-----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, BqG8aaFUSuY2N69ed3axB28cEx4fm4VtARZHqxYsGlGOFune1Tpa8IAn5ZfJOG77 ZfffENUMorYMBcPbCckLxQ== 0000950128-99-000599.txt : 19990322 0000950128-99-000599.hdr.sgml : 19990322 ACCESSION NUMBER: 0000950128-99-000599 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 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-K405 SEC ACT: SEC FILE NUMBER: 001-00878 FILM NUMBER: 99569241 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-K405 1 BLAIR CORPORATION 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission file number 1-878 BLAIR CORPORATION Incorporated in Delaware I.R.S. Employer Identification Number: 220 Hickory Street Warren, Pennsylvania 16366 25-0691670 (814) 723-3600 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Stock, without nominal or par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 26, 1999 was $139,605,085. There were 8,407,043 shares of common stock outstanding as of February 26, 1999. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 1998 (the "Annual Report") are incorporated by reference into Part II and Part IV of this Form 10-K. Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by reference into Part III of this Form 10-K. ================================================================================ 2 PART I ITEM 1. BUSINESS (a) GENERAL. Blair Corporation (the "Company") was founded in 1910 by John L. Blair, Sr., and was incorporated in 1924 under the laws of the State of Delaware. The Company's business consists of the sale of fashion apparel for men and women, plus a wide range of home products, primarily through direct mail merchandising. The Company operates two retail stores, one in Pennsylvania and one in Delaware, and two outlet stores in Pennsylvania. The Company employs approximately 2,300 people. None of the Company's employees are subject to collective bargaining agreements. (b) INFORMATION REGARDING INDUSTRY SEGMENTS. The Company's business consists of only one industry segment, which is the direct mail and retail merchandising of men's and women's fashion apparel and home products. (c) DESCRIPTION OF BUSINESS. The Company markets a wide range of merchandise, manufactured by a number of independent suppliers, both domestic and foreign. Most of these suppliers have been associated with the Company for many years and manufacture products based upon the Company's specifications. Suppliers are selected in accordance with their ability to produce high quality products in a cost-effective manner. The Company markets its products mainly by direct mail. Catalogs and letters containing color folders depict the current styles of womenswear (such as coordinates, dresses, tops, pants, skirts, lingerie, sportswear, suits, jackets, outerwear and shoes), menswear (such as suits, shirts, outerwear, active wear, slacks, shoes, and accessories), and home products (such as bedspread ensembles, draperies, furniture covers, area rugs, bath accessories, kitchenware, tools, exercise and personal care items) and are mailed directly to existing and prospective customers. Sales of the menswear and womenswear products accounted for approximately 88% of the Company's total sales in 1998, and sales of home products accounted for the remaining 12% (approximately). Media and co-op prospect advertising programs continue to be used as components of the Company's customer acquisition strategy. The Company had minimal presence on the Internet in 1998, but will be expanding its Internet presence in 1999. Catalog mailings are mailed from commercial printers engaged by the Company and letter mailings originate from the Company's Mailing Center in nearby Irvine, Pennsylvania. Orders for merchandise are processed at the Company corporate offices in Warren, Pennsylvania (telephone orders via the call centers) and orders are filled and mailed from the Company's Distribution center in Irvine, Pennsylvania. The Company serves customers throughout the fifty states. The Company's outlet stores enable it to more efficiently promote and liquidate discontinued, overstocked and returned merchandise. The Delaware retail store is the only Company retail facility located outside of its home state of Pennsylvania. The Company considers its merchandise to be low/medium-priced and competes for sales with other direct mail businesses, retail department stores, specialty shops and discount store chains. The Company competes based on its sales expertise, customer service, pricing, customer credit privileges and diverse product mix. During 1998, the Company continued to broaden its customer information systems. The marketing and credit departments are continually updated in order to enhance the Company's ability to market to both customers and prospects. (d) FOREIGN OPERATIONS AND EXPORT SALES. The Company does not derive any revenue from sales of merchandise outside of the United States. -2- 3 ITEM 2. PROPERTIES The Company owns the following properties: 1. Blair Headquarters (220 Hickory Street, Warren, Pennsylvania). 2. Blair Distribution Center (Route 62, Irvine, Pennsylvania). 3. Blair Mailing Center (Route 62, Irvine, Pennsylvania). 4. Blair Warehouse Outlet (Route 62, Starbrick, Pennsylvania). 5. Blair Warehouse Outlet (Millcreek Mall, Erie, Pennsylvania). 6. Bell Warehouse Building (Liberty Street, Warren, Pennsylvania). 7. Starbrick Warehouse Building (Route 62, Starbrick, Pennsylvania). The Company leases the following properties: 1. Blair Retail Store (Wilmington, Delaware). 2. Warehouse Building (Route 62, Starbrick, Pennsylvania). 3. Telephone Call Center (Erie, Pennsylvania). 4. Telephone Call Center (Franklin, Pennsylvania). In addition, the Company's wholly-owned subsidiary, Blair Holdings, Inc., leases office space in Newark, Delaware, which it uses as its principal office. Management believes that these properties are capable of meeting the Company's anticipated needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any pending legal proceedings other than legal proceedings occurring in the ordinary course of business. Management believes that none of these legal proceedings, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to page 14 of the Company's 1998 Annual Report to Stockholders. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference to page 14 of the Company's 1998 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference to pages 15 through 18 of the Company's 1998 Annual Report to Stockholders. -3- 4 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference to pages 8 through 14 of the Company's 1998 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information regarding directors and executive officers of the Company appearing under the caption "Election of Directors" in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement") is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION Information appearing under the caption "Executive Compensation" in the 1999 Proxy Statement is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information setting forth the security ownership of certain beneficial owners and management appearing under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the 1999 Proxy Statement is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) EXHIBITS AND FINANCIAL STATEMENTS AND SCHEDULES. (1) Financial Statements. The Company's consolidated financial statements to be included in Part II, Item 8 are incorporated herein by reference to the Company's 1998 Annual Report to Stockholders, a copy of which accompanies this report on Form 10-K. (2) Financial Statement Schedules. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS is being filed as part of this report on Form 10-K, and should be read in conjunction with the consolidated financial statements of the Company described in Item 14(a)(1) above. All other schedules set forth in the applicable accounting regulations of the Securities and Exchange Commission either are not required under the related instructions or are not applicable and, therefore, have been omitted. -4- 5 (3) List of Exhibits. 3 (i) Certificate of Incorporation of the Company 3 (ii) Bylaws of the Company 10 Stock Accumulation and Deferred Compensation Plan for Directors *11 Computation of Earnings per Share (incorporated by reference to page 8 of the 1998 Annual Report to Stockholders) *13 1998 Annual Report to Stockholders 21 Subsidiaries of Registrant *23 Consents of Experts and Counsel *27 Financial Data Schedule (b) REPORTS ON FORM 8-K. The registrant has filed no Forms 8-K during the quarter ended December 31, 1998. (c) EXHIBITS. All exhibits listed above were previously filed with the Commission, except for those marked with an asterisk, which are being filed with this Form 10-K. -5- 6 CONFORMED SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BLAIR CORPORATION (Registrant) Date: March 19, 1999 By: /s/ KENT R. SIVILLO ----------------------------------- Kent R. Sivillo Vice President and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Date: March 19, 1999 By: /s/ MURRAY K. MCCOMAS ----------------------------------- Murray K. McComas President and Director (Principal Executive Officer) Date: March 19, 1999 By: /s/ BLAIR T. SMOULDER ----------------------------------- Blair T. Smoulder Executive Vice President and Director Date: March 19, 1999 By: /s/ MICHAEL J. SAMARGYA ----------------------------------- Michael J. Samargya Vice President, Information Services, and Director Date: March 19, 1999 By: /s/ STEVEN M. BLAIR ----------------------------------- Steven M. Blair Vice President, Order Handling, and Director Date: March 19, 1999 By: /s/ JOHN E. ZAWACKI ----------------------------------- John E. Zawacki Vice President, Womenswear, and Director Date: March 19, 1999 By: /s/ DAVID A. BLAIR ----------------------------------- David A. Blair Secretary and Director -6- 7 Date: March 19, 1999 By: /s/ KENT R. SIVILLO ----------------------------------- Kent R. Sivillo Vice President, Treasurer and Director (Principal Financial and Accounting Officer) Date: March 19, 1999 By: /s/ ROBERT D. CROWLEY ----------------------------------- Robert D. Crowley Vice President, Menswear, and Director Date: March 19, 1999 By: /s/ THOMAS P. MCKEEVER ----------------------------------- Thomas P. McKeever Vice President, Corporate Affairs and Human Resources, and Director -7- 8 Annual Report on Form 10-K Item 14(a) (1) and (2), and (d) List of Financial Statements and Financial Statement Schedules Blair Corporation and Subsidiary Warren, Pennsylvania Year ended December 31, 1998 -8- 9 Blair Corporation and Subsidiary List of Financial Statements and Financial Statement Schedules Form 10-K -- Item 14(a)(1) and (2), and (d) The following consolidated financial statements of Blair Corporation, included in the annual report of the registrant to its stockholders for the year ended December 31, 1998, are incorporated by reference in Item 8: -- Consolidated Balance Sheets -- December 31, 1998 and 1997 -- Consolidated Statements of Income -- Years ended December 31, 1998, 1997 and 1996 -- Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1998, 1997 and 1996 -- Consolidated Statements of Cash Flows -- Years ended December 31, 1998, 1997 and 1996 -- Notes to Consolidated Financial Statements -- December 31, 1998 The following financial statement schedule of Blair Corporation is included in Item 14(d): -- Schedule II -- Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. -9- 10 Blair Corporation and Subsidiary Schedule II Valuation and Qualifying Accounts December 31, 1998
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ----------------------------------------------------------------------------------------------------------- ADDITIONS- BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND DEDUCTIONS- AT END DESCRIPTION OF PERIOD EXPENSES DESCRIBE OF PERIOD - ----------- --------- -------- -------- --------- Year ended December 31, 1998: Allowance deducted from asset accounts (customer accounts receivable): For doubtful accounts $ 31,984,888 $ 22,033,466(A) $ 24,794,032(B) $ 29,224,323 For estimated loss on returns 6,495,000 88,927,593 89,172,593(C) 6,250,000 ============ ============ ============ ============ Totals $ 38,479,888 $110,961,059 $113,966,625 $ 35,474,323 ============ ============ ============ ============ Year ended December 31, 1997: Allowance deducted from asset accounts (customer accounts receivable): For doubtful accounts $ 37,272,572 $ 32,222,092(A) $ 37,509,776(B) $ 31,984,888 For estimated loss on returns 7,192,000 94,114,182 94,811,182(C) 6,495,000 ============ ============ ============ ============ Totals $ 44,464,572 $126,336,274 $132,320,958 $ 38,479,888 ============ ============ ============ ============ Year ended December 31, 1996: Allowance deducted from asset accounts (customer accounts receivable): For doubtful accounts $ 40,508,071 $ 47,550,310(A) $ 50,785,809(B) $ 37,272,572 For estimated loss on returns 6,676,000 100,976,722 100,460,722(C) 7,192,000 ============ ============ ============ ============ Totals $ 47,184,071 $148,527,032 $151,246,531 $ 44,464,572 ============ ============ ============ ============
- ---------- Note (A) -- Current year provision for doubtful accounts, charged against income. Note (B) -- Accounts charged off, net of recoveries. Note (C) -- Sales value of merchandise returned. -10- EX-13 2 ANNUAL REPORT 1 Exhibit 13 CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 1998 1997 1996 - ---------------------- ------------ ------------ ------------ Net sales ................................... $506,803,591 $486,581,737 $544,129,005 Other income-- Note 5 ....................... 43,862,320 39,931,577 44,291,914 ------------ ------------ ------------ 550,665,911 526,513,314 588,420,919 Costs and expenses: Cost of goods sold ....................... 251,832,019 242,828,539 268,757,869 Advertising .............................. 132,274,259 128,117,432 141,035,288 General and administrative ............... 108,567,387 98,352,175 102,209,670 Provision for doubtful accounts .......... 22,033,466 32,222,092 47,550,310 Interest ................................. 2,116,772 4,102,148 5,524,561 ------------ ------------ ------------ 516,823,903 505,622,386 565,077,698 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES .................. 33,842,008 20,890,928 23,343,221 Income taxes--Note 6 ........................ 11,553,000 7,637,000 8,617,000 ------------ ------------ ------------ NET INCOME .................................. $ 22,289,008 $ 13,253,928 $ 14,726,221 ============ ============ ============ Basic and diluted earnings per share based on weighted average shares outstanding ...... $2.49 $1.45 $1.58 ===== ===== =====
See accompanying notes. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS - ------------------------------------------------------------------------------- Board of Directors and Stockholders Blair Corporation and Subsidiary We have audited the accompanying consolidated balance sheets of Blair Corporation and Subsidiary as of December 31, 1998 and 1997 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of Blair Corporation management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Blair Corporation and Subsidiary at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Buffalo, New York February 1, 1999 8 2
CONSOLIDATED BALANCE SHEETS ========================================================================================== DECEMBER 31 1998 1997 - ------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS Cash ............................................ $ 3,211,376 $ 3,468,483 Customer accounts receivable, less allowances for doubtful accounts and returns of $35,474,323 in 1998 and $38,479,888 in 1997 .......................... 158,191,826 157,636,096 Inventories: Merchandise .................................. 102,152,680 68,143,275 Advertising and shipping supplies ............ 12,982,870 10,584,134 ------------ ------------ 115,135,550 78,727,409 Deferred income taxes -- Note 6 .................... 7,781,000 9,910,000 Prepaid and refundable federal and state taxes .. 12,455,216 6,499,412 Prepaid expenses ................................ 344,482 391,532 ------------ ------------ TOTAL CURRENT ASSETS ............................... 297,119,450 256,632,932 PROPERTY, PLANT AND EQUIPMENT Land ............................................ 1,142,144 1,142,144 Buildings ....................................... 63,433,347 63,263,399 Equipment ....................................... 39,255,983 38,859,725 ------------ ------------ 103,831,474 103,265,268 Less allowances for depreciation ................ 55,787,582 51,322,255 ------------ ------------ 48,043,892 51,943,013 TRADEMARKS ......................................... 849,380 921,623 ------------ ------------ TOTAL ASSETS ....................................... $346,012,722 $309,497,568 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable -- Note 2 ......................... $ 22,750,000 $ 38,600,000 Trade accounts payable .......................... 52,135,922 46,358,297 Advance payments from customers ................. 1,182,829 1,393,814 Accrued expenses -- Note 3 ...................... 12,074,736 9,033,411 ------------ ------------ TOTAL CURRENT LIABILITIES .......................... 88,143,487 95,385,522 DEFERRED INCOME TAXES -- Note 6 .................... 1,368,000 1,683,000 LONG-TERM DEBT -- Note 2 ........................... 30,000,000 -0- STOCKHOLDERS' EQUITY -- Note 4 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 ............................... 240,798,008 223,868,940 ------------ ------------ 255,496,646 237,519,001 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 2,239,344 1,928,786 226,501,235 212,429,046 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $346,012,722 $309,497,568 ============ ============
See accompanying notes. 9 3 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- COMMON STOCK ..................................... $ 419,810 $ 419,810 $ 419,810 ADDITIONAL PAID-IN CAPITAL: Balance at beginning of year .................. 13,230,251 12,928,260 12,372,697 Issuance (net of forfeitures) of Common Stock under Employee Stock Purchase Plan -- Note 4 ............................ 1,025,989 288,303 555,563 Issuance of Common Stock to non-employee directors ..................... 22,588 13,688 -0- ------------ ------------ ------------ Balance at end of year ........................ 14,278,828 13,230,251 12,928,260 RETAINED EARNINGS: Balance at beginning of year .................. 223,868,940 216,068,537 211,588,111 Net income .................................... 22,289,008 13,253,928 14,726,221 Cash dividends declared per share -- $0.60 in 1998; $0.60 in 1997; $1.10 in 1996 .............................. (5,359,940) (5,453,525) (10,245,795) ------------ ------------ ------------ Balance at end of year ........................ 240,798,008 223,868,940 216,068,537 TREASURY STOCK: Balance at beginning of year .................. (23,161,169) (19,013,814) (16,927,008) Purchase of 147,573 shares in 1998; 276,866 shares in 1997; and 120,300 shares.. in 1996 of Common Stock for treasury ...... (4,001,471) (4,551,438) (2,267,655) Issuance (net of forfeitures) of Common Stock under Employee Stock Purchase Plan-- Note 4 .............................. 393,536 395,646 180,849 Issuance of 1,500 shares in 1998 and 1997 of Common Stock to non-employee directors ..... 13,037 8,437 -0- ------------ ------------ ------------ Balance at end of year ....................... (26,756,067) (23,161,169) (19,013,814) RECEIVABLE FROM EMPLOYEE STOCK PURCHASE PLAN: Balance at beginning of year .................. (1,928,786) (1,803,910) (1,887,595) Issuance (net of forfeitures) of Common Stock under Employee Stock Purchase Plan -- Note 4 ............................. (494,285) (362,765) (177,635) Repayments .................................... 183,727 237,889 261,320 ------------ ------------ ------------ Balance at end of year ........................ (2,239,344) (1,928,786) (1,803,910) ------------ ------------ ------------ TOTAL STOCKHOLDERS' EQUITY ....................... $226,501,235 $212,429,046 $208,598,883 ============ ============ ============
See accompanying notes. 10 4 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income ................................................. $22,289,008 $ 13,253,928 $ 14,726,221 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization ........................... 4,979,582 5,369,394 5,418,237 Provision for doubtful accounts ......................... 22,033,466 32,222,092 47,550,310 Provision for deferred income taxes ..................... 1,814,000 6,816,000 1,599,000 Compensation expense for stock awards ................... 1,094,025 375,525 559,538 Changes in operating assets and liabilities providing (using) cash: Customer accounts receivable ...................... (22,589,196) 3,913,868 (49,922,884) Inventories ....................................... (36,408,141) 9,121,189 (7,455,793) Prepaid expenses .................................. 47,050 264,383 (127,624) Trade accounts payable ............................ 5,777,625 5,860,935 (7,725,784) Advance payments from customers ................... (210,985) 248,432 (9,777) Accrued expenses .................................. 3,041,325 (503,070) (1,859,605) Federal and state taxes ........................... (5,955,804) 3,642,597 (9,501,748) ----------- ------------ ------------ NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ....................................... (4,088,045) 80,585,273 (6,749,909) INVESTING ACTIVITIES Purchases of property, plant and equipment ................. (1,008,218) (3,033,033) (3,249,030) ----------- ------------ ------------ NET CASH (USED IN) INVESTING ACTIVITIES ....................... (1,008,218) (3,033,033) (3,249,030) FINANCING ACTIVITIES Net proceeds (repayments) from bank borrowings ............. 14,150,000 (68,400,000) 22,700,000 Dividends paid ............................................. (5,359,940) (5,453,525) (10,245,795) Purchase of Common Stock for treasury ...................... (4,001,471) (4,551,438) (2,267,655) Decrease in notes receivable from Employee Stock Purchase Plan ............................ 50,567 205,673 260,559 ----------- ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ....................................... 4,839,156 (78,199,290) 10,447,109 ----------- ------------ ------------ NET (DECREASE) INCREASE IN CASH ................................ (257,107) (647,050) 448,170 Cash at beginning of year .................................. 3,468,483 4,115,533 3,667,363 ----------- ------------ ------------ CASH AT END OF YEAR ........................................... $ 3,211,376 $ 3,468,483 $ 4,115,533 =========== ============ ============
See accompanying notes. 11 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 1. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION The consolidated financial statements include the accounts of Blair Corporation and its wholly-owned subsidiary, Blair Holdings, Inc., a Delaware Corporation (Company). All significant intercompany accounts are eliminated upon consolidation. REVENUE RECOGNITION Sales (cash, Blair credit, or third party credit card) are recorded when the merchandise is shipped to the customer. Blair credit sales are made under Easy Payment Plan sales arrangements. Monthly, a provision for potentially doubtful accounts is charged against income based on management's estimate of realization. Any recoveries of bad debts previously written-off are credited back against the allowance for doubtful accounts in the period received. As reported in the balance sheets, the carrying amount, net of allowances for doubtful accounts and returns for customer accounts receivable on Blair credit sales, approximates fair value. Finance charges on time payment accounts are recognized on an accrual basis of accounting. 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. RETURNS A provision for anticipated returns is recorded monthly as a percentage of gross sales based upon historical experience. This provision is charged directly against gross sales to arrive at net sales as reported in the consolidated statements of income. Actual returns are charged against the allowance for returns which is netted against accounts receivable in the balance sheets. The provision for returns charged against income in 1998, 1997 and 1996 amounted to $88,927,593, $94,114,182 and $100,976,722 respectively. Management believes these provisions are adequate based upon the relevant information presently available. However, it is reasonably possible that the Company's provisions may change in the near term. DOUBTFUL ACCOUNTS A provision for doubtful accounts is recorded monthly as a percentage of gross sales based upon experience of delinquencies and charge-offs and current credit market conditions. Management believes these provisions are adequate based upon the relevant information presently available. However, it is reasonably possible that the Company's provisions may change in the near term. 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, inventories would have increased by approximately $7,662,000 and $8,538,000 at December 31, 1998 and 1997, respectively. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated on the basis of cost. Depreciation has been provided principally by the straight-line method using rates which are estimated to be sufficient to amortize the cost of the assets over their period of usefulness. TRADEMARKS Trademarks are stated on the basis of cost. All trademarks are being amortized by the straight-line method for a period of 15 years. Amortization expense amounted to $72,243, $72,244 and $71,852 in 1998, 1997 and 1996, respectively. EMPLOYEE BENEFITS The Company's employee benefits include a profit sharing and retirement feature available to all eligible employees. Contributions are dependent on net income of the Company and recognized on an accrual basis of accounting. The contributions to the plan charged against income in 1998, 1997 and 1996 amounted to $2,371,992, $1,407,745 and $1,568,137, respectively. As part of the same benefit plan, the Company has a contributory savings feature whereby all eligible employees may contribute up to 10% of their annual base salaries. The Company's matching contribution to the plan is based upon a percentage formula as set forth in the plan agreement. The Company's matching contributions to the plan charged against income in 1998, 1997 and 1996 amounted to $1,871,906, $1,852,557 and $1,925,675, respectively. 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. FINANCIAL INSTRUMENTS The carrying amounts of cash, customer accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The interest rates on the Company's revolving credit facility is adjusted regularly to reflect current market rates. Accordingly, the carrying amounts of the Company's borrowings also approximate fair value. NEW ACCOUNTING PRONOUNCEMENTS 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 year ended December 31, 1998 and 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 was adopted in the financial statements for the year ended December 31, 1998 and had no impact on the financial statements of the Company. 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. The SOP is effective for fiscal years beginning after December 15, 1998, on a prospective basis. Management does not believe the adoption of this SOP will have a significant impact on the financial statements of the Company. 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. 12 6 2. 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 December 31, 1998 and 1997, the Company was in compliance with all the agreement's covenants. At December 31, 1998 and 1997, the Company had borrowed $52,750,000 and $38,600,000, respectively, of which $30,000,000 and $-0- was classified as long-term, respectively. On January 22, 1999, the Company repurchased 500,000 shares of their Common Stock. The Company used their revolving credit facility to pay for these shares. Interest paid during 1998, 1997 and 1996 amounted to $2,030,379, $4,186,967 and $5,506,851, respectively. The weighted average interest rate on average debt outstanding was 5.97%, 5.96% and 5.89% for the years ended December 31, 1998, 1997 and 1996, respectively. Additionally, the Company has available a $25 million line for letters of credit. Outstanding letters of credit amounted to approximately $12,725,000 at December 31, 1998 and related primarily to inventory purchases. 3. ACCRUED EXPENSES
Accrued expenses consist of: 1998 1997 ----------- ---------- Employee compensation $ 7,537,456 $5,674,054 Contribution to Profit Sharing and Retirement Plan 2,371,992 1,407,745 Taxes, other than taxes on income 524,687 297,457 Other accrued items 1,640,601 1,654,155 ----------- ---------- $12,074,736 $9,033,411 =========== ==========
4. EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase Plan (Plan) (amended in 1992) which provides for 400,000 shares of the Company's treasury stock to be reserved for sale and issuance to employees at a price to be established by the Stock Purchase Plan Committee. At December 31, 1998 and 1997, 101,000 and 146,700 shares, respectively, were available to be issued under the Plan. The Company follows APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations and Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) in accounting for its Employee Stock Purchase Plan. Compensation expense equals the difference between the exercise price and the market price of the shares at the date of grant. Compensation expense related to these awards amounted to $1,058,400, $353,400, and $559,538 for the years ended December 31, 1998, 1997 and 1996, respectively. A summary of the activity under the Plan is as follows:
1998 1997 1996 -------- -------- --------- Shares granted and issued 50,400 49,600 34,700 Grant and issue price per share $10.50 $7.50 $7.50 Market value per share at date of issue $31.50 $14.625 $23.625 Shares cancelled and forfeited 4,700 1,050 2,000 Original issue price per share $7.50 TO $7.50 to $13.00 to $16.00 $16.00 $15.00 Weighted average price per share $11.75 $11.75 $14.00
5. OTHER INCOME
Other income consists of: 1998 1997 1996 ----------- ----------- ----------- Finance charges on time payment accounts $34,006,347 $36,416,174 $42,503,052 Insurance proceeds 2,800,000 -0- -0- Miscellaneous 7,055,973 3,515,403 1,788,862 ----------- ----------- ----------- $43,862,320 $39,931,577 $44,291,914 =========== =========== ===========
6. INCOME TAXES
The components of income tax expense are as follows: 1998 1997 1996 ----------- ---------- ---------- Currently payable: Federal $ 8,949,000 $2,012,000 $6,682,000 State 790,000 (1,191,000) 336,000 ----------- ---------- ---------- 9,739,000 821,000 7,018,000 Deferred 1,814,000 6,816,000 1,599,000 ----------- ---------- ---------- $11,553,000 $7,637,000 $8,617,000 =========== ========== ==========
The differences between total tax expense and the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes are as follows:
1998 1997 1996 ----------- ---------- ---------- Statutory rate applied to pretax income $11,844,703 $7,311,825 $8,170,127 State income taxes, net of federal benefit 643,500 256,100 365,950 Non taxable insurance proceeds (980,000) -0- -0- Other items 44,797 69,075 80,923 ----------- ---------- ---------- $11,553,000 $7,637,000 $8,617,000 =========== ========== ==========
Components of the deferred tax asset and liability under the liability method as of December 31, 1998 and 1997 are as follows:
1998 1997 ---------- ---------- Current net deferred tax asset: Doubtful accounts $6,913,000 $6,960,000 Returns allowance 1,823,000 2,013,000 Inventory obsolescence 1,997,000 1,937,000 Inventory costs 130,000 778,000 Vacation pay 1,399,000 1,321,000 Advertising costs (4,939,000) (4,113,000) Other items 458,000 1,014,000 ---------- ---------- $7,781,000 $9,910,000 ========== ========== Long-term deferred tax liability: Property, plant and equipment $1,368,000 $1,683,000 ========== ==========
Income taxes paid (refunded) during 1998, 1997 and 1996 amounted to $14,985,120, ($2,224,794) and $15,553,202, respectively. 7. BUSINESS SEGMENT AND CONCENTRATION OF BUSINESS RISK The Company operates as one segment in the business of selling men's and women's fashion wearing apparel and accessories and home product items. The Company's customer base is comprised of individuals throughout the United States and is diverse in both geographic and demographic terms. Advertising is done mainly by means of catalogs and direct mail letters which offer the Company's merchandise. Sales of the men's and women's fashion wearing apparel and accessories accounted for 88%, 87% and 83% of total 1998, 1997 and 1996 sales, respectively. Home products accounted for the remaining sales volume. 13 7 QUARTERLY RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The following is a summary of unaudited quarterly results of operations for the years ended December 31, 1998 and 1997
1998 1997 QUARTER ENDED QUARTER ENDED MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER 31 30 30 31 31 30 30 31 ------------------------------------------------ ----------------------------------------------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) NET SALES $115,887 $126,727 $111,873 $152,317 $110,882 $127,546 $102,810 $145,344 Cost of goods sold 56,915 61,241 57,684 75,992 55,117 63,639 52,630 71,443 Net income 5,518 7,092 2,588 7,090 1,965 3,620 2,256 5,413 Basic and diluted earnings per share .61 .80 .29 .79 .21 .40 .25 .59
Quarter ended September 30, 1998 includes non-taxable insurance proceeds of $2.8 million ($.31 per share). Quarter ended December 31, 1998 includes additional net income of $2.7 million ($.31 per share) due to reductions in the provisions for doubtful accounts and returns resulting from improved bad debt and returns experience. Quarter ended December 31, 1997 includes an additional provision for doubtful accounts of $3.1 million (pretax), $.20 net income per share, due to actual bad debt experience exceeding prior estimates. COMMON STOCK MARKET PRICES AND DIVIDENDS DECLARED PER SHARE - -------------------------------------------------------------------------------- The Company's Common Stock is traded on the American Stock Exchange (symbol BL). The number of record holders of the Company's Common Stock at December 31, 1998 was 2,630.
1998 1997 SALES PRICE DIVIDENDS SALES PRICE DIVIDENDS HIGH LOW DECLARED HIGH LOW DECLARED ---- --- -------- ---- --- -------- FIRST QUARTER $23 5/8 $17 1/8 $.15 $20 3/4 $15 3/4 $.15 Second Quarter 32 5/8 20 5/8 .15 17 3/4 13 5/16 .15 Third Quarter 33 1/2 24 13/16 .15 18 1/4 15 1/16 .15 Fourth Quarter 30 1/4 17 1/4 .15 20 1/4 16 5/8 .15
The payment of dividends is not subject to any restrictions. The payment of dividends is dependent on future earnings, capital requirements and financial condition. The Company intends to continue its policy of paying regular cash dividends; however, the company will evaluate its dividend policy on an on-going basis. SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net sales $506,803,591 $486,581,737 $544,129,005 $560,889,612 $535,792,222 Net income 22,289,008 13,253,928 14,726,221 25,267,910 37,678,710 Total assets 346,012,722 309,497,568 368,757,108 353,333,548 288,881,909 Long-term debt 30,000,000 -0- 80,000,000 80,000,000 -0- Per share: Basic and diluted earnings 2.49 1.45 1.58 2.72 4.07 Cash dividends declared .60 .60 1.10 2.30 2.05
14 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ RESULTS OF OPERATIONS COMPARISON OF 1998 AND 1997 Net income for 1998 increased 68% as compared to 1997. The year 1998 was favorably impacted by improving bad debt and return experience and by non-recurring insurance proceeds of $2,800,000, $.31 per share. Net sales for 1998 were 4.2% higher than net sales for 1997. Response rates overall were slightly better in 1998 than in 1997. Total advertising volume was slightly higher in 1998. Gross sales revenue generated per advertising dollar was approximately the same in both 1998 and 1997. The total number of orders shipped increased while the average order size remained approximately the same in 1998 as compared to 1997. Returns as a percentage of adjusted gross sales improved to 15.1% in 1998 from 16.4% in 1997. A change in return policy was primarily responsible for the improvement in the returns percentage. Other income increased 9.8% in 1998 as compared to 1997. Insurance proceeds and commissions earned more than offset the drop in finance charges resulting from strengthened credit procedures. Insurance proceeds of $2,800,000 were the result of the Company-owned term life policy on John L. Blair, former President and Chairman of the Company. Mr. Blair died on August 29, 1998. Cost of goods sold as a percentage of net sales decreased to 49.7% in 1998 from 49.9% in 1997. The improvement in returns was primarily responsible for lower cost of goods in 1998. Advertising expense in 1998 increased 3.2% from 1997. The increase in catalog mailings was responsible for the higher advertising expense. The total number of catalog mailings released in 1998 was 27% higher than in 1997 (128.2 million vs. 100.7 million). Catalogs have been the primary advertising format for Home Products for over four 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 reviewed as to mailing frequency, page density, product content, number of pages and trim size. The total number of circular letter mailings released in 1998 was 22% less than in 1997 (88.5 million vs. 114.0 million). Circular letter mailings have decreased due to the expansion of catalog advertising. Total volume of the co-op and media advertising programs decreased 4% in 1998 as compared to 1997 (1.41 billion vs. 1.47 billion). General and administrative expense increased 10.4% in 1998 as compared to 1997. The higher general and administrative expense was primarily the result of a 9.8% 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 35% lower in 1998 as compared to 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 slightly. 1997 included an additional provision for doubtful accounts of $8.3 million (pretax), $.52 net income per share. At December 31, 1998, the allowance for doubtful accounts as a percentage of delinquencies was 5.3% higher than at December 31, 1997. Recoveries of bad debts previously charged off have been credited back against the allowance for doubtful accounts. The Company has continued to strengthen its credit procedures. Revised credit granting and collection policies have resulted in turning down more bad credit risks and in shortening and strengthening the collection cycle. Credit granting, collection and behavior models continue to gain effectiveness and, along with expanding database capabilities, should provide valuable credit marketing opportunities. Interest expense decreased 48% in 1998 as compared to 1997. Interest expense results primarily from the Company's borrowings necessary to finance customer accounts receivable and inventories. While customer accounts receivable have changed little as of December 31, 1998 ($158.2 million) and December 31, 1997 ($157.6 million), inventories have grown 46% ($115.1 million vs. $78.7 million). Average borrowings outstanding have been lower in 1998 ($34.9 million vs. $66.5 million), but inventory growth has caused higher borrowings outstanding at year-end 1998 than at year-end 1997. Income taxes as a percentage of income before income taxes were 34.1% in 1998 and 36.6% in 1997. The federal income tax rate was 35% in both years. The reduction in the total tax rate in 1998 was due to the non-taxable insurance proceeds ($2,800,000). COMPARISON OF 1997 AND 1996 Net income for 1997 decreased 10.0% as compared to 1996. The year 1997 was negatively impacted by lower net sales and deteriorating bad debt experience. Net sales for 1997 were 10.6% lower than 1996 net sales. Sales declined in 1997 due to a reduction in the volume of advertising mail, tightened credit management and elimination of high-dollar, high-credit-risk electronics items in the Home Products line. Advertising mail volume was reduced as a result of the elimination of pre-approved credit offers to prospects and, to a lesser extent, the early stage implementation of mail stream optimization and segmentation. Response rates were mixed - reduced by tighter credit management, improved by mail stream optimization and segmentation - but remained about the same overall. Gross sales revenue generated per advertising dollar decreased 1.7%. In 1997, the average order size ($60) remained approximately the same but the total number of orders shipped dropped (reduction in advertising) as compared to 1996. Returns as a percentage of adjusted gross sales increased to 16.4% in 1997 from 15.7% in 1996. Returns are higher on Blair Credit (Easy Payment Plan) and credit card sales and these sales (combined) grew to 71% of gross mail order sales in 1997 from 68% in 1996. Returns are also higher on Womenswear sales and Womenswear sales grew to 65% of gross mail order sales in 1997 from 59% in 1996. Other income decreased 9.8% in 1997 as compared to 1996 due to a 14.3% drop in finance charges assessed on Easy Payment Plan accounts receivable. Average Easy Payment Plan accounts receivable decreased 15.2%, approximately $37,000,000. 15 9 Cost of goods sold as a percentage of net sales increased to 49.9% in 1997 from 49.4% in 1996. Increased returns and liquidation of the electronics items in the Home Products line were primarily responsible for the higher cost of goods in 1997. Advertising expense in 1997 decreased 9.2% from 1996. Increased catalog mailings were more than offset by reductions in circular letter mailings, co-op and media volume and paper costs. The total number of catalog mailings released in 1997 was 67% higher than in 1996 (100.7 million vs. 60.3 million). The catalog has been the primary advertising format for Home Products for over three years. The Company released initial test mailings of Menswear catalogs in July 1995 and began full mailings to prospects and customers in September 1996. The Company released initial test mailings of Womenswear catalogs in January 1996 and began full mailings in the first quarter of 1997. The increased catalog volume and lower paper prices resulted in a net catalog mailing cost increase of $18,523,000 over 1996. Catalog mailings from all three product lines, including combined line offerings, are continually reviewed as to mailing frequency, page density, product mix, number of pages and trim size. The total number of circular mailings released in 1997 was 35% less than in 1996 (114.0 million vs. 176.0 million). The decreased circular volume and lower paper prices resulted in a circular mailing cost decrease of $28,247,000 from 1996. Circular mailings have decreased primarily due to the expansion of the catalog advertising program. Total volume of the co-op and media advertising programs decreased 20% in 1997 as compared to 1996 (1.47 billion vs. 1.83 billion). The decreased co-op and media volume and lower paper prices resulted in a co-op and media cost decrease of $3,155,000 from 1996. The co-op and media advertising volume has declined because the unproductive advertising placements have been eliminated. General and administrative expense decreased 3.8% in 1997 as compared to 1996. The lower general and administrative expense was primarily the result of declines in wages and benefits and in professional service fees. Wages and benefits were down due to a 4.9% drop in the average number of employees in 1997 as compared to 1996. The Company's study of its existing marketing programs, in support of the strategic plan to target the "over 40 low-to-moderate income" market, is coming to a conclusion and thus professional service fees have declined. The provision for doubtful accounts as a percentage of credit sales was 1.9% lower in 1997 as compared to 1996. A reduction in the provision due to lower credit sales and finance charges was nearly offset by an additional provision due to actual bad debt experience exceeding prior estimates. Credit sales decreased 27% and finance charges decreased 14% in comparison to 1996. The estimated provision for doubtful accounts is based on current expectations, sales mix (prospect/customer) and prior years' experience. Due to increases in the delinquency and charge-off rates experienced in 1997 on prior receivables, 1997 included an additional provision for doubtful accounts of $8.3 million (pretax), $.52 net income per share. Due to increases in the delinquency and charge-off rates experienced in 1996 on prior receivables, 1996 included an additional provision for doubtful accounts of $11.5 million (pre-tax), $.71 net income per share. The 1997 provision for doubtful accounts increased the allowance for doubtful accounts to a higher percentage of delinquencies at year-end 1997 than at year-end 1996. Recoveries of bad debts previously charged off, which more than doubled in 1997 over 1996, 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 policies. 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. After some delay, credit granting models addressing prospects (first-time buyers) were implemented in mid-September and early-October 1997. Plans for the first quarter of 1998 include the implementation of behavior and collection models to further strengthen credit procedures. The full impact of the credit policies is not likely to be realized until later in 1998. Interest expense decreased 25.7% in 1997 as compared to 1996. Interest expense has resulted primarily from the Company's borrowings necessary to finance customer accounts receivable. Average borrowings outstanding have decreased to $66,543,000 during 1997 from $92,806,000 during 1996. The reduction in Blair Credit (Easy Payment Plan) sales, the increase in credit card sales and improved credit policies are greatly responsible for lowering the levels of customer accounts receivable and borrowings. The weighted average interest rate on average debt outstanding was 5.96% for 1997 and 5.89% for 1996. Income taxes as a percentage of income before income taxes were 36.6% in 1997 and 36.9% in 1996. The federal income tax rate was 35% in both years. The difference in the total income tax rate was caused by a reduction in the Company's effective state income tax rate. LIQUIDITY AND SOURCES OF CAPITAL - -------------------------------------------------------------------------------- All working capital and cash requirements were met. In November 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 unsecured Revolving Credit Facility requires the Company to meet certain covenants, and as of December 31, 1998 the Company was in compliance with all the covenants. Borrowings outstanding at December 31, 1998 were $52,750,000 of which $30,000,000 was classified as long-term. Borrowings outstanding at December 31, 1997 were $38,600,000, all classified as current. The ratio of current assets to current liabilities was 3.37 at December 31, 1998, 2.69 at December 31, 1997 and 4.01 at December 31, 1996. Working capital increased $47,728,553 in 1998 primarily due to increases in long-term debt and net income. Working capital decreased $74,129,476 in 1997 due to the reduction in long-term debt. The 1998 increase was primarily reflected in increased inventories and decreased notes payable. The 1997 decrease was primarily reflected in decreased customer accounts receivable, inventories, deferred income taxes and prepaid federal and state taxes and increased notes payable and trade accounts payable. 16 10 Merchandise inventory turnover was 2.4 in 1998, 2.6 in 1997 and 2.9 in 1996. Merchandise inventory as of December 31, 1998 increased 49.9% from December 31, 1997 and 37.0% from December 31, 1996. Inventory levels have been impacted by the transition to a larger catalog operation and by the continuing effort to improve customer service. The Company's new catalog inventory management system is not yet fully operational. The Company operates as one business segment consisting of three product lines. Home Products net sales as a percentage of total net sales were 13.9 % ($70.3 million) in 1998, 13.4% ($65.3 million) in 1997 and 17.3% ($94.1 million) in 1996. Menswear net sales were 24.0% ($121.6 million) in 1998, 23.2% ($112.7 million) in 1997 and 25.1% ($136.5 million) in 1996. Womenswear net sales were 62.1% ($314.9 million) in 1998, 63.4% ($308.5 million) in 1997 and 57.6% ($313.5 million) in 1996. Home Products inventory totaled $18.2 million at December 31, 1998, $6.8 million at December 31, 1997 and $18.5 million at December 31, 1996. Menswear inventory was $26.6 million at December 31, 1998, $17.6 million at December 31, 1997 and $21.6 million at December 31, 1996. Womenswear inventory was $57.4 million at December 31, 1998, $43.7 million at December 31, 1997 and $34.4 million at December 31, 1996. 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 $1,008,218, $3,033,033 and $3,249,030 during 1998, 1997 and 1996. Capital expenditures for 1999, 2000 and 2001 are projected to be approximately $5,000,000 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. Delays in the database project kept capital expenditures well below projected levels 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 March 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 to the present, repurchased on the open market 544,739 shares of its common stock. In January 1999, the Company repurchased 500,000 shares of its common stock from the Estate of John L. Blair. The Company intends to repurchase approximately 100,000 additional shares from John Blair's Estate in March 1999. 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 credit industry trends, sales volume, operating cost fluctuations and unplanned capital spending. 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 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, decreased in late 1998 and decreased in early 1999. Overall, paper prices were lower in 1997 than in 1996, were higher in 1998 than in 1997 and, based on current trends, are expected to be lower in 1999 than in 1998. Postal rates increased in 1995, increased again in 1996 (slight increase due to the USPS Classification Reform) and increased again on January 10, 1999. The Company's estimate is 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. 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. ACCOUNTING PRONOUNCEMENTS - -------------------------------------------------------------------------------- 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 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 17 11 in interim financial reports issued to stockholders. The Company adopted Statement No. 131 in the 1998 financial statements, and the adoption had no impact on the Company's financial statements. 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 SOP is effective for fiscal years beginning after December 15, 1998. The Company believes that adoption of SOP 98-1 will not have a significant impact on its financial statements. 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 erratic consumer response rates. A prime aspect of the Company's 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. 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 $700,000 to $850,000 all of which will be expensed as incurred. To date, the Company has incurred and expensed approximately $525,000. 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 pose 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 70% 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 nearly 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. 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. 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. 18 EX-23 3 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Blair Corporation We consent to the incorporation by reference in this Form 10-K of Blair Corporation and Subsidiary of our report dated February 1, 1999, included in the 1998 Annual Report to Stockholders of Blair Corporation. Our audits also included the financial statement schedule of Blair Corporation and Subsidiary listed in Item 14(a). This schedule is the responsibility of Blair Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement on Form S-8 dated July 22, 1998, pertaining to the Blair Corporation Employee Stock Purchase Plan, of our report dated February 1, 1999, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Form 10-K of Blair Corporation. /s/ ERNST & YOUNG LLP Buffalo, New York March 18, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BLAIR CORPORATION'S 12/31/98 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH YEAR END, 1998 10-K FILING FOR BLAIR CORPORATION. 0000071525 BLAIR CORPORATION 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 3,211,376 0 158,191,826 35,474,323 115,135,550 297,119,450 103,831,474 55,787,582 346,012,722 88,143,487 0 0 0 419,810 226,081,425 346,012,722 506,803,591 550,665,911 251,832,019 516,823,903 0 22,033,466 2,116,772 33,842,008 11,553,000 22,289,008 0 0 0 22,289,008 2.49 2.49 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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