SUPERIOR GROUP OF COMPANIES, INC. - Annual Report: 2002 (Form 10-K)

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2002

o            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.

10055 Seminole Blvd.
Seminole, Florida 33772

Telephone (727) 397-9611

Securities registered pursuant to Section 12 (b) of the Act:

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Yes o    No x

As of March 3, 2003, 7,159,137 common shares were outstanding, and the aggregate market value of the registrant’s common shares held by non-affiliates was approximately $54 million (based on the closing sale price of the registrant’s common shares on the American Stock Exchange on the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2002). Shares of common stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.

Documents Incorporated by Reference:

Portions of the Registrant’s Proxy Statement to be filed on or before March 30, 2003, for its Annual Meeting of Shareholders to be held May 2, 2003, are incorporated by reference to furnish the information required by Items 10, 11, 12 and 13 of Part III.

Exhibit index may be found on Page 31.

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PART I

Special Note Regarding Forward-Looking Statements

References in this report to “the Company”, “Superior”, “we”, “our”, or “us” mean Superior Uniform Group, Inc. together with its subsidiary, except where the context otherwise requires. Certain matters discussed in this Form 10-K 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; and the availability of manufacturing materials. 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-K and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

Item 1.            Business

(a)       Superior Uniform Group, Inc. was organized in 1920 and was incorporated in 1922 as a New York company under the name Superior Surgical Mfg. Co., Inc. In 1998, the Company changed its name to Superior Uniform Group, Inc. and its state of incorporation to Florida. Registrant’s business has not changed in any significant way during the past five years.

(b)       Although Superior operates for selling, promotional and other reasons through various divisions, nevertheless there are no significant distinct segments or lines of business; approximately 95% of registrant’s business consists of the sale of uniforms and service apparel, and miscellaneous products directly related thereto.

(c)       Superior manufactures and sells a wide range of apparel and accessories for the medical and health fields as well as for the industrial, commercial, leisure, and public safety markets. Its principal products are:

1.        Uniforms and service apparel for personnel of:

A)       Hospitals and health facilities;

B)       Hotels, commercial buildings, residential buildings, and food service facilities;

C)       General and special purpose industrial uses;

D)       Commercial enterprises (career apparel for banks, airlines, etc.);

E)       Public and private safety and security organizations;

F)        Miscellaneous service uses.

2.        Miscellaneous products directly related to:

A)       Uniforms and service apparel specified above (e.g. operating room masks, boots, and sheets);

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B)       Linen suppliers and industrial launderers, to whom a substantial portion of the registrant’s uniforms and service apparel are sold; such products being primarily industrial laundry bags.

3.        Corporate and resort embroidered sportswear.

(d)       Uniforms and service apparel account for 90-95% of total sales and revenues; no other single class of product listed above accounts for more than 10% of total sales and revenues.

Superior competes with national and regional manufacturers and also with local firms in most major metropolitan areas. Industry statistics are not available, but we believe that Superior is one of the leading suppliers of garments to hospitals and industrial clean rooms, hotels and motels, food service establishments and uniforms to linen suppliers. Superior experiences competition primarily in the areas of product development, styling and pricing.

Superior competes with more than three dozen firms including divisions of larger corporations. The nature and degree of competition varies with the customer and market where it occurs.

Superior has a substantial number of customers, the largest of which accounted for no more than 5% of its 2002 sales. Although Superior at all times has a substantial backlog of orders, we do not consider this significant since our backlog of orders at any time consists primarily of recurrent firm orders being processed and filled. Superior normally completes shipments of orders from stock between 1 and 2 weeks after their receipt. As of March 1, 2003, the backlog of all orders that we believe to be firm was approximately $4,132,000, compared to approximately $5,727,000 a year earlier.

Superior markets itself to its customers as a “stock house”. Therefore, Superior at all times carries substantial inventories of raw materials (principally piece goods) and finished garments which requires substantial working capital. Superior’s principal raw materials are textile products, generally available from a number of sources.

While Superior owns and uses several trademarks, its mark “Fashion Seal Uniforms” (presently registered until August 7, 2007, subject to renewal) is important since more than 50% of Superior’s products are sold under that name. In view of the nature of our business, compliance with federal, state, or local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has had no material effect upon our operations or earnings and we do not expect it to have a material impact in the future. Substantially all of our business is non-seasonal in nature. Superior employed approximately 1,042 persons as of December 31, 2002.

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Item 2.            Properties

The Company has an ongoing program designed to maintain and improve its facilities. Generally, all properties are in satisfactory condition. The Company’s properties are currently fully utilized (except as otherwise noted), and have aggregate productive capacity to meet the Company’s present needs as well as those of the foreseeable future. The material manufacturing locales are rented for nominal amounts due to cities providing incentives for manufacturers to locate in their area - all such properties may be purchased for nominal amounts. As a result, it is believed that the subject lease expirations and renewal terms thereof are not material.

(a)       Seminole, Florida - Plant of approximately 60,000 square feet owned by the registrant; used as principal administrative office and for warehousing and shipping, as well as the corporate design center.

(b)      Eudora, Arkansas - Plant of approximately 217,000 square feet, partially leased from the City of Eudora under lease requiring payment of only a nominal rental; used for manufacturing, warehousing, and shipping.

(c)       Lake Village, Arkansas - Plant of approximately 35,000 square feet, leased from the City of Lake Village under lease requiring payment of only a nominal amount; used for storage.

(d)      Tampa, Florida - Plant of approximately 111,000 square feet, owned by the registrant; used for regional administrative offices, warehousing, shipping and small retail operation.

(e)       Miami, Florida - Plant of approximately 5,000 square feet, leased from private owners under a lease expiring in 2005; used for regional sales office, warehousing, shipping, and small retail operation.                                          

(f)       McGehee, Arkansas - Plant of approximately 26,000 square feet, leased from the City of McGehee under lease requiring payment of only a nominal rental; used for manufacturing.

(g)      Marietta, Georgia - Plant and warehouse of approximately 33,000 square feet leased from private owners.

(h)      Portland, Oregon – Plant and warehouse of approximately 35,800 square feet leased from private owners.

(i)       Miscellaneous - Atlanta, Georgia, warehouse and sales office - leased; San Antonio, Texas, sales office - leased; Lexington, Mississippi, used for manufacturing – owned.

Item 3.            Legal Proceedings

None.

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

(a)                 None

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PART II

Item 5.            Market Price of and Dividends on Superior’s Common Equity and Related Stockholder Matters.

The principal market on which Superior’s common shares are traded is the American Stock Exchange; said shares have also been admitted to unlisted trading on the Midwest Stock Exchange.

The table below presents, for our common shares, dividend information and high and low sales prices as reported in the consolidated transaction reporting system of the American Stock Exchange.

Our long-term debt agreements include covenants that, among other things, restrict dividends payable by us. Under the most restrictive debt agreement, retained earnings of approximately $12,589,000 were available at December 31, 2002 for declaration of dividends. We have declared cash dividends of $.135 per share in each of the quarters for the fiscal years ending December 31, 2001 and 2002. We expect that, so long as earnings and business conditions warrant, we will continue to pay dividends and that the amount thereof, as such conditions permit, and as the Directors approve, will increase from time to time.

On March 3, 2003, registrant had 299 shareholders of record and the closing price for registrant’s common shares on the American Stock Exchange was $11.00 per share.

The information required by this Item relating to Securities Authorized For Issuance Under Equity Compensation Plans is incorporated herein by reference to the Company’s definitive proxy statement to be filed in connection with its 2003 Annual Meeting of Shareholders.

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Item 6.            Selected Financial Data

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Item 7.            Management’ s Discussion and Analysis of Financial Condition and Results of Operations

OPERATIONS: In 2002 net sales decreased 5.4% in comparison to 2001 and in 2001 net sales decreased 8.6% in comparison to 2000. These decreases were attributed to the continued economic slowdown as our customers postponed or cancelled orders in an effort to reduce the impact of the slowdown on their own operations.

As a percentage of sales, cost of goods sold were 65.7% in 2002, and in 2001, and 65.5% in 2000. The increase in 2001 was attributed to the reduction in production levels and accordingly less efficient absorption of overhead costs offset by the continued transition of production to offshore contractors.

As a percentage of sales, selling and administrative expenses were 28.0% in 2002, 26.6% in 2001 and 26.2% in 2000. The increase in this percentage in 2002 is attributed to the following factors; the overall decline in sales volume more than offset the impact of staff reductions on selling administrative expenses; selling and administrative expenses for 2002 included bad debt expense of approximately $1,165,000 versus $584,000 in the prior year due primarily to the write off of one large account in 2002; during 2002, the Company incurred approximately $360,000 in costs associated with the review of a potential acquisition that we are no longer pursuing; finally, the 2001 selling and administrative expenses were reduced by a gain of $1,683,000 recorded as a result of the settlement of vendor matters. The increase in this percentage in 2001 versus 2000 was primarily attributed to the reduction in sales volume that more than offset the reductions in selling and administrative expenses during the period. Selling and administrative expenses in 2001 were reduced by the impact of the settlement gain from the vendor matters discussed above and significant staff reductions instituted in the latter half of the year. Additionally, the 2000 selling and administrative expenses were reduced by the impact of a settlement gain relative to the Company’s pension plan of approximately $1,286,000.

Interest expense as a percentage of sales was 0.6% in 2002, 1.1% in 2001, and 1.3% in 2000. The decrease in 2002 is due to lower average borrowings outstanding and lower interest rates.

The effective income tax rate in 2002 was 36.2%; in 2001 was 36.6%; and in 2000 it was 36.5%.

In 2002, the Company reported earnings before extraordinary item and cumulative effect of change in accounting principle of 3.6% of sales with a return of 6.5% on average shareholders’ equity. In 2001, the Company reported earnings before extraordinary item and cumulative effect of change in accounting principle of 4.2% of sales with a return of 7.9% on average shareholders’ equity. In 2000, the Company reported earnings before extraordinary item and cumulative effect of change in accounting principle of 4.4% of sales with a return of 9.0% on average shareholders’ equity.

Extraordinary item – loss on early extinguishment of debt in the amount of $187,039, net of a tax benefit of $105,000 was recognized in 2002. This loss related to the prepayment of the Company’s outstanding loan with MassMutual of approximately $6.2 million. This prepayment is expected to result in annualized interest savings of approximately $400,000 per year.

Cumulative effect of change in accounting principle charge in the amount of $4,504,563, net of tax benefit of $2,560,000 was recognized in 2002 as a result of the Company’s adoption of FAS No. 142. The Company completed its transitional impairment testing of goodwill and determined that its goodwill for certain reporting units was impaired.

In 2002, the Company reported net income of 0.4% of sales with a return of 0.7% on average shareholders’ equity.

In 2001, the Company reported net income of 4.2% of sales with a return of 7.9% on average shareholders’ equity. In 2000, the Company reported net income of 4.4% of sales with a return of 9.0% on average shareholders’ equity.

LIQUIDITY AND CAPITAL RESOURCES: The Company uses a number of standards for its own purposes in measuring its liquidity, such as: working capital, profitability ratios, long-term debt as a percentage of long-term debt and equity, and activity ratios. In its computations, as in this report, all inventory figures are on a FIFO basis.

The working capital of the Company in 2002 was approximately $61,689,000 and the working capital ratio, 6.1:1; for 2001, it was approximately $65,118,000 and the working capital ratio, 5.5:1. The Company has operated without hindrance or restraint with its present working capital, believing that income generated from operations and outside sources of credit, both trade and institutional, are more than adequate to fund the Company’s operations.

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Management’ s Discussion and Analysis of Financial Condition and Results of Operations (con’t)

In 2002, the Company’s percentage of total debt to total debt and equity was 9.6% and in 2001 it was 16.4%. The decrease is attributed primarily to decreased borrowings under the Company’s borrowing agreements as a result of the reduced working capital requirements in 2002.

The Company has an on-going capital expenditure program designed to maintain and improve its facilities. Capital expenditures were approximately $2,820,000, $1,349,000, and $2,826,000, in the years 2002, 2001, and 2000, respectively. The Company at all times evaluates its capital expenditure programs in light of prevailing economic conditions.

During the years ended December 31, 2002 and 2001, the Company paid cash dividends of approximately $3,818,000 and $3,835,000, respectively, on a quarterly dividend of $0.135 per share. The Company reacquired and retired 16,000 and 94,440 of its common shares in the years ended December 31, 2002 and 2001, respectively, with costs of $178,000 and $883,000, respectively. The Company anticipates that it will repurchase additional shares of its common stock in the future as financial conditions allow.

In 2002, cash and cash equivalents increased by $4,256,000. This increase is attributed to approximately $18,816,000 in cash provided from operations, offset by approximately $3,855,000 utilized in investing activities and approximately $10,706,000 utilized in financing activities.

In 2001, cash and cash equivalents increased by $3,026,000. This increase is attributed to approximately $24,324,000 in cash provided from operations, approximately $895,000 provided from investing activities, and approximately $22,193,000 utilized in financing activities.

On March 26, 1999, the Company entered into a new 3-year credit agreement with Wachovia Bank (f/k/a First Union National 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 (1.98% at December 31, 2002). 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 December 31, 2002, approximately $580,000 was outstanding under letters of credit. On March 27, 2001, the Company entered into an agreement with Wachovia to extend the maturity of the revolving credit agreement. The revolving credit agreement matures on March 26, 2004. 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.

On October 16, 2000, the Company entered into a 5-year term loan with Wachovia. The term loan is an amortizing loan, with monthly payments of principal in the amount of $83,333 plus interest, maturing on November 1, 2005. The term loan carried a variable interest rate of LIBOR plus 0.80% based upon the one-month LIBOR rate for U.S. dollar based borrowings. The proceeds of this term loan were utilized to reduce the outstanding balance on the Company’s revolving credit agreement. Concurrent with the execution of the new term loan agreement, Wachovia and the Company amended the March 26, 1999 term loan and the revolving credit agreement to revise the net worth requirements. The net worth requirements included below reflect this amendment. This term loan was paid in full in June 2001.

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 ($67,684,000 at December 31, 2002); working capital ratio (2.5:1), fixed charges coverage ratio (2.5:1), stock repurchases and payment of dividends.

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Management’ s Discussion and Analysis of Financial Condition and Results of Operations (con’t)

At December 31, 2002, under the most restrictive terms of the debt agreements, retained earnings of approximately $12,589,000 were available for declaration of dividends. The Company is in full compliance with all terms, conditions and covenants of the various credit agreements. The Company prepaid the balance of its 6.65% note payable to MassMutual, including a prepayment penalty of approximately $285,000, on March 18, 2002 utilizing cash balances on hand as of December 31, 2001 and additional cash generated from operations in the first quarter of 2002. With funds from the credit agreement, anticipated cash flows generated from operations and other credit sources readily available, the Company believes that its liquidity is satisfactory, its working capital adequate and its capital resources sufficient for funding its ongoing capital expenditure program and its operations, including planned expansion for 2003.

The following table summarizes our fixed cash obligations as of December 31, 2002 for the fiscal years ending December 31:

The Company does not engage in any off-balance sheet financing arrangements. In particular, we do not have any interest in so-called limited purpose entities, which include special purpose entities and structured finance entities.

RECENT ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standard (“FAS”) No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The purpose of this statement is to develop consistent accounting of asset retirement obligations and related costs in financial statements and provide more information about future cash outflows, leverage and liquidity regarding retirement obligations and the gross investment in long-lived assets. FAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company has not evaluated the effect, if any, that the adoption of FAS No. 143 will have on the Company’s consolidated financial statements. In October 2001, the FASB issued FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. FAS No. 144 replaces FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, the accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30, Reporting Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, for the disposal of segments of a business. FAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less costs to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. FAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. FAS No. 144 did not have a material effect on the Company’s consolidated financial statements. In April 2002, the FASB issued FAS No. 145, “Rescission of FAS No. 4, ‘Reporting Gains and Losses from Extinguishment of Debt,’ Rescission of FAS No. 44, ‘Accounting for Intangible Assets of Motor Carriers,’ Rescission of FAS No. 64, ‘Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements,’ Amendment of FAS No. 13, ‘Accounting for Leases,’ and Technical Corrections”. FAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. We do not expect FAS No. 145 to have a material effect on the Company’s financial statements. In June 2002, the FASB issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. FAS No. 146 addresses the financial accounting and reporting for the costs associated with exist or disposal activities. FAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect FAS No. 146 to have a material effect on the Company’s consolidated financial statements.

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Management’ s Discussion and Analysis of Financial Condition and Results of Operations (con’t)

Item 7a – Quantitative and Qualitative Disclosures About Market Risks

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 5 of the Notes to Consolidated Financial Statements. The Company estimates that a hypothetical increase in interest rates of 1% would have resulted in an insignificant increase in the Company’s interest expense for the year ended December 31, 2002.

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 $8,549,148 is designated as a hedged item for interest rate swaps at December 31, 2002. This interest rate swap is accounted for as a cash flow hedge in accordance with FAS No. 133 and FAS No. 138 which were implemented as of the beginning of 2001. As of the report date, the swap met the effectiveness test, 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. Losses of $464,000 and $440,000 (including the transition adjustment of $48,000) were included in other comprehensive income (loss) for the years ended December 31, 2002 and 2001, 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.

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Item 8. – Financial Statements and Supplementary Data

Superior Uniform Group, Inc. and Subsidiary

Consolidated Statements of Earnings
Years Ended December 31,

See Notes to Consolidated Financial Statements.

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Superior Uniform Group, Inc. and Subsidiary

Consolidated Balance Sheets
December 31,

See Notes to Consolidated Financial Statements.

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Superior Uniform Group, Inc. and Subsidiary

Consolidated Statements of Shareholders’ Equity
Years Ended December 31,

See Notes to Consolidated Financial Statements.

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Superior Uniform Group, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,