-----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, Wk5otUkU2pPsJOJ/ZpSS4Y5cy+yJt4bFCeIwLgQXaopk+vvH55uTKIJ5h3NNyncG WtHHGKiss/HWNxaFO8v46w== 0000071525-99-000021.txt : 19991117 0000071525-99-000021.hdr.sgml : 19991117 ACCESSION NUMBER: 0000071525-99-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99751972 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 QUARTER FILING 1999 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, 1999 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, 1999 the registrant had outstanding 8,210,023 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, 1999 CONSOLIDATED BALANCE SHEETS BLAIR CORPORATION AND SUBSIDIARY September 30 December 31 1999 1998 ------------ ------------ ASSETS Current assets: Cash $ 7,557,357 $ 3,211,376 Customer accounts receivable, less allowances for doubtful accounts and returns of $35,317,323 in 1999 and $35,474,323 in 1998 149,750,666 158,191,826 Inventories - Note F Merchandise 72,749,154 102,152,680 Advertising and shipping supplies 19,910,004 12,982,870 ------------ ------------ 92,659,158 115,135,550 Deferred income taxes - Note E 6,966,000 7,781,000 Prepaid and refundable federal and state taxes 14,383,241 12,455,216 Prepaid expenses 871,501 344,482 ------------ ------------ Total current assets 272,187,923 297,119,450 Property, plant and equipment: Land 1,142,144 1,142,144 Buildings 63,524,405 63,433,347 Equipment 41,290,524 39,255,983 ------------ ------------ 105,957,073 103,831,474 Less allowances for depreciation 59,159,210 55,787,582 ------------ ------------ 46,797,863 48,043,892 Trademarks 795,198 849,380 ------------ ------------ TOTAL ASSETS $319,780,984 $346,012,722 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - Note H $ 9,450,000 $ 22,750,000 Trade accounts payable 51,725,849 52,135,922 Advance payments from customers 4,090,259 1,182,829 Accrued expenses - Note D 11,179,562 12,074,736 ------------ ------------ Total current liabilities 76,445,670 88,143,487 Deferred income taxes 1,145,000 1,368,000 Long-term debt - Note H 25,000,000 30,000,000 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 14,635,935 14,278,828 Retained earnings 243,670,023 240,798,008 ------------ ------------ 258,725,768 255,496,646 Less 1,865,417 shares in 1999 and 1,168,097 shares in 1998 of common stock in treasury - at cost 39,075,558 26,756,067 Less receivable from Employee Stock Purchase Plan 2,459,896 2,239,344 ------------ ------------ 217,190,314 226,501,235 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $319,780,984 $346,012,722 ============ ============ See accompanying notes. CONSOLIDATED STATEMENTS OF INCOME BLAIR CORPORATION AND SUBSIDIARY
Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net sales $111,652,415 $111,872,529 $367,106,360 $354,486,140 Other income - Note G 9,916,760 9,669,514 29,243,480 30,174,391 Insurance proceeds - Note M -0- 2,800,000 -0- 2,800,000 ------------ ------------ ------------ ------------ 121,569,175 124,342,043 396,349,840 387,460,531 Costs and expenses: Cost of goods sold 59,991,630 57,683,795 190,921,849 175,840,448 Advertising 30,310,711 31,882,655 98,046,525 92,564,529 General and administrative 27,264,128 26,966,308 80,154,534 78,577,979 Provision for doubtful accounts 4,900,116 5,055,849 14,837,672 16,372,456 Interest 474,990 448,981 2,180,919 1,508,575 ------------ ------------ ------------ ------------ 122,941,575 122,037,588 386,141,499 364,863,987 ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (1,372,400) 2,304,455 10,208,341 22,596,544 Income taxes - Note E (640,000) (284,000) 3,621,000 7,398,000 ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ (732,400) $ 2,588,455 $ 6,587,341 $ 15,198,544 ============ ============ ============ ============ Basic and diluted earnings per share based on weighted average shares outstanding - Note C $(.08) $ .29 $ .79 $1.70 ===== ===== ===== ===== See accompanying notes.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY BLAIR CORPORATION AND SUBSIDIARY
Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Common Stock $ 419,810 $ 419,810 $ 419,810 $ 419,810 Additional paid-in capital: Balance at beginning of period 14,262,505 13,193,208 14,278,828 13,230,251 Issuance (net of forfeitures) of Common Stock under Employee Stock Purchase Plan 373,430 1,085,620 345,107 1,025,989 Issuance of Common Stock to non-employee directors -0- -0- 12,000 22,588 ------------ ------------ ------------ ----------- Balance at end of period 14,635,935 14,278,828 14,635,935 14,278,828 Retained earnings: Balance at beginning of period 245,633,927 233,791,292 240,798,008 223,868,940 Net income (loss) (732,400) 2,588,455 6,587,341 15,198,544 Cash dividends declared - Note B (1,231,504) (1,336,101) (3,715,326) (4,023,838) ------------ ------------ ------------ ------------ Balance at end of period 243,670,023 235,043,646 243,670,023 235,043,646 Treasury Stock: Balance at beginning of period (39,844,165) (26,144,521) (26,756,067) (23,161,169) Purchase of treasury stock -0- (1,018,213) (13,095,634) (4,001,471) Issuance (net of forfeitures) of Common Stock under Employee Stock Purchase Plan 768,607 406,667 761,799 393,536 Issuance of Common Stock to non-employee directors -0- -0- 14,344 13,037 ------------ ------------ ------------ ----------- Balance at end of period (39,075,558) (26,756,067) (39,075,558) (26,756,067) Receivable from Employee Stock Purchase Plan: Balance at beginning of period (2,141,109) (1,842,374) (2,239,344) (1,928,786) Issuance (net of forfeitures) of Common Stock under Employee Stock Purchase Plan (372,100) (508,987) (360,825) (494,285) Repayments 53,313 65,517 140,273 137,227 ------------ ------------ ------------ ------------ Balance at end of period (2,459,896) (2,285,844) (2,459,896) (2,285,844) ------------ ------------ ------------ ------------ TOTAL STOCKHOLDERS' EQUITY $217,190,314 $220,700,373 $217,190,314 $220,700,373 ============ ============ ============ ============ See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS BLAIR CORPORATION AND SUBSIDIARY Nine Months Ended September 30 1999 1998 ------------ ------------ OPERATING ACTIVITIES Net income $ 6,587,341 $ 15,198,544 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,762,167 3,772,375 Provision for doubtful accounts 14,837,672 16,372,456 Provision for deferred income taxes 592,000 2,680,000 Changes in operating assets and liabilities providing (using) cash: Customer accounts receivable (6,396,512) (3,520,174) Inventories 22,476,392 (36,348,680) Federal and state taxes (1,928,025) (11,175,124) Prepaid expenses (527,019) (398,454) Trade accounts payable (410,073) 20,440,860 Advance payments from customers 2,907,430 2,588,932 Accrued expenses (895,174) 3,649,544 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 41,006,199 13,260,279 INVESTING ACTIVITIES Purchases of property, plant and equipment (2,461,956) (1,224,013) ------------ ------------ NET CASH (USED IN) INVESTING ACTIVITIES (2,461,956) (1,224,013) FINANCING ACTIVITIES Net (repayments) from bank borrowings (18,300,000) (1,100,000) Dividends paid (3,715,326) (4,023,838) Purchase of Common Stock for treasury (13,095,634) (4,001,471) Issuance (net of forfeitures) of Common Stock under Employee Stock Purchase Plan 1,106,906 1,419,525 Increase in notes receivable from Employee Stock Purchase Plan (220,552) (357,058) Issuance of Common Stock to non-employee directors 26,344 35,625 ------------ ------------ NET CASH (USED IN) FINANCING ACTIVITIES (34,198,262) (8,027,217) ------------ ------------ NET INCREASE IN CASH 4,345,981 4,009,049 Cash at beginning of year 3,211,376 3,468,483 ------------ ------------ CASH AT END OF PERIOD $ 7,557,357 $ 7,477,532 ============ ============ See accompanying notes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BLAIR CORPORATION AND SUBSIDIARY September 30, 1999 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, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 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, 1998. 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. NOTE B - DIVIDENDS DECLARED 2-05-98 $.15 per share 2-05-99 $.15 per share 4-21-98 .15 4-20-99 .15 7-21-98 .15 7-20-99 .15 10-20-98 .15 10-19-99 .15 NOTE C - BASIC AND DILUTED EARNINGS PER SHARE Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ----------- ----------- ----------- ------------ Net income $ (732,400) $ 2,588,455 $ 6,587,341 $15,198,544 Weighted average shares outstanding 8,195,811 8,911,043 8,337,153 8,945,447 Basic and diluted earnings per share $(.08) $ .29 $ .79 $1.70 NOTE D - ACCRUED EXPENSES Accrued expenses consist of: September 30 December 31 1999 1998 ----------- ----------- Employee compensation $ 8,029,809 $ 7,537,456 Contribution to profit sharing and retirement plan 701,826 2,371,992 Taxes, other than taxes on income 447,440 524,687 Other accrued items 2,000,487 1,640,601 ----------- ----------- $11,179,562 $12,074,736 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1999 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 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Currently payable: Federal $(2,549,000) $(2,856,000) $ 3,102,000 $ 4,533,000 State (644,000) (697,000) (73,000) 185,000 ----------- ----------- ----------- ----------- (3,193,000) (3,553,000) 3,029,000 4,718,000 Deferred 2,553,000 3,269,000 592,000 2,680,000 ----------- ----------- ----------- ----------- $ (640,000) $ (284,000) $ 3,621,000 $ 7,398,000 =========== =========== =========== =========== The differences between total tax expense (credit) and the amount computed by applying the statutory federal income tax rate of 35% to income (loss) before income taxes are as follows: Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Statutory rate applied to pre-tax income (loss) $ (480,340) $ 806,559 $ 3,572,919 $ 7,908,790 State income taxes, net of federal tax benefit (170,950) (135,850) 10,400 379,600 Insurance proceeds -0- (980,000) -0- (980,000) Other items 11,290 25,291 37,681 89,610 ----------- ----------- ----------- ----------- $ (640,000) $ (284,000) $ 3,621,000 $ 7,398,000 =========== =========== =========== =========== Components of the provision for deferred income tax expense are as follows: Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Advertising costs $ 3,768,000 $ 3,248,000 $ 2,744,000 $ 2,889,000 Provision for doubtful accounts (490,000) 71,000 (892,000) 990,000 Provision for estimated returns (622,000) (262,000) (662,000) (1,230,000) Other items - net (103,000) 212,000 (598,000) 31,000 ----------- ----------- ----------- ----------- $ 2,553,000 $ 3,269,000 $ 592,000 $ 2,680,000 =========== =========== =========== =========== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1999 NOTE E - INCOME TAXES - Continued Components of the deferred tax asset and liability under the liability method as of September 30, 1999 and December 31, 1998 are as follows: September 30 December 31 1999 1998 ----------- ----------- Current net deferred tax asset: Doubtful accounts $ 7,805,000 $ 6,913,000 Returns allowance 2,485,000 1,823,000 Inventory obsolescence 2,259,000 1,997,000 Vacation pay 1,399,000 1,399,000 Inventory costs 168,000 130,000 Advertising costs (7,683,000) (4,939,000) Other items 533,000 458,000 ----------- ----------- $ 6,966,000 $ 7,781,000 =========== =========== Long-term deferred tax liability: Property, plant and equipment $ 1,145,000 $ 1,368,000 =========== =========== 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 $7,752,000 at September 30, 1999 and $7,662,000 at December 31, 1998, respectively. NOTE G - OTHER INCOME Other income consists of: Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Finance charges on time payment accounts $ 7,982,611 $ 7,950,997 $25,138,978 $25,626,182 Commissions earned 1,039,374 631,116 1,968,057 1,690,209 Other items 894,775 1,087,401 2,136,445 2,858,000 ----------- ----------- ----------- ----------- $ 9,916,760 $ 9,669,514 $29,243,480 $30,174,391 =========== =========== =========== =========== 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, 1999 NOTE H - FINANCING ARRANGEMENTS On November 13, 1998, the Company entered into an amended and restated $95,000,000 Revolving Credit Facility, which expires on November 13, 2001. This agreement replaced the $125,000,000 Revolving Credit Facility which expired on November 17, 1998. The interest rate is, at the Company's option, based on a base rate option, swing loan 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, interest coverage ratio and fixed charge coverage ratio and complying with certain indebtedness restrictions. As of September 30, 1999 and December 31, 1998, the Company was in compliance with all the agreement's covenants. At September 30, 1999, the Company had borrowed $34,450,000 of which $25,000,000 was classified as long-term and at December 31, 1998, $52,750,000 of which $30,000,000 was classified as long-term. NOTE I - NEW ACCOUNTING PRONOUNCEMENTS Accounting for the Costs of Computer Software Developed for or Obtained for Internal Use Statement of Position 98-1, (SOP 98-1) "Accounting for the Costs of Computer Software Developed For or Obtained For Internal Use," requires capitalization of costs to purchase or develop internal use software and amortization of those costs to income over the software's estimated useful life. These costs include external direct costs, payroll and payroll-related costs for employees who are directly associated with the project and interest costs. Training and research and development costs are to be expensed as incurred. Allocations of overhead are not permitted. SOP 98-1 was adopted in the financial statements for the year ended December 31, 1999 and has not had a significant impact on the financial statements of the Company. Accounting for Derivative Instruments and Hedging Activities In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities", was issued. SFAS 133 provides new guidelines for derivative instruments. SFAS 133 requires companies to recognize all derivatives on the balance sheet at fair value. Gains or losses resulting from changes in the values of the derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 is effective for fiscal periods beginning after June 15, 2000. Management believes the adoption of this Statement will not have a significant impact on the financial statements of 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 - 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1999 NOTE L - 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 60,150 shares on August 4, 1999 and 50,400 shares on July 27, 1998. NOTE M - INSURANCE PROCEEDS The $2,800,000 in insurance proceeds in 1998 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, 1999 Results of Operations - -------------------- Comparison of Third Quarter 1999 and Third Quarter 1998 The third quarter of 1999 resulted in a net loss of $732,400 as compared to net income of $2,588,455 for the third quarter of 1998. However, the third quarter of 1998 included income from non-recurring insurance proceeds of $2.8 million. Net of the insurance proceeds, the third quarter of 1998 resulted in a net operating loss of $211,545. The third quarter of 1999 was negatively impacted by the disposition of excess inventory (approximately $1.6 million pre-tax inventory writedown and increased volume of sale-priced offerings) and by increased postage costs (approximately $.9 million pre-tax). These increased costs were primarily reflected in cost of goods sold and advertising expense. Net sales for the third quarter of 1999 were approximately the same (down .2%) as net sales for the third quarter of 1998. Overall, response rates in the third quarter of 1999 were slightly higher than in the third quarter of 1998 and were at expected levels for 1999. Gross sales revenue generated per advertising dollar increased approximately 4.3% in third quarter 1999 as compared to third quarter 1998. The total number of orders shipped increased slightly and the average order size decreased slightly in the third quarter of 1999 from the third quarter of 1998. The provision for returned merchandise as a percentage of gross sales decreased approximately 6% in the third quarter of 1999 as compared to the third quarter of 1998 primarily due to the Company's efforts to improve product quality. Other income increased 2.6% in the third quarter of 1999 as compared to the third quarter of 1998. Commissions earned on continuity programs were primarily responsible for the increased other income. There were no insurance proceeds in 1999. Insurance proceeds in the third quarter of 1998 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 52.7% in the third quarter of 1999 from 51.6% in the third quarter of 1998. Cost of goods sold has been negatively impacted by the disposition of excess inventory (approximately $1.6 million pre-tax inventory writedown) and by increased shipping (postage) costs. Excess inventory had resulted from the Company's transition to a larger catalog operation and lower than expected response in the fourth quarter of 1998 and the first quarter of 1999. Advertising expense in the third quarter of 1999 decreased 4.9% from the third quarter of 1998. Increased catalog mailings and postal rates were more than offset by decreased letter mailings and co-op and media volume. The total number of catalog mailings released in the third quarter of 1999 was 3% higher than in the third quarter of 1998 (35.4 million vs. 34.2 million). Catalog mailings from all three product lines, including combined product line offerings, are continually reviewed as to mailing frequency, page density, product content, number of pages and trim size. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1999 Results of Operations - Continued - --------------------- Comparison of Third Quarter 1999 and Third Quarter 1998 - Continued The total number of letter mailings released in the third quarter of 1999 was 2% less than in the third quarter of 1998 (16.5 million vs. 16.8 million). The increased volume of sale-priced offerings, to help move excess inventory, is included in the third quarter 1999 letter mailings. Total volume of the co-op and media advertising programs decreased 49% in the third quarter of 1999 as compared to the third quarter of 1998 (108 million vs. 211 million). The Company reduced the volume primarily due to increased costs and/or lower response. General and administrative expense increased 1.1% in the third quarter of 1999 as compared to the third quarter of 1998. The higher general and administrative expense was primarily the result of a 2.8% increase in wages and benefits. The higher wages and benefits resulted primarily from normal pay increases. The provision for doubtful accounts as a percentage of credit sales was 11.6% lower in the third quarter of 1999 as compared to the third quarter of 1998. The estimated provision for doubtful accounts is based on current expectations (consumer credit and economic trends, etc...), sales mix (prospect / customer) and prior years' experience (delinquencies, accounts over 30 days past due; actual charge-offs, accounts removed from accounts receivable). Prior to 1994, actual charge-offs were consistently below delinquencies. In 1994, this trend reversed itself - actual charge-offs started exceeding delinquencies, resulting in additional provisions in 1995, 1996 and 1997. Now that stronger credit controls have been implemented, provisions for doubtful accounts and delinquencies as a percentage of actual charge-offs have been declining (1998 and 1999). The estimated bad debt rate used for the third quarter of 1999 was approximately 14% less than the estimated bad debt rate used for the third quarter of 1998. At September 30, 1999, the delinquency rate of open accounts receivable was 5% lower than at September 30, 1998. The charge-off rate for the third quarter of 1999 was 20% less than the charge-off rate for the third quarter of 1998. Recoveries of bad debts previously charged off have been credited back against the allowance for doubtful accounts. Credit granting, collection and behavior models continue to improve and, along with expanding database capabilities, provide valuable credit marketing opportunities. Interest expense increased 6% in the third quarter of 1999 as compared to the third quarter of 1998. Interest expense results primarily from the Company's borrowings necessary to finance customer accounts receivable and inventories. Higher average inventory levels and the repurchase of Blair Common Stock from the Estate of John L. Blair have been responsible for the increased level of interest expense. Income taxes as a percentage of the operating losses before income taxes (excludes insurance proceeds in 1998) were 46.6% in the third quarter of 1999 and 57.3% in the third quarter of 1998. The federal income tax rate was 35% in both years. The total income tax rate, in both years, was the result of a decrease in the Company's effective state income tax rate. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1999 Results of Operations - Continued - --------------------- Comparison of Nine Month Periods Ended September 30, 1999 and September 30, 1998 Net income for the first nine months of 1999 decreased 57% as compared to the first nine months of 1998. The first nine months of 1999 were negatively impacted by the disposition of excess inventory (approximately $5.3 million pre-tax inventory writedown and increased volume of sales-priced offerings) and by increased postage costs (approximately $2.8 million pre-tax). The first nine months of 1998 included non-recurring insurance proceeds of $2.8 million ($.31 per share). Net sales for the first nine months of 1999 were 3.6% higher than net sales for the first nine months of 1998. Overall, response rates have been slightly higher in the first nine months of 1999 as compared to the first nine months of 1998. Gross sales revenue generated per advertising dollar decreased 4%. The total number of orders shipped decreased slightly and the average order size increased slightly in the first nine months of 1999 as compared to the first nine months of 1998. The provision for returned merchandise as a percentage of gross sales has improved approximately 10% in the first nine months of 1999 as compared to the first nine months of 1998. The returns improvement in 1999 was primarily due to the Company's efforts to improve product quality and to a change in return policy. The Company stopped refunding shipping and handling charges on returned merchandise during the first quarter of 1998. This return policy is in line with the Company's competitors in the direct marketing industry. Other income decreased 3% in the first nine months of 1999 as compared to the first nine months of 1998. A 1.9% decrease in finance charges, resulting from strengthened credit procedures, was primarily responsible for the decrease in other income. There were no insurance proceeds in 1999. Insurance proceeds in 1998 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 52.0% in the first nine months of 1999 from 49.6% in the first nine months of 1998. Cost of goods sold has been negatively impacted by the disposition of excess inventory (approximately $5.3 million pre-tax inventory writedown) and by increased shipping (postage) costs. Excess inventory had resulted from the Company's transition to a larger catalog operation and lower than expected response in the fourth quarter of 1998 and the first quarter of 1999. Advertising expense in the first nine months of 1999 increased 5.9% from the first nine months of 1998. Increased catalog mailings and postal rates were responsible for the higher advertising expense. The total number of catalog mailings released in the first nine months of 1999 was 11% higher than in the first nine months of 1998 (100.6 million vs. 91.0 million). Catalog mailings from all three product lines, including combined ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1999 Results of Operations - Continued - --------------------- Comparison of Nine Month Periods Ended September 30, 1999 and September 30, 1998 - Continued product line offerings, are continually reviewed as to mailing frequency, page density, product content, number of pages and trim size. The total number of letter mailings released in the first nine months of 1999 was 5% less than in the first nine months of 1998 (61.5 million vs. 63.5 million). Total volume of the co-op and media advertising programs decreased 5% in the first nine months of 1999 as compared to the first nine months of 1998 (878 million vs. 925 million). General and administrative expense increased 2.0% in the first nine months of 1999 as compared to the first nine months of 1998. Increased wages and benefits (2.2%) and the costs associated with implementing and maintaining expanded database capabilities in marketing, credit management and advertising were primarily responsible for the higher general and administrative expense. The provision for doubtful accounts as a percentage of credit sales was 17% lower in the first nine months of 1999 as compared to the first nine months of 1998. Due to continued improvement in delinquency and charge off rates, the estimated bad debt rate used for the first nine months of 1999 was approximately 15% less than the estimated bad debt rate used for the first nine months of 1998. At September 30, 1999, the delinquency rate (accounts over 30 days past due) of open accounts receivable was 5% lower than at September 30, 1998. The charge off rate for the first nine months of 1999 was 20% less than the charge off rate for the first nine months of 1998. Recoveries of bad debts previously charged off have been credited back against the allowance for doubtful accounts. Interest expense increased 45% in the first nine months of 1999 as compared to the first nine months of 1998. Interest expense results primarily from the Company's borrowings necessary to finance customer accounts receivable and inventories. Higher average inventory levels and the repurchase of Blair Common Stock from the Estate of John L. Blair have been responsible for the increased level of interest expense. Income taxes as a percentage of income before income taxes were 35.5% in the first nine months of 1999 and 32.7% in the first nine months of 1998. The federal income tax rate was 35% in both years. The lower total tax rate in 1998 was due to the non-taxable insurance proceeds ($2.8 million). ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1999 Liquidity and Sources of Capital - -------------------------------- All working capital and cash requirements were met. In November 1998, the Company entered into a $95,000,000 Revolving Credit Facility, which expires on November 13, 2001. This agreement replaced the $125,000,000 Revolving Credit Facility which expired on November 17, 1998. The unsecured Revolving Credit Facility requires the Company to meet certain covenants, and as of September 30, 1999 the Company was in compliance with all the covenants. Borrowings outstanding at September 30, 1999 were $34,450,000 of which $25,000,000 was classified as long-term. Borrowings outstanding at December 31, 1998 were $52,750,000 of which $30,000,000 was classified as long-term. Borrowings outstanding at September 30, 1998 were $37,500,000, all classified as current. As of November 10, 1999, the Company's borrowings outstanding totaled $30,000,000. The ratio of current assets to current liabilities was 3.56 at September 30, 1999, 3.37 at December 31, 1998 and 2.42 at September 30, 1998. Working capital decreased $13,233,710 in the first nine months of 1999 primarily due to the purchase of Common Stock for treasury from the Estate of John L. Blair and the reduction of long-term debt. The 1999 decrease was primarily reflected in decreased inventories and customer accounts receivable more than offsetting decreased notes payable. Merchandise inventory turnover was 2.3 at September 30, 1999, 2.4 at December 31, 1998 and 2.5 at September 30, 1998. Merchandise inventory as of September 30, 1999 decreased 28.8% from December 31, 1998 and 25.1% from September 30, 1998. Inventory turnover has been impacted by transition to a larger catalog operation, by the continuing efforts to improve customer service, by lower than expected response in the fourth quarter of 1998 and the first quarter of 1999 and, most recently, by increased efforts to move excess inventory. The Company operates as one business segment consisting of three product lines. Home Products net sales as a percentage of total net sales were 14.8% ($54.4 million) in the first nine months of 1999 as compared to 13.7% ($48.6 million) in the first nine months of 1998. Menswear net sales were 22.0% ($80.8 million) compared to 22.5% ($79.9 million). Womenswear net sales were 63.2% ($231.9 million) compared to 63.8% ($226.0 million). Home Products inventory totaled $12.8 million at September 30, 1999, $18.2 million at December 31, 1998 and $18.0 million at September 30, 1998. Menswear inventory was $21.8 million at September 30, 1999, $26.6 million at December 31, 1998 and $25.0 million at September 30, 1998. Womenswear inventory was $38.1 million at September 30, 1999, $57.4 million at December 31, 1998 and $54.1 million at September 30, 1998. The Company looks upon its credit granting (Blair Credit) as a marketing advantage. In the early 1990's, the Company started extending revolving credit to first-time (prospect) buyers - only offered credit to customers prior to this time. Prospects responded. This led to a broad offering of pre-approved lines of credit to prospects in 1995 and 1996. Sales, accounts receivable and bad debts expectedly increased. However, as the receivables aged, bad debts greatly exceeded expected levels. The Company recognized that ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1999 Liquidity and Sources of Capital - Continued - -------------------------------- it didn't have all the necessary credit controls in place and put a hold (second quarter 1996) on pre-approved credit offers and reviewed and strengthened (mid-1996 and on) credit controls. Blair Credit customers, on average, buy more, buy more often and are more loyal than cash and credit card customers. The benefit from the increased sales volume achieved by offering Blair Credit is significant and more than outweighs the cost of the credit program. The cost and/or contribution of the credit program itself can be quickly assessed by comparing finance charges (included in other income) to the provision for doubtful accounts. For the first nine months of 1999, finance charges were $25,138,978 and the provision for doubtful accounts was $14,837,672 (net of $10,301,306) as compared to the first nine months of 1998, finance charges were $25,626,182 and the provision for doubtful accounts was $16,372,456 (net of $9,253,726). This quick assessment does not take into consideration the administrative cost of the credit program (included in general and administrative expense), the cost of money and the increased sales. 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 $2,461,956 during the first nine months of 1999 and $1,224,013 during the first nine months of 1998. Capital expenditures are projected to be $3.5 million for 1999 and $9 million for 2000. The increased capital expenditures will result primarily from developing our own internet commerce site, from maintaining a higher inventory level, from expanding database capabilities and from developing new product lines. The Company has recently signed a contract with IBM to build our internet commerce site, with phased implementation to begin mid-year 2000. The Company recently declared a quarterly dividend of $.15 per share payable on December 15, 1999. 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 has, from the fourth quarter of 1996 through the third quarter of 1998, repurchased on the open market 544,730 shares of its Common Stock. In 1999, the Company has repurchased 756,220 shares (500,000 in January, 100,000 in April and 156,220 in May) of its Common Stock from the Estate of John L. Blair. 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 revised capital spending plans. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1999 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. Profit margins have been pressured by paper cost and postal rate increases. Paper prices were higher in 1998 than in 1997 and have been lower in 1999 than in 1998, but are expected to increase in 2000. Postal rates increased on January 10, 1999. The Company estimates that the January 10, 1999 postal rate increase will increase the Company's 1999 postage bill by approximately 4.7%. 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. 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. Accounting Pronouncements - ------------------------- In March 1998, Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued. SOP 98-1 requires capitalization of costs to purchase or develop internal use software and amortization of those costs to income over the software's estimated useful life. The Company adopted SOP 98-1 in the 1999 financial statements, and the adoption has not had a significant impact on the Company's financial statements. In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. Statement No. 133 provides new guidelines for accounting for derivative instruments and requires companies to recognize all derivatives on the balance sheet at fair value. Gains or losses resulting from changes in the values of the derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Statement No. 133 is effective for fiscal periods beginning after June 15, 2000. The Company believes that adoption of Statement No. 133 will not have a significant impact on the financial statements of the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1999 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 and/or reactivation of established customers. These actions are vital in growing the business but are being impacted by increased operating costs and a declining labor pool and by increased competition in the retail sector, high levels of consumer debt and varying consumer response rates. The Company's marketing strategy includes targeting customers in the "40 to 60, low-to-moderate income" market and in the "60+, low-to-moderate income" market (the Company's traditional market). The "40 to 60" market, though younger in age than our traditional market, is the fastest growing segment of the population. Success of the Company's marketing strategy requires investment in database management, operating systems, prospecting programs, catalog marketing, new product lines, telephone call centers, internet commerce 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. 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 has been modifying or replacing 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 $825,000, all of which will be expensed as incurred. To date, the Company has incurred and expensed approximately $800,000. The project cost has been funded by cash flow from operations. The project is estimated to be completed not later than November 15, 1999. The Company believes that with the modifications to existing software and the conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. At this time, all mainframe software has been modified and/or converted and has been fully tested. The remaining work to be completed is the upgrading of personal computer operating software and utilities. Again, this is expected to be completed by November 15, 1999. If the software installations are not completed timely, the Year ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued BLAIR CORPORATION AND SUBSIDIARY September 30, 1999 Impact of Year 2000 -Continued - ------------------- 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. In order to maintain and enhance the Company's readiness, ongoing testing will be continued through year-end. The Company has made formal communications with all of its significant suppliers (including 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 all 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. Open items include the final installation and testing of point of sale terminals at two of the Company's four stores. This non-IT system is expected to be in compliance by early December 1999. The old system can be modified as a backup. At this time, all major vendors, domestic and foreign, have indicated that they will be Year 2000 compliant by year end 1999. The Company has and will continue to inquire as to the Year 2000 readiness of its suppliers. If the Company determines that a vendor is not Year 2000 compliant, the Company, upon further assessment, may place its business with a different vendor. 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, 1999 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II. OTHER INFORMATION BLAIR CORPORATION AND SUBSIDIARY September 30, 1999 Item 5. Other Information ----------------- The Company filed a Registration Statement on Form S-8 on August 3, 1999 registering 60,150 shares of the Company's Common Stock which was offered for purchase on August 4, 1999 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 ------------------- The Company (Registrant) filed a Form 8-K on July 22, 1999. Per "Item 5. Other Events" of the Form 8-K, the Registrant announced that, effective December 16, 1999 Mr. Murray K. McComas will resign as President/CEO of the Registrant. Mr. McComas will continue to serve as Chairman of the Registrant's Board of Directors. Mr. John E. Zawacki, currently Vice President/General Manager of the Registrant's Womenswear Division, will succeed Mr. McComas as President/CEO of the Registrant. Mark J. Espin, currently assistant Vice President and Merchandise Director of the Womenswear Division, will succeed Mr. Zawacki as Vice President/General Manager of the Registrant's Womenswear Division. 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, 1999 By Kent R. Sivillo - -------------------------------- ----------------------- Kent R. Sivillo Vice President and Treasurer (Principal Financial Officer) EX-27 2 FDS 3RD QUARTER FILING 1999
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BLAIR CORPORATION'S 9/30/99 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH THIRD QUARTER, 1999 10-Q FILING FOR BLAIR CORPORATION. 0000071525 BLAIR CORPORATION 9-MOS DEC-31-1999 SEP-30-1999 7,557,357 0 149,750,666 35,317,323 92,659,158 272,187,923 105,957,073 59,159,210 319,780,984 76,445,670 0 0 0 419,810 216,770,504 319,780,984 367,106,360 396,349,840 190,921,849 386,141,499 0 14,837,672 2,180,919 10,208,341 3,621,000 6,587,341 0 0 0 6,587,341 .79 .79 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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