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FORM 10-Q

 


 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarter ended June 30, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 1-5869-1

 


 

SUPERIOR UNIFORM GROUP, INC.

 


 

Incorporated - Florida  

Employer Identification No.

11-1385670

 

10055 Seminole Boulevard

Seminole, Florida 33772-2539

Telephone No.: 727-397-9611

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No   x

 

As of July 23, 2004, the Registrant had 7,462,837 shares of common stock outstanding, which is Registrant’s only class of common stock.

 



PART I - FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS

(Unaudited)

 

     Three Months Ended June 30,

     2004

   2003

Net sales

   $ 34,470,407    $ 34,187,586
    

  

Costs and expenses:

             

Cost of goods sold

     22,389,285      22,036,004

Selling and administrative expenses

     9,987,212      9,987,399

Interest expense

     156,577      181,118
    

  

       32,533,074      32,204,521
    

  

Earnings before taxes on income

     1,937,333      1,983,065

Taxes on income

     660,000      700,000
    

  

Net earnings

   $ 1,277,333    $ 1,283,065
    

  

Weighted average number of shares outstanding during the period

             

(Basic)

     7,442,372 Shs.      7,138,115 Shs.

(Diluted)

     7,634,435 Shs.      7,230,412 Shs.

Basic net earnings per common share

   $ 0.17    $ 0.18
    

  

Diluted net earnings per common share

   $ 0.17    $ 0.18
    

  

Dividends per common share

   $ 0.135    $ 0.135
    

  

 

See accompanying notes to condensed consolidated interim financial statements.

 

Page 2


SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS

(Continued)

(Unaudited)

 

     Six Months Ended June 30,

     2004

   2003

Net sales

   $ 67,445,795    $ 65,142,533
    

  

Costs and expenses:

             

Cost of goods sold

     43,691,386      42,051,459

Selling and administrative expenses

     19,751,970      19,790,064

Interest expense

     314,638      351,759
    

  

       63,757,994      62,193,282
    

  

Earnings before taxes on income

     3,687,801      2,949,251

Taxes on income

     1,280,000      1,040,000
    

  

Net earnings

   $ 2,407,801    $ 1,909,251
    

  

Weighted average number of shares outstanding during the period

             

(Basic)

     7,418,583 Shs.      7,144,441 Shs.

(Diluted)

     7,611,488 Shs.      7,244,046 Shs.

Basic net earnings per common share

   $ 0.32    $ 0.27
    

  

Diluted net earnings per common share

   $ 0.32    $ 0.26
    

  

Dividends per common share

   $ 0.27    $ 0.27
    

  

 

The results of the six months ended June 30, 2004 are not necessarily indicative of results to be expected for

the full year ending December 31, 2004.

 

See accompanying notes to condensed consolidated interim financial statements.

 

Page 3


SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    

June 30,

2004
(Unaudited)


   December 31,
2003 (1)


ASSETS

             

CURRENT ASSETS:

             

Cash and cash equivalents

   $ 8,353,750    $ 14,915,079

Accounts receivable and other current assets

     28,785,231      26,575,352

Inventories*

     37,958,123      36,380,470
    

  

TOTAL CURRENT ASSETS

     75,097,104      77,870,901

PROPERTY, PLANT AND EQUIPMENT, NET

     19,944,151      18,289,436

GOODWILL

     741,929      741,929

OTHER INTANGIBLE ASSETS, NET

     2,475,536      —  

OTHER ASSETS

     6,200,333      6,071,667
    

  

     $ 104,459,053    $ 102,973,933
    

  

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

CURRENT LIABILITIES:

             

Accounts payable

   $ 5,909,730    $ 5,400,401

Other current liabilities

     4,897,857      5,078,982

Current portion of long-term debt

     1,221,216      1,179,021
    

  

TOTAL CURRENT LIABILITIES

     12,028,803      11,658,404

LONG-TERM DEBT

     5,644,464      6,266,047

DEFERRED INCOME TAXES

     300,000      165,000

SHAREHOLDERS’ EQUITY

     86,485,786      84,884,482
    

  

     $ 104,459,053    $ 102,973,933
    

  


* Inventories consist of the following:

 

    

June 30,

2004
(Unaudited)


   December 31,
2003(1)


Finished goods

   $ 31,769,781    $ 30,826,116

Work in process

     647,569      386,517

Raw materials

     5,540,773      5,167,837
    

  

     $ 37,958,123    $ 36,380,470
    

  


(1) The balance sheet as of December 31, 2003 has been derived from the audited balance sheet as of that date and has been condensed.

 

See accompanying notes to condensed consolidated interim financial statements.

 

Page 4


 

SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED SUMMARY OF CASH FLOWS

(Unaudited)

 

     Six Months Ended June 30,

 
     2004

    2003

 
     (Unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES

                

Net earnings

   $ 2,407,801     $ 1,909,251  

Adjustments to reconcile net earnings to net cash flows provided from operating activities:

                

Depreciation and amortization

     1,700,907       1,785,327  

Provision for bad debts

     6,000       90,000  

Deferred income tax provision (benefit)

     135,000       (140,000 )

Changes in assets and liabilities, net of acquisition:

                

Accounts receivable and other current assets

     10,478       489,460  

Inventories

     492,964       2,210,520  

Accounts payable

     (188,286 )     (394,817 )

Other current liabilities

     63,875       (182,334 )
    


 


Net cash flows provided from operating activities

     4,628,739       5,767,407  
    


 


CASH FLOWS FROM INVESTING ACTIVITIES

                

Additions to property, plant and equipment

     (3,328,348 )     (1,009,078 )

Disposals of property, plant and equipment

     170,008       122,715  

Purchase of business, net of cash acquired

     (6,283,920 )     —    

Other assets

     (116,923 )     (218,996 )
    


 


Net cash used in investing activities

     (9,559,183 )     (1,105,359 )
    


 


CASH FLOWS FROM FINANCING ACTIVITIES

                

Repayment of long-term debt

     (579,388 )     (542,660 )

Payment of cash dividends

     (2,003,380 )     (1,930,098 )

Proceeds received on exercised stock options

     951,883       374,451  

Common stock reacquired and retired

     —         (365,750 )
    


 


Net cash used in financing activities

     (1,630,885 )     (2,464,057 )
    


 


Net (decrease) increase in cash and cash equivalents

     (6,561,329 )     2,197,991  

Cash and cash equivalents balance, beginning of year

     14,915,079       7,470,719  
    


 


Cash and cash equivalents balance, end of period

   $ 8,353,750     $ 9,668,710  
    


 


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

                

Interest paid

   $ 327,241     $ 352,768  
    


 


Income taxes paid

   $ 1,996,371     $ 1,798,742  
    


 


 

See accompanying notes to condensed consolidated interim financial statements.

 

Page 5


SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

 

(Unaudited)

 

NOTE 1 – Summary of Significant Interim Accounting Policies:

 

a) Basis of presentation

 

The condensed consolidated interim financial statements include the accounts of Superior Uniform Group, Inc. and its wholly-owned subsidiary, Fashion Seal Corporation. Intercompany items have been eliminated in consolidation. The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, and filed with the Securities and Exchange Commission. The interim financial information contained herein is not certified or audited; it reflects all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of the operating results for the periods presented, stated on a basis consistent with that of the audited financial statements. The unaudited financial information included in this report as of and for the three and six months ended June 30, 2004 has been reviewed by Grant Thornton LLP, independent certified public accountants, and their review report thereon accompanies this filing; such review was made in accordance with established professional standards and procedures for such a review. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.

 

b) Recognition of costs and expenses

 

Costs and expenses other than product costs are charged to income in interim periods as incurred, or allocated among interim periods based on an estimate of time expired, benefit received or activity associated with the periods. Procedures adopted for assigning specific cost and expense items to an interim period are consistent with the basis followed by the registrant in reporting results of operations at annual reporting dates. However, when a specific cost or expense item charged to expense for annual reporting purposes benefits more than one interim period, the cost or expense item is allocated to the interim periods.

 

c) Inventories

 

Inventories at interim dates are determined by using both perpetual records on a first-in, first-out basis and gross profit calculations.

 

d) Accounting for income taxes

 

The provision for income taxes is calculated by using the effective tax rate anticipated for the full year.

 

e) Earnings per share

 

Historical basic per share data is based on the weighted average number of shares outstanding. Historical diluted per share data is reconciled by adding to weighted average shares outstanding the dilutive impact of the exercise of outstanding stock options.

 

Page 6


    

Three Months Ended

June 30,


  

Six Months Ended

June 30,


     2004

   2003

   2004

   2003

Earnings used in the computation of basic and diluted earnings per share:

                           

Net earnings

   $ 1,277,333    $ 1,283,065    $ 2,407,801    $ 1,909,251
    

  

  

  

Weighted average shares outstanding

     7,442,372      7,138,115      7,418,583      7,144,441

Common stock equivalents

     192,063      92,297      192,905      99,605
    

  

  

  

Total weighted average shares outstanding

     7,634,435      7,230,412      7,611,488      7,244,046
    

  

  

  

Basic net earnings

   $ 0.17    $ 0.18    $ 0.32    $ 0.27
    

  

  

  

Diluted net earnings

   $ 0.17    $ 0.18    $ 0.32    $ 0.26
    

  

  

  

 

f) Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

g) Comprehensive Income

 

Total comprehensive income represents the change in equity during a period, from sources other than transactions with shareholders and, as such, includes net earnings. For the Company, the only other component of total comprehensive income is the change in the fair value of derivatives accounted for as cash flow hedges.

 

    

Three Months Ended

June 30,


   

Six Months Ended

June 30,


 
     2004

   2003

    2004

   2003

 

Net earnings

   $ 1,277,333    $ 1,283,065     $ 2,407,801    $ 1,909,251  

Other comprehensive income (loss):

                              

Net unrealized gain (loss) during the period related to cash flow hedges

     250,000      (48,000 )     245,000      (17,000 )
    

  


 

  


Comprehensive income:

   $ 1,527,333    $ 1,235,065     $ 2,652,801    $ 1,892,251  
    

  


 

  


 

h) Operating Segments

 

Statement of Financial Accounting Standards (FAS) No. 131 “Disclosures about Segments of an Enterprise and Related Information” requires disclosures of certain information about operating segments and about products and services, geographic areas in which the Company operates, and their major customers. The Company has evaluated the effect of this standard and has determined that currently it operates in one segment, as defined in this statement.

 

i) Derivative Financial Instruments

 

The Company has only limited involvement with derivative financial instruments. The Company has one interest rate swap agreement to hedge against the potential impact on earnings from increases in market interest rates of a variable rate term loan. Under the interest rate swap agreement, the Company receives or makes payments on a monthly basis, based on the differential between a specified interest rate and one month LIBOR. A term loan of $6,865,680 is designated as a hedged item for interest rate swaps at June 30, 2004.

 

This interest rate swap is accounted for as a cash flow hedge in accordance with FAS 133 and FAS 138. As of the report date, all swaps met effectiveness tests, and as such no gains or losses were included in net income during the quarter related to hedge ineffectiveness and there was no income adjustment related to any portion excluded from the assessment of hedge effectiveness. A gain (loss) of $250,000 and ($48,000) was included in other comprehensive income (loss) for the three months ended June 30, 2004 and 2003, respectively. A gain (loss) of $245,000 and ($17,000) was included in other comprehensive income (loss) for the six months ended June 30, 2004 and 2003, respectively. The original term of the contract is ten years.

 

j) Stock-based Compensation:

 

In December 2002, the Financial Accounting Standards Board (FASB) issued FAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.” This Statement amends FAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results

 

Page 7


The Company continues to apply Accounting Principles Board Opinion No. 25 for the method used to account for stock-based employee compensation arrangements, where applicable, but has adopted the disclosure requirements of FAS No. 148 beginning with its first quarter ending March 31, 2003. The Company estimated the fair value of options utilizing the Black-Scholes option pricing model.

 

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

 

    

Three Months Ended

June 30,


  

Six Months Ended

June 30,


     2004

   2003

   2004

   2003

Net earnings, as reported

   $ 1,277,333    $ 1,283,065    $ 2,407,801    $ 1,909,251

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

     49,253      86,504      450,774      346,738
    

  

  

  

Pro forma net earnings

   $ 1,228,080    $ 1,196,561    $ 1,957,027    $ 1,562,513
    

  

  

  

Net earnings per common share:

                           

Basic – as reported

   $ 0.17    $ 0.18    $ 0.32    $ 0.27
    

  

  

  

Basic – pro forma

   $ 0.17    $ 0.17    $ 0.26    $ 0.22
    

  

  

  

Diluted – as reported

   $ 0.17    $ 0.18    $ 0.32    $ 0.26
    

  

  

  

Diluted – pro forma

   $ 0.16    $ 0.17    $ 0.26    $ 0.22
    

  

  

  

 

NOTE 2 – Acquisitions

 

On February 27, 2004, the Company acquired substantially all of the net assets of UniVogue, Inc. (“UniVogue”), a supplier of uniforms with a strong national presence, particularly in the hospitality, lodging, food service and culinary markets, with revenues for the year ended December 2003 of approximately $9,300,000. The acquisition has been accounted for utilizing the purchase method of accounting. The purchase price for this acquisition, subject to adjustment, was approximately $6,304,000 and was allocated as follows:

 

Cash

   $ 20,431

Accounts Receivable

     1,965,646

Other Current Assets

     260,711

Inventories

     2,070,617

Property, Plant & Equipment

     108,032

Other Assets

     11,743

Other Intangible Assets

     2,564,786
    

TOTAL ASSETS

   $ 7,001,966
    

Accounts Payable and Accrued Expenses

   $ 697,836
    

 

NOTE 3 – Recent Accounting Pronouncements:

 

On January 17, 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN No. 46”). FIN No. 46 addresses consolidation of entities that are not controlled through voting interests or in which the equity investors do not bear the residual economic risks and rewards. These entities have been commonly referred to as special purpose entities. FIN No. 46 provides guidance related to identifying variable interest entities and determining whether such entities should be consolidated. It also provides guidance related to the initial and subsequent measurement of assets, liabilities and non-controlling interests in newly consolidated variable interest entities and requires disclosures for both the primary beneficiary of a variable interest entity and other beneficiaries of the entity. To date, the Company has not created any variable interest entities.

 

Page 8


In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. FAS No. 149 is generally effective for derivative instruments, including derivative instruments embedded in certain contracts, entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of FAS No. 149 has not had a material impact on the Company’s financial position and results of operations.

 

In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. FAS No. 150 establishes standards for how to classify and measure certain financial instruments with characteristics of both liabilities and equity. FAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of FAS No. 150 has not had a material impact on the Company’s financial position and results of operations.

 

NOTE 4 – Goodwill and Other Intangible Assets:

 

The Company follows FAS No. 142, “Goodwill and Other Intangible Assets,” which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the statement of financial position, and no longer be amortized but tested for impairment on a periodic basis.

 

Other intangible assets were recorded in the quarter ended June 30, 2004 as the Company completed its initial valuation of the UniVogue acquisition. Other intangible assets include the value assigned to the customer list acquired in this acquisition of $2,564,786 less accumulated amortization of $89,250. The customer list is being amortized over 7 years.

 

NOTE 5 - Long-Term Debt:

 

    

June 30,

2004


   December 31,
2003


Note payable to Wachovia, pursuant to revolving credit agreement, maturing April 26, 2007

   $ —      $ —  

6.75% term loan payable to Wachovia, with monthly payments of principal and interest, maturing April 1, 2009

     6,865,680      7,445,068
    

  

       6,865,680      7,445,068

Less payments due within one year included in current liabilities

     1,221,216      1,179,021
    

  

Long-term debt less current maturities

   $ 5,644,464    $ 6,266,047
    

  

 

On March 26, 1999, the Company entered into a 3-year credit agreement with Wachovia Bank that made available to the Company up to $15,000,000 on a revolving credit basis. Interest is payable at LIBOR plus 0.60% based upon the one-month LIBOR rate for U.S. dollar based borrowings (2.0% at June 30, 2004). The Company pays an annual commitment fee of 0.15% on the average unused portion of the commitment. The available balance under the credit agreement is reduced by outstanding letters of credit. As of June 30, 2004, approximately $962,000 was outstanding under letters of credit. On March 27, 2001 and again on April 27, 2004, the Company entered into agreements with Wachovia Bank to extend the maturity of the revolving credit agreement. The revolving credit agreement matures on June 30, 2007. At the option of the Company, any outstanding balance on the agreement at that date will convert to a one-year term loan. The remaining terms of the original revolving credit agreement remain unchanged. The Company also entered into a $12,000,000 10-year term loan on March 26, 1999 with the same bank. The term loan is an amortizing loan, with monthly payments of principal and interest, maturing on April 1, 2009. The term loan carries a variable interest rate of LIBOR plus 0.80% based upon the one-month LIBOR rate for U.S. dollar based borrowings. Concurrent with the execution of the term loan agreement, the Company entered into an interest rate swap with the bank under which the Company receives a variable rate of interest on a notional amount equal to the outstanding balance of the term loan from the bank and the Company pays a fixed rate of 6.75% on a notional amount equal to the outstanding balance of the term loan to the bank.

 

The credit agreement and the term loans with Wachovia contain restrictive provisions concerning debt to net worth ratios, other borrowings, capital expenditures, rental commitments, tangible net worth ($76,204,000 at June 30, 2004); working capital ratio (2.5:1), fixed charges coverage ratio (2.5:1), stock repurchases and payment of dividends. At June 30, 2004, under the most restrictive terms of the debt agreements, retained earnings of approximately $7,467,000 were available for declaration of dividends. The Company is in full compliance with all terms, conditions and covenants of the various credit agreements.

 

Page 9


NOTE 6 – Periodic Pension Expense

 

The following table presents the net periodic pension expense under our plans for the following periods:

 

    

Three Months Ended

June 30,


   

Six Months Ended

June 30,


 
     2004

    2003

    2004

    2003

 

Service cost - benefits earned during the period

   $ 168,000     $ 174,000     $ 336,000     $ 349,000  

Interest cost on projected benefit obligation

     259,000       274,000       517,000       548,000  

Expected return on plan assets

     (312,000 )     (251,000 )     (624,000 )     (501,000 )

Amortization of prior service cost

     43,000       42,000       86,000       86,000  

Recognized actuarial loss

     8,000       51,000       16,000       104,000  
    


 


 


 


Net periodic pension cost

   $ 166,000     $ 290,000     $ 331,000     $ 586,000  
    


 


 


 


 

NOTE 7 – Contingencies:

 

The Company is involved in various legal actions and claims arising from the normal course of business. In the opinion of management, the ultimate outcome of these matters will not have a material impact on the Company’s results of operations, cash flows, or financial position.

 

Page 10


Report of Independent Registered Public Accounting Firm

 

Board of Directors and Shareholders

Superior Uniform Group, Inc.

 

We have reviewed the accompanying condensed consolidated balance sheet of Superior Uniform Group, Inc. and subsidiary (“the Company”) as of June 30, 2004, the related condensed consolidated summary of operations for the three-month and six-month periods ended June 30, 2004, and the condensed consolidated summary of cash flows for the six-month period ended June 30, 2004. These financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

 

The condensed consolidated balance sheet as of December 31, 2003, the related condensed consolidated summary of operations for the three-month and six-month periods ended June 30, 2003, and the condensed consolidated summary of cash flows for the six-month period ended June 30, 2003, were reviewed by other accountants whose reports dated April 21,2004 and July 23, 2003, respectively, stated that they were not aware of any material modifications that should be made to those statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

 

GRANT THORNTON LLP

 

Tampa, Florida

July 20, 2004

 

Page 11


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

 

Certain matters discussed in this Form 10-Q are “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate”, “expect” or words of similar import. Similarly, statements that describe our future plans, objectives, strategies or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that may materially adversely affect the anticipated results. Such risks and uncertainties include, but are not limited, to the following: general economic conditions in the areas of the United States in which the Company’s customers are located; changes in the healthcare, resort and commercial industries where uniforms and service apparel are worn; the impact of competition; the availability of manufacturing materials, and other factors described in the Company’s filings with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

 

Critical Accounting Policies

 

Our significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for the preparation of interim financial statements. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate the estimates that we have made. These estimates are based upon our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

 

Revenue Recognition and Allowance for Doubtful Accounts

 

The Company recognizes revenue in the period in which the product is shipped. Judgments and estimates are used in determining the collectability of accounts receivable. The Company analyzes specific accounts receivable and historical bad debt experience, customer credit worthiness, current economic trends and the age of outstanding balances when evaluating the adequacy of the allowance for doubtful accounts. Management judgments and estimates are used in connection with establishing the allowance in any accounting period. Changes in estimates are reflected in the period they become known. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Material differences may result in the amount and timing of bad debt expense recognition for any given period if management makes different judgments or utilizes different estimates.

 

Inventories

 

Inventories are stated at the lower of cost or market value. Judgments and estimates are used in determining the likelihood that new goods on hand can be sold to customers. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

 

Insurance

 

The Company self-insures for certain obligations related to health and workers’ compensation programs. The Company also purchases stop-loss insurance policies to protect it from catastrophic losses. Judgments and estimates are used in determining the potential value associated with reported claims and for losses that have occurred, but have not been reported. The Company’s estimates consider historical claim experience and other factors. The Company’s liabilities are based on estimates, and, while the Company believes that the accrual for loss is adequate, the ultimate liability may be in excess of or less than the amounts recorded. Changes in claim experience, the Company’s ability to settle claims or other estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.

 

Results of Operations

 

Net sales increased from $34,187,586 for the three months ended June 30, 2003 to $34,470,407 for the three months ended June 30, 2004. Net sales increased from $65,142,533 for the six months ended June 30, 2003 to $67,445,795 for the six months ended June 30, 2004. The increase in the three and six-month totals is attributed primarily to the acquisition of UniVogue effective February 27, 2004.

 

Page 12


Cost of goods sold, as a percentage of net sales, approximated 65.0% for the three months ended June 30, 2004 compared to 64.5% for the three months ended June 30, 2003. Cost of goods sold, as a percentage of net sales, approximated 64.8% for the six months ended June 30, 2004 compared to 64.6% for the six months ended June 30, 2003. The increases in the three and six month periods are attributed to increased pricing pressures experienced in the current periods, partially offset by the continued transition of production to offshore sources.

 

Selling and administrative expenses, as a percentage of net sales, were approximately 29.0% and 29.2%, respectively, for the three months ended June 30, 2004 and 2003. Selling and administrative expenses, as a percentage of net sales, were approximately 29.3% and 30.4%, respectively, for the first six months of 2004 and 2003. The decrease as a percentage of net sales is primarily attributed to the increase in sales volume and the reductions in selling and administrative expenses in the current periods as a result of prior year cost reduction activities.

 

Interest expense of $314,638 for the six-month period ended June 30, 2004 decreased 10.6% from $351,759 for the similar period ended June 30, 2003 due to lower average outstanding borrowings in the current period.

 

Net earnings decreased 0.4% to $1,277,333 for the three months ended June 30, 2004 as compared to $1,283,065 for the same period ended June 30, 2003. Net earnings for the six months ended June 30, 2004 were $2,407,801 as compared to $1,909,251 for the same period in 2003. This increase was primarily due to increased sales volume in the current period.

 

Liquidity and Capital Resources

 

Cash and cash equivalents decreased by $6,561,329 from $14,915,079 on December 31, 2003 to $8,353,750 as of June 30, 2004. This decrease is attributed to $4,629,000 provided from operating activities offset by $9,559,000 utilized in investing activities and $1,631,000 utilized in financing activities. The $9,559,000 utilized in investing activities consists primarily of $6,284,000 utilized in the acquisition of UniVogue and $3,328,000 utilized for additions to fixed assets with the majority of these funds expended on the upgrade of the Company’s central warehouse distribution system in Eudora, Arkansas. Total borrowings under long-term debt agreements decreased by $579,388 from $7,445,068 on December 31, 2003 to $6,865,680 on June 30, 2004 as a result of scheduled repayments of outstanding borrowings. The Company has operated without hindrance or restraint with its present working capital, as income generated from operations and outside sources of credit, both trade and institutional, have been more than adequate. At March 31, 2004, our principal sources of liquidity consisted of cash and available borrowings under our revolving credit facility and term loan with Wachovia.

 

Accounts receivable and other current assets increased 8.3% from $26,575,352 on December 31, 2003 to $28,785,231 as of June 30, 2004 primarily due to the acquisition of UniVogue in the first quarter of 2004.

 

Inventories increased 4.3% from $36,380,470 on December 31, 2003 to $37,958,123 as of June 30, 2004 levels primarily due to the acquisition of UniVogue in the first quarter of 2004 which was partially offset by the Company’s continued focus on reducing inventory levels.

 

Other intangible assets increased from $0 as of December 31, 2003 to $2,475,536 at June 30, 2004 as a result of the acquisition of UniVogue. The Company completed its valuation of the intangible assets associated with this acquisition in the second quarter of 2004. The entire balance of $2,564,786 was assigned to the customer list of the acquired company. This amount is being amortized over a seven-year period. $89,250 of amortization expense was recognized in the second quarter of 2004. There was no amortization expense associated with intangible assets in 2003.

 

Accounts payable increased 9.4% from $5,400,401 on December 31, 2003 to $5,909,730 on June 30, 2004 primarily due to the acquisition of UniVogue in the first quarter of 2004.

 

In the foreseeable future, the Company will continue its ongoing capital expenditure program designed to maintain and improve its facilities. The Company at all times evaluates its capital expenditure program in light of prevailing economic conditions.

 

During the six months ended June 30, 2004 and 2003, respectively, the Company paid cash dividends of $2,003,380 and $1,930,098. During the six months ended June 30, 2003, the Company reacquired and retired 35,000 shares of the Company’s Common Stock for $365,750. The Company did not reacquire any shares of its Common Stock in 2004. The Company anticipates that it will continue to pay dividends and that it will reacquire and retire additional shares of its common stock in the future as financial conditions permit.

 

The Company believes that its cash flow from operating activities together with other capital resources and funds from credit sources will be adequate to meet all of its funding requirements for the remainder of the year and for the foreseeable future.

 

Page 13


ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company is exposed to market risk from changes in interest rates, which may adversely affect its results of operations and financial condition. The Company seeks to minimize the risks from these interest rates when considered appropriate, through the limited use of derivative financial instruments. The Company’s policy is to not use financial instruments for trading or other speculative purposes and is not a party to any leveraged financial instruments. The Company has debt obligations with variable interest rates tied to LIBOR which are described in “Liquidity and Capital Resources” as well as Note 1 of the Notes to Consolidated Financial Statements. The Company estimates that a hypothetical increase in interest rates of 1% would have resulted in no material change in the Company’s interest expense for the six-month period ended June 30, 2004.

 

The Company has one interest rate swap agreement to hedge against the potential impact on earnings from increases in market interest rates of a variable rate term loan. Under the interest rate swap agreement, the Company receives or makes payments on a monthly basis, based on the differential between a specified interest rate and one month LIBOR. A term loan of $6,865,680 is designated as a hedged item for interest rate swaps at June 30, 2004. This interest rate swap is accounted for as a cash flow hedge in accordance with FAS 133 and FAS 138. As of the report date, all swaps met effectiveness tests, and as such no gains or losses were included in net income during the quarter related to hedge ineffectiveness and there was no income adjustment related to any portion excluded from the assessment of hedge effectiveness. A gain (loss) of $250,000 and ($48,000) was included in other comprehensive income (loss) for the three months ended June 30, 2004 and 2003, respectively. A gain (loss) of $245,000 and ($17,000) was included in other comprehensive income (loss) for the six months ended June 30, 2004 and 2003, respectively. The original term of the contract is ten years.

 

The Company is also exposed to changes in prevailing market interest rates affecting the return on its investments but does not consider this interest rate market risk exposure to be material to its financial condition or results of operations. The Company invests primarily in highly liquid debt instruments with strong credit ratings and short-term (less than three months) maturities.

 

ITEM 4. Controls and Procedures

 

(a). The Chief Executive Officer, Michael Benstock, and the Chief Financial Officer, Andrew D. Demott, Jr., evaluated the effectiveness of Superior’s disclosure controls and procedures as of the end of the period covered by this report (the “Evaluation Date”), and concluded that, as of the Evaluation Date, Superior’s disclosure controls and procedures were effective to ensure that information Superior is required to disclose in its filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and to ensure that information required to be disclosed by Superior in the reports that it files under the Exchange Act is accumulated and communicated to Superior’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

PART II - OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

None.

 

ITEM 2. Changes in Securities

 

None.

 

ITEM 3. Defaults Upon Senior Securities

 

Inapplicable.

 

Page 14


ITEM 4. Submission of Matters to a Vote of Security-Holders

 

The Annual Meeting of Shareholders was held on May 7, 2004. Of the 7,409,287 shares outstanding and entitled to vote at the meeting, 7,026,843 shares were present at the meeting, in person or by proxy. At the meeting the shareholders:

 

a) Voted for the nomination of all proposed Directors being, Messrs. G. M. Benstock, A. D. Schwartz, M. Benstock, P. Benstock, M. Gaetan, PhD, S. Kirschner, R. Hensley, P. Mellini and A. Wiener. The votes on all directors nominated were as follows:

 

Nominee


   Votes For:

   Votes Withheld:

Gerald M. Benstock

   7,012,708    14,135

Michael Benstock

   7,013,176    13,667

Alan D. Schwartz

   7,013,609    13,234

Peter Benstock

   6,550,276    476,567

Manuel Gaetan

   6,550,676    476,167

Sidney Kirschner

   6,548,126    478,717

Robin Hensley

   6,550,476    476,367

Paul Mellini

   7,009,979    16,864

Arthur Wiener

   7,006,702    20,141

 

The tabulation of votes for the election of directors resulted in no broker non-votes or abstentions.

 

b) Ratified the appointment of Deloitte & Touche LLP, independent certified public accountants, as auditors for the Company’s financial statements for the year ending December 31, 2004 with 6,983,701 votes for the motion, 22,288 votes against and 20,854 votes abstaining.

 

ITEM 5. Other Information

 

Inapplicable.

 

ITEM 6. Exhibits and Reports on Form 8-K

 

a)

 

Exhibit No.

 

Description


15   Letter re: Unaudited Interim Financial Information.
31.1  

Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2  

Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32  

Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

  b) Reports on Form 8-K –

 

  On April 23, 2004, the Company filed a report on Form 8-K containing a press release announcing its earnings for the first quarter of 2004.

 

  On June 14, 2004, the Company filed a report on Form 8-K announcing a change in Registrant’s Certifying Accountant.

 

Page 15


SIGNATURES

 

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

 

Date: July 30, 2004

 

SUPERIOR UNIFORM GROUP, INC.

    By  

/s/ Michael Benstock


       

Michael Benstock

       

Chief Executive Officer

    By  

/s/ Andrew D.Demott, Jr.


       

Andrew D. Demott, Jr.

       

Sr. Vice President, Chief Financial Officer

       

and Treasurer (Principal Accounting Officer)

 

Page 16


EXHIBIT INDEX

 

Exhibit No.

 

Description


15   Letter re: Unaudited Interim Financial Information.
31.1  

Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2  

Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32  

Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.