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SUPERIOR GROUP OF COMPANIES, INC. - Quarter Report: 2004 March (Form 10-Q)

Form 10-Q

FORM lO-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 March 31, 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   I.R.S. 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 May 3, 2004 the registrant had 7,441,587 common shares outstanding, which is the registrant’s only

class of common stock.

 


 

Page 1


PART I—FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS

(Unaudited)

 

          Three Months Ended March 31,

 
          2004

    2003

 

Net sales

        $ 32,975,388     $ 30,954,947  
         


 


Costs and expenses:

                     

Cost of goods sold

          21,302,101       20,015,455  

Selling and administrative expenses

          9,764,758       9,802,665  

Interest expense

          158,061       170,641  
         


 


            31,224,920       29,988,761  
         


 


Earnings before taxes on income

          1,750,468       966,186  

Taxes on income

          620,000       340,000  
         


 


Net earnings

        $ 1,130,468     $ 626,186  
         


 


Weighted average number of shares out- standing during the period

   (Basic)      7,394,795  Shs.     7,150,767  Shs.
     (Diluted)      7,588,541  Shs.     7,257,680  Shs.

Basic net earnings per common share

        $ 0.15     $ 0.09  
         


 


Diluted net earnings per common share

        $ 0.15     $ 0.09  
         


 


Dividends per common share

        $ 0.135     $ 0.135  
         


 


 

The results of the three months ended March 31, 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 2


SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

     March 31, 2004
(Unaudited)


   December 31,
2003 (1)


CURRENT ASSETS:

             

Cash and cash equivalents

   $ 11,869,778    $ 14,915,079

Accounts receivable and other current assets

     28,047,092      26,575,352

Inventories*

     37,410,289      36,380,470
    

  

TOTAL CURRENT ASSETS

     77,327,159      77,870,901

PROPERTY, PLANT AND EQUIPMENT, net

     19,156,550      18,289,436

GOODWILL AND OTHER INTANGIBLE ASSETS

     3,298,494      741,929

OTHER ASSETS

     6,078,078      6,071,667
    

  

     $ 105,860,281    $ 102,973,933
    

  

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:

             

Accounts payable

   $ 6,509,079    $ 5,400,401

Other current liabilities

     6,508,273      5,078,982

Current portion of long-term debt

     1,200,365      1,179,021
    

  

TOTAL CURRENT LIABILITIES

     14,217,717      11,658,404

LONG-TERM DEBT

     5,956,839      6,266,047

DEFERRED INCOME TAXES

     100,000      165,000

SHAREHOLDERS’ EQUITY

     85,585,725      84,884,482
    

  

     $ 105,860,281    $ 102,973,933
    

  

* Inventories consist of the following:

             
     March 31, 2004
(Unaudited)


   December 31,
2003


Finished goods

   $ 32,359,284    $ 30,826,116

Work in process

     316,855      386,517

Raw materials

     4,734,150      5,167,837
    

  

     $ 37,410,289    $ 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 3


SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED SUMMARY OF CASH FLOWS

(Unaudited)

 

     Three Months Ended March 31,

 
     2004

    2003

 

CASH FLOWS FROM OPERATING ACTIVITIES

                

Net earnings

   $ 1,130,468     $ 626,186  

Adjustments to reconcile net earnings to net cash provided by operating activities:

                

Depreciation and amortization

     801,523       916,552  

Provision for bad debts

     29,000       45,000  

Deferred income tax benefit

     (65,000 )     (170,000 )

Changes in assets and liabilities, net of acquisition:

                

Accounts receivable and other current assets

     725,617       1,308,987  

Inventories

     1,040,798       137,797  

Accounts payable

     411,063       (999,157 )

Other current liabilities

     1,424,291       642,663  
    


 


Net cash flows provided from operating activities

     5,497,760       2,508,028  
    


 


CASH FLOWS FROM INVESTING ACTIVITIES

                

Additions to property, plant and equipment

     (1,726,299 )     (242,433 )

Disposals of property, plant and equipment

     165,694       82,631  

Purchase of business, net of cash acquired

     (6,275,699 )     —    

Other assets

     5,332       (205,608 )
    


 


Net cash used in investing activities

     (7,830,972 )     (365,410 )
    


 


CASH FLOWS FROM FINANCING ACTIVITIES

                

Repayment of long-term debt

     (287,864 )     (268,945 )

Payment of cash dividends

     (998,712 )     (966,480 )

Proceeds received on exercised stock options

     574,487       367,184  

Common stock reacquired and retired

     —         (365,750 )
    


 


Net cash used in financing activities

     (712,089 )     (1,233,991 )
    


 


Net (decrease) increase in cash and cash equivalents

     (3,045,301 )     908,627  

Cash and cash equivalents balance, beginning of year

     14,915,079       7,470,719  
    


 


Cash and cash equivalents balance, end of period

   $ 11,869,778     $ 8,379,346  
    


 


 

See accompanying notes to condensed consolidated interim financial statements.

 

Page 4


SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 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 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 has been reviewed by Deloitte & Touche 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.

 

     Three Months Ended March 31,

     2004

   2003

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

             

Net earnings

   $ 1,130,468    $ 626,186
    

  

Weighted average shares outstanding

     7,394,795      7,150,767

Common stock equivalents

     193,746      106,913
    

  

Total weighted average shares outstanding

     7,588,541      7,257,680
    

  

Earnings per common share:

             

Basic net earnings

   $ 0.15    $ 0.09
    

  

Diluted net earnings

   $ 0.15    $ 0.09
    

  

 

Page 5


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 March 31,

     2004

    2003

Net earnings

   $ 1,130,468     $ 626,186

Other comprehensive income (loss):

              

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

     (5,000 )     31,000
    


 

Comprehensive income

   $ 1,125,468     $ 657,186
    


 

 

h) Operating Segments

 

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 $7,157,204 is designated as a hedged item for interest rate swaps at March 31, 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 loss of $ 5,000 and a gain of $31,000 was included in other comprehensive income for the three months ended March 31, 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 Statement of Financial Accounting Standards No. 148 (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. 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 SFAS 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.

 

Page 6


     Three Months Ended March 31,

     2004

   2003

Net earnings, as reported

   $ 1,130,468    $ 626,186

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

     401,521      260,234
    

  

Pro forma net earnings

   $ 728,947    $ 365,952
    

  

Net earnings per common share:

             

Basic – as reported

   $ 0.15    $ 0.09
    

  

Basic – pro forma

   $ 0.10    $ 0.05
    

  

Diluted – as reported

   $ 0.15    $ 0.09
    

  

Diluted – pro forma

   $ 0.10    $ 0.05
    

  

 

k) Reclassifications

 

Certain reclassifications to the 2003 financial information have been made to conform to the 2004 presentation.

 

NOTE 2 – Acquisitions

 

On March 1, 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 $6,296,000 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

Goodwill and Other Intangible Assets

     2,556,565
    

TOTAL ASSETS

   $ 6,993,745
    

Accounts Payable and Accrued Expenses

   $ 697,615
    

 

The Company is in the process of completing its valuation of the intangible assets acquired in the acquisition. Once this valuation is completed, the Company will allocate the intangible value between goodwill and other intangible assets that may require periodic amortization charges. No amortization was taken for any of these intangibles in the first quarter of 2004.

 

NOTE 3 – Recent Accounting Pronouncements:

 

On January 17, 2003, the Financial Accounting Standards Board (“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.

 

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

 

Page 7


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:

 

In June 2001, the FASB issued FAS No. 141, “Business Combinations,” which eliminates the pooling method of accounting for all business combinations initiated after June 30, 2001 and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. The Company has adopted this accounting standard.

 

Effective January 1, 2002, the Company adopted 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.

 

In accordance with FAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” the Company has historically evaluated goodwill for impairment by comparing the entity level balance of goodwill to projected undiscounted cash flows, which did not result in an indicated impairment. FAS No. 142 requires that goodwill be tested for impairment at the reporting unit level upon adoption and at least annually thereafter or more frequently, if indicators of impairment arise, utilizing a two-step methodology. The initial step requires the Company to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. The Company determined the fair value of each reporting unit by using a combination of present value and multiple of earnings valuation techniques and compared it to the reporting units’ carrying values. If the fair value exceeds the carrying value, no impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of this unit may be impaired. The amount, if any, of the impairment would then be measured in the second step.

 

NOTE 5 – Long-Term Debt:

 

     March 31,
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

     7,157,204      7,445,068
    

  

       7,157,204      7,445,068

Less payments due within one year included in current liabilities

     1,200,365      1,179,021
    

  

     $ 5,956,839    $ 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 (1.7% at March 31, 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 March 31, 2004, approximately $1,003,000 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 April 26, 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 ($71,108,000 at March 31, 2004); working capital ratio

 

Page 8


(2.5:1), fixed charges coverage ratio (2.5:1), stock repurchases and payment of dividends. At March 31, 2004, under the most restrictive terms of the debt agreements, retained earnings of approximately $11,833,000 were available for declaration of dividends. The Company is in full compliance with all terms, conditions and covenants of the various credit agreements.

 

NOTE 6 – Periodic Pension Expense

 

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

ended March 31,:

 

     2004

    2003

 

Service cost—benefits earned during the period

   $ 168,000     $ 175,000  

Interest cost on projected benefit obligation

     258,000       274,000  

Expected return on plan assets

     (312,000 )     (250,000 )

Amortization of prior service cost

     43,000       44,000  

Recognized actuarial loss

     8,000       53,000  
    


 


Net periodic pension cost

   $ 165,000     $ 296,000  
    


 


 

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 9


INDEPENDENT ACCOUNTANTS’ REPORT

 

Board of Directors

Superior Uniform Group, Inc.

Seminole, Florida

 

We have reviewed the accompanying condensed consolidated balance sheet of Superior Uniform Group, Inc. and subsidiary (the “Company”) as of March 31, 2004 and the related condensed consolidated summaries of operations and cash flows for the three-month periods ended March 31, 2004 and 2003. 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 to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, 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 such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Superior Uniform Group, Inc. and subsidiary as of December 31, 2003, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 27, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ Deloitte & Touche LLP

 

Certified Public Accountants

Tampa, Florida

April 21, 2004

 

Page 10


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 consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 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 accounted for on a first-in, first-out basis and 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 $30,954,947 for the three months ended March 31, 2003 to $32,975,388 for the three months ended March 31, 2004. The increase is attributed to a general improvement in the economy and increased business from several new contracts that were entered into during the latter part of 2003. Slightly less than half of the increase was attributed to the acquisition of UniVogue March 1, 2004.

 

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Cost of goods sold, as a percentage of sales, approximated 64.6% and 64.7%, respectively, for the three months ended March 31, 2004 and 2003.

 

Selling and administrative expenses, as a percentage of sales approximated 29.6% for the first three months of 2004 as compared to 31.7% for the first three months of 2003. The decrease as a percentage of sales is primarily attributed to the increase in sales volume and the reductions in selling and administrative expenses in the current quarter as a result of prior year cost reduction activities.

 

Interest expense of $158,061 for the three-month period ended March 31, 2004 decreased 7.4% from $170,641 for the similar period ended March 31, 2003. This decrease is attributed to lower outstanding borrowings in the current period.

 

Net earnings increased 80.5% to $1,130,468 for the three months ended March 31, 2004 as compared to net earnings of $626,186 for the same period ended March 31, 2003.

 

Liquidity and Capital Resources

 

Accounts receivable and other current assets increased 5.5% from $26,575,352 on December 31, 2003 to $28,047,092 as of March 31, 2004 due primarily to the acquisition of UniVogue and the increase in sales.

 

Inventories as of March 31, 2004 increased 2.8% to $37,410,289 from $36,380,470 on December 31, 2003 due primarily to the acquisition of UniVogue offset by continued improvement in our inventory management.

 

Goodwill and Other Intangible Assets increased from $741,929 at December 31, 2003 to $3,298,494 as a result of the acquisition of UniVogue as of February 28, 2004. The Company is in the process of completing its valuation of the intangible assets acquired in the acquisition. Once this valuation is completed, the Company will allocate the intangible value between goodwill and other intangible assets that may require periodic amortization charges. No amortization was taken for any of these intangibles in the first quarter of 2004.

 

Accounts payable increased 20.5% from $5,400,401 on December 31, 2003 to $6,509,079 on March 31, 2004 due primarily to the acquisition of UniVogue and the timing of inventory purchases within the two periods.

 

Cash and cash equivalents decreased by $3,045,301 from $14,915,079 on December 31, 2003 to $11,869,778 as of March 31, 2004. This decrease is attributed to $5,498,000 provided from operating activities offset by $7,831,000 utilized in investing activities and $712,000 utilized in financing activities. The $7,831,000 utilized in investing activities consists primarily of $6,276,000 utilized in the acquisition of UniVogue and $1,726,000 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 $287,864 from $7,445,068 on December 31, 2003 to $7,157,204 on March 31, 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.

 

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 three months ended March 31, 2004 and 2003, respectively, the Company paid cash dividends of $998,712 and $966,480. During the three months ended March 31, 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 the current year quarter. 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.

 

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 change in the Company’s interest expense for the quarter ended March 31, 2004.

 

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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 $7,157,204 is designated as a hedged item for interest rate swaps at March 31, 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 loss of $ 5,000 and a gain of $31,000 was included in other comprehensive income for the three months ended March 31, 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) Evaluation of Disclosure Controls and Procedures. 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 Quarterly Report on Form 10-Q (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.

 

(b) Changes to Internal Controls and Procedures for Financial Reporting. There were no significant changes to Superior’s internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date.

 

PART II—OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

None.

 

ITEM 2. Changes in Securities

 

None.

 

ITEM 3. Defaults Upon Senior Securities

 

Inapplicable.

 

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

 

None.

 

ITEM 5. Other Information

 

Inapplicable.

 

ITEM 6. Exhibits and Reports on Form 8-K

 

  a) Exhibits

 

    15   Letter from Deloitte & Touche LLP 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.

 

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  b) Reports on Form 8-K

 

  On February 25, 2004, the Company filed a report on Form 8-K containing a press release announcing its earnings for the fourth quarter and year-end operating results for the year ended December 31, 2003.

 

  On March 1, 2004, the Company filed a report on Form 8-K containing a press release announcing the acquisition of UniVogue of Dallas, Texas.

 

  On April 22, 2004, the Company filed a report on Form 8-K containing a press release announcing its earnings for the quarter ended March 31, 2004.

 

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: May 7, 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)
         

 

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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.