-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JGbXb0kau23e1m536Y6K6SK9qZsA0syogVVf4B6hnMNnr+IDuHBUn1C5z6c8X/An aKdK709yL29/BygoBameiQ== 0000071525-98-000022.txt : 19981118 0000071525-98-000022.hdr.sgml : 19981118 ACCESSION NUMBER: 0000071525-98-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLAIR CORP CENTRAL INDEX KEY: 0000071525 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 250691670 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00878 FILM NUMBER: 98750104 BUSINESS ADDRESS: STREET 1: 220 HICKORY ST CITY: WARREN STATE: PA ZIP: 16366 BUSINESS PHONE: 8147233600 FORMER COMPANY: FORMER CONFORMED NAME: NEW PROCESS CO DATE OF NAME CHANGE: 19890507 10-Q 1 3RD QTR FILING 1998 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q --------- QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Period Ended September 30, 1998 Commission File Number 1-878 ------------------- ------------ BLAIR CORPORATION - --------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 25-0691670 - --------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 220 HICKORY STREET, WARREN, PENNSYLVANIA 16366-0001 - --------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (814) 723-3600 - --------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not applicable - --------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- As of November 10, 1998 the registrant had outstanding 8,907,343 shares of its common stock without nominal or par value. PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS (UNAUDITED) BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 CONSOLIDATED BALANCE SHEETS BLAIR CORPORATION AND SUBSIDIARY September 30 December 31 1998 1997 ------------ ------------ ASSETS Current assets: Cash $ 7,477,532 $ 3,468,483 Customer accounts receivable, less allowances for doubtful accounts and returns of $37,318,798 in 1998 and $38,479,888 in 1997 144,783,814 157,636,096 Inventories - Note F Merchandise 97,072,697 68,143,275 Advertising and shipping supplies 18,003,392 10,584,134 ------------ ------------ 115,076,089 78,727,409 Deferred income taxes 6,968,000 9,910,000 Prepaid federal and state taxes 17,674,536 6,499,412 Prepaid expenses 789,986 391,532 ------------ ------------ Total current assets 292,769,957 256,632,932 Property, plant and equipment: Land 1,142,144 1,142,144 Buildings 63,433,347 63,263,399 Equipment 39,764,702 38,859,725 ------------ ------------ 104,340,193 103,265,268 Less allowances for depreciation 54,891,360 51,322,255 ------------ ------------ 49,448,833 51,943,013 Trademarks 867,441 921,623 ------------ ------------ TOTAL ASSETS $343,086,231 $309,497,568 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - Note H $ 37,500,000 $ 38,600,000 Trade accounts payable 66,799,157 46,358,297 Advance payments from customers 3,982,746 1,393,814 Accrued expenses - Note D 12,682,955 9,033,411 ------------ ------------ Total current liabilities 120,964,858 95,385,522 Deferred income taxes 1,421,000 1,683,000 Stockholders' equity: Common Stock without par value: Authorized 12,000,000 shares; issued 10,075,440 shares (including shares held in treasury) - stated value 419,810 419,810 Additional paid-in capital 14,278,828 13,230,251 Retained earnings 235,043,646 223,868,940 ------------ ------------ 249,742,284 237,519,001 Less 1,168,097 shares in 1998 and 1,067,724 shares in 1997 of common stock in treasury - at cost 26,756,067 23,161,169 Less receivable from Employee Stock Purchase Plan 2,285,844 1,928,786 ------------ ------------ 220,700,373 212,429,046 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $343,086,231 $309,497,568 ============ ============ See accompanying notes. CONSOLIDATED STATEMENTS OF INCOME BLAIR CORPORATION AND SUBSIDIARY
Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net sales $111,872,529 $102,809,800 $354,486,140 $341,237,544 Other income - Note G 9,669,514 9,036,032 30,174,391 30,085,087 Insurance proceeds - Note N 2,800,000 -0- 2,800,000 -0- ------------ ------------ ------------ ------------ 124,342,043 111,845,832 387,460,531 371,322,631 Costs and expenses: Cost of goods sold 57,683,795 52,629,516 175,840,448 171,385,242 Advertising 31,882,655 22,628,018 92,564,529 88,243,489 General and administrative 26,966,308 24,678,613 78,577,979 73,978,148 Provision for doubtful accounts 5,055,849 7,572,550 16,372,456 21,978,459 Interest 448,981 791,478 1,508,575 3,370,582 ------------ ------------ ------------ ------------ 122,037,588 108,300,175 364,863,987 358,955,920 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 2,304,455 3,545,657 22,596,544 12,366,711 Income taxes - Note E (284,000) 1,290,000 7,398,000 4,526,000 ------------ ------------ ------------ ------------ NET INCOME $ 2,588,455 $ 2,255,657 $ 15,198,544 $ 7,840,711 ============ ============ ============ ============ Basic and diluted earnings per share based on weighted average shares outstanding - Note C $ .29 $ .25 $1.70 $ .86 ===== ===== ===== ===== See accompanying notes.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY BLAIR CORPORATION AND SUBSIDIARY
Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Common Stock $ 419,810 $ 419,810 $ 419,810 $ 419,810 Additional paid-in capital: Balance at beginning of period 13,193,208 12,919,478 13,230,251 12,928,260 Issuance (net of forfeitures) of Common Stock under Employee Stock Purchase Plan 1,085,620 310,773 1,025,989 288,303 Issuance of Common Stock to non-employee directors -0- -0- 22,588 13,688 ------------ ------------ ------------ ------------ Balance at end of period 14,278,828 13,230,251 14,278,828 13,230,251 Retained earnings: Balance at beginning of period 233,791,292 218,910,178 223,868,940 216,068,537 Net income 2,588,455 2,255,657 15,198,544 7,840,711 Cash dividends declared - Note B (1,336,101) (1,358,116) (4,023,838) (4,101,529) ------------ ------------ ------------ ------------ Balance at end of period 235,043,646 219,807,719 235,043,646 219,807,719 Treasury Stock: Balance at beginning of period (26,144,521) (21,913,986) (23,161,169) (19,013,814) Purchase of treasury stock (1,018,213) (900,613) (4,001,471) (3,804,742) Issuance (net of forfeitures) of Common Stock under Employee Stock Purchase Plan 406,667 400,126 393,536 395,646 Issuance of Common Stock to non-employee directors -0- -0- 13,037 8,437 ------------ ------------ ------------ ------------ Balance at end of period (26,756,067) (22,414,473) (26,756,067) (22,414,473) Receivable from Employee Stock Purchase Plan: Balance at beginning of period (1,842,374) (1,676,959) (1,928,786) (1,803,910) Issuance (net of forfeitures) of Common Stock under Employee Stock Purchase Plan (508,987) (368,100) (494,285) (362,765) Repayments 65,517 76,388 137,227 198,004 ------------ ------------ ------------ ------------ Balance at end of period (2,285,844) (1,968,671) (2,285,844) (1,968,671) ------------ ------------ ------------ ------------ TOTAL STOCKHOLDERS' EQUITY $220,700,373 $209,074,636 $220,700,373 $209,074,636 ============ ============ ============ ============ See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS BLAIR CORPORATION AND SUBSIDIARY Nine Months Ended September 30 1998 1997 ------------ ------------ OPERATING ACTIVITIES Net income $ 15,198,544 $ 7,840,711 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,772,375 4,010,407 Provision for doubtful accounts 16,372,456 21,978,459 Provision for deferred income taxes 2,680,000 4,065,000 Changes in operating assets and liabilities providing (using) cash: Customer accounts receivable (3,520,174) 16,622,660 Inventories (36,348,680) (5,966,119) Prepaid federal and state taxes (11,175,124) 6,661,208 Prepaid expenses (398,454) 29,469 Trade accounts payable 20,440,860 11,070,981 Advance payments from customers 2,588,932 1,315,577 Accrued expenses 3,649,544 355,226 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 13,260,279 67,983,579 INVESTING ACTIVITIES Purchases of property, plant and equipment (1,224,013) (2,354,133) ------------ ------------ NET CASH (USED IN) INVESTING ACTIVITIES (1,224,013) (2,354,133) FINANCING ACTIVITIES Net (repayments) from bank borrowings (1,100,000) (56,050,000) Dividends paid (4,023,838) (4,101,529) Purchase of Common Stock for treasury (4,001,471) (3,804,742) Issuance (net of forfeitures) of Common Stock under Employee Stock Purchase Plan 1,419,525 683,949 Increase in notes receivable from Employee Stock Purchase Plan (357,058) (164,761) Issuance of Common Stock to non-employee directors 35,625 22,125 ------------ ------------ NET CASH (USED IN) FINANCING ACTIVITIES (8,027,217) (63,414,958) ------------ ------------ NET INCREASE IN CASH 4,009,049 2,214,488 Cash at beginning of year 3,468,483 4,115,533 ------------ ------------ CASH AT END OF PERIOD $ 7,477,532 $ 6,330,021 ============ ============ See accompanying notes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Blair Corporation and its wholly-owned subsidiary have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information refer to the financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1997. The consolidated financial statements include the accounts of Blair Corporation and its wholly-owned subsidiary, Blair Holdings, Inc. All significant intercompany accounts are eliminated upon consolidation. The Company changed its interim closing procedures in the first quarter of 1998, to a 5 week, 4 week, 4 week quarter from a calendar quarter. The change had a minor impact on the third quarter of 1998 as the Company had one more shipping day in the third quarter of 1998 than in the third quarter of 1997. Shipping days for the first nine months of 1998 and 1997 were the same. The year end closing will not be affected by this change. NOTE B - DIVIDENDS DECLARED 2-06-97 $.15 per share 2-05-98 $.15 per share 5-12-97 .15 4-21-98 .15 7-15-97 .15 7-21-98 .15 10-21-97 .15 10-20-98 .15 NOTE C - BASIC AND DILUTED EARNINGS PER SHARE Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net income $ 2,588,455 $ 2,255,657 $15,198,544 $ 7,840,711 Weighted average shares outstanding 8,911,043 9,063,214 8,945,447 9,142,530 Basic and diluted earnings per share $ .29 $ .25 $1.70 $ .86 NOTE D - ACCRUED EXPENSES Accrued expenses consist of: September 30 December 31 1998 1997 ----------- ----------- Employee compensation $ 8,459,810 $ 5,674,054 Contribution to profit sharing and retirement plan 1,622,608 1,407,745 Taxes, other than taxes on income 401,553 297,457 Other accrued items 2,198,984 1,654,155 ----------- ----------- $12,682,955 $ 9,033,411 =========== =========== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 NOTE E - INCOME TAXES The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The components of income tax expense (credit) are as follows: Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Currently payable: Federal $(2,856,000) $(1,534,000) $ 4,533,000 $ 897,000 State (697,000) (460,000) 185,000 (436,000) ----------- ----------- ----------- ----------- (3,553,000) (1,994,000) 4,718,000 461,000 Deferred 3,269,000 3,284,000 2,680,000 4,065,000 ----------- ----------- ----------- ----------- $ (284,000) $ 1,290,000 $ 7,398,000 $ 4,526,000 =========== =========== =========== =========== The differences between total tax expense (credit) and the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes are as follows: Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Statutory rate applied to pre-tax income $ 806,559 $ 1,240,980 $ 7,908,790 $ 4,328,349 State income taxes, net of federal tax benefit (135,850) 19,500 379,600 111,150 Insurance proceeds (980,000) -0- (980,000) -0- Other items 25,291 29,520 89,610 86,501 ----------- ----------- ----------- ----------- $ (284,000) $ 1,290,000 $ 7,398,000 $ 4,526,000 =========== =========== =========== =========== Components of the provision for deferred income tax expense are as follows: Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Advertising costs $ 3,248,000 $ 4,960,000 $ 2,889,000 $ 4,164,000 Provision for doubtful accounts 71,000 (1,642,000) 990,000 151,000 Provision for estimated returns (262,000) 74,000 (1,230,000) (83,000) Other items - net 212,000 (108,000) 31,000 (167,000) ----------- ----------- ----------- ----------- $ 3,269,000 $ 3,284,000 $ 2,680,000 $ 4,065,000 =========== =========== =========== =========== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 NOTE E - INCOME TAXES - Continued Components of the deferred tax asset and liability under the liability method as of September 30, 1998 and December 31, 1997 are as follows: September 30 December 31 1998 1997 ----------- ----------- Current net deferred tax asset: Doubtful accounts $ 5,970,000 $ 6,960,000 Returns allowance 3,243,000 2,013,000 Inventory obsolescence 1,937,000 1,937,000 Vacation pay 1,321,000 1,321,000 Inventory costs 849,000 778,000 Advertising costs (7,002,000) (4,113,000) Other items 650,000 1,014,000 ----------- ----------- $ 6,968,000 $ 9,910,000 =========== =========== Long-term deferred tax liability: Property, plant and equipment $ 1,421,000 $ 1,683,000 =========== =========== NOTE F - INVENTORIES Inventories are valued at the lower of cost or market. Cost of merchandise inventories is determined principally on the last-in, first-out (LIFO) method. Cost of advertising and shipping supplies is determined on the first-in, first-out (FIFO) method. Advertising and shipping supplies include printed advertising material and related mailing supplies for promotional mailings which are generally scheduled to occur within two months. These costs are expensed when mailed. If the FIFO method had been used for all inventories, the total amount would have increased by approximately $8,718,000 at September 30, 1998 and $8,538,000 at December 31, 1997, respectively. NOTE G - OTHER INCOME Other income consists of: Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Finance charges on time payment accounts $ 7,950,997 $ 8,401,016 $25,626,182 $28,411,295 Commissions earned 631,116 17,180 1,690,209 46,063 Other items 1,087,401 617,836 2,858,000 1,627,729 ----------- ----------- ----------- ----------- $ 9,669,514 $ 9,036,032 $30,174,391 $30,085,087 =========== =========== =========== =========== Finance charges on time payment accounts are recognized on an accrual basis of accounting. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 NOTE H - FINANCING ARRANGEMENTS In 1995, the Company entered into a $125,000,000 Revolving Credit Facility, which expires on November 17, 1998. The interest rate is, at the Company's option, based on a base rate option, federal funds rate option or euro-rate option as defined in the agreement. The Revolving Credit Facility is unsecured and requires the Company to meet certain covenants as outlined in the agreement. These covenants specifically relate to tangible net worth, maintaining a defined leverage ratio and fixed charge coverage ratio, and complying with certain indebtedness restrictions. As of September 30, 1998 and December 31, 1997, the Company was in compliance with all the agreement's covenants. At September 30, 1998 and December 31, 1997, the Company had borrowed $37,500,000 and $38,600,000 under the agreement, all of which was classified as current. NOTE I - NEW ACCOUNTING PRONOUNCEMENTS EARNINGS PER SHARE In February 1997, Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share," was issued. SFAS 128 establishes standards for computing and presenting earnings per share (EPS) and simplifies the existing standards. This statement replaces the presentation of primary EPS with a presentation of basic and diluted EPS. SFAS 128 was adopted in the financial statements for the year ended December 31, 1997. The adoption of this statement had no impact on the Company's earnings per share amounts. COMPREHENSIVE INCOME In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130), "Comprehensive Income," was issued. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 was adopted in the financial statements for the quarter ended March 31, 1998. The adoption of this statement had no impact on the financial statements of the Company. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June 1997, Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," was issued. SFAS 131 establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS 131 is effective for fiscal years beginning after December 15, 1997, and requires restatement of earlier periods presented - but not for interim periods in the initial year of adoption. Management believes adoption of this statement will not have a significant impact on the financial statements of the Company. EMPLOYERS' DISCLOSURES ABOUT PENSION AND OTHER POSTRETIREMENT BENEFITS In February 1998, Statement of Financial Accounting Standards No. 132 (SFAS 132), "Employers' Disclosures about Pension and Other Postretirement NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 NOTE I - NEW ACCOUNTING PRONOUNCEMENTS - Continued Benefits", was issued. SFAS 132 revises employers' disclosures of pensions and other postretirement benefits, requires additional information on changes in benefit obligations and fair value of plan assets and eliminates certain disclosures. SFAS 132 is effective for the year ending December 31, 1998, and requires restatement of disclosures for earlier periods. Management believes adoption of this statement will not have a significant impact on the financial statements of the Company. ACCOUNTING FOR DERIVATIVE INSTRUMENTS In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments," was issued. SFAS 133 provides new guidelines for accounting for derivative instruments. SFAS 133 is effective for financial periods beginning after June 15, 1999. Management is currently analyzing the impact of this statement on the Company. NOTE J - CONTINGENCIES The Company is involved in certain items of litigation, arising in the normal course of business. While it cannot be predicted with certainty, management believes that the outcome will not have a material effect on the Company's financial condition or results of operations. NOTE K - RECLASSIFICATIONS Certain amounts in the prior year financial statements have been reclassified to conform with the current year presentation. NOTE L - USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE M - EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase Plan wherein shares of treasury stock may be issued to certain employees at a price established at the discretion of the Employee Stock Purchase Plan Committee. The stock issued under the Plan was 50,400 shares on July 27, 1998 and 49,600 shares on July 23, 1997. NOTE N - INSURANCE PROCEEDS The $2,800,000 in insurance proceeds resulted from the death of John L. Blair, former President and Chairman of the Company. The Company was the owner and beneficiary of a life insurance policy on Mr. Blair who died on August 29, 1998. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 Results of Operations - --------------------- Comparison of Third Quarter 1998 and Third Quarter 1997 Net income for the third quarter of 1998 increased 15% as compared to the third quarter of 1997. However, the third quarter of 1998 included non- recurring insurance proceeds of $2,800,000. A net operating loss of $211,545 resulted primarily from difficulties at the Distribution Center that prevented the timely fulfillment of orders. The resulting order backlog should be worked off in the fourth quarter. Inventory levels associated with the Company's increased catalog efforts and a declining labor pool caused the fulfillment difficulties at the Distribution Center. Net sales for the third quarter of 1998 were 8.8% higher than third quarter 1997 net sales. Increased advertising volume was more than offset by lower than expected response in the second half of September 1998, the previously discussed increased order backlog and an increased level of prospecting in the advertising mix. Response rates overall were better in the third quarter of 1998 than in the third quarter of 1997 but didn't meet expectations in the third quarter of 1998. Gross sales revenue generated per advertising dollar decreased 24%. The total number of orders shipped increased and the average order size increased slightly in 1998 in comparing the third quarters. Returns as a percentage of adjusted gross sales improved to 14.3% in the third quarter of 1998 from 15.9% in the third quarter of 1997. A change in return policy was primarily responsible for the improvement in the returns percentage. Other income increased 7% in the third quarter of 1998 as compared to the third quarter of 1997. Primarily, commissions earned more than offset the drop in finance charges assessed on Easy Payment Plan accounts receivable. Insurance proceeds were the result of the Company owned term life policy on John L. Blair, former President and Chairman of the Company. John died on August 29, 1998. Cost of goods sold as a percentage of net sales increased to 51.6% in the third quarter of 1998 from 51.2% in the third quarter of 1997. Increases in prospect sales (promotional offers) and Home Products sales (lower margins) more than offset the improvement in returns in the third quarter of 1998. Advertising expense in the third quarter of 1998 increased 41% from the third quarter of 1997. The increase in catalog mailings was responsible for the higher advertising expense. The total number of catalog mailings released in the third quarter of 1998 was 82% higher than in the third quarter of 1997 (34.2 million vs. 18.9 million). Catalogs have been the primary advertising format for Home Products for over three years. The Company began full release, to both customers and prospects, of Menswear catalogs in September 1996 and Womenswear catalogs in March 1997. Catalog mailings from all three product lines, including combined product line offerings, are continually tested as to mailing frequency, page density, product content, number of pages and size. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 Results of Operations - Continued - --------------------- Comparison of Third Quarter 1998 and Third Quarter 1997 - Continued The total number of circular letter mailings in the third quarter of 1998 was 18% less than in the third quarter of 1997 (16.8 million vs. 20.5 million). Circular letter mailings have decreased due to the expansion of catalog advertising. Total volume of the co-op and media advertising programs decreased 24% in the third quarter of 1998 as compared to the third quarter of 1997 (211 million vs. 278 million). General and administrative expense increased 9% in the third quarter of 1998 as compared to the third quarter of 1997. The higher general and administrative expense was primarily the result of an 8% increase in wages and benefits and the costs associated with implementing and maintaining expanded database capabilities in marketing, credit management and advertising. The higher wages and benefits resulted from normal pay increases, an increase in the number of employees and increases in net income related benefits. The provision for doubtful accounts as a percentage of credit sales was 39% lower in the third quarter of 1998 as compared to the third quarter of 1997. The third quarter of 1998 provision was lower primarily due to an additional provision required in the third quarter of 1997. The estimated provision for doubtful accounts is based on current expectations, sales mix (prospect/customer) and prior years' experience. Due to improvement in the delinquency and charge-off rates in 1998, the estimated bad debt rate for 1998 credit sales and finance charges has been lowered and no additional provision has been required. The third quarter of 1997 included an additional provision of $3,159,000. At September 30, 1998, the allowance for doubtful accounts as a percentage of delinquencies was higher than at any time in 1997 and was approximately the same as at March 31, 1998 and June 30, 1998. Recoveries of bad debts previously charged off have been credited back against the allowance for doubtful accounts. The Company, having previously completed a study of its credit policies, continues to implement improved credit procedures. Revised credit granting and collection policies already implemented have resulted in turning down more bad credit risks and in shortening and strengthening the collection cycle. Credit granting models addressing prospects (first-time buyers) were implemented in mid-September and early-October 1997. Behavior and collection models were implemented in the first quarter of 1998. The full impact of the credit models is not likely to be realized until later in 1998. Interest expense decreased 43% in the third quarter of 1998 as compared to the third quarter of 1997. Interest expense results primarily from the Company's borrowings necessary to finance customer accounts receivable. Average borrowings outstanding have decreased in 1998 as compared to 1997. The increase in credit card sales and improved credit policies are greatly responsible for lowering the levels of customer accounts receivable and borrowings outstanding. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 Results of Operations - Continued - --------------------- Comparison of Third Quarter 1998 and Third Quarter 1997 - Continued Income taxes as a percentage of income before income taxes were a negative 12.3% in the third quarter of 1998 and a positive 36.4% in the third quarter of 1997. The federal income tax rate was 35% in both years. The reduction in the total income tax rate in the third quarter of 1998 was due to the non- taxable insurance proceeds ($2,800,000) and a decrease in the Company's effective state income tax rate. The Company changed its interim closing procedures in the first quarter of 1998 to a 5 week, 4 week, 4 week quarter from a calendar quarter. The change has had little or no impact as the Company had one more shipping day in the third quarter of 1998 than it had in the third quarter of 1997. Comparison of Nine Month Periods Ended September 30, 1998 and September 30, 1997 Net income for the first nine months of 1998 increased 94% as compared to the first nine months of 1997. The first nine months of 1998 have been favorably impacted by improved response to all advertising and by reductions in the provision for doubtful accounts and in interest expense. 1998 net income also included non-recurring insurance proceeds of $2,800,000. Net sales for the first nine months of 1998 were 3.9% higher than net sales for the first nine months of 1997. Net sales improved in 1998 due to increased response to all the Company's advertising formats and would have improved more had there not been fulfillment difficulties at the Distribution Center. Gross sales revenue generated per advertising dollar decreased 1.5%. The total number of orders shipped increased and the average order size increased slightly in 1998 as compared to 1997. Returns as a percentage of adjusted gross sales improved to 15.9% in the nine months of 1998 from 16.6% in the first nine months of 1997. Other income increased .3% in the nine months of 1998 as compared to the first nine months of 1997. The drop in finance charges assessed on Easy Payment Plan accounts receivable was more than offset by increased commissions earned and miscellaneous charges to vendors and customers. Insurance proceeds were the result of the Company owned term life policy on John L. Blair, former President and Chairman of the Company. John died on August 29, 1998. Cost of goods sold as a percentage of net sales decreased to 49.6% in the nine months of 1998 from 50.2% in the first nine months of 1997. Lower returns in 1998 and the liquidation of electronics merchandise in 1997 were primarily responsible for the favorable cost of goods comparison. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 Results of Operations - Continued - --------------------- Comparison of Nine Month Periods Ended September 30, 1998 and September 30, 1997 - Continued Advertising expense in the nine months of 1998 increased 4.9% from the first nine months of 1997. The increase in catalog mailings was responsible for the higher advertising expense. The total number of catalog mailings released in the nine months of 1998 was 35% higher than in the first nine months of 1997 (91.0 million vs. 67.4 million). The total number of circular letter mailings released in the nine months of 1998 was 28% less than in the first nine months of 1997 (64.5 million vs. 89.2 million). Total volume of the co-op and media advertising programs decreased approximately 4% in the nine months of 1998 as compared to the first nine months of 1997 (925 million vs. 965 million). General and administrative expense increased 6.2% in the nine months of 1998 as compared to the first nine months of 1997. The higher general and administrative expense was primarily the result of an 8.3% increase in wages and benefits. The higher wages and benefits resulted from normal pay increases, an increase in the number of employees and increases in net income related benefits. The provision for doubtful accounts as a percentage of credit sales was 29% lower in the nine months of 1998 as compared to the first nine months of 1997. The 1998 provision was lower primarily due to an additional provision required in 1997. The estimated provision for doubtful accounts is based on current expectations, sales mix (prospect/customer) and prior years' experience. Improved delinquency and charge-off rates in 1998 allowed the estimated bad debt rate for 1998 credit sales and finance charges to be lowered and eliminated the need of an additional provision. The first nine months of 1997 included an additional provision of $5,194,000. At September 30, 1998, the allowance for doubtful accounts as a percentage of delinquencies was higher than at any time in 1997. Recoveries of bad debts previously charged off have been credited back against the allowance for doubtful accounts. Interest expense decreased 55% in the nine months of 1998 as compared to the first nine months of 1997. Interest expense results primarily from the Company's borrowings necessary to finance customer accounts receivable. Average borrowings outstanding have decreased in 1998 as compared to 1997. The increase in credit card sales and improved credit policies are greatly responsible for lowering the levels of customer accounts receivable and borrowings outstanding. Income taxes as a percentage of income before income taxes were 32.7% in the nine months of 1998 and 36.6% in the first nine months of 1997. The federal income tax rate was 35% in both years. The reduction in the total income tax rate in 1998 was primarily due to the non-taxable insurance proceeds ($2,800,000). ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 Results of Operations - Continued - --------------------- Comparison of Nine Month Periods Ended September 30, 1998 and September 30, 1997 - Continued The Company changed its interim closing procedures in the first quarter of 1998 to a 5 week, 4 week, 4 week quarter from a calendar quarter. The change has had little or no impact as the Company had the same number of shipping days in the nine months of 1998 as it had in the first nine months of 1997. Liquidity and Sources of Capital - -------------------------------- All working capital and cash requirements were met. In November 1995, the Company entered into a $125,000,000 Revolving Credit Facility, which expires on November 17, 1998. The unsecured Revolving Credit Facility requires the Company to meet certain covenants, and as of September 30, 1998 the Company was in compliance with all the covenants. Borrowings outstanding at September 30, 1998 were $37,500,000, all classified as current. Borrowings outstanding at December 31, 1997 were $38,600,000, all classified as current. Borrowings outstanding at September 30, 1997 were $50,950,000 of which $35,000,000 was classified as long-term. The Company will be entering into a $95,000,000 Revolving Credit Facility before November 17, 1998. The ratio of current assets to current liabilities was 2.42 at September 30, 1998, 2.69 at December 31, 1997 and 3.41 at September 30, 1997. The ratio has decreased at September 30, 1998 primarily due to the increase in trade accounts payable resulting from higher inventories. Working capital increased $10,557,689 in the first nine months of 1998 primarily due to higher net income. The 1998 increase was primarily reflected in increased inventories and prepaid federal and state taxes more than offsetting decreased customer accounts receivable and increased notes payable. Merchandise inventory turnover was 2.5 at September 30, 1998, 2.6 at December 31, 1997 and 2.6 at September 30, 1997. Merchandise inventory as of September 30, 1998 increased 42% from December 31, 1997 and 37.0% from September 30, 1997. Inventory levels have been impacted by the continuing effort to increase order fulfillment rates, by transition to a larger catalog operation and by fulfillment problems in the third quarter of 1998. The Company's new catalog inventory management system is nearing full operation. Net sales and inventory levels for the Company's three product lines were as follows. Home Products net sales as a percentage of total net sales were 13.7% ($48.6 million) in the nine months of 1998 as compared to 13.1% ($44.8 million) in the first nine months of 1997. Menswear net sales were 22.5% ($79.9 million) compared to 23.1% ($78.9 million). Womenswear net sales were 63.8% ($226.0 million) compared to 63.8% ($217.5 million). Home Products inventory ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 Liquidity and Sources of Capital - Continued - -------------------------------- totaled $18.0 million at September 30, 1998, $6.8 million at December 31, 1997 and $9.2 million at September 30, 1997. Menswear inventory was $25.0 million at September 30, 1998, $17.6 million at December 31, 1997 and $22.5 million at September 30, 1997. Womenswear inventory was $54.1 million at September 30, 1998, $43.7 million at December 31, 1997 and $39.0 million at September 30, 1997. The Company has added new facilities, modernized its existing facilities and acquired new cost saving equipment during the last several years. Capital expenditures for property, plant and equipment totaled $1,224,013 during the first nine months of 1998 and $2,354,133 during the first nine months of 1997. Capital expenditures for 1998, 1999 and 2000 had been projected to be approximately $7,000,000 a year in order to support the Company's marketing strategy. The increased capital expenditures will result primarily from expanding database capabilities in target marketing, credit management and mail stream optimization. A delay in the start-up of the database project will likely keep capital expenditures below $5,000,000 in 1998. In August 1995, the Company's second call center was opened in Erie, Pennsylvania. A 75% expansion of the Erie Call Center was completed in September 1996. A third call center, located in Franklin, Pennsylvania, was added in January 1997. Further expansion and refinement of all three call centers - Warren, Erie and Franklin - was completed by September 1997. See "Future Considerations". The Company recently declared a quarterly dividend of $.15 per share payable on December 15, 1998. It is the Company's intent to continue paying dividends; however, the Company will evaluate its dividend practice on an on- going basis. See "Future Considerations". The Company bought back 276,866 shares of its common stock at a total price of $4,551,438 ($16.44 per share) in 1997. The Company bought back 147,573 shares at a total price of $4,001,471 ($27.12 per share) in the first nine months of 1998. The Company intends to continue buying back stock; however, the Company will assess future buy-back opportunities on an on-going basis. Future cash needs will be financed by cash flow from operations, the current borrowing arrangement and, if needed, other financing arrangements that may be available to the Company. The Company's current projection of future cash requirements, however, may be affected in the future by numerous factors, including changes in customer payments on accounts receivable, consumer industry credit trends, sales volume, operating cost fluctuations and unplanned capital spending. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 Impact of Inflation and Changing Prices - --------------------------------------- Although inflation has moderated in our economy, the Company is continually seeking ways to cope with its impact. To the extent permitted by competition, increased costs are passed on to customers by selectively increasing selling prices over a period of time. During the past several years, selling prices have been raised sufficiently to offset increased merchandise costs, thereby realizing profit margins that continue to build fiscal strength. Profit margins have been pressured by paper cost and postal rate increases. Paper prices have fluctuated since 1994 - reached their high point at 1995 year-end, retreated below 1995 levels during the third quarter of 1996, reached their low point during the first quarter of 1997, increased quarterly throughout the rest of 1997 and the first quarter of 1998, will decrease in late 1998 and are expected to decrease further in early 1999. Overall, paper prices were lower in 1997 than in 1996 and have been higher in 1998 than they were in 1997. Postal rates increased in 1995, increased again in 1996 (slight increase due to the USPS Classification Reform) and will increase again on January 10, 1999. The Company's early estimate is that the January 10, 1999 increase will be approximately 4%. The Company principally uses the LIFO method of accounting for its merchandise inventories. Under this method, the cost of products sold reported in the financial statements approximates current costs and thus reduces distortion in reported income due to increasing costs. The charges to operations for depreciation represent the allocation of historical costs incurred over past years and are significantly less than if they were based on the current cost of productive capacity being used. Property, plant and equipment are continuously being expanded and updated. Recent major projects are discussed under Liquidity and Sources of Capital. Assets acquired in prior years will, of course, be replaced at higher costs but this will take place over many years. New assets, when acquired, will result in higher depreciation charges, but in many cases, due to technological improvements, savings in operating costs should result. The Company considers these matters in setting pricing policies. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 Accounting Pronouncements - ------------------------- The Financial Accounting Standards Board issued four new statements that the Company needed to consider. In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings Per Share," was issued. Statement No. 128 establishes standards for computing and presenting earnings per share and simplifies the existing standards. Statement No. 128 replaces the presentation of primary earnings per share with a presentation of basic and diluted earnings per share. The Company adopted Statement No. 128 in the December 31, 1997 financial statements, and the adoption had no impact on the Company's earnings per share amounts. In June 1997, statement of Financial Accounting standards No. 130, "Comprehensive Income," was issued. Statement No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company adopted Statement No. 130 in the March 31, 1998 financial statements, and the adoption had no impact on the Company's financial statements. In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued. Statement No. 131 establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders, but not for interim periods in the initial year of adoption. Statement No. 131 is effective for fiscal years beginning after December 15, 1997. The Company believes that it operates as one segment, which includes three product lines (Home Products, Menswear and Womenswear) and that adoption of Statement No.131 will not have a significant impact on its financial statements. In February 1998, Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits," was issued. Statement No. 132 revises employers' disclosure of pensions and other postretirement benefits, requires additional information on changes in benefit obligations and fair value of plan assets and eliminates certain disclosures. Statement No. 132 is effective for the year ending December 31, 1998, and requires restatement of disclosures for earlier periods. The Company believes that adoption of Statement No. 132 will not have a significant impact on its financial statements. In June 1998, Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. Statement No. 133 provides new guidelines for accounting for derivative instruments. The Statement is effective for financial periods beginning after June 15, 1999. The Company is currently analyzing the impact of Statement No. 133. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 Future Considerations - --------------------- The Company is faced with the ever-present challenge of maintaining and expanding the customer file. This involves the acquisition of new customers (prospects), the conversion of new customers to established customers (active repeat buyers) and the retention of established customers. These actions are vital in growing the business but are being impacted by increased operating costs, increased competition in the retail sector, high levels of consumer debt, a softening in consumer response rates and a declining labor pool. The Company underwent a strategic planning study in 1995 in which our marketing programs, operating systems and competitive position were thoroughly assessed. The continuing strategic planning process has resulted in a marketing strategy that requires utilizing our existing strengths, changing business processes and organizational structure and improving information systems. A prime aspect of the marketing strategy involves targeting customers in the "over 40, low-to-moderate income" market. This redefinition of our target customer from "over 50" to "over 40" has been made possible by the ability of our catalog advertising to reach younger buyers within our traditional list sources. This market, though younger in age than our traditional customer file, is the fastest growing segment of the population. Success of the marketing strategy requires investment in database management, operating systems, prospecting programs, catalog marketing, telephone call centers, and, possibly, a second distribution center. Management believes that these investments should improve Blair Corporation's position in new and existing markets and provide opportunities for future earnings growth. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 Impact of Year 2000 - ------------------- Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has completed an assessment of its IT systems and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is estimated at $600,000 to $800,000 all of which will be expensed as incurred. To date, the Company has incurred and expensed approximately $450,000. The project is estimated to be completed not later than September 30, 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with modification to existing software and conversions to new software, the Year 2000 Issue will not post significant operational problems for its computer systems. At this time, all software has been modified and/or converted but has not been fully tested - testing is approximately 55% complete. However, if the software installations are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. Operations could be disrupted or stopped for some period of time. Should this occur, the Company would direct all available resources at the situation in order to resolve it in as short a time as possible. The Company has initiated formal communications with all of its significant suppliers (includes suppliers of non - IT systems) to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. The Company has received favorable response from most of these suppliers, however, there is no guarantee that the systems of suppliers on which the Company relies will be timely converted and would not have an adverse effect on the Company's systems. Non-responding and/or non-compliant suppliers are being further assessed by the Company. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 - --------------------------------------------------------------------------- Forward-looking statements in this report, including without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Company's plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company, (ii) the Company's plans and results of operations will be affected by the Company's ability to manage its growth, accounts receivable and inventory; and (iii) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. PART II. OTHER INFORMATION BLAIR CORPORATION AND SUBSIDIARY September 30, 1998 Item 5. Other Information ----------------- The Company filed a Registration Statement on Form S-8 on July 22, 1998 registering 50,400 shares of the Company's Common Stock which was offered for purchase on July 27, 1998 to selected employees of the Company under and in accordance with the Company's Employee Stock Purchase Plan. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -------- None (b) Reports on Form 8-K -------------------- No reports on Form 8-K were filed during the quarter ended September 30, 1998. SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BLAIR CORPORATION -------------------------- (Registrant) Date November 10, 1998 By Kent R. Sivillo - -------------------------------- ----------------------------- Kent R. Sivillo Vice President and Treasurer (Principal Financial Officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BLAIR CORPORATION'S 9/30/98 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH THIRD QUARTER, 1998 10-Q FILING FOR BLAIR CORPORATION. 0000071525 BLAIR CORPORATION 9-MOS DEC-31-1998 SEP-30-1998 7,477,532 0 144,783,814 37,318,798 115,076,089 292,769,957 104,340,193 54,891,360 343,086,231 120,964,858 0 0 0 419,810 220,280,563 343,086,231 354,486,140 387,460,531 175,840,448 364,863,987 0 16,372,456 1,508,575 22,596,544 7,398,000 15,198,544 0 0 0 15,198,544 1.70 1.70 AMOUNT REPRESENTS NET ACCOUNTS RECEIVABLE. AMOUNT INCLUDES ADDITIONAL PAID-IN CAPITAL, RETAINED EARNINGS, TREASURY STOCK, AND THE EMPLOYEE STOCK PURCHASE PLAN RECEIVABLE.
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