DELTA APPAREL, INC.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Fiscal Year Ended June 28, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-15583
DELTA APPAREL, INC.
(Exact name of registrant as specified in its charter)
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Georgia
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58-2508794 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
2750 Premiere Parkway, Suite 100
Duluth, Georgia 30097
(Address of principal executive offices) (zip code)
Registrants telephone number, including area code: (678) 775-6900
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common Stock, par value $0.01
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American Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned filer, as defined in Rule 405 of
the Securities Act. Yes o No þ.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark 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 registrants 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ.
The aggregate market value of the shares of common stock held by non-affiliates of the registrant,
based on the closing price for the common stock on the American Stock Exchange on December 28,
2007, the last business day of the registrants most recently completed second fiscal quarter, was
approximately $44.2 million. For the purpose of this response, the registrant has assumed that its
directors, corporate officers and beneficial owners of 5% or more of its common stock are the
affiliates of the registrant.
Number of shares of the registrants common stock, par value $0.01 per share, outstanding as of
August 26, 2008: 8,496,749
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Part III of this Form 10-K shall be incorporated from the
registrants definitive Proxy Statement to be filed pursuant to Regulation 14A for the registrants
2008 Annual Meeting of Shareholders currently scheduled to be held on November 13, 2008.
FORWARD LOOKING STATEMENTS
We may from time to time make written or oral statements that are forward-looking, including
statements contained in this report and other filings with the Securities and Exchange Commission
and in reports to our shareholders. 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 earnings, 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.
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 its domestic wholly-owned subsidiaries, including M. J. Soffe,
Co., a North Carolina corporation (M. J. Soffe, or Soffe) and Junkfood Clothing Company, a
Georgia corporation (Junkfood), and other international subsidiaries, as appropriate to the
context.
Additional information about our Company, which is not a part of this annual report, is available
at www.deltaapparelinc.com. Our reports filed with the Securities and Exchange Commission may be
found on this website.
OVERVIEW
Delta Apparel, Inc. is an international apparel design, manufacturing, sourcing and marketing
company that features a diverse portfolio of high quality branded and private label activewear
apparel. We specialize in selling a variety of casual and athletic products through almost every
distribution channel for these types of apparel. Our products are sold to specialty and boutique
shops, upscale and traditional department stores, mid-tier retailers, sporting goods stores, screen
printers, and private label accounts. In addition, we sell certain products to college bookstores
and to the U.S. military. Our products are also available direct to consumers on our websites at
www.soffe.com and www.deltaapparel.com. We expect to launch our new Junkfood website in the fall
at www.junkfoodforever.com. As a result, we anticipate further growth in the internet market
channel across all our businesses in fiscal year 2009. We believe this diversified distribution
allows us to capitalize on our strengths to provide casual activewear to consumers purchasing from
all types of retailers.
We design and manufacture the majority of our products ourselves, which allows us to provide our
customers consistent, high quality, high value branded and private label products. Our
manufacturing operations are located in the southeastern United States, El Salvador, Honduras, and
Mexico. We also use foreign and domestic contractors as additional sources of production. Our
distribution facilities are strategically located throughout the United States to better serve our
customers.
We were incorporated in Georgia in 1999 and our headquarters is located at 2750 Premiere Parkway,
Suite 100, Duluth, Georgia 30097 (telephone number: 678-775-6900). In addition, we maintain an
executive office at 322 South Main Street, Greenville, South Carolina 29601 (telephone number:
864-232-5200). 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 2008, 2007
and 2006 fiscal years were 52-week years and ended on June 28, 2008, June 30, 2007, and July 1,
2006, respectively.
2
ACQUISITIONS AND BUSINESS DEVELOPMENTS
FunTees Acquisition
On October 2, 2006, we completed the acquisition of substantially all of the assets of FunTees,
Inc. and its business of selling private label knit custom t-shirts (the FunTees Acquisition).
The assets acquired included substantially all of the equipment, inventories, and accounts
receivable of the FunTees business. The aggregate consideration paid for the FunTees Acquisition
was $21.8 million in cash, consisting of $20.0 million paid at closing and an additional $1.8
million paid on April 12, 2007 as an adjustment for the actual working capital purchased.
We integrated the FunTees textile operations into our Maiden, North Carolina facility during fiscal
year 2007 and have maintained the FunTees offshore cutting, sewing and decorating facilities
located in El Salvador and Campeche, Mexico. FunTees, a division of our Activewear segment,
designs, manufactures, and embellishes private label custom knit t-shirts primarily to major
branded sportswear companies. We believe that the strength of FunTees lies with its long-term
customer relationships as FunTees provides the quality products and services levels that meet their
demands. This is achieved by FunTees through its flexibility to custom-manufacture products in a
variety of garment styles, fabrics and colors then decorate and package these products for retail
in its offshore facilities, offering a quality garment at competitive prices.
In connection with the integration of the textile operations of the FunTees business into our
Maiden, North Carolina textile facility, we expensed start-up and excess manufacturing costs
totaling $7.7 million, or $0.59 per diluted share.
Restructuring Plan
On July 18, 2007 we announced an overall restructuring plan which included the closing of our
Fayette, Alabama manufacturing facility, the expensing of excess manufacturing costs associated
with the FunTees manufacturing integration, and the expensing of start-up costs stemming from the
opening of our Honduran textile facility. The restructuring plan began in the fourth quarter of
fiscal year 2007 and was completed in the third quarter of fiscal year 2008. Expenses associated
with the restructuring plan impacted our financials as follows:
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FY 07 Qtr 4 |
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FY 08 Qtr 1 |
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FY 08 Qtr 2 |
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FY 08 Qtr 3 |
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Total |
Cost of Sales |
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5.4 |
million |
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$ |
1.9 |
million |
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$ |
2.0 |
million |
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$ |
0.9 |
million |
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$ |
10.2 |
million |
Restructuring Charges |
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$ |
1.5 |
million |
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$ |
0.1 |
million |
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$ |
1.6 |
million |
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Total |
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$ |
6.9 |
million |
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$ |
2.0 |
million |
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$ |
2.0 |
million |
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$ |
0.9 |
million |
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$ |
11.8 |
million |
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Diluted EPS Impact |
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$ |
0.51 |
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$ |
0.16 |
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$ |
0.15 |
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$ |
0.08 |
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$ |
0.90 |
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Closing of Fayette, Alabama Operations
In July 2007, we announced plans to close our manufacturing facility in Fayette, Alabama and ceased
production at the facility in September 2007. The closing of this facility left us with two
remaining U.S. textile operations, one located in Maiden, North Carolina and the other in
Fayetteville, North Carolina. During our fourth quarter of fiscal year 2007 we recorded a $1.5
million impairment charge, or $0.11 per diluted share, related to impairment on the plant and
equipment in Fayette, Alabama. During the first half of fiscal year 2008, we incurred expenses
totaling $1.0 million, or $0.08 per diluted share, associated with the closing of this textile
facility.
Offshore Textiles
During fiscal year 2007, we also began our offshore textile manufacturing initiatives. In November
2007, we began production at Ceiba Textiles, our state-of-the-art textile facility located in the
Green Valley Industrial Park near San Pedro Sula, Honduras. At this facility, we knit, dye, finish
and cut fabrics for apparel, primarily for the Activewear segment of our business. We are leasing
the building from the Green Valley Industrial Park. In addition to transferring some of our
existing equipment from the United States, we invested $16.7 million in new equipment for the
facility. Of the capital invested in the facility, $15.0 million is being financed through a
local Honduran bank. During fiscal year 2008, we expensed $1.6 million, or $0.12 per diluted
share, associated with the start-up of the facility. In June 2008, we reached our initial goal of
500,000 pounds of production per week, and plan to continue to increase production levels at the
facility in fiscal year 2009.
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Junkfood Acquisition
On August 22, 2005, we acquired substantially all of the assets and properties of Liquid Blaino
Designs, Inc. d/b/a Junkfood Clothing, a California-based designer, distributor and marketer of
branded apparel. Junkfood has gained brand recognition through its soft, weathered fabrications
incorporating retro and contemporary pop culture images as well as original artwork. We operate
Junkfood, headquartered in Los Angeles, California, as a separate business within our Retail-Ready
segment. At closing, we paid $20 million in cash and issued a promissory note to the seller for
$2.5 million. The promissory note bears interest at 9% and has a three-year term. The purchase
price was subject to a post-closing adjustment of $4.4 million based on the actual working capital
purchased, which we paid in fiscal year 2006. Also, additional amounts are payable to the Junkfood
sellers if performance targets are met by Junkfood during the period beginning on August 22, 2005
and ending on July 1, 2006 and during each of the three fiscal years thereafter ending on June 27,
2009, (the Earnout Provisions). These amounts are payable in the first quarter of the fiscal
year subsequent to attaining the performance target. Related to the earnout period ended July 1,
2006, $3.3 million was earned in accordance to the Earnout Provisions and subsequently paid in the
first quarter of fiscal year 2007. Performance targets were not met for the earnout period ending
June 30, 2007. Based on the financial performance of Junkfood in fiscal year 2008, $2.6 million
was earned in accordance to the Earnout Provisions. This amount was accrued as of June 28, 2008
and paid during the first quarter of fiscal year 2009.
Soffe Acquisition
On October 3, 2003, we acquired all of the outstanding stock of M. J. Soffe Co., a North Carolina
corporation. We operate Soffe as a separate business within our Retail-Ready segment,
headquartered in Fayetteville, North Carolina. In connection with the acquisition, we paid
approximately $43.5 million in cash, issued a promissory note to the selling individuals in the
aggregate principal amount of $8.0 million and paid approximately $8.5 million to satisfy all
outstanding bank debt of M. J. Soffe Co. Also, additional amounts were payable to the selling
individuals in cash during each of fiscal years 2005, 2006 and 2007 if specified financial
performance targets were met by M. J. Soffe Co. during annual periods beginning on September 28,
2003 and ending on September 30, 2006 (the Earnout Amounts). In fiscal years 2007, 2006 and
2005, we paid approximately $2.3 million, $1.5 million and $1.0 million, respectively, in Earnout
Amounts.
BUSINESS SEGMENTS
We operate our business in two distinct segments: Activewear and Retail-Ready. 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 Activewear segment consists of our business units primarily focused on garment styles that are
characterized by low fashion risk. We market, distribute and manufacture 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, branded sportswear companies, corporate industry programs and
sports licensed apparel marketers. The custom knit unembellished and embellished private label
apparel products in the FunTees business are included in the Activewear segment since the FunTees
Acquisition on October 2, 2006.
The Retail-Ready segment consists of our business units primarily focused on more specialized
apparel garments to meet consumer preferences and fashion trends. We sell these embellished and
unembellished products through specialty and boutique stores, upscale and traditional department
stores, mid-tier retailers and sporting goods stores. In addition to these retail channels, we
also supply college bookstores and produce products for the U.S. military. Our products in this
segment are marketed under the brands of Soffe®, Intensity Athletics®, Junkfood®, Junk
Mail® and Sweet and Sour®.
See Note 13 of the Notes to Consolidated Financial Statements for financial information regarding
segment reporting, which information is incorporated herein by reference.
PRODUCTS
We specialize in selling a variety of casual and athletic products through almost every
distribution channel for these types of apparel. Our products are sold to specialty and boutique
shops, upscale and traditional department stores, mid-tier retailers, sporting goods stores, screen
printers, and private label accounts. In addition, we sell certain products to college bookstores
and to the U.S. military. Our products are also available direct to consumers on our websites at
www.soffe.com and www.deltaapparel.com. We expect to launch our new Junkfood website in the fall
at www.junkfoodforever.com. As a result, we anticipate further growth in the internet market
channel across all our businesses in fiscal year 2009. We believe this
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diversified distribution allows us to capitalize on our strengths to provide casual activewear to
consumers purchasing from all types of retailers.
Our Activewear 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 brand
names. The Pro Weight line represents a diverse selection of mid-weight, 100% cotton silhouettes.
Short sleeve and long sleeve tees are available in youth and adult sizes in a variety of colors.
Specialty items that are also available for adults include pocket tees and ringer tees in a wide
variety of colors. The Magnum Weight line is designed to give our customers a variety of
silhouettes in a heavier-weight, 100% cotton fabric. Products in this category include short
sleeve and long sleeve silhouettes in a wide range of colors, available from the size 2-Toddler to
adult sizes up to 5X. Specialty items are also available within this segment, including the
popular Tall Tee in sizes to 5XLT for young men and toddler and juvenile styles for the younger
child. The Quail Hollow line includes polo shirts, ladies and junior tees. The ladies and
juniors programs feature an assortment of styles developed specifically for misses, plus sizes and
young juniors. Quail Hollow also offers a trendy slim fitting tee for all adults. Through the
acquisition of FunTees, we have increased our business of designing, manufacturing, marketing, and
selling private label custom knit t-shirts, including embellished products, primarily to major
branded sportswear companies. Also in connection with the FunTees Acquisition, we have added the
ability to provide our customers with products that they can direct ship to the retailer without
further packaging enhancements (hangers, tags, wrappings).
Our Retail-Ready segment designs and produces shorts, t-shirts, jersey and fleece apparel that are
available in a wide variety of colors and sizes, including toddlers, boys, girls, mens, womens
and big & tall. We believe that 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. During the 2006 fiscal year, we also added sports team uniforms to our product
line, under the Intensity Athletics® label. With the addition of Junkfood Clothing Company in
fiscal year 2006, our Retail-Ready segment includes vintage licensed apparel for juniors, men, boys
and children. The Junkfood® product line, including Junk Mail® and Sweet and Sour®, has distinct
and innovative designs and styles. We believe our Retail-Ready segment is also a leader in product
innovation as demonstrated by our Dri-release offerings. 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. Our recent additions to this line include the Soffe performance
apparel line offering WicAway fabrics, a new fabric with quick-drying properties.
MARKETING
Our marketing is performed by employed sales personnel and independent sales representatives
located throughout the country. In the Retail-Ready segment, our sales force services the retail
direct, sporting goods, military, private label, department store and college bookstore customer
bases. With the acquisition of Junkfood, we expanded our international presence in Canada, Europe,
Asia and Australia and believe our international sales can become a larger portion of our revenue
in future years. In the Activewear segment, our employed sales personnel sell our knit apparel
products primarily direct to large and small screen printers and, to a lesser extent, into the
promotional markets. Our private label products are sold primarily to the major branded sportswear
companies.
During fiscal year 2008, we served approximately 14,000 customers. No single customer accounted for
more than 10% of our sales in fiscal years 2008, 2007 or 2006. 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. Revenue attributable to foreign countries
was approximately 2.5% of consolidated net revenue for the 2008 fiscal year. For fiscal years 2007
and 2006, revenue attributable to foreign countries was approximately 1.0% or less of total
consolidated revenues.
The majority of our products are produced based on forecasts to permit quick shipment and to level
production schedules. Private label programs are generally made only to order or based on our
customers forecast. We offer same-day shipping on our catalog goods within our Activewear
segment, and both segments use third party carriers to ship products to our customers. In order to
better serve our customers, we allow our customers to order products by the piece, by the dozen, or
in full case quantities. Because a significant portion of our business consists of at-once EDI
orders and direct catalog orders, we believe that backlog order levels do not give a general
indication of future sales.
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COMPETITION
We sell our products in highly competitive domestic and international markets in which numerous
United States-based and foreign apparel firms compete. Many of these competitors are larger and
have greater financial resources than we do. Competition in our the Activewear segment for catalog
goods 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. For the private label market, quality and service are greater factors
for customer choice. We believe that competition within our branded apparel lines in our
Retail-Ready segment is based primarily upon design, brand recognition, and consumer preference.
Our strategy for Soffe includes sustaining the strong reputation of Soffe and adapting our product
offerings to changes in fashion trends and consumer preferences. Our strategy for Junkfood is to
continue to build strong brand recognition, increase our product offerings with the mens, boys
and childrens lines, and increase our customer base. In addition, with respect to both our
Activewear and Retail-Ready segments, we want to provide the best overall value to our customers.
We believe that our favorable competitive aspects include high consumer recognition and loyalty to
the Soffe and Junkfood brands, the high quality of our products, and our flexibility and process
control, which helps lead to product consistency. Our ability to remain competitive in the areas
of quality, price, design, marketing, product development, manufacturing, and distribution will, in
large part, determine our future success.
SEASONALITY
Although our various product lines are sold on a year-round basis, the demand for specific products
or styles 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 percentage of net sales by quarter for the year ended June 28, 2008 was 23%, 21%, 23% and 33%
for the first, second, third, and fourth fiscal quarters, respectively. The apparel industry,
especially in our Activewear segment, is highly competitive based upon price. Therefore, actions
by our competitors can greatly influence pricing and demand for our products. In our Retail-Ready
segment, demand for any particular product varies from time to time based largely upon shifts in
fashion trends, changes in consumer preferences and general economic conditions affecting the
apparel industry. Therefore, the distribution of sales in by quarter in fiscal year 2008 may not
be indicative of the distribution in future years.
MANUFACTURING
We manufacture fabrics in our company-owned plants located in Maiden, North Carolina and
Fayetteville, North Carolina, and in a leased facility located near San Pedro Sula, Honduras. Our
garments are primarily cut and sewn in our company-owned plants in Fayetteville, North Carolina,
and Rowland, North Carolina, in a leased facility in La Paz, El Salvador, in two leased facilities
in Campeche, Mexico and in two leased facilities in San Pedro Sula, Honduras. At the 2008, 2007
and 2006 fiscal year ends, our long-lived assets in Honduras, El Salvador and Mexico collectively
comprised 50.4%, 27.3% and 5.2%, respectively, of our total net property, plant and equipment. At
the 2008, 2007 and 2006 fiscal year ends, our long-lived assets in Honduras comprised 45.0%, 18.9%
and 2.4%, respectively, of our total net property, plant and equipment. The percentage of our
long-lived assets located offshore has increased from previous years due to the addition of our
offshore textile facility, Ceiba Textiles, in Honduras and due to the additional sew and print
operations acquired in the FunTees Acquisition. In fiscal years 2008, 2007 and 2006, approximately
68%, 70% and 74%, respectively, of our manufactured products were sewn in company-operated
locations. For a description of risks associated with our operations located in Honduras, El
Salvador and Mexico, see Item 1A. Risk Factors. The remaining products were sewn by outside
contractors located in the Caribbean basin. Along with our internal manufacturing, we source
undecorated products and full-package products through independent sources throughout the world.
In fiscal years 2008, 2007 and 2006, we sourced from third parties approximately 12%, 6% and 7%,
respectively, of our products.
RAW MATERIALS
In conjunction with the sale of our yarn spinning facility located in Edgefield, South Carolina in
January 2005, we entered into a five-year agreement with Parkdale America to supply our yarn
requirements. During this five-year period, we contracted to purchase exclusively from Parkdale
all yarn required by Delta Apparel and our wholly owned subsidiaries for use in our manufacturing
operations (excluding yarns that Parkdale did not manufacture as of the date of the agreement in
the ordinary course of its business or due to temporary Parkdale capacity restraints). The
purchase price of yarn is based upon the cost of cotton plus a fixed conversion cost. If
Parkdales operations are disrupted and it is not able to provide us with our yarn requirements, we
may need to obtain yarn from alternative sources. Although alternative sources are available, we
may not be able to enter into arrangements with substitute suppliers on terms as favorable as our
current terms with Parkdale. As
6
there can be no assurance that we would be able to pass along our own higher cost of yarn to our
customers, this could have a material adverse effect on our results of operations.
We also purchase greige fabric to supplement our own production when required or when it is
cost-effective to do so. These products are available from a number of suppliers. Our dyes and
chemicals are also purchased from several suppliers. While historically, we have not had
difficulty obtaining sufficient quantities of dyes and chemicals for our manufacturing, recent
increased demand in Asia along with heightened environmental awareness has reduced the availability
of certain products. Although we have the ability to adjust dye and chemical formulations as
necessary, this could result in higher manufacturing costs negatively impacting our results of
operations.
TRADEMARKS
We own trademarks which are important to our business. We believe that Soffe®, which has been in
existence since 1946, has stood for quality and value in the activewear market for more than sixty
years. Soffe® has been a registered trademark since 1992 and Junkfood® has been a registered
trademark since 1999. In addition to the Soffe® and Junkfood® trademarks, we also rely on the
strength of our Sweet and Sour®, Junk Mail®, Delta®, Quail Hollow, and Intensity Athletics®
brands.
LICENSES
We have the right to use trademarks under license agreements. Soffe is an official licensee for
over 250 colleges and universities, and Junkfood licenses several hundred trademarks. Our license
agreements are primarily non-exclusive in nature and typically have terms that range from one to
three years. Historically, we have been able to renew our license agreements and do not anticipate
difficulty in renewing our license agreements in the future. Although we are not dependent on any
single license, we believe our license agreements in the aggregate are of significant value to our
business.
EMPLOYEES
As of June 28, 2008, we employed approximately 6,400 full time employees, of whom approximately
1,500 were employed in the United States. Approximately 950 employees in Honduras are covered by a
collective bargaining agreement. We have never had a strike or legal work stoppage and believe
that our relations with our employees are good. We have invested significant time and resources in
ensuring that the working conditions in all of our facilities meet or exceed the standards imposed
by the governing laws. We have obtained WRAP (Worldwide Responsible Apparel Production)
certification for all of our existing sewing plants that we operate in Honduras, El Salvador and
Mexico. We also obligate our third party manufacturing contractors to follow our employment
policies.
AVAILABLE INFORMATION
Our corporate internet address is www.deltaapparelinc.com. Through the website, we make available,
free of charge, our SEC reports, including our annual report on Form 10-K, 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. The
information found on our website is not part of this, or any other, report we file with or furnish
to the SEC.
In addition, we will provide upon request, 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., 322 South Main Street, Greenville, South Carolina 29601. Requests
can also be made by telephone to 864-232-5200 ext 6621.
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
and we are currently in compliance with the requirements of these permits.
We incur capital and other expenditures each year that are aimed at achieving compliance with
current environmental standards. Generally, the environmental rules applicable to us are becoming
increasingly stringent. We do not expect that
7
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.
ITEM 1A. RISK FACTORS
We operate in a rapidly-changing, highly competitive business environment that involves substantial
risks and uncertainties, including, but not limited to, the risks identified below. The following
factors, as well as factors described elsewhere in this report or in our other filings with the
SEC, which could materially affect our business, financial condition or operating results, should
be carefully considered in evaluating our company and the forward-looking statements contained in
this report or future reports. The risks described below are not the only risks facing our company.
Additional risks not presently known to us or that we currently do not view as material, may become
material, and may impair our business operations. Any of these risks could cause, or contribute to
causing, our actual results to differ materially from expectations.
The apparel industry is heavily influenced by general economic cycles. The apparel industry is
cyclical and dependent upon the overall level of discretionary consumer spending, which changes as
regional, domestic and international economic conditions change. These include, but are not limited
to, employment levels, energy costs, interest rates, tax rates, personal debt levels, and
uncertainty about the future. Any deterioration in general economic conditions that creates
uncertainty or alters discretionary consumer spending habits could reduce our sales, increase our
costs of goods sold or require us to significantly modify our current business practices, and
consequently negatively impact our results of operations.
We are exposed to the risk of financial non-performance by our customers on a significant amount of
our sales. Our extension of credit involves considerable judgment and is based on an evaluation of
each customers financial condition and payment history. We monitor our credit risk exposure by
periodically obtaining credit reports and updated financials on our customers. Recently we have
seen a heightened amount of bankruptcies in our customers, especially retailers, and we believe
this trend may continue. We maintain an allowance for doubtful accounts for potential credit
losses based upon our historical trends and other available information. However, the inability to
collect on sales to significant customers or a group of customers could have a material adverse
effect on our results of operations.
Our Activewear segment is subject to significant pricing pressures and we must implement our cost
reduction business strategies and plans to be successful. We operate our Activewear segment in a
highly competitive, price sensitive industry that requires off-shore production for a significant
portion of manufacturing. Our strategy in this market environment is to be a low-cost producer and
to differentiate ourselves by providing quality products and service to our customers. To achieve
this goal, we began production in our new Honduran textile facility, Ceiba Textiles in fiscal year
2008. In addition, we continue to seek improvements in our production and delivery of products.
These are expected to improve our production efficiency and results of operations. If we are
unable to achieve the cost savings expected from the new offshore textile plant, it could have a
material adverse effect on our results of operations.
The apparel industry is highly competitive and we face significant competitive threats to our
business. We sell our products in a highly competitive market in which numerous distributors and
manufacturers compete, some of which are larger, more diversified and have greater financial
resources than we do. Competition in the activewear apparel industry for catalog goods 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. For the private label market, quality and service are greater factors for customer
choice. With respect to branded product lines in the retail industry, competition is mainly based
upon consumer recognition and preference. If we are unable to remain competitive in the areas of
quality, price, design, marketing, product development, manufacturing, and distribution, it could
harm our business.
Our success depends, in part, on our ability to anticipate evolving consumer preferences and
trends. The Retail-Ready segment consists of our business units primarily focused on more
specialized apparel garments to meet consumer preferences and fashion trends. We believe that the
Soffe and Junkfood brands are recognized in the retail market for their high quality and fashion
products. The popularity, supply and demand for particular apparel products can change
significantly from year to year based on prevailing fashion trends and other factors. Our ability
to adapt to fashion trends in designing our products is important to the success in the
Retail-Ready segment. As an example, a significant percentage of our sales in this segment is one
particular product item, the Soffe cheer short. If consumer demand for this product decreases
significantly or if we are unable to quickly adapt to changes in consumer preferences in the design
of our other products, it could have a material adverse effect on our results of operations.
8
The price of our purchased raw materials is prone to significant fluctuations and volatility. Yarn
is the primary raw material used in our manufacturing processes. As described above in Raw
Materials, in conjunction with the sale of our yarn spinning facility, we entered into a five-year
agreement with Parkdale to supply our yarn requirements. During this five-year period, we
contracted to purchase from Parkdale all yarn required by Delta Apparel and our wholly owned
subsidiaries for use in our manufacturing operations (excluding yarns that Parkdale did not
manufacture as of the date of the agreement in the ordinary course of its business or due to
temporary Parkdale capacity restraints). The purchase price of yarn is based upon the cost of
cotton plus a fixed conversion cost. We set future cotton prices with purchase commitments as a
component of the purchase price of yarn in advance of the shipment of finished yarn from Parkdale.
Prices are set according to prevailing prices, as reported by the New York Cotton Exchange, at the
time we enter into the commitments. Thus, we are subject to the commodity risk of cotton prices
and cotton price movements, which could result in unfavorable yarn pricing for us. While we
believe that we will be competitive with other companies in setting the price of cotton purchased
for future production, any significant increase in the price of cotton, or any significant decrease
in the price of cotton where we have previously fixed the price of cotton, could have a material
adverse effect on our results of operations. In addition, if Parkdales operations are disrupted
and it is not able to provide us with our yarn requirements, we may need to obtain yarn from
alternative sources. We may not be able to enter into arrangements with substitute suppliers on
terms as favorable as our current terms with Parkdale, which could negatively affect our business.
We rely on our distribution operations to deliver product to customers. We have company-owned and
leased distribution facilities located throughout the United States. Any significant interruption
in the operation of any of these facilities may delay shipment of merchandise to our customers or
damage our reputation. Moreover, a failure to successfully coordinate the operations of these
facilities in planning and distribution activities could have a material adverse effect on our
financial condition and results of operations.
Our business operations rely on our information systems. We depend on information systems to
manage our inventory, process transactions, respond to customer inquiries, purchase, sell and ship
goods on a timely basis and maintain cost-effective operations. We may experience operational
problems with our information systems as a result of system failures, viruses, or other causes.
Any material disruption or slowdown of our systems could cause operational delays that could have a
material adverse effect on our results of operations.
Our business incurs significant freight and transportation costs. We incur significant freight
costs to transport our goods from our domestic textile plants to off-shore sewing facilities and
then to bring our goods back into the United States. In addition, we incur transportation expenses
to ship our products to our customers. Transportation costs significantly increased during fiscal
year 2006, and have remained high in fiscal years 2007 and 2008, and, accordingly, had an
unfavorable impact on our results of operations. Further significant increases in the costs of
freight and transportation could have a material adverse effect on our results of operations, as
there can be no assurance that we could pass these increased costs to our customers.
The price of energy is prone to significant fluctuations and volatility. Our manufacturing
operations require high inputs of energy, and therefore changes in energy prices directly impact
our gross profits. Energy costs significantly increased during fiscal year 2006 and remained high
in fiscal years 2007 and 2008, and thus had an unfavorable impact on our results of operations. We
are focusing on manufacturing methods that will reduce the amount of energy used in the production
of our apparel products to mitigate the rising costs of energy. However, further significant
increases in energy prices could have a material adverse effect on our results of operations, as
there can be no assurance that we could pass these increased costs to our customers.
We may be subject to the impairment of acquired intangible assets. When we acquire a business, a
portion of the purchase price of the acquisition may be allocated to goodwill and other
identifiable intangible assets. The amount of the purchase price that is allocated to goodwill and
other intangible assets is determined by the excess of the purchase price over the net identifiable
assets acquired. At June 28, 2008 and June 30, 2007, our goodwill and other intangible assets was
approximately $24.4 million and $22.3 million, respectively. Under current accounting standards,
if we determine goodwill or intangible assets are impaired, we will be required to write down the
value of these assets. We conduct an annual review to determine whether goodwill and other
identifiable intangible assets are impaired. We completed such impairment analysis for our fiscal
year ended June 28, 2008, and concluded that no impairment charge was necessary. There can,
however, be no assurance that we will not be required to take an impairment charge in the future,
which could have a material adverse effect on our results of operations.
We may be restricted in our ability to borrow under our credit agreement. Significant operating
losses or significant uses of cash in our operations could cause us to default on our credit
facility. Our credit agreement contains customary representations and warranties, funding
conditions and events of default. An event of default under the credit agreement could result in
an acceleration of our obligations under the agreement, in the foreclosure on any assets subject to
liens in favor of the credit agreements lenders, and in the inability of us to borrow additional
amounts under the credit agreement. In
9
addition, our agreement is an asset-based revolving credit facility. Our ability to borrow under
the agreement depends on our accounts receivable and inventory levels. A significant deterioration
in our accounts receivable or inventory levels could restrict our ability to borrow funds.
The cost to borrow under our credit agreement may impact our results of operations. Although we
have entered into an interest rate swap agreement that effectively converts $15.0 million of
floating rate debt under our credit facility to a fixed obligation, and we have entered into a
separate $15.0 million interest rate collar agreement that provides a cap and a floor on our rates,
we have a significant amount of debt subject to variable interest rates. At June 28, 2008, we had
an aggregate of $71.1 million of variable interest rate debt outstanding that was not covered by
these agreements. If the cost to borrow under our credit agreement increases, it could have a
material adverse effect on our results of operations.
The market price of Delta Apparel shares is affected by its illiquidity. 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 26, 2008, we had outstanding 8,496,749 shares of common stock. We believe that
approximately 61.9% 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. Additionally, within this
group approximately 41.4% of the outstanding stock is beneficially owned by institutional investors
that 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 our
common stock.
Our principal shareholders may exert substantial influence. As of August 15, 2008, three members
of our board of directors and related individuals had or shared the voting power with respect to
approximately 24.9% 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. In addition, our directors, executive officers and related
individuals, as a group (comprised of 16 people), owned 27.2% of our outstanding stock as of August
15, 2008, and therefore will exert substantial influence with respect to all matters submitted to a
vote of shareholders, including the election of directors.
Our operations are subject to political and economic risks in Mexico, Honduras and El Salvador. We
have two company-operated sewing facilities in each of Mexico and Honduras and one company-operated
sewing facility in El Salvador. Economic or legal changes could occur that affect the way in which
we conduct our business in any of 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 staff our manufacturing facilities. The applicable government could also decide
to add additional holidays or change employment laws, thereby increasing our costs to operate in
that country. Domestic unrest or political instability in any of these countries could also
disrupt our operations. Any of these political, social or economic conditions could adversely
affect our results of operations.
We are subject to international 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 for 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 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. We have sewing operations in Mexico to take advantage
of the NAFTA benefits. Subsequent repeal or alteration of NAFTA could seriously adversely affect
our results of operations.
On August 2, 2005, the Central America Free Trade Agreement (CAFTA) was signed into law. CAFTA
currently creates a free-trade zone among the United States, El Salvador, Nicaragua, Guatemala and
Honduras. In addition, Costa Rica may become a part of CAFTA in the future. We currently have
cutting and sewing operations in Honduras and El Salvador to take advantage of the CAFTA benefits.
Subsequent repeal or alteration of CAFTA could seriously adversely affect our results of
operations.
The World Trade Organization or WTO, a 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
10
developing countries (which are generally exporters of textile and apparel products) that are
members of the WTO to encourage 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 were eliminated on January 1, 2005, significantly changing the competitiveness of
many countries as apparel sourcing locations. As we believe that we are a low-cost producer of
high quality apparel, we do not expect this to have a material impact on our results of operations
in future years if NAFTA and CAFTA remain in place. In addition, the U.S. Government may take
other action to improve the impact of a possible influx of textile and apparel products from China.
There is, however, no assurance that our future results will not be impacted by increased global
competition.
Our operations are subject to environmental regulation. Our operations must meet extensive
federal, state and local regulatory standards in the areas of safety, health and environmental
pollution controls. There can be no assurance that interpretations of existing regulations, future
changes in existing laws, or the enactment of new laws and regulations will not require substantial
additional expenditures. Similarly, the extent of our liability, if any, for the discovery of
currently unknown problems or conditions, or past failures to comply with laws, regulations and
permits applicable to our operations, cannot be determined.
We have a significant amount of independent contract production. We have historically relied upon
third party suppliers for up to a third of our sewing production. Any shortage of supply or
significant price increases from our suppliers could adversely affect our results of operations.
We rely on the strength of our trademarks. Our trademarks include the Soffe®, Intensity
Athletics®, Delta®, Quail
HollowTM, Junkfood®, Junk Mail® and Sweet and Sour® brands.
We have incurred legal costs in the past to establish and protect these trademarks, but these costs
have 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.
A significant portion of our business relies upon license agreements. Our Retail-Ready segment
relies on its licensed products for a substantial part of its sales. Although we are not dependent
on any single license, we believe our license agreements in the aggregate are of significant value
to our business. The loss of or failure to obtain license agreements could adversely affect our
sales and results of operations.
We depend on key management. Our success depends upon the talents and continued contributions of
our key management, many of whom 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 1B. UNRESOLVED STAFF COMMENTS
None.
11
ITEM 2. PROPERTIES
Our principal headquarters is located in a leased facility in Duluth, Georgia. We also maintain a
leased executive office in Greenville, South Carolina. Our administrative, manufacturing and
distribution functions are conducted in both leased and owned facilities. Our principal
manufacturing, distribution and administrative facilities are listed below:
|
|
|
|
|
Location |
|
Utilization |
|
Segment |
Duluth, Georgia*
|
|
Principal Headquarters
|
|
Activewear and
Retail-Ready |
Maiden Plant, Maiden, NC
|
|
Knit/dye/finish/cut
|
|
Activewear |
Ceiba Textiles, Honduras
|
|
Knit/dye/finish/cut
|
|
Activewear |
Fayetteville Plant 1, Fayetteville, NC
|
|
Cut/sew/decoration/distribution/administration
|
|
Retail-Ready |
Fayetteville Plant 2, Fayetteville, NC
|
|
Knit/dye/finish/cut
|
|
Retail-Ready |
Rowland Plant, Rowland, NC
|
|
Sew
|
|
Retail-Ready |
Honduras Plant, San Pedro Sula, Honduras*
|
|
Sew
|
|
Activewear |
Cortes Plant, San Pedro Sula, Honduras*
|
|
Sew
|
|
Activewear |
La Paz Plant, La Paz, El Salvador*
|
|
Sew
|
|
Activewear |
Campeche Sportswear Plant, Campeche, Mexico*
|
|
Sew
|
|
Activewear |
Mexico Plant, Campeche, Mexico*
|
|
Sew
|
|
Activewear |
FunTees Design, Concord, NC*
|
|
Research/development
|
|
Activewear |
FunTees Samples, Concord, NC*
|
|
Research/development
|
|
Activewear |
Shannon Drive Warehouse, Fayetteville, NC
|
|
Warehouse
|
|
Retail-Ready |
Distribution Center, Clinton, TN*
|
|
Distribution
|
|
Activewear |
Distribution Center, Santa Fe Springs, CA*
|
|
Distribution
|
|
Activewear and
Retail-Ready |
Distribution Center, Miami, FL*
|
|
Distribution
|
|
Activewear and
Retail-Ready |
Distribution Center, Cranbury NJ*
|
|
Distribution
|
|
Activewear and
Retail-Ready |
DC Annex, Fayetteville, NC*
|
|
Distribution
|
|
Retail-Ready |
Distribution Center, Lansing, MI*
|
|
Distribution
|
|
Retail-Ready |
Distribution Center, Andalusia, AL*
|
|
Distribution
|
|
Activewear |
Soffe Outlet Store, Smithfield, NC*
|
|
Retail sales
|
|
Retail-Ready |
New York Office, New York, NY*
(two office locations)
|
|
Sales
|
|
Activewear and
Retail-Ready |
FunTees Executive Office, Concord, NC*
|
|
Administration/sales
|
|
Activewear |
Greenville Executive Office, Greenville, SC*
|
|
Administration
|
|
Activewear and
Retail-Ready |
Los Angeles Office, Los Angeles, CA*
|
|
Administration/sales
|
|
Retail-Ready |
|
|
|
* |
|
- Denotes leased location |
During fiscal year 2008, our manufacturing facilities operated at less than full capacity. We
believe all of our facilities are suitable for the purposes for which they are designed and are
generally adequate to allow us to remain competitive with our competitors. In September 2008, we
donated our Fayette, Alabama textile facility which we had ceased production as part of our
restructuring plan. Substantially all of our assets are subject to liens in favor of our Wachovia
and Banco Ficohsa credit agreements.
ITEM 3. LEGAL PROCEEDINGS
On May 17, 2006, adversary proceedings were filed in U.S. Bankruptcy Court for the Eastern District
of North Carolina against both Delta Apparel, Inc. and M. J. Soffe Co. in which the bankruptcy
trustee, on behalf of the debtor National Gas Distributors, LLC, alleges that Delta and Soffe each
received avoidable transfers of property from the debtor. The amount of the claim is
approximately $0.7 million plus interest against Delta, and approximately $0.2 million plus
interest against Soffe. We contend that the claims of the trustee have no merit, and have filed
counterclaims, totaling approximately $0.4 million, in the adversary proceedings.
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 2008 fiscal
year.
12
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
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 14, 2008, there were approximately 1,145 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 as reported on the American Stock Exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2008 |
|
Fiscal Year 2007 |
|
|
High |
|
Low |
|
High |
|
Low |
First Quarter |
|
$ |
19.99 |
|
|
$ |
16.38 |
|
|
$ |
19.85 |
|
|
$ |
16.48 |
|
Second Quarter |
|
|
17.25 |
|
|
|
6.06 |
|
|
|
20.50 |
|
|
|
16.45 |
|
Third Quarter |
|
|
9.34 |
|
|
|
6.04 |
|
|
|
18.50 |
|
|
|
14.91 |
|
Fourth Quarter |
|
|
7.45 |
|
|
|
2.09 |
|
|
|
18.50 |
|
|
|
14.97 |
|
Dividends: On April 18, 2002, our Board of Directors adopted a quarterly dividend program. On
October 29, 2007, the Board of Directors elected to suspend payment of our quarterly dividend on
common stock. The Board believes the suspension of the dividend is prudent to preserve our
financial flexibility in this uncertain retail environment. The additional capital resulting from
this decision is intended to allow us to improve our balance sheet and increase our debt
availability. We paid $0.4 million and $1.7 million in dividends during fiscal years 2008 and
2007, respectively.
Dividends declared per common share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
Fiscal Year 2008 |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007 |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
Subject to the provisions of any outstanding blank check preferred stock (none of which is
currently outstanding), 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. Pursuant to our credit facility with Wachovia Bank, National
Association, as Agent, we are allowed to make cash dividends in amounts such that the aggregate
amount paid to shareholders since May 16, 2000 does not exceed twenty-five percent (25%) of our
cumulative net income calculated from May 16, 2000 to the date of determination. At June 28, 2008,
there was $10.1 million of retained earnings free of restrictions for the payment of dividends.
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: On August 15, 2007, our Board of Directors increased
our authorization to repurchase stock in open market transactions by an additional $4.0 million
pursuant to our Stock Repurchase Program. This brings the total amount authorized for share
repurchases to $15.0 million as of June 28, 2008, of which $5.9 million remained available for
future stock repurchases as of June 28, 2008. Our Stock Repurchase Program does not have an
expiration date. During fiscal year 2008, we did not purchase any shares of our common stock
pursuant to our Stock Repurchase Program. Since inception of the program in November 2000, we have
purchased 1,024,771 shares of our stock under the program for a total cost of $9.1 million. All
purchases were made at the discretion of our management.
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.
13
COMPARISON OF TOTAL RETURN AMONG DELTA APPAREL, INC., AMEX US MARKET INDEX, AND AMEX WHOLESALE &
RETAIL TRADE INDEX
Our common stock began trading on the American Stock Exchange on June 30, 2000, the last trading
day of our fiscal year 2000. Prior to that date, no securities of the Company were publicly
traded. Set forth below is a line graph comparing the yearly change in the cumulative total
stockholder return, assuming dividend reinvestment, on our common stock with (1) the American Stock
Exchange US Market Index (the AMEX US Market Index) and (2) the American Stock Exchange Wholesale
and Retail Trade Index (the AMEX Wholesale and Retail Trade Index), which is comprised of all
AMEX companies with SIC codes from 5000 through 5999.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
Delta Apparel, Inc. |
|
|
100.00 |
|
|
|
150.16 |
|
|
|
168.81 |
|
|
|
223.29 |
|
|
|
239.12 |
|
|
|
48.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMEX US Market Index |
|
|
100.00 |
|
|
|
121.27 |
|
|
|
135.15 |
|
|
|
151.28 |
|
|
|
179.95 |
|
|
|
161.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMEX Wholesale & Retail Trade Index |
|
|
100.00 |
|
|
|
122.47 |
|
|
|
148.04 |
|
|
|
198.37 |
|
|
|
248.24 |
|
|
|
215.24 |
|
This Performance Graph assumes that $100 was invested in the common stock of our company and
comparison groups on June 28, 2003 and that all dividends have been reinvested.
ITEM 6. SELECTED FINANCIAL DATA
On October 2, 2006, we completed the acquisition of substantially all of the assets of FunTees,
Inc. On August 22, 2005, we acquired substantially all of the assets of Liquid Blaino Designs, Inc.
d/b/a Junkfood Clothing. On October 3, 2003, we acquired all of the outstanding stock of M. J.
Soffe Co. The consolidated statement of income for the years ended July 3, 2004 and July 2, 2005,
and the consolidated balance sheet data as of July 3, 2004, July 2, 2005 and July 1, 2006 are
derived from, and are qualified by reference to, our audited consolidated financial statements not
included in this document. The consolidated statement of operations data for the years ended July
1, 2006, June 30, 2007 and June 28, 2008 and the consolidated balance sheet data as of June 30,
2007 and June 28, 2008 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 2008, 2007, 2006 and 2005 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 and the related notes as indexed
on page F-1 and Managements Discussion and Analysis of Financial Condition and Results of
Operations in Item 7.
14
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Fiscal Year Ended |
|
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|
|
|
June 28, |
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June 30, |
|
|
July 1, |
|
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July 2, |
|
|
July 3, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(In thousands, except per share amounts) |
|
|
|
|
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
322,034 |
|
|
$ |
312,438 |
|
|
$ |
270,108 |
|
|
$ |
228,065 |
|
|
$ |
208,113 |
|
Cost of goods sold |
|
|
(257,319 |
) |
|
|
(239,365 |
) |
|
|
(190,222 |
) |
|
|
(174,156 |
) |
|
|
(159,852 |
) |
Selling, general and administrative expenses |
|
|
(59,898 |
) |
|
|
(59,187 |
) |
|
|
(53,530 |
) |
|
|
(37,881 |
) |
|
|
(31,043 |
) |
Other income (loss) |
|
|
132 |
|
|
|
(89 |
) |
|
|
657 |
|
|
|
4,117 |
|
|
|
(192 |
) |
Restructuring costs |
|
|
(62 |
) |
|
|
(1,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
4,887 |
|
|
|
12,299 |
|
|
|
27,013 |
|
|
|
20,145 |
|
|
|
17,026 |
|
Interest expense, net |
|
|
(6,042 |
) |
|
|
(5,157 |
) |
|
|
(3,819 |
) |
|
|
(3,022 |
) |
|
|
(2,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(1,155 |
) |
|
|
7,142 |
|
|
|
23,194 |
|
|
|
17,123 |
|
|
|
14,404 |
|
(Benefit) provision for income taxes |
|
|
(647 |
) |
|
|
1,471 |
|
|
|
8,350 |
|
|
|
5,880 |
|
|
|
4,674 |
|
Extraordinary gain, net of taxes |
|
|
|
|
|
|
672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(508 |
) |
|
$ |
6,343 |
|
|
$ |
14,844 |
|
|
$ |
11,243 |
|
|
$ |
9,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before extraordinary gain |
|
$ |
(0.06 |
) |
|
$ |
0.67 |
|
|
$ |
1.73 |
|
|
$ |
1.35 |
|
|
$ |
1.19 |
|
Extraordinary gain, net of income taxes |
|
|
|
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(0.06 |
) |
|
$ |
0.75 |
|
|
$ |
1.73 |
|
|
$ |
1.35 |
|
|
$ |
1.19 |
|
|
|
|
|
|
|
|
|
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|
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|
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Diluted earnings per common share: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before extraordinary gain |
|
$ |
(0.06 |
) |
|
$ |
0.65 |
|
|
$ |
1.71 |
|
|
$ |
1.33 |
|
|
$ |
1.16 |
|
Extraordinary gain, net of income taxes |
|
|
|
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(0.06 |
) |
|
$ |
0.73 |
|
|
$ |
1.71 |
|
|
$ |
1.33 |
|
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Declared per Common Share |
|
$ |
0.050 |
|
|
$ |
0.200 |
|
|
$ |
0.170 |
|
|
$ |
0.145 |
|
|
$ |
0.125 |
|
|
|
|
|
|
|
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Balance Sheet Data (at year end): |
|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
133,917 |
|
|
$ |
120,645 |
|
|
$ |
103,210 |
|
|
$ |
86,910 |
|
|
$ |
94,408 |
|
Total assets |
|
|
261,623 |
|
|
|
232,790 |
|
|
|
203,123 |
|
|
|
159,514 |
|
|
|
169,379 |
|
Total long-term debt, less current maturities |
|
|
95,542 |
|
|
|
70,491 |
|
|
|
46,967 |
|
|
|
17,236 |
|
|
|
29,246 |
|
Shareholders equity |
|
|
104,893 |
|
|
|
103,669 |
|
|
|
100,988 |
|
|
|
86,464 |
|
|
|
75,492 |
|
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OUTLOOK
We are encouraged as we begin fiscal year 2009 and believe our businesses are well-positioned to
sustain the organic growth we accomplished in the fourth quarter of fiscal year 2008. Our
Activewear segment will remain focused on completing the major initiatives that we began in the
fourth quarter of fiscal year 2007. While we completed the FunTees manufacturing integration
during fiscal year 2008, we expect to continue improving our production cost in sewing and screen
printing. We also plan to enhance our information technology systems to reduce our cost and
provide better information to our customers. We believe demand for the production capabilities of
FunTees is strong and we expect to grow our revenue and leverage our fixed cost over additional
production in fiscal year 2009.
Sales of our traditional Delta catalog products were solid during the fourth quarter of fiscal year
2008. With the additional fabric production from our new, state-of-the-art textile facility in
Honduras, Ceiba Textiles, we were able to improve our in- stock inventory position, which helped
lead to increased sales. We believe that on-going improvement in our service levels in the catalog
business will be key to our Delta growth in fiscal year 2009. We have recently added new sales
management in this business to target new channels of business for our catalog products. We are,
however, concerned about the overall undecorated tee shirt market, as there is evidence that
undecorated tee shirt sales in the industry are down from last year and inventories at the
distributor level are higher than a year ago. This may indicate a slowdown in sales in this
business and may lead to future pricing pressures. We began production in Ceiba Textiles in
November 2007, reached our initial goal of 500,000 production pounds per week in June 2008, and
will continue to increase production in this facility during fiscal year 2009, expecting to reach
700,000 pounds per week of output by the end of calendar year 2008. We also expect to achieve
further productivity gains in our sewing operations, which should increase output at each of our
manufacturing facilities.
Our Retail-Ready segment ended fiscal year 2008 with solid positive momentum, which we believe
provides a platform to grow sales and operating profits in fiscal year 2009. We believe the Soffe
brand is performing well at retail. With retail inventories lean in July, we have experienced
re-orders in early summer, extending our typically strong spring selling season. We are seeing
increased sales in our team sports business, driven by our Intensity Athletic brand. In fiscal year
2009, we are
15
targeting to expand our presence with smaller sporting goods stores by improving our service levels
to these retailers. The Soffe internet site generated record sales of Soffe product during fiscal
year 2008 and we expect to see further expansion of this market segment in the upcoming year.
Our Junkfood business continues to enjoy strong consumer appeal in all of its markets. Our
co-branded business with GapKids and babyGap is growing and has been well received by consumers.
Junkfood continues to grow its international presence, especially in Japan and Europe, and is
expanding its licensing capabilities to further allow for foreign sales. We recently acquired the
NFL license for certain markets, including game venues for vintage tees. These products will be
introduced in the first quarter of fiscal year 2009. We are committed to growing the Junkfood
business and continue to strengthen the operational management team at Junkfood to support the
expansion of this business.
EARNINGS GUIDANCE
Despite slowing consumer spending and uncertain general economic conditions, we expect further
expansion of our revenue and return to profitability in fiscal year 2009. With this organic
growth, we expect sales to be in the range of $340 to $360 million and earnings to be in the range
of $0.70 to $0.90 per diluted share.
We believe there is considerable risk and uncertainty in the apparel marketplace. Raw material
prices continue to be volatile and could further increase cost. Consumer demand has recently been
solid for our products, but could weaken at any time. The overall retail climate is difficult for
apparel and we have seen an increase in bankruptcies and the closing of retail apparel outlets.
Although we have made significant progress on our Ceiba Textiles startup and our FunTees
integration, further improvement is required to reach our long term objectives for these
investments. While it is impossible to predict the extent to which these conditions may impact our
business, we have evaluated these heightened risk factors in setting our expectations for the
upcoming year.
RESULTS OF OPERATIONS
Overview
For the year ended June 28, 2008, sales reached an all-time record for the second year in a row of
$322.0 million, a 3.1% increase from $312.4 million in sales in the prior year due primarily to a
significant increase in sales within our Retail-Ready segment while our Activewear segment showed a
slight improvement over the prior year, which included FunTees for nine months of the fiscal year.
Gross margins for the year decreased 330 basis points to 20.1% compared to 23.4% in the prior year
driven primarily from higher raw material, energy and transportation prices.
For fiscal year 2008, the Retail-Ready segment contributed $18.9 million in operating income and
the Activewear segment had a $14.1 million operating loss, which included $4.9 million in
restructuring related expenses. For the year ended June 28, 2008 we experienced a net loss of $0.5
million compared to net income of $6.3 million for the previous fiscal year. The decline was
primarily due to the lower gross margins referred to above, along with higher interest expense
associated with the additional debt incurred to finance our Ceiba Textiles manufacturing facility.
Net loss per both basic and diluted share for fiscal year 2008 was $0.06, which includes $0.39 per
diluted share of restructuring related charges. For fiscal year 2007, earnings were $0.75 per basic
share and $0.73 per diluted share, including $0.51 per diluted share of restructuring related
expenses.
We ended fiscal year 2008 with $62.0 million in total receivables, an increase of $15.6 million
from the prior year, resulting from higher sales in the forth quarter along with higher days sales
outstanding. Our inventories on June 28, 2008 were $124.7 million, slightly more than the $124.6
million in inventory at the end of the prior year. We believe our year-end inventory levels are
well-balanced to start the new fiscal year and service our customers well. Our overall debt
increased by $28.9 million during the fiscal year, primarily resulting from the completion of our
Ceiba Textiles Facility and increased working capital requirements, ending with $102.3 million in
total debt. We had $11.1 million of availability under our revolving credit facility at year end.
Quarterly Financial Data
For information regarding quarterly financial data, refer to Note 17 Quarterly Financial
Information (Unaudited) to the consolidated financial statements, which information is
incorporated herein by reference.
16
Fiscal Year 2008 versus Fiscal Year 2007
Net sales for fiscal year 2008 were $322.0 million, an increase of $9.6 million, or 3.1%, from net
sales of $312.4 million in fiscal year 2007. The Retail-Ready segment contributed $142.6 million
in net sales, compared to $134.2 million in fiscal year 2007. Sales in the Soffe business declined
3.1% compared to the prior year while Junkfood generated growth of 42.4% over the prior year.
Lower consumer spending hurt sales in the Soffe business, as our customers took a more cautious
approach with their orders. Net sales in the Activewear segment were $179.4 million, an increase
of $1.1 million, or 0.6%, due to increased FunTees sales offset partially by a decrease in the
Delta catalog business. The prior year included results from the FunTees business since its
acquisition on October 2, 2006. Sales in FunTees declined during the year due in part from lower
orders for the fall, holiday and spring seasons, which we believe was caused primarily by
disruptions during the integration of FunTees into our Maiden textile facility.
Gross profit as a percentage of net sales decreased to 20.1% in fiscal year 2008 from 23.4% in the
prior year. Pricing in the catalog business increased during the year; however, these price
increases were offset by higher cotton, energy and transportation costs. In addition, changes in
our mix of products sold lowered our overall margins. Our gross margins may not be comparable to
other companies, since some companies include costs related to their distribution network in cost
of goods sold and we exclude a portion of them from gross margin and include them in selling,
general and administrative expenses.
Selling, general and administrative expenses for fiscal year 2008 were $59.8 million, or 18.5% of
sales, compared to $59.2 million, or 18.9% of sales, for fiscal year 2007. During the fourth
quarter of fiscal year 2008, the Company had two customers file bankruptcy, increasing bad debt
expense by $0.8 million. The decrease in selling, general and administrative expenses as a
percentage of sales in fiscal year 2008 compared to fiscal year 2007 is primarily due to lower
management incentive expenses. Selling costs as a percentage of net sales are higher in the
Retail-Ready segment primarily due to additional staffing, higher commissions, royalty expense on
licensed products, and increased advertising expenses associated with selling branded apparel
products.
Operating
income for fiscal year 2008 was $4.9 million, a decrease of $7.4 million, or 60.3%, from
$12.3 million in fiscal year 2007. The decrease was primarily the result of the factors described
above. For fiscal year 2008, the Retail-Ready segment contributed $18.9 million in operating
income and the Activewear segment had a $14.0 million operating loss, which included $4.9 million
in restructuring related expenses. Fiscal year 2007 included $6.9 million in restructuring related
charges.
Other income for fiscal year 2008 was $0.1 million, primarily related to the Green Valley joint
venture. Other expense for fiscal year 2007 was not material.
Net interest expense for fiscal year 2008 was $6.0 million, an increase of $0.8 million, or 17.2%,
from $5.2 million for fiscal year 2007. The increase in interest expense was primarily due to the
higher debt levels resulting from the completion of the Ceiba Textiles facility as well as
increased working capital requirements.
Our effective income tax rate for fiscal year 2008 was 56.0%, compared to 20.6% for fiscal year
2007. Due to the small loss in fiscal year 2008, the effective income tax rate is not meaningful.
In fiscal year 2008, we donated the Fayette, Alabama facility to a charitable organization and
recognized a $0.2 million tax benefit. In addition, profits that are permanently reinvested in the
tax-free zone of Honduras further increased our effective tax benefit in fiscal year 2008. In
fiscal year 2007, we donated our old Knoxville, Tennessee distribution facility to a charitable
organization. This, along with having a higher proportion of our earnings in the tax-free zone of
Honduras, lowered our effective tax rate from statutory rates.
During the first quarter of fiscal year 2007, we recorded an extraordinary gain associated with the
final earn-out payment made to the former M. J. Soffe shareholders. This extraordinary gain, net
of taxes, was $0.7 million, or $0.08 per diluted share.
Due to the factors described above, net loss for fiscal year 2008 was $0.5 million, a decrease of
$6.8 million from net income of $6.3 million for fiscal year 2007.
Fiscal Year 2007 versus Fiscal Year 2006
Net sales for fiscal year 2007 were $312.4 million, an increase of $42.3 million, or 15.7%, from
net sales of $270.1 million in fiscal year 2006. Net sales in the Activewear segment were $178.2
million, an increase of $41.6 million, or 30.4%, due to the acquisition of the FunTees business,
which contributed $55.6 million, offset partially by a decline of $14.0 million, or 10.2%, in the
core Delta activewear business. In the Delta catalog business, unit volume declined from the prior
year by lower volumes in the basic t-shirt products, which were partially offset by average selling
prices improving by 1.4%. Higher
17
average selling prices contributed $1.7 million in revenue while reduced unit volumes had a
negative impact of $15.7 million. The industrys pricing for basic t-shirts declined due to
competition in the marketplace, which Delta chose not to match, resulting in decreased volume but
increased selling prices. The Retail-Ready segment contributed $134.2 million in net sales,
compared to $133.4 million in fiscal year 2006. Sales increased slightly by $0.8 million, or 0.6%,
due to increased sales in the Soffe business of $7.2 million, or 7.3%, offset by lower sales in the
Junkfood business of $6.4 million, or 18.9%.
Gross profit as a percentage of net sales decreased to 23.4% in fiscal year 2007 from 29.6% in the
prior year. The margin decline of 620 basis points was primarily the result of the restructuring
charges of $5.4 million from the expensing of start-up and excess manufacturing costs associated
with the integration of FunTees into our existing facility in Maiden, N.C. The Retail-Ready
segment had flat gross margins from the prior year. The addition of FunTees reduced our overall
gross margins in fiscal year 2007 as sales from its private label business generally carry lower
gross margins than our branded business. Our gross margins may not be comparable to other
companies, since some companies include costs related to their distribution network in cost of
goods sold and we exclude a portion of them from gross margin and include them in selling, general
and administrative expenses.
Selling, general and administrative expenses for fiscal year 2007 were $59.2 million, or 18.9% of
sales, compared to $53.5 million, or 19.8% of sales, for fiscal year 2006. The increase of $5.7
million in additional expenses was due primarily from the addition of the FunTees business.
Selling, general and administrative expenses as a percentage of sales declined 90 basis points due
to the lower costs associated with the FunTees business and lower management incentive expenses.
Selling costs as a percentage of net sales were higher in the Retail-Ready segment primarily due to
additional staffing, higher commissions, royalty expense on licensed products, and increased
advertising expenses associated with selling branded apparel products.
Restructuring costs of $1.5 million recognized in 2007 consist of noncash impairment charges
related to the reduction of textile operations in the U.S.
Operating income for fiscal year 2007 was $12.3 million, a decrease of $14.7 million, or 54.5%,
from $27.0 million in fiscal year 2006. The decrease was primarily the result of the factors
described above. For fiscal year 2007, the Retail-Ready segment contributed $17.1 million in
operating income and the Activewear segment had a $4.8 million operating loss, which included $6.9
million in restructuring related expenses described above.
Other income for fiscal year 2006 was $0.7 million, primarily related to insurance proceeds
received as a result of losses of inventory during the 2005 hurricane season. Other income for
fiscal year 2007 was insignificant.
Net interest expense for fiscal year 2007 was $5.2 million, an increase of $1.3 million, or 35.0%,
from $3.8 million for fiscal year 2006. The increase in interest expense was primarily due to the
higher debt levels resulting from the acquisition of FunTees. Interest rates also increased during
fiscal year 2007 from fiscal year 2006 by approximately 90 basis points, contributing to the higher
interest expense.
Our effective income tax rate for fiscal year 2007 was 20.6%, compared to 36.0% for fiscal year
2006. Our effective income tax rate for fiscal year 2007 was lower than for fiscal year 2006
primarily as a result of the donation of our old Knoxville, Tennessee distribution facility to a
charitable organization. From this donation, we recognized a $0.7 million tax benefit. In
addition, due to our lower earnings in fiscal year 2007, a higher proportion of our earnings are in
the tax-free zone of Honduras, driving a lower overall effective tax rate.
During the first quarter of fiscal year 2007, we recorded an extraordinary gain associated with the
final earn-out payment made to the former M. J. Soffe shareholders. This extraordinary gain, net
of taxes, was $0.7 million, or $0.08 per diluted share.
Due to the factors described above, net income for fiscal year 2007 was $6.3 million, a decrease of
$8.5 million, or 57.3%, from net income of $14.8 million for fiscal year 2006.
LIQUIDITY AND CAPITAL RESOURCES
Credit Facility and Other Financial Obligations
On September 21, 2007, Delta Apparel, Junkfood and M. J. Soffe Co. entered into a Third Amended and
Restated Loan and Security Agreement (the Amended Loan Agreement) with Wachovia Bank, National
Association, as Agent, and the financial institutions named in the Amended Loan Agreement as
Lenders.
18
Pursuant to the Amended Loan Agreement, the maturity of the loans under the previous credit
facility was extended to September 21, 2012, and the line of credit available was increased to $100
million (subject to borrowing base limitations based on the value and type of collateral provided),
which represented an increase of $10 million in the amount that was previously available under the
credit facility. Under the Amended Loan Agreement, provided that no event of default exists, we
have the option to increase the maximum credit available under the facility to $110 million
(subject to borrowing base limitations based on the value and type of collateral provided),
conditioned upon the Agents ability to secure additional commitments and customary closing
conditions.
The credit facility is secured by a first-priority lien on substantially all of the real and
personal property of Delta Apparel, Junkfood, and Soffe. All loans under the credit agreement bear
interest at rates based on either an adjusted LIBOR rate plus an applicable margin or a banks
prime rate plus an applicable margin. The facility requires monthly installment payments of
approximately $0.2 million per month in connection with fixed asset amortizations, and these
amounts reduce the amount of availability under the facility. Annual facility fees are .25% of the
amount by which $100 million exceeds the average daily principal balance of the outstanding loans
and letters of credit accommodations during the immediately preceding month.
Our credit facility includes the financial covenant that if the amount of availability falls below
$10 million, our Fixed Charge Coverage Ratio (as defined in the credit agreement) for the preceding
12 month period must not be less than 1.10 to 1.0 and otherwise includes customary conditions to
funding, covenants, and events of default. During the quarter ended June 28, 2008 we did not fall
below $10 million in availability and were therefore not subject to the Fixed Charge Coverage Ratio
financial covenant. As of June 28, 2008, our Fixed Charge Coverage Ratio was 1.66 for the
preceding 12 months, and we expect to continue to meet the Fixed Charge Coverage Ratio for fiscal
year 2009. At June 28, 2008, we had the ability to borrow an additional $11.1 million under the
credit facility. At June 28, 2008, we had $87.1 million outstanding under our credit facility, at
an average interest rate of 4.66%. Proceeds of the loans may be used for general operating, working
capital, other corporate purposes, and to finance fees and expenses under the facility.
The credit facility contains a subjective acceleration clause and a springing lockbox arrangement
(as defined in EITF 95-22), whereby remittances from customers will be forwarded to our general
bank account and will not reduce the outstanding debt until and unless a specified event or an
event of default occurs. Pursuant to EITF 95-22, we classify borrowings under the facility as
non-current debt.
On April 2, 2007, we entered into an interest rate swap agreement and interest rate collar
agreement to manage our interest rate exposure and effectively reduce the impact of future interest
changes. Both agreements mature (or expire) on April 1, 2010. By entering into the interest rate
swap agreement, we effectively converted $15.0 million of floating rate debt under our credit
facility to a fixed obligation with a LIBOR rate at 5.06%. By entering into the interest rate
collar agreement, we effectively provided a cap of 5.5% and a floor of 4.33% on LIBOR rates on
$15.0 million of floating rate debt under our credit facility. We have assessed these agreements
and elected to account for each as a hedge.
In addition to the credit facility with Wachovia Bank, National Association, we have a seller note
payable to the former Junkfood shareholders pursuant to the Asset Purchase Agreement dated as of
August 22, 2005. The seller note bears interest at 9%, is payable quarterly, and has a three year
term. At June 28, 2008, we had $1.3 million outstanding under the seller note, which is payable in
August 2008.
In the fourth quarter of fiscal year 2007 we entered into a loan agreement with Banco Ficohsa, a
Honduran bank, for our capital expansion in Honduras. The loan is secured by a first-priority lien
on the assets of our Honduran operations. The loan bears interest at LIBOR plus 2%, is payable
monthly, has a five year term and is denominated in U. S. dollars. At June 28, 2008, we had $14.0
million outstanding on this loan.
Pursuant to the First Amendment to Amended and Restated Stock Purchase Agreement related to the
October 2003 Soffe acquisition, amounts were payable to the prior shareholders of M. J. Soffe if
specified financial performance targets were met by M. J. Soffe Co. during the annual period
beginning on October 2, 2005 and ending on September 30, 2006 (the Earnout Amount). The Earnout
Amount was capped at a maximum aggregate amount of $4.0 million and was payable five business days
subsequent to the filing of the Form 10-Q for the first fiscal quarter of fiscal year 2007. Based
on the financial performance achieved, we paid the final Earnout Amount of $2.3 million to the
prior shareholders of M. J. Soffe in November 2006. We recorded an extraordinary gain of $0.7
million, net of taxes, or $0.08 per diluted share, associated with the final earnout payment.
As part of the consideration for the acquisition of Junkfood, additional amounts are payable to the
Junkfood sellers if performance targets are met by Junkfood during the period beginning on August
22, 2005 and ending on July 1, 2006 and during each of the three fiscal years thereafter (ending on
June 27, 2009). These amounts are payable in the first quarter of the fiscal year subsequent to
attaining the performance target. Related to the earnout period ended July 1, 2006, $3.3 million
was earned in accordance to the Earnout Provisions and subsequently paid in the first quarter of
fiscal year 2007. Based on
19
the financial performance of Junkfood in fiscal year 2008, $2.6 million was earned in accordance to
the Earnout Provisions. This amount was accrued as of June 28, 2008 and paid during the first
quarter of fiscal year 2009.
Our primary cash needs are for working capital and capital expenditures. In addition, in the
future we may use cash to fund share repurchases under our Stock Repurchase Program or to pay
dividends.
Derivative Instruments
We use derivative instruments to manage our exposure to interest rates. We do not enter into
derivative financial instruments for purposes of trading or speculation. When we enter into a
derivative instrument, we determine whether hedge accounting can be applied. Where hedge
accounting can be applied, a hedge relationship is designated as either a fair value hedge or cash
flow hedge. The hedge is documented at inception, detailing the particular risk objective and
strategy considered for undertaking the hedge. The documentation identifies the specific asset or
liability being hedged, the risk being hedged, the type of derivative used and how effectiveness of
the hedge will be assessed.
As described above, on April 2, 2007, we entered into an interest rate swap agreement and an
interest rate collar agreement to manage our interest rate exposure and effectively reduce the
impact of future interest rate changes. We have assessed these agreements and have concluded that
each met the requirements to account for each as a hedge.
Changes in the derivatives fair values are deferred and are recorded as a component of accumulated
other comprehensive income (AOCI), net of income taxes, until the underlying transaction is
recorded. When the hedged item affects income, gains or losses are reclassified from AOCI to the
Consolidated Statements of Operations as interest income/expense. Any ineffectiveness in the
Companys hedging relationships is recognized immediately in the Consolidated Statement of
Operations. The changes in fair value of the interest rate swap and collar agreement resulted in
AOCI, net of taxes, of a loss of $0.5 million as of June 28, 2008 and AOCI, net of taxes, of a gain
of $0.1 million as of June 30, 2007.
Operating Cash Flows
Net cash used by operating activities for fiscal year 2008 was $12.1 million while operating
activities for fiscal 2007 provided $20.5 million in cash. Our cash used by operating activities
in fiscal year 2008 was primarily due to our net loss combined with the unfavorable increase in
accounts receivable due to increased sales in the fourth quarter in comparison to the previous year
as well as having slower collections from our customers. Our cash flow from operating activities
in fiscal year 2007 was primarily due to net income plus depreciation, amortization and non-cash
compensation and an increase in accounts payable. Changes in working capital are primarily
monitored by analysis of the investment in accounts receivable and inventories and by the amount of
accounts payable.
Investing Cash Flows
During fiscal year 2008, we used $16.6 million in cash for purchases of property, plant and
equipment, primarily related to the investment in Ceiba Textiles and upgrades in information
technology systems. We spent a total of $11.8 million on our Ceiba Textiles facility during fiscal
year 2008. During fiscal year 2007, we used $10.9 million in cash for purchases of property, plant
and equipment, primarily related to Ceiba Textiles, the integration of the FunTees manufacturing
into our existing operations and upgrades in information technology systems. We spent a total of
$4.9 million on our Ceiba Textiles facility during fiscal year 2007. On October 2, 2006, we
completed the acquisition of substantially all of the assets of FunTees, Inc. and paid the sellers
$21.8 million in cash. In addition, we paid $3.3 million to the former Junkfood shareholders
related to the earn-out period ended July 1, 2006 and paid $2.3 million to the prior shareholders
of M. J. Soffe based on the financial performance achieved for the twelve months ended September
30, 2006.
We plan to take a more conservative approach to our capital spending in fiscal year 2009, expecting
to spend $3 to $4 million. We may decide to further expand Ceiba Textiles to increase our
production output, increasing our capital spending in fiscal year 2009 by an additional $2 to $3
million. We will make this decision later in fiscal year 2009 as we determine production levels
required to support our future business.
Financing Activities
Our financing activities in fiscal year 2008 provided $28.5 million in cash as compared to $18.0
million of cash provided in fiscal year 2007. In fiscal year 2008, the cash provided by financing
activities primarily came from our credit facility for use in operating and investing activities
and to pay $0.8 million of the Junkfood seller note. We also obtained additional funding from
Banco Ficohsa for the investment in Ceiba Textiles in Honduras. In fiscal year 2007, the cash
provided by financing activities primarily came from our credit facility and those proceeds were
primarily used for the acquisition of FunTees and
20
to pay $0.5 million of the Junkfood seller note. Additionally, $3.0 million was secured from Banco
Ficohsa for the investment in Ceiba Textiles.
Our credit facility contains limitations on, or prohibitions of, cash dividends. We are allowed to
make cash dividends in amounts such that the aggregate amount paid to shareholders since May 16,
2000 does not exceed twenty-five percent (25%) of our cumulative net income calculated from May 16,
2000 to the date of determination. At June 28, 2008 and June 30, 2007, there was $10.1 million and
$10.6 million, respectively, of retained earnings free of restrictions for the payment of
dividends. We paid dividends to our shareholders totaling $0.4 million and $1.7 million in fiscal
years 2008 and 2007, respectively. In fiscal year 2007, we also used $3.4 million for share
repurchases. The credit facility also contains limitations on, or prohibitions of, stock
repurchases, related party transactions, mergers, acquisitions, sales of assets, indebtedness and
investments.
Future Liquidity and Capital Resources
Based on our expectations, we believe that our credit facility 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 line should be sufficient to service our debt payment requirements, to
satisfy our day-to-day working capital needs and to fund our planned capital expenditures. Any
material deterioration in our results of operations, however, may result in us losing our ability
to borrow under our revolving credit facility and to issue letters of credit to suppliers or may
cause the borrowing availability under our facility to be insufficient for our needs.
The following table summarizes our contractual cash obligations, as of June 28, 2008, by future
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period (in thousands) |
|
|
|
|
|
|
|
Less than |
|
|
1 - 3 |
|
|
3 5 |
|
|
After 5 |
|
|
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
years |
|
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (a) |
|
$ |
102,322 |
|
|
$ |
6,780 |
|
|
$ |
94,378 |
|
|
$ |
1,164 |
|
|
$ |
|
|
Operating leases |
|
|
42,207 |
|
|
|
8,446 |
|
|
|
17,866 |
|
|
|
11,482 |
|
|
|
4,413 |
|
Letters of credit |
|
|
874 |
|
|
|
874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations |
|
|
19,645 |
|
|
|
19,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
165,048 |
|
|
$ |
35,745 |
|
|
$ |
112,244 |
|
|
$ |
12,646 |
|
|
$ |
4,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We exclude interest payments from these amounts as the cash outlay for the interest is
unknown and could not be reliably estimated as the majority of the debt is under a
revolving credit facility. Interest payments will be determined based upon the daily
outstanding balance of the revolving credit facility and the prevailing interest rate
during that time. The interest on the Junkfood Seller Note is immaterial and therefore was
excluded. |
Off-Balance Sheet Arrangements
As of June 28, 2008, we do not have any off-balance sheet arrangements that are material to our
financial condition, results of operations or cash flows as defined by Item 303(a)(4) of Regulation
S-K promulgated by the SEC other than the letters of credit described above. We have entered into
derivative interest rate contracts as described and included below in Quantitative and Qualitative
Disclosures about Market Risk in Item 7A of this report.
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 credit facility permits the payment of cash dividends in amounts such that
the aggregate amount paid to shareholders since May 16, 2000 does not exceed twenty-five percent
(25%) of our cumulative net income calculated from May 16, 2000 to the date of determination. At
June 28, 2008 there was $10.1 million of retained earnings free of restrictions for the payment of
dividends.
During the fiscal year ended June 28, 2008, we did not purchase any shares of our common stock
pursuant to our Stock Repurchase Program. Since the inception of the program, weve purchased
1,024,771 shares of our stock under the program at a total cost of $9.1 million. We currently have
authorization from our Board of Directors to spend up to $15.0 million for share repurchases under
the Stock Repurchase Program of which $5.9 million remains available for share repurchases. All
purchases are made at the discretion of our management.
21
Dividend Program
On April 18, 2002, our Board of Directors adopted a quarterly dividend program. We paid $0.4
million and $1.7 million in dividends during fiscal years 2008 and 2007, respectively. On October
29, 2007, the Board of Directors elected to suspend payment of our quarterly dividend on common
stock. The Board believes the suspension of the dividend is prudent to preserve our financial
flexibility in this uncertain retail environment. The additional capital resulting from this
decision is intended to allow us to improve our balance sheet and increase our debt availability.
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
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 2 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, title has transferred to the customer, the price is
fixed and determinable and the collectibility is reasonably assured. The majority of our sales are
shipped FOB shipping point and revenue is therefore recognized when the goods are shipped to the
customer. For the sales that are shipped FOB destination point, we do not recognize the revenue
until the goods are received by the customer. 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.
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. We are currently experiencing
slower collections from our customers as they are managing their cash flows tightly. We anticipate
this trend will continue through fiscal year 2009. In addition, we are facing heightened credit
risk as the slowdown of consumer spending is negatively impacting retailers and thus increasing the
risk of bankruptcies of these retailers in the future. 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 sell-through 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 primarily 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. We had self insurance reserves of approximately
$595,000 and $445,000 for June 28, 2008 and June 30, 2007, respectively.
22
Share-Based Compensation
We adopted the fair value based method prescribed in Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment, effective July 3, 2005. Under the fair value based
method, compensation cost is measured at the grant date based on the fair value of the award and is
recognized over the award vesting period. We determine the fair value of each stock option at the
date of grant using the Black-Scholes options pricing model. This model requires that we estimate
a risk-free interest rate, the volatility of the price of our common stock, the dividend yield, and
the expected life of the options. The use of a different estimate for any one of these components
could have a material impact on the amount of calculated compensation expense.
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 our 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. We had operating loss carryforwards of approximately
$21.0 million and $7.5 million for state tax purposes and a related valuation allowance against the
operating loss carryforwards of approximately $0.9 million and $0.3 million at June 28, 2008 and
June 30, 2007, respectively. These carryforwards expire at various intervals through 2028.
RECENT ACCOUNTING STANDARDS
In February 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 155,
Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and
140 (SFAS 155). SFAS 155 permits an entity to measure at fair value any financial instrument
that contains an embedded derivative that otherwise would be required to be bifurcated and
accounted for separately under FASB Statement No. 133. SFAS 155 is effective for fiscal years
beginning after September 15, 2006. We adopted SFAS 155 on July 1, 2007 and the adoption had no
material impact on our financial position and results of operations.
In June 2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 provides clarifying guidance on the accounting for uncertainty in income taxes
recognized in financial statements in accordance with SFAS 109, Accounting for Income Taxes, and
prescribes recognition and measurement guidance in determining amounts to be recorded in the
financial statements. FIN 48 applies to all income-based tax items and is effective for fiscal
years beginning after December 15, 2006. We adopted FIN 48 on July 1, 2007 and the adoption had no
material impact on our financial position and results of operations. See Note 9 to our Consolidated
Financial Statements for additional information on the adoption of FIN 48.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (SFAS 157),
which defines fair value, establishes a framework for measuring fair value under generally accepted
accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies to
other accounting pronouncements that require or permit fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and for interim periods within those
fiscal years. We are currently evaluating the effect that the adoption of SFAS 157 will have on our
financial position and results of operations and do not expect that the adoption of this statement
will have a material impact on our financial statements.
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159), which permits companies to choose to measure certain
financial instruments and certain other items at fair value. The standard requires that unrealized
gains and losses on items for which the fair value option has been elected be reported in earnings.
SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently
evaluating the effect that the adoption of SFAS 159 will have on our financial position and results
of operations and do not expect the adoption of this statement will have a material impact on our
financial statements.
In December 2007, the FASB issued FASB Statement No. 160, Non-controlling Interests in Consolidated
Financial Statements (SFAS 160), which requires all entities to report non-controlling (minority)
interests in subsidiaries as equity in the consolidated financial statements. SFAS 160 is
effective for fiscal years beginning after December 15, 2008. We are currently evaluating the
effect that the adoption of SFAS 160 will have on our financial position and results of operations
and do not expect the adoption of this statement will have a material impact on our financial
statements.
23
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R)
to improve the relevance, representational faithfulness, and comparability of the information that
a reporting entity provides in its financial statements about a business combination and its
effects. SFAS 141R applies to all transactions or other events in which an entity obtains control
of one or more businesses, and combinations achieved without the transfer of consideration. SFAS
141R is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 141R is
prospective and will impact the financial position and results of operations for acquisitions
recorded after the date of adoption.
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 will amend the factors that must be considered in
developing renewal or extension assumptions used to determine the useful life over which to
amortize the cost of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible
Assets. FSP 142-3 is effective for financial statements for fiscal years beginning after December
15, 2008. We are currently evaluating the effect that the adoption of FSP 142-3 will have on our
financial position and results of operations and do not expect the adoption of this statement will
have a material impact on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk Sensitivity
On January 5, 2005, in conjunction with the sale of our yarn spinning facility in Edgefield, South
Carolina, we entered into a five-year agreement with Parkdale to supply our yarn requirements.
During this five-year period, we will purchase from Parkdale all yarn required by Delta Apparel and
our wholly owned subsidiaries for use in our manufacturing operations (excluding yarns that
Parkdale did not manufacture as of the date of the agreement in the ordinary course of its business
or due to temporary Parkdale capacity restraints). The purchase price of yarn is based upon the
cost of cotton plus a fixed conversion cost. Thus, we are subject to the commodity risk of cotton
prices and cotton price movements which could result in unfavorable yarn pricing for us. We set
future cotton prices with purchase commitments as a component of the purchase price of yarn in
advance of the shipment of finished yarn from Parkdale. Prices are set according to prevailing
prices, as reported by the New York Cotton Exchange, at the time we enter into the commitments.
Yarn with respect to which we have fixed cotton prices at June 28, 2008 was valued at $13.4
million, and is scheduled for delivery between July 2008 and December 2008. At June 28, 2008, a
10% decline in the market price of the cotton covered by our fixed price yarn would have had a
negative impact of approximately $1.0 million on the value of the yarn. This compares to what
would have been a negative impact of $1.3 million at the 2007 fiscal year end based on the yarn
with fixed cotton prices at June 30, 2007. The impact of a 10% decline in the market price of the
cotton covered by our fixed price yarn would have been less at June 28, 2008 than at June 30, 2007
due to our having less commitments at June 28, 2008 than at June 30, 2007, partially offset by the
higher price of cotton at June 28, 2008 than at June 30, 2007.
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 income or
other expense in the statements of income. We did not own any cotton options contracts on June 28,
2008 or June 30, 2007.
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 June 28, 2008 under the revolving credit
facilities had been outstanding during the entire year and the interest rate on this outstanding
indebtedness was increased by 100 basis points, our expense would have increased by approximately
$0.9 million, or 14.4%, for the fiscal year. This compares to an increase of $0.7 million, or
13.2%, for the 2007 fiscal year based on the outstanding indebtedness at June 30, 2007. The effect
of a 100 basis point increase in interest rates would have a larger impact as of June 28, 2008 than
as of June 30, 2007 due to the higher debt levels outstanding on June 28, 2008, resulting primarily
from increased working capital requirements and capital expenditures during fiscal 2008. 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.
24
Derivatives
On April 2, 2007, we entered into an interest rate swap agreement and interest rate collar
agreement to manage our interest rate exposure and effectively reduce the impact of future interest
rate changes. Both agreements mature (or expire) on April 1, 2010. By entering into the interest
rate swap agreement, we effectively converted $15.0 million of floating rate debt under our credit
facility to a fixed obligation with a LIBOR rate at 5.06%. By entering into the interest rate
collar agreement, we effectively provided a cap of 5.5% and a floor of 4.33% on LIBOR rates on
$15.0 million of floating rate debt under our credit facility. We have assessed these agreements
and elected to account for each as a hedge.
Changes in the derivatives fair values are deferred and recorded as a component of accumulated
other comprehensive income (AOCI) until the underlying transaction is recorded. When the hedged
item affects income, gains or losses are reclassified from AOCI to the Consolidated Statements of
Operations as interest income/expense. Any ineffectiveness, if material, in the Companys hedging
relationships is recognized immediately in the Consolidated Statement of Operations. The changes in
fair value of the interest rate swap and collar agreement resulted in AOCI, net of taxes, of a loss
of $0.5 million as of June 28, 2008 and AOCI, net of taxes, of a gain of $0.1 million as of June
30, 2007.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements for each of the fiscal years in the three-year period ended
June 28, 2008, 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
Evaluation of Disclosure 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 June 28, 2008 and,
based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded
that these controls and procedures were effective at the evaluation date.
Disclosure controls and procedures are our controls and other procedures that are designed to
reasonably assure 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 Commissions rules and forms. 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.
Managements Annual Report on Internal Control over Financial Reporting
Management of Delta Apparel, Inc. is responsible for establishing and maintaining effective
internal control over financial reporting as defined in Rules 13a-15(f) under the Securities
Exchange Act of 1934. The Companys internal control over financial reporting is designed to
provide reasonable assurance regarding the preparation and fair presentation of published financial
statements. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial
reporting as of June 28, 2008 based on the framework in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The scope of our
efforts to comply with the Section 404 Rules with respect to fiscal year 2008 included all of
25
our operations. Based on that evaluation, our management has concluded that, as of June 28, 2008,
our internal control over financial reporting is effective.
The effectiveness of the Companys internal control over financial reporting as of June 28, 2008
has been audited by Ernst & Young LLP, the Companys independent registered public accounting firm,
who also audited the Companys consolidated financial statements. Ernst & Youngs attestation
report on the Companys internal controls over financial reporting is included herein.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fourth quarter of
fiscal year 2008 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Delta Apparel, Inc.
We have audited Delta Apparel, Inc.s internal control over financial reporting as of June 28,
2008, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Delta
Apparel, Inc.s management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Managements Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the companys internal control over
financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Delta Apparel, Inc. maintained, in all material respects, effective internal
control over financial reporting as of June 28, 2008, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Delta Apparel, Inc. as of June 28, 2008
and June 30, 2007, and the related consolidated statements of operations, shareholders equity, and
cash flows for each of the three years in the period ended June 28, 2008 of Delta Apparel, Inc. and
our report dated August 25, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
August 25, 2008
26
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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.deltaapparelinc.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,
Compensation Committee Interlocks and Insider Participation and Compensation Committee Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
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 June 28, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
Weighted-average |
|
|
remaining available for |
|
|
|
Number of securities to |
|
|
exercise price of |
|
|
future issuance under equity |
|
|
|
be issued upon exercise |
|
|
outstanding |
|
|
compensation plans |
|
|
|
of outstanding options, |
|
|
options, warrants |
|
|
(excluding securities |
|
Plan Category |
|
warrants and rights |
|
|
and rights |
|
|
reflected in column (a)) |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation
plans approved by
security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders |
|
|
1,070,050 |
|
|
$ |
11.23 |
|
|
|
490,012 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,070,050 |
|
|
$ |
11.23 |
|
|
|
490,012 |
|
|
|
|
|
|
|
|
|
|
|
Under the Stock Option Plan, options may be granted covering up to 2,000,000 shares of common
stock. Options are granted by the Compensation Committee of our Board of Directors to our officers
and 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.
27
Under the Incentive Stock Award Plan, the Compensation Committee of our board of directors has the
discretion to grant awards for up to an aggregate maximum of 800,000 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.
For additional information on our Stock Option Plan and Incentive Stock Award Plan, see Note 12 to
the Consolidated Financial Statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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 headings Related Party Transactions and
Election of Directors.
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 headings Ratification of Appointment of
Independent Registered Public Accounting Firm and Election of Directors.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) Financial Statements and Financial Statement Schedules
|
|
|
Report of Independent Registered Public Accounting Firm. |
|
|
|
|
Consolidated Balance Sheets as of June 28, 2008 and June 30, 2007 |
|
|
|
|
Consolidated Statements of Operations for the years ended June 28, 2008, June 30, 2007
and July 1, 2006. |
|
|
|
|
Consolidated Statements of Shareholders Equity for the years ended June 28, 2008, June
30, 2007 and July 1, 2006. |
|
|
|
|
Consolidated Statements of Cash Flows for the years ended June 28, 2008, June 28, 2007
and July 1, 2006. |
|
|
|
|
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 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
Companys Form 8-K/A filed on October 17, 2003.
2.1.1 First Amendment to Amended and Restated Stock Purchase Agreement dated as of November
10, 2004 among Delta Apparel, Inc., M. J. Soffe Co., James F. Soffe, John D. Soffe, and Anthony M.
Cimaglia: Incorporated by reference to Exhibit 2.2.1 to the Companys Form 10-Q filed on February
9, 2005.
2.2 Asset Purchase Agreement dated as of November 18, 2004 between Delta Apparel, Inc. and
Parkdale America, LLC (excluding schedules and exhibits): Incorporated by reference to Exhibit 2.3
to the Companys Form 10-Q filed on February 9, 2005.
28
2.2.1 First Amendment to the Asset Purchase Agreement dated as of December 31, 2004 between
Delta Apparel, Inc. and Parkdale America, LLC: Incorporated by reference to Exhibit 2.3.1 to the
Companys Form 10-Q filed on February 9, 2005.
2.3 Asset Purchase Agreement dated as of August 22, 2005 among Delta Apparel, Inc., Junkfood
Clothing Company, Liquid Blaino Designs, Inc. d/b/a Junkfood Clothing, Natalie Grof, and Blaine
Halvorson (excluding schedules and exhibits): Incorporated by reference to Exhibit 2.1 to the
Companys Form 8-K filed on August 26, 2005.
2.4 Asset Purchase Agreement dated as of August 17, 2006 among Delta Apparel, Inc., Fun-Tees,
Inc., Henry T. Howe, James C. Poag, Jr., Beverly H. Poag, Lewis G. Reid, Jr., Kurt R. Rawald, Larry
L. Martin, Jr., Julius D. Cline and Marcus F. Weibel: Incorporated by reference to Exhibit 2.1 to
the Companys Form 8-K filed on August 21, 2006.
3.1.1 Articles of Incorporation of the Company: Incorporated by reference to Exhibit 3.1 to
the Companys Form 10.
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 Companys 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 Companys
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 Companys 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 Companys 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 Companys Form 10.
3.2.5 Amendment to Bylaws dated August 18, 2006: Incorporated by reference to Exhibit 3.2.5 to
the Companys Form 10-K/A filed on September 15, 2006.
4.1. See Exhibits 3.1.1, 3.1.2, 3.2.1, 3.2.2, 3.2.3, 3.2.4, and 3.2.5.
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 Companys Form 10.
10.1. See Exhibits 2.1, 2.1.1, 2.2, 2.2.1, 2.3, and 2.4.
10.2 Third Amended and Restated Loan and Security Agreement dated as of September 21, 2007
among Delta Apparel, Inc., Junkfood Clothing Company, M. J. Soffe Co., Wachovia Bank, National
Association, as Agent, and the financial institutions named therein as Lenders: Incorporated by
reference to Exhibit 10.1 to the Companys Form 8-K filed on September 25, 2007.
10.3 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 Companys Form 8-K filed
on October 17, 2003.
10.4 Employment Agreement between Delta Apparel, Inc. and Deborah H. Merrill dated January 29,
2007: Incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed on February 2,
2007.**
10.5 Employment Agreement between Delta Apparel, Inc. and Martha M. Watson dated January 29,
2007: Incorporated by reference to Exhibit 10.2 to the Companys Form 8-K filed on February 2,
2007.**
10.6 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 Companys Form 10.**
10.7 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 Companys Form 10.**
10.8 Yarn Supply Agreement dated as of January 5, 2005 between Delta Apparel, Inc. and
Parkdale Mills, LLC and Parkdale America, LLC: Incorporated by reference to Exhibit 10.29 to the
Companys Form 10-Q filed on February 9, 2005.
29
10.9 Delta Apparel, Inc. 2004 Non-Employee Director Stock Plan: Incorporated by reference to
Exhibit 10.30 to the Companys Form 10-Q filed on May 16, 2005.
10.10 Employment Agreement between Delta Apparel, Inc. and Kenneth D. Spires dated January 29,
2007: Incorporated by reference to Exhibit 10.19 to the Companys Form 10K filed on August 31,
2007.**
10.11 Employment Agreement between Delta Apparel, Inc. and William T. McGhee dated April 27, 2007*.**
21 Subsidiaries of the Company.
23.1 Consent of Independent Registered Public Accounting Firm.
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) Exhibits
See Item 15(a)(3) above.
(c) Schedules
See information under (a)(1) and (2) of Item 15.
30
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) |
|
|
|
|
|
|
|
|
|
By: /s/ Deborah H. Merrill
Deborah H. Merrill
|
|
|
|
|
Vice President, Chief Financial |
|
|
|
|
Officer and Treasurer |
|
|
|
|
(principal financial and accounting officer) |
|
|
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
|
|
8-25-08
|
|
/s/ E. Erwin Maddrey, II
|
|
8-23-08 |
|
|
|
David S. Fraser
|
|
Date
|
|
E. Erwin Maddrey, II
|
|
Date |
Director
|
|
|
|
Director |
|
|
|
|
|
|
|
|
|
/s/ William F. Garrett
|
|
8-22-08
|
|
/s/ Deborah H. Merrill
|
|
8-28-08 |
|
|
|
William F. Garrett
|
|
Date
|
|
Deborah H. Merrill
|
|
Date |
Director
|
|
|
|
Vice President, Chief Financial |
|
|
|
|
|
|
Officer and Treasurer (principal |
|
|
|
|
|
|
financial and accounting officer) |
|
|
|
|
|
|
|
|
|
/s/ Elizabeth J. Gatewood
|
|
8-22-08
|
|
/s/ Buck A. Mickel
|
|
8-22-08 |
|
|
|
Elizabeth J. Gatewood, Ph.D.
|
|
Date
|
|
Buck A. Mickel
|
|
Date |
Director
|
|
|
|
Director |
|
|
|
|
|
|
|
|
|
/s/ Robert W. Humphreys
|
|
8-28-08
|
|
/s/ David Peterson
|
|
8-25-08 |
|
|
|
Robert W. Humphreys
|
|
Date
|
|
David Peterson
|
|
Date |
President, Chief Executive
Officer
|
|
|
|
Director |
|
|
and Director |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Max Lennon
|
|
8-22-08 |
|
|
|
|
|
|
|
|
|
Max Lennon
|
|
Date |
|
|
|
|
Director |
|
|
|
|
|
|
31
Delta Apparel, Inc. and Subsidiaries
Index to Consolidated Financial Statements
|
|
|
|
|
Reports of Independent Registered Public Accounting Firm |
|
|
F-2 |
|
|
Consolidated Balance Sheets as of June 28, 2008 and June 30, 2007 |
|
|
F-3 |
|
|
Consolidated Statements of Operations for the years ended June 28, 2008, June 30, 2007 and July 1, 2006 |
|
|
F-4 |
|
|
Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the years ended
June 28, 2008, June 30, 2007 and July 1, 2006 |
|
|
F-5 |
|
|
Consolidated Statements of Cash Flows for the years ended June 28, 2008, June 30, 2007 and July 1, 2006 |
|
|
F-6 |
|
|
Notes to Consolidated Financial Statements |
|
|
F-7 |
|
F- 1
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 June 28, 2008 and June 30, 2007, and the related consolidated
statements of operations, shareholders equity and comprehensive (loss) income, and cash flows for
each of the three years in the period ended June 28, 2008. Our audits also included the financial
statement schedule listed in the index at Item 15(d). These financial statements and schedule are
the responsibility of the Companys 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 consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at June 28, 2008 and June 30,
2007, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended June 28, 2008, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions
of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement No. 109, effective July 2, 2007.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of June 28, 2008,
based on criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated August 25, 2008 expressed
an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
August 25, 2008
F- 2
Delta Apparel, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share amounts and per share data)
|
|
|
|
|
|
|
|
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
586 |
|
|
$ |
792 |
|
Accounts receivable, less allowances of $2,813
and $1,943, respectively |
|
|
61,048 |
|
|
|
45,326 |
|
Other receivables |
|
|
964 |
|
|
|
1,118 |
|
Income tax receivable |
|
|
1,007 |
|
|
|
2,192 |
|
Inventories, net |
|
|
124,746 |
|
|
|
124,604 |
|
Prepaid expenses and other current assets |
|
|
2,916 |
|
|
|
2,597 |
|
Deferred income taxes |
|
|
2,542 |
|
|
|
1,891 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
193,809 |
|
|
|
178,520 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
40,042 |
|
|
|
29,407 |
|
Goodwill |
|
|
16,814 |
|
|
|
14,222 |
|
Intangibles, net |
|
|
7,603 |
|
|
|
8,091 |
|
Other assets |
|
|
3,355 |
|
|
|
2,550 |
|
|
|
|
|
|
|
|
|
|
$ |
261,623 |
|
|
$ |
232,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
35,423 |
|
|
$ |
35,906 |
|
Accrued expenses |
|
|
17,689 |
|
|
|
19,042 |
|
Current portion of long-term debt |
|
|
6,780 |
|
|
|
2,927 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
59,892 |
|
|
|
57,875 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities |
|
|
95,542 |
|
|
|
70,491 |
|
Deferred income taxes |
|
|
578 |
|
|
|
749 |
|
Other liabilities |
|
|
718 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
156,730 |
|
|
|
129,121 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred stock2,000,000 shares authorized, none issued
and outstanding. |
|
|
|
|
|
|
|
|
Common stock $.01 par value, 15,000,000 shares authorized,
9,646,972 shares issued, and 8,496,749 and 8,398,395 shares
outstanding as of June 28, 2008 and June 30, 2007, respectively. |
|
|
96 |
|
|
|
96 |
|
Additional paid-in capital |
|
|
57,431 |
|
|
|
55,510 |
|
Retained earnings |
|
|
57,307 |
|
|
|
58,235 |
|
Accumulated other comprehensive (loss) income |
|
|
(441 |
) |
|
|
140 |
|
Treasury stock 1,150,223 and 1,248,577 shares as of June 28, 2008
and June 30, 2007, respectively. |
|
|
(9,500 |
) |
|
|
(10,312 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
104,893 |
|
|
|
103,669 |
|
|
|
|
|
|
|
|
|
|
$ |
261,623 |
|
|
$ |
232,790 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F- 3
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except share amounts and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
|
July 1, 2006 |
|
Net sales |
|
$ |
322,034 |
|
|
$ |
312,438 |
|
|
$ |
270,108 |
|
Cost of goods sold |
|
|
257,319 |
|
|
|
239,365 |
|
|
|
190,222 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
64,715 |
|
|
|
73,073 |
|
|
|
79,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
59,898 |
|
|
|
59,187 |
|
|
|
53,530 |
|
Other (income) expense, net |
|
|
(132 |
) |
|
|
89 |
|
|
|
(657 |
) |
Restructuring costs |
|
|
62 |
|
|
|
1,498 |
|
|
|
|
|
|
|
|
Operating income |
|
|
4,887 |
|
|
|
12,299 |
|
|
|
27,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
6,042 |
|
|
|
5,157 |
|
|
|
3,819 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before (benefit) provision for income
taxes and extraordinary gain |
|
|
(1,155 |
) |
|
|
7,142 |
|
|
|
23,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes |
|
|
(647 |
) |
|
|
1,471 |
|
|
|
8,350 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before extraordinary gain |
|
|
(508 |
) |
|
|
5,671 |
|
|
|
14,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary gain |
|
|
|
|
|
|
672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(508 |
) |
|
$ |
6,343 |
|
|
$ |
14,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before extraordinary gain |
|
|
($0.06 |
) |
|
$ |
0.67 |
|
|
$ |
1.73 |
|
Extraordinary gain |
|
|
|
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
($0.06 |
) |
|
$ |
0.75 |
|
|
$ |
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before extraordinary gain |
|
|
($0.06 |
) |
|
$ |
0.65 |
|
|
$ |
1.71 |
|
Extraordinary gain |
|
|
|
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
($0.06 |
) |
|
$ |
0.73 |
|
|
$ |
1.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding |
|
|
8,480 |
|
|
|
8,506 |
|
|
|
8,590 |
|
Dilutive effect of stock options |
|
|
|
|
|
|
169 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares assuming dilution |
|
|
8,480 |
|
|
|
8,675 |
|
|
|
8,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
0.05 |
|
|
$ |
0.20 |
|
|
$ |
0.17 |
|
See accompanying notes to consolidated financial statements.
F- 4
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Shareholders Equity and Comprehensive (Loss) Income
(Amounts in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|
|
|
|
|
Common Stock |
|
Paid-In |
|
Retained |
|
Comprehensive |
|
Treasury Stock |
|
|
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Income (Loss) |
|
Shares |
|
Amount |
|
Total |
|
|
|
Balance at July 2, 2005 |
|
|
9,646,972 |
|
|
$ |
96 |
|
|
$ |
53,867 |
|
|
$ |
39,106 |
|
|
$ |
|
|
|
|
1,124,920 |
|
|
$ |
(6,605 |
) |
|
$ |
86,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,477 |
|
|
|
(1,252 |
) |
|
|
(1,252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock grant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
(4,844 |
) |
|
|
29 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised under
Awards Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
805 |
|
|
|
|
|
|
|
(94,402 |
) |
|
|
554 |
|
|
|
1,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised under
Option Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76 |
|
|
|
|
|
|
|
(14,000 |
) |
|
|
82 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend ($0.17 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,460 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,460 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock based compensation |
|
|
|
|
|
|
|
|
|
|
805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1, 2006 |
|
|
9,646,972 |
|
|
|
96 |
|
|
|
54,672 |
|
|
|
53,412 |
|
|
|
|
|
|
|
1,084,151 |
|
|
|
(7,192 |
) |
|
|
100,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,343 |
|
Unrealized gain on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196,770 |
|
|
|
(3,378 |
) |
|
|
(3,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock grant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
(4,844 |
) |
|
|
33 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock based compensation |
|
|
|
|
|
|
|
|
|
|
838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised under
Option Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123 |
|
|
|
|
|
|
|
(27,500 |
) |
|
|
225 |
|
|
|
348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend ($0.20 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007 |
|
|
9,646,972 |
|
|
|
96 |
|
|
|
55,510 |
|
|
|
58,235 |
|
|
|
140 |
|
|
|
1,248,577 |
|
|
|
(10,312 |
) |
|
|
103,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(508 |
) |
Unrealized loss on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(581 |
) |
|
|
|
|
|
|
|
|
|
|
(581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,089 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock grant |
|
|
|
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
(5,438 |
) |
|
|
45 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock based compensation |
|
|
|
|
|
|
|
|
|
|
1,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised under
Awards Plan |
|
|
|
|
|
|
|
|
|
|
842 |
|
|
|
|
|
|
|
|
|
|
|
(92,916 |
) |
|
|
767 |
|
|
|
1,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend ($0.05 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 28, 2008 |
|
|
9,646,972 |
|
|
$ |
96 |
|
|
$ |
57,431 |
|
|
$ |
57,307 |
|
|
$ |
(441 |
) |
|
|
1,150,223 |
|
|
$ |
(9,500 |
) |
|
$ |
104,893 |
|
|
|
|
See accompanying notes to consolidated financial statements.
F- 5
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
|
July 1, 2006 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(508 |
) |
|
$ |
6,343 |
|
|
$ |
14,844 |
|
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
5,843 |
|
|
|
4,785 |
|
|
|
4,329 |
|
Amortization |
|
|
488 |
|
|
|
488 |
|
|
|
421 |
|
(Benefit from) provision for deferred income taxes |
|
|
(822 |
) |
|
|
24 |
|
|
|
(506 |
) |
Provision for (benefit from) allowances on accounts
receivable, net |
|
|
870 |
|
|
|
(226 |
) |
|
|
(711 |
) |
Non-cash stock compensation |
|
|
1,208 |
|
|
|
1,778 |
|
|
|
2,959 |
|
Extraordinary gain on earn-out payment |
|
|
|
|
|
|
(672 |
) |
|
|
|
|
Loss (gain) on disposal and impairment of property |
|
|
105 |
|
|
|
1,758 |
|
|
|
(73 |
) |
Changes in operating assets and liabilities, net of
effect of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(16,438 |
) |
|
|
10,784 |
|
|
|
480 |
|
Inventories |
|
|
(142 |
) |
|
|
(1,541 |
) |
|
|
(807 |
) |
Prepaid expenses and other current assets |
|
|
(319 |
) |
|
|
237 |
|
|
|
(549 |
) |
Other non-current assets |
|
|
(805 |
) |
|
|
50 |
|
|
|
360 |
|
Accounts payable |
|
|
(483 |
) |
|
|
(1,147 |
) |
|
|
3,581 |
|
Accrued expenses |
|
|
(2,420 |
) |
|
|
1,288 |
|
|
|
(1,262 |
) |
Income taxes |
|
|
1,185 |
|
|
|
(3,178 |
) |
|
|
506 |
|
Other liabilities |
|
|
131 |
|
|
|
(321 |
) |
|
|
(3,389 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(12,107 |
) |
|
|
20,450 |
|
|
|
20,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of plant and equipment |
|
|
(16,590 |
) |
|
|
(10,915 |
) |
|
|
(5,381 |
) |
Proceeds from sale of property, plant and equipment |
|
|
7 |
|
|
|
6 |
|
|
|
182 |
|
Cash paid for businesses, net of cash acquired |
|
|
|
|
|
|
(27,430 |
) |
|
|
(28,237 |
) |
Cash invested in joint venture |
|
|
|
|
|
|
|
|
|
|
(2,248 |
) |
Proceeds from sale of joint venture |
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(16,583 |
) |
|
|
(38,339 |
) |
|
|
(35,634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of Soffe revolving credit facility, net |
|
|
|
|
|
|
|
|
|
|
(11,781 |
) |
Proceeds from long-term debt |
|
|
353,703 |
|
|
|
317,634 |
|
|
|
156,372 |
|
Repayment of long-term debt |
|
|
(324,799 |
) |
|
|
(294,864 |
) |
|
|
(126,242 |
) |
Dividends paid |
|
|
(420 |
) |
|
|
(1,699 |
) |
|
|
(1,460 |
) |
Treasury stock acquired |
|
|
|
|
|
|
(3,378 |
) |
|
|
(1,252 |
) |
Proceeds from exercise of stock options |
|
|
|
|
|
|
346 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
28,484 |
|
|
|
18,039 |
|
|
|
15,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash |
|
|
(206 |
) |
|
|
150 |
|
|
|
344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of year |
|
|
792 |
|
|
|
642 |
|
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
586 |
|
|
$ |
792 |
|
|
$ |
642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
5,219 |
|
|
$ |
5,292 |
|
|
$ |
3,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (refunded) paid during the year for income taxes |
|
$ |
(1,394 |
) |
|
$ |
4,781 |
|
|
$ |
8,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activityissuance of common stock |
|
$ |
1,703 |
|
|
$ |
89 |
|
|
$ |
1,428 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F- 6
Delta Apparel, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1THE COMPANY
We are an international apparel design, manufacturing, sourcing and marketing company that features
a diverse portfolio of high quality branded and private label activewear apparel. We specialize in
selling a variety of casual and athletic products through almost every distribution channel for
these types of apparel. Our products are sold to specialty and boutique shops, upscale and
traditional department stores, mid-tier retailers, sporting goods stores, screen printers, and
private label accounts. In addition, we sell certain products to college bookstores and to the
U.S. military. Our products are also available direct to consumers on our websites. We design and
manufacture the majority of our products ourselves, which allows us to provide our customers
consistent, high quality, high value branded and private label products. Our manufacturing
operations are located in the southeastern United States, El Salvador, Honduras, and Mexico. We
also use foreign and domestic contractors as additional sources of production. Our distribution
facilities are strategically located throughout the United States to better serve our customers.
NOTE 2SIGNIFICANT 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: Activewear and Retail-Ready. 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 2008, 2007 and 2006 fiscal years were 52-week years and ended on June 28, 2008, June 30,
2007 and July 1, 2006, 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
related valuation allowance, 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, title has transferred to the customer, the price to the buyer is
fixed and determinable and collectibility is reasonably assured. The majority of our sales are
shipped FOB shipping point and revenue is therefore recognized when the goods are shipped to the
customer. For the sales that are shipped FOB destination point, we do not recognize the revenue
until the goods are received by the customer. Shipping and handling charges billed to our
customers are included in net revenue, and the related costs are included in cost of goods sold.
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.
(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
and we generally do not require collateral. We actively monitor our exposure to credit risk
through the use of credit approvals and credit limits. We assign a portion of our trade accounts
receivable at our Junkfood division under a factoring agreement. We account for our assignment of
receivables under our factoring agreement as a sale in accordance with FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The
assignment of these receivables is without recourse, provided that the customer orders are approved
by the factor prior to shipment of the goods, up to a maximum for each individual account. The
agreement does not include provisions for advances from the factor against the assigned
receivables. The factor funds the accounts receivable upon collection, or, exclusive of disputed
claims,
F- 7
upon 90 days after the due date. The amount due from the factor is included in our accounts
receivable on our consolidated balance sheets and changes in the amount due from factor are
included in our cash flows from operations. At June 28, 2008, our trade accounts receivable less
allowances was $61.0 million, consisting of $57.6 million in unfactored accounts receivable, $3.4
million due from factor, and $2.8 million in allowances. At June 30, 2007, our accounts receivable
less allowances was $45.3 million, consisting of $43.1 million in unfactored accounts receivable,
$4.1 million due from factor, and $1.9 million in allowances.
(g) Inventories: We state inventories at the lower of cost (first-in, first-out method) or
market. Inventory cost includes materials, labor and manufacturing overhead. Estimated losses on
inventories represent reserves for obsolescence, excess quantities, irregulars and slow moving
inventory. We estimate losses on the basis of our assessment of the inventorys 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. We
depreciate and amortize our assets on a 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 amortized over the useful lives 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. Major replacements that substantially extend the useful life of an asset
are capitalized and depreciated.
(i) Impairment of Long-Lived Assets: In accordance with Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, our long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. When evaluating assets for potential
impairment, we compare the carrying amount of the asset to the undiscounted future net cash flows
expected to be generated by the asset. If impairment is indicated, the asset is permanently
written down to its estimated fair market value (based upon future discounted cash flows) and an
impairment loss is recognized. We recorded $1.5 million in impairment losses for fiscal year 2007.
See Note 15 for a further discussion on these impairment losses.
(j) Goodwill and Intangibles: Certain intangibles and goodwill were recorded upon the
acquisition of Junkfood Clothing Company in fiscal year 2006, including the trade name and
trademarks, customer relationships, non-compete agreements and goodwill. Earnout payments
associated with the acquisition that were accrued for the 2006, 2007 and 2008 earnout periods
increased goodwill by $5.9 million. Intangible assets are amortized based on their estimated useful
lives, ranging from five to twenty years, as detailed in Note 6 Goodwill and Intangible Assets.
Goodwill represents the excess of purchase price over fair value of net identified tangible and
intangible assets and liabilities acquired and is not amortized. The total amount of goodwill is
expected to be deductible for tax purposes.
(k) Impairment of Goodwill and Intangibles: We evaluate the carrying value of goodwill and
intangibles annually as of December 31 and between annual evaluations if events occur or
circumstances change that would more likely than not reduce the fair value of the reporting unit
below its carrying amount. Such circumstances could include, but are not limited to, a significant
adverse change in business climate or unanticipated competition. When evaluating whether goodwill
and intangibles are impaired, we compare the fair value of the reporting unit to which the goodwill
and intangibles are assigned to its carrying amount. If the carrying amount of the reporting unit
exceeds its fair value, then the amount of the impairment loss must be measured. The impairment
loss is calculated by comparing the implied fair value of reporting unit goodwill and intangibles
to its carrying amount. In calculating the implied fair value of goodwill and intangibles, the
fair value of the reporting unit is allocated to all of the other assets and liabilities, including
intangible assets, of that unit based on their fair values. The excess of the fair value of a
reporting unit over the amount assigned to its other assets and liabilities is the implied fair
value of goodwill and intangibles. Junkfood is the only reporting unit with goodwill and
intangible assets recorded. We completed our annual test of goodwill and intangibles as of
December 31, 2007 and we did not identify any impairment as a result of the review.
(l) Self Insurance Reserves: Our medical, prescription and dental care benefits are primarily
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. We had
self-insurance reserves of approximately $595,000 and $445,000 for June 28, 2008 and June 30, 2007,
respectively.
(m) Internally Developed Software Costs. We account for internally developed software in
accordance with SOP 98-1, Accounting for Computer Software Developed for or obtained for Internal
Use. After technical feasibility has been established, we capitalize the cost of our software
development process, including payroll and payroll benefits, by tracking
F- 8
the software development hours invested in the software projects. We amortize our software
development costs in accordance with the estimated economic life of the software, which is
generally three to ten years.
(n) 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.
(o) Cost 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 cost of goods
sold principally includes product cost, purchasing costs, inbound freight charges, insurance, and
inventory write-downs. 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.
(p) 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, and shipping goods for delivery
to our customers. Distribution costs included in selling, general and administrative expenses
totaled $14.3 million, $14.1 million and $13.8 million in fiscal years 2008, 2007 and 2006,
respectively. In addition, selling, general and administrative expenses include costs related to
sales associates, administrative personnel cost, advertising and marketing expenses, royalty
payments on licensed products and general and administrative expenses.
(q) Advertising Costs: All costs associated with advertising and promoting our products are
expensed during the year in which they are incurred and are included in selling, general and
administrative expenses in the consolidated statements of income. We participate in cooperative
advertising programs with our customers. Depending on the customer, our defined cooperative
programs allow the customer to use from 1% to 5% of its net purchases from us towards
advertisements of our products. As our products are being specifically advertised, we are
receiving an identifiable benefit resulting from the consideration for cooperative advertising.
Therefore, pursuant to Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendors Products), we record our
cooperative advertising costs as a selling expense based on the net sales sold under the
cooperative program and the related cooperative advertising reserve balances are recorded as
accrued liabilities. Advertising costs totaled $4.3 million, $4.5 million and $4.4 million in
fiscal years 2008, 2007 and 2006, respectively. Included in these costs were $1.5 million, $1.8
million and $1.4 million in fiscal years 2008, 2007 and 2006, respectively, related to our
cooperative advertising programs.
(r) 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 at each 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.
(s) (Loss) 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
(loss) earnings per share includes the dilutive effect of stock options and non-vested stock awards
unless their impact is anti-dilutive.
(t) Yarn and Cotton Procurements: On January 5, 2005, in conjunction with the sale of our yarn
spinning facility in Edgefield, South Carolina, we entered into a five-year supply agreement with
Parkdale America, LLC to supply our yarn requirements. During this five-year period, we will
purchase from Parkdale all yarn required by Delta Apparel and our wholly-owned subsidiaries, for
use in our manufacturing operations (excluding yarns that Parkdale did not manufacture as of the
date of the agreement in the ordinary course of its business or due to temporary Parkdale capacity
restraints). The purchase price of yarn is based upon the cost of cotton plus a fixed conversion
cost. Thus, we are subject to the commodity risk of cotton prices and cotton price movements,
which could result in unfavorable yarn pricing for us. We fix the cotton prices as a component of
the purchase price of yarn with Parkdale, pursuant to the supply agreement, in advance of the
shipment of finished yarn from Parkdale. Prices are set according to prevailing prices, as
reported by the New York Cotton Exchange, at the time we elect to fix specific cotton prices.
(u) Stock Option and Incentive Award Plans: As of July 3, 2005, we adopted the fair-value
recognition provisions of FASB Statement No. 123 (revised 2004), Share-Based Payment (Statement
123(R)) and the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-Based
Payment (SAB 107) using the modified-prospective
F- 9
transition method. Statement 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based on their fair
values.
(v) Comprehensive (Loss) Income: Other Comprehensive (Loss) Income consists of net (loss) income
and unrealized (losses) gains from cash flow hedges and is presented in the Consolidated Statements
of Shareholders Equity. Accumulated other comprehensive (loss) income contained in the
shareholders equity section of the Consolidated Balance Sheets in fiscal years 2008 and 2007
consisted of ($0.4) million and $0.1 million, respectively, for an interest rate swap agreement and
an interest rate collar agreement.
(w) 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 and accounts payable. 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.
(x) Derivatives: From time to time, we enter into forward contracts, option agreements or other
instruments to limit our exposure to fluctuations in interest rates and raw material prices with
respect to long-term debt and cotton purchases, respectively. We determine at inception whether
the derivative instruments will be accounted for as hedges.
The Company accounts for derivatives and hedging activities in accordance with SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. It requires the recognition of all
derivative instruments as either assets or liabilities in the Consolidated Balance Sheets and
measurement of those instruments at fair value. The accounting treatment of changes in fair value
is dependent upon whether or not a derivative instrument is designated as a hedge and, if so, the
type of hedge. For derivative financial instruments not designated as a hedge, changes in fair
value are recognized in income. For derivatives designated as cash flow hedges, to the extent
effective, changes in fair value are recognized in accumulated other comprehensive income (loss)
until the hedged item is recognized in income. Ineffectiveness is recognized immediately in
income. The Company formally documents all relationships between hedging instruments and hedged
items, as well as risk management objectives and strategies for undertaking various hedge
transactions, at the inception of those transactions.
No raw material option agreements were purchased during fiscal year 2008, 2007 or 2006. On April
2, 2007, we entered into an interest rate swap agreement and interest rate collar agreement to
manage our interest rate exposure and effectively reduce the impact of future interest changes.
Both agreements mature (or expire) on April 1, 2010. By entering into the interest rate swap
agreement, we effectively converted $15.0 million of floating rate debt under our credit facility
to a fixed obligation with a LIBOR rate at 5.06%. By entering into the interest rate collar
agreement, we effectively provided a cap of 5.5% and a floor of 4.33% on LIBOR rates on $15.0
million of floating rate debt under our credit facility. We have assessed these agreements and
elected to account for each as a cash flow hedge.
The changes in fair value of the interest rate swap and collar agreement resulted in AOCI, net of
taxes, of $0.5 million loss and $0.1 million income for the years ended June 28, 2008 and June 30,
2007, respectively. There were no outstanding derivative instruments at July 1, 2006.
(y) Reclassifications: We have made certain reclassifications to the presentation of prior year
results in order to conform to the current period presentation.
(z) Recent Accounting Pronouncements: In February 2006, the FASB issued FASB Statement No.
155, Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133
and 140 (SFAS 155). SFAS 155 permits an entity to measure at fair value any financial
instrument that contains an embedded derivative that otherwise would be required to be bifurcated
and accounted for separately under FASB Statement No. 133. SFAS 155 is effective for fiscal years
beginning after September 15, 2006. We adopted SFAS 155 on July 1, 2007 and the adoption had no
material impact on our financial position and results of operations.
In June 2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in Income Taxes
an Interpretation of FASB Statement No.109 (FIN 48). FIN 48 provides clarifying guidance on the
accounting for uncertainty in income taxes recognized in financial statements in accordance with
SFAS 109, Accounting for Income Taxes, and prescribes recognition and measurement guidance in
determining amounts to be recorded in the financial statements. This Interpretation applies to all
income-based tax items and is effective for fiscal years beginning after December 15, 2006. We
adopted FIN 48 on July 1, 2007 and the adoption had no material impact on our financial position
and results of operations. See Note 9 for additional information on the adoption of FIN 48.
F- 10
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (SFAS 157),
which defines fair value, establishes a framework for measuring fair value under generally accepted
accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies to
other accounting pronouncements that require or permit fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and for interim periods within those
fiscal years. We are currently evaluating the effect that the adoption of SFAS 157 will have on our
financial position and results of operations and do not expect that the adoption of this statement
will have a material impact on our financial statements.
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159), which permits companies to choose to measure certain
financial instruments and certain other items at fair value. The standard requires that unrealized
gains and losses on items for which the fair value option has been elected be reported in earnings.
SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently
evaluating the effect that the adoption of SFAS 159 will have on our financial position and results
of operations and do not expect the adoption of this statement will have a material impact on our
financial statements.
In December 2007, the FASB issued FASB Statement No. 160, Non-controlling Interests in Consolidated
Financial Statements (SFAS 160), which requires all entities to report non-controlling (minority)
interests in subsidiaries as equity in the consolidated financial statements. SFAS 160 is
effective for fiscal years beginning after December 15, 2008. We are currently evaluating the
effect that the adoption of SFAS 160 will have on our financial position and results of operations
and do not expect the adoption of this statement will have a material impact on our financial
statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R)
to improve the relevance, representational faithfulness, and comparability of the information that
a reporting entity provides in its financial statements about a business combination and its
effects. SFAS 141R applies to all transactions or other events in which an entity obtains control
of one or more businesses, and combinations achieved without the transfer of consideration. SFAS
141R is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 141R is
prospective and will impact the financial position and results of operations for acquisitions
recorded after the date of adoption.
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 will amend the factors that must be considered in
developing renewal or extension assumptions used to determine the useful life over which to
amortize the cost of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible
Assets. FSP 142-3 is effective for financial statements for fiscal years beginning after December
15, 2008. We are currently evaluating the effect that the adoption of FSP 142-3 will have on our
financial position and results of operations and do not expect the adoption of this statement will
have a material impact on our financial statements.
NOTE 3ACQUISITIONS
FunTees Acquisition
On October 2, 2006, we acquired substantially all of the assets of FunTees, Inc. and its business
of designing, manufacturing, marketing, and selling private label knitted custom t-shirts primarily
to major branded sportswear companies (the FunTees Acquisition). FunTees, which has been
included in our Activewear segment since its acquisition, further services its customers through
its ability to decorate and package products for retail in its offshore locations. The aggregate
consideration paid for substantially all of the assets of FunTees, Inc. was $21.8 million in cash,
consisting of $20.0 million paid at closing and an additional $1.8 million paid on April 12, 2007
as an adjustment for the actual working capital purchased.
Junkfood Acquisition
On August 22, 2005, we acquired substantially all of the assets and properties of Liquid Blaino
Designs, Inc. d/b/a Junkfood Clothing (Seller), a California-based designer, distributor and
marketer of licensed and branded apparel. We are operating Junkfood, headquartered in Los Angeles,
California, as a separate business within our Retail-Ready segment. At closing, we paid $20
million in cash and issued a promissory note to the Seller for $2.5 million. The promissory note
bears interest at 9% and has a three-year term. The purchase price was subject to a post-closing
adjustment of $4.4 million based on the actual working capital purchased, which we paid in fiscal
year 2006. Also, additional amounts are payable to the Seller in cash during each of fiscal years
2007, 2008, 2009, and 2010 if financial performance targets are met by Junkfood during the period
beginning on August 22, 2005 and ending on July 2, 2006 and during each of the three fiscal years
thereafter, ending on June 27, 2009. In fiscal year 2007 we paid approximately $3.3 million in
accordance with the Earnout Provisions relating to the earnout period ended July 2, 2006. No
payment was earned related to the earnout period ended June 30, 2007. As of June 28, 2008, we had
$2.6 million accrued in accordance with the Earnout Provisions related to the earnout period ended
June 28, 2008. This amount is expected to be paid during the first fiscal quarter of fiscal year
2009.
F- 11
NOTE 4INVENTORIES
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Raw materials |
|
$ |
10,881 |
|
|
$ |
11,922 |
|
Work in process |
|
|
23,198 |
|
|
|
27,723 |
|
Finished goods |
|
|
90,667 |
|
|
|
84,959 |
|
|
|
|
|
|
|
|
|
|
$ |
124,746 |
|
|
$ |
124,604 |
|
|
|
|
|
|
|
|
Raw materials at June 28, 2008 and June 30, 2007 include finished yarn and direct materials for the
Activewear segment and include finished yarn, direct materials and blank t-shirts for the
Retail-Ready segment.
NOTE 5PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
June 28, |
|
|
June 30, |
|
|
|
Useful Life |
|
|
2008 |
|
|
2007 |
|
Land and land improvements |
|
N/A |
|
$ |
993 |
|
|
$ |
1,243 |
|
Buildings |
|
10-20 years |
|
|
7,189 |
|
|
|
8,144 |
|
Machinery and equipment |
|
5-15 years |
|
|
56,938 |
|
|
|
40,490 |
|
Computers and software |
|
3-10 years |
|
|
10,926 |
|
|
|
8,065 |
|
Furniture and fixtures |
|
7 years |
|
|
3,897 |
|
|
|
3,665 |
|
Leasehold improvements |
|
3-10 years |
|
|
1,712 |
|
|
|
1,720 |
|
Automobiles |
|
5 years |
|
|
367 |
|
|
|
361 |
|
Construction in progress |
|
N/A |
|
|
3,078 |
|
|
|
8,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,100 |
|
|
|
72,515 |
|
Less accumulated depreciation and amortization |
|
|
|
|
|
|
(45,058 |
) |
|
|
(43,108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40,042 |
|
|
$ |
29,407 |
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6GOODWILL AND INTANGIBLE ASSETS
Components of intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
June 30, |
|
Economic |
|
|
2008 |
|
2007 |
|
Life |
|
|
|
Goodwill |
|
$ |
16,814 |
|
|
$ |
14,222 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
Tradename/trademarks |
|
|
1,530 |
|
|
|
1,530 |
|
|
20 yrs |
Customer relationships |
|
|
7,220 |
|
|
|
7,220 |
|
|
20 yrs |
Non-compete agreements |
|
|
250 |
|
|
|
250 |
|
|
5 yrs |
|
|
|
|
|
|
|
Total intangibles |
|
|
9,000 |
|
|
|
9,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization |
|
|
(1,397 |
) |
|
|
(909 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,603 |
|
|
$ |
8,091 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnout payments accrued in fiscal year 2008 associated with the acquisition of substantially all
of the assets of Junkfood increased the balance of goodwill by $2.6 million. Amortization expense
for intangible assets was $0.5 million for each of years ended June 28, 2008 and June 30, 2007, and
was $0.4 million for the year ended July 1, 2006. Amortization expense is estimated to be
approximately $0.5 million for each of the fiscal years 2009 through 2010, and approximately $0.4
million in succeeding fiscal years.
F- 12
NOTE 7ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Accrued employee compensation and benefits |
|
$ |
6,310 |
|
|
$ |
11,936 |
|
Taxes accrued and withheld |
|
|
516 |
|
|
|
496 |
|
Accrued insurance |
|
|
734 |
|
|
|
659 |
|
Accrued advertising |
|
|
657 |
|
|
|
862 |
|
Accrued earnout payment |
|
|
2,592 |
|
|
|
|
|
Accrued royalties |
|
|
1,682 |
|
|
|
973 |
|
Other |
|
|
5,198 |
|
|
|
4,116 |
|
|
|
|
|
|
|
|
|
|
$ |
17,689 |
|
|
$ |
19,042 |
|
|
|
|
|
|
|
|
NOTE 8LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Revolving credit facility secured by receivables,
inventory, property and equipment, interest at
prime rate or LIBOR rate plus an applicable margin
(4.66% at June 28, 2008) due August 2012 |
|
$ |
87,120 |
|
|
$ |
68,418 |
|
Capital expansion loan agreement with Banco
Ficohsa, a Honduran bank, interest at LIBOR plus
2%, payable monthly, (6.0% at June 28, 2008) with
a five year term (denominated in U. S. dollars) |
|
|
13,952 |
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
Junkfood Seller note, interest at 9% with interest
payable quarterly, principal amount of $1,250 due
August 2008. |
|
|
1,250 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
102,322 |
|
|
|
73,418 |
|
Less current installments |
|
|
(6,780 |
) |
|
|
(2,927 |
) |
|
|
|
|
|
|
|
Long-term debt, excluding current installments |
|
$ |
95,542 |
|
|
$ |
70,491 |
|
|
|
|
|
|
|
|
On September 21, 2007, Delta Apparel, Junkfood and M. J. Soffe Co. entered into a Third Amended and
Restated Loan and Security Agreement (the Amended Loan Agreement) with Wachovia Bank, National
Association, as Agent, and the financial institutions named in the Amended Loan Agreement as
Lenders.
Pursuant to the Amended Loan Agreement, the maturity of the loans under the previous credit
facility was extended to September 21, 2012, and the line of credit available was increased to $100
million (subject to borrowing base limitations based on the value and type of collateral provided),
which represents an increase of $10 million in the amount that was previously available under the
credit facility. Under the Amended Loan Agreement, provided that no event of default exists, we
have the option to increase the maximum credit available under the facility to $110 million
(subject to borrowing base limitations based on the value and type of collateral provided),
conditioned upon the Agents ability to secure additional commitments and customary closing
conditions.
The credit facility is secured by a first-priority lien on substantially all of the real and
personal property of Delta Apparel, Junkfood, and Soffe. All loans under the credit agreement bear
interest at rates based on either an adjusted LIBOR rate plus an applicable margin or a banks
prime rate plus an applicable margin. The facility requires monthly installment payments of
approximately $0.2 million in connection with fixed asset amortizations, and these amounts reduce
the amount of availability under the facility. Annual facility fees are 0.25% of the amount by
which $100 million exceeds the average daily principal balance of the outstanding loans and letters
of credit accommodations during the immediately preceding month.
Our credit facility includes the financial covenant that if the amount of availability falls below
$10 million, our Fixed Charge Coverage Ratio (as defined in the credit agreement) for the preceding
12 month period must not be less than 1.10 to 1.0 and otherwise includes customary conditions to
funding, covenants, and events of default. During the quarter ended June 28, 2008, we did not fall
below $10 million in availability and were therefore not subject to the Fixed Charge Coverage Ratio
financial covenant. As of June 28, 2008 our Fixed Charge Coverage Ratio was 1.66 for the preceding
12 months and we expect to continue to meet the Fixed Charge Coverage Ratio for fiscal year 2009.
At June 28, 2008, we had the ability to borrow an additional $11.1 million under the credit
facility.
F- 13
Proceeds of the loans may be used for general operating, working capital, other corporate purposes,
and to finance fees and expenses under the facility. Our credit facility contains limitations on,
or prohibitions of, cash dividends. We are allowed to make cash dividends in amounts such that the
aggregate amount paid to shareholders since May 16, 2000 does not exceed twenty-five percent (25%)
of our cumulative net income calculated from May 16, 2000 to the date of determination. At June
28, 2008 and June 30, 2007, there was $10.1 million and $10.6 million, respectively, of retained
earnings free of restrictions for the payment of dividends.
The credit facility contains a subjective acceleration clause and a springing lockbox arrangement
(as defined in EITF 95-22), whereby remittances from customers will be forwarded to our general
bank account and will not reduce the outstanding debt until and unless a specified event or an
event of default occurs. Pursuant to EITF 95-22, we classify borrowings under the facility as
non-current debt.
In addition to the credit facility with Wachovia Bank, National Association, we have a seller note
payable to the former Junkfood shareholders pursuant to the Asset Purchase Agreement dated as of
August 22, 2005. The seller note bears interest at 9%, is payable quarterly, and has a three year
term. At June 28, 2008, we had $1.25 million outstanding under the seller note, which is payable in
August 2008.
In the fourth quarter of fiscal year 2007 we entered into a loan agreement with Banco Ficohsa, a
Honduran bank, for our capital expansion in Honduras. The loan is secured by a first-priority lien
on the assets of our Honduran operations. The loan bears interest at LIBOR plus 2%, is payable
monthly, has a five year term and is denominated in U. S. dollars. At June 28, 2008, we had $14.0
million outstanding on this loan.
The aggregate maturities of debt at June 28, 2008 are as follows (in thousands):
|
|
|
|
|
Fiscal Year |
|
|
|
|
2009 |
|
$ |
6,780 |
|
2010 |
|
|
5,530 |
|
2011 |
|
|
5,530 |
|
2012 |
|
|
83,318 |
|
2013 |
|
|
1,164 |
|
|
|
|
|
|
|
$ |
102,322 |
|
|
|
|
|
NOTE 9INCOME TAXES
The provision for income taxes consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
July 1, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(687 |
) |
|
$ |
(10 |
) |
|
$ |
7,471 |
|
State |
|
|
599 |
|
|
|
140 |
|
|
|
1,308 |
|
Foreign |
|
|
119 |
|
|
|
216 |
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
31 |
|
|
|
346 |
|
|
|
8,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(539 |
) |
|
|
869 |
|
|
|
(433 |
) |
State |
|
|
(139 |
) |
|
|
256 |
|
|
|
(73 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
(678 |
) |
|
|
1,125 |
|
|
|
(506 |
) |
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes |
|
$ |
(647 |
) |
|
$ |
1,471 |
|
|
$ |
8,350 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation between actual income tax expense and the income tax expense computed using the
federal statutory income tax rate of 34% for years ended June 28, 2008 and June 30, 2007 and 35%
for year ended July 1, 2006 is as follows (in thousands):
F- 14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
July 1, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Income tax expense at the statutory rate |
|
$ |
(393 |
) |
|
$ |
2,428 |
|
|
$ |
8,118 |
|
State income tax expense net of federal income tax effect |
|
|
(375 |
) |
|
|
257 |
|
|
|
803 |
|
Rate difference and nondeductible items in foreign jurisdictions |
|
|
(33 |
) |
|
|
(72 |
) |
|
|
8 |
|
Permanent reinvestment of foreign earnings |
|
|
(580 |
) |
|
|
(271 |
) |
|
|
(297 |
) |
Section 199 deduction under the American Jobs Creation Act of 2004 |
|
|
|
|
|
|
14 |
|
|
|
(237 |
) |
Valuation allowance adjustments |
|
|
681 |
|
|
|
109 |
|
|
|
|
|
Nondeductible amortization and other permanent differences |
|
|
(138 |
) |
|
|
(643 |
) |
|
|
42 |
|
Amended return and charitable contribution adjustments |
|
|
177 |
|
|
|
(348 |
) |
|
|
|
|
Other |
|
|
14 |
|
|
|
(3 |
) |
|
|
(87 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
(647 |
) |
|
$ |
1,471 |
|
|
$ |
8,350 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and amounts used for income tax
purposes. The undistributed earnings of our foreign subsidiaries are considered to be indefinitely
reinvested. As such, no U.S. federal and state income taxes have been provided thereon, and it is
not practical to determine the amount of the related unrecognized deferred income tax liability.
Significant components of our deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
State net operating loss carryforward |
|
$ |
1,427 |
|
|
$ |
840 |
|
Charitable donation carryforward |
|
|
834 |
|
|
|
507 |
|
Derivative interest rate contract |
|
|
276 |
|
|
|
|
|
Currently nondeductible accruals |
|
|
3,196 |
|
|
|
2,133 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
5,733 |
|
|
|
3,480 |
|
|
|
|
|
|
|
|
|
|
Less valuation allowance |
|
|
(936 |
) |
|
|
(255 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
4,797 |
|
|
|
3,225 |
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
(1,670 |
) |
|
|
(1,067 |
) |
Goodwill and intangibles |
|
|
(1,161 |
) |
|
|
(693 |
) |
Other |
|
|
(2 |
) |
|
|
(323 |
) |
|
|
|
|
|
|
|
Gross deferred tax liabilities |
|
|
(2,833 |
) |
|
|
(2,083 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
1,964 |
|
|
$ |
1,142 |
|
|
|
|
|
|
|
|
As of June 28, 2008, we had $2.2 million of charitable contribution carryforwards for federal
income tax purposes, of which $1.6 million expires in fiscal year 2012, and $0.6 million expires in
fiscal year 2013. The future charitable contribution deduction is limited to 10% of taxable income
for each year. As our federal income tax returns are filed on a consolidated basis, we believe
that the deferred tax asset related to these charitable contributions will be realized and
therefore no valuation allowance was recorded related to the charitable contribution carryforwards.
As of June 28, 2008 and June 30, 2007, we had operating loss carryforwards of approximately $21.0
million and $7.5 million, respectively, for state purposes. These carryforwards expire at various
intervals through 2028. 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 28,
2008 was an increase of $0.7 million. 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.
As discussed in Note 2, we adopted FIN 48 on July 1, 2007. FIN 48 requires that a position taken
or expected to be taken in a tax return be recognized in the financial statements when it is more
likely than not (i.e., a likelihood of more than fifty percent) that the position would be
sustained upon examination by tax authorities. A recognized tax position is then measured at the
largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate
settlement. The tax years 2004 to 2007, according to statute, remain open to examination by the
major taxing jurisdictions to which we are subject. Upon adoption of FIN 48, we did not have any
material unrecognized tax benefits, nor did we have any material unrecognized tax benefits as of
June 28, 2008. We recognize interest and penalties accrued related to unrecognized tax benefits as
components of our income tax provision. We did not have any interest and penalties accrued upon
adoption of FIN 48, nor did we have any interest and penalties accrued related to unrecognized tax
benefits as of June 28, 2008.
F- 15
NOTE 10LEASES
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.
Future minimum lease payments under non-cancelable operating leases as of June 28, 2008 were as
follows (in thousands):
|
|
|
|
|
Fiscal Year |
|
|
|
|
2009 |
|
$ |
8,446 |
|
2010 |
|
|
6,903 |
|
2011 |
|
|
5,999 |
|
2012 |
|
|
4,964 |
|
2013 |
|
|
4,352 |
|
Thereafter |
|
|
11,543 |
|
|
|
|
|
|
|
$ |
42,207 |
|
|
|
|
|
Rent expense for all operating leases was approximately $6.2 million, $6.0 million and $5.0 million
for fiscal years 2008, 2007, and 2006, respectively.
NOTE 11EMPLOYEE BENEFIT PLANS
We sponsor and maintain a 401(k) retirement savings plan (the 401(k) Plan) for our employees who
meet certain service and age requirements. The 401(k) Plan permits participants to make pre-tax
contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. The
401(k) Plan provides for us to make a guaranteed match of the employees contributions. We
contributed approximately $1.0 million, $0.9 million and $0.7 million to the 401(k) Plan during
fiscal years 2008, 2007, and 2006, 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 5.15% for fiscal years
2008, 2007 and 2006. The following table presents the benefit obligation for these benefits, which
is included in accrued expenses in the accompanying balance sheet (in thousands).
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Change in benefit obligations: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
964 |
|
|
$ |
939 |
|
Interest cost |
|
|
80 |
|
|
|
82 |
|
Benefits paid |
|
|
(99 |
) |
|
|
(58 |
) |
Actuarial adjustment |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
945 |
|
|
$ |
964 |
|
|
|
|
|
|
|
|
NOTE 12STOCK 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). Effective July 3, 2005, we
adopted the fair-value recognition provisions of Statement 123(R) and the Securities and Exchange
Commission Staff Accounting Bulletin No. 107 (SAB 107).
Option Plan
Under the Option Plan, the Compensation Committee of our Board of Directors has the discretion to
grant options for up to 2,000,000 shares of common stock to officers and 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, with an exercise term (as determined by the Compensation Committee)
not to exceed 10 years. The Compensation Committee determines the vesting period for our stock
options. Generally, such stock options become exercisable over four years. Certain option awards
provide for accelerated vesting
F- 16
upon meeting specific retirement, death or disability criteria. During fiscal years 2008, 2007,
and 2006, we granted options for 286,000, 88,000 and 734,000 shares, respectively, of our common
stock. At June 28, 2008, we had 332,000 shares available for grant under the Option Plan.
Compensation expense is allocated between our cost of sales and selling, general and administrative
expense line items in our statements of income on a straight-line basis over the vesting periods.
In fiscal years 2008, 2007 and 2006, we expensed $1.0 million, $0.8 million and $0.8 million,
respectively, in conjunction with our Option Plan. Associated with the compensation cost for the
Option Plan are recognized tax benefits of $0.4 million, $0.3 million, and 0.3 million for each of
fiscal year 2008, 2007 and 2006, respectively.
The following table summarizes the weighted average grant date fair values and assumptions that
were used to estimate the grant date fair values using the Black-Scholes option-pricing model of
the options granted during the fiscal years ended 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
Risk-free interest rate |
|
|
3.11 |
% |
|
|
4.85 |
% |
|
|
4.00 |
% |
Expected life |
|
6.7 |
yrs |
|
6 |
yrs |
|
7 |
yrs |
Expected volatility |
|
|
34.3 |
% |
|
|
31.7 |
% |
|
|
35.8 |
% |
Expected dividend yield |
|
|
1.20 |
% |
|
|
1.13 |
% |
|
|
1.30 |
% |
Weighted-average per share fair
value of options granted |
|
$ |
2.95 |
|
|
$ |
6.16 |
|
|
$ |
5.18 |
|
The risk-free interest rate for the periods within the expected life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant. Due to minimal exercising of stock
options historically, in 2008, 2007 and 2006, we have estimated the expected life of options
granted to be the midpoint between the average vesting term and the contractual term as permitted
under SAB 107. The expected volatility for the periods of the expected life of the option is
determined using historical volatilities based on historical stock prices. The expected dividend
yield is based on our annual dividend in relation to our historical average stock price.
A summary of our stock option activity for the fiscal year ended June 28, 2008 under the Option
Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Average |
|
Contractual |
|
Intrinsic Value |
|
|
Shares |
|
Exercise Price |
|
Term |
|
(thousands) |
|
|
|
Outstanding at June 30, 2007 |
|
|
810,500 |
|
|
$ |
13.44 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
286,000 |
|
|
$ |
8.30 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(100,000 |
) |
|
$ |
12.47 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 28, 2008 |
|
|
996,500 |
|
|
$ |
12.06 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 28, 2008 |
|
|
555,500 |
|
|
$ |
13.28 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the fiscal years 2008, 2007
and 2006 was $2.95, $6.16 and $5.18, respectively, per option. Proceeds received on the exercise
of options under the Option Plan were $0.3 million and $0.2 million during fiscal years 2007 and
2006, respectively. The total intrinsic value of options exercised during the years ended June 30,
2007 and July 1, 2006 was $0.1 million and $0.1 million, respectively. Shares are issued from
treasury stock upon exercise of the options. No options were exercised during fiscal year 2008.
Prior to the adoption of Statement 123(R), we presented all tax benefits of deductions resulting
from the exercise of stock options as operating cash flows in the statements of cash flows.
Statement 123(R) requires that cash flows from tax benefits attributable to tax deductions in
excess of the compensation cost recognized for those options (excess tax benefits) be classified as
financing cash flows. We did not have any significant excess tax benefits for fiscal years 2007
and 2006.
A summary of the status of our non-vested stock options as of June 28, 2008, and changes during the
fiscal year ended June 28, 2008, is presented below:
F- 17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
Nonvested at June 30, 2007 |
|
|
366,000 |
|
|
$ |
5.37 |
|
Granted |
|
|
286,000 |
|
|
$ |
2.95 |
|
Vested |
|
|
(183,000 |
) |
|
$ |
5.37 |
|
Forfeited |
|
|
(28,000 |
) |
|
$ |
4.38 |
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 28, 2008 |
|
|
441,000 |
|
|
$ |
3.86 |
|
|
|
|
|
|
|
|
As of June 28, 2008, there was $1.6 million of total unrecognized compensation cost related to
non-vested stock options under the Option Plan. This cost is expected to be recognized over a
period of 4 years.
In December 2005, the FASB issued FSP FAS No. 123R-3 (FSP123R), Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards, which provides for a simplified
method of calculating the initial pool of excess tax benefits upon adoption of Statement 123(R).
The Option Plan meets the requirements of Internal Revenue Code Section 422 to qualify as an
Incentive Stock Option (ISO) plan. We had no knowledge of any disqualifying dispositions, and
accordingly, we did not have any tax deductions and there were no excess tax benefits, associated
with our Option Plan. Therefore, we had no initial pool of excess tax benefits upon the adoption
of Statement 123(R).
During fiscal year 2006, we recorded expense associated with our Option Plan pursuant to Statement
123(R). During the third quarter of fiscal year 2006 we amended all of our outstanding unvested
options to convert them from ISO options to nonqualified options. Prior to March 2006 our Option
Plan qualified as an ISO plan, and therefore the related expense was not tax deductible and
resulted in a permanent tax difference, thus increasing our effective income tax rate. Upon the
future exercise of these options we will be able record a tax benefit equal to the lesser of the
actual benefit of the tax deduction or the cumulative compensation cost previously recognized in
earnings. Any excess benefit will be recognized as an increase to additional paid-in capital.
Award Plan
Under the Award Plan, the Compensation Committee of our Board of Directors has the discretion to
grant awards for up to an aggregate maximum of 800,000 shares of common stock. The Award Plan
authorizes the Compensation Committee to grant to our officers and key and middle level executives
rights to acquire shares at a cash purchase price of $0.01 per share. The Award Plan contains
certain provisions that require it to be accounted for as a liability under Statement 123(R). In
fiscal year 2008, awards for 76,950 shares of our common stock were granted. These awards will
vest upon the filing of our Annual Report on Form 10-K for fiscal year 2009 based on the
achievement of performance criteria for the two-year period ended June 27, 2009. Awards provide
for accelerated vesting upon meeting specific retirement, death or disability criteria. At June
28, 2008, we had 158,012 shares available for grant under the Award Plan. Compensation expense
recorded under the Award Plan was $0.1 million, $0.9 million and $2.2 million in fiscal years 2008,
2007 and 2006, respectively. Compensation expense is allocated between our cost of sales and
selling, general and administrative expense line items of our statements of income as incurred.
A summary of the status of our nonvested awards as of June 28, 2008, and changes during the year
ended June 28, 2008, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
Nonvested at June 30, 2007 |
|
|
92,916 |
|
|
$ |
0.01 |
|
Granted |
|
|
76,950 |
|
|
$ |
0.01 |
|
Vested |
|
|
(92,916 |
) |
|
$ |
0.01 |
|
Forfeited |
|
|
(3,400 |
) |
|
$ |
0.01 |
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 28, 2008 |
|
|
73,550 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
As of June 28, 2008, there was $22,000 of total unrecognized compensation cost related to
non-vested awards under the Award Plan. This cost is expected to be recognized over a period of 60
weeks.
F- 18
NOTE 13BUSINESS SEGMENTS
We operate our business in two distinct segments: Activewear and Retail-Ready. 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 Activewear segment comprises our business units primarily focused on garment styles that are
characterized by low fashion risk. We market, distribute and manufacture 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. The unembellished and embellished private label apparel products, including custom
knit t-shirts to major branded sportswear companies, that our FunTees operations manufacture are
included in the Activewear segment since the FunTees Acquisition on October 2, 2006.
The Retail-Ready segment comprises our business units primarily focused on more specialized apparel
garments to meet consumer preferences and fashion trends. These embellished and unembellished
products are sold through specialty and boutique stores, high-end and mid-tier retail stores and
sporting goods stores. In addition to these retail channels, we also supply college bookstores and
produce products for the U.S. military. Junkfood is included in the Retail-Ready segment as of
August 22, 2005. Our products in this segment are marketed under the Soffe®, Intensity
Athletics®, Junkfood®, Junk Mail® and Sweet and Sour® labels.
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 (Loss)).
Our Segment Operating Income (Loss) 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 2. Intercompany transfers between operating segments are transacted at cost and
have been eliminated within the segment amounts shown in the following table (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Activewear |
|
Retail-Ready |
|
and |
|
|
|
|
Apparel |
|
Apparel |
|
Unallocated |
|
Consolidated |
Fiscal Year 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
179,394 |
|
|
$ |
142,640 |
|
|
$ |
|
|
|
$ |
322,034 |
|
Segment operating (loss) income |
|
|
(14,027 |
) |
|
|
18,914 |
|
|
|
|
|
|
|
4,887 |
|
Segment assets |
|
|
146,499 |
|
|
|
115,124 |
|
|
|
|
|
|
|
261,623 |
|
Purchases of property, plant and equipment |
|
|
14,148 |
|
|
|
2,442 |
|
|
|
|
|
|
|
16,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
178,249 |
|
|
$ |
134,189 |
|
|
$ |
|
|
|
$ |
312,438 |
|
Segment operating (loss) income |
|
|
(4,826 |
) |
|
|
17,082 |
|
|
|
43 |
|
|
|
12,299 |
|
Segment assets |
|
|
126,086 |
|
|
|
106,704 |
|
|
|
|
|
|
|
232,790 |
|
Purchases of property, plant and equipment |
|
|
8,422 |
|
|
|
2,493 |
|
|
|
|
|
|
|
10,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
136,666 |
|
|
$ |
133,442 |
|
|
$ |
|
|
|
$ |
270,108 |
|
Segment operating income |
|
|
7,556 |
|
|
|
19,111 |
|
|
|
346 |
|
|
|
27,013 |
|
Segment assets |
|
|
99,786 |
|
|
|
103,337 |
|
|
|
|
|
|
|
203,123 |
|
Purchases of property, plant and equipment |
|
|
3,711 |
|
|
|
1,670 |
|
|
|
|
|
|
|
5,381 |
|
F- 19
The following reconciles the Segment Operating Income to the consolidated (loss) income before
income taxes (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
July 1, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Segment operating income |
|
$ |
4,887 |
|
|
$ |
12,299 |
|
|
$ |
27,013 |
|
Unallocated interest expense |
|
|
6,042 |
|
|
|
5,157 |
|
|
|
3,819 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated (loss) income
before taxes |
|
$ |
(1,155 |
) |
|
$ |
7,142 |
|
|
$ |
23,194 |
|
|
|
|
|
|
|
|
|
|
|
Our long-lived assets in foreign locations consist of property, plant and equipment and we
attribute our long-lived assets to a particular country based on the location of our production
facilities. Summarized financial information by geographic area is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
|
|
|
Long Lived Assets: |
|
|
|
|
|
|
|
|
United States |
|
$ |
19,388 |
|
|
$ |
21,392 |
|
|
Honduras |
|
|
18,007 |
|
|
|
5,568 |
|
El Salvador |
|
|
978 |
|
|
|
1,212 |
|
Mexico |
|
|
1,632 |
|
|
|
1,235 |
|
Dominican Republic |
|
|
37 |
|
|
|
|
|
|
|
|
All Foreign Countries |
|
|
20,654 |
|
|
|
8,015 |
|
|
|
|
|
Total Long-lived Assets |
|
$ |
40,042 |
|
|
$ |
29,407 |
|
|
|
|
NOTE 14COMMITMENTS AND CONTINGENCIES
On May 17, 2006, adversary proceedings were filed in U.S. Bankruptcy Court for the Eastern District
of North Carolina against both Delta Apparel, Inc. and M. J. Soffe Co. in which the bankruptcy
trustee, on behalf of the debtor National Gas Distributors, LLC, alleges that Delta and Soffe each
received avoidable transfers of property from the debtor. The amount of the claim is
approximately $0.7 million plus interest against Delta, and approximately $0.2 million plus
interest against Soffe. We contend that the claims of the trustee have no merit, and have filed
counterclaims, totaling approximately $0.4 million, in the adversary proceedings. The adversary
proceedings has been stayed for the time being while an appeal is pending in the U.S. Court of
Appeals for the Fourth Circuit in a related adversary proceeding.
In addition, 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.
We have entered into agreements, and have fixed prices, to purchase yarn, finished fabric and
finished apparel products for use in our manufacturing operations. At June 28, 2008, minimum
payments under these contracts were as follows (in thousands):
|
|
|
|
|
Yarn |
|
|
13,477 |
|
Finished fabric |
|
|
1,802 |
|
Finished apparel products |
|
|
4,366 |
|
|
|
|
|
|
|
$ |
19,645 |
|
|
|
|
|
F- 20
As of June 28, 2008, we had outstanding standby letters of credit totaling $0.5 million and
outstanding commercial letters of credit totaling $0.4 million. |
NOTE 15RESTRUCTURING PLAN
On July 18, 2007, we announced plans to restructure our U.S. textile operations by closing our
manufacturing facility in Fayette, Alabama, as part of our overall restructuring of our textile
manufacturing operations. Related to this restructuring plan, in the fourth quarter of fiscal year
2007, we evaluated the ongoing value of our production building and associated machinery, equipment
and parts in Fayette. Based on this evaluation, we concluded that the long-lived assets at the
Fayette plant with a carrying value of $1.9 million were no longer recoverable and were impaired,
and therefore wrote them down to their estimated fair value of $0.4 million. Fair value was based
on expected future cash flows to be generated. This resulted in a $1.5 million write-down of the
assets which is reflected on the Statement of Operations line item Restructuring costs. These
assets are included in the Activewear segment. The restructuring plan also included fiscal year
2007 charges to cost of sales of $5.4 million related to expensing excess manufacturing costs
associated with the integration of the FunTees business into our existing Maiden, NC facility.
During fiscal year 2008 we incurred an additional $4.9 million in charges associated with the
restructuring plan. Of these charges, $4.8 million was associated with the start-up of Ceiba
Textiles with the remaining $0.1 million due to the closing of our Fayette facility. These charges
were recorded in our Activewear segment.
NOTE 16RELATED PARTY TRANSACTIONS
On October 3, 2003, 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 of Soffe. 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 $0.6
million per year.
NOTE 17QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Presented below is a summary of our unaudited consolidated quarterly financial information for the
fiscal years ended June 28, 2008 and June 30, 2007 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Quarter Ended |
|
2007 Quarter Ended |
|
|
September 29 (b) |
|
December 29 (c) |
|
March 29 (d) |
|
June 28 |
|
September 30 |
|
December 30 |
|
March 31 |
|
June 30 (a) |
Net sales |
|
$ |
72,562 |
|
|
$ |
68,780 |
|
|
$ |
75,364 |
|
|
$ |
105,328 |
|
|
$ |
62,680 |
|
|
$ |
72,949 |
|
|
$ |
85,013 |
|
|
$ |
91,796 |
|
Gross profit |
|
|
12,991 |
|
|
|
10,883 |
|
|
|
15,710 |
|
|
|
25,131 |
|
|
|
17,336 |
|
|
|
16,094 |
|
|
|
20,719 |
|
|
|
18,924 |
|
Operating
(loss) income |
|
|
(1,192 |
) |
|
|
(2,597 |
) |
|
|
1,074 |
|
|
|
7,602 |
|
|
|
3,489 |
|
|
|
2,521 |
|
|
|
5,230 |
|
|
|
1,059 |
|
(Loss) income
before
extraordinary gain |
|
|
(1,548 |
) |
|
|
(2,834 |
) |
|
|
(385 |
) |
|
|
4,259 |
|
|
|
1,575 |
|
|
|
633 |
|
|
|
2,778 |
|
|
|
685 |
|
Net (loss) income |
|
|
(1,548 |
) |
|
|
(2,834 |
) |
|
|
(385 |
) |
|
|
4,259 |
|
|
|
2,247 |
|
|
|
633 |
|
|
|
2,778 |
|
|
|
685 |
|
Basic EPS |
|
$ |
(0.18 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.50 |
|
|
$ |
0.26 |
|
|
$ |
0.07 |
|
|
$ |
0.33 |
|
|
$ |
0.08 |
|
Diluted EPS |
|
$ |
(0.18 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.50 |
|
|
$ |
0.26 |
|
|
$ |
0.07 |
|
|
$ |
0.32 |
|
|
$ |
0.08 |
|
|
|
|
(a) |
|
The quarter ended June 30, 2007 includes excess manufacturing costs and restructuring
costs of $5.4 million and $1.5 million in gross profit and operating income, respectively. |
|
(b) |
|
The quarter ended September 29, 2007 includes excess manufacturing costs and
restructuring costs of $2.0 million and $0.1 million in gross profit and operating income
(loss), respectively. |
|
(c) |
|
The quarter ended December 29, 2007 includes excess manufacturing costs of $2.0 million
in gross profit. |
|
(d) |
|
The quarter ended March 29, 2008 includes excess manufacturing costs of $0.8 million in
gross profit. |
NOTE 18EXTRAORDINARY GAIN
During the first quarter of fiscal year 2007, we recorded an extraordinary gain associated with the
final earnout payment made to the former M. J. Soffe shareholders. In the purchase accounting for
Soffe in October 2003, we recorded a liability
F- 21
for the contingent earnout payments. Based on the final outcome of the payments, we had a $1.1
million accrual remaining. The reversal of this accrual created an extraordinary gain, net of
taxes, of $0.7 million.
F- 22
SCHEDULE II CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
DELTA APPAREL, INC. AND SUBSIDIARIES
(In thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
Purchase |
|
|
|
|
|
|
|
|
|
Ending |
|
|
Balance |
|
Accounting * |
|
Expense |
|
Write-Offs |
|
Balance |
2008 |
|
$ |
341 |
|
|
$ |
|
|
|
$ |
1,348 |
|
|
$ |
(572 |
) |
|
$ |
1,117 |
|
2007 |
|
|
1,051 |
|
|
|
|
|
|
|
467 |
|
|
|
(1,177 |
) |
|
|
341 |
|
2006 |
|
|
1,290 |
|
|
|
|
|
|
|
(123 |
) |
|
|
(116 |
) |
|
|
1,051 |
|
RETURNS AND ALLOWANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
Purchase |
|
|
|
|
|
|
|
|
|
Ending |
|
|
Balance |
|
Accounting * |
|
Expense |
|
Credits Issued |
|
Balance |
2008 |
|
$ |
1,602 |
|
|
$ |
|
|
|
$ |
6,077 |
|
|
$ |
(5,984 |
) |
|
$ |
1,695 |
|
2007 |
|
|
1,118 |
|
|
|
300 |
|
|
|
9,894 |
|
|
|
(9,710 |
) |
|
|
1,602 |
|
2006 |
|
|
604 |
|
|
|
987 |
|
|
|
6,961 |
|
|
|
(7,434 |
) |
|
|
1,118 |
|
TOTAL RESERVES FOR ALLOWANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
Purchase |
|
|
|
|
|
Write-Offs/ |
|
Ending |
|
|
Balance |
|
Accounting * |
|
Expense |
|
Credits Issued |
|
Balance |
2008 |
|
$ |
1,943 |
|
|
$ |
|
|
|
$ |
7,425 |
|
|
$ |
(6,556 |
) |
|
$ |
2,812 |
|
2007 |
|
|
2,169 |
|
|
|
300 |
|
|
|
10,361 |
|
|
|
(10,887 |
) |
|
|
1,943 |
|
2006 |
|
|
1,894 |
|
|
|
987 |
|
|
|
6,838 |
|
|
|
(7,550 |
) |
|
|
2,169 |
|
MARKET AND OBSOLESCENCE RESERVE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
Purchase |
|
|
|
|
|
|
|
|
|
Ending |
|
|
Balance |
|
Accounting * |
|
Expense ** |
|
Deductions ** |
|
Balance |
2008 |
|
$ |
2,039 |
|
|
$ |
|
|
|
$ |
176 |
|
|
$ |
|
|
|
$ |
2,215 |
|
2007 |
|
|
1,614 |
|
|
|
|
|
|
|
425 |
|
|
|
|
|
|
|
2,039 |
|
2006 |
|
|
2,371 |
|
|
|
220 |
|
|
|
(977 |
) |
|
|
|
|
|
|
1,614 |
|
SELF INSURANCE RESERVE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
Purchase |
|
|
|
|
|
|
|
|
|
Ending |
|
|
Balance |
|
Accounting * |
|
Expense ** |
|
Deductions ** |
|
Balance |
2008 |
|
$ |
445 |
|
|
$ |
|
|
|
$ |
150 |
|
|
$ |
|
|
|
$ |
595 |
|
2007 |
|
|
478 |
|
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
445 |
|
2006 |
|
|
720 |
|
|
|
|
|
|
|
(242 |
) |
|
|
|
|
|
|
478 |
|
DEFERRED TAX ASSET VALUATION ALLOWANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
Purchase |
|
|
|
|
|
|
|
|
|
Ending |
|
|
Balance |
|
Accounting * |
|
Expense ** |
|
Deductions ** |
|
Balance |
2008 |
|
$ |
255 |
|
|
$ |
|
|
|
$ |
681 |
|
|
$ |
|
|
|
$ |
936 |
|
2007 |
|
|
146 |
|
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
255 |
|
2006 |
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146 |
|
|
|
|
* |
|
Represents the allowance provided for as a result of the acquisition of the assets of
FunTees, Inc. on October 2, 2006 and the acquisition of the assets of Junkfood Clothing
Company on August 22, 2005. |
|
** |
|
Net change in the market and obsolescence and self insurance reserves are shown in the expense
column. |