared to the prior year quarter. Gross margins in the Delta business improved as a result of a focused shift from reduced production levels, andsales of basic commodity tees to sales of higher raw material costs.margin products, in a response to our lower distribution capacity during the quarter. Gross margins in the Soffe business declined during the quarter. We shipped approximately $1 million of close-out products from our Soffe business as a step to improve our inventory utilization, which impacted our gross margins during the quarter. Gross profit as a percentage of net sales increased to 21.6%23.0% in the first sixnine months of fiscal year 2005 from 17.0%20.3% in the same period of the prior year, resulting primarily from the higher gross profits associated with M. J. Soffe Co., which were included for threesix months in the first sixnine months of fiscal year 2004. Gross margins as a percentage of sales are higher in the Soffe segment than the Delta segment due to the higher average selling prices achieved on the branded products, partially offset by higher manufacturing costs. Assuming no material decline in pricing, we expect margins in both the Delta and the Soffe segments to improve for fiscal year 2005 as compared to fiscal year 2004. Our gross margins may not be comparable to other companies, since some entities include costs related to their distribution network in cost of goods sold and we exclude a portion of them from gross margin, including them in selling, general and administrative expenses.

Selling, general and administrative expenses, including the provision for bad debts, for the secondthird quarter of fiscal year 2005 were $8.1$10.4 million, or 16.5%17.8% of sales, compared to $8.2$8.9 million, or 17.9%15.1% of sales for the same period in the prior year. Selling costs decreasedThe 270 basis point increase in selling, general and administrative expenses was primarily the result of increased general and administrative expenses. General and administrative expenses increased primarily as a percentageresult of salescosts associated with the sale of our Edgefield facility during the quarter and increased incentive compensation costs resulting from the increase in the price of our common stock. In addition, distribution expenses increased primarily as a result of the higher sales duringstartup costs associated with the quarter in the Delta segment.new Clinton, Tennessee and Cranbury, New Jersey distribution facilities. We expect distribution costs to increase approximately $1.5 million annually as a result of our New Jersey Distribution center. Selling, general and administrative expenses, including the provision for bad debts, for the first sixnine months of fiscal year 2005 were $16.5$26.9 million, or 16.0%16.6% of sales, compared to $11.2$20.1 million, or 14.7%14.9% of sales for the same period in the prior year. The increase as a percentage of sales primarily relates to the inclusion of the Soffe operations in our results for the full sixnine month period during fiscal year 2005. Selling costs as a percentage of net sales are higher in the Soffe segment primarily due to the additional staffing, higher commissions and increased advertising expenses associated with selling branded apparel products. We expect selling, general and administrative expenses as a percentage of net sales for fiscal year 2005 to remain relatively consistent with fiscal year 2004 in both business segments.

Other expenseincome for the first sixnine months of fiscal year 2005 was $5 thousand, a decrease of $55 thousand$3.6 million compared with other income of $50to $29 thousand for the first sixnine months of the prior year. Other income in the six months ended December 27, 2003 primarily related to a net gain onOn January 5, 2005, we completed the sale of cotton options.our yarn manufacturing plant in Edgefield, South Carolina to Parkdale America, LLC for $10 million in cash. The sale of the Edgefield Plant resulted in a pre-tax financial gain of $3.6 million, or estimated after-tax gain of $0.26 per diluted share (adjusted to reflect 2-for-1 stock split effective as of May 31, 2005).

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Inventories at January 1,April 2, 2005 were $106.7$105.2 million, consistent with the inventory at July 3, 2004. DuringIn the first six months of fiscal year 2005, we adjusted production schedules to manage our overall inventory levels. During the quarter ended April 2, 2005, we increased our manufacturing production in both the Delta and Soffe businesses. Although we are not yet at maximum capacity, we expect to continue to increase our production levels through fiscal year 2006. Although we expect to increase production over the next several quarters, we expect to further reduce our inventory levels through sales in excess ofwill trend downward as we improve our increased production.inventory utilization.

Capital expenditures in the secondthird quarter of fiscal year 2005 were $3.1$3.5 million compared to $0.6$0.3 million in the secondthird quarter of the prior year. Capital expenditures for the quarter ended April 2, 2005 primarily related to the opening of our two distribution facilities in Clinton, Tennessee and Cranbury, New Jersey. Capital expenditures in the first sixnine months of fiscal year 2005 totaled $5.4$9.0 million compared to $1.1$1.3 million in the first sixnine months of the prior year. The expenditures during fiscal year 2005 primarily related to the acquisition oftwo new distribution centers, and $1.8 million related to the distribution center in Tennessee, and upgrading the air filtration system and adding an additional spinning frame at our Edgefield yarn plant.spinning facility, in addition to increasing capacity and lowering costs in our existing facilities. The expenditures during fiscal year 2004 primarily related to increasing capacity and lowering costs in our existing textile facilities. Capital expenditures for fiscal year 2005 are expected to total approximately $10 million, of which includesapproximately $5 million will be related to the capital expenditure ofnew distribution centers. We expect to spend approximately $4 million related to the acquisition of the distribution center in Tennessee and $1.8 million related to the Edgefield yarn spinning facility. In orderannually to continue to increaseincreasing capacity and lowerlowering costs in our existing facilities,facilities. In addition, we expectmay spend additional capital in fiscal year 2006 expanding our future capital expenditure needs to be approximately $4 million per year.distribution network and manufacturing operations.

LIQUIDITY AND CAPITAL RESOURCES

Our primary cash needs are for working capital and capital expenditures. In addition, we use cash to fund our dividend payments and share repurchases under our Stock Repurchase Program.

On October 3, 2003, we entered into an Amended and Restated Loan and Security Agreement with Wachovia Bank, N. A. (successor by merger to Congress Financial Corporation (Southern)), as lender and as agent for the financial institutions named as lenders, pursuant to which our existing line of credit (the “Delta Facility”) was increased to $40 million, which represented a $5 million increase in our predecessor credit facility.million. On November 8, 2004, we amended the Delta Facility to increase our line of credit by an additional $2.75 million to $42.75 million. The purpose of the amendment was to provide funds for our acquisition of a more modernour Clinton, Tennessee distribution center in Tennessee.

center. In conjunction with the sale of the yarn manufacturing plant, on January 6, 2005, we amended our Delta Facility to lower the Fixed Asset Loan Limit Amount from $10.0 million to $5.0 million.

Also on October 3, 2003, M. J. Soffe Co. entered into a Loan and Security Agreement with Wachovia Bank, N. A. (successor by merger to Congress Financial Corporation (Southern)), which provides M. J. Soffe Co. with a $38.5 million line of credit (the “Soffe Facility”). Together, the Delta Facility and the Soffe Facility provide for lines of credit in an aggregate amount of $81.25 million. The Delta Facility and the Soffe Facility are secured by a first priority lien on all of the assets of Delta Apparel and M. J. Soffe Co. Delta Apparel is a guarantor of the Soffe Facility, and M. J. Soffe Co. is a guarantor of the Delta Facility. M. J. Soffe Co. has the option to increase the Soffe Facility from $38.5 million to $41.0 million, provided that no event of default exists under the facility. The restricted net assets of M. J. Soffe Co. do not exceed 25% of the consolidated net assets as of July 3, 2004.

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

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respectively. Our cash flow from operating activities is primarily due to net income plus depreciation and changes in working capital. We monitor changes in working capital by analyzing our investment in accounts receivable and inventories and by the amount of accounts payable. During fiscal year 2005, our cash flow provided by operating activities was primarily from net income plus depreciation and a reductionan increase in accounts receivable.payable and accrued expenses, offset partially by a decrease in other liabilities. Accounts payable and accrued expenses increased $9.9 million during the nine months ended April 2, 2005, primarily as a result of the decision to terminate our non-qualified deferred compensation plans. This decision was made primarily as a result of the new restrictions put in place by the American Jobs Creation Act of 2004. As a result, we reclassified $6.2 million of long-term deferred compensation liability to current accrued liabilities from other noncurrent liabilities. In addition, accounts payable increased primarily as a result of having longer terms for our yarn purchases compared to buying cotton for the Edgefield plant, which we sold in January 2005. We are also being more aggressive on terms with our other vendors. The cash provided by operating activities in fiscal year 2004 was primarily the result of a reduction in accounts receivable and net income plus depreciation, a decrease in noncurrent assets and an increase in income taxes, offset partially by increases in inventory.inventory and accounts receivable. In December 2003, we received a net $7.7 million cash refund of federal taxes, resulting from a tax loss generated as a result of no value being allocated in the purchase price allocation to the property, plant and equipment of M. J. Soffe Co.

Investing Cash Flows

During the sixnine months ended January 1,April 2, 2005, investing activitieswe used $5.4$9.0 million in cash for capital expenditures.expenditures and received $9.8 million in proceeds for the sales of property, plant and equipment. The expenditures during fiscal year 2005 primarily related to the purchasetwo new distribution centers, and $1.8 million related to the Edgefield yarn spinning facility, in addition to increasing capacity and lowering costs in our existing facilities. The proceeds from the sale of a distribution center in Tennessee,property, plant and upgradingequipment primarily related to the air filtration system and adding an additional spinning frame atsale of our Edgefield yarn plant.plant which we sold in January 2005. During the sixnine months ended DecemberMarch 27, 2003,2004, investing activities used $52.3$52.6 million in cash and principally represented the acquisition of M. J. Soffe Co. We spent $1.1$1.3 million in capital expenditures during the first sixnine months of fiscal 2004, primarily related to increasing capacity and lowering costs in our textile facilities. Capital expenditures for fiscal year 2005 are expected to total approximately $10 million, of which includesapproximately $5 million will be related to the capital expenditure ofnew distribution centers. We expect to spend approximately $4 million relatedannually to the acquisition of thecontinue increasing capacity and lowering costs in our existing facilities. In addition, we may spend additional capital in fiscal year 2006 expanding our distribution center in Tennesseenetwork and $1.8 million related to the Edgefield yarn spinning facility.manufacturing operations.

Financing Activities

For the first sixnine months of fiscal 2005 we used $0.9$14.4 million in cash in financing activities, primarily related to the payment of dividends and repayment of long-term debt. For the first sixnine months of fiscal 2004, financing activities provided $48.5$51.8 million principally from our credit facilities and primarily related to the acquisition of M. J. Soffe Co. We paid dividends to our shareholders totaling $0.6$0.9 million and $0.5$0.7 million in the first sixnine months of fiscal years 2005 and 2004, respectively.

Based on our expectations, we believe that our $81.25 million credit facilities should be sufficient to satisfy our foreseeable working capital needs, and that the cash flow generated by our operations and funds available under our credit facilities should be sufficient to service our debt payment requirements, to satisfy our day-to-day working capital needs, to fund our planned capital expenditures, to fund purchases of our stock as described below and to fund the payment of dividends as described below. Any material deterioration in our results of operations, however, may result in the Company losing its ability to borrow under its credit facilities and to issue letters of credit to suppliers or may cause the borrowing availability under the facilities to be insufficient for our needs.

Purchases by Delta Apparel of its Own Shares

We have authorization from our Board of Directors to spend up to an aggregate of $6.0 million for share repurchases under the Stock Repurchase Program. All purchases are made at the discretion of our management. We did not purchase shares of our common stock during the three months ended January 1,April 2, 2005. Since the inception of the Stock Repurchase Program, we’vewe have purchased 368,057736,114 shares (adjusted to reflect the 2-for-1 stock split effective as of May 31, 2005) of our common stock pursuant to the program for an aggregate of $4.2 million.

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regard to the number of shares or average number of shares of common stock and related prices, dividends and per share amounts have been restated to reflect the 2-for-1 stock split.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions relate to the adequacy of receivable and inventory reserves, self-insurance accruals and the accounting for income taxes.

The detailed Summary of Significant Accounting Policies is included in Note B toour Annual Report on Form 10-K for our fiscal year ended July 3, 2004. There have been no changes in our critical accounting policies since the Condensed Consolidated Financial Statements.filing of that Annual Report.

Revenue Recognition and Accounts Receivable

We consider revenue realized or realizable and earned when the following criteria are met: persuasive evidence of an agreement exists, shipment has occurred, the price is fixed and determinable and the collectibility is reasonably assured. Sales are recorded net of discounts and provisions for estimated returns and allowances. We estimate returns and allowances on an ongoing basis by considering historical and current trends. We record these costs as a reduction to net sales and cost of sales. We estimate the net collectibility of our accounts receivable and establish an allowance for doubtful accounts based upon this assessment. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness or weakening in economic trends could have a significant impact on the collectibility of receivables and our operating results.

Inventories

Our inventory is carried at the lower of FIFO cost or market. We regularly review inventory quantities on hand and record a provision for damaged, excess and out of style or otherwise obsolete inventory based primarily on our historical selling prices for these products and our estimated forecast of product demand for the next twelve months. If actual market conditions are less favorable than those projected, or if liquidation of the inventory is more difficult than anticipated, additional inventory write-downs may be required.

Self Insurance

Our medical, prescription and dental care benefits are self-insured. Our self-insurance accruals are based on claims filed and estimates of claims incurred but not reported. We develop estimates of claims incurred but not reported based upon the historical time it takes for a claim to be reported and historical claim amounts. While the time it takes for a claim to be reported has been declining, if claims are greater than we originally estimate, or if costs increase beyond what we have anticipated, our recorded reserves may not be sufficient, and it could have a significant impact on our operating results.

Income Taxes

We use the liability method of accounting for income taxes, which requires recognition of temporary differences between financial statement and income tax basis of assets and liabilities measured by enacted tax rates. We have recorded deferred tax assets for certain state operating loss carryforwards and nondeductible accruals. We established a valuation allowance related to certain of the state operating loss carryforward amounts in accordance with the provisions of FASB Statement No. 109, Accounting for Income Taxes. We continually review the adequacy of the valuation allowance and recognize the benefits of deferred tax assets if reassessment indicates that it is more likely than not that the deferred tax assets will be realized based on earnings forecasts in the respective tax locations.

There have been no changes in our critical accounting policies since the filing of our Annual Report on Form 10-K for the year ended July 3, 2004.

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Statement 123(R)123® must be adopted for annual periods beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued.Statement 123® applies to new awards and to awards modified, repurchased, or cancelled after the required effective date, as well as to the unvested portion of awards outstanding as of the required effective date (“modified prospective application”). We expect to adopt Statement 123(R)123® on July 3, 2005. We are currently evaluating the effect that the adoption of Statement 123(R)123® will have on our financial position and results of operations.operations (see Note H).

In March 2005, the Securities and Exchange Commission released SEC Staff Accounting Bulletin (“SAB”) No. 107,Share-Based Payment. SAB No. 107 provides the SEC staff’s position regarding the implementation of Statement 123®. SAB No. 107 contains interpretive guidance related to the interaction between Statement 123® and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment transactions. We are currently evaluating the effects that the adoption of SAB No. 107 will have on our financial position and will be incorporating it as part of our adoption of Statement 123®.

ENVIRONMENTAL AND REGULATORY MATTERS

On May 27, 2002, we received a renewal of our National Pollution Discharge Elimination System (“NPDES”) permit from the North Carolina Department of Environment and Natural Resources, Division of Water Quality (“DWQ”) for our Maiden, North Carolina textile plant. Among other things, the new permit required us to reduce our effluent (waste discharge) color to specified color concentration limits. We believed that the DWQ exceeded its authority and acted arbitrarily in imposing the specific color concentration limitations within the new permit and, on July 23, 2002 contested the permit by filing a petition with the North Carolina Office of Administrative Hearings. We have reached a settlement with the DWQ and have negotiated a permit modification. The permit modification became effective February 1, 2005.

The modified permit, as agreed by DWQ and us, provides that we will have approximately one year to research and test alternative color removal technologies and thereafter must select and implement a technology by October 2005 if we continue to require our NPDES discharge permit. In addition, we must continue to monitor our color removal and will be subject to a gradual lowering of our effluent color standard. We are currently in compliance with the effluent color standard that the permit requires as of October 2005. Our NPDES permit will be subject to renewal in the spring of 2006.

We are currently evaluating the future cost to comply with the modified permit. Although we do not believe that the cost to comply with the modified permit will be material there can be no assurance that the cost of compliance will not be material to the financial condition of the Company.Company, there can be no assurance of this.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

COMMODITY RISK SENSITIVITY

On January 5, 2005, in conjunction with the sale of our yarn spinning facility in Edgefield, South Carolina, we entered into a five-year agreement with Parkdale to supply our yarn requirements. During this five-year period, we will purchase exclusively from Parkdale all yarn required by Delta Apparel and our wholly owned subsidiary, M. J. Soffe Co., for use in our manufacturing operations (excluding yarns that Parkdale does not manufacture as of the date of the agreement in the ordinary course of its business)business and temporary Parkdale capacity restraints). The purchase price of yarn will be based upon the cost of cotton plus a fixed conversion cost. Thus, we are still subject to the commodity risk of cotton prices and cotton price movements which could result in unfavorable yarn pricing for us. We will fix ourthe cotton prices as a component of the purchase price of yarn with Parkdale, pursuant to the supply agreement, in advance of the shipment of finished yarn from Parkdale, pursuant to our supply agreement.Parkdale. Prices are set according to prevailing prices, as reported by the New York Cotton Exchange, at the time we elect to fix specific cotton prices.

Yarn with respect to which we have fixed cotton prices at January 1,April 2, 2005 was valued at $16.3$28.2 million, and is scheduled for delivery between JanuaryApril 2005 and JuneDecember 2005. At January 1,April 2, 2005, a 10% decline in the market price of the cotton covered by our fixed price yarn would have had a negative impact of approximately $1.1$2.8 million on the value of the yarn.

We may use derivatives, including cotton option contracts, to manage our exposure to movements in commodity prices. We do not designate our options as hedge instruments upon inception. Accordingly, we mark to market changes in the fair market value of the options as other expense (income) in the statements of income. We did not own any cotton options contracts on January 1,April 2, 2005.

INTEREST RATE SENSITIVITY

Our credit agreements provide that outstanding amounts bear interest at variable rates. If the amount of outstanding indebtedness at January 1,April 2, 2005 under the revolving credit facilities had been outstanding during the entire three months ended January 1,April 2, 2005 and the interest rate on this outstanding indebtedness were increased by 100 basis points, our interest expense would have increased by approximately $109,000,$76,000, or 13.1%11.2%, during the quarter. This compares to an increase of $433,000, or 9.3%, for the 2004 fiscal year, or an average of $108,250 per quarter, based on the outstanding indebtedness at July 3, 2004. The actual increase in interest expense resulting from a change in interest rates would depend on the magnitude of the increase in rates and the average principal balance outstanding.

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Item 4:4. Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of January 1,April 2, 2005, and, based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective. Therewere effective at the evaluation date. During our third fiscal quarter, there were no significant changes into our internal controlscontrol over financial reporting that has materially affected, or in other factorsis reasonably likely to materially affect, that could significantly affect these controls subsequent to the date of their evaluation.control.

Our disclosure controls and procedures are designed to ensureprovide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensureprovide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

The following summarizes the votes at the Annual Meeting of the Company’s shareholders held on November 11, 2004:

Item 5. Other Information

On November 11, 2004, the Company’s shareholders approved the 2004 Non-Employee Director Stock Plan (the “Plan”). The Plan is described in Item 2 of the Company’s Proxy Statement, filed with the Securities and Exchange Commission on October 1, 2004, which description is hereby incorporated by reference herein.

Item 6. Exhibits and Reports on Form 8-K

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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