UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,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, 20062007
| ¨ | 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.
(Exact Name of Registrant as Specified in Its Charter)
Incorporation or Organization) | (I.R.S. Employer Identification No.) |
10055 Seminole Blvd.
Seminole, Florida 33772
(Address of Principal Executive Offices, including Zip Code)
Registrant’s telephone number, including area code: (727) 397-9611
Securities registered pursuant to Section 12(b) of the Act:
| Name of Each Exchange on Which Registered | |
| Common Shares, | Listed on American Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: N/A
Indicate by check mark if the registrant is a well-known, seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.
Yes ¨No x
Indicate by check mark whether the Registrant: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 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. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definition of “accelerated filer” and “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨Accelerated filer x Non-accelerated filer ¨ Smaller Reporting Company x
Indicate by check mark whether the Companyregistrant is a shell company (as defined in Rule 12b-2d of the Exchange Act).
Yes ¨No x
At June 30, 2006,2007, the aggregate market value of the registrant’s common shares held by non-affiliates, computed by reference to the last sales price ($13.10)12.23) as reported by the American Stock Exchange, was approximately $62$57 million.
The number of shares outstanding as of March 2, 2007February 26, 2008 was 6,637,9096,670,650 shares.
Documents Incorporated by Reference:
Portions of the Registrant’s Definitive Proxy Statement to be filed with the Commission not later than 120 days after the conclusion of the Registrant’s fiscal year ended December 31, 2006,2007, relating to its Annual Meeting of Shareholders to be held May 4, 2007,2, 2008, are incorporated by reference to furnish the information required by Items 10, 11, 12, 13 and 14 of Part III and portions of the information required by Item 5 of Part II.
Exhibit index may be found on Page 44.
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; our ability to successfully integrate operations following consummation of acquisitionsacquisitions; the availability of manufacturing materials and those risks discussed under Item 1A of this report entitled “Risk Factors.” 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 |
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.
Superior, through its Signature marketing brands – Fashion Seal®, Fashion Seal Healthcare™, Martin’s®, Worklon®, Universal®, Sope Creek® and UniVogue™ – manufactures and sells a wide range of uniforms, career apparel and accessories for the hospital and healthcare fields; hotels; fast food and other restaurants; and public safety, industrial, and commercial markets, as well as resort embroidered sportswear.markets. There are no significant distinct segments or lines of business. ApproximatelyIn excess of 95% of its business consists of the sale of uniforms and service apparel, and miscellaneous products directly related thereto.
Products
Superior manufactures and sells a wide range of uniforms, corporate I.D., career 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:
Uniforms and service apparel for personnel of:
Hospitals and health facilities;
Hotels, commercial buildings, residential buildings, and food service facilities;
General and special purpose industrial uses;
Commercial enterprises (career apparel for banks, airlines, etc.);
Public and private safety and security organizations; and
Miscellaneous service uses.
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Miscellaneous products directly related to:
Uniforms and service apparel specified above (e.g. operating room masks, boots and sheets); and
Linen suppliers and industrial launderers, to whom a substantial portion of Superior’s uniforms and service apparel are sold; such products being primarily industrial laundry bags.
Resort embroidered sportswear.
Uniforms and service apparel account for in excess of 95% of net sales; no other single class of product listed above accounts for more than 10% of net sales.
Competition
Superior competes with more than three dozen firms, including divisions of larger corporations. Superior competes with national and regional manufacturers which include publicly held companies such as ARAMARK (a division of ARAMARK Corporation), Cintas Corporation, Unifirst Corporation and G&K Services.Services, as well as ARAMARK – a division of privately-held ARAMARK Corporation. Superior also competes with local firms in most major metropolitan areas. The nature and degree of competition varies with the customer and market where it occurs. 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. We believe that the strength of our brands and marketing, coupled with the quality of our products, allow us to compete effectively.
Customers
Superior has a substantial number of customers, the largest of which accounted for approximately 6% of its 20062007 net sales.
Backlog
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 recurring firm orders being processed and filled.
Superior normally completes shipments of orders from stock betweenwithin one and two weeksweek after their receipt. As of March 10, 2007,February 23, 2008, the backlog of all orders that we believe to be firm was approximately $6.4$6.5 million, compared to approximately $6.7$6.4 million in the previous year.as of February 24, 2007.
Inventory
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. In 2007 and 2006, 2005,approximately 62% and 2004, approximately 75%, 73%, and 70%, respectively, of our products were obtained from suppliers located in Central America. Superior does not believe that it is dependent upon any of its suppliers, despite the concentration of its purchasing from a few sources, as other suppliers of the same or similar products are readily available. However, if Superior is unable to continue to obtain its products from Central America, it could significantly disrupt Superior’s business.
Intellectual Property
While Superior owns and uses several trademarks [and service marks] relating to its brands that have significant value and are instrumental to our ability to market our products. Superior’s most significant trademark is its mark “Fashion Seal Uniforms” (presently registered with the United States Patent and Trademark Office until August 8, 2007)2017). The Fashion Seal Uniforms trademark is critically important sinceto the marketing and operation of Superior’s business, as more than 50% of Superior’s products are sold under that name. We have filed the required application to renew this Registration. We expect to receive the renewal before the expiration date. When the renewal is received, the “Fashion Seal Uniforms” mark will be registered through August 8, 2017.
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Environmental Matters
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.
Employees
Superior employed 696623 persons as of December 31, 2006.2007.
Securities Exchange Act Reports
The Company maintains an internet website at the following address: www.superioruniformgroup.com. The information on the Company’s website is not incorporated by reference in this annual report on Form 10-K.
We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the Securities and Exchange Commission (the “SEC”) in accordance with the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and Section 16 filings. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC.
| Item 1A. | Risk Factors |
Our business, operations and financial condition are subject to various risks, and many of those risks are driven by factors that we cannot control or predict. The following discussion addresses those risks that management believes are the most significant, and you should take these risks into account in evaluating us or any investment decision involving us. Additional risks and uncertainties not presently known or that we currently believe to be less significant may also adversely affect us.
Risks Relating To Our Industry
We face intense competition within our industry and our revenue may decrease if we are not able to respond to this competition accordingly.
Customers in the uniform and corporate identity apparel industry choose suppliers primarily based upon the quality, price and breadth of products offered. We encounter competition from a number of companies in the geographic areas we serve. Major competitors include publicly held companies such as ARAMARK (a division of ARAMARK Corporation), Cintas Corporation, Unifirst Corporation and G&K Services.Services, as well as ARAMARK – a division of privately-held ARAMARK Corporation. We also compete with a multitude of regional and local competitors that vary by market. If our existing or future competitors seek to gain or retain market share by reducing prices, we may be required to lower our prices, which would adversely affect our operating results.In addition, our competitors generally compete with us for acquisition candidates, which can increase the price for acquisitions and reduce the number of acquisition candidates available to us.
Regional or national economic slowdowns and high unemployment levels will likely have an adverse effect on our revenues and operating results.
National or regional economic slowdowns or certain industry specific slowdowns resulting in higher unemployment levels and overall weak economic conditions generally result in reductions of customers’ employees in uniform that, in turn, adversely affect our revenues. If we are unable to offset this effect through the addition of new customers (through acquisition or otherwise) or the penetration of existing customers with a broader mix of product and service offerings, our revenue growth rates will be negatively impacted. Events or conditions in a particular geographic area, such as adverse weather and other factors, could also hurt operating results. While we do not believe that our exposure is greater than that of our competitors, we could be adversely affected by increases in the prices of fabric, natural gas, gasoline, wages, employee benefits, insurance costs and other components of product cost unless we can recover such increases through increases in the prices for our products and services. Competitive and general economic conditions might limit our ability and that of our competitors to increase prices to cover such increases.
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The uniform and corporate identity apparel industry is subject to pricing pressures that may cause us to lower the prices we charge for our products and adversely affect our financial performance.
Prices in the uniform and corporate identity apparel industry have been declining over the past several years primarily as a result of the trend to move sewing operations offshore, the introduction of new manufacturing technologies, and increased competition. Products sewn offshore generally cost less to manufacture than those made domestically primarily because labor costs are lower offshore. Many of our competitors source their product requirements from developing countries to achieve a lower cost operating environment, possibly in environments with lower costs than our offshore facilities, and those manufacturers may use these cost savings to reduce prices. To remain competitive, we must adjust our prices from time to time in response to these industry-wide pricing pressures. Moreover, increased customer demands for allowances, incentives and other forms of economic support reduce our gross margins and affect our profitability. Our financial performance may be negatively affected by these pricing pressures if we are forced to reduce our prices and we cannot reduce our productionproduct costs or if our productionproduct costs increase and we cannot increase our prices.
Increases in the price of raw materials used to manufacture our products could materially increase our costs and decrease our profitability.
The principal fabrics used in our business are made from cotton, wool, silk, synthetic and cotton-synthetic blends. The prices we pay for these fabrics are dependent on the market price for the raw materials used to produce them, primarily cotton and chemical components of synthetic fabrics. These raw materials are subject to price volatility caused by weather, supply conditions, government regulations, economic climate, currency exchange rates, and other unpredictable factors. Fluctuations in petroleum prices may also influence the prices of related items such as chemicals, dyestuffs and polyester yarn. Any raw material price increase could increase our cost of sales and decrease our profitability unless we are able to pass higher prices on to our customers. In addition, if one or more of our competitors is able to reduce their production costs by taking advantage of any reductions in raw material prices or favorable sourcing agreements, we may face pricing pressures from those competitors and may be forced to reduce our prices or face a decline in net sales, either of which could have a materially adverse effect on our business, results of operations or financial condition.
Changing international trade regulation and the elimination of quotas on imports of textiles and apparel may increase competition in our industry. Future quotas, duties or tariffs may increase our costs or limit the amount of products that we can import.
A portion of our operations are subject to quotas imposed by bilateral textile agreements between the countries from which we procure raw materials and the countries where our products are manufactured. These quotas limit the amount of products that may be imported from a particular country.
In addition, the countries in which our products are manufactured or into which they are imported may from time to time impose additional new quotas, duties, tariffs and requirements as to where raw materials must be purchased, additional workplace regulations, or other restrictions on our imports or adversely modify existing restrictions. Adverse changes in these costs and restrictions could harm our business. We cannot assure you that future trade agreements will not provide our competitors an advantage over us, or increase our costs, either of which could have a material adverse effect on our business, results of operations or financial condition.
Our operations are also subject to various international trade agreements and regulations such as the North American Free Trade Agreement and the Caribbean Basin Initiative, and the activities and regulations of the World Trade Organization (“WTO”). Generally, these trade agreements benefit our business by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country. However, trade agreements can also impose requirements that negatively affect our business, such as limiting the countries from which we can purchase raw materials and setting quotas on products that may be imported into the United States from a particular country. In addition, increased competition from developing countries could have a material adverse effect on our business, results of operations or financial condition.
The corporate identity apparel and uniform industry is subject to changing fashion trends and if we misjudge consumer preferences, the image of one or more of our brands may suffer and the demand for our products may decrease.
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We believe our products are, in general, less subject to fashion trends compared to many other apparel manufacturers because we manufacture and sell uniforms, corporate identity apparel and other accessories. However, the apparel industry, including uniforms and corporate identity apparel is subject to shifting customer demands and evolving fashion trends and our success is also dependent upon our ability to anticipate and promptly respond to these changes. Failure to anticipate, identify or promptly react to changing trends or styles may result in decreased demand for our products, as well as excess inventories and markdowns, which could have a material adverse effect on our business, results of operations, and financial condition. In addition, if we misjudge consumer preferences, our brand image may be impaired.
RISKS RELATING TO OUR BUSINESS
Our success depends upon the continued protection of our trademarks and other intellectual property rights and we may be forced to incur substantial costs to maintain, defend, protect and enforce our intellectual property rights.
Our registered and common law trademarks, as well as certain of our licensed trademarks, have significant value and are instrumental to our ability to market our products. While we own and use several trademarks, our mark “Fashion Seal Uniforms” (presently registered until August 8, 2007)2017) is important to our business, as more than 50% of our products are sold under that name. We have filed the required application to renew this Registration. We expect to receive the renewal before the expiration date. When the renewal is received, the “Fashion Seal Uniforms” mark will be registered through August 8, 2017. We cannot assure you that third parties will not assert claims against any such intellectual property or that we will be able to successfully resolve all such claims. In addition, although we seek international protection of our intellectual property, the laws of some foreign countries may not allow us to protect, defend or enforce our intellectual property rights to the same extent as the laws of the United States. We could also incur substantial costs to defend legal actions relating to use of our intellectual property, which could have a material adverse effect on our business, results of operations or financial condition. In addition, some of our license agreements with third parties will expire by their terms over the next several years. There can be no assurance that we will be able to negotiate and conclude extensions of such agreements on similar economic terms or at all.
Our customers may cancel or decrease the quantity of their orders, which could negatively impact our operating results.
Although we have long-standing customer relationships, we do not have long-term contracts with many of our customers. Sales to many of our customers are on an order-by-order basis. If we cannot fill customers’ orders on time, orders may be cancelled and relationships with customers may suffer, which could have an adverse effect on us, especially if the relationship is with a major customer. Furthermore, if any of our customers experience a significant downturn in their business, or fail to remain committed to our programs or brands, the customer may reduce or discontinue purchases from us. The reduction in the amount of our products purchased by several of our major customers could have a material adverse effect on our business, results of operations or financial condition.
In addition, some of our customers have experienced significant changes and difficulties, including consolidation of ownership, increased centralization of buying decisions, restructurings, bankruptcies and liquidations. A significant adverse change in a customer relationship or in a customer’s financial position could cause us to limit or discontinue business with that customer, require us to assume more credit risk relating to that customer’s receivables or limit our ability to collect amounts related to previous purchases by that customer, all of which could have a material adverse effect on our business, results of operations or financial condition.
We may undertake acquisitions to expand our business, which may pose risks to our business.
We selectively pursue acquisitions from time to time as part of our growth strategy. We compete with others within our industry for suitable acquisition candidates. This competition may increase the price for acquisitions and reduce the number of acquisition candidates available to us. As a result, acquisition candidates may not be available to us in the future on favorable terms. Even if we are able to acquire businesses on favorable terms, managing growth through acquisition is a difficult process that includes integration and training of personnel, combining plant and operating procedures, and additional matters related to the integration of acquired businesses within our existing organization. Unanticipated issues related to integration may result in additional expense or in disruption to our operations, either of which could negatively impact our ability to achieve anticipated benefits. While we believe we will be able to fully integrate acquired businesses, we can give no assurance that we will be successful in this regard.
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We are subject to local laws and regulations.
We are subject to federal, state and local laws and regulations affecting our business, including those promulgated under the Occupational Safety and Health Act, the Consumer Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Product Identification Act, the rules and regulations of the Consumer Products Safety Commission and various labor, workplace and related laws, as well as environmental laws and regulations. Failure to comply with such laws may expose us to potential liability and have an adverse effect on our results of operations.
Shortages of supply of sourced goods from suppliers or interruptions in our manufacturing could adversely affect our results of operations.
We utilize multiple supply sources and manufacturing facilities. However, an unexpected interruption in any of the sources or facilities could temporarily adversely affect our results of operations until alternate sources or facilities can be secured. In 2007 and 2006 2005,approximately 62% and 2004 approximately 75%, 73%, and 70%, respectively, of our products were obtained from suppliers located in Central America. If we are unable to continue to obtain our products from Central America, it could significantly disrupt our business. Because we source products in Central America, we are affected by economic conditions in Central America, including increased duties, possible employee turnover, labor unrest and lack of developed infrastructure.
Our business may be impacted by adverse weather.
Our corporate headquarters and a substantial number of our customers are located in Florida. During fiscal 2005, four hurricanes made land-fall in Florida, with Hurricane Wilma moving directly through South Florida and causing significant infrastructure damage and disruption to the area. Sales of our products were adversely affected by these [andand the other Gulf Coast hurricanes]hurricanes during fiscal 2005. While we were not impacted by any hurricane related events during fiscal 2006 or 2007, because we are located in Florida, which is a hurricane-sensitive area, we are particularly susceptible to the risk of damage to, or total destruction of, our headquarters and surrounding transportation infrastructure caused by a hurricane. In addition, similar disruptions to the business of our customers located in areas affected by hurricanes may adversely impact sales of our products.
Certain of our existing stockholders have significant control.
At December 31, 2006,2007, our executive officers and certain of their family members collectively beneficially owned 28.9%30.6% of our outstanding common stock, of which Gerald M. Benstock, our Chairman of the Board, beneficially owned 22.9%23.3%. As a result, our executive officers and certain of their family members have significant influence over the election of our Board of Directors, the approval or disapproval of any other matters requiring stockholder approval, and the affairs and policies of our company.
The success of our business depends on our ability to attract and retain qualified employees.
We need talented and experienced personnel in a number of areas including our core business activities. An inability to retain and attract qualified personnel, especially our key executives, could harm our business.
| Item 1B. | Unresolved Staff Comments |
None.
| 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 and distribution locales are rented for nominal amounts due to cities providing incentives for manufacturersbusinesses 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. Set forth below are the locations of our facilities:
Seminole, Florida – Plant of approximately 60,000 square feet owned by the registrant;Company; used as principal administrative office and for warehousing and shipping, as well as the corporate design center.
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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 fee; used for manufacturing, warehousing, and shipping; lease expiring in 2011.
Tampa, Florida – Plant of approximately 15,000 square feet, leased from private owners; used for warehousing, shipping and customer service for customers located in the greater Tampa Bay area; lease expiring in 2010.
Miami, Florida – Plant of approximately 5,000 square feet, leased from private owners under a lease expiring in 2007; used for regional sales office, warehousing, shipping, and small retail operation.
McGehee, Arkansas – Plant of approximately 26,000 square feet, leased from the City of McGehee under lease requiring payment of only a nominal rental;rental fee; used for storage; lease expiring in 2009.
Marietta, Georgia – Plant and warehouse of approximately 25,000 square feet leased from private owners; lease expiring in 2008.
Portland, Oregon – Plant and warehouse of approximately 6,000 square feet leased from private owners used for warehousing and shipping, expiring in 2008.
Miscellaneous – Atlanta, Georgia,Georgia: leased warehouse and sales office of approximately 10,000 square feet – lease expiring in 2010; Lexington, Mississippi,Mississippi: facility used for warehousing and shipping, of approximately 40,000 square feet – owned;owned by the Company; Hamburg, Arkansas,Arkansas: approximately 18,000 square feet, used for shipping – owned;owned by the Company; Dallas, Texas,Texas: leased sales office of approximately 2,055 square feet – lease expiring in 2007.2009.
| Item 3. | Legal Proceedings |
We are a party to certain lawsuits in the ordinary course of business. We do not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows.
| Item 4. | Submission of Matters to a Vote of Security Holders |
None
PART II
| Item 5. | Market |
The principal market on which Superior’s common shares are traded is the American Stock Exchange;Exchange under the symbol “SGC”; said shares have also been admitted to unlisted trading on the Midwest Stock Exchange.
The following table below presents, for our common shares, dividend per share information andsets forth the quarterly high and low sales prices per shareand cash dividends declared on our common stock by quarter for 2007 and 2006 as reported in the consolidated transaction reporting system of the American Stock Exchange.
| QUARTER ENDED | QUARTER ENDED | |||||||||||||||||||||||||||||||||||||||||||||||
| 2006 | 2005 | 2007 | 2006 | |||||||||||||||||||||||||||||||||||||||||||||
| Mar. 31 | June 30 | Sept. 30 | Dec. 31 | Mar. 31 | June 30 | Sept. 30 | Dec. 31 | Mar. 31 | June 30 | Sept. 30 | Dec. 31 | Mar. 31 | June 30 | Sept. 30 | Dec. 31 | |||||||||||||||||||||||||||||||||
Common Shares: | ||||||||||||||||||||||||||||||||||||||||||||||||
High | $ | 11.53 | $ | 13.15 | $ | 13.34 | $ | 13.40 | $ | 14.95 | $ | 14.85 | $ | 13.70 | $ | 12.80 | $ | 13.54 | $ | 13.46 | $ | 13.30 | $ | 13.60 | $ | 11.53 | $ | 13.15 | $ | 13.34 | $ | 13.40 | ||||||||||||||||
Low | $ | 10.00 | $ | 11.00 | $ | 11.35 | $ | 11.39 | $ | 13.26 | $ | 10.92 | $ | 11.65 | $ | 9.95 | $ | 12.35 | $ | 12.35 | $ | 10.41 | $ | 9.38 | $ | 10.00 | $ | 11.00 | $ | 11.35 | $ | 11.39 | ||||||||||||||||
Dividends (total for 2006-$0.54; 2005-$0.54) | $ | 0.135 | $ | 0.135 | $ | 0.135 | $ | 0.135 | $ | 0.135 | $ | 0.135 | $ | 0.135 | $ | 0.135 | ||||||||||||||||||||||||||||||||
Dividends (total for 2007-$0.54; 2006-$0.54) | $ | 0.135 | $ | 0.135 | $ | 0.135 | $ | 0.135 | $ | 0.135 | $ | 0.135 | $ | 0.135 | $ | 0.135 | ||||||||||||||||||||||||||||||||
We have declared cash dividends of $0.135 per share in each of the quarters for the fiscal years ending December 31, 20052006 and 2006.2007. We expect that, so long as earnings and business conditions warrant, we will continueintend to pay dividends and thatregular quarterly distributions to our common stockholders, the amount thereof, as such conditions permit, and as the Directors approve, willof which may increase from time to time. Future distributions will be declared and paid at the discretion of our Board of Directors, and will depend upon cash generated by operating activities, our financial condition, capital requirements, and such other factors as our Board of Directors deem relevant.
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On March 2, 2007, registrantFebruary 26, 2008, we had 205189 shareholders of record and the closing price for registrant’sour common shares on the American Stock Exchange was $12.70$9.10 per share.
Equity Compensation Plan Information
The following table provides information about our common stock that may be issued upon the exercise of options, warrants, rights and restricted stock under all our existing equity compensation plans as of December 31, 2006,2007, including the 1993 Incentive Stock Option Plan and the 2003 Incentive Stock and Awards Plan:
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||
| (a) | (b) | (c) | ||||
| Equity compensation Plans approved by Security holders | 938,850 | $13.03 | 1,810,500 | |||
| Equity compensation Plans not approved by Security holders | — | — | — | |||
Total | 938,850 | $13.03 | 1,810,500 | |||
Plan category Equity compensation Plans approved by Security holders Equity compensation Plans not approved by Security holders TotalSTOCK PERFORMANCE GRAPH Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights Weighted-average
exercise price of
outstanding options,
warrants and rights Number of securities
remaining available
for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a)) (a) (b) (c) 1,030,975 $ 13.21 1,616,525 — — — 1,030,975 $ 13.21 1,616,525
COMPARISON OF FIVE YEAR CUMULATIVE RETURN* AMONG SUPERIOR UNIFORM GROUP, INC., S&P 500 INDEX, AND S&P APPAREL ACCESSORIES & LUXURY GOODS INDEX**
The following graph, based on data provided by Standard & Poor, shows changes in the value of $100 invested on December 31, 2001 of: (a) shares of Company common stock; (b) the S&P 500 Index; and (c) the S&P 500 Apparel, Accessories & Luxury Goods Index. Total shareholder returns from each investment can be calculated from the year-end investment values shown in the table above the graph provided below.
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| ANNUAL RETURN PERCENTAGE | ||||||||||||
| Years Ending | ||||||||||||
Company / Index | Dec02 | Dec03 | Dec04 | Dec05 | Dec06 | |||||||
SUPERIOR UNIFORM GROUP INC | 43.90 | 38.54 | -5.77 | -28.52 | 30.62 | |||||||
S&P 500 INDEX | -22.10 | 28.68 | 10.88 | 4.91 | 15.79 | |||||||
S&P 500 APPAREL, ACCESSORIES & LUXURY GOODS | -7.74 | 13.20 | 28.39 | 3.28 | 29.75 | |||||||
| INDEXED RETURNS | ||||||||||||
Base Period | Years Ending | |||||||||||
Company / Index | Dec01 | Dec02 | Dec03 | Dec04 | Dec05 | Dec06 | ||||||
SUPERIOR UNIFORM GROUP INC | 100 | 143.90 | 199.35 | 187.86 | 134.28 | 175.40 | ||||||
S&P 500 INDEX | 100 | 77.90 | 100.25 | 111.15 | 116.61 | 135.03 | ||||||
S&P 500 APPAREL, ACCESSORIES & LUXURY GOODS | 100 | 92.26 | 104.44 | 134.09 | 138.49 | 179.68 | ||||||
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Note: The stock price performance shown on the graph above is not necessarily indicative of future price performance.
10
| Item 6. | Selected Financial Data |
The following selected data areis derived from our consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and notes thereto incorporated into Item 8, and with Item 7 -– Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Superior Uniform Group, Inc. and Subsidiary
Consolidated Statements of Earnings
Years Ended December 31,
Years Ended December 31, | 2006 | 2005 | 2004 | 2003 | 2002 | 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||||||||||||||||
Net sales | $ | 127,695,735 | $ | 133,312,351 | $ | 143,567,473 | $ | 137,326,341 | $ | 148,106,311 | $ | 120,457,891 | $ | 123,714,773 | $ | 128,068,824 | $ | 135,844,749 | $ | 129,180,305 | |||||||||||||||
Costs and expenses: | |||||||||||||||||||||||||||||||||||
Cost of goods sold | 87,875,036 | 93,596,828 | 96,279,784 | 90,334,765 | 99,859,787 | 80,837,592 | 84,385,588 | 89,674,453 | 91,025,370 | 85,146,244 | |||||||||||||||||||||||||
Selling and administrative expenses | 35,812,406 | 37,610,557 | 38,524,803 | 37,491,162 | 39,400,795 | 33,784,794 | 33,983,449 | 35,920,705 | 35,531,559 | 34,706,297 | |||||||||||||||||||||||||
Interest expense | 451,026 | 610,781 | 624,199 | 696,504 | 853,081 | 329,674 | 451,026 | 610,781 | 624,199 | 696,504 | |||||||||||||||||||||||||
Gain on sale of facility | — | — | (651,944 | ) | — | — | |||||||||||||||||||||||||||||
| 124,138,468 | 131,818,166 | 135,428,786 | 128,522,431 | 140,113,663 | 114,952,060 | 118,820,063 | 125,553,995 | 127,181,128 | 120,549,045 | ||||||||||||||||||||||||||
Earnings before taxes on income, and cumulative effect of change in accounting principle | 3,557,267 | 1,494,185 | 8,138,687 | 8,803,910 | 7,992,648 | ||||||||||||||||||||||||||||||
Earnings from continuing operations before taxes on income | 5,505,831 | 4,894,710 | 2,514,829 | 8,663,621 | 8,631,260 | ||||||||||||||||||||||||||||||
Taxes on income | 1,360,000 | 250,000 | 2,760,000 | 3,100,000 | 2,895,000 | 1,810,000 | 1,830,000 | 600,000 | 2,940,000 | 3,040,000 | |||||||||||||||||||||||||
Earnings before cumulative effect of change in accounting principle | 2,197,267 | 1,244,185 | 5,378,687 | 5,703,910 | 5,097,648 | ||||||||||||||||||||||||||||||
Cumulative effect of change in accounting principle, net of tax benefit of $2,560,000 | — | — | — | — | (4,504,563 | ) | |||||||||||||||||||||||||||||
Earnings from continuing operations | 3,695,831 | 3,064,710 | 1,914,829 | 5,723,621 | 5,591,260 | ||||||||||||||||||||||||||||||
(Loss) earnings from discontinued operations, net of taxes | (1,146,503 | ) | (867,443 | ) | (670,644 | ) | (344,934 | ) | 112,650 | ||||||||||||||||||||||||||
Net earnings | $ | 2,197,267 | $ | 1,244,185 | $ | 5,378,687 | $ | 5,703,910 | $ | 593,085 | $ | 2,549,328 | $ | 2,197,267 | $ | 1,244,185 | $ | 5,378,687 | $ | 5,703,910 | |||||||||||||||
Basic net earnings per common share: | |||||||||||||||||||||||||||||||||||
Earnings before cumulative effect of change in accounting principle | $ | 0.32 | $ | 0.17 | $ | 0.72 | $ | 0.79 | $ | 0.72 | |||||||||||||||||||||||||
Cumulative effect of change in accounting principle, net of tax | — | — | — | — | (0.64 | ) | |||||||||||||||||||||||||||||
Basic net earnings per common share | $ | 0.32 | $ | 0.17 | $ | 0.72 | $ | 0.79 | $ | 0.08 | |||||||||||||||||||||||||
Per Share Data: | |||||||||||||||||||||||||||||||||||
Basic | |||||||||||||||||||||||||||||||||||
Earnings from continuing operations | $ | 0.56 | $ | 0.45 | $ | 0.26 | $ | 0.77 | $ | 0.77 | |||||||||||||||||||||||||
(Loss) earnings from discontinued operations, net of taxes | (0.18 | ) | (0.13 | ) | (0.09 | ) | (0.05 | ) | 0.02 | ||||||||||||||||||||||||||
Diluted net earnings per common share: | |||||||||||||||||||||||||||||||||||
Earnings before cumulative effect of change in accounting principle | $ | 0.32 | $ | 0.17 | $ | 0.71 | $ | 0.78 | $ | 0.71 | |||||||||||||||||||||||||
Cumulative effect of change in accounting principle, net of tax | — | — | — | — | (0.63 | ) | |||||||||||||||||||||||||||||
Net earnings | $ | 0.38 | 0.32 | $ | 0.17 | $ | 0.72 | $ | 0.79 | ||||||||||||||||||||||||||
Diluted net earnings per common share | $ | 0.32 | $ | 0.17 | $ | 0.71 | $ | 0.78 | $ | 0.08 | |||||||||||||||||||||||||
Diluted | |||||||||||||||||||||||||||||||||||
Earnings from continuing operations | $ | 0.55 | $ | 0.45 | $ | 0.26 | $ | 0.76 | $ | 0.76 | |||||||||||||||||||||||||
(Loss) earnings from discontinued operations, net of taxes | (0.17 | ) | (0.13 | ) | (0.09 | ) | (0.05 | ) | 0.02 | ||||||||||||||||||||||||||
Net earnings | $ | 0.38 | 0.32 | $ | 0.17 | $ | 0.71 | $ | 0.78 | ||||||||||||||||||||||||||
Cash dividends per common share | $ | 0.54 | $ | 0.54 | $ | 0.54 | $ | 0.54 | $ | 0.54 | $ | 0.54 | $ | 0.54 | $ | 0.54 | $ | 0.54 | $ | 0.54 | |||||||||||||||
At year end: | |||||||||||||||||||||||||||||||||||
Total assets | $ | 85,158,774 | $ | 97,261,057 | $ | 107,954,243 | $ | 102,973,933 | $ | 99,826,952 | $ | 87,903,512 | $ | 85,158,774 | $ | 97,261,057 | $ | 107,954,243 | $ | 102,973,933 | |||||||||||||||
Long-term debt | $ | 2,201,806 | $ | 3,979,540 | $ | 5,662,569 | $ | 6,266,047 | $ | 7,445,068 | $ | 2,445,604 | $ | 2,201,806 | $ | 3,979,540 | $ | 5,662,569 | $ | 6,266,047 | |||||||||||||||
Working capital | $ | 56,411,002 | $ | 58,922,055 | $ | 61,255,572 | $ | 66,212,497 | $ | 61,688,699 | $ | 59,251,139 | $ | 56,411,002 | $ | 58,922,055 | $ | 61,255,572 | $ | 66,212,497 | |||||||||||||||
Shareholders’ equity | $ | 72,102,191 | $ | 81,524,754 | $ | 87,068,494 | $ | 84,884,482 | $ | 80,110,389 | $ | 72,445,430 | $ | 72,102,191 | $ | 81,524,754 | $ | 87,068,494 | $ | 84,884,482 | |||||||||||||||
11
| Item 7. |
OPERATIONS:OVERVIEW: In 2007, net sales decreased by 2.6% in comparison to 2006 and in 2006, net sales decreased 4.2%by 3.4% in comparison to 2005. We implemented a new warehouse management system in January of 2005. The warehouse system implementation was difficult and resulted in disruptions in our service levels to customers. These service issues combined with the related distraction of our sales force caused a significant portion of the above-described decreases in net sales. We believe that we have resolved these service issues and our warehouse management system is currently operating effectively and efficiently. In 2005,addition, we believe that our sales force has moved beyond our prior service issues and is highly focused on pursuing new customer opportunities. As a result, we obtained several new contracts that began to impact sales during the latter portion of 2007. We expect these new contracts, as well as our renewed sales efforts to result in solid sales increases for 2008.
During the fourth quarter of 2007, we made a decision to divest the Sope Creek business. At the beginning of February 2008, we sold the operations of Sope Creek. As a result, we have classified the assets of Sope Creek as held for sale at December 31, 2007 and have marked them down to their estimated fair value less selling costs. Additionally, we have reclassified the results of operations of Sope Creek to loss from discontinued operations in the consolidated statement of earnings.
OPERATIONS: In 2007, net sales decreased 7.1%2.6% in comparison to 2004.2006. The 2006 decrease in net sales is primarily attributed to the Januaryelimination of the uniform program at one of our major customers in the fourth quarter of 2006. This resulted in a decrease of approximately $2,917,000 in net sales for 2007. During 2007, we were awarded additional business from this customer that began shipping late in the second quarter. This resulted in net sales of approximately $1,422,000 in 2007. Additionally, demand from existing customers was lower than expected and more than offset the new business generated in 2007. The remainder of the decrease is attributed to customers lost as a result of the 2005 implementation of our new warehouse management system that resulted in disruptions to our service levels with customers during the first half of 2005. As a resultCertain of these service issues,lost customers were still winding down purchases from the Company experienced continuing declines in revenues with certain customers over the remainder of 2005 and in 2006 in excess of new revenues generated. The 2005 decrease is attributed to several factors. First, the Company experienced shipping difficulties throughduring the first quarterhalf of 2005 as a result of issues created in the implementation of its new warehouse management system at its central distribution center. As a result of these difficulties, certain customers reduced the amount of purchases that they made with the Company through the remainder of 2005. Additionally, the Company and its customers were adversely affected by several major hurricanes later in the year. These hurricanes disrupted the Company’s supply lines for several months and more significantly affected certain of our customers operations and purchasing patterns.2006.
As a percentage of sales, cost of goods sold was 68.8% in 2006, 70.2% in 2005, and 67.1% in 2004.2007, and 68.2% in 2006. The percentage decrease in 20062007 as compared to 20052006 is primarily attributed to reductionsimproved efficiencies in payrollour embroidery and benefits related costs (0.8%alterations operations (0.3%), and improvedmore effective sourcing of product (1.4%). These improvements are offset by the impact of management’s decisionfinished products in the fourth quarter of 2006 to exit the corporate sales portion of our Sope Creek business. As a result of this decision, we took a pre-tax charge of approximately $450,000 in the fourth quarter of 2006 for the write-downcurrent period (0.8%). The Company’s gross margins may not be comparable with other entities, since some entities include all of the remaining corporate inventory and $800,000 or (0.6%) of sales for the full year 2006costs related to the inventory write-downs and close-out sales at losses related to this inventory. The percentage increasetheir distribution network in 2005 as compared to 2004 is primarily attributed to the following items. First, cost of goods sold increased 0.6% assold. As disclosed in Note 1 to the Condensed Consolidated Financial Statements, the Company includes a percentageportion of net sales as a result of increased productthe costs as well as the competitive pricing market in which we operated in 2005. Second, reductions in sales and production volumes without corresponding decreases in overhead added approximately 2.0% to our cost of goods sold as a percentage of net sales. Finally, increased obsolescence in 2005, associated with the releaseits distribution network in selling and administrative expenses. The amounts included in selling and administrative expenses for each of the newDefining Uniforms catalogyears ended December 31, 2007 and related product line changes, added 0.5% to cost of goods sold as a percentage of net sales.2006, respectively, were $7,323,836, and $8,025,626.
As a percentage of sales, selling and administrative expenses were 28.0% in 2006, 28.2%2007 and 27.5% in 2005, and 26.8% in 2004.2006. The decreaseincrease in percentage in 20062007 as compared to 20052006 is attributed primarily to a reduction inincreased salaries, wages and benefit related costs, (0.6%benefits (0.9%). This decrease is net of the impact of options expensed in the current period of approximately $502,000 (0.4%). This improvement is offset by the reduction in gain on sale of fixed assets (0.4%general cost reductions (0.3%). The Company sold its Tampa distribution facility in 2005 and relocated the majority of the operations from this facility to its central distribution facility in Eudora, Arkansas and opened a small retail location in Tampa. The increase in selling and administrative expenses as a percentage of sales in 2005 as compared to 2004 is primarily attributed to the significant reductions in sales with less significant reductions in selling and administrative expenses. 2005 selling and administrative expenses included increased depreciation, associated primarily with the new warehouse system, of approximately $476,000; $299,000 in pension settlement losses associated with staff reductions and corresponding lump sum pension payments to employees; and $206,000 in increased severance costs associated with the staff reductions. These increases were offset by a $355,000 reduction in professional fees, primarily associated with outside consulting fees for Sarbanes-Oxley section 404 compliance work and a $665,000 reduction in medical insurance expense as a result of lower headcounts and various modifications to the Company’s medical plans.
Interest expense as a percentage of sales was 0.4%0.3% in 2006, 0.5% in 2005,2007 and 0.4% in 2004.2006. The decrease in 20062007 as compared to 20052006 is due to lower borrowings outstanding. The increase in 2005 as compared to 2004 is due to lower sales volume and increased borrowings outstanding during the year on the Company’s revolving debt agreement.
The effective income tax rate in 2007 was 32.9% and in 2006 was 38.2%, 2005 was 16.7%; and in 2004 it was 33.9%37.4%. The increase in 2006 is primarily attributed to non-deductible share-based compensation expense recognized for book purposes in 2006 (3.0%) and due to the prior year’s reduction in the accrual for tax contingencies (10.9%) as discussed below. Additionally, other permanent differences between book and tax included a non-taxable income amount for Officer life insurance (4.0%) in 2005 that did not recur in 2006. Finally, the prior year percentages were higher due to the significantly lower taxable income in 2005. The decrease in 2005 as compared to 20042007 is primarily attributed to a reduction in the accrual for uncertain tax contingenciespositions (5.3%) in the current year as a result of an audit of the Company’s federal tax returns for 2004 and 2005, and from the expiration of the statute of limitations on various other uncertain tax positions.
The Company reported income from continuing operations of 3.1% and 2.5% of sales for the years 2007 and 2006, respectively.
The Company reported losses from discontinued operations of 1.0% and 0.7% of sales for the years 2007 and 2006, respectively. As discussed above, during the year (-12.4%)fourth quarter of 2007, we made a decision to divest Sope Creek. At the beginning of February 2008, we sold the operations of Sope Creek. As a result, we have classified the assets of Sope Creek as held for sale at December 31, 2007 and duehave marked them down to other permanent differences between book and tax income (-4.7%) duetheir estimated fair value less selling costs. Additionally, we have reclassified the results of operations of Sope Creek to a decreaseloss from discontinued operations in taxable income.
12the consolidated statements of earnings.
Management’ sManagement’s Discussion and Analysis of Financial Condition and Results of Operations (con’t)
In 2006, the
The Company reported net income of 1.7%2.1% and 1.8% of sales for the years 2007 and 2006, respectively; with a return of 3.5% and 2.9% on average shareholders’ equity. In 2005, the Company reported net income of 0.9% of sales with a return of 1.5% on average shareholders’ equity. In 2004, the Company reported net income of 3.7% of sales with a return of 6.3% on average shareholders’ equity.
LIQUIDITY AND CAPITAL RESOURCES: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.
Accounts receivable decreased 0.1%27.3% from $25,706,970$25,692,752 on December 31, 20052006 to $25,692,752$18,670,466 as of December 31, 2006.2007. Approximately $4,800,000 of this decrease is attributed to a change in our operating arrangement with our primary supplier in Central America, as described below. Prior to July 2007, the Company shipped raw material inventory to our primary supplier, transferred title to the supplier, and recorded a receivable due from the supplier. In July 2007, we modified the operating arrangement whereby the Company maintains title to the raw material inventory until such time as the supplier actually utilizes the fabric in production for the Company. As a result, raw material inventories increased by approximately $4,800,000 and accounts receivable was decreased by the same amount. The remainder of the decrease is primarily attributed to improvement in the aging of customer accounts.
Inventories decreased 10.6%increased 39.7% from $37,186,779$33,251,964 on December 31, 20052006 to $33,251,964$46,463,662 as of December 31, 2006. This decrease2007. Approximately $4,800,000 of this increase is attributed to improvedthe change in our operating arrangement with our Central American supplier as described above. The remainder of the increase is primarily attributed to increases in inventory management procedureslevels in preparation for implementing several large new customer programs during the first part of 2008, as well as in anticipation of higher net sales in future periods, and a focused effort by management to reduce inventory levels.an increase in the amount of inventories being sourced from Asia.
OtherPrepaid expenses and other current assets decreased 80.3%increased 25.6% from $7,434,119$2,807,564 on December 31, 20052006 to $1,462,753$3,525,114 as of December 31, 2006. The Company cashed2007. $251,000 of this increase is attributed to an increase in its outstanding officer life insurance policies duringdeposits for inventory paid for in advance of receipt and $305,000 is due to an increase in refundable income taxes in the current year.
Other assets increased 50.7% from $1,462,753 on December 31, 2006 resultingto $2,204,434 as of December 31, 2007. This increase is primarily attributed to the increase in a decrease of approximately $4,638,000. Additionally, the adoption of FAS No. 158Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plansresulted in a reduction of the amount recognized for prepaidof pension assets by $1,158,025.recognized in other assets of $666,000.
Accounts payable decreased 16.9%increased 32.0% from $6,046,575 on December 31, 2005 to $5,025,981 on December 31, 2006 to $6,635,412 on December 31, 2007 primarily due to increased inventory purchases in the lower inventory levels discussed above.current period.
Other current liabilities increased 10.3%3.7% from $2,228,243 on December 31, 2005 to $2,457,839 on December 31, 2006. The2006 to $2,549,680 on December 31, 2007 primarily due to increases in accrued salaries, wages and benefits.
Other long-term liabilities increased from $0 on December 31, 2006 to $603,000 on December 31, 2007 as a result of adopting the provisions of FIN 48, and FASB Staff Position No. FIN 48-1, on January 1, 2007. Only tax positions that met the more-likely-than-not recognition threshold at the adoption date were recognized or continued to be recognized. As a result of the implementation of FIN No. 48, we recognized a $133,000 increase is primarily attributed to the liability for uncertain tax positions, which was accounted for as an increaseadjustment to the beginning balance of approximately $77,000 in real estate and personal property taxes and anretained earnings. As of the date of adoption, including the increase in the liability noted above, we had approximately $728,000 of unrecognized tax benefits. At December 31, 2006, the liability was accrued medical costsin accordance with FAS No. 5 and was offset against our income tax receivable balance included in prepaid expenses and other current assets. As of $92,000.December 31, 2007, we have $603,000 of unrecognized tax benefits, all of which, if recognized, would favorably affect the annual effective income tax rate. During 2007, the Internal Revenue Service completed an audit of our 2004 and 2005 federal income tax returns. As a result of the audit, we also made an adjustment to our 2006 federal tax return and paid approximately $87,000 of taxes that had previously been accrued as uncertain tax positions. Finally, the accrual for uncertain tax positions was reduced by approximately $207,000 resulting from the audit and the expiration of the statute of limitations on various other uncertain tax positions.
Cash flows related to discontinued operations are not segregated in the statements of cash flows. Cash flows used in operating activities related to discontinued operations were approximately $155,000 and $45,000 in 2007 and 2006, respectively. Cash flows used in investing and financing activities for discontinued operations were insignificant in 2007 and 2006.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (con’t)
The working capital of the Company at December 31, 2007 was approximately $59,251,000 and the working capital ratio was 6.5:1. At December 31, 2006, our working capital was approximately $56,411,000 and the working capital ratio was 7.1:1. For 2005, our working capital was approximately $58,922,000 and the working capital ratio was 6.9:1. 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.
In 2007 and in 2006, the Company’s percentage of total debt to total debt and equity was 5.2% and in 2005 it was 6.5%. The decrease is attributed primarily to a reduction in long-term debt due to scheduled principal payments offset by a reduction in equity due to stock repurchases.
The Company has an on-going capital expenditure program designed to maintain and improve its facilities. Capital expenditures were approximately $887,000, $2,157,000,$1,163,000 and $6,162,000,$887,000, in the years 2006, 2005, and 2004, respectively. The significant increase in 2004, and subsequent decreases in 20052007 and 2006, is primarily attributed to an upgrade of the Company’s central warehouse distribution system in Eudora, Arkansas. This project was completed in January of 2005. Total capitalized expenditures for this project in 2005 and 2004, were approximately $830,000 and $5,237,000, respectively. During 2005 the Company also sold its warehouse and distribution facility in Tampa, Florida generating proceeds of approximately $3,093,000. Additionally, in 2004, the Company purchased certain software for approximately $990,000 that was 100% financed via long-term debt. The Company at all times evaluates its capital expenditure programs in light of prevailing economic conditions.
During the years ended December 31, 20062007 and 2005,2006, the Company paid cash dividends of approximately $3,591,000 and $3,692,000, and $3,993,000, respectively, onresulting from a quarterly dividend of $.135 per share. In July 2002, the Company’s Board of Directors authorized the Company to repurchase 750,000 shares of its common stock. Through May 4, 2006, the Company repurchased 728,098 shares of its common stock under such repurchase program. On May 5, 2006, the Company’s Board of Directors approved additional repurchases of 750,000 shares of the Company’s outstanding shares of common stock. The Company did not repurchase any of its common shares during the year ended December 31, 2007. The Company reacquired and retired 707,194 and 295,124 of its common shares in the yearsyear ended December 31, 2006 and 2005, respectively, with costs of $8,705,000 and $3,620,000, respectively.$8,705,000. At December 31, 2006,2007, we had 329,830 shares remaining on ourof common stock remaining that are authorized for repurchase authorization.under our repurchase program. Shares purchased under our share repurchase program are constructively retired and returned to unissued status. We consider several factors in determining when
13
Management’ s Discussion and Analysis of Financial Condition and Results of Operations (con’t)
to make share repurchases, including among other things, our cost of equity, our after-tax cost of borrowing, our debt to total capitalization targets and our expected future cash needs. There is no expiration date or other restriction governing the period over which we can make our share repurchases under the program. The Company anticipates that it will continue to pay dividends and that it will repurchase additional shares of its common stock in the future as financial conditions permit.
In 2007, cash and cash equivalents decreased by approximately $3,151,000. This decrease is attributed to approximately $839,000 in cash provided from operations, offset by approximately $1,004,000 utilized in investing activities, as well as approximately $2,986,000 utilized in financing activities. Investing activities consisted primarily of capital expenditures. Financing activities consisted primarily of dividends paid, as discussed above, which were offset by debt proceeds of approximately $17,000 and approximately $562,000 in proceeds from the exercise of employee stock options.
In 2006, cash and cash equivalents increased by approximately $700,000. This increase is attributed to approximately $9,851,000 in cash provided from operations, and by approximately $3,862,000 from investing activities, and offset by approximately $13,012,000 utilized in financing activities. Investing activities consisted of proceeds from cash surrender values on life insurance policies of approximately $4,600,000 and proceeds from disposal of property, plant and equipment of approximately $110,000 offset by capital expenditures of approximately $890,000. Financing activities consisted primarily of dividends paid and common stock repurchases, as discussed above, as well as scheduled debt payments of approximately $1,683,000. These amounts were offset by approximately $1,032,000 in proceeds for the exercise of employee stock options.
In 2005, cash and cash equivalents increased by approximately $3,069,000. This increase is attributed to approximately $11,239,000 in cash provided from operations, approximately $475,000 provided from investing activities and approximately $8,645,000 utilized in financing activities. Financing activities consisted primarily of dividends paid and common stock repurchases, as discussed above, as well as scheduled debt payments of approximately $1,594,000. These amounts were offset by approximately $562,000 in proceeds for the exercise of employee stock options.
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 (5.3%(4.6% at December 31, 2006)2007). 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, 2006,2007, $1,795,000 was outstanding on the revolver and approximately $185,000 was outstanding under letters of credit. On March 27, 2001, and again on April 27, 2004, and again on June 25, 2007, 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, 2007.2010. 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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (con’t)
The credit agreement and the term loan with Wachovia Bank contain restrictive provisions concerning liabilities to tangible net worth ratio (0.75:(.75:1), other borrowings, capital expenditures, working capital ratio (2.5:1), and fixed charges coverage ratio (2.5:1). The Company is in full compliance with all terms, conditions and covenants of the various credit agreements.
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 2007.2008.
14
Management’ s Discussion and Analysis of Financial Condition and Results of Operations (con’t)OFF-BALANCE SHEET ARRANGEMENTS:
The following table describes our contractual obligations as of December 31, 2006 and for the following periods:
Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | |||||||||||
Variable rate term loans and revolving credit facility | $ | 1,448,000 | $ | 2,201,000 | $ | — | $ | — | $ | 3,649,000 | |||||
Other debt arrangements, including capital leases | 330,000 | — | — | — | $ | 330,000 | |||||||||
Operating leases | 384,000 | 543,000 | — | — | $ | 927,000 | |||||||||
Total contractual cash obligations | $ | 2,162,000 | $ | 2,744,000 | $ | — | $ | — | $ | 4,906,000 | |||||
The Company does not engage in any off-balance sheet financing arrangements. In particular, we do not have any interest in variable interest entities, which include special purpose entities and structured finance entities.
Critical Accounting PoliciesCRITICAL ACCOUNTING POLICIES:
Our significant accounting policies are described in Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K. 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 of America. 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
Our critical accounting policies affectestimates are those that we believe require our moremost significant judgments and estimates used inabout the preparationeffect of matters that are inherently uncertain. A discussion of our condensed consolidated financial statements.critical accounting estimates, the underlying judgments and uncertainties used to make them and the likelihood that materially different estimates would be reported under different conditions or using different assumptions is as follows:
Revenue Recognition and Allowance for DoubtfulLosses on Accounts Receivable
The Company records revenue as productsThese allowances are shipped and title passes. A provision for estimated returns and allowances is recorded based on historical experience and current allowance programs. Judgments and estimates are used in determining the collectabilityboth recent trends of accounts receivable. The Company analyzes specific accounts receivable and historical bad debt experience, customercertain customers estimated to be a greater credit worthiness, current economicrisk as well as general 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.entire customer pool. 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. An additional impairment in value of one percent of net accounts receivable would require an increase in the allowance for doubtful accounts and would result in additional expense of approximately $187,000. The Company’s concentration of risk is also monitored and at year-end 2007, the largest outstanding customer account balance was $1,259,000 and the five largest account balances totaled $2,945,000.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) 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.
Goodwill Impairment
15The Company has approximately $1,617,000 of goodwill on its balance sheet related to its largest reporting unit. The carrying value of this reporting unit is approximately $67,000,000. The Company reviews this goodwill for impairment at least on an annual basis. These reviews of fair value involve judgment and estimates of discount rates, transaction multiples and future cash flows for the reporting unit that may be impacted by future sales and operating results for the reporting unit, market conditions and economic conditions. The Company analyzed various discount rates, transaction multiples and cash flows for the reporting unit. As a result of these calculations, we determined a range of fair values of the reporting unit with related goodwill of approximately $70,000,000 to $75,000,000. We believe that we have made reasonable estimates and judgments in determining whether our goodwill has been impaired. However, if there is a material change in the assumptions used in our determination of fair value or if there is a material change in the conditions or circumstances influencing fair value, we could be required to recognize a material impairment charge.
Management’ sManagement’s Discussion and Analysis of Financial Condition and Results of Operations (con’t)
Insurance
The Company self-insures for certain obligations related to health and workers’ compensationinsurance 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.
Recent Accounting Pronouncements:Pensions
The Company’s pension obligations are determined using estimates including those related to discount rates, asset values and changes in compensation. The 6% discount rate used for 2007 and 2006 was determined based on the Moody’s rating on AA bonds with maturity of 20 years and beyond. This rate was selected as the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date taking into account the nature and duration of the benefit obligations of the plan using high-quality fixed-income investments currently available (rated AA or better) and expected to be available during the period to maturity of the benefits. The 8.0% expected return on plan assets was determined based on historical long-term investment returns as well as future expectations given target investment asset allocations and current economic conditions. The 4.5% rate of compensation increase represents the long-term assumption for expected increases in salaries among continuing active participants accruing benefits under the plans. In November 2004,2007, a reduction in the expected return on plan assets of 0.25% would have resulted in additional expense of approximately $43,000, while a reduction in the discount rate of 0.25% would have resulted in additional expense of approximately $16,000 and would have reduced the funded status by $372,000 for the Company’s defined benefit pension plans. Interest rates and pension plan valuations may vary significantly based on worldwide economic conditions and asset investment decisions.
Income Taxes
The Company is required to estimate and record income taxes payable for federal and state jurisdictions in which the Company operates. This process involves estimating actual current tax expense and assessing temporary differences resulting from differing accounting treatment between tax and book that result in deferred tax assets and liabilities. In addition, accruals are also estimated for federal and state tax matters for which deductibility is subject to interpretation. Taxes payable and the related deferred tax differences may be impacted by changes to tax laws, changes in tax rates and changes in taxable profits and losses. Reserves are also estimated for uncertain tax positions that are currently unresolved. The Company routinely monitors the potential impact of such situations and believes that it is properly reserved. We adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. As a result of the implementation of FIN 48, we recognized an increase of approximately $133,000 in total unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007, balance of retained earnings. As of January 1, 2007, we had total unrecognized tax benefits of approximately $728,000. For the year ending December 31, 2007, we recognized a net decrease in total unrecognized tax benefits of approximately $125,000, primarily as a result of current year audits by the Internal Revenue Service and the expiration of the statute of limitations on various outstanding tax positions. We accrue interest and penalties related to unrecognized tax benefits in income tax expense, and the related liability is included in the total liability for unrecognized tax benefits under FIN 48.
Share-based Compensation
We adopted Statement of Financial Accounting Standards BoardNo. 123 (revised 2004) (“FASB”) issued FAS No. 151,Inventory Costs—an Amendment123R”) on January 1, 2006. FAS 123R requires all share-based payments to employees, including grants of ARB No. 43, Chapter 4,employee stock options, to provide clarification that abnormal amounts of idle facility expense, freight, handling costs, and wasted material be recognized as current-period charges. In addition, this standard requires that allocation of fixed production overheads toin the costs of conversion befinancial statements based on their fair values. This statement revises FAS 123, and supersedes Accounting Principles Board (APB) Opinion 25. Share-based compensation expense that was recorded in 2007 and 2006 includes the normal capacitycompensation expense for the share-based payments granted in those years. In our share-based compensation strategy we utilize a combination of stock options and stock appreciation rights (“SARS”) that fully vest on the date of grant. Therefore, the fair value of the production facilities.options and SAR’s granted is recognized as expense on the date of grant. We used the Black-Scholes-Merton valuation model to value any share-based compensation under FAS 123R. Option valuation methods, including Black-Scholes-Merton, require the input of assumptions including the risk free interest rate, dividend rate, expected term and volatility rate. The provisionsCompany determines the assumptions to be used based upon current economic conditions. The impact of this standard are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoptionchanging any of FAS No. 151 as of January 1, 2006 hasthe individual assumptions by 10% would not hadhave a material impact on the Company’s financial position or the resultsrecorded expense.
Management’s Discussion and Analysis of operations.Financial Condition and Results of Operations (con’t)
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes: anInterpretation Interpretation of FAS No. 109(“FIN No. 48”). InterpretationFIN No. 48, which clarifies FAS No. 109,Accounting for Income Taxes, establishes the criterion that an individual tax position has to meet for some or all of the benefits of that position to be recognized in the Company’s financial statements. On initial application, Interpretation
We adopted the provisions of FIN No. 48, will be applied to all tax positions for which the statute of limitations remains open.and FASB Staff Position No. FIN 48-1, on January 1, 2007. Only tax positions that meetmet the more-likely-than-not recognition threshold at the adoption date will bewere recognized or continuecontinued to be recognized. The cumulative effectAs a result of applying Interpretationthe implementation of FIN No. 48, will be reportedwe recognized a $133,000 increase to the liability for uncertain tax positions, which was accounted for as an adjustment to retained earnings at the beginning balance of retained earnings.
As of the perioddate of adoption, including the increase in the liability noted above, we had approximately $728,000 of unrecognized tax benefits all of which, itif recognized, would favorably affect the annual effective income tax rate. As of December 31, 2007, we have $603,000 of unrecognized tax benefits that, if recognized, would favorably affect the annual effective income tax rate. None of this liability is adopted. Interpretationexpected to be paid in the next twelve months. Accordingly, the balance of $603,000 is included in other long-term liabilities.
The Internal Revenue Service completed an audit of our 2004 and 2005 federal income tax returns during the year ended December 31, 2007. As a result, we paid approximately $137,000 of tax, $28,000 of interest and $0 in penalties during the year ended December 31, 2007. The tax payment was primarily related to timing difference benefits being deferred.
We recognize interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes. After adopting FIN 48 is effective for fiscal years beginning after December 15, 2006, and will be adopted by the Company onat January 1, 2007.2007, we had $129,000 accrued for interest and penalties, net of tax benefit. During 2007, we recorded $50,000 for interest and penalties, net of tax benefit. We reduced the liability by $59,000 of interest and penalties due to lapse of statute of limitations and audit settlements. At December 31, 2007, we had $120,000 accrued for interest and penalties, net of tax benefit.
As of December 31, 2007, we have approximately $105,000 of accrued interest and $51,000 of accrued penalties related to uncertain tax positions, which are included in the $603,000 noted above. The Company currently does not believe that the adoption of Interpretation 48 will haveearliest tax year open to examination by a significant effect on its financial statements or its ability to comply with its current debt covenants.major taxing jurisdiction is 2001.
In June 2006, the Emerging Issues Task Force reached a consensus on Issue No. 06-3 (“EITF 06-3”), “DisclosureDisclosure Requirements for Taxes Assessed by a Governmental Authority on Revenue-Producing Transactions.”Transactions. The consensus allows companies to choose between two acceptable alternatives based on their accounting policies for transactions in which the company collects taxes on behalf of a governmental authority, such as sales taxes. The guidance should be applied to financial reports through retrospective application for all periods presented, if amounts are significant, for interim and annual reporting beginning after February 1, 2007. We doThe Company collects sales tax for various taxing authorities. It is the Company’s policy to record these amounts on a net basis. Therefore, these amounts are not expectincluded in net sales for the Company. The adoption of EITF 06-3 to havehas not had a material effect on our consolidated financial statements.
In September 2006, the FASB issued FAS No. 157,Fair Value Measurements (“FAS No. 157”). FAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. FAS No. 157 is effective for fiscal years beginning after November 15, 2007, the year beginning January 1, 2008 for the Company. The Company is currently reviewing the provisions of FAS No. 157 to determine the impact on its consolidated financial statements.statements.
In September 2006,February 2007, the FASB issued FAS No. 158,159,Employers’ AccountingThe Fair Value Option for Defined Benefit PensionFinancial Assets and Other Postretirement PlansFinancial Liabilities. (“FAS No. 158 amends159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS No. 87,Employers’ Accounting159 will be effective for Pensions,the Company on January 1, 2008. The Company is currently evaluating the impact of adopting FAS No. 88,Employers’ Accounting for Settlements159 on its financial position, cash flows, and Curtailmentsresults of Defined Benefit Plans and for Termination Benefits, FAS No. 106,Employers’ Accounting for Postretirement Benefits Other Than Pensions and FAS No. 132(R),Employers’ Disclosures about Pensions and Other Postretirement Benefits.operations.
Effective December 31, 2006, the Company adopted FAS No. 158 which requires balance sheet recognition of the funded status for all pension and postretirement benefit plans. The impact of initial adoption has been recorded as an adjustment to other comprehensive income. Subsequent changes in funded status shall also be recognized as a component of other comprehensive income to the extent they have not yet been recognized as a component of net periodic benefit cost pursuant to FAS No. 87, FAS No. 88 or FAS No. 106. As further described in Note 8, we have pension benefit plans that are subject to the provisions of FAS No. 158.
16
Management’ sManagement’s Discussion and Analysis of Financial Condition and Results of Operations (con’t)
In September 2006,December 2007, the SECFASB issued Staff Accounting BulletinFAS No. 108, Considering141 (revised 2007) (FAS No. 141(R)),Business Combinations, which is a revision of FAS No. 141,Business Combinations. The primary requirements of FAS No. 141(R) are as follows: (I.) Upon initially obtaining control, the Effects of Prior Year Misstatements when Quantifying Misstatementsacquiring entity in Current Year Financial Statements. SAB No. 108 provides guidance regarding the considerationa business combination must recognize 100% of the effects of prior year misstatements in quantifying current year misstatements for the purpose of materiality assessments. The method established by SAB No. 108 requires each of our financial statements and the related financial statement disclosures to be considered when quantifying and assessing the materialityfair values of the misstatement.acquired assets, including goodwill, and assumed liabilities, with only limited exceptions even if the acquirer has not acquired 100% of its target. As a consequence, the current step acquisition model will be eliminated. (II.) Contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration. The provisionsconcept of SABrecognizing contingent consideration at a later date when the amount of that consideration is determinable beyond a reasonable doubt, will no longer be applicable. (III.) All transaction costs will be expensed as incurred. FAS No. 108 apply to our financial position and results141 (R) is effective as of operations for the beginning of an entity’s first fiscal year endedbeginning after December 31, 200615, 2008. Adoption is prospective and didearly adoption is not permitted. The Company does not believe the adoption of this standard will have a materialan impact on ourits consolidated financial position or results of operations.statements.
A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to the Company’s consolidated financial statements.
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 6 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, 2006.
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 $3,649,431 is designated as a hedged item for the interest rate swap at December 31, 2006.
This interest rate swap is accounted for as a cash flow hedge in accordance with FAS No. 133 and FAS No. 138. 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 year related to hedge ineffectiveness and there was no income adjustment related to any portion excluded from the assessment of hedge effectiveness. A gain of $65,000 associated with this interest rate swap agreement was included in other comprehensive income for the year ended December 31, 2006. A gain of $230,000 associated with this interest rate swap agreement was included in other comprehensive income for the year ended December 31, 2005. A gain of $317,000 associated with this interest rate swap agreement was included in other comprehensive income for the year ended December 31, 2004. The fair market values of the interest rate swap of $36,000 and $101,000 are included in accrued expenses in the accompanying consolidated balance sheets as of December 31, 2006 and 2005, 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.
17
| Item 8. | Financial Statements and Supplementary Data |
Superior Uniform Group, Inc. and Subsidiary
Consolidated Statements of Earnings
Years Ended December 31,
| 2006 | 2005 | 2004 | 2007 | 2006 | |||||||||||||
Net sales | $ | 127,695,735 | $ | 133,312,351 | $ | 143,567,473 | $ | 120,457,891 | $ | 123,714,773 | |||||||
Costs and expenses: | |||||||||||||||||
Cost of goods sold | 87,875,036 | 93,596,828 | 96,279,784 | 80,837,592 | 84,385,588 | ||||||||||||
Selling and administrative expenses | 35,812,406 | 37,610,557 | 38,524,803 | 33,784,794 | 33,983,449 | ||||||||||||
Interest expense | 451,026 | 610,781 | 624,199 | 329,674 | 451,026 | ||||||||||||
| 124,138,468 | 131,818,166 | 135,428,786 | 114,952,060 | 118,820,063 | |||||||||||||
Earnings before taxes on income | 3,557,267 | 1,494,185 | 8,138,687 | ||||||||||||||
Earnings from continuing operations before taxes on income | 5,505,831 | 4,894,710 | |||||||||||||||
Taxes on income | 1,360,000 | 250,000 | 2,760,000 | 1,810,000 | 1,830,000 | ||||||||||||
Earnings from continuing operations | 3,695,831 | 3,064,710 | |||||||||||||||
Loss from discontinued operations, net of tax benefits of $680,000 and $470,000, respectively | (1,146,503 | ) | (867,443 | ) | |||||||||||||
Net earnings | $ | 2,197,267 | $ | 1,244,185 | $ | 5,378,687 | $ | 2,549,328 | $ | 2,197,267 | |||||||
Basic net earnings per common share | $ | 0.32 | $ | 0.17 | $ | 0.72 | |||||||||||
Diluted net earnings per common share | $ | 0.32 | $ | 0.17 | $ | 0.71 | |||||||||||
Per Share Data: | |||||||||||||||||
Basic | |||||||||||||||||
Earnings from continuing operations | $ | 0.56 | $ | 0.45 | |||||||||||||
Loss from discontinued operations, net of tax benefits | (0.18 | ) | (0.13 | ) | |||||||||||||
Dividends per common share | $ | 0.54 | $ | 0.54 | $ | 0.54 | |||||||||||
Net earnings | $ | 0.38 | $ | 0.32 | |||||||||||||
Diluted | |||||||||||||||||
Earnings from continuing operations | $ | 0.55 | $ | 0.45 | |||||||||||||
Loss from discontinued operations, net of tax benefits | (0.17 | ) | (0.13 | ) | |||||||||||||
Net earnings | $ | 0.38 | $ | 0.32 | |||||||||||||
Cash dividends per common share | $ | 0.54 | $ | 0.54 | |||||||||||||
See Notes to Consolidated Financial Statements.
18
Superior Uniform Group, Inc. and Subsidiary
Years Ended December 31,
| 2007 | 2006 | |||||||||||||||
| ASSETS | ASSETS | |||||||||||||||
| 2006 | 2005 | |||||||||||||||
CURRENT ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 3,920,276 | $ | 3,220,174 | $ | 769,715 | $ | 3,920,276 | ||||||||
Accounts receivable, net | 25,692,752 | 25,706,970 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $490,000 and $500,000, respectively | 18,670,466 | 25,692,752 | ||||||||||||||
Inventories | 33,251,964 | 37,186,779 | 46,463,662 | 33,251,964 | ||||||||||||
Prepaid expenses and other current assets | 2,807,564 | 2,765,979 | 3,525,114 | 2,807,564 | ||||||||||||
Assets held for sale | 558,476 | — | ||||||||||||||
TOTAL CURRENT ASSETS | 65,672,556 | 68,879,902 | 69,987,433 | 65,672,556 | ||||||||||||
PROPERTY, PLANT AND EQUIPMENT, NET | 15,393,879 | 18,079,292 | 13,320,218 | 15,393,879 | ||||||||||||
GOODWILL | 1,617,411 | 1,617,411 | 1,617,411 | 1,617,411 | ||||||||||||
OTHER INTANGIBLE ASSETS | 1,012,175 | 1,250,333 | 774,016 | 1,012,175 | ||||||||||||
OTHER ASSETS | 1,462,753 | 7,434,119 | 2,204,434 | 1,462,753 | ||||||||||||
| $ | 87,903,512 | $ | 85,158,774 | |||||||||||||
| $ | 85,158,774 | $ | 97,261,057 | |||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Accounts payable | $ | 5,025,981 | $ | 6,046,575 | $ | 6,635,412 | $ | 5,025,981 | ||||||||
Accrued expenses | 2,457,839 | 3,182,159 | 2,549,680 | 2,457,839 | ||||||||||||
Current portion of long-term debt | 1,777,734 | 1,683,029 | 1,551,202 | 1,777,734 | ||||||||||||
TOTAL CURRENT LIABILITIES | 9,261,554 | 10,911,763 | 10,736,294 | 9,261,554 | ||||||||||||
LONG-TERM DEBT | 2,201,806 | 3,979,540 | 2,445,604 | 2,201,806 | ||||||||||||
LONG-TERM PENSION LIABILITY | 1,108,223 | — | 923,184 | 1,108,223 | ||||||||||||
OTHER LONG-TERM LIABILITIES | 603,000 | — | ||||||||||||||
DEFERRED INCOME TAXES | 485,000 | 845,000 | 750,000 | 485,000 | ||||||||||||
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11) | ||||||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||||||
Preferred stock, $1 par value - authorized 300,000 shares (none issued) | — | — | ||||||||||||||
Common stock, $.001 par value - authorized 50,000,000 shares, issued and outstanding - 6,604,844 and 7,202,338, respectively. | 6,605 | 7,202 | ||||||||||||||
Preferred stock, $1 par value—authorized 300,000 shares (none issued) | — | — | ||||||||||||||
Common stock, $.001 par value—authorized 50,000,000 shares, issued and outstanding—6,670,650 and 6,604,844, respectively. | 6,670 | 6,605 | ||||||||||||||
Additional paid-in capital | 15,235,448 | 15,240,229 | 16,763,987 | 15,235,448 | ||||||||||||
Retained earnings | 57,753,587 | 66,378,323 | 56,178,511 | 57,753,587 | ||||||||||||
Other comprehensive income (loss), net: | ||||||||||||||||
Accumulated other comprehensive loss, net of tax: | ||||||||||||||||
Cash flow hedges | (36,000 | ) | (101,000 | ) | (30,000 | ) | (36,000 | ) | ||||||||
Pensions | (857,449 | ) | — | (473,738 | ) | (857,449 | ) | |||||||||
TOTAL SHAREHOLDERS’ EQUITY | 72,102,191 | 81,524,754 | 72,445,430 | 72,102,191 | ||||||||||||
| $ | 85,158,774 | $ | 97,261,057 | $ | 87,903,512 | $ | 85,158,774 | |||||||||
See Notes to Consolidated Financial Statements.
19
Superior Uniform Group, Inc. and Subsidiary
Consolidated Statements of Shareholders’ Equity
Years Ended December 31,
| Common Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2004 | 7,370,562 | $ | 7,371 | $ | 13,641,223 | $ | 71,883,888 | $ | (648,000 | ) | $ | 84,884,482 | ||||||||||||||||||||||||||||||||||
Common shares issued upon exercise of options | 160,900 | 161 | 1,659,233 | 1,659,394 | ||||||||||||||||||||||||||||||||||||||||||
Tax benefit from exercise of stock options | 155,000 | 155,000 | ||||||||||||||||||||||||||||||||||||||||||||
Purchase and retirement of common shares | (94,950 | ) | (95 | ) | (189,594 | ) | (1,121,821 | ) | (1,311,510 | ) | ||||||||||||||||||||||||||||||||||||
Cash dividends declared ($.54 per share) | (4,014,559 | ) | (4,014,559 | ) | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive Income: | ||||||||||||||||||||||||||||||||||||||||||||||
Net earnings | 5,378,687 | 5,378,687 | ||||||||||||||||||||||||||||||||||||||||||||
Net change during the period related to cash flow hedges | 317,000 | 317,000 | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive Income | 317,000 | |||||||||||||||||||||||||||||||||||||||||||||
Comprehensive Income | 5,695,687 | |||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2004 | 7,436,512 | 7,437 | 15,265,862 | 72,126,195 | (331,000 | ) | 87,068,494 | |||||||||||||||||||||||||||||||||||||||
Common shares issued upon exercise of options | 60,950 | 61 | 562,137 | 562,198 | ||||||||||||||||||||||||||||||||||||||||||
Tax benefit from exercise of stock options | 33,000 | 33,000 | ||||||||||||||||||||||||||||||||||||||||||||
Purchase and retirement of common shares | (295,124 | ) | (296 | ) | (620,770 | ) | (2,999,624 | ) | (3,620,690 | ) | ||||||||||||||||||||||||||||||||||||
Cash dividends declared ($.54 per share) | (3,992,433 | ) | (3,992,433 | ) | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive Income: | ||||||||||||||||||||||||||||||||||||||||||||||
Net earnings | 1,244,185 | 1,244,185 | ||||||||||||||||||||||||||||||||||||||||||||
Net change during the period related to cash flow hedges | 230,000 | 230,000 | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive Income | 230,000 | |||||||||||||||||||||||||||||||||||||||||||||
Comprehensive Income | 1,474,185 | |||||||||||||||||||||||||||||||||||||||||||||
| Common Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss, net of tax | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2005 | 7,202,338 | 7,202 | 15,240,229 | 66,378,323 | (101,000 | ) | 81,524,754 | 7,202,338 | $ | 7,202 | $ | 15,240,229 | $ | 66,378,323 | $ | (101,000 | ) | $ | 81,524,754 | |||||||||||||||||||||||||||
Common shares issued upon exercise of options | 109,700 | 110 | 1,031,693 | 1,031,803 | 109,700 | 110 | 1,031,693 | 1,031,803 | ||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | 502,051 | 502,051 | 502,051 | 502,051 | ||||||||||||||||||||||||||||||||||||||||||
Tax benefit from exercise of stock options | 36,000 | 36,000 | 36,000 | 36,000 | ||||||||||||||||||||||||||||||||||||||||||
Purchase and retirement of common shares | (707,194 | ) | (707 | ) | (1,574,525 | ) | (7,130,020 | ) | (8,705,252 | ) | (707,194 | ) | (707 | ) | (1,574,525 | ) | (7,130,020 | ) | (8,705,252 | ) | ||||||||||||||||||||||||||
Cash dividends declared ($.54 per share) | (3,691,983 | ) | (3,691,983 | ) | (3,691,983 | ) | (3,691,983 | ) | ||||||||||||||||||||||||||||||||||||||
Comprehensive Income: | ||||||||||||||||||||||||||||||||||||||||||||||
Net earnings | 2,197,267 | 2,197,267 | 2,197,267 | 2,197,267 | ||||||||||||||||||||||||||||||||||||||||||
Net change during the period related to cash flow hedges | 65,000 | 65,000 | 65,000 | 65,000 | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive Income | 2,262,267 | |||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive Income | 65,000 | |||||||||||||||||||||||||||||||||||||||||||||
Adjustment to initially apply FAS No. 158, net of tax benefit of $472,000 | (857,449 | ) | (857,449 | ) | ||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2006 | 6,604,844 | 6,605 | 15,235,448 | 57,753,587 | (893,449 | ) | 72,102,191 | |||||||||||||||||||||||||||||||||||||||
Common shares issued upon exercise of options | 101,850 | 101 | 1,046,102 | 1,046,203 | ||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | 539,915 | 539,915 | ||||||||||||||||||||||||||||||||||||||||||||
Tax benefit from exercise of stock options | 27,000 | 27,000 | ||||||||||||||||||||||||||||||||||||||||||||
Common shares received for exercise of stock options | (36,044 | ) | (36 | ) | (84,478 | ) | (400,103 | ) | (484,617 | ) | ||||||||||||||||||||||||||||||||||||
Cash dividends declared ($.54 per share) | (3,591,301 | ) | (3,591,301 | ) | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive Income: | ||||||||||||||||||||||||||||||||||||||||||||||
Net earnings | 2,549,328 | 2,549,328 | ||||||||||||||||||||||||||||||||||||||||||||
Net change during the period related to: | ||||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedges | 6,000 | 6,000 | ||||||||||||||||||||||||||||||||||||||||||||
Pensions, net of taxes of $236,000 | 383,711 | 383,711 | ||||||||||||||||||||||||||||||||||||||||||||
Comprehensive Income | 2,262,267 | 2,939,039 | ||||||||||||||||||||||||||||||||||||||||||||
Adjustment to initially apply FIN 48 | (133,000 | ) | (133,000 | ) | ||||||||||||||||||||||||||||||||||||||||||
Adjustment to initially apply FAS No. 158, net of tax | (857,449 | ) | (857,449 | ) | ||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2007 | 6,670,650 | $ | 6,670 | $ | 16,763,987 | $ | 56,178,511 | $ | (503,738 | ) | $ | 72,445,430 | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2006 | 6,604,844 | $ | 6,605 | $ | 15,235,448 | $ | 57,753,587 | $ | (893,449 | ) | $ | 72,102,191 | ||||||||||||||||||||||||||||||||||
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,
| 2006 | 2005 | 2004 | 2007 | 2006 | ||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||||||
Net earnings | $ | 2,197,267 | $ | 1,244,185 | $ | 5,378,687 | $ | 2,549,328 | $ | 2,197,267 | ||||||||||
Adjustments to reconcile net earnings to net cash provided from operating activities: | ||||||||||||||||||||
Depreciation and amortization | 3,810,767 | 3,936,752 | 3,489,772 | 3,358,646 | 3,810,767 | |||||||||||||||
Provision for (recovery of) bad debts | 29,000 | 114,000 | (11,638 | ) | ||||||||||||||||
Tax benefit from exercise of stock options | — | 33,000 | 155,000 | |||||||||||||||||
Provision for bad debts | 88,000 | 29,000 | ||||||||||||||||||
Share-based compensation expense | 502,051 | — | — | 539,915 | 502,051 | |||||||||||||||
Deferred income tax provision (benefit) | 112,000 | (170,000 | ) | 850,000 | ||||||||||||||||
Deferred income tax provision | 29,000 | 112,000 | ||||||||||||||||||
Gain on sale of property, plant and equipment | (110,916 | ) | (651,944 | ) | — | (77,215 | ) | (110,916 | ) | |||||||||||
Changes in assets and liabilities, net of acquisition: | ||||||||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||
Accounts receivable | (14,782 | ) | 1,117,891 | 506,861 | 2,128,833 | (14,782 | ) | |||||||||||||
Inventories | 3,934,815 | 8,554,631 | (7,295,496 | ) | (8,849,134 | ) | 3,934,815 | |||||||||||||
Prepaid expenses and other current assets | (41,585 | ) | (133,061 | ) | (216,142 | ) | (179,440 | ) | (41,585 | ) | ||||||||||
Other assets | 1,333,475 | 349,299 | (864,062 | ) | (751,676 | ) | 1,333,475 | |||||||||||||
Accounts payable | (1,020,594 | ) | (2,806,138 | ) | 1,721,251 | 1,609,431 | (1,020,594 | ) | ||||||||||||
Accrued expenses | (1,034,853 | ) | (378,927 | ) | (569,209 | ) | 603,552 | (1,034,853 | ) | |||||||||||
Long-term pension liability | 154,307 | 29,426 | (431,113 | ) | (185,039 | ) | 154,307 | |||||||||||||
Other long-term liabilities | (25,000 | ) | — | |||||||||||||||||
Net cash flows provided from operating activities | 9,850,952 | 11,239,114 | 2,713,911 | 839,201 | 9,850,952 | |||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||||||
Additions to property, plant and equipment | (887,196 | ) | (2,157,013 | ) | (6,162,371 | ) | (1,162,745 | ) | (887,196 | ) | ||||||||||
Proceeds from disposal of property, plant and equipment | 110,916 | 3,093,431 | 176,656 | 148,437 | 110,916 | |||||||||||||||
Purchase of business, net of cash acquired | — | — | (6,272,259 | ) | ||||||||||||||||
Other assets | 4,637,891 | (461,189 | ) | (374,757 | ) | 9,995 | 4,637,891 | |||||||||||||
Net cash provided from (used in) investing activities | 3,861,611 | 475,229 | (12,632,731 | ) | ||||||||||||||||
Net cash (used in) provided from investing activities | (1,004,313 | ) | 3,861,611 | |||||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||||||
Proceeds from long-term debt | 18,643,000 | 21,710,000 | ||||||||||||||||||
Repayment of long-term debt | (1,683,029 | ) | (1,593,807 | ) | (1,179,021 | ) | (18,625,734 | ) | (23,393,029 | ) | ||||||||||
Payment of cash dividends | (3,691,983 | ) | (3,992,433 | ) | (4,014,559 | ) | (3,591,301 | ) | (3,691,983 | ) | ||||||||||
Proceeds received on exercise of stock options | 1,031,803 | 562,198 | 1,659,394 | 561,586 | 1,031,803 | |||||||||||||||
Excess tax benefit from exercise of stock options | 36,000 | — | — | 27,000 | 36,000 | |||||||||||||||
Common stock reacquired and retired | (8,705,252 | ) | (3,620,690 | ) | (1,311,510 | ) | — | (8,705,252 | ) | |||||||||||
Net cash used in financing activities | (13,012,461 | ) | (8,644,732 | ) | (4,845,696 | ) | (2,985,449 | ) | (13,012,461 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents | 700,102 | 3,069,611 | (14,764,516 | ) | ||||||||||||||||
Net (decrease) increase in cash and cash equivalents | (3,150,561 | ) | 700,102 | |||||||||||||||||
Cash and cash equivalents balance, beginning of year | 3,220,174 | 150,563 | 14,915,079 | 3,920,276 | 3,220,174 | |||||||||||||||
Cash and cash equivalents balance, end of year | $ | 3,920,276 | $ | 3,220,174 | $ | 150,563 | $ | 769,715 | $ | 3,920,276 | ||||||||||
See Notes to Consolidated Financial Statements.
21
Superior Uniform Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005,2007 and 20042006
NOTE 1 – Summary of Significant Accounting Policies:
a) Business description
Superior Uniform Group®, through its Signature marketing brands – Fashion Seal®, Fashion Seal Healthcare™, Martin’s®, Worklon®, Sope Creek® (See Notes 17 and 18) and UniVogue™ – manufactures and sells a wide range of uniforms, image apparel and accessories, primarily in domestic markets. Superior specializes in managing comprehensive uniform programs, and is dedicated to servicing the Healthcare, Hospitality, Restaurant/Food Services, Retail Employee I.D., Governmental/Public Safety, Entertainment, Commercial, Cleanroom, and ResortwearCleanroom markets.
b) Basis of presentation
The consolidated financial statements include the accounts of Superior Uniform Group, Inc. and its wholly-owned subsidiary, Fashion Seal Corporation (collectively, the “Company”). Intercompany items have been eliminated in consolidation.
c) Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents.
d) Revenue Recognitionrecognition and Allowanceallowance for Doubtful Accountsdoubtful accounts
The Company recognizes revenue as products are shipped and title passes. A provision for estimated returns and allowances is recorded based upon historical experience and current allowance programs. 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.
e) Advertising expenses
The Company expenses advertising costs as incurred. Advertising costs for the years ended December 31, 2006, 20052007 and 2004,2006, respectively were $174,997, $171,041,$255,665 and $227,194.$184,810.
f) ShippingCost of goods sold and shipping and handling fees and costs
TheCost of goods sold consists primarily of direct costs of acquiring inventory, including cost of merchandise, inbound freight charges, purchasing and receiving costs, inspection costs, and warehousing costs. Additionally, the Company follows EITF 00-10,Accounting for Shipping and Handling Fees and Costs,which requires shipping and handling fees billed to customers to be classified as revenue and shipping and handling costs to be either classified as cost of sales or disclosed in the notes to the financial statements. The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with in-bound and out-bound freight are generally recorded in cost of goods sold. Other shipping and handling costs are included in selling and administrative expenses and totaled $8,504,047, $8,451,407,$7,323,836 and $7,521,935$8,025,626 for the years ended December 31, 2007 and 2006, 2005, and 2004, respectively.
g) Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market value. Judgments and estimates are used in determining the likelihood that 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.
h) Property, plant and equipment
Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while replacements, maintenance and repairs which do not improve or extend the life of the respective assets are expensed currently. Costs of assets sold or retired and the related accumulated depreciation and amortization are eliminated from accounts and the net gain or loss is reflected in the statement of earnings within selling and administrative expenses.
i) 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,consolidated balance sheets and no longer be amortized but tested for impairment on a periodic basis. We annually evaluate the recoverability of goodwill and take into account events or circumstances that warrant revised estimates of useful lives or indicate that an impairment exists. The Company has completed the annual impairment test at December 31, 2006, 2005,2007 and 20042006, which indicated no
impairment of the remaining goodwill. Amortization expense for other intangible assets was $238,159 $238,159, and $178,619, for each of the years ended December 31, 2006, 2005,2007 and 2004, respectively.
22
Other2006. Amortization expense for other intangible assets were recordedis expected to be $238,159 in each of the yearyears ended December 31, 2004 as2008, 2009 and 2010 with the Company completed its valuationremaining balance of the UniVogue acquisition. Other intangible assets include the value assigned to the customer list acquired in this acquisition of $1,667,111 less accumulated amortization of $654,936. The customer list is$59,536 being amortized straight-line over 7 years.in 2011.
j) Depreciation and amortization
Plant and equipment are depreciated on the straight-line basis at 2-1/2%2- 1/2% to 5% for buildings, 2-1/2%2- 1/2% to 20% for improvements, 10% to 20% for machinery, equipment and fixtures and 20% to 33-1/3%33- 1/3% for transportation equipment. Leasehold improvements are amortized over the terms of the leases inasmuch as such improvements have useful lives of at least the terms of the respective leases.
k) Employee benefits
Pension plan costs are funded currently based on actuarial estimates, with prior service costs amortized over 20 years. The Company recognizes settlement gains and losses in its financial statements when the cost of all settlements in a year is greater than the sum of the service cost and interest cost components of net periodic pension cost for the plan for the year.
l) Insurance
The Company self-insures for certain obligations related to employee 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.
m) Taxes on income
Income taxes are provided for under the liability method in accordance with FAS No. 109,Accounting for Income Taxes, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
n) Impairment of Long-Lived Assetslong-lived assets
In accordance with FAS No. 144,Accounting for Impairment or Disposal of Long-lived Assets, long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to future net cash flows the asset is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value.
o) Share-based compensation
The Company awards share-based compensation as an incentive for employees to contribute to the Company’s long-term success. Historically, the Company has issued options and stock settled stock appreciation rights. At December 31, 2006,2007, the Company had 1,810,5001,616,525 shares of common stock authorized for awards of share-based compensation under its 2003 Incentive Stock and Awards Plan.
On January 1, 2006, the Company adopted Statement of Financial Accounting StandardsFAS No. 123(R),Share-Based Payment (“FAS No. 123R”). Accordingly, the Company is now recognizing share-based compensation expense for all awards granted to employees, which is based on the fair value of the award on the date of grant. The Company adoptedUnder FAS No. 123(R) under the modified prospective transition method, and consequently prior period results have not been restated. Under this transition method, in 2006, the Company’s reported stock compensation expense will include expense related to stock compensation awards granted subsequent to January 1, 2006, which is based on the grant date fair value estimated in accordance with the provisions of FAS No. 123(R). Prior to January 1, 2006,All share-based awards previously granted by the Company applied APB Opinion No. 25 “Accounting for Stock Issuedwere fully vested prior to Employees” in accounting for its employee stock compensation and appliedthe adoption of FAS No. 123Accounting for Stock Issued to Employees for disclosure purposes only. Under APB 25, the intrinsic value method was used to account for share-based employee compensation plans and expense was not recorded for awards granted with no intrinsic value. The FAS No. 123 disclosures include pro forma net earnings (loss) and earnings (loss) per share as if the fair value-based method of accounting had been used.123(R). Determining the appropriate fair value model and calculating the fair value of stock compensation awards requires the input of certain highly complex and subjective assumptions, including the expected life of the stock compensation awards, the Company’s common stock price volatility, and the rate of employee forfeitures. The assumptions used in calculating the fair value of stock compensation awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary to use different assumptions, stock compensation expense could be materially different from what has been recorded in the current period.
23
For the yearyears ended December 31, 2007 and 2006, the Company recognized $539,915 and $502,051, respectively, of pre-tax share-based compensation expense under FAS No. 123(R), recorded in selling and administrative expense in the Consolidated Statementconsolidated statements of Earnings . This expense wasearnings. These expenses were offset by a$42,000 and $63,000, respectively, of deferred tax benefitbenefits for non-qualified share–based compensation. As of December 31, 2006,2007, the Company had no unrecognized compensation cost expected to be recognized for share-based awards made prior to January 1, 2006. All such grants were fully-vested prior to January 1, 2006 under the Company’s standard vesting policies, which provide for immediate vesting at the date of grant.
Stock options and stock settled stock appreciation rights.The Company grants stock options and stock settled stock appreciation rights to employees that allow them to purchase shares of the Company’s common stock. Options are also granted to outside members of the Board of Directors of the Company. The Company determines the fair value of stock options and stock settled stock appreciation rights at the date of grant using the Black-ScholesBlack-Scholes-Merton valuation model. All options and stock appreciation rights vest immediately at the date of grant. Awards generally expire five years after the date of grant with the exception of options granted to outside directors, which expire ten years after the date of grant. The Company issues new shares upon the exercise of stock options and stock settled stock appreciation rights.
During the yearyears ended December 31, 2007 and 2006, the Company received $561,586 and $1,031,803, respectively, in cash from stock option exercises. Tax benefits of $27,000 and $36,000, respectively, were recognized for these exercises. Additionally, during the year ended December 31, 2007, the Company received 36,044 shares of its common stock as payment for the issuance of 48,725 shares of its common stock related to the exercise of stock option agreements.
p) 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.
q) Comprehensive Incomeincome
FAS No. 130,Reporting Comprehensive Income requires disclosure of total comprehensive income. Other comprehensive income (loss) is defined as the change in equity during a period, from transactions and other events, excluding changes resulting from investments by owners (e.g., supplemental stock offering) and distributions to owners (e.g., dividends).
r) Operating Segmentssegments
FAS No. 131Disclosures about Segments of an Enterprise and Related Information requires disclosures of certain information about operating segments, 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.
s) Risks and Concentrationsconcentrations
In 2007 and 2006, 2005,approximately 62% and 2004 approximately 75%, 73%, and 70%, respectively, of the Company’s products were obtained from suppliers located in Central America. Any inability by the Company to continue to obtain its products from Central America could significantly disrupt the Company’s business. Because the Company manufactures and sources products in Central America, the Company is affected by economic conditions in those countries, including increased duties, possible employee turnover, labor unrest and lack of developed infrastructure. Included in the Company’s consolidated balance sheets at December 31, 20062007 and 20052006 are receivable balances from contractors in Central America totaling approximately $0.1 million and $4.8 million, respectively. This decrease is attributed to a change in our operating arrangement with our primary supplier in Central America. Prior to July 2007, the Company shipped raw material inventory to our primary supplier, transferred title to the supplier, and $5.2 million, respectively.recorded a receivable due from the supplier. In July 2007, we modified the operating arrangement whereby the Company maintains title in the raw material inventory until such time as the supplier actually utilizes the fabric in production for the Company.
t) Fair Valuevalue of Financial Instruments—financial instruments
The carrying amounts of cash and cash equivalents, receivables and accounts payable approximated fair value as of December 31, 20062007 and 2005,2006, because of the relatively short maturities of these instruments. The carrying amount of long-term debt, including current maturities, approximated fair value as of December 31, 20062007 and 2005,2006, based upon terms and conditions currently available to the Company in comparison to terms and conditions of the existing long-term debt.
u) Derivative Financial Instrumentsfinancial instruments
The Company follows FAS No. 133Accounting for Derivative Instruments and Hedging Activities (“FAS No. 133”) as amended by FAS No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities —anActivities—an Amendment to FAS Statement No. 133 (“FAS No. 138”). 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 $3,649,431$2,201,806 is designated as a hedged item for the interest rate swap at December 31, 2006.2007. This interest rate swap is accounted for as a cash flow hedge in accordance with FAS No. 133 and FAS No. 138. As of the report date, the swap met the effectiveness test, and as such no gains or losses were included in net earnings during the year related to hedge ineffectiveness and there was no income adjustment related to any portion excluded from the assessment of hedge effectiveness. Gains of $65,000, $230,000,$6,000 and $317,000$65,000 were included in other comprehensive income for the yearyears ended December 31, 2006, 2005,2007 and 2004,2006, respectively. The fair market values of the interest rate swap of $36,000$30,000 and $101,000$36,000 are included in accrued expenses in the accompanying consolidated balance sheets as of December 31, 20062007 and 2005,2006, respectively. The original term of the contract is ten years.
v) Use of Estimatesestimates
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 materially from those estimates.
24
w) Recent Accounting Pronouncements:
In November 2004, the Financial Accounting Standards Board (“FASB”) issued FAS No. 151,Inventory Costs—an Amendment of ARB No. 43, Chapter 4, to provide clarification that abnormal amounts of idle facility expense, freight, handling costs, and wasted material be recognized as current-period charges. In addition, this standard requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this standard are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of FAS No. 151 as of January 1, 2006 has not had a material impact on the Company’s financial position or the results of operations.accounting pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes: an Interpretation of FAS No. 109(“FIN No. 48”). InterpretationFIN No. 48, which clarifies FAS No. 109,Accounting for Income Taxes, establishes the criterion that an individual tax position has to meet for some or all of the benefits of that position to be recognized in the Company’s financial statements. On initial application, Interpretation 48 will be applied to all tax positions for which the statute of limitations remains open. Only tax positions that meet the more-likely-than-not recognition threshold at the adoption date will be recognized or continue to be recognized. The cumulative effect of applying Interpretation 48 will be reported as an adjustment to retained earnings at the beginning of the period in which it is adopted. Interpretation 48 is effective for fiscal years beginning after December 15, 2006, and will be adopted by the Company on January 1, 2007. The Company currently does not believe that the adoption of Interpretation 48 will have a significant effect on its financial statements or its ability to comply with its current debt covenants.
In June 2006, the Emerging Issues Task Force reached a consensus on Issue No. 06-3 (“EITF 06-3”), “DisclosureDisclosure Requirements for Taxes Assessed by a Governmental Authority on Revenue-Producing Transactions.”Transactions. The consensus allows companies to choose between two acceptable alternatives based on their accounting policies for transactions in which the company collects taxes on behalf of a governmental authority, such as sales taxes. The guidance should be applied to financial reports through retrospective application for all periods presented, if amounts are significant, for interim and annual reporting beginning after February 1, 2007. We doThe Company collects sales tax for various taxing authorities. It is the Company’s policy to record these amounts on a net basis. Therefore, these amounts are not expectincluded in net sales for the Company. The adoption of EITF 06-3 to havehas not had a material effect on our consolidated financial statements.
In September 2006, the FASB issued FAS No. 157,Fair Value Measurements (“FAS No. 157”). FAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. FAS No. 157 is effective for fiscal years beginning after November 15, 2007, the year beginning January 1, 2008 for the Company. The Company is currently reviewing the provisions of FAS No. 157 to determine the impact on its consolidated financial statements.
In September 2006,February 2007, the FASB issued FAS No. 158,159,Employers’ AccountingThe Fair Value Option for Defined Benefit PensionFinancial Assets and Other Postretirement PlansFinancial Liabilities. (“FAS No. 158 amends159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS No. 87,Employers’ Accounting159 will be effective for Pensions,the Company on January 1, 2008. The Company is currently evaluating the impact of adopting FAS No. 88,Employers’ Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits,159 on its consolidated financial statements.
In December 2007, the FASB issued FAS No. 106,Employers’ Accounting for Postretirement Benefits Other Than Pensions and FAS141 (revised 2007) (FAS No. 132(R)141(R)),Employers’ Disclosures about Pensions and Other Postretirement Benefits.
Effective December 31, 2006, the Company adopted FAS No. 158 “Business Combinations,” which requires balance sheet recognition of the funded status for all pension and postretirement benefit plans. The impact of initial adoption has been recorded as an adjustment to other comprehensive income. Subsequent changes in funded status shall also be recognized asis a component of other comprehensive income to the extent they have not yet been recognized as a component of net periodic benefit cost pursuant to FAS No. 87, FAS No. 88 or FAS No. 106. As further described in Note 8, we have pension benefit plans that are subject to the provisionsrevision of FAS No. 158.
In September 2006,141, “Business Combinations.” The primary requirements of FAS No. 141(R) are as follows: (I.) Upon initially obtaining control, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatementsacquiring entity in Current Year Financial Statements. SAB No. 108 provides guidance regarding the considerationa business combination must recognize 100% of the effects of prior year misstatements in quantifying current year misstatements for the purpose of materiality assessments. The method established by SAB No. 108 requires each of our financial statements and the related financial statement disclosures to be considered when quantifying and assessing the materialityfair values of the misstatement.acquired assets, including goodwill, and assumed liabilities, with only limited exceptions even if the acquirer has not acquired 100% of its target. As a consequence, the current step acquisition model will be eliminated. (II.) Contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration. The provisionsconcept of SABrecognizing contingent consideration at a later date when the amount of that consideration is determinable beyond a reasonable doubt, will no longer be applicable. (III.) All transaction costs will be expensed as incurred. FAS No. 108 apply to our financial position and results141 (R) is effective as of operations for the beginning of an entity’s first fiscal year endedbeginning after December 31, 200615, 2008. Adoption is prospective and didearly adoption is not permitted. The Company is currently evaluating the impact that the adoption of FAS No. 141 (R) will have a material impact on ourits consolidated financial position or results of operations.statements.
A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to the Company’s consolidated financial statements.
25
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 was approximately $6,293,000 and was allocated as follows:
Cash | $ | 20,431 | |
Accounts Receivable | 1,965,646 | ||
Other Current Assets | 260,711 | ||
Inventories | 2,065,444 | ||
Property, Plant & Equipment | 108,032 | ||
Other Assets | 11,743 | ||
Other Intangible Assets | 1,667,111 | ||
Goodwill | 875,482 | ||
TOTAL ASSETS | $ | 6,974,600 | |
Accounts Payable and Accrued Expenses | $ | 681,910 | |
Revenue and expenses of UniVogue are included in the consolidated financial statements beginning March 1, 2004.
NOTE 3 – Allowance for Doubtful Accounts Receivable:
The activity in the allowance for doubtful accounts receivable was as follows:
| 2006 | 2005 | 2004 | 2007 | 2006 | ||||||||||||||||
Balance at the beginning of year | $ | 535,000 | $ | 525,000 | $ | 475,000 | $ | 500,000 | $ | 535,000 | ||||||||||
Provision (recovery) for bad debts | 29,000 | 114,000 | (11,638 | ) | ||||||||||||||||
Provision for bad debts | 88,000 | 29,000 | ||||||||||||||||||
Charge-offs | (166,126 | ) | (123,974 | ) | (112,006 | ) | (108,413 | ) | (166,126 | ) | ||||||||||
Recoveries | 102,126 | 19,974 | 125,571 | 10,413 | 102,126 | |||||||||||||||
Acquisition | — | — | 48,073 | |||||||||||||||||
Balance at the end of year | $ | 500,000 | $ | 535,000 | $ | 525,000 | $ | 490,000 | $ | 500,000 | ||||||||||
NOTE 3 – Reserve for Sales Returns and Allowances:
The activity in the reserve for sales returns and allowances was as follows:
| 2007 | 2006 | |||||||
Balance at the beginning of year | $ | 343,753 | $ | 296,548 | ||||
Provision for returns and allowances | 4,231,837 | 4,560,221 | ||||||
Actual returns and allowances paid to customers | (4,202,503 | ) | (4,513,016 | ) | ||||
Balance at the end of year | $ | 373,087 | $ | 343,753 | ||||
NOTE 4 – Inventories:
| December 31, | December 31, | |||||||||||
| 2006 | 2005 | 2007 | 2006 | |||||||||
Finished goods | $ | 30,692,108 | $ | 33,072,321 | $ | 35,613,513 | $ | 30,692,108 | ||||
Work in process | 163,276 | 277,162 | 171,842 | 163,276 | ||||||||
Raw materials | 2,396,580 | 3,837,296 | 10,678,307 | 2,396,580 | ||||||||
| $ | 33,251,964 | $ | 37,186,779 | $ | 46,463,662 | $ | 33,251,964 | |||||
NOTE 5 – Property, Plant and Equipment:
| December 31, | ||||||
| 2006 | 2005 | |||||
Land | $ | 727,416 | $ | 727,416 | ||
Buildings, improvements and leaseholds | 8,101,428 | 8,041,336 | ||||
Machinery, equipment and fixtures | 46,047,580 | 46,203,032 | ||||
| 54,876,424 | 54,971,784 | |||||
Accumulated depreciation and amortization | 39,482,545 | 36,892,492 | ||||
| $ | 15,393,879 | $ | 18,079,292 | |||
26
| December 31, | ||||||
| 2007 | 2006 | |||||
Land | $ | 727,416 | $ | 727,416 | ||
Buildings, improvements and leaseholds | 7,938,553 | 8,101,428 | ||||
Machinery, equipment and fixtures | 45,018,711 | 46,047,580 | ||||
| 53,684,680 | 54,876,424 | |||||
Accumulated depreciation and amortization | 40,364,462 | 39,482,545 | ||||
| $ | 13,320,218 | $ | 15,393,879 | |||
Depreciation and amortization charges were approximately $3,120,000 and $3,573,000 $3,699,000,in 2007 and $3,311,000, in 2006, 2005, and 2004, respectively.
NOTE 6 – Long-Term Debt:
| December 31, 2006 | December 31, 2005 | December 31, 2007 | December 31, 2006 | |||||||||
Note payable to Wachovia, pursuant to revolving credit agreement, maturing June 30, 2007 | $ | — | $ | — | ||||||||
Note payable to Wachovia, pursuant to revolving credit agreement, maturing June 30, 2010 | $ | 1,795,000 | $ | — | ||||||||
6.75% term loan payable to Wachovia, with monthly payments of principal and interest, maturing April 1, 2009 | 3,649,431 | 5,002,350 | 2,201,806 | 3,649,431 | ||||||||
Note payable to Bank of America, 0% interest, payable on January 1, 2007 | 330,109 | 660,219 | ||||||||||
Note payable to Bank of America, 0% interest, paid on January 2, 2007 | — | 330,109 | ||||||||||
| 3,979,540 | 5,662,569 | 3,996,806 | 3,979,540 | |||||||||
Less payments due within one year included in current liabilities | 1,777,734 | 1,683,029 | 1,551,202 | 1,777,734 | ||||||||
Long-term debt less current maturities | $ | 2,201,806 | $ | 3,979,540 | $ | 2,445,604 | $ | 2,201,806 | ||||
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 (5.3%(4.6% at December 31, 2006)2007). 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, 2006,2007, approximately $185,000 was outstanding under letters of credit. On March 27, 2001, and again on April 27, 2004, and again on June 25, 2007, 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, 2007.2010. 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 loan with Wachovia Bank contain restrictive provisions concerning liabilities to tangible net worth ratio (0.75:(.75:1), other borrowings, capital expenditures, working capital ratio (2.5:1), and fixed charges coverage ratio (2.5:1). The Company is in full compliance with all terms, conditions and covenants of the various credit agreements as of December 31, 2006.agreements.
Scheduled principal payments on long-term obligations are $1,777,734 in 2007, $1,551,202 in 2008, and $650,604 in 2009.
272009 and $1,795,000 in 2010.
NOTE 7 – Taxes on Income:
Aggregate income tax provisions consist of the following:
| 2006 | 2005 | 2004 | 2007 | 2006 | ||||||||||||
Current: | ||||||||||||||||
Federal | $ | 1,186,000 | $ | 408,000 | $ | 1,832,000 | $ | 1,600,000 | $ | 1,632,000 | ||||||
State and local | 62,000 | 12,000 | 78,000 | 181,000 | 86,000 | |||||||||||
| 1,248,000 | 420,000 | 1,910,000 | 1,781,000 | 1,718,000 | ||||||||||||
Deferred | 112,000 | (170,000 | ) | 850,000 | 29,000 | 112,000 | ||||||||||
| $ | 1,360,000 | $ | 250,000 | $ | 2,760,000 | $ | 1,810,000 | $ | 1,830,000 | |||||||
The significant components of the deferred income tax liability are as follows:
| 2006 | 2005 | 2007 | 2006 | |||||||||
Deferred income tax assets: | ||||||||||||
Operating reserves and other accruals | $ | 2,514,000 | $ | 2,192,000 | $ | 2,382,000 | $ | 2,514,000 | ||||
Deferred income tax liabilities: | ||||||||||||
Book carrying value in excess of tax basis of property | 2,028,000 | 2,150,000 | 1,934,000 | 2,028,000 | ||||||||
Deferred expenses | 971,000 | 887,000 | 1,198,000 | 971,000 | ||||||||
Net deferred income tax liability | $ | 485,000 | $ | 845,000 | $ | 750,000 | $ | 485,000 | ||||
The difference between the total statutory Federal income tax rate and the actual effective income tax rate is accounted for as follows:
| 2006 | 2005 | 2004 | 2007 | 2006 | |||||||||||
Statutory Federal income tax rate | 34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % | |||||
State and local income taxes, net of Federal income tax benefit | 1.2 | 0.5 | 0.6 | 2.2 | 1.2 | ||||||||||
(Reduction) increase in accrual for tax contingencies | (1.2 | ) | (12.1 | ) | 0.3 | ||||||||||
Effect of change in unrecognized tax benefit | (5.3 | ) | (0.9 | ) | |||||||||||
Non-deductible share-based employee compensation expense | 3.0 | — | — | 2.6 | 2.2 | ||||||||||
Other items | 1.2 | (5.7 | ) | (1.0 | ) | (0.6 | ) | 0.9 | |||||||
Effective income tax rate | 38.2 | % | 16.7 | % | 33.9 | % | 32.9 | % | 37.4 | % | |||||
We adopted the provisions of FIN No. 48, and FASB Staff Position No. FIN 48-1, on January 1, 2007. Only tax positions that met the more-likely-than-not recognition threshold at the adoption date were recognized or continued to be recognized. As a result of the implementation of FIN No. 48, we recognized a $133,000 increase to the liability for uncertain tax positions, which was accounted for as an adjustment to the beginning balance of retained earnings.
As of the date of adoption, including the increase in the liability noted above, we had approximately $728,000 of unrecognized tax benefits, all of which, if recognized, would favorably affect the annual effective income tax rate. As of December 31, 2007, we have $603,000 of unrecognized tax benefits, all of which, if recognized, would favorably affect the annual effective income tax rate. None of this liability is expected to be paid in the next twelve months. Accordingly, the balance of $603,000 is included in other long-term liabilities.
The Internal Revenue Service completed an audit of our 2004 and 2005 federal income tax returns during the year ended December 31, 2007. As a result, we paid approximately $137,000 of tax, $28,000 of interest and $0 in penalties during the year ended December 31, 2007. The tax payment was primarily related to timing difference benefits being deferred.
Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows:
Balance at January 1, 2007 | $ | 599,000 | ||
Additions based on tax positions related to the current year | 88,000 | |||
Additions for tax positions of prior years | 99,000 | |||
Reductions for tax positions of prior years | (80,000 | ) | ||
Reductions due to lapse of statute of limitations | (47,000 | ) | ||
Reductions due to settlements with tax authorities | (176,000 | ) | ||
Balance at December 31, 2007 | $ | 483,000 | ||
28
NOTE 8 – Benefit Plans:
Defined Benefit Plans
The Company is the sponsor of two noncontributory qualified defined benefit pension plans, providing for normal retirement at age 65, covering all eligible employees (as defined). Periodic benefit payments on retirement are determined based on a fixed amount applied to service or determined as a percentage of earnings prior to retirement. The Company is also the sponsor of an unfunded supplemental executive retirement plan (SERP) in which several of its employees are participants. Pension plan assets for retirement benefits consist primarily of fixed income securities and common stock equities.
In September 2006, the Financial Accounting Standards Board issued FAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans: an amendment of FAS Statements No. 87, 88, 106, and 132(R). FAS No. 158 requires the Company to recognize the funded status of its defined benefit postretirement plan in the Company’s statement of financial position.consolidated balance sheets. The funded status was previously disclosed in the notes to the Company’s consolidated financial statements, but differed from the amount recognized in the statement of financial position.consolidated balance sheets. The Statement does not change the accounting for the Company’s defined contribution plan.
Effective for fiscal years ending after December 15, 2008, FAS No. 158 also removes the existing option to use a plan measurement date that is up to 90 days prior to the date of the statement of financial position. The Statement offers two alternate transition methods for making the measurement date change.
The recognition and disclosure provisions of FAS No. 158 are effective for fiscal years ending after December 15, 2006, for entities with publicly traded equity securities that have defined benefit plans and is to be applied as of the end of the year of adoption. Retrospective application is not permitted. The Company adopted the recognition and disclosure provisions of FAS No. 158 effective December 31, 2006.
At December 31, 2006,2007, the Company’s projected benefit obligation under twoone of its pension plans exceeded the fair value of the plans’ assets by $1,108,000$923,000 and thus the plans areplan is underfunded.
The adoption of FAS No. 158 had the following effect on the Company’s consolidated balance sheet as of December 31, 2006:
| As of December 31, 2006 | ||||||||||||
| Prior to adoption of Statement 158 | Effect of adopting Statement 158 | As adjusted | ||||||||||
Non-current assets | $ | 2,429,000 | $ | (1,158,000 | ) | $ | 1,271,000 | |||||
Long-term pension liability | (937,000 | ) | (171,000 | ) | (1,108,000 | ) | ||||||
Deferred income taxes | (957,000 | ) | 472,000 | (485,000 | ) | |||||||
Accumulated other comprehensive income (loss), net of tax | (36,000 | ) | (857,000 | ) | (893,000 | ) | ||||||
With the adoption of FAS No. 158, the Company reclassified the pension liability to long-term as of December 31, 2006. The adoption of FAS No. 158 did not affect the Company’s statement of earnings for the year ended December 31, 2006, or any prior periods. Application of the Statement will not change the calculation of net income in future periods, but will affect the calculation of other comprehensive income.
Plan liabilities and the market-related value of our corporate plan assets are determined based on a November 1st measurement date and our factory plan is determined based upon a December 31st measurement date. It is our policy to make contributions to the various plans in accordance with statutory funding requirements and any additional funding that may be deemed appropriate.
The following tables present the changes in the benefit obligations and the various plan assets, the funded status of the plans, and the amounts recognized in the Company’sConsolidated Balance Sheets consolidated balance sheets at December 31, 20062007 and 2005:2006:
29
| December 31, | ||||||||
| 2007 | 2006 | |||||||
Changes in benefit obligation | ||||||||
Benefit obligation at beginning of year | $ | 16,848,000 | $ | 17,201,000 | ||||
Service cost | 655,000 | 618,000 | ||||||
Interest cost | 998,000 | 991,000 | ||||||
Actuarial loss (gain) | 4,000 | (368,000 | ) | |||||
Settlement | 188,000 | 252,000 | ||||||
Benefits paid | (2,014,000 | ) | (1,846,000 | ) | ||||
Benefit obligation at end of year | 16,679,000 | 16,848,000 | ||||||
Changes in plan assets | ||||||||
Fair value of plan assets at beginning of year | 17,011,000 | 16,534,000 | ||||||
Actual return on assets | 2,196,000 | 1,823,000 | ||||||
Employer contributions | 500,000 | 500,000 | ||||||
Benefits paid | (2,014,000 | ) | (1,846,000 | ) | ||||
Fair value of plan assets at end of year | 17,693,000 | 17,011,000 | ||||||
Funded status at end of year | $ | 1,014,000 | $ | 163,000 | ||||
| December 31, | ||||||||
| 2006 | 2005 | |||||||
| Changes in benefit obligation | ||||||||
Benefit obligation at beginning of year | $ | 17,201,000 | $ | 18,282,000 | ||||
Service cost | 618,000 | 647,000 | ||||||
Interest cost | 991,000 | 1,078,000 | ||||||
Actuarial (gain) loss | (368,000 | ) | (722,000 | ) | ||||
Settlement | 252,000 | 348,000 | ||||||
Benefits paid | (1,846,000 | ) | (2,432,000 | ) | ||||
Benefit obligation at end of year | 16,848,000 | 17,201,000 | ||||||
| Changes in plan assets | ||||||||
Fair value of plan assets at beginning of year | 16,534,000 | 17,274,000 | ||||||
Actual return on assets | 1,823,000 | 1,192,000 | ||||||
Employer contributions | 500,000 | 500,000 | ||||||
Benefits paid | (1,846,000 | ) | (2,432,000 | ) | ||||
Fair value of plan assets at end of year | 17,011,000 | 16,534,000 | ||||||
Funded status at end of year | $ | 163,000 | $ | (667,000 | ) | |||
| Amounts recognized in consolidated balance sheet | ||||||||
Noncurrent assets | $ | 1,271,000 | $ | 2,460,000 | ||||
Noncurrent liabilities | (1,108,000 | ) | (954,000 | ) | ||||
| $ | 163,000 | $ | 1,506,000 | |||||
| Amounts recognized in accumulated other comprehensive income consist of: | ||||||||
Net actuarial loss | $ | 1,145,000 | $ | — | ||||
Prior service cost | 184,000 | — | ||||||
| $ | 1,329,000 | $ | — | |||||
Information for pension plans with projected benefit obligation in excess of plan assets
| December 31, | ||||||
| 2006 | 2005 | |||||
Projected benefit obligation | $ | 11,888,000 | $ | 12,369,000 | ||
Fair value of plan assets | 10,780,000 | 10,707,000 | ||||
Components of net periodic benefit cost
| 2007 | 2006 | |||||||||||||||||||
Amounts recognized in consolidated balance sheet | ||||||||||||||||||||
Other assets | $ | 1,937,000 | $ | 1,271,000 | ||||||||||||||||
Long-term pension liability | (923,000 | ) | (1,108,000 | ) | ||||||||||||||||
| $ | 1,014,000 | $ | 163,000 | |||||||||||||||||
| Amounts recognized in accumulated other comprehensive income consist of: | ||||||||||||||||||||
Net actuarial loss | $ | 570,000 | $ | 1,145,000 | ||||||||||||||||
Prior service cost | 140,000 | 184,000 | ||||||||||||||||||
| $ | 710,000 | $ | 1,329,000 | |||||||||||||||||
| Information for pension plans with projected benefit obligation in excess of plan assets | ||||||||||||||||||||
| December 31, | ||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||
Projected benefit obligation | $ | 923,000 | $ | 11,888,000 | ||||||||||||||||
Fair value of plan assets | — | 10,780,000 | ||||||||||||||||||
| $ | 923,000 | $ | 1,108,000 | |||||||||||||||||
| Components of net periodic benefit cost | ||||||||||||||||||||
Net periodic benefits cost | 2006 | 2005 | 2004 | 2007 | 2006 | |||||||||||||||
Service cost - benefits earned during the period | $ | 618,000 | $ | 647,000 | $ | 672,000 | ||||||||||||||
Service cost—benefits earned during the period | $ | 655,000 | $ | 618,000 | ||||||||||||||||
Interest cost on projected benefit obligation | 991,000 | 1,078,000 | 1,033,000 | 998,000 | 991,000 | |||||||||||||||
Expected return on plan assets | (1,288,000 | ) | (1,366,000 | ) | (1,249,000 | ) | (1,363,000 | ) | (1,288,000 | ) | ||||||||||
Amortization of prior service cost | 61,000 | 175,000 | 172,000 | 37,000 | 61,000 | |||||||||||||||
Recognized actuarial loss | 23,000 | 84,000 | 34,000 | |||||||||||||||||
Settlement loss | 108,000 | 338,000 | — | |||||||||||||||||
Recognized actuarial (gain) loss | (22,000 | ) | 23,000 | |||||||||||||||||
Settlement (gain) loss | (36,000 | ) | 108,000 | |||||||||||||||||
Net periodic pension cost after settlements | $ | 513,000 | $ | 956,000 | $ | 662,000 | $ | 269,000 | $ | 513,000 | ||||||||||
The pension settlement gain and losses included in the table above relate to lump sum payments made to various employees upon their retirement or termination in the currenteach year.
The estimated net actuarial (gain) loss (gain) and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are ($22,000)$33,000 and $37,000,
30
$11,000, respectively. There is no estimated prior service credit for the other defined benefit postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year.
The accumulated benefit obligation for the Company’s defined benefit plans totaled $14,265,000 and $14,608,000 at December 31, 2006 and 2005, respectively.
Included in the above table are pension plans with aggregate accumulated benefit obligations in excess of plan assets. The aggregate accumulated benefit obligations for these plans were $388,000 and $385,000 at December 31, 2006 and 2005, respectively. There are no plan assets for these plans at December 31, 2006 and 2005, respectively.
The table below presents various assumptions used in determining the benefit obligation for each year and reflects the percentages for the various plans:plans.
Weighted-average assumptions used to determine benefit obligations at December 31,
| Long Term Rate | |||||||||||||||||
| Discount Rate | of Return | Salary Scale | |||||||||||||||
| Corp. | Plants | Corp. | Plants | Corp. | Plants | ||||||||||||
2004 | 6.00 | % | 6.00 | % | 8.00 | % | 8.00 | % | 4.50 | % | N/A | ||||||
2005 | 6.00 | % | 6.00 | % | 8.00 | % | 8.00 | % | 4.50 | % | N/A | ||||||
2006 | 6.00 | % | 6.00 | % | 8.00 | % | 8.00 | % | 4.50 | % | N/A | ||||||
| Discount Rate | Long Term Rate of Return | Salary Scale | |||||||||||||||
| Corp. | Plants | Corp. | Plants | Corp. | Plants | ||||||||||||
2006 | 6.00 | % | 6.00 | % | 8.00 | % | 8.00 | % | 4.50 | % | N/A | ||||||
2007 | 6.00 | % | 6.00 | % | 8.00 | % | 8.00 | % | 4.50 | % | N/A | ||||||
Weighted-average assumptions used to determine net periodic benefit cost for years ending December 31,
| Long Term Rate | |||||||||||||||||
| Discount Rate | of Return | Salary Scale | |||||||||||||||
| Corp. | Plants | Corp. | Plants | Corp. | Plants | ||||||||||||
2004 | 6.20 | % | 6.20 | % | 8.00 | % | 8.00 | % | 4.50 | % | N/A | ||||||
2005 | 6.00 | % | 6.00 | % | 8.00 | % | 8.00 | % | 4.50 | % | N/A | ||||||
2006 | 6.00 | % | 6.00 | % | 8.00 | % | 8.00 | % | 4.50 | % | N/A | ||||||
| Discount Rate | Long Term Rate of Return | Salary Scale | |||||||||||||||
| Corp. | Plants | Corp. | Plants | Corp. | Plants | ||||||||||||
2006 | 6.00 | % | 6.00 | % | 8.00 | % | 8.00 | % | 4.50 | % | N/A | ||||||
2007 | 6.00 | % | 6.00 | % | 8.00 | % | 8.00 | % | 4.50 | % | N/A | ||||||
The methodology used to determine the expected rate of return on the pension plan assets was based on review of actual returns in the past and consideration of projected returns based upon our projected asset allocation. Our strategy with respect to our investments in pension plan assets is to be invested with a long-term outlook. Therefore, the risk and return balance of our asset portfolio should reflect a long-term horizon. Our pension plan asset allocation at December 31, 2007, 2006 2005 and target allocation for 20072008 are as follows:
| Percentage of Plan Assets at December 31, | Target Allocation | Percentage of Plan Assets at December 31, | Target Allocation 2008 | |||||||||||||||
Investment description | 2006 | 2005 | 2007 | 2007 | 2006 | |||||||||||||
Equity securities | 71 | % | 70 | % | 70 | % | 71 | % | 71 | % | 70 | % | ||||||
Fixed income | 29 | 30 | 30 | 29 | 29 | 30 | % | |||||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||
We do not plan to contribute approximately $500,000 to our defined benefit pension plans in 2007.2008.
The following table includes projected benefit payments for the years indicated:
Year | Projected Benefit Payments | ||
2007 | $ | 470,000 | |
2008 | 841,000 | ||
2009 | 601,000 | ||
2010 | 1,134,000 | ||
2011 | 1,094,000 | ||
2012-2016 | $ | 6,913,000 | |
31
Year | Projected Benefit Payments | |
2008 | 761,000 | |
2009 | 598,000 | |
2010 | 1,053,000 | |
2011 | 981,000 | |
2012 | 1,324,000 | |
2013-2017 | 6,758,000 |
Defined Contribution Plan
The Company provides a defined contribution plan covering qualified employees. The plan includes a provision that allows employees to make pre-tax contributions under Section 401(k) of the Internal Revenue Code. The plan provides for the Company to make a guaranteed match equal to 25% of each employee’s eligible contributions. The plan also provides the Company with the option of making an additional discretionary contribution to the plan each year. The Company contributions for the years ended December 31, 2006, 2005,2007 and 2004,2006, were approximately $130,000 and $126,000, $147,000, and $147,000, respectively.
NOTE 9 – Quarterly Results for 20052006 and 20062007 (Unaudited):
| Quarter Ended | ||||||||||||
March 31, 2005 | June 30, 2005 | September 30, 2005 | December 31, 2005 | |||||||||
Net sales | $ | 31,857,089 | $ | 34,858,915 | $ | 34,194,000 | $ | 32,402,347 | ||||
Gross Profit | $ | 10,341,475 | $ | 10,801,684 | $ | 9,857,419 | $ | 8,714,945 | ||||
Earnings before taxes on income | $ | 219,443 | $ | 976,533 | $ | 228,550 | $ | 69,659 | ||||
Net earnings | $ | 139,443 | $ | 646,533 | $ | 158,550 | $ | 299,659 | ||||
Basic net earnings per common share | $ | 0.02 | $ | 0.09 | $ | 0.02 | $ | 0.04 | ||||
Diluted net earnings per common share | $ | 0.02 | $ | 0.09 | $ | 0.02 | $ | 0.04 | ||||
Dividends per common share | $ | 0.135 | $ | 0.135 | $ | 0.135 | $ | 0.135 | ||||
Average outstanding shares (Basic) | 7,445,442 | 7,446,900 | 7,447,700 | 7,241,855 | ||||||||
Average outstanding shares (Diluted) | 7,552,475 | 7,518,508 | 7,511,157 | 7,272,644 | ||||||||
| Quarter Ended | ||||||||||||||||
| March 31, 2006 | June 30, 2006 | September 30, 2006 | December 31, 2006 | |||||||||||||
Net sales | $ | 30,079,203 | $ | 30,731,255 | $ | 32,388,631 | $ | 30,515,684 | ||||||||
Gross Profit | $ | 9,792,278 | $ | 9,868,477 | $ | 10,360,636 | $ | 9,307,794 | ||||||||
Earnings from continuing operations before taxes on income | $ | 1,116,844 | $ | 1,338,595 | $ | 1,750,990 | $ | 688,281 | ||||||||
Earnings from continuing operations | $ | 656,844 | $ | 868,595 | $ | 1,090,990 | $ | 448,281 | ||||||||
Loss from discontinued operations, net of tax benefits | $ | (104,618 | ) | $ | (238,927 | ) | $ | (178,775 | ) | $ | (345,123 | ) | ||||
Net earnings | $ | 552,226 | $ | 629,668 | $ | 912,215 | $ | 103,158 | ||||||||
Per Share Data: | ||||||||||||||||
Basic | ||||||||||||||||
Earnings from continuing operations | $ | 0.09 | $ | 0.12 | $ | 0.17 | $ | 0.06 | ||||||||
Loss from discontinued operations, net of tax benefits | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.05 | ) | ||||
Net earnings | $ | 0.08 | $ | 0.09 | $ | 0.14 | $ | 0.01 | ||||||||
Diluted | ||||||||||||||||
Earnings from continuing operations | $ | 0.09 | $ | 0.12 | $ | 0.17 | $ | 0.06 | ||||||||
Loss from discontinued operations, net of tax benefits | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.05 | ) | ||||
Net earnings | $ | 0.08 | $ | 0.09 | $ | 0.14 | $ | 0.01 | ||||||||
Average Outstanding Shares (Basic) | 7,184,459 | 6,919,658 | 6,619,404 | 6,601,571 | ||||||||||||
Average Outstanding Shares (Diluted) | 7,198,753 | 6,963,514 | 6,661,217 | 6,656,142 | ||||||||||||
| Quarter Ended | ||||||||||||||||
| March 31, 2007 | June 30, 2007 | September 30, 2007 | December 31, 2007 | |||||||||||||
Net sales | $ | 28,713,303 | $ | 29,938,498 | $ | 30,391,919 | $ | 31,414,171 | ||||||||
Gross Profit | $ | 9,539,629 | $ | 9,801,584 | $ | 9,941,098 | $ | 10,337,988 | ||||||||
Earnings from continuing operations before taxes on income | $ | 370,488 | $ | 1,268,395 | $ | 1,692,277 | $ | 2,174,671 | ||||||||
Earnings from continuing operations | $ | 240,488 | $ | 808,395 | $ | 1,352,277 | $ | 1,294,671 | ||||||||
Loss from discontinued operations, net of tax benefits | $ | (115,893 | ) | $ | (148,352 | ) | $ | (134,905 | ) | $ | (747,353 | ) | ||||
Net earnings | $ | 124,595 | $ | 660,043 | $ | 1,217,372 | $ | 547,318 | ||||||||
Per Share Data: | ||||||||||||||||
Basic | ||||||||||||||||
Earnings from continuing operations | $ | 0.04 | $ | 0.12 | $ | 0.20 | $ | 0.20 | ||||||||
Loss from discontinued operations, net of tax benefits | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.12 | ) | ||||
Net earnings | $ | 0.02 | $ | 0.10 | $ | 0.18 | $ | 0.08 | ||||||||
Diluted | ||||||||||||||||
Earnings from continuing operations | $ | 0.04 | $ | 0.12 | $ | 0.20 | $ | 0.19 | ||||||||
Loss from discontinued operations, net of tax benefits | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.11 | ) | ||||
Net earnings | $ | 0.02 | $ | 0.10 | $ | 0.18 | $ | 0.08 | ||||||||
Average Outstanding Shares (Basic) | 6,628,158 | 6,642,162 | 6,656,214 | 6,666,653 | ||||||||||||
Average Outstanding Shares (Diluted) | 6,668,376 | 6,678,825 | 6,676,054 | 6,679,465 | ||||||||||||
| Quarter Ended | ||||||||||||
March 31, 2006 | June 30, 2006 | September 30, 2006 | December 31, 2006 | |||||||||
Net sales | $ | 31,136,543 | $ | 31,504,585 | $ | 33,440,168 | $ | 31,614,439 | ||||
Gross Profit | $ | 10,105,133 | $ | 9,953,881 | $ | 10,522,387 | $ | 9,239,298 | ||||
Earnings before taxes on income | $ | 952,226 | $ | 979,668 | $ | 1,472,215 | $ | 153,158 | ||||
Net earnings | $ | 552,226 | $ | 629,668 | $ | 912,215 | $ | 103,158 | ||||
Basic net earnings per common share | $ | 0.08 | $ | 0.09 | $ | 0.14 | $ | 0.01 | ||||
Diluted net earnings per common share | $ | 0.08 | $ | 0.09 | $ | 0.14 | $ | 0.01 | ||||
Dividends per common share | $ | 0.135 | $ | 0.135 | $ | 0.135 | $ | 0.135 | ||||
Average outstanding shares (Basic) | 7,184,459 | 6,996,257 | 6,619,404 | 6,601,571 | ||||||||
Average outstanding shares (Diluted) | 7,198,753 | 7,040,113 | 6,661,217 | 6,656,142 | ||||||||
The independent registered public accounting firm made limited reviews of the 20052006 and 20062007 quarterly financial information in accordance with standards established by the Public Company Accounting Oversight Board (United States). Such reviews were substantially less in scope than examinations in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole, and accordingly, no such opinions were expressed.
32
NOTE 10 – Rentals:
Aggregate rent expense, including month-to-month rentals, approximated $531,000, $590,000,$491,000 and $751,000,$531,000, for the years ended December 31, 2006, 2005,2007 and 2004,2006, respectively. Long-term lease commitments totaling $927,000$560,000 are as follows: 2007 - $384,000; 2008 - $253,000; 2009 – $151,000; 2010 - $139,000.2008—$269,000; 2009—$152,000; 2010—$139,000.
NOTE 11 – 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.
During 2005, the Company entered into severance protection agreements with senior management. The terms of these agreements require the Company to potentially make certain payments to members of senior management in the event of a change in control of the Company.
During 2006, the Company entered into indemnification agreements with its directors and officers for certain events or occurrences that happen by reason of the fact that the officer or director is, was or has agreed to serve as an officer or director of the Company. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that is considered adequate to cover its exposure. No claims have ever been filed under these agreements.
NOTE 12 – Stock Options:Share-Based Compensation:
In 1993, the Company adopted an Incentive Stock Option Plan (the “1993 Plan”) under which options on 1,500,000 shares were reserved for grant. The 1993 Plan provided for the issuance of incentive stock options. This plan expired in February of 2003. In May, 2003, the stockholders of the Company approved the 2003 Incentive Stock and Awards Plan (the “2003 Plan”), authorizing the granting of incentive stock options, non-qualified stock options, stock-settled stock appreciation rights (“SARS”), restricted stock, performance stock and other stock basedshare-based compensation. A total of 2,500,000 shares of common stock (subject to adjustment for expirations and cancellations of options outstanding from the 1993 Plan subsequent to its termination) have been reserved for issuance under the 2003 Plan. All optionsawards under both plans have been or will be granted at prices at least equal to the fair market value of the shares on the date of grant. OptionsAwards (all of which are exercisable at each respective year end) granted to date under both plans are exercisable in part or in full within five years of grant date with the exception of annual grants to outside directors which are exercisable in part or in full within ten years of grant date. Proceeds from the exercise of optionsawards are credited to common stock to the extent of par value, and the balance is credited to additional paid-in capital. A summary of option transactions during the threetwo years ended December 31, 20062007 follows:
No. of Shares | Weighted Average Exercise Price | Total | Market Price | ||||||||||||||||
Outstanding January 1, 2004 | 662,175 | $ | 10.89 | $ | 7,213,187 | ||||||||||||||
Granted | 244,475 | 14.97 | 3,659,918 | $ | 3,659,918 | ||||||||||||||
Exercised | (160,900 | ) | 10.31 | (1,659,390 | ) | ||||||||||||||
Lapsed | (22,175 | ) | 17.30 | (383,705 | ) | ||||||||||||||
Cancelled | (13,750 | ) | 13.36 | (183,705 | ) | ||||||||||||||
Outstanding December 31, 2004 | 709,825 | 12.18 | 8,646,305 | ||||||||||||||||
Granted | 262,450 | 14.41 | 3,782,978 | $ | 3,782,978 | ||||||||||||||
Exercised | (60,950 | ) | 9.22 | (562,198 | ) | ||||||||||||||
Lapsed | (2,750 | ) | 8.13 | (22,344 | ) | ||||||||||||||
Cancelled | (58,825 | ) | 13.86 | (815,407 | ) | ||||||||||||||
| No. of Shares | Weighted Average Exercise Price | ||||||||||||||||||
Outstanding December 31, 2005 | 849,750 | 12.98 | 11,029,334 | 767,750 | $ | 12.77 | |||||||||||||
Granted | 237,825 | 11.55 | 2,747,189 | $ | 2,747,189 | 162,825 | 11.71 | ||||||||||||
Exercised | (109,700 | ) | 9.41 | (1,031,802 | ) | (109,700 | ) | 9.41 | |||||||||||
Lapsed | (2,100 | ) | 9.35 | (19,635 | ) | (2,100 | ) | 9.35 | |||||||||||
Cancelled | (36,925 | ) | 13.27 | (489,856 | ) | (36,925 | ) | 13.27 | |||||||||||
Outstanding December 31, 2006 | 938,850 | $ | 13.03 | $ | 12,235,230 | 781,850 | 13.01 | ||||||||||||
Granted | 161,350 | 12.58 | |||||||||||||||||
Exercised | (101,850 | ) | 10.27 | ||||||||||||||||
Lapsed | (1,250 | ) | 9.75 | ||||||||||||||||
Cancelled | (41,125 | ) | 13.20 | ||||||||||||||||
Outstanding December 31, 2007 | 798,975 | $ | 13.26 | ||||||||||||||||
At December 31, 2006,2007, options and stock appreciation rights outstanding, all of which were fully vested and exercisable, had aggregate intrinsic values of ($208,562).$5,325.
Options exercised during the years ended December 31, 2006, 20052007 and 20042006, had intrinsic values of $289,936 and $288,966, $241,036 and $770,251, respectively.
33
The weighted average fair value of options granted for each of the years ended December 31, 2007 and 2006, 2005,was $2.26 and 2004 was $2.11, $2.91, and $2.93,$2.17, respectively. At December 31, options available to issue were 1,810,500 for 2006, 2,009,300 for 2005, and 2,210,175 for 2004. Options have never been repriced by the Company in any year.
The following table summarizes information about stock options outstanding as of December 31, 2006:2007:
Range of Exercise Price | Shares | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | ||||
| $ 8.13 to $ 10.45 | 80,150 | 0.5 | $ | 9.64 | |||
| 11.02 to 13.78 | 480,875 | 3.3 | 12.05 | ||||
| 14.00 to 17.13 | 377,825 | 2.8 | 15.00 | ||||
| $ 8.13 to $ 17.13 | 938,850 | 2.8 | $ | 13.03 | |||
Range of | Shares | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | ||||
| $8.125-$10.45 | 7,500 | 2.93 | $ | 9.24 | |||
| $11.02-$13.78 | 509,700 | 2.92 | 12.36 | ||||
| $14.00-$17.13 | 281,775 | 1.71 | 15.02 | ||||
| $8.125-$17.13 | 798,975 | 2.49 | $ | 13.26 | |||
A summary of stock-settled stock appreciation rights transactions during the two years ended December 31, 2007 follows:
| No. of Shares | Weighted Average Exercise Price | ||||
Outstanding December 31, 2005 | 82,000 | $ | 14.95 | ||
Granted | 75,000 | 11.20 | |||
Exercised | — | — | |||
Lapsed | — | — | |||
Cancelled | — | — | |||
Outstanding December 31, 2006 | 157,000 | 13.16 | |||
Granted | 75,000 | 12.74 | |||
Exercised | — | — | |||
Lapsed | — | — | |||
Cancelled | — | — | |||
Outstanding December 31, 2007 | 232,000 | $ | 13.02 | ||
At December 31, 2007 SARS outstanding, all of which were fully vested and exercisable, had no aggregate intrinsic value.
There were no SARS exercised during the years ended December 31, 2007 and 2006.
The weighted average fair value of SARS granted for each of the years ended December 31, 2007 and 2006 was $2.34 and $1.99, respectively.
The following table summarizes information about stock appreciation rights outstanding as of December 31, 2007:
Range of | SARS | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | ||||
| $11.20-$12.74 | 150,000 | 3.58 | $ | 11.97 | |||
| $14.95 | 82,000 | 2.08 | 14.95 | ||||
| $11.20-$14.95 | 232,000 | 3.05 | $ | 13.02 | |||
At December 31, options and SARS available to issue were 1,616,525 for 2007 and 1,810,500 for 2006. Options and SARS have never been repriced by the Company in any year.
The following table summarizes significant assumptions utilized to determine the fair value of share-based compensation awards:
Related Party Options | Other Options | |||||
Exercise price | ||||||
2006 | $ | 11.20 | $ | 11.20-$12.84 | ||
2005 | $ | 14.95 | $ | 11.55-$14.95 | ||
2004 | $ | 15.11 | $ | 14.60-$16.00 | ||
Market price | ||||||
2006 | $ | 11.20 | $ | 11.20-$12.84 | ||
2005 | $ | 14.95 | $ | 11.55-$14.95 | ||
2004 | $ | 15.11 | $ | 14.60-$16.00 | ||
Risk free interest rate (1) | ||||||
2006 | 4.57% | 4.57%-5.12% | ||||
2005 | 3.77% | 3.77%-3.98% | ||||
2004 | 3.07% | 3.07%-3.69% | ||||
Expected option life (2) | 5 years | 5-10 years | ||||
Expected volatility (3) | ||||||
2006 | 25.1% | 25.1%-26.7% | ||||
2005 | 27.2% | 26.7%-36.0% | ||||
2004 | 29.2% | 28.1%-30.2% | ||||
Expected dividend yield (4) | ||||||
2006 | 4.5% | 4.2%-4.5% | ||||
2005 | 3.6% | 4.0%-4.7% | ||||
2004 | 4.5% | 3.4%-4.5% | ||||
| SARS | Options | |||||||
Exercise price | ||||||||
2007 | $ | 12.74 | $ | 12.35-$12.74 | ||||
2006 | $ | 11.20 | $ | 11.20-$12.84 | ||||
Market price | ||||||||
2007 | $ | 12.74 | $ | 12.35-$12.74 | ||||
2006 | $ | 11.20 | $ | 11.20-$12.84 | ||||
Risk free interest rate (1) | ||||||||
2007 | 4.7 | % | 4.6%-4.8 | % | ||||
2006 | 4.6 | % | 4.6%-5.1 | % | ||||
Expected award life (2) | 5 years | 5-10 years | ||||||
Expected volatility (3) | ||||||||
2007 | 24.6 | % | 23.0%-26.0 | % | ||||
2006 | 25.1 | % | 25.1%-26.7 | % | ||||
Expected dividend yield (4) | ||||||||
2007 | 4.2 | % | 4.2%-4.4 | % | ||||
2006 | 4.5 | % | 4.2%-4.5 | % | ||||
| (1) | The risk-free interest rate is based on the yield of a U.S. treasury bond with a similar maturity as the expected life of the awards. |
| (2) | The expected life in years for |
| (3) | The determination of expected stock price volatility for |
| (4) | The dividend yield assumption is based on the history and expectation of the Company’s dividend payouts. |
The following table illustrates the effect on net earnings and net earnings per common share as if the fair value based method had been applied to all awards for 2005 and 2004. The 2006 amounts are presented for comparative purposes only.
34
| December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Net earnings, as reported | $ | 2,197,267 | $ | 1,244,185 | $ | 5,378,687 | ||||||
Add: Total stock-based employee compensation programs recorded as expense, net of tax | 439,051 | — | — | |||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (439,051 | ) | (763,771 | ) | (715,917 | ) | ||||||
Pro forma net earnings | $ | 2,197,267 | $ | 2,007,956 | $ | 6,094,604 | ||||||
Net earnings per common share: | ||||||||||||
Basic – as reported | $ | 0.32 | $ | 0.17 | $ | 0.72 | ||||||
Basic – pro forma | $ | 0.06 | $ | 0.63 | ||||||||
Diluted – as reported | $ | 0.32 | $ | 0.17 | $ | 0.71 | ||||||
Diluted – pro forma | $ | 0.06 | $ | 0.61 | ||||||||
NOTE 13 – Earnings Per Share:
The following table represents a reconciliation of basic and diluted earnings per share:
| 2007 | 2006 | ||||||||||||||||
Earnings from continuing operations | $ | 3,695,831 | $ | 3,064,710 | |||||||||||||
Loss from discontinued operations, net of tax benefits | (1,146,503 | ) | (867,443 | ) | |||||||||||||
| 2006 | 2005 | 2004 | |||||||||||||||
Net earnings used in the computation of basic and diluted earnings per share | $ | 2,197,267 | $ | 1,244,185 | $ | 5,378,687 | 2,549,328 | 2,197,267 | |||||||||
Weighted average shares outstanding - basic | 6,831,273 | 7,395,474 | 7,437,703 | ||||||||||||||
Weighted average shares outstanding—basic | 6,648,297 | 6,831,273 | |||||||||||||||
Common stock equivalents | 38,633 | 68,222 | 156,077 | 27,383 | 38,633 | ||||||||||||
Total weighted average shares outstanding - diluted | 6,869,906 | 7,463,696 | 7,593,780 | ||||||||||||||
Total weighted average shares outstanding—diluted | 6,675,680 | 6,869,906 | |||||||||||||||
Net earnings per share: | |||||||||||||||||
Per Share Data: | |||||||||||||||||
Basic | $ | 0.32 | $ | 0.17 | $ | 0.72 | |||||||||||
Earnings from continuing operations | $ | 0.56 | $ | 0.45 | |||||||||||||
Loss from discontinued operations, net of tax benefits | (0.18 | ) | (0.13 | ) | |||||||||||||
Net earnings | $ | 0.38 | $ | 0.32 | |||||||||||||
Diluted | $ | 0.32 | $ | 0.17 | $ | 0.71 | |||||||||||
Earnings from continuing operations | $ | 0.55 | $ | 0.45 | |||||||||||||
Loss from discontinued operations, net of tax benefits | (0.17 | ) | (0.13 | ) | |||||||||||||
Net earnings | $ | 0.38 | $ | 0.32 | |||||||||||||
OptionsAwards to purchase an average of 645,625 shares of common stock with a weighted average exercise price of $14.11 per share were outstanding during 2007 but were not included in the computation of diluted EPS because the awards’ exercise prices were greater than the average market price of the common shares. Awards to purchase an average of 585,650 shares of common stock with a weighted average exercise price of $11.94 per share were outstanding during 2006, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase an average of 508,000 shares of common stock with a weighted average exercise price of $14.59 per share were outstanding during 2005, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase 225,075 shares of common stock at $14.60 to $15.11 per share were outstanding during the second half of 2004 but were not included in the computation of diluted EPS because the options’awards’ exercise prices were greater than the average market price of the common shares.
35
NOTE 14 – Accrued Expenses:
| December 31, | December 31, | |||||||||||
| 2006 | 2005 | 2007 | 2006 | |||||||||
Salaries, wages, commissions and vacation pay | $ | 1,344,513 | $ | 1,294,362 | $ | 1,504,662 | $ | 1,344,513 | ||||
Other accrued expenses | 1,113,326 | 933,881 | 1,045,018 | 1,113,326 | ||||||||
| $ | 2,457,839 | $ | 2,228,243 | $ | 2,549,680 | $ | 2,457,839 | |||||
NOTE 15 – Supplemental Cash Flow Information:
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||
| 2006 | 2005 | 2004 | 2007 | 2006 | |||||||||||
Income taxes paid | $ | 848,198 | $ | 286,300 | $ | 2,724,263 | $ | 1,012,172 | $ | 848,198 | |||||
Interest paid | $ | 462,259 | $ | 617,087 | $ | 635,437 | $ | 338,721 | $ | 462,259 | |||||
Non-cash investing transactions are excluded from the consolidated statement of cash flows. The years ended December 31, 2006, and 2005, do not include any such non-cash transactions. ForDuring the year ended December 31, 2004, non-cash activities included $990,3292007, the Company repurchased $4,805,453 of raw materials inventory from its primary supplier in fixed asset acquisitions financed with long-term borrowings ofCentral America. The Company reduced the accounts receivable balance from the supplier by the same amount.amount as payment for the inventory. During the year ended December 31, 2007, the Company received 36,044 shares of its common stock as payment for the issuance of 48,725 shares of its common stock related to the exercise of stock option agreements.
NOTE 16 – Stock Repurchase Plan:
In July 2002, the Board of Directors reset the common stock repurchase program authorization so that the Company may make future repurchases of up to 750,000 of its common shares. Through May 4, 2006, the Company repurchased 728,098 shares of its common stock under such repurchase program. On May 5, 2006, the Company’s Board of Directors approved additional repurchases of 750,000 shares of the Company’s outstanding shares of common stock. The Company reacquired and retired 707,194 shares, 295,124–0– shares and 94,950707,194 shares of its common stock in the years ended December 31, 2006, 20052007 and 2004,2006, respectively, with approximate costs of $0, and $8,705,000, $3,621,000, and $1,312,000, respectively. 39,850 shares of the stock repurchased during 2004 were purchased from five members of senior management of the Company at $13.88 per share, the then current market price of the Company’s common stock. At December 31, 2006,2007, the Company had 329,830 shares remaining on its common stock repurchase authorization. Shares purchased under the share repurchase program are constructively retired and returned to unissued status. The Company considers several factors in determining when to make share repurchases, including among other things, the cost of equity, the after-tax cost of borrowing, the debt to total capitalization targets and the expected future cash needs. There is no expiration date or other restriction governing the period over which the Company can make its share repurchases under the program.
NOTE 17 – Discontinued Operations:
36During the fourth quarter of 2007, the Company made a decision to divest Sope Creek. As a result, the related assets of Sope Creek have been classified as held for sale at December 31, 2007 and have been written down to their estimated fair value less selling costs. The write down to fair value resulted in a charge to loss from discontinued operations of approximately $596,000, net of tax benefit in the fourth quarter of 2007. Additionally, the results of operations of Sope Creek have been reported as a loss from discontinued operations in the consolidated statements of earnings for each of the two years ended December 31, 2007. The table below summarizes financial results for the Sope Creek business:
| Year Ended December 31, | ||||||
| 2007 | 2006 | |||||
Net sales | $ | 3,455,836 | $ | 3,980,962 | ||
Loss from discontinued operations before income taxes | $ | 1,826,503 | $ | 1,337,443 | ||
Loss from discontinued operations | $ | 1,146,503 | $ | 867,443 | ||
Assets held for sale at December 31, 2007 includes $442,889 of inventory, $70,890 of prepaid expenses and other current assets, and $44,697 of property, plant and equipment.
NOTE 18 – Subsequent Event:
The Company completed the sale of its Sope Creek business on February 4, 2008. The Company received $225,000 in cash at closing and a short-term note receivable for $324,606. These proceeds, net of expenses related to the transaction, approximated the carrying value of the assets sold, which were classified as assets held for sale in the consolidated balance sheet.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Superior Uniform Group, Inc.:
We have audited the accompanying consolidated balance sheets of Superior Uniform Group, Inc. (a Florida corporation) and subsidiarySubsidiary as of December 31, 20062007 and 2005,2006, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the threetwo years in the period ended December 31, 2006. These2007.These financial statements are the responsibility of the Company’s management. Ourmanagement.Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Superior Uniform Group, Inc. and subsidiarySubsidiary as of December 31, 20062007 and 2005,2006, and the results of their operations and their cash flows for each of the threetwo years in the period ended December 31, 20062007 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004),Board Interpretation No 48,Share-Based Payment, and the provisions of Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109, effective January 1, 2006 and December 31, 2006, respectively.2007.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Superior Uniform Group, Inc.’s internal control over financial reporting as of December 31, 2006,2007, based on criteria established inInternal Control - Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 9, 2007February 28, 2008 expressed an unqualified opinion on management’s assessment of and the effectiveness of internal control over financial reporting.
/s/ GRANT THORNTON LLP |
Tampa, Florida |
February 28, 2008 |
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| Item 9. | Changes in and Disagreements |
None.
| Item 9A. | 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 report (the “Evaluation Date”), and concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that information the Company 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 the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There have been no changes in the Company’s internal controls over financial reporting identified in connection with this evaluation that occurred during the period covered by this report and that have affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Internal Control Over Financial Reporting
The reportsattestation report required to be furnished pursuant to this item appears on page 37.38.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2006,2007, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based
38
on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the Internal Control – Integrated Framework, management concluded that the internal control over financial reporting was effective as of December 31, 2006.2007.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 has been audited by Grant Thornton LLP, an independent registered certified public accounting firm, as stated in their report which is included in Item 8.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Superior Uniform Group, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, thateffectiveness of Superior Uniform Group, Inc.’s (a Florida corporation) and subsidiary maintained effective internal control over financial reporting as of December 31, 2006,2007, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Superior Uniform Group Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’sSuperior Uniform Group, Inc.’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Superior Uniform Group, Inc. and subsidiary maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established inInternal Control—Integrated Framework issued by COSO. Also in our opinion, Superior Uniform Group, Inc. and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006,2007, based on the criteria established inInternal Control—Integrated Frameworkissued by COSO.
39
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Superior Uniform Group, Inc. and subsidiarySubsidiary as of December 31, 20062007 and 2005,2006, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the threetwo years in the period ended December 31, 20062007 and our report dated March 9, 2007February 28, 2008 expressed an unqualified opinion on those financial statements.and contains an explanatory paragraph related to the adoption of Financial Accounting Standards Board Interpretation No 48,Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109, effective January 1, 2007.
/s/ GRANT THORNTON LLP |
Tampa, Florida |
February 28, 2008 |
| Item 9B. | Other Information |
NONENone.
PART III
| Item 10. | Directors, |
BOARD OF DIRECTORSThe Company’s directors and executive officers as of December 31, 2007 are listed below:
BOARD OF DIRECTORS | ||||||||||||
| Gerald M. Benstock | Chairman of the Board and Executive Committee | |||||||||||
| Michael Benstock | Chief Executive Officer | |||||||||||
| Alan D. Schwartz | President | |||||||||||
| Manuel Gaetan, Ph.D. PE | President, CEO, MGR Enterprises, Inc. | |||||||||||
| Robin Hensley | President, Raising the Bar | |||||||||||
| Sidney Kirschner | Retired, President and CEO, Northside Hospital, Inc. | |||||||||||
| Paul V. Mellini | Chief Executive Officer and President, Nature Coast Bank | |||||||||||
| ||||||||||||
| EXECUTIVE OFFICERS | ||||||||||||
| Gerald M. Benstock | Chairman of the Board and Executive Committee | |||||||||||
| Michael Benstock | Chief Executive Officer | |||||||||||
| Alan D. Schwartz | President | |||||||||||
| Peter Benstock | Executive Vice President | |||||||||||
| Andrew D. Demott, Jr. | Senior Vice President, Chief Financial Officer and Treasurer | |||||||||||
| Richard T. Dawson | Vice President, General Counsel and Secretary | |||||||||||
The Company has adopted a code of business conduct and ethics applicable to the Company’s Directors, officers (including the Company’s principal executive officer, principal financial officer and controller) and employees, known as
40
the Code of Business Conduct and Ethics (“Thethe Code”). The Code is available on the Company’s website. In the event that we amend or waive any of the provisions of the Code applicable to our principal executive officer, principal financial officer or controller that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, we intend to disclose the same on the Company’s website at www.superioruniformgroup.com.www.superioruniformgroup.com.
The remaining information required by this Item is incorporated herein by reference to the Company’s definitive proxy statement to be filed in connection with its 20072008 Annual Meeting of Shareholders.
| Item 11. | Executive Compensation |
The information required by this Item is incorporated herein by reference to the Company’s definitive proxy statement to be filed in connection with its 20072008 Annual Meeting of Shareholders.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item is incorporated herein by reference to the Company’s definitive proxy statement to be filed in connection with its 20072008 Annual Meeting of Shareholders.
Information regarding equity compensation plans is incorporated by reference to the information set forth in Item 5 of Part I of this report.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item is incorporated herein by reference to the Company’s definitive proxy statement to be filed in connection with its 20072008 Annual Meeting of Shareholders.
| Item 14. | Principal Accountant Fees and Services |
The information required by this Item is incorporated herein by reference to the Company’s definitive proxy statement to be filed in connection with its 20072008 Annual Meeting of Shareholders.
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| Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K |
| Page | |||||||||||
| 1. | Consolidated Financial Statements | ||||||||||
The following financial statements of Superior Uniform Group, Inc. | |||||||||||
are included in Part II, Item 8: | |||||||||||
Consolidated statements of earnings - years ended December 31, | 17 | ||||||||||
| 18 | |||||||||||
| 19 | |||||||||||
| 20 | |||||||||||
| |||||||||||
| |||||||||||
| |||||||||||
| (a) | 2. | Financial Statement Schedules | |||||||||
All schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes | |||||||||||
| (a) | 3. | Exhibits | |||||||||
See Exhibit Index | |||||||||||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SUPERIOR UNIFORM GROUP, INC. | ||||
/s/ Michael Benstock | ||||
| By: | Michael Benstock | |||
| (Chief Executive Officer and Principal Executive Officer ) | ||||
DATE: March 13, 2007February 29, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantregistrant and in the capacities and on the dates indicated:indicated.
/s/ Michael Benstock | ||||
Michael Benstock, | ||||
Chief Executive Officer | ||||
(Principal Executive Officer) |
/s/ Andrew D. Demott, Jr. | ||||
| Andrew D. Demott, Jr., | ||||
| Chief Financial Officer and Treasurer | ||||
| (Principal Accounting Officer and Principal Financial Officer) | ||||
42
/s/ Gerald M. Benstock Gerald M. Benstock, February 29, 2008 (Chairman) | /s/ Alan D. Schwartz | |||
| Alan D. Schwartz, (Director) | |||
| ||||
/s/ | /s/ Robin Hensley | |||
| Paul Mellini, February 29, 2008 | Robin Hensley, February 29, 2008 (Director) | |||
| (Director) | ||||
| ||||
| ||||
/s/ Manuel Gaetan | /s/ Sidney Kirschner | |||
Manuel Gaetan, | Sidney Kirschner, | |||
(Director) | ||||
| ||||
| ||||
| (Director) | |||
43
SUPERIOR UNIFORM GROUP, INC.
EXHIBIT INDEX
| (a) | 3. Exhibits |
Exhibit No.: | Description | |
| 3.1 | Amended and restated Articles of Incorporation of the Registrant filed as Exhibit 3.1 to the Registrant’s Interim Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference. | |
| 3.2 | By-Laws of the Registrant filed as Exhibit 3.2 to the Registrant’s 1998 Interim Report on Form 10-Q for the quarter ended June 30, 1998, as amended by the Amendment to By-Laws of Registrant, filed as Exhibit 3 to the Registrant’s Interim Report on Form 10-Q for the quarter ended September 30, 2003, and incorporated herein by reference. | |
| 4.1 | Credit Agreement dated March 26, 1999, between the Registrant and First Union, filed with the Commission as Exhibit 4.1 in Registrant’s Form 10-Q for the quarter ended March 31, 1999 and is hereby incorporated herein by reference. | |
| 4.2 | Credit Agreement dated October 16, 2000, between the Registrant and First Union, filed with the Commission as Exhibit 4.2 in Registrant’s Form 10-Q for the quarter ended September 30, 2000 and is hereby incorporated herein by reference. | |
| 4.3 | Second amendment to Loan Agreement and Other Loan Documents between Registrant and First Union filed with the Commission as Exhibit 4.1 and Renewal of Revolving Credit Note filed with the Commission as Exhibit 4.2 in Registrant’s 2001 Form 10-Q for the quarter ended March 31, 2001 which is hereby incorporated herein by reference. | |
| 4.4 | Third amendment to Loan Agreement and Other Loan Documents between Registrant and Wachovia and Renewal of Revolving Credit Note as filed as Exhibit 4.4 to the Registrant’s 2004 Annual Report on Form 10-K and incorporated herein by reference. | |
| 4.5 | Renewal Revolving Line of Credit Promissory Note between Registrant and Wachovia. | |
| 10.* | Form of Indemnification Agreement between the Registrant and each of the directors and the following officers as filed as Exhibit 10 to the Registrant’s Form 10Q for the quarter ended March 31, 2006, which is hereby incorporated herein by reference: Outside Directors: Manuel Gaetan, Paul Mellini, Sidney Kirschner, Robin M. Hensley, and Arthur Wiener. Officers: Gerald M. Benstock, Michael Benstock, Alan Schwartz, Peter Benstock, Andrew D. Demott, Jr., and Richard T. Dawson | |
| 10.1 * | Description of the informal bonus plan for officers of the Registrant filed as Exhibit 10 to the Registrant’s 1992 Annual Report on Form 10-K and incorporated herein by reference. | |
| 10.2 * | 1993 Incentive Stock Option Plan of the Registrant filed as Exhibit 4.3 to the Registrant’s August 18, 1993 Registration Statement on Form S-8 and incorporated herein by reference. | |
| 10.3 * | 1994 Superior Surgical Mfg. Co., Inc. Supplemental Pension Plan filed as Exhibit 10.3 to the Registrant’s 1994 Annual Report on Form 10-K and incorporated herein by reference. | |
| 10.4 * | 2003 Incentive Stock and Awards Plan of the Registrant filed as Exhibit 4 to the Registrant’s June 6, 2003 Registration Statement on Form S-8 and incorporated herein by reference. | |
| 10.5 * | Severance Protection Agreement with Michael Benstock filed with 8-K in November 2005, hereby incorporated herein by reference. | |
| 10.6 * | Severance Protection Agreement with Alan Schwartz filed with 8-K in November 2005, hereby incorporated herein by reference. | |
| 10.7 * | Severance Protection Agreement with Peter Benstock filed with 8-K in November 2005, hereby incorporated herein by reference. | |
| 10.8 * | Severance Protection Agreement with Andrew D. Demott, Jr. filed with 8-K in November 2005, hereby incorporated herein by reference. | |
| 10.9 | Code of Business Ethics | |
| 21. | Subsidiaries of the | |
| 23.1 | Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP | |
| 31.1 | Certification of Chief Executive Officer pursuant to 18 | |
| 31.2 | Certification of Chief Financial Officer pursuant to 18 | |
| 32.1 | Written Statement of Chief Executive Officer pursuant to 18 | |
| 32.2 | Written Statement of Chief Financial Officer pursuant to 18 | |
| * | Management contracts and compensatory plans and arrangements |
44