| SUPERIOR UNIFORM GROUP INC Item 1A Risk Factors Our business, operations and financial condition are subject to various risks, and many of those risks are driven by factors that we cannot control or predict |
| The following discussion addresses those risks that management believes are the most significant, and you should take these risks into account in evaluating us or any investment decision involving us |
| Additional risks and uncertainties not presently known or that we currently believe to be less significant may also adversely affect us |
| Risks Relating To Our Industry We face intense competition within our industry and our revenue may decrease if we are not able to respond to this competition accordingly |
| Customers in the uniform and corporate identity apparel industry choose suppliers primarily based upon the quality, price and breadth of products offered |
| We encounter competition from a number of companies in the geographic areas we serve |
| Major 3 ______________________________________________________________________ [4]Table of Contents competitors include publicly held companies such as ARAMARK (a division of ARAMARK Corporation), Cintas Corporation, Unifirst Corporation and G&K Services |
| We also compete with a multitude of regional and local competitors that vary by market |
| If our existing or future competitors seek to gain or retain market share by reducing prices, we may be required to lower our prices, which would adversely affect our operating results |
| In addition, our competitors generally compete with us for acquisition candidates, which can increase the price for acquisitions and reduce the number of acquisition candidates available to us |
| Regional or national economic slowdowns and high unemployment levels will likely have an adverse effect on our revenues and operating results |
| National or regional economic slowdowns or certain industry specific slowdowns resulting in higher unemployment levels and overall weak economic conditions generally result in reductions of customers’ employees in uniform that, in turn, adversely affect our revenues |
| If we are unable to offset this effect through the addition of new customers (through acquisition or otherwise) or the penetration of existing customers with a broader mix of product and service offerings, our revenue growth rates will be negatively impacted |
| Events or conditions in a particular geographic area, such as adverse weather and other factors, could also hurt operating results |
| While we do not believe that our exposure is greater than that of our competitors, we could be adversely affected by increases in the prices of fabric, natural gas, gasoline, wages, employee benefits, insurance costs and other components of product cost unless we can recover such increases through increases in the prices for our products and services |
| Competitive and general economic conditions might limit our ability and that of our competitors to increase prices to cover such increases |
| The uniform and corporate identity apparel industry is subject to pricing pressures that may cause us to lower the prices we charge for our products and adversely affect our financial performance |
| Prices in the uniform and corporate identity apparel industry have been declining over the past several years primarily as a result of the trend to move sewing operations offshore, the introduction of new manufacturing technologies, and increased competition |
| Products sewn offshore generally cost less to manufacture than those made domestically primarily because labor costs are lower offshore |
| Many of our competitors source their product requirements from developing countries to achieve a lower cost operating environment, possibly in environments with lower costs than our offshore facilities, and those manufacturers may use these cost savings to reduce prices |
| To remain competitive, we must adjust our prices from time to time in response to these industry-wide pricing pressures |
| Moreover, increased customer demands for allowances, incentives and other forms of economic support reduce our gross margins and affect our profitability |
| Our financial performance may be negatively affected by these pricing pressures if we are forced to reduce our prices and if we cannot reduce our production costs or if our production 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 and other unpredictable factors |
| Fluctuations in petroleum prices may also influence the prices of related items such as chemicals, dyestuffs and polyester yarn |
| Any raw material price increase could increase our cost of sales and decrease our profitability unless we are able to pass higher prices on to our customers |
| In addition, if one or more of our competitors is able to reduce their production costs by taking advantage of any reductions in raw material prices or favorable sourcing agreements, we may face pricing pressures from those competitors and may be forced to reduce our prices or face a decline in net sales, either of which could have a materially adverse effect on our business, results of operations or financial condition |
| Changing international trade regulation and the elimination of quotas on imports of textiles and apparel may increase competition in our industry |
| Future quotas, duties or tariffs may increase our costs or limit the amount of products that we can import |
| A portion of our operations are subject to quotas imposed by bilateral textile agreements between the countries from which we procure raw materials, and the countries where our products are manufactured |
| These quotas limit the amount of products that may be imported from a particular country |
| In addition, the countries in which our products are manufactured or into which they are imported may from time to time impose additional new quotas, duties, tariffs and requirements as to where raw materials must be purchased, additional workplace regulations, or other restrictions on our imports or adversely modify existing restrictions |
| 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 |
| 4 ______________________________________________________________________ [5]Table of Contents Our operations are also subject to various international trade agreements and regulations such as the North American Free Trade Agreement and the Caribbean Basin Initiative, and the activities and regulations of the World Trade Organization (“WTO”) |
| Generally, these trade agreements benefit our business by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country |
| However, trade agreements can also impose requirements that negatively affect our business, such as limiting the countries from which we can purchase raw materials and setting quotas on products that may be imported into the United States from a particular country |
| In addition, increased competition from developing countries could have a material adverse effect on our business, results of operations or financial condition |
| The corporate identity apparel and uniform industry is subject to changing fashion trends and if we misjudge consumer preferences, the image of one or more of our brands may suffer and the demand for our products may decrease |
| We believe our products are, in general, less subject to fashion trends compared to many other apparel manufacturers because we manufacture and sell uniforms, corporate identity apparel and other accessories |
| However, the apparel industry, including uniforms and corporate identity apparel is subject to shifting customer demands and evolving fashion trends and our success is also dependent upon our ability to anticipate and promptly respond to these changes |
| Failure to anticipate, identify or promptly react to changing trends or styles may result in decreased demand for our products, as well as excess inventories and markdowns, which could have a material adverse effect on our business, results of operations, and financial condition |
| In addition, if we misjudge consumer preferences, our brand image may be impaired |
| RISKS RELATING TO OUR BUSINESS Our success depends upon the continued protection of our trademarks and other intellectual property rights and we may be forced to incur substantial costs to maintain, defend, protect and enforce our intellectual property rights |
| Our registered and common law trademarks, as well as certain of our licensed trademarks, have significant value and are instrumental to our ability to market our products |
| While we own and use several trademarks, our mark “Fashion Seal Uniforms” (presently registered until August 7, 2007, subject to renewal) is important to our business, as more than 50prca 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 |
| 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 |
| 5 ______________________________________________________________________ [6]Table of Contents 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 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 2005, 2004 and 2003 approximately 73prca, 70prca and 75prca, 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 |
| Certain of our existing stockholders have significant control |
| At December 31, 2005, our executive officers and certain of their family members collectively beneficially owned 26dtta4prca of our outstanding common stock, of which Gerald M Benstock, our Chairman of the Board, beneficially owned 20dtta8prca |
| As a result, our executive officers and certain of their family members have significant influence over the election of our Board of Directors, the approval or disapproval of any other matters requiring stockholder approval, and the affairs and policies of our company |
| 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 |