1 FORM l0-Q -------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-5869-1 SUPERIOR UNIFORM GROUP, INC. Incorporated - Florida Employer Identification No. 11-1385670 10099 Seminole Boulevard Post Office Box 4002 Seminole, Florida 33775-0002 Telephone No.: 727-397-9611 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- -------- As of the date of this report, the registrant had 7,846,202 common shares outstanding. Page 1
2 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements SUPERIOR UNIFORM GROUP, INC. CONDENSED SUMMARY OF OPERATIONS <TABLE> <CAPTION> Three Months Ended September 30, -------------------------------- 1998 1997 ------ ------ (Unaudited) <S> <C> <C> Net sales $ 41,675,244 $ 37,117,239 ------------ ------------ Costs and expenses: Cost of goods sold 27,731,959 24,630,986 Selling and administrative expenses 9,608,795 8,304,976 Business process re-engineering costs 655,986 Interest expense 302,025 249,084 ------------ ------------ 38,298,765 33,185,046 ------------ ------------ Earnings before taxes on income 3,376,479 3,932,193 Taxes on income 1,220,000 1,474,000 ------------ ------------ Net earnings $ 2,156,479 $ 2,458,193 ============ ============ Weighted average number of shares out- standing during the period (Basic) 7,896,163 Shs. 7,975,914 Shs. (Diluted) 7,967,220 Shs. 8,063,110 Shs. Basic earnings per common share $0.27 $0.31 ============ ============ Diluted earnings per common share $0.27 $0.30 ============ ============ Cash dividends declared per common share $0.125 $0.11 ============ ============ <CAPTION> Nine Months Ended September 30, -------------------------------- 1998 1997 ------ ------ (Unaudited) Net sales $117,811,906 $108,149,043 ------------ ------------ Costs and expenses: Cost of goods sold 78,156,742 71,831,620 Selling and administrative expenses 27,460,154 24,893,925 Business process re-engineering costs 2,806,069 Interest expense 736,850 852,647 ------------ ------------ 109,159,815 97,578,192 ------------ ------------ Earnings before taxes on income 8,652,091 10,570,851 Taxes on income 3,130,000 3,964,000 ------------ ------------ Net earnings $ 5,522,091 $ 6,606,851 ============ ============ Weighted average number of shares out- standing during the period (Basic) 7,886,478 Shs. 8,007,366 Shs. (Diluted) 7,990,730 Shs. 8,066,657 Shs. Basic earnings per common share $0.70 $0.83 ============ ============ Diluted earnings per common share $0.69 $0.82 ============ ============ Cash dividends declared per common share $0.375 $0.33 ============ ============ </TABLE> The results of the nine months ended September 30, 1998 are not necessarily indicative of results to be expected for the full year ending December 31, 1998. See accompanying notes to summarized interim financial statements. Page 2
3 SUPERIOR UNIFORM GROUP, INC. CONDENSED BALANCE SHEETS ASSETS <TABLE> <CAPTION> September 30, 1998 December 31, (Unaudited) 1997 ------------- ------------ (1) <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 412,606 $ 8,889,948 Accounts receivable and other current assets 31,960,956 26,722,727 Inventories* 51,249,385 42,523,009 ------------ ------------ TOTAL CURRENT ASSETS 83,622,947 78,135,684 PROPERTY, PLANT AND EQUIPMENT, NET 28,547,505 26,772,477 EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED 2,800,069 813,626 OTHER ASSETS 2,826,983 2,633,068 ------------ ------------ $117,797,504 $108,354,855 ============ ============ </TABLE> LIABILITIES AND SHAREHOLDERS' EQUITY <TABLE> <S> <C> <C> CURRENT LIABILITIES: Accounts payable $ 11,778,376 $ 6,806,955 Other current liabilities 6,583,002 5,297,452 Current portion of long-term debt 2,266,667 2,266,667 ------------ ------------ TOTAL CURRENT LIABILITIES 20,628,045 14,371,074 LONG-TERM DEBT 15,016,666 13,466,666 DEFERRED INCOME TAXES 2,420,000 2,400,000 SHAREHOLDERS' EQUITY 79,732,793 78,117,115 ------------ ------------ $117,797,504 $108,354,855 ============ ============ * Inventories consist of the following: <CAPTION> September 30, 1998 December 31, (Unaudited) 1997 ------------ ------------ Finished goods $ 33,496,906 $ 25,835,299 Work in process 4,799,450 4,627,273 Raw materials 12,953,029 12,060,437 ------------ ------------ $ 51,249,385 $ 42,523,009 ============ ============ </TABLE> (1) The balance sheet as of December 31, 1997 has been taken from the audited financial statement as of that date and has been condensed. See accompanying notes to summarized interim financial statements. Page 3
4 SUPERIOR UNIFORM GROUP, INC. SUMMARY OF CASH FLOWS <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------- 1998 1997 ------ ------ (Unaudited) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 5,522,091 $ 6,606,851 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 3,324,473 3,277,622 Deferred income taxes 20,000 240,000 Changes in assets and liabilities: Accounts receivable and other current assets (5,238,229) (3,059,793) Inventories (8,726,376) 1,197,439 Accounts payable 4,971,421 1,784,136 Other current liabilities 1,285,550 1,145,496 ----------- ----------- Net cash flows provided from operating activities 1,158,930 11,191,751 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant, and equipment (5,492,896) (1,196,154) Proceeds from disposals of property, plant and equipment 474,413 (1,317,989) Goodwill acquired (2,067,461) Other assets (193,915) (334,650) ----------- ----------- Net cash used in investing activities (7,279,859) (1,317,989) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 3,100,000 - Reduction in long-term debt (1,550,000) (1,550,000) Declaration of cash dividends (2,952,501) (2,640,403) Proceeds received on exercised stock options 904,064 329,407 Common stock reacquired and retired (1,857,976) (1,298,500) ----------- ----------- Net cash used in financing activities (2,356,413) (5,159,496) ----------- ----------- Net (decrease) increase in cash and cash equivalents (8,477,342) 4,714,266 Cash and cash equivalents balance, beginning of period 8,889,948 4,718,632 ----------- ----------- Cash and cash equivalents balance, end of period $ 412,606 $ 9,432,898 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 855,061 $ 1,248,171 =========== =========== Income taxes paid $ 3,594,543 $ 4,680,144 =========== =========== </TABLE> See accompanying notes to summarized interim financial statements. Page 4
5 SUPERIOR UNIFORM GROUP, INC. NOTES TO SUMMARIZED INTERIM FINANCIAL STATEMENTS Note 1 - Summary of Significant Interim Accounting Policies: a) Recognition of costs and expenses Costs and expenses other than product costs are charged to income in interim periods as incurred, or allocated among interim periods based on an estimate of time expired, benefit received or activity associated with the periods. Procedures adopted for assigning specific cost and expense items to an interim period are consistent with the basis followed by the registrant in reporting results of operations at annual reporting dates. However, when a specific cost or expense item charged to expense for annual reporting purposes benefits more than one interim period, the cost or expense item is allocated to the interim periods. b) Inventories Inventories at interim dates are determined by using both perpetual records and gross profit calculations. c) Accounting for income taxes The provision for income taxes is calculated by using the effective tax rate anticipated for the full year. d) Earnings per share The Company adopted the provisions of the Financial Accounting Standards Board Opinion No. 128, "Earnings Per Share," ("FAS 128"), during the fourth quarter of 1997, as required. Historical basic per share data under FAS 128 is based on the weighted average number of shares outstanding. Historical diluted per share data under FAS 128 is reconciled by adding to weighted average shares outstanding the dilutive impact of the exercise of outstanding stock options. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $2,156,479 $2,458,193 $5,522,091 $6,606,851 Weighted average shares Outstanding 7,896,163 7,975,914 7,886,478 8,007,366 Basic earnings per common Share $.27 $.31 $.70 $.83 <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net Income $2,156,479 $2,458,193 $5,522,091 $6,606,851 Weighted average shares Outstanding 7,896,163 7,975,914 7,886,478 8,007,366 Common stock equivalents 71,057 87,196 104,252 59,291 Total weighted average shares Outstanding 7,967,220 8,063,110 7,990,730 8,066,652 Diluted earnings per common share $.27 $.30 $.69 $.82 </TABLE> e) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets Page 5
6 and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. f) Comprehensive Income The Company adopted the provisions of FAS 130, "Reporting Comprehensive Income" in the first quarter of 1998. FAS No. 130 requires disclosures of comprehensive income including per-share amounts in addition to the existing income statement. Comprehensive income 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). As of September 30, 1998, there are no items requiring separate disclosure in accordance with this statement. g) Operating Segments The Company adopted the provisions of FAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." in the first quarter of 1998. FAS No. 131 requires disclosures of certain information about operating segments and about products and services, geographic areas in which the Company operates, and their major customers. The Company has evaluated the effect of this new standard and has determined that currently they operate in one segment, as defined in this statement. Note 2 - Acquisition: Effective January 2, 1998, the Company acquired the net assets of J & L Group, Inc., a manufacturer of embroidered sportswear, with revenues for the year ended December 1997 of approximately $6,700,000. The purchase price for this acquisition was $2,873,929 and was allocated as follows: <TABLE> <CAPTION> <S> <C> Cash $36,773 Accounts Receivable 902,754 Inventories 1,157,435 Property, Plant & Equipment 92,021 Excess of Cost Over Fair Value of Assets Acquired 2,067,461 ---------- TOTAL ASSETS $4,256,444 ========== Accounts Payable and Accrued Expenses $1,382,515 ========== </TABLE> Note 3 - Business Process Re-Engineering: The condensed summaries of operations for the three and nine month periods ended September 30, 1998 include pre-tax charges (in compliance with an Emerging Issues Task Force Consensus issued November 20, 1997) in the amounts of $655,986 and $2,806,069, respectively, as part of the Company's 1998 commitment to business process re-engineering activities (integrated SAP systems). The Company expects that for the balance of 1998 it will incur approximately $700,000 in additional pre-tax business process re-engineering charges and that the project will be substantially completed during 1998. The actual charges may differ from the amount estimated based upon changes in the cost of hardware, software and implementation. The interim information contained above is not certified or audited; it reflects all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the operating results for the periods presented, stated on a basis consistent with that of the audited financial statements. The financial information included in this form has been reviewed by Deloitte & Touche LLP, independent certified public accountants; such review was made in accordance with established professional standards and procedures for such a review. All financial information has been prepared in accordance with the accounting principles or practices reflected in the financial statements for the year ended December 31, 1997, filed with the Securities and Exchange Commission. Reference is hereby made to registrant's Financial Statements for 1997, heretofore filed with registrant's Form 10-K. Page 6
7 INDEPENDENT ACCOUNTANTS' REVIEW REPORT To the Board of Directors of Superior Uniform Group, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Superior Uniform Group, Inc. (the "Company") (formerly Superior Surgical Mfg. Co., Inc.) as of September 30, 1998, and the related condensed consolidated summaries of operations for the three months and nine months ended September 30, 1998 and 1997, and the condensed consolidated summaries of cash flows for the nine months ended September 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Superior Uniform Group, Inc. as of December 31, 1997, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 19, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1997 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP October 26, 1998 Page 7
8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Net sales of the registrant increased by approximately 12% in the first quarter of 1998 compared to the first quarter of 1997. For the second and third quarters of 1998 compared to 1997, sales increased by approximately 8% and 12% respectively due to new customers and new uniform programs. Accordingly, for the nine months ended September 30, 1998 sales were approximately 9% more than the nine months ended September 30, 1997. Cost of goods sold approximated 66.3% for the nine months ended September 30, 1998 compared to 66.4% for the nine months ended September 30, 1997. Selling and administrative expenses, as a percentage of sales, were approximately 23.3% for the first nine months of 1998 compared to 23.0% for the nine months ended September 30, 1997. Interest expense of $736,850 for the nine month period ended September 30, 1998 decreased 13.6% from $852,647 for the similar period ended September 30, 1997 due to repayment of debt. Net earnings decreased 12.3% to $2,156,479 for the three months ended September 30, 1998 as compared to net earnings of $2,458,193 for the same period ended September 30, 1997. Included in our earnings for the three and nine months ended September 30, 1998 are pre-tax charges (in accordance with an Emerging Issues Task Force Consensus issued November 20, 1997) in the amounts of $655,986 and $2,806,069, respectively, as part of our 1998 commitment to business process re-engineering activities (integrated SAP systems). The business process re-engineering activities extend across substantially all operating processes of the Company's business including inventory management, manufacturing, sales and distribution, and human resources. The Company will be utilizing SAP's R-3 product along with apparel specific enhancements in the apparel/footwear solution. The Company expects to be on the leading edge of integrated business process technology in the apparel industry. The costs associated with the charge consist primarily of charges from external consultants assisting with the implementation and external costs associated with training users. On a net of tax basis, these charges approximate $.05 and $.22 per share (diluted) for the three and nine months ended September 30, 1998, respectively. The Company expects that for the balance of 1998 it will incur approximately $700,000 in additional pre-tax business process re-engineering charges and that the project will be substantially completed during 1998. The actual charges may differ from the amount estimated based upon changes in the cost of hardware, software and implementation. Accounts receivable and other current assets increased 19.6% from $26,722,727 on December 31, 1997 to $31,960,956 as of September 30, 1998 primarily due to increased sales and due to prepayments for inventory in transit from our Caribbean contractors at the end of the current quarter. Inventories increased 20.5% from $42,523,009 on December 31, 1997 to $51,249,385 as of September 30, 1998 primarily to support increasing sales. Accounts payable increased 73.0% from $6,806,955 on December 31, 1997 to $11,778,376 on September 30, 1998 primarily due to increases in purchases of inventories. The registrant's current portion of long-term debt of $2,266,667 and long-term debt of $15,016,666 for September 30, 1998 is $1,550,000 higher than it was at December 31, 1997, due to borrowings under the Company's line of credit offset by scheduled repayments of debt. The Year 2000 Project The Company recognizes the need to ensure that its systems, applications and hardware will recognize and process transactions for the Year 2000 and beyond and therefore initiated a project to identify its risks with regard to Year 2000. This project consists of four phases including; collecting an inventory of potential risks, assessing the actual risk, remedial work to correct identified problems, and testing for proper operation. The first two phases of the project have been completed and systems found to be non-compliant are either being remedied or are ready for testing. All systems are expected to be tested and ready for Year 2000 operations by June 30, 1999. There can be no assurance that the Company will successfully complete the Year 2000 project. While the Company does not consider the possibility of such occurrence to be reasonably likely, if the Company does not complete significant portions of the project on a timely basis, the Company's operations and financial condition could be adversely impacted. The Company started a project approximately two years ago to replace all of its existing business information systems with enterprise resource planning software as part of a business process re-engineering initiative. Having selected SAP R/3, a fully Year 2000 Page 8
9 compliant product, we expect to place this system in operation in early 1999. As such, these systems are not included in further discussions or cost estimates concerning Year 2000. All other systems, including warehouse management, shop floor data collection, and computer aided design and manufacturing systems have been determined to be compliant or have available upgrades that are compliant, and those upgrades are currently in process. Due to the nature of the Company's business, its operations generally do not include significant systems relying on embedded technology, such as microcontrollers, which are difficult to evaluate and repair. The cost to repair or replace affected systems is estimated at $380,000. Of this amount approximately $200,000 has been incurred and expensed as of September 30, 1998. This estimate, based on currently available information, may need to be revised upon receipt of additional information from vendors and suppliers. The Company is also assessing the Year 2000 readiness of key third parties. The Company is contacting critical suppliers of products and services and other significant third parties regarding Year 2000 compliance to evaluate the extent to which the Company may be vulnerable in the event of their failure to resolve their own Year 2000 issues. If the Company does not receive reasonable assurances from such third parties as to Year 2000 compliance, the Company will assess the potential risks and where practicable, the Company will develop and finalize contingency plans by June 30, 1999 to attempt to mitigate the extent of the potential impact of the failure of these third parties to be Year 2000 ready. The Company has no means of ensuring that third parties will be Year 2000 ready and the failure by third parties to address Year 2000 issues could have a material adverse effect on the Company's operations and financial results. However, the effect, if any, on the Company from the failure of such parties to be Year 2000 ready is unknown and not reasonably estimable. While the Company believes its Year 2000 program is adequate to detect in advance compliance issues, the Year 2000 issue has many aspects and potential consequences which are not reasonably foreseeable and there can be no assurance that the Company will not be adversely impacted. Furthermore, the Company could also be adversely affected by the domino effect of general disruptions in the general economy resulting from Year 2000 issues and does not believe it can develop a contingency plan to protect the Company from such event. Finally, although the Company's business requires the availability of key public services and utilities, no contingency plans are being developed to address any disruptions of such services and utilities. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased by $8,477,342 from $8,889,948 on December 31, 1997 to $412,606 as of September 30, 1998. The change is primarily a result of normal operations. Additionally, as of September 30, 1998, under its existing revolving Credit Agreement, the registrant had $4,014,000 available to it. The registrant has operated without hindrance or restraint with its present working capital, as income generated from operations and outside sources of credit, both trade and institutional, have been more than adequate. In the foreseeable future, the registrant will continue its ongoing capital expenditure program designed to maintain and improve its facilities. The registrant at all times evaluates its capital expenditure program in light of prevailing economic conditions. The registrant believes that its cash flow from operating activities together with other capital resources and funds from credit sources are adequate to meet its anticipated funding requirements for the foreseeable future. During the nine months ended September 30, 1998 and 1997, the Company paid cash dividends of $2,952,501 and $2,640,403, respectively. The Company reacquired and retired 119,800 and 108,000 shares in the nine month periods ended September 30, 1998 and 1997, respectively, with costs of $1,857,976 and $1,298,500. This quarterly report contains certain forward-looking statements that involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following - general economic conditions in the areas of the United States in which the Company's customers are located; changes in the healthcare, resort and commercial industries where uniforms and service apparel are worn; the impact of competition; the availability of manufacturing materials; and the impact of Year 2000 issues. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings None. ITEM 2. Changes in Securities None. Page 9
10 ITEM 3. Defaults Upon Senior Securities Inapplicable. ITEM 4. Submission of Matters to a Vote of Security-holders None. ITEM 5. Other Information Inapplicable. ITEM 6. Exhibits and Reports on Form 8-K a) Exhibits 15 Letter re: Unaudited Interim Financial Information. 27 Financial Data Schedule. b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 10, 1998 SUPERIOR UNIFORM GROUP, INC. By -------------------------- Gerald M. Benstock Chairman and Chief Executive Officer By --------------------------- Andrew D. Demott, Jr. Chief Financial Officer and Principal Accounting Officer, Vice President and Treasurer Page 10