sgc20131231_10k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2013

 

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

 

Commission File Number 001-05869

 

SUPERIOR UNIFORM GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Florida
(State or Other Jurisdiction
of Incorporation or Organization)

11-1385670
(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:

 

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, par value $.001 per share

Listed on the NASDAQ Stock Market

 

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

 

Yes X                      No                  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

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.            

 

 
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer            Accelerated filer              Non-accelerated filer            Smaller Reporting Company X

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Yes                         No X      

 

At June 30, 2013, the aggregate market value of the registrant’s common shares held by non-affiliates, computed by reference to the last sales price ($10.79) as reported by the NASDAQ Stock Market, was approximately $43 million (based on the assumption, solely for purposes of this computation, that all directors and officers of the registrant were affiliates of the registrant).

 

The number of shares of common stock outstanding as of February 24, 2014 was 6,584,467 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, 2013, relating to its Annual Meeting of Shareholders to be held May 2, 2014, are incorporated by reference to furnish the information required by Items 10, 11, 12, 13 and 14 of Part III. The exhibit index may be found on Page 49.

 

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 subsidiaries, 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, goals, and projections regarding industry and general economic trends, our expected financial position, results of operations, or market position 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 acquisitions; 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 is comprised of two reportable business segments: (1) Uniforms and Related Products, and (2) Remote Staffing Solutions.

 

Superior’s Uniforms and Related Products segment, through its Signature marketing brands—Fashion Seal®, Fashion Seal Healthcare®, HPI Direct®, Martin’s®, Worklon®, UniVogue® and Blade, 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. In excess of 95% of Superior’s Uniforms and Related Products segment’s net sales are from the sale of uniforms and service apparel and directly-related products.

 

Superior services its Remote Staffing Solutions segment through multiple The Office Gurus entities, including its direct and indirect subsidiaries in El Salvador, Belize, and the United States, (collectively, “TOG”). TOG is a near-shore premium provider of cost effective multilingual telemarketing and total office support solutions. 

 

 
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Products

 

Superior manufactures and sells a wide range of uniforms, corporate identity apparel, career apparel and accessories for the medical and health fields as well as for the industrial, commercial, leisure, and public safety markets in its Uniforms and Related Products segment. Its principal products are:

 

●    Uniforms and service apparel for personnel of:

 

  ●    Hospitals and health facilities;
 

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

 

Retail stores;

 

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.

 

●   Miscellaneous products directly related to:

 

  ●  Uniforms and service apparel specified above (e.g. 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.

 

Uniforms and service apparel and related products 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.

 

Services

 

Through the recruitment and employment of highly qualified English-speaking agents, we provide our customers with extended office support from a versatile call and contact center environment in our Remote Staffing Solutions segment.

 

Competition

 

Superior competes in its Uniforms and Related Products segment with more than three dozen firms, including divisions of larger corporations. Superior competes with national and regional manufacturers, such as Cintas Corporation, Unifirst Corporation, G&K Services and 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 the market. Industry statistics are not available, but we believe 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.

 

The market in which TOG operates is competitive and highly fragmented. TOG’s competitors in the Remote Staffing Solutions segment range in size from very small firms offering specialized applications or short-term projects to very large independent firms, and include the in-house operations of many customers and potential customers. We compete directly and indirectly with various companies that provide contact center and other business process outsourcing solutions on an outsourced basis. These companies include, but are not limited to, U.S.-based providers, such as APAC Customer Services, Convergys, Sitel, Startek, Sykes, TechTeam Global, TeleTech and West. TOG also competes with local entities in other offshore geographies, such as TIVIT and the Philippine Long Distance Telephone Company; small niche providers, such as Alpine Access, Arise, VIPDesk, and Working Solutions; and large global companies that offer outsourced services within their portfolios, such as IBM, HP, CapGemini, Accenture and Fujitsu. The list of potential competitors includes both publicly traded and privately held companies.

 

Customers

 

Superior has a substantial number of customers, the largest of which accounted for approximately 6.7% of its 2013 net sales.

 

 
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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 within one week after their receipt. As of February 22, 2014, the backlog of all orders that we believe to be firm was approximately $6.9 million, compared to approximately $4.4 million as of February 23, 2013. 

 

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 2013 and 2012, approximately 33% and 48%, 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

 

Superior owns and uses several trademarks and service marks relating to its brands that have significant value and are instrumental to its ability to market its 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, 2017). The Fashion Seal Uniforms trademark is critically important to the marketing and operation of Superior’s business, as more than 50% of Superior's products are sold under that name.

 

Environmental Matters

 

In view of the nature of our business, compliance with federal, state, and 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 973 persons, of which 967 were full-time employees, as of December 31, 2013.

 

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.

 

 
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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 Cintas Corporation, Unifirst Corporation and G&K 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, high unemployment levels, or cost increases might have an adverse effect on our 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), the penetration of existing customers with a broader mix of product and service offerings, or decreased production costs, 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 our 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 in our product cost.

 

Volatility in the global economy could adversely affect results. 

 

In the past, global financial markets have experienced an extreme disruption, including, among other things, volatility in security prices, diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. There can be no assurance that there will not be further change, which could lead to challenges in our business and negatively impact our financial results. The tightening of credit in financial markets adversely affects the ability of our customers and suppliers to obtain financing for significant purchases and operations and could result in a decrease in orders and spending for our products and services. We are unable to predict the likely duration and severity of any disruption in financial markets and adverse economic conditions and the effects they may have on our business and financial condition.

 

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.

 

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 could 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 product costs or if our product 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 also may 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 material adverse effect on our business, results of operations and financial condition.

 

 
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 Changing international trade regulation 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.

 

Our operations are subject to various international trade agreements and regulations, such as the North American Free Trade Agreement, as supplemented (NAFTA), Dominican Republic–Central America Free Trade Agreement (CAFTA-DR), Haitian Hemispheric Opportunity through Partnership Encouragement Act, as amended (HOPE), and African Growth and Opportunity Act (AGOA), 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 countries in which our products are manufactured or into which they are imported may from time to time impose 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.

 

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.

 

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. We believe our products are, however, 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.

 

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 intellectual property, as well as certain of our licensed intellectual property, 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, 2017) is important to our business, as more than 50% of our products are sold under that name. 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.

 

 
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We have significant pension obligations with respect to our employees and our available cash flow may be adversely affected in the event that payments become due under any pension plans that are unfunded or underfunded.

 

A portion of our active and retired employees participate in defined benefit pension plans under which we are obligated to provide prescribed levels of benefits regardless of the value of the underlying assets, if any, of the applicable pension plan. If our obligations under a plan are unfunded or underfunded, we will have to use cash flow from operations and other sources to pay our obligations either as they become due or over some shorter funding period. As of December 31, 2013, we had approximately $3.6 million in unfunded or underfunded obligations related to our pension plans.

 

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.

 

We are subject to federal, state and 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 2013 and 2012 approximately 33% and 48%, 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 and the other Gulf Coast hurricanes during fiscal 2005.  While we were not impacted by any hurricane related events during fiscal 2012 or 2013, 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.

 

 
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Our Remote Staffing Solutions business may not develop in ways that we currently anticipate due to negative public reaction to outsourcing and recently proposed legislation.

 

We have based our growth strategy on certain assumptions regarding our industry, services and future demand in the market for our services. However, the trend to outsource business processes may not continue and could reverse. Outsourcing is a politically sensitive topic in the United States and elsewhere due to a perceived association between outsourcing providers and the loss of jobs in the United States. A variety of U.S. federal and state legislation has been proposed that, if enacted, could restrict or discourage U.S. companies from outsourcing services outside the United States. For example, public figures have supported legislation that they contend will generate new jobs in the United States, including limiting income tax benefits for companies that offshore American jobs. Because all of our current customers are U.S. companies, any expansion of existing laws or the enactment of new legislation restricting offshore outsourcing could harm our business, results of operations and financial condition. It is possible that legislation could be adopted that would restrict U.S. private sector companies that have federal or state government contracts from outsourcing their services to off-shore service providers. This would also negatively affect our ability to attract or retain customers that have these contracts.

 

Certain of our existing shareholders have significant control. 

 

At December 31, 2013, our executive officers and certain of their family members collectively beneficially owned 33.3% of our outstanding common stock. 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 shareholder 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 (none noted as not fully utilized) 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 businesses 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 Company; used as principal administrative office and for warehousing and shipping, as well as the corporate design center.
 

Eudora, Arkansas – Plant of approximately 217,000 square feet, partially leased from the City of Eudora requiring payment of only a nominal rental fee; used for manufacturing, warehousing, and shipping; lease expiring November 30, 2016.

 

McGehee, Arkansas – Plant of approximately 26,000 square feet, leased from the City of McGehee requiring payment of only a nominal rental fee; used for storage; lease expiring in 2014.

 

Alpharetta, Georgia – Plant of approximately 75,000 square feet owned by the Company; used for manufacturing, warehousing and office space.

 

Alpharetta, Georgia – Facility used for warehousing and office space, leased by the Company, approximately 31,000 square feet.

 

San Salvador, El Salvador – Office space of approximately 23,200 square feet; owned by The Office Gurus, LTDA De C.V., a subsidiary of SUG Holding, and Fashion Seal Corporation, wholly-owned subsidiaries of the Company; used as office space for our Remote Staffing Solutions business.

 

Belize – Office space of approximately 9,300 square feet, owned by The Office Gurus, Ltd.

 

Costa Rica – Office space of approximately 495 square feet; leased by Power Three Web, LTDA, a wholly-owned subsidiary of SUG Holding, Inc.; lease expiring in January 2015.

 

Miscellaneous – Lexington, Mississippi: facility used for warehousing and shipping, approximately 40,000 square feet – owned by the Company; Dallas, Texas: leased sales office of approximately 2,055 square feet – lease expiring in 2017.

 

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.

 

 
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Item 4.          Mine Safety Disclosures

 

Not applicable.

 

 

 

PART II

 

Item 5.          Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The principal market on which Superior's common shares are traded is the NASDAQ Stock Market under the symbol “SGC”; said shares have also been admitted to unlisted trading on the Chicago Stock Exchange.

 

The following table sets forth the high and low sales prices and cash dividends declared on our common stock by quarter for 2013 and 2012 as reported in the consolidated transaction reporting system of the NASDAQ Stock Market.

 

  

    QUARTER ENDED  
    2013     2012  
    Mar.31     June 30     Sept. 30     Dec. 31     Mar. 31     June 30     Sept. 30     Dec. 31  
Common Shares:                                                                
High   $ 11.99     $ 12.00     $ 12.91     $ 16.97     $ 13.50     $ 12.48     $ 12.65     $ 12.25  
                                                                 

Low

  $ 10.92     $ 10.63     $ 10.08     $ 12.71     $ 10.95     $ 10.70     $ 11.15     $ 10.37  
                                                                 

Dividends (total for 2013 - $.0.135; 2012-$1.08)

    -       -       -     $ 0.135     $ 0.135     $ 0.135     $ 0.135     $ 0.675  

 

We declared cash dividends of $0.135 per share in each of the quarters during the fiscal year ended December 2012. Additionally, we declared and paid a special dividend of $0.54 per share in the fourth quarter of 2012. On December 31, 2012, the Company paid a special dividend of $0.54 per share representing an early payment of the Company’s regular dividend for 2013 in order to take advantage of a tax efficient method to return capital to our shareholders prior to anticipated increases in tax rates associated with dividends. We intend to pay regular quarterly distributions to our shareholders, the amount of which may change 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.

 

Under our credit agreement with Fifth Third Bank, if an event of default exists, we may not make distributions to our shareholders. The Company is in full compliance with all terms, conditions and covenants of its credit agreement.

 

On February 24, 2014, we had 154 shareholders of record and the closing price for our common shares on the NASDAQ Stock Market was $15.97 per share.

 

Information regarding the Company’s equity compensation plans is incorporated by reference to the information set forth in Item 12 of Part III of this report under the section entitled “Equity Compensation Plan Information.”

 

Issuer Purchases of Equity Securities

 

The table below sets forth information with respect to purchases made by or on behalf of Superior Uniform Group, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common shares during the three months ended December 31, 2013.

 

 
9

 

 

Period

(a) Total Number of Shares Purchased

(b) Average Price Paid per Share

(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)

Month #1

       

(October 1, 2013 to October 31, 2013)

-

-

-

 

Month #2

       

(November 1, 2013 to November 30, 2013)

-

-

-

 

Month #3

       

(December 1, 2013 to December 31, 2013)

-

-

-

 

TOTAL

-

-

-

261,675

 

(1) On August 1, 2008, the Company’s Board of Directors reset the common stock repurchase program authorization to allow for the repurchase of 1,000,000 additional shares of the Company’s outstanding shares of common stock. There is no expiration date or other restriction governing the period over which we can make our share repurchases under the program. All such purchases were open market transactions.

 

 
10

 

  

Item 6.           Selected Financial Data

 

The following selected data is 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 Subsidiaries

 

Consolidated Statements of Comparative Income

Years Ended December 31,

 

   

2013

   

2012

   

2011

   

2010

   

2009

 

Net sales

  $ 151,496,000     $ 119,486,000     $ 112,373,000     $ 105,878,000     $ 102,802,000  

Costs and expenses:

                                       

Cost of goods sold

    98,938,000       79,723,000       72,114,000       68,411,000       69,583,000  

Selling and administrative expenses

    43,873,000       33,886,000       34,646,000       31,697,000       30,402,000  

Intangible asset impairment

    -       1,226,000       -       -       -  

Interest expense

    195,000       30,000       27,000       23,000       120,000  
      143,006,000       114,865,000       106,787,000       100,131,000       100,105,000  

Income from continuing operations before taxes on income

    8,490,000       4,621,000       5,586,000       5,747,000       2,697,000  

Taxes on income

    2,640,000       1,590,000       1,450,000       1,940,000       730,000  
                                         

Net income

  $ 5,850,000     $ 3,031,000     $ 4,136,000     $ 3,807,000     $ 1,967,000  
                                         

Per Share Data:

                                       

Basic

                                       

Net income

  $ 0.93     $ 0.50     $ 0.69     $ 0.64     $ 0.33  

Diluted

                                       

Net income

  $ 0.92     $ 0.49     $ 0.68     $ 0.64     $ 0.33  
                                         

Cash dividends per common share

  $ 0.135     $ 1.08     $ 0.54     $ 0.54     $ 0.54  
                                         

At year end:

                                       

Total assets

  $ 125,494,000     $ 78,913,000     $ 80,947,000     $ 74,194,000     $ 73,568,000  

Long-term debt

  $ 24,500,000       -     $ 640,000     $ -     $ -  

Working capital

  $ 69,809,000     $ 55,393,000     $ 55,784,000     $ 53,148,000     $ 51,475,000  

Shareholders' equity

  $ 71,935,000     $ 57,788,000     $ 61,046,000     $ 61,100,000     $ 60,119,000  

 

 
11

 

 

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

 

Business Outlook

 

The current economic environment in the United States remains very challenging.  Our primary products are provided to workers employed by our customers and, as a result, our business prospects are dependent upon levels of employment among other factors. Our revenues are impacted by our customers’ opening and closing of locations and reductions and increases in headcount. Additionally, since 2009 voluntary employee turnover has been reduced significantly as a result of fewer alternative jobs available to employees of our customers.  Fewer available jobs coupled with less attrition results in decreased demand for our uniforms and service apparel.

 

Our focus is geared towards mitigating these factors in the current economic environment and has included the following strategies. First, we have been actively pursuing acquisitions to increase our market share in the Uniforms and Related Products segment. As discussed in Note 16 to the consolidated financial statements, the Company completed the acquisition of substantially all of the assets of HPI Direct, Inc. on July 1, 2013.   Second, we diversified our business model to include the Remote Staffing Solutions segment.  This business segment was initially started to provide these services for the Company at a lower cost structure in order to improve our own operating results.  

 

Uniforms and Related Products

 

Historically, we have manufactured and sold a wide range of uniforms, career apparel and accessories, which comprises our Uniforms and Related Products segment. As noted above, we are actively pursuing acquisitions to increase our market share in the Uniforms and Related Products business and it is our intention to continue to seek additional acquisitions that fit into this business in the future.

 

During the latter part of 2010, cotton prices began increasing dramatically and reached historical highs during 2011 due to weather-related and other supply disruptions, which when combined with robust global demand, particularly in Asia, created concerns about availability in addition to increased costs for our products. While we were able to pass on a portion of these price increases to our customers during most of 2011, we began to see a negative impact on our gross margins in the fourth quarter of 2011. This trend continued for us through the end of the third quarter of 2012 at which point we began to realize cost reductions as cotton prices began to stabilize. Our fourth quarter 2012 margins began to show improvement in comparison to the first three quarters of 2012 and this trend continued to improve significantly during 2013. This situation appears to have stabilized and our margins have returned to historically normal levels. 

 

Remote Staffing Solutions

 

This segment, located in El Salvador, Belize, and the United States, has enabled us to reduce our operating expenses in our Uniforms and Related Products segment and to more effectively service our customers’ needs in that segment.  We added our Belize location at the end of 2012 and eliminated our Costa Rica location at the same time.  The Belize operation offers a more competitive cost structure for the Company as compared to Costa Rica.  We began selling these services to other companies at the end of 2009. We have grown this business from approximately $1 million in net sales to outside customers in 2010 to approximately $5.7 million in net sales to outside customers in 2013.  We spent significant effort in 2012 improving our management infrastructure in this segment to support significant growth in this segment in 2013 and beyond.  Net sales to outside customers in this segment increased by approximately 63% in 2013 as compared to 2012.  We are aggressively marketing this service and we believe this sector will continue to grow significantly in 2014 and beyond. We expect to make a significant investment in a new building to service our El Salvador location in 2014. This project is expected to be completed late in 2014 and is expected to have a total cost in excess of $7 million.

 

 

Operations

 

Net Sales

 

   

2013

   

2012

   

% Change

 

Uniforms and Related Products

  $ 145,846,000     $ 116,029,000       25.7 %

Remote Staffing Solutions

    9,285,000       7,196,000       29.0 %

Net intersegment eliminations

    (3,635,000 )     (3,739,000 )     -2.8 %

Consolidated Net Sales

  $ 151,496,000     $ 119,486,000       26.8 %

 

 
12

 

 

Net sales increased 26.8% from $119,486,000 in 2012 to $151,496,000 in 2013. The increase in net sales is split between growth in our Uniforms and Related Products segment (25.0%) and increases in net sales after intersegment eliminations from our Remote Staffing Solutions segment (1.8%). Intersegment eliminations reduced total net sales for sales of the Remote Staffing Solutions segment to the Uniforms and Related Products segment.

 

Uniforms and Related Products net sales increased 25.7% in 2013. Net sales for HPI, from July 1, 2013, the date of acquisition, through December 31, 2013 were $21,052,000. This represented an increase 36.0% versus their net sales for the comparable period in 2012. This accounted for 18.1 points of the 25.7% increase in net sales with the remaining increase in net sales for this segment attributed primarily to increased market penetration.

 

Remote Staffing Solutions net sales increased 29.0% before intersegment eliminations and 63.4% after intersegment eliminations in 2013. These increases are attributed primarily to continued market penetration in 2013.

 

As a percentage of net sales, cost of goods sold for our Uniforms and Related Products Segment was 66.2% in 2013 and 67.4% in 2012. The percentage decrease in 2013 as a percentage of net sales is primarily attributed to a decrease in direct product costs as a percentage of net sales on non HPI sales during the current period (1.4%) due to lower raw material costs primarily related to the impact of shortages of cotton in 2012, a reduction in overhead costs as a percentage of net sales as a result of higher volume in the current period (0.2%) partially offset by higher cost of goods sold on HPI sales as a percentage of net sales (0.4%).

 

As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions Segment was 38.4% in 2013, and 40.9% in 2012. The percentage decrease in 2013 as compared to 2012 is primarily attributed to a shift of business between our previous call center in Costa Rica and our newest location in Belize.

 

As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products Segment approximated 29.4% in 2013 and 29.2% in 2012. Exclusive of HPI net sales and selling and administrative expenses, selling and administrative expenses as a percentage of net sales would have been 29.7%. The increase as a percentage of sales, exclusive of HPI, is attributed primarily to higher incentive compensation expense as a result of higher earnings (1.8%), settlement loss related to pension plans in the current year (0.4%), transaction expenses associated with the acquisition of HPI (0.8%), partially offset by the impact of higher net sales to cover operating expenses (2.2%), lower amortization of intangibles as a result of the write off of the remaining licensing agreement balance in the fourth quarter of 2012 (0.7%) and minor increases in various other costs (0.1%). HPI selling and administrative expenses as a percentage of HPI net sales was 27.2% for 2013 including amortization of intangible assets associated with the acquisition (4.6%).

 

During the fourth quarter of 2012, we concluded that we did not have adequate, verifiable cash flows to support recovery of the intangible asset associated with our licensing agreement at December 31, 2012. Therefore, we recognized a pre-tax, non-cash impairment charge of $1,226,000 in the fourth quarter of 2012 to write off the remaining balance of the licensing agreement. This impairment charge is included in the results of our Uniforms and Related Products segment. There were no such charges in 2013.

 

As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions Segment approximated 37.0% in 2013 and 32.9% in 2012. The increase as a percentage of sales is attributed primarily to an increase in salaries, wages and benefits (2.3%) as the Company staffed up to support significant future growth of this segment and increased outside broker fees as the Company supplemented its internal sales efforts with independent brokers in 2013 (1.6%) and other miscellaneous increases (0.2%).

 

 

The effective income tax rate in 2013 was 31.1% and in 2012 was 34.4%.  The 3.3% decrease in the effective tax rate is attributed primarily to the following: a decrease in the state income tax rate (0.7%), a decrease in the accrual for uncertain tax positions (0.9%), a decrease due to a non-deductible portion of intangible asset impairment (1.8%), a decrease from the impact of permanent differences between book and tax basis earnings related to share-based compensation (2.3%), and a decrease in the impact of other items (0.7%) partially offset by a decrease in the benefit for untaxed foreign income (3.1%). During the years ended December 31, 2013 and 2012, the Company did not recognize deferred income taxes on foreign income of $1,688,000 and $1,437,000, respectively, due to the fact that these amounts are considered to be reinvested indefinitely in foreign subsidiaries. Based upon our current expectations, we do not expect to recognize deferred income taxes on our 2014 foreign income as this income is expected to be reinvested indefinitely in foreign subsidiaries.

 

 Liquidity and Capital Resources

 

The Company uses a number of standards for its own purposes in measuring its liquidity, such as: working capital, profitability ratios, long-term debt as a percentage of long-term debt and equity, and activity ratios. The Company’s balance sheet is very strong at this point and provides the ability to pursue acquisitions, to invest in new product lines and technologies, and to invest in additional working capital as necessary. We have a $15 million revolving credit facility available for use in the event we should need it, under which no debt is outstanding at December 31, 2013. As of December 31, 2013, approximately $3,326,000 of our cash is held in our foreign subsidiaries and cannot be repatriated without recognizing and paying Federal income taxes on this amount.

 

 
13

 

 

Accounts receivable – trade increased 36.5% from $16,655,000 on December 31, 2012 to $22,735,000 as of December 31, 2013.  The Company acquired $4,672,000 of accounts receivable as part of the acquisition of HPI on July 1, 2013. The remainder of the increase is attributed to increased net sales in the current period.

 

Accounts receivable - other increased 38.0% from $2,995,000 on December 31, 2012 to $4,133,000 as of December 31, 2013. This increase is attributed to higher levels of raw materials held at our supplier in Haiti to support increased volume of goods being purchased to support higher sales levels. The Company purchases raw materials on behalf of its supplier and records a receivable from the supplier on its books. The cost of these raw materials are deducted from payments to the supplier when finished goods are delivered to the Company.

 

Prepaid expenses and other current assets increased 115.2% from $2,794,000 on December 31, 2012 to $6,012,000 as of December 31, 2013. The Company acquired $1,096,000 of prepaid expenses and other current assets as part of the acquisition of HPI on July 1, 2013. The balance of the increase is primarily attributed to higher levels of deposits paid to suppliers for inventory purchases. The level of inventory purchases on order is to meet future sales demand.

 

Inventories increased 26.1% from $39,246,000 on December 31, 2012 to $49,486,000 as of December 31, 2013. The Company acquired $10,374,000 of inventory as part of the acquisition of HPI on July 1, 2013.

 

Other intangible assets increased from $559,000 to $22,488,000. As part of the acquisition of HPI on July 1, 2013, the Company recorded $18,900,000 of other intangible assets consisting of acquired customer relationships of $9,200,000; a non-compete agreement of $5,000,000; and an acquired trade name for $4,700,000.The acquired customer relationships are being amortized over a ten year period. The non-compete agreement is being amortized over its five year life. The trade name is considered to be an indefinite life asset and is not being amortized. These increases are offset by normal amortization of the newly acquired items above in addition to amortization of the previously existing intangibles.

 

The Company also recorded $4,135,000 of goodwill as a result of the acquisition of HPI.

 

Accounts payable increased 26.2% from $6,629,000 on December 31, 2012 to $8,363,000 on December 31, 2013. The Company did not assume any accounts payable as part of the acquisition of HPI on July 1, 2013.  Accounts payable for HPI for purchases and expenses after the acquisition resulted in an accounts payable balance for HPI of $2,113,000 as of December 31, 2013.  The remainder of the fluctuation is not considered significant.

 

Other current liabilities increased 141.1% from $3,222,000 on December 31, 2012 to $7,768,000 on December 31, 2013. This increase is primarily due to increased accruals for incentive compensation as a result of improved operating results of $2,242,000; accrued payroll and incentive compensation for HPI employees of $417,000; other accrued expenses for HPI of $1,461,000; $125,000 accrued loss relative to the interest rate swap entered into during the third quarter of 2013 and $301,000 of other miscellaneous increases.

 

Long-term pension liability decreased 65.4% from $10,468,000 on December 31, 2012 to $3,617,000 on December 31, 2013. This decrease is attributed to the following items. Effective June 30, 2013, the Company no longer accrues additional benefits for future service or for future increases in compensation levels for the Company’s primary defined benefit pension plan. As a result of this change, the Company re-measured its pension obligations as of June 30, 2013 and the Company recognized a curtailment gain of $1,990,000 and a corresponding reduction in the long-term pension liability. Additionally there were actuarial gains recognized in the current year that reduced the obligation balance by $2,810,000 and actual return on plan assets exceeded the service cost and interest recognized by $1,051,000. Additionally, the Company contributed $1,000,000 to its pension plans in the current year.

 

As part of its acquisition of HPI in the current year, the Company recorded a liability for an acquisition related contingent liability. This amount will be earned by the former owners of HPI based upon the performance of HPI following the acquisition for each of the years from 2014 through 2017. The total amount of this liability expected to be paid is $7,200,000. This liability was discounted to recognize the time value of the liability. The liability will be increased each year to reflect the interest component of this liability. The increase is being recorded through other expense in selling and administrative expense in the consolidated statement of comprehensive income.

 

 
14

 

  

At December 31, 2012, the working capital of the Company was approximately $55,393,000 and the working capital ratio was 6.6:1. At December 31, 2013, the working capital of the Company was approximately $69,801,000 and the working capital ratio was 4.9:1. 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.

 

The Company has an on-going capital expenditure program designed to maintain and improve its facilities. Capital expenditures, excluding the HPI acquisition, were approximately $1,631,000 and $1,647,000 in 2013 and 2012, respectively. We expect to make a significant investment in a new building to service our El Salvador location of our Remote Staffing segment in 2014. This project is expected to be completed late in 2014 and is expected to have a total cost in excess of $7 million.

 

During the years ended December 31, 2013 and 2012, the Company paid cash dividends of approximately $874,000 and $6,574,000, respectively. On December 31, 2012, the Company paid a special dividend of $0.54 per share representing a prepayment — and payment in lieu of — the Company’s regular quarterly dividend for 2013 in order to take advantage of a tax efficient method to return capital to our shareholders prior to anticipated increases in tax rates associated with dividends. During 2013, the Company restarted its regular quarterly dividend of $0.135 per share one quarter early and paid this dividend during the fourth quarter of 2013.

 

On August 1, 2008, the Company’s Board of Directors reset the common stock repurchases program authorization to allow for the repurchase of 1,000,000 additional shares of the Company’s outstanding shares of common stock. The Company reacquired and retired 13,211 shares and 36,570 shares of its common stock in the years ended December 31, 2013 and 2012, respectively, with approximate costs of $162,000 and $437,000, respectively. At December 31, 2013, the Company had 261,675 shares remaining for purchase under its common stock repurchases authorization. Shares purchased under the share repurchase program are constructively retired and returned to unissued status. We consider several factors in determining when 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 2013, cash and cash equivalents increased by approximately $1,762,000. $8,401,000 in cash was provided by operating activities, $34,100,000 was used in investing activities with $32,483,000 related to the acquisition of HPI and the balance primarily related to fixed asset additions of $1,631,000, and $27,461,000 was provided by financing activities. Financing activities included the borrowing of $30,000,000 for a term loan for the acquisition of HPI. The Company paid down the term loan by $3,000,000 in addition to required amortization of the loan using excess cash generated from operations. Financing activities also included the reacquisition and retirement of shares of the Company’s common stock of $162,000, and the payment of dividends of $874,000, partially offset by proceeds received from the exercise of stock options of $2,216,000.

 

Effective July 1, 2013, the Company entered into an amended and restated 5-year credit agreement with Fifth Third Bank that made available to the Company up to $15,000,000 on a revolving credit basis in addition to a $30,000,000 term loan utilized to finance the acquisition of substantially all of the assets of HPI Direct, Inc. as discussed in Note 7. Interest is payable on both the revolving credit agreement and the term loan at LIBOR (rounded up to the next 1/8th of 1%) plus 0.95% based upon the one-month LIBOR rate for U.S. dollar based borrowings (1.20% at December 31, 2013). The Company pays an annual commitment fee of 0.10% 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, 2013, there were no balances outstanding under letters of credit.

 

On October 22, 2013, the credit agreement was amended to, among other things, increase the amount of permitted investments in subsidiaries that are not parties to the credit and related agreements, from $1 million to $5 million.

 

In order to reduce interest rate risk on the term loan, the Company entered into an interest rate swap agreement with Fifth Third Bank, N.A. in July 2013 that was designed to effectively convert or hedge the variable interest rate on a portion of this borrowing to achieve a net fixed rate of 2.53% per annum, beginning July 1, 2014 with a notional amount of $14,250,000 that is adjusted to match the outstanding principal on the related debt. The notional amount of the interest rate swap is reduced by the scheduled amortization of the principal balance of the term loan of $187,500 per month through July 1, 2015 and $250,000 per month through June 1, 2018. The remaining notional balance of $3,250,000 will be eliminated at the maturity of the term loan on July 1, 2018.

 

 
15

 

 

Under the terms of the interest rate swap, the Company will receive variable interest rate payments and make fixed interest rate payments on an amount equal to the notional amount at that time. Changes in the fair value of the interest rate swap designated as the hedging instrument that effectively offset the variability of cash flows associated with the variable-rate, long-term debt obligation are reported in OCI, net of related income tax effects. At December 31, 2013, the interest rate swap had a negative fair value of $125,000, which is presented within other current liabilities within the Consolidated Balance Sheet. The entire change of $125,000, net of tax benefit of $40,000, since the inception of the hedge in July 2013 has been recorded within OCI for the year ended December 31, 2013. The Company does not currently expect any of those losses to be reclassified into earnings over the subsequent twelve-month period.

 

The remaining scheduled amortization for the term loan is as follows: 2014 $1,750,000; 2015 $2,625,000; 2016 $3,000,000; 2017 $3,000,000; 2018 $15,875,000. The term loan does not include a prepayment penalty. In connection with the credit agreement, the Company incurred approximately $68,000 of debt financing costs, which primarily consisted of legal fees. These costs are being amortized over the life of the credit agreement and are recorded as additional interest expense.

 

The amended and restated credit agreement with Fifth Third Bank is secured by substantially all of the operating assets of Superior Uniform Group, Inc. and is guaranteed by all domestic subsidiaries of Superior Uniform Group, Inc. The agreement contains restrictive provisions concerning a maximum funded senior indebtedness to EBITDA ratio as defined in the agreement (3.5:1), a maximum funded indebtedness to EBITDA ratio as defined in the agreement (4.0:1) and fixed charge coverage ratio (1.25:1). The Company is in full compliance with all terms, conditions and covenants of the credit agreement.

 

 

Long-Term Contractual Obligations

                                       
           

Payments Due by Period

 
                                         
           

One year

   

Two to

   

Four to

   

After five

 
   

Total

   

or less

   

three years

   

five years

   

years

 

Long-term debt

  $ 26,250,000     $ 1,750,000     $ 5,625,000     $ 18,875,000       -  

Operating leases

    75,000       43,000       29,000       3,000       -  

Interest payments (1)

    1,609,000       358,000       817,000       434,000       -  
                                         

Total long-term contractual cash obligations

  $ 27,934,000     $ 2,151,000     $ 6,471,000     $ 19,312,000     $ -  

 

(1) Interest payments include both the fixed and variable rate portions of interest on the Company’s term loan with Fifth Third Bank.

 

Off-Balance Sheet Arrangements

 

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 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.

 

Our critical accounting estimates are those that we believe require our most significant judgments about the effect of matters that are inherently uncertain. A discussion of our 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:

 

Allowance for Losses on Accounts Receivable

 

These allowances are based on both recent trends of certain customers estimated to be a greater credit risk as well as general trends of the 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 $227,000. The Company’s concentration of risk is also monitored and at year-end 2013, no customer had an account balance greater than 10% of receivables and the five largest customer account balances totaled $6,264,000. Additionally, the Company advances funds for certain of its suppliers to purchase raw materials. The Company deducts payment for these raw materials from payments made to the suppliers upon completion of the related finished goods. The Company had a receivables balance from one of its suppliers located in Haiti totaling approximately $4,018,000 at December 31, 2013. This amount is included in accounts receivable-other on the consolidated balance sheet.

  

 
16

 

 

Inventories

 

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

 

Goodwill

 

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The Company tests goodwill for impairment annually as of December 31st and/or when an event occurs or circumstances change such that it is more likely than not that impairment may exist. Examples of such events and circumstances that the Company would consider include the following:

 

macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets;

 

industry and market considerations such as a deterioration in the environment in which the Company operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for the Company's products or services, or a regulatory or political development;

 

cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows;

 

overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods;

 

other relevant entity-specific events such as changes in management, key personnel, strategy, or customers;

  

Goodwill is tested at a level of reporting referred to as "the reporting unit." The Company's reporting units are defined as each of its two reporting segments with all of its goodwill included in the Uniforms and Related Products segment.

 

An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The Company completed its assessment of the qualitative factors as of December 31, 2013 and determined that it was not more likely than not that the fair value of the reporting unit was less than its carrying value.

 

Insurance

 

The Company self-insures for certain obligations related to health insurance 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.

 

Pensions 

 

The Company’s pension obligations are determined using estimates including those related to discount rates and asset values. The discount rates used for the Company’s pension plans of 4.66% to 4.82% were determined based on the Citigroup Pension Yield Curve.  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% 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.

 

 
17

 

  

In 2013, a reduction in the expected return on plan assets of 0.25% would have resulted in additional expense of approximately $40,000, while a reduction in the discount rate of 0.25% would have resulted in additional expense of approximately $93,000 and would have reduced the funded status by $900,000 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, state and foreign 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. Federal income taxes are not provided on that portion of unremitted earnings of foreign subsidiaries that are expected to be reinvested indefinitely. 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. For the year ending December 31, 2013, we recognized a net decrease in total unrecognized tax benefits of approximately $111,000. As of December 31, 2013, we had an accrued liability of $625,000 for unrecognized tax benefits. We accrue interest and penalties related to unrecognized tax benefits in income tax expense, and the related liability is included in other long-term liabilities on the accompanying consolidated balance sheet.

 

Share-Based Compensation

 

The Company recognizes expense for all share-based payments to employees, including grants of employee stock options, in the financial statements based on their fair values. Share-based compensation expense that was recorded in 2013 and 2012 includes the compensation expense for the share-based payments granted in those years. In the Company’s 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 options and SARS granted is recognized as expense on the date of grant. The Company used the Black-Scholes-Merton valuation model to value any share-based compensation. 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 Company determines the assumptions to be used based upon current economic conditions. The impact of changing any of the individual assumptions by 10% would not have a material impact on the recorded expense.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

 
18

 

  

Item 8. Financial Statements and Supplementary Data

Superior Uniform Group, Inc. and Subsidiaries

 

Consolidated Statements of Comprehensive Income

Years Ended December 31,

 

   

2013

   

2012

 

Net sales

  $ 151,496,000     $ 119,486,000  
                 

Costs and expenses:

               

Cost of goods sold

    98,938,000       79,723,000  

Selling and administrative expenses

    43,873,000       33,886,000  

Intangible asset impairment

    -       1,226,000  

Interest expense

    195,000       30,000  
      143,006,000       114,865,000  
                 

Income before taxes on income

    8,490,000       4,621,000  

Taxes on income

    2,640,000       1,590,000  
                 

Net income

  $ 5,850,000     $ 3,031,000  
                 

Weighted average number of shares outstanding during the period

               

(Basic)

    6,261,588       6,061,691  

(Diluted)

    6,343,604       6,142,997  

Per Share Data:

               

Basic

               

Net earnings

  $ 0.93     $ 0.50  

Diluted

               

Net earnings

  $ 0.92     $ 0.49  
                 

Other comprehensive income (loss), net of tax:

               

Defined benefit pension plans:

               

Amortization of prior service costs included in net periodic pension costs

    9,000       12,000  
                 

Recognition of net losses included innet periodic pension costs

    617,000       632,000  
                 

Recognition of settlement loss included in net periodic pension costs

    314,000       -  
                 

Current period gains (losses)

    3,888,000       (1,704,000 )
                 

Loss on cash flow hedging activities

    (85,000 )     -  
                 

Other comprehensive income (loss)

    4,743,000       (1,060,000 )
                 

Comprehensive income

  $ 10,593,000     $ 1,971,000  
                 

Dividends per common share

  $ 0.135     $ 1.08  

 

See Notes to Consolidated Financial Statements.

 

 
19

 

 

 Superior Uniform Group, Inc. and Subsidiaries

 

Consolidated Balance Sheets

December 31,

 

   

2013

   

2012

 
ASSETS  

CURRENT ASSETS

               

Cash and cash equivalents

  $ 5,316,000     $ 3,554,000  

Accounts receivable, less allowance for doubtful accounts of $560,000 and $725,000, respectively

    22,735,000       16,655,000  

Accounts receivable - other

    4,133,000       2,995,000  

Inventories

    49,486,000       39,246,000  

Prepaid expenses and other current assets

    6,012,000       2,794,000  

TOTAL CURRENT ASSETS

    87,682,000       65,244,000  

PROPERTY, PLANT AND EQUIPMENT, NET

    13,160,000       8,723,000  

OTHER INTANGIBLE ASSETS, NET

    18,353,000       559,000  

GOODWILL

    4,135,000       -  

DEFERRED INCOME TAXES

    2,009,000       4,205,000  

OTHER ASSETS

    155,000       182,000  
    $ 125,494,000     $ 78,913,000  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

                 

CURRENT LIABILITIES

               

Accounts payable

  $ 8,363,000     $ 6,629,000  

Other current liabilities

    7,768,000       3,222,000  

Current portion of long-term debt

    1,750,000       -  

TOTAL CURRENT LIABILITIES

    17,881,000       9,851,000  

LONG-TERM DEBT

    24,500,000       -  

LONG-TERM PENSION LIABILITY

    3,617,000       10,468,000  

ACQUISITION-RELATED CONTINGENT LIABILITY

    6,806,000       -  

OTHER LONG-TERM LIABILITIES

    625,000       736,000  

DEFERRED INCOME TAXES

    130,000       70,000  

COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)

               

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 6,520,408 and 6,115,907, respectively.

    6,000       6,000  

Additional paid-in capital

    25,828,000       21,288,000  

Retained earnings

    49,315,000       44,451,000  

Accumulated other comprehensive loss, net of tax:

               

Pensions

    (3,129,000 )     (7,957,000 )

Cash flow hedges

    (85,000 )     -  

TOTAL SHAREHOLDERS' EQUITY

    71,935,000       57,788,000  
    $ 125,494,000     $ 78,913,000  

 

See Notes to Consolidated Financial Statements.

 

 
20

 

 

Superior Uniform Group, Inc. and Subsidiaries

 

Consolidated Statements of Shareholders’ Equity

Years Ended December 31,

 

   

Common

Shares

   

Common

Stock

   

Additional

Paid-In

Capital

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

(Loss) Income,

net of tax

   

Total

Shareholders'

Equity

 

Balance, January 1, 2012

    5,993,062     $ 6,000     $ 19,347,000     $ 48,590,000     $ (6,897,000 )   $ 61,046,000  

Common shares issued upon exercise of options

    138,252       -       889,000                       889,000  

Common shares issued upon exercise of Stock Appreciation Rights

    10,324       -       -                       -  

Share-based compensation expense

                    893,000                       893,000  

Warrants exercised

    44,912       -       -                       -  

Common shares received as payment for exercise of stock options

    (34,073 )     -       282,000       (282,000 )             -  

Purchase and retirement of common shares

    (36,570 )     -       (123,000 )     (314,000 )             (437,000 )

Cash dividends declared ($1.08 per share)

                            (6,574,000 )             (6,574,000 )

Comprehensive Income (Loss):

                                               

Net earnings

                            3,031,000               3,031,000  

Net change during the period related to:

                                               

Pensions, net of tax benefit of $549,000

                                    (1,060,000 )     (1,060,000 )

Comprehensive Income:

                                            1,971,000  

Balance, December 31, 2012

    6,115,907       6,000       21,288,000       44,451,000       (7,957,000 )     57,788,000  

Common shares issued upon exercise of options

    206,441       -       2,216,000                       2,216,000  

Restricted shares issued

    208,617               1,555,000                       1,555,000  

Common shares issued upon exercise of Stock Appreciation Rights

    2,654       -       -                       -  

Share-based compensation expense

                    788,000                       788,000  

Tax benefit from exercise of stock options

            -       31,000                       31,000  

Common shares received as payment for exercise of stock options

            -                               -  

Purchase and retirement of common shares

    (13,211 )     -       (50,000 )     (112,000 )             (162,000 )

Cash dividends declared ($.135 per share)

                            (874,000 )             (874,000 )

Comprehensive Income (Loss):

                                               

Net earnings

                            5,850,000               5,850,000  

Net change during the period related to:

                                               

Cash flow hedges, net of taxes of $40,000

                                    (85,000 )     (85,000 )

Pensions, net of taxes of $2,506,000

                                    4,828,000       4,828,000  

Comprehensive Income:

                                            10,593,000  
                                                 

Balance, December 31, 2013

    6,520,408     $ 6,000     $ 25,828,000     $ 49,315,000     $ (3,214,000 )   $ 71,935,000  

 

See Notes to Consolidated Financial Statements.

 

 
21

 

 

Superior Uniform Group, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

 

   

2013

   

2012

 

CASH FLOWS FROM OPERATING ACTIVITIES

               
                 

Net income

  $ 5,850,000     $ 3,031,000  

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

               

Depreciation and amortization

    2,582,000       2,300,000  

Provision for bad debts - accounts receivable

    161,000       74,000  

Share-based compensation expense

    788,000       893,000  

Deferred income tax benefit

    (249,000 )     (131,000 )

Gain on sale of property, plant and equipment

    (12,000 )     (1,000 )
Accretion of acquisition-related contingent liability     63,000       -  

Intangible asset impairment

    -       1,226,000  

Changes in assets and liabilities, net of acquisition of business:

               

Accounts receivable - trade

    (1,569,000 )     (787,000 )

Accounts receivable - other

    (1,138,000 )     750,000  

Inventories

    134,000       1,962,000  

Prepaid expenses and other current assets

    (2,122,000 )     (269,000 )

Other assets

    27,000       (75,000 )

Accounts payable

    1,734,000       688,000  

Other current liabilities

    1,781,000       (1,277,000 )

Pension liability

    482,000       773,000  

Other long-term liabilities

    (111,000 )     1,000  

Net cash provided from operating activities

    8,401,000       9,158,000  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Additions to property, plant and equipment

    (1,631,000 )     (1,647,000 )

Disposals of property, plant and equipment

    14,000       1,000  

Purchase of business

    (32,483,000 )     -  

Net cash used in investing activities

    (34,100,000 )     (1,646,000 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Proceeds from long-term debt

    44,740,000       29,360,000  

Repayment of long-term debt

    (18,490,000 )     (30,000,000 )

Payment of cash dividends

    (874,000 )     (6,574,000 )

Proceeds received on exercise of stock options

    2,216,000       889,000  

Excess tax benefit from exercise of stock options

    31,000       -  

Common stock reacquired and retired

    (162,000 )     (437,000 )

Net cash provided from (used in) financing activities

    27,461,000       (6,762,000 )
                 

Net increase in cash and cash equivalents

    1,762,000       750,000  

Cash and cash equivalents balance, beginning of year

    3,554,000       2,804,000  

Cash and cash equivalents balance, end of year

  $ 5,316,000     $ 3,554,000  

 

See Notes to Consolidated Financial Statements.

 

 
22

 

  

Superior Uniform Group, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

Years Ended December 31, 2013 and 2012

 

NOTE 1 – Summary of Significant Accounting Policies:

 

a)  Business description

 

Superior Uniform Group®, through its Signature marketing brands—Fashion Seal®, Fashion Seal Healthcare®, HPI Direct®, Martin’s®, Worklon®, UniVogue® and Blade—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, and Cleanroom markets. The Company also provides remote staffing solutions through its direct and indirect subsidiaries and its affiliates, The Office Gurus, Ltda. De C.V., The Office Gurus, LLC, Power Three Web Ltda., and The Office Gurus, Ltd.

 

b)  Basis of presentation

 

The consolidated interim financial statements include the accounts of Superior Uniform Group, Inc. and its wholly-owned subsidiaries, The Office Gurus, LLC, SUG Holding and Fashion Seal Corporation; The Office Gurus, LTDA. De C.V., The Office Masters, LTDA. De C.V. and The Office Gurus, Ltd., each a subsidiary of Fashion Seal Corporation and SUG Holding; and Power Three Web Ltda. and Superior Sourcing, each a wholly-owned subsidiary of SUG Holding. All of these entities are referred to collectively as “the Company”.

 

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 recognition and allowance for doubtful accounts

 

The Company recognizes revenue as products are shipped and title passes and as services are provided. The 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 included in net sales for the Company. 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. Charge-offs of accounts receivable are made once all collection efforts have been exhausted. 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)  Accounts receivable-other

 

The Company purchases raw materials and has them delivered to certain suppliers of the Company. The Company pays for the raw materials and then deducts the cost of these materials from payments to the suppliers at the time the related finished goods are invoiced to the Company by those suppliers.

 

f)  Advertising expenses

 

The Company expenses advertising costs as incurred. Advertising costs for the years ended December 31, 2013 and 2012, respectively, were $89,000 and $51,000.

 

 
23

 

  

g)  Cost of goods sold and shipping and handling fees and costs  

 

Cost 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 for our Uniforms and Related Products segment. Cost of goods sold for our Remote Staffing Solutions segment includes salaries and payroll related benefits for agents. The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with 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 $7,053,000 and $5,458,000 for the years ended December 31, 2013 and 2012, respectively.

 

h)  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.

 

i)  Property, plant and equipment

 

Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. 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.

 

j)  Goodwill

 

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The Company tests goodwill for impairment annually as of December 31st and/or when an event occurs or circumstances change such that it is more likely than not that impairment may exist. Examples of such events and circumstances that the Company would consider include the following:

 

macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets;

 

industry and market considerations such as a deterioration in the environment in which the Company operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for the Company's products or services, or a regulatory or political development;

 

cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows;

 

overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods;

 

other relevant entity-specific events such as changes in management, key personnel, strategy, or customers;

  

Goodwill is tested at a level of reporting referred to as "the reporting unit." The Company's reporting units are defined as each of its two reporting segments with all of its goodwill included in the Uniforms and Related Products segment.

 

An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The Company completed its assessment of the qualitative factors as of December 31, 2013 and determined that it was not more likely than not that the fair value of the reporting unit was less than its carrying value.

 

 
24

 

 

 k)  Other intangible assets

 

Other intangible assets consist of customer lists, a non-compete agreement and an acquired trade name acquired in previous business acquisitions.

 

The breakdown of intangible assets as of December 31, 2013 and 2012 was as follows:

 

   

Customer

Relationships

 

Weighted

Average Life (years)

 

Non-compete

Agreement

 

Weighted

Average Life (years)

December 31, 2013

                   

Cost

  $ 10,221,000  

9.6

  $ 5,000,000  

5

Accumulated amortization

    (1,068,000 )       (500,000 )  

Net

  $ 9,153,000       $ 4,500,000    

 

   

Customer

Relationships

     

License

Agreement

   

December 31, 2012

                   

Cost

  $ 1,021,000  

7

  $ 2,861,000  

3.5

Accumulated amortization

    (462,000 )       (1,635,000 )  

Intangible asset impairment

    -         (1,226,000 )  

Net

  $ 559,000       $    

 

 

Amortization expense for other intangible assets was $1,106,000 and $964,000 for the years ended December 31, 2013 and 2012, respectively. Amortization expense for other intangible assets is expected to be $2,066,000 for each of the years ending December 2014 and 2015; $2,041,000 in 2016; $1,920,000 in 2017; $1,420,000 in 2018; $920,000 in each of the years ending December 31, 2019 through 2022; and $460,000 in 2023. The Company recognized a pre-tax, non-cash impairment charge of $1,226,000 in the fourth quarter of 2012 to write off the remaining balance of the licensing agreement. This impairment charge is included in the results of our Uniforms and Related Products segment. Refer to Note 6.

 

As part of the acquisition of HPI in 2013, the Company recorded $4,700,000 as the fair value of the acquired trade name in other intangible assets. This asset is considered to be of an indefinite life and as such is not being amortized.

 

l)  Depreciation and amortization

 

Plant and equipment are depreciated on the straight-line basis at 2.5% to 5% for buildings, 2.5% to 20% for improvements, 10% to 33.33% for machinery, equipment and fixtures and 20% to 33.33% 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.

 

m)  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.

 

n)  Insurance

 

The Company self-insures for certain obligations related to employee health 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.

 

 
25

 

 

 o)  Taxes on income

 

Income taxes are provided for under the liability method, 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. The calculation of the Company’s tax liabilities also involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain income tax positions based on estimates of whether, and the extent to which, additional taxes will be required. The Company also reports interest and penalties related to uncertain income tax positions as income taxes. Refer to Note 8.

 

p)  Impairment 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. There was no impairment of long-lived assets for the year ended December 31, 2013. The Company recognized an impairment loss of $1,226,000 related to an intangible asset in the year ended 2012. Refer to Note 6.

 

q)  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, 2013, the Company had 2,484,281 shares of common stock authorized for awards of share-based compensation under its 2013 Incentive Stock and Awards Plan.

 

The Company recognizes 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. 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 and the Company’s common stock price volatility. 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.

 

r)  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 and stock-settled stock appreciation rights.

 

s)  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).

 

t)  Operating segments

 

FASB establishes standards for the way that public companies report information about operating segments in annual financial statements and establishes standards for related disclosures about product and services, geographic areas and major customers. The Company has reviewed the standard and determined that it has two reportable segments, Uniforms and Related Products and Remote Staffing Solutions.

 

 
26

 

 

 u)  Risks and concentrations  

 

Financial instruments that potentially subject the Company to concentrations of credit risk include cash in banks in excess of federally insured amounts.  The Company manages this risk by maintaining all deposits in high quality financial institutions and periodically performing evaluations of the relative credit standing of the financial institutions. When assessing credit risk the Company considers whether the credit risk exists at both the individual and group level. Consideration is given to the activity, region and economic characteristics when assessing if there exists a group concentration risk. At December 31, 2013 and 2012, the Company had no customer with an accounts receivable balance greater than 10% of the total accounts receivable. At December 31, 2013 and 2012, the accounts receivable balances for the Company’s five largest customers totaled $6,264,000 and $4,930,000, respectively, or approximately 27.6% and 29.6% of the respective total accounts receivable balances. The Company’s largest customer for each of the years ended December 31, 2013 and 2012 had net sales of approximately $10,110,000 and $8,412,000, respectively, or approximately 6.7% and 7.0% of the respective total net sales for the Company. The Company’s five largest customers for the year ended December 31, 2013 and 2012 had net sales of approximately $35,084,000 and $31,961,000, respectively, or approximately 23.2% and 26.7% of the respective total net sales for the Company.   

 

Included in accounts receivable-other on the Company’s consolidated balance sheets at December 31, 2013 and 2012 are receivable balances from a supplier in Haiti totaling $4,018,000 and $2,966,000, respectively.

 

In 2013 and 2012, approximately 33% and 48%, 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.

 

v)  Fair value of financial instruments

 

The carrying amounts of cash and cash equivalents, receivables and accounts payable approximated fair value as of December 31, 2013 and 2012, because of the relatively short maturities of these instruments. The carrying amount of the Company’s long-term debt approximated fair value as the rates are adjustable based upon current market conditions.

 

w)  Use of estimates

 

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

 

 
27

 

 

NOTE 2 - Allowance for Doubtful Accounts Receivable:

 

The activity in the allowance for doubtful accounts receivable was as follows:

 

   

2013

   

2012

 

Balance at the beginning of year

  $ 725,000     $ 758,000  
                 

Provision for bad debts

    161,000       74,000  
                 

Charge-offs

    (337,000 )     (125,000 )
                 

Recoveries

    11,000       18,000  
                 

Balance at the end of year

  $ 560,000     $ 725,000  

 

 

NOTE 3 - Reserve for Sales Returns and Allowances:

 

The activity in the reserve for sales returns and allowances was as follows:

 

   

2013

   

2012

 

Balance at the beginning of year

  $ 178,000     $ 272,000  
                 

Provision for returns and allowances

    3,062,000       2,203,000  
                 

Liability asumed in acquisition of business

    645,000       -  
                 

Actual returns and allowances paid to customers

    (3,092,000 )     (2,297,000 )
                 

Balance at the end of year

  $ 793,000     $ 178,000  

   

 

NOTE 4 - Inventories:

 

   

December 31,

 
   

2013

   

2012

 

Finished goods

  $ 37,259,000     $ 27,382,000  

Work in process

    111,000       71,000  

Raw materials

    12,116,000       11,793,000  
    $ 49,486,000     $ 39,246,000  

 

NOTE 5 - Property, Plant and Equipment:

 

   

December 31,

 
   

2013

   

2012

 

Land

  $ 2,340,000     $ 1,790,000  

Buildings, improvements and leaseholds

    11,719,000       8,683,000  

Machinery, equipment and fixtures

    40,292,000       47,007,000  
      54,351,000       57,480,000  

Accumulated depreciation and amortization

    (41,191,000 )     (48,757,000 )
    $ 13,160,000     $ 8,723,000  

 

Depreciation and amortization charges were approximately $1,476,000 and $1,336,000 in 2013 and 2012, respectively.

 

NOTE 6 – License Agreement:

  

On January 4, 2011, the Company entered into a License and Distribution Agreement (the “License Agreement”) with EyeLevel Interactive, LLC (“Licensor”), a leading technology company, pursuant to which the Company was granted a license to market, promote, sell and distribute garments utilizing certain intellectual property of Licensor (the “Products”) to the Company’s current and potential clients. The License Agreement was to expire three years and 180 days following its effective date (the “Term”).

 

 
28

 

 

In conjunction with the execution of the License Agreement, the Company paid Licensor a license fee (the “License Fee”) equal to (1) $2.0 million cash, plus (2) a warrant to acquire 360,000 shares of the Company’s common stock (the “Warrant”) at the greater of the Company’s closing price as quoted on the Nasdaq Stock Market or the book value per share of the Company’s common stock as of the effective date of the agreement. This Warrant was exercisable until January 4, 2016, and had an exercise price of $10.63 per share. On March 6, 2012, Licensor exercised their warrant and acquired 44,912 shares of the Company’s stock in exchange for the surrender of the remainder of the warrant. The Company determined the fair value of the Warrant at $800,000 utilizing the Black-Scholes valuation model. Additionally, the Company incurred $61,000 in expenses associated with the acquisition of the License Agreement. The total capitalized cost of the License Agreement was $2,861,000 at inception.

 

During 2012, we concluded that we did not have adequate, verifiable cash flows to support recovery of the intangible asset, related to the License Agreement, on our statement of financial position at December 31, 2012. Therefore, we recorded a pre-tax, non-cash impairment charge of $1,226,000 in the fourth quarter of 2012 to write off the remaining balance of the License Agreement. The Company and Licensor agreed to terminate the License Agreement during the third quarter of 2013.

  

NOTE 7 - Long-Term Debt: 

   

December 31,

2013

   

December 31,

2012 

 
                 
                 

Term loan payable to Fifth Third Bank, maturing July 1, 2018

  $ 26,250,000     $ -  
                 

Note payable to Fifth Third Bank, pursuant to revolving credit agreement, maturing July 1,2018 

    -       -  
                 
    $ 26,250,000     $ -  

 

               

Less payments due within one year included in current liabilities 

    1,750,000       -  
                 

Long-term debt less current maturities

  $ 24,500,000     $ -  

 

 

Effective July 1, 2013, the Company entered into an amended and restated 5-year credit agreement with Fifth Third Bank that made available to the Company up to $15,000,000 on a revolving credit basis in addition to a $30,000,000 term loan utilized to finance the acquisition of substantially all of the assets of HPI Direct, Inc. as discussed in Note 16. Interest is payable on both the revolving credit agreement and the term loan at LIBOR (rounded up to the next 1/8th of 1%) plus 0.95% based upon the one-month LIBOR rate for U.S. dollar based borrowings (1.20% at December 31, 2013). The Company pays an annual commitment fee of 0.10% 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, 2013, there were no balances outstanding under letters of credit.

 

On October 22, 2013, the credit agreement was amended to, among other things, increase the amount of permitted investments in subsidiaries that are not parties to the credit and related agreements, from $1 million to $5 million.

 

In order to reduce interest rate risk on the term loan, the Company entered into an interest rate swap agreement with Fifth Third Bank, N.A. in July 2013 that was designed to effectively convert or hedge the variable interest rate on a portion of this borrowing to achieve a net fixed rate of 2.53% per annum, beginning July 1, 2014 with a notional amount of $14,250,000 that is adjusted to match the outstanding principal on the related debt. The notional amount of the interest rate swap is reduced by the scheduled amortization of the principal balance of the term loan of $187,500 per month through July 1, 2015 and $250,000 per month through June 1, 2018. The remaining notional balance of $3,250,000 will be eliminated at the maturity of the term loan on July 1, 2018.

 

Under the terms of the interest rate swap, the Company will receive variable interest rate payments and make fixed interest rate payments on an amount equal to the notional amount at that time. Changes in the fair value of the interest rate swap designated as the hedging instrument that effectively offset the variability of cash flows associated with the variable-rate, long-term debt obligation are reported in OCI, net of related income tax effects. At December 31, 2013, the interest rate swap had a negative fair value of $125,000, which is presented within other current liabilities within the Consolidated Balance Sheet. The entire change of $125,000, net of tax benefit of $40,000, since the inception of the hedge in July 2013 has been recorded within OCI for the year ended December 31, 2013. The Company does not currently expect any of those losses to be reclassified into earnings over the subsequent twelve-month period.

 

 
29

 

  

The remaining scheduled amortization for the term loan is as follows: 2014 $1,750,000; 2015 $2,625,000; 2016 $3,000,000; 2017 $3,000,000; 2018 $15,875,000. The term loan does not include a prepayment penalty. In connection with the credit agreement, the Company incurred approximately $68,000 of debt financing costs, which primarily consisted of legal fees. These costs are being amortized over the life of the credit agreement and are recorded as additional interest expense.

 

The amended and restated credit agreement with Fifth Third Bank is secured by substantially all of the operating assets of Superior Uniform Group, Inc. and is guaranteed by all domestic subsidiaries of Superior Uniform Group, Inc. The agreement contains restrictive provisions concerning a maximum funded senior indebtedness to EBITDA ratio as defined in the agreement (3.5:1), a maximum funded indebtedness to EBITDA ratio as defined in the agreement (4.0:1) and fixed charge coverage ratio (1.25:1). The Company is in full compliance with all terms, conditions and covenants of the credit agreement.

 

NOTE 8 – Taxes on Income:

 

Aggregate income tax provisions consist of the following:

 

   

2013

   

2012

 

Current:

               

Federal

  $ 2,620,000     $ 1,508,000  

State and local

    269,000       213,000  
      2,889,000       1,721,000  

Deferred tax benefit

    (249,000 )     (131,000 )
                 
    $ 2,640,000     $ 1,590,000  

 

 

The significant components of the deferred income tax asset (liability) are as follows:

 

   

2013

   

2012

 

Deferred income tax assets:

               

Pension accruals

  $ 1,794,000     $ 4,300,000  

Operating reserves and other accruals

    861,000       1,385,000  

Tax carrying value in excess of book basis of goodwill

    545,000       323,000  

Deferred income tax liabilities:

               

Book carrying value in excess of tax basis of property

    (605,000 )     (549,000 )

Deferred expenses

    (716,000 )     (1,324,000 )
                 

Net deferred income tax asset

  $ 1,879,000     $ 4,135,000  

 

The difference between the total statutory Federal income tax rate and the actual effective income tax rate is accounted for as follows:

 

   

2013

   

2012

 
                 

Statutory Federal income tax rate

    34.0

%

    34.0

%

State and local income taxes, net of Federal income tax benefit

    2.3       3.0  

Effect of change in unrecognized tax benefit

    (2.0 )     (1.1 )

Untaxed foreign income

    (6.0 )     (9.1 )

Non-deductible share-based employee compensation expense

    2.3       4.6  

Non-deductible portion of intangible asset impairment

    0.0       1.8  

Other items

    0.5       1.2  

Effective income tax rate

    31.1

%

    34.4

%

 

Only tax positions that meet the more-likely-than-not recognition threshold are recognized in the consolidated financial statements.

 

 
30

 

 

As of December 31, 2013 and 2012, respectively, we have $625,000 and $736,000 of unrecognized tax benefits, all of which, if recognized, would favorably affect the annual effective income tax rate.  We do not expect any significant amount of this liability to be paid in the next twelve months. Accordingly, the balance of $625,000 is included in other long-term liabilities.

 

Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows:

 

   

2013

   

2012

 

Balance at January 1,

  $ 565,000     $ 582,000  

Additions based on tax positions related to the current year

    59,000       68,000  

Additions for tax positions of prior years

    1,000       (10,000 )

Reductions due to audits by taxing jurisdictions

    (50,000 )     -  

Reductions due to lapse of statute of limitations

    (78,000 )     (75,000 )

Balance at December 31,

  $ 497,000     $ 565,000  

 

We recognize interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes. During 2013 and 2012, we recorded $45,000 and $46,000 respectively, for interest and penalties, net of tax benefits. During 2013 and 2012, we reduced the liability by $65,000 and $29,000, respectively, of interest and penalties due to lapse of statute of limitations and an adjustment to the expected interest rate. Additionally, the accrued interest and penalties balance was reduced by $23,000 as a result of payments made during 2013 related to audits completed during the year. At December 31, 2013 and 2012, we had $128,000 and $171,000, respectively, accrued for interest and penalties, net of tax benefit.

 

We anticipate that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by approximately $117,000 within the next 12 months due to the closure of tax years by expiration of the statute of limitations and audit settlements related to various state tax filing positions. The earliest year open to federal examinations is 2010 and significant state examination is 2004.

 

We have not provided deferred taxes on undistributed earnings attributable to foreign operations that have been considered to be reinvested indefinitely. These earnings relate to ongoing operations and were $7,266,000 and $5,578,000 at December 31, 2013 and 2012, respectively. It is not practical to determine the income tax liability that would be payable if such earnings were not indefinitely reinvested.

 

NOTE 9 – 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.

 

Effective June 30, 2013, the Company no longer accrues additional benefits for future service or for future increases in compensation levels for the company’s primary defined benefit pension plan. The curtailment gain included in the table in this note was recognized as a result of this change.

 

The Company recognizes the funded status of its defined benefit post retirement plans in the Company’s consolidated balance sheets.

 

At December 31, 2013, the Company’s projected benefit obligation under its pension plans exceeded the fair value of the plans’ assets by $3,617,000 and thus the plans are underfunded.

 

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.

 

 
31

 

 

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's consolidated balance sheets at December 31, 2013 and 2012:

 

 

   

December 31,

 
   

2013

   

2012

 
                 

Changes in benefit obligation

               

Benefit obligation at beginning of year

  $ 27,819,000     $ 23,897,000  

Service cost

    364,000       595,000  

Interest cost

    1,016,000       1,023,000  

Actuarial (gain) loss

    (2,810,000 )     3,469,000  

Curtailment gain

    (1,990,000 )     -  

Benefits paid

    (2,766,000 )     (1,165,000 )

Benefit obligation at end of year

    21,633,000       27,819,000  
                 

Changes in plan assets

               

Fair value of plan assets at beginning of year

    17,351,000       15,811,000  

Actual return on assets

    2,431,000       2,155,000  

Employer contributions

    1,000,000       550,000  

Benefits paid

    (2,766,000 )     (1,165,000 )

Fair value of plan assets at end of year

    18,016,000       17,351,000  
                 

Funded status at end of year

  $ (3,617,000 )   $ (10,468,000 )
                 

Amounts recognized in consolidated balance sheet

               

Long-term pension liability

  $ (3,617,000 )   $ (10,468,000 )
                 
                 

Amounts recognized in accumulated other comprehensive income consist of:

               

Net actuarial loss

  $ 4,903,000     $ 12,223,000  

Prior service cost

    -       13,000  
    $ 4,903,000     $ 12,236,000  

  

Information for pension plans with projected benefit obligation in excess of plan assets              
               
   

December 31,

 
   

2013

   

2012

 

Projected benefit obligation

  $ 21,633,000     $ 27,819,000  

Fair value of plan assets

    (18,016,000 )     (17,351,000 )
    $ 3,617,000     $ 10,468,000  

 

Components of net periodic benefit cost

               
                 

Net periodic benefits cost

 

2013

   

2012

 

Service cost - benefits earned during the period

  $ 364,000     $ 595,000  

Interest cost on projected benefit obligation

    1,016,000       1,023,000  

Expected return on plan assets

    (1,325,000 )     (1,270,000 )

Amortization of prior service cost

    13,000       17,000  

Recognized actuarial loss

    938,000       957,000  

Settlement loss

    476,000       -  

Net periodic pension cost after settlements

  $ 1,482,000     $ 1,322,000  

 

The pension settlement loss included in the table above relates to lump sum payments made to various employees upon their retirement or termination each year.

 

 
32

 

 

The estimated net actuarial loss 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 $324,000 and $-0-, respectively.

 

The table below presents various assumptions used in determining the benefit obligation for each year and reflects the percentages for the various plans.

 

Weighted-average assumptions used to determine benefit obligations at December 31,

 

    Discount Rate    

Long Term Rate

of Return
    Salary Scale
    Corp.    

Plants

    Corp.    

Plants

   

Corp.

 

Plants

2012

    3.93 %     3.77 %     8.00 %     8.00 %     3.00  % N/A

2013

    4.82 %     4.66 %     8.00 %     8.00 %