-----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, TaVEJGvDPm6iHgvQD4jW57aCJfl8XhllqFcWYJoyVYACfWr6PVyimdVUOWooQE2L YWLevbi9AaFPpv/pRuDYsw== 0000950152-05-001642.txt : 20050301 0000950152-05-001642.hdr.sgml : 20050301 20050301130940 ACCESSION NUMBER: 0000950152-05-001642 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050301 DATE AS OF CHANGE: 20050301 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-00878 FILM NUMBER: 05649124 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-K 1 j1146201e10vk.txt BLAIR CORPORATION 10-K ================================================================================ 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, 2004 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: TITLE OF EACH CLASS NAME OF EACH EXCHANGE 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] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of June 30, 2004 was approximately $236,838,997. There were 8,243,326 shares of common stock outstanding as of February 23, 2005 as reported by the Company's transfer agent and the aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 23, 2005 was $276,151,421. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2005 Annual Meeting of Stockholders (the "2005 Proxy Statement") are incorporated by reference into Part III of this Form 10-K. ================================================================================ 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. Although the Company's revenues are generated primarily through direct mail merchandising, the Company has transitioned into a multi-channel direct marketer, as an increasing amount of total sales revenue, approximately 16% in 2004, is being generated through its e-commerce Web sites, which were launched in 2000. The Company operates three retail stores, two in Pennsylvania and one in Delaware. The Company employs approximately 2,000 people. None of the Company's employees are subject to collective bargaining agreements. (b) INFORMATION REGARDING INDUSTRY SEGMENTS. The Company operates as one reporting segment, which is direct mail, e-commerce and retail merchandising of men's and women's fashion apparel and home products. The Company does not aggregate operating segments. Retail store sales comprise less than 1% of the Company's total net sales and the method used to distribute the Company's products (United States Postal Service or United Parcel Service) is the same for 99% of the business (i.e., direct mail and internet). 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, direct mail letters and the internet, which offer the Company's merchandise. The format of the information used by the Company's CEO in the oversight of the business is consistent with the reporting format used in the Company's 2004 Form 10-K and other external financial information. The direct mail business represents approximately 83% of net sales, the internet accounts for approximately 16% and the retail component accounts for approximately 1%. The Company considers all of these components to be engaged in business activities from which revenues are earned and expenses are incurred relating to transactions of the same enterprise. (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 (such as bedspread ensembles, draperies, furniture covers, area rugs, bath accessories, kitchenware, gifts, collectibles and personal care items) are mailed directly to existing and prospective customers. Sales of the Menswear and Womenswear products accounted for 87% of the Company's total sales in 2004, and sales of home products accounted for the remaining 13%. The environment for our products is very competitive and the Company has numerous competitors throughout various channels within the industry. Our current and potential competitors include brick and mortar retailers and catalog retailers, many of which possess significant brand awareness, sales volume, and customer bases. Some of these competitors currently sell products through the internet, mail order, or direct marketing. We believe that the principal competitive factors in our market segments include value, credit, availability, convenience, brand recognition, customer service, and reliability. The Company considers its merchandise to be value-priced and competes for sales with other direct marketers, retail department stores, specialty shops, discount store chains and e-commerce and multi-channel marketers. The Company competes based on its sales expertise and its unique combination of product, quality, price, credit, guarantee and service. As of December 31, 2004 the Company had $5,946,766 of backlog orders of which the Company reasonably did not expect to fill $683,878, compared to $9,224,041 of backlog orders as of December 31, 2003 of which the Company reasonably did not expect to fill $1,060,765. The majority of the backlog orders was the result of ordered items being out of stock at the time the order was originally placed. The reduction in backlog orders was the result of the Company's enhanced inventory management efforts. Emphasis was placed on carrying greater quantities of recurring or staple products. Conversely, lower levels of newly introduced or untested products were maintained. 2 Media and co-op prospect advertising programs continue to be used as components of the Company's customer acquisition strategy. The Company continued to expand its internet presence in 2004 generating over $91 million in sales demand, approximately 16% of the Company's total gross sales, as compared to approximately $84 million in sales demand or 12% in 2003. The Company launched its e-commerce Web sites in the third quarter of 2000 and has continued to expand its affiliate partnerships to extend the reach of the Web sites. The Company's Web sites have also become an effective way to help liquidate excess inventory. Both catalog mailings and letter mailings are mailed from commercial printers engaged by the Company. Orders for merchandise are processed at the Company's corporate offices in Warren, Pennsylvania (telephone orders via the call centers in Franklin, Pennsylvania, Erie, Pennsylvania and Warren, Pennsylvania) and orders are filled and mailed from the Company's Distribution Center in Irvine, Pennsylvania. All of the Company's products, including Allegheny Trail, are warehoused in its Irvine, Pennsylvania Distribution Center. The Distribution Center has been expanded to include the former Mailing Center, and enhanced to improve customer service levels and to support the Company's growth plans. Merchandise returns operations are located in Erie, Pennsylvania. The Company serves customers throughout the United States. The Delaware retail store is the only Company retail facility located outside of the Company's home state of Pennsylvania. During 2004, the Company continued to broaden its customer information database system. The marketing and credit department databases are continually updated in order to enhance the Company's ability to market to both customers and prospects. The information database system, covering all of the Company's products and customer file, is used by the marketing and credit departments to administer strategic business decisions. The Company announced on May 3, 2004, that it will discontinue circulation of its Crossing Pointe catalog title beginning in 2005. The Company's intention is to more fully focus new business development efforts on the core Blair brand and its proven appeal to significant market segments. The Company has evaluated the impact of discontinuing circulation of the Crossing Pointe title on all assets associated with this operation. All appropriate reserves have been recorded. This decision did not have a negative effect on 2004 profitability, but is expected to moderately benefit 2005 performance. In June 2003, the Company formed a new wholly-owned subsidiary, Allegheny Trail Corp., to launch a wholesale business targeted primarily at outdoor sporting goods and recreational retailers. Allegheny Trail offers a product line of men's and women's outdoor apparel basics at entry-level price points allowing retailers to be more competitive with major brands. On January 25, 2005, the Company decided to phase out its Allegheny Trail wholesale business by April 30, 2005. The Company's intention is to more fully focus new business development efforts on the core Blair brand and its proven appeal to significant customer profiles. The decision to focus on core operations is based in part on the historical success of the Blair brand and an extensive consumer and brand strategy study undertaken by the Company as part of its efforts to enhance profitability and shareholder value. The Company has evaluated the impact of phasing out the Allegheny Trail business on all assets associated with this operation. All appropriate reserves have been recorded. This decision did not have a negative effect on 2004 profitability, and is not expected to negatively impact 2005 performance. In August 2003, the Company commenced operations of a new wholly-owned subsidiary, JLB Service Bank. The establishment of JLB Service Bank will enable the Company to manage its credit portfolio in a more cost-effective and efficient manner. The bank's products will involve the extension of credit on an unsecured basis to individuals who are customers of Blair Corporation to facilitate their purchases of Blair's merchandise. Neither of the two new businesses required an investment of a material amount of working capital. (d) FOREIGN OPERATIONS AND EXPORT SALES. The Company does not conduct export sales of merchandise from the United States. The Company's International Trade Offices, the Company's only foreign operations, directly source more than 28% of the Company's merchandise from foreign suppliers. All activity is intercompany and the foreign offices have insignificant amounts of cash and fixed assets. (e) AVAILABLE INFORMATION. The Company makes available free of charge copies of its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments made to these reports pursuant to Section 13(a) and 15(d) of the Exchange Act, on its Web site at www.blair.com. Such reports are posted as soon as reasonably practicable after being filed with the SEC. 3 ITEM 2. PROPERTIES The Company owns the following properties: 1. Blair Headquarters (220 Hickory Street, Warren, Pennsylvania). 2. Blair Distribution Center South (Route 62, Irvine, Pennsylvania). 3. Blair Distribution Center North (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 Blair Warehouse Outlet building in Erie Pennsylvania is not currently being used by the Company. The Company is seeking prospective buyers for the Erie facility. A $300,773 impairment charge was taken in 2003 to reduce the value of the asset to its fair value less costs to sell. The Company is continuing to seek buyers for this facility and will monitor the realization of the net carrying value. The Company leases the following properties: 1. Blair Retail Store (Wilmington, Delaware). 2. Telephone Call Center (Erie, Pennsylvania). 3. Telephone Call Center (Franklin, Pennsylvania). 4. Blair Retail Store (Grove City, Pennsylvania). 5. Blair Returns Center (Erie, Pennsylvania). 6. International Trade Offices (Hong Kong, Taiwan, Singapore, India, and China). The Korea office, which was established in support of the Crossing Pointe catalog, was closed in July 2004 consistent with the Company's decision to discontinue circulation of this catalog title beginning in 2005. In addition, four of the Company's wholly-owned subsidiaries lease office space in the Wilmington, Delaware area, which they use as their principal offices. Management believes that these properties are capable of meeting the Company's anticipated needs for the near 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. 4 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 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, 2004 was 2,155.
2004 2003 Sales Price Dividends Sales Price Dividends High Low Declared High Low Declared First Quarter $26.94 $23.75 $.15 $24.80 $21.72 $ .15 Second Quarter 29.35 25.25 .15 24.73 20.60 .15 Third Quarter 29.50 25.31 .15 23.00 20.22 .15 Fourth Quarter 36.70 28.00 .15 25.70 21.15 .15
The Company and its affiliates have not repurchased any Company securities during the years ended December 31, 2004 and 2003. The payment of dividends is dependent on future earnings, capital requirements and financial condition. The Company currently intends to continue its policy of paying regular cash dividends; however, the Company will evaluate its dividend policy on an ongoing basis. ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31 2004 2003 2002 2001 2000 Net sales.................. $ 496,120,207 $ 581,939,971 $ 568,545,582 $ 580,700,163 $ 574,595,907 Net income................. 14,868,647 14,526,182 19,135,556 9,292,146 21,104,444 Total assets .............. 346,140,844 345,975,803 344,097,432 324,113,329 356,506,152 Long-term debt ............ -0- -0- -0- -0- -0- Per share: Basic earnings.......... 1.83 1.82 2.39 1.17 2.63 Diluted earnings........ 1.80 1.81 2.38 1.17 2.63 Cash dividends declared............ .60 .60 .60 .60 .60
5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION RESULTS OF OPERATION During 2004, the Company laid the groundwork for its efforts to focus on profitability and enhance shareholder value. Margins were maintained due to deflationary experience on merchandise purchases, fewer promotions and less inventory liquidation costs. All of these factors were offset by higher outbound freight costs. The planned elimination of unprofitable circular mailings and a reduction in Crossing Pointe mailings served to reduce net sales, but improve selling expense efficiency. The Company also experienced reduced provisions for doubtful accounts. The Company discontinued circulation of its Crossing Pointe catalog title as of December 31, 2004 and plans to phase out its Allegheny Trail wholesale business by April 30, 2005. The Company's intention is to more fully focus on core operations. These decisions are based in part on the historical success of the Blair brand and its proven appeal to significant market segments. Also contributing to the Company's decision to focus on core operations were the findings of an extensive consumer and brand strategy study undertaken by the Company as part of its efforts to enhance profitability and shareholder value. The study, conducted with the assistance of a national marketing and strategy consulting firm, provided a deeper understanding of who the customer is, well beyond the demographics of age and income. The study suggests the Company's core customer comprises a significant portion of the identified customer profiles. The Company believes that by focusing on these customer profiles it will be better positioned for increased profitability and enhanced shareholder value. COMPARISON OF 2004 AND 2003 Net income for 2004 increased 2.4% to $14.9 million or $1.83 basic earnings per share and $1.80 diluted earnings per share, compared to $14.5 million, or $1.82 basic earnings per share and $1.81 diluted earnings per share, in 2003. The Company realized advertising efficiency and improved bad debt experience in 2004. This positive experience was primarily offset by lower net sales attributed to lower response rates, the planned elimination of unprofitable letter mailings, and reduced Crossing Pointe mailings. Net sales for 2004 decreased $85.8 million to $496.1 million or 14.8% less than net sales for 2003. The decrease in net sales was primarily attributable to strategic decreases in catalog and letter mailings in an attempt to focus on the Company's core Blair brand. In support of this strategic decision, during 2004, the Company eliminated unprofitable letter mailings and reduced the number of Crossing Pointe mailings. These efforts resulted in slightly improved advertising efficiency and reduced provisions for doubtful accounts. In May, 2004 the Company announced that it would be discontinuing its Crossing Pointe catalog title at the end of 2004 and would be more fully focusing new business development efforts on the core Blair brand and its proven appeal to significant market segments. The decision to focus on core operations is based in part on the historical success of the Blair brand and an extensive consumer and brand strategy study undertaken by the Company as a component of its efforts to enhance profitability and shareholder value. Actual response rates in 2004 were lower than in 2003 and were lower than expected levels for 2004. The provision for returned merchandise ($71.7 million) as a percentage of gross sales decreased 57 basis points or $3.3 million in 2004 as compared to 2003. Management attributes this favorable change to improved product quality and fit, and to delivery efficiencies driven by its new fulfillment equipment. Other income increased approximately $3.2 million or 7.6% to $44.7 million in 2004 as compared to 2003. The increase was primarily due to increased finance charge revenues associated with the establishment of JLB Service Bank on August 20, 2003. Cost of goods sold decreased $40.7 million or 14.8% to $235.0 million in 2004 compared to 2003 as a result of decreased sales as described above. As a percentage of net sales, cost of goods sold was 47.4% in both 2004 and 2003. The Company's gross profit may not be comparable to that of other direct marketers, as some direct marketers include all costs related to their distribution network in cost of goods sold and others may exclude a portion of these costs from cost of goods sold, including them in a line item such as general and administrative expenses. While costs of goods sold as a percent of net sales remained consistent with the prior year, multiple variables were considered in 2004. Serving to positively impact cost of goods sold by approximately $1.6 million were: deflationary experience on merchandise purchases, effective inventory management resulting in lower inventory liquidation costs, fewer promotions and lower customer merchandise returns. Cost of goods sold was negatively impacted by approximately $1.6 million in 2004 as a result of shipping a greater mix of packages in excess of one pound that increased shipping costs. The Company's decision to 6 carry more inventory led to fewer cancellations and provided the ability to ship more multiple unit orders. This led to increased shipping costs that were more than offset by reduced order fulfillment costs, primarily lower warehouse staffing requirements. In addition, the basic profile of the products ordered by the customer also contributed to the increased average package weight in 2004. The Company's International Trade Offices, the Company's only foreign operations, directly sourced more than 28% of the Company's merchandise from foreign suppliers in 2004 as compared to 33% in 2003. The existence of these offices serves to lower the Company's cost of acquiring merchandise. All activity is intercompany and all merchandise is purchased in U.S. dollars. The foreign offices have insignificant amounts of cash and fixed assets, which are converted to U.S. dollars for financial statement purposes. Advertising expense in 2004 decreased $28.1 million or 18.0% to $128.3 million. The Company's more targeted mailings led to strategic decreases in catalog and letter mailings. This reduction includes the reduction in Crossing Pointe mailings as a result of the Company's decision to discontinue circulation of its 4 year old Crossing Pointe catalog title in early 2005. The total number of catalog mailings released in 2004 was 24.8 million or 11.8% less than those released in 2003. The total number of letter mailings released in 2004 was 23.8 million or 41.4% less than those released in 2003. The more targeted mailing strategy led to a reduction in customer catalog mailings of 7.9 million or 5.3% and prospect mailings of 16.9 million or 27.6%. The reduced prospect catalog circulation was primarily attributable to reduced Crossing Pointe circulation in 2004 compared to 2003. Total circulation of the co-op and media advertising programs decreased by 180.3 million pieces or 17.9% in 2004 as compared to 2003. The Company launched its e-commerce sites in the third quarter of 2000. In 2004, the Company generated $91.7 million in e-commerce sales demand as compared to $84.3 million in 2003. This increase was achieved after considering the reduction in Crossing Pointe web demand associated with the Company's decision to reduce Crossing Pointe mailings in 2004 as a precursor to discontinuing this catalog title in 2005. General and administrative expense decreased by $4.8 million or 3.5% in 2004 as compared to 2003. Reduced variable employee costs associated with lower sales volume served to lower general and administrative expense by $6.8 million. As a percent of net sales, general and administrative expenses were 26.5% for 2004 compared to 23.4% for 2003. The increase in percentage of net sales is primarily attributable to increased fees for professional services. $1.1 million is due to the added expense of complying with Section 404 of the Sarbanes-Oxley Act. Another component of the increased professional fees was the cost associated with an extensive consumer and brand strategy study conducted by the Company in 2004 of $1.9 million. The study concluded the Company would enhance profitability and improve shareholder value by focusing new business developments on the core Blair brand and its proven appeal to significant customer profiles. The provision for doubtful accounts decreased $9.1 million from $31.8 million to $22.6 million or 28.8% in 2004 compared to 2003. The decrease is primarily the result of a 14.0% decrease in credit sales. The estimated bad debt rate used in 2004 was 124 basis points lower than the bad debt rate used in 2003. The estimated bad debt rate has decreased primarily due to reduced credit offers to both Blair and Crossing Pointe prospects as well as improved delinquency and charge-off experience. Prospect credit offers traditionally result in higher bad debts. In the fourth quarter of 2004, the Company raised the acceptable FICO (Beacon) credit score that a customer is required to have in order to be eligible for Blair credit. This action began to improve the creditworthiness of the portfolio in the fourth quarter and is expected to positively impact delinquency rates and related bad debt experience in 2005. The provision for doubtful accounts is based on current expectations (consumer credit and economic trends, etc.), sales mix (prospect/customer) and current and prior years' experience, especially delinquencies (accounts over 30 days past due) and actual charge-offs (accounts removed from accounts receivable for non-payment). At December 31, 2004, the delinquency rate on open accounts receivable was 96 basis points lower than at December 31, 2003. Further, the charge-off rate for 2004 was 11 basis points less than the charge-off rate for 2003. The reduced charge off experience is the result of reduced customer and prospect credit marketing initiatives implemented in the second half of the year. The initial impact of raising the acceptable FICO (Beacon) score also contributed to reduced delinquencies. Due to the reduced credit risk associated with these initiatives, bad debt and related charge off experience decreased. Recoveries of bad debts previously charged off have been credited back against the allowance for doubtful accounts. The allowance for doubtful accounts as a percentage of delinquent accounts is 2.8% lower than the prior year. At December 31, 2004, the allowance for doubtful accounts as a percentage of open accounts is 204 basis points less than December 31, 2003. Both statistics reflect the greater mix of customer (versus prospect) open accounts at year-end and a much smaller Crossing Pointe credit portfolio associated with the Company's decision to discontinue its Crossing Pointe catalog title. At this time, the Company feels that the allowance for doubtful accounts is sufficient to cover the charge-offs from the current customer accounts receivable portfolio. Also, credit granting, collection and behavior models continue to be updated and 7 improved, and, along with expanding database capabilities, provide valuable credit-marketing opportunities and improve the ability to forecast doubtful accounts. Interest income, net of interest expense increased $43,000 or 54.2% to $122,757 in 2004 as compared to 2003. Interest income results from the Company's investment of surplus cash into money market securities and other investments with a maturity of three months or less when purchased. Interest expense primarily reflects the impact of $15 million of borrowings that are required under the receivables securitization. At December 31, 2004, inventories were 1.5% lower and gross customer accounts receivable were 4.2% lower as compared to December 31, 2003. Average borrowings were comparable in 2004 to 2003. Interest rates trended up throughout 2004. Other expense, net, decreased $38,000 or 14.7% to $221,699 in 2004 as compared to 2003. In 2004 the Company charged off $240,000 of construction in progress related to its decision to phase out the Allegheny Trail business by April 30, 2005. In 2003 the Company closed its outlet store in Erie, Pennsylvania. This facility is held for sale. A $300,773 impairment charge was taken in 2003 to reduce the value of the asset to its fair value less costs to sell. The balance of this line item is gain on foreign currency translation. Income taxes as a percentage of income before income taxes were 36.4% in 2004 and 37.3% in 2003. The statutory federal income tax rate of 35% was favorably impacted in 2004 by a change in estimated foreign tax credits. COMPARISON OF 2003 AND 2002 Net income for 2003 decreased 24.1% to $14.5 million or $1.82 basic earnings per share, $1.81 diluted earnings per share, compared to $19.1 million, or $2.39 basic earnings per share, $2.38 diluted earnings per share in 2002. The decline in net income in 2003 resulted primarily from increases in advertising expenses, cost of goods sold, general & administrative expenses and the provision for doubtful accounts that were not totally offset by the increase in sales. Net sales for 2003 increased $13.4 million to $581.9 million or 2.4% greater than net sales for 2002. The increase in net sales was primarily attributable to increases in catalog and letter mailings to current and prospective customers that served to generate sales, maintain the customer file and improve inventory management. Actual response rates in 2003 were lower than in 2002 and were lower than expected levels for 2003. The provision for returned merchandise as a percentage of gross sales decreased 50 basis points or $3.4 million in 2003 as compared to 2002. Management attributes this favorable change to improved product quality and fit, and to delivery efficiencies driven by its new fulfillment equipment. Other income increased approximately $3.3 million or 8.8% to $41.6 million in 2003 as compared to 2002. The increase was substantially impacted by increased finance charge revenues associated with the establishment of JLB Service Bank on August 20, 2003. Cost of goods sold increased $7.0 million or 2.6% to $275.7 million in 2003 compared to 2002. As a percentage of net sales, cost of goods sold increased to 47.4% in 2003 from 47.3% in 2002. The slight increase in cost of goods sold reflects the net impact of multiple variables. Serving to positively impact cost of goods sold were: effective inventory management resulting in lower inventory liquidation costs, less outbound freight in the fourth quarter attributable to increased use of shipping consolidators affording the company the opportunity to disseminate customer packages deeper in the mail stream which provided greater postal discounts, and lower in-bound freight in the fourth quarter compared to the prior year. In 2002, the Company incurred significant amounts of air freight (driven by the west coast dock strike) to expedite foreign merchandise receipts in an attempt to fill customer backorders. Cost of goods sold was negatively impacted in 2003 by: an increase in sales generated from promotional activities intended to address lower response rates, higher inbound freight expenses in the first quarter associated with the west coast dock strike, a greater mix in the first quarter of outbound packages in excess of one pound that increased shipping costs, and the postal rate increase of approximately 10% that took place on June 30, 2002. The Company's International Trade Offices, the Company's only foreign operations, directly sourced more than 33% of the Company's merchandise from foreign suppliers in 2003 as compared to 30% in 2002. The existence of these offices serves to lower the Company's cost of acquiring merchandise. All activity is intercompany and all merchandise is purchased in U.S. dollars. The foreign offices have insignificant amounts of cash and fixed assets, which are converted to U.S. dollars for financial statement purposes. Advertising expense in 2003 increased $10.5 million or 7.2% to $156.4 million. Strategic increases in letter and catalog mailings to current customers accounted for the majority of the increase. The June 30, 2002 postal rate increase and a 2% increase in printing costs effective April 1, 2003 also contributed to this variance. The total number of catalog mailings released in 2003 was 26.6 million or 14.5% greater than those released in 2002. The total number of letter mailings released in 2003 was 3.3 million or 6.2% greater than those released in 2002. Total circulation of the co-op and media advertising programs increased by 89.4 million pieces or 9.8% in 2003 as compared to 2002. 8 The Company launched its e-commerce sites in the third quarter of 2000. In 2003, the Company generated $83.5 million in e-commerce sales demand as compared to $65.6 million in 2002. General and administrative expense increased by $5.3 million or 4.1% in 2003 as compared to 2002. The increase in general and administrative expense is attributable to increased employee costs (primarily wages and the cost of health insurance), professional fees, additional bank fees incurred as a result of rate increases for check processing along with the amortization of costs associated with the amended securitization of accounts receivable, increased costs incurred to service an expanded credit program, depreciation on the new fulfillment equipment and professional fees incurred for the establishment of the JLB Service Bank and Allegheny Trail subsidiaries. The Company's amended securitization of accounts receivable, which is discussed further in the "Liquidity and Sources of Capital" section, provided additional liquidity and extended the term of the facility. JLB Service Bank enables the Company to manage its accounts receivable portfolio in a more cost-effective and efficient manner. The formation of Allegheny Trail represents the launch of a wholesale business targeted at outdoor sporting goods and recreational retailers. The provision for doubtful accounts increased $1.8 million from $30.0 million to $31.8 million or 6.1% in 2003 compared to 2002. The increase is primarily the result of a 4.8% increase in credit sales. The estimated bad debt rate used in 2003 was 26 basis points lower than the bad debt rate used in 2002. The estimated bad debt rate has decreased primarily due to reduced credit offers to both Blair and Crossing Pointe prospects in the second half of the year and improved credit experience on the Crossing Pointe credit portfolio. Prospect credit offers traditionally result in higher bad debts. The provision for doubtful accounts is based on current expectations (consumer credit and economic trends, etc.), sales mix (prospect/customer) and current and prior years' experience, especially delinquencies (accounts over 30 days past due) and actual charge-offs (accounts removed from accounts receivable for non-payment). At December 31, 2003, the delinquency rate of open accounts receivable was 30 basis points lower than at December 31, 2002. Conversely, the charge-off rate for 2003 was 15 basis points greater than the charge-off rate for 2002. The increased charge off experience is the result of additional customer and prospect credit marketing initiatives implemented early in 2003. Due to the inherent credit risk associated with these initiatives, bad debt and related charge off experience increased to anticipated levels. As the year progressed, the credit marketing initiatives were curtailed resulting in less credit risky sales (primarily in the fourth quarter) and an improved year-end delinquency rate. Recoveries of bad debts previously charged off have been credited back against the allowance for doubtful accounts. The allowance for doubtful accounts as a percentage of delinquent accounts is the same at December 31, 2003 and December 31, 2002. At December 31, 2003, the allowance for doubtful accounts as a percentage of open accounts is 61 basis points less than December 31, 2002. This trend reflects the greater mix of customer (versus prospect) open accounts at year-end. At this time, the Company feels that the allowance for doubtful accounts is sufficient to cover the charge-offs from the current customer accounts receivable portfolio. Also, credit granting, collection and behavior models continue to be updated and improved, and, along with expanding database capabilities, provide valuable credit-marketing opportunities and improve the ability to forecast doubtful accounts. Interest income, net of interest expense increased $188,000 or 73.5% to $79,613 in 2003 as compared to 2002. Interest income results from the Company's investment of surplus cash into money market securities and other investments with a maturity of three months or less when purchased. Interest expense primarily reflects the impact of $15 million of borrowings that are required under the receivables securitization. Interest expense for 2002 included an amount attributable to an IRS tax settlement. At December 31, 2003, inventories were 15.3% higher and gross customer accounts receivable were 2.9% higher as compared to December 31, 2002. Average borrowings were comparable in 2003 to 2002. Interest rates were substantially lower throughout 2003. Other expense, net, increased $229,000 to $260,035 in 2003 as compared to 2002. In 2003 the Company closed its outlet store in Erie, Pennsylvania. This facility is held for sale. A $300,773 impairment charge was taken in 2003 to reduce the value of the asset to its fair value less costs to sell. The balance of this line item is gain/(loss) on foreign currency translation. Income taxes as a percentage of income before income taxes were 37.3% in 2003 and 38.5% in 2002. The statutory federal income tax rate was 35% in both years. The difference in the total income tax rate was caused by minor changes in several estimated items. LIQUIDITY AND SOURCES OF CAPITAL All working capital and cash requirements for the year 2004 were met using funds from operations and surplus cash. The Company maintains two facilities that collectively provide $110 million of credit. As of December 31, 2004 the Company was in compliance with all debt covenants. 9 The syndicated revolving facility (the "Credit Agreement") was originally signed on December 20, 2001 and has been amended four times, most recently on October 28, 2004. The amended Credit Agreement provides a commitment of $40 million and is secured by inventory and certain other assets of the Company and its subsidiaries. The Company is required to meet certain covenants that relate to tangible net worth, maintaining a defined leverage ratio and fixed charge coverage ratio, and complying with certain indebtedness restrictions. At December 31, 2004, the Company had no borrowings (loans) outstanding on this credit facility and had letters of credit totaling $16.1 million outstanding, which reduces the amount of borrowings available under the Credit Agreement. Outstanding letters of credit totaled $20.9 million at December 31, 2003. Letters of credit are comprised mainly of two categories. One such category is comprised of commercial letters of credit used for the purpose of purchasing goods from non-U.S. suppliers. The other category is comprised of a performance guarantee of a consolidated subsidiary of the Company. All letters of credit have a term of one year or less. The amended facility is scheduled to expire on September 1, 2007. The Company also maintains a securitization of up to $100 million in accounts receivable. At the present time, $70 million of the $100 million is available to the Company. The Company sells all right, title and interest in and to certain of its accounts receivable to Blair Factoring Company, a wholly-owned subsidiary. Blair Factoring Company is a separate, bankruptcy remote, special purpose entity that entered into a Receivables Purchase Agreement with PNC Bank, National Association, as administrator, and certain conduit purchasers. The Company's consolidated financial statements reflect all the accounts of Blair Factoring Company, including the receivables and secured borrowings. Transactions entered into under the Receivables Purchase Agreement are considered secured borrowings and collateral transactions under the provisions of Statement of Financial Accounting Standards No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. The securitization requires certain performance standards for the Company's accounts receivable portfolio in addition to complying with the covenants in the Credit Agreement. At December 31, 2004 and 2003, $15 million had been borrowed under the securitization and is included on the balance sheet as $15 million of short term notes payable. $15 million is the minimum amount required to be outstanding under the Receivables Purchase Agreement. Accordingly, at December 31, 2004 and 2003, $15 million of undivided interests in the receivables pool has been utilized under the terms of the facility, resulting in a remaining unused commitment of $55 million. At December 31, 2004 and 2003, the weighted average interest rate was 2.26% and 1.97%, respectively. Interest paid during 2004, 2003, and 2002 was approximately $339,000, $282,000, and $366,000, respectively. The securitization has a scheduled termination date of April 7, 2006. The following table and narrative highlight significant changes in cash and cash equivalents for the years ended December 31, 2004 and 2003.
Twelve Months Ended December 31 Increase/ 2004 2003 (decrease) ------------ ------------ ------------ Net cash provided by (used in) operating activities $ 21,342,668 $ (2,390,612) $ 23,733,280 Net cash (used in) investing activities (4,623,552) (7,191,272) 2,567,720 Net cash (used in) financing activities (2,436,554) (3,976,022) 1,539,468 Effect of exchange rate changes on cash (102,616) (37,548) (65,068) ------------ ------------ ------------ Net (decrease) in cash and cash equivalents $ 14,179,946 $(13,595,454) $ 27,775,400 ============ ============ ============
Net cash provided by operating activities was $21.3 million for the year ended December 31, 2004, a $23.7 million increase over the same period in fiscal 2003. This increase is primarily attributable to favorable year over year changes in several components of working capital. The primary factors of improved working capital are favorable changes to accounts receivable ($11.9 million) and in inventory ($12.7 million). In 2003, inventories rose approximately $11.4 million over 2002 levels. 2004 inventory levels are $1.3 million below year end 2003 levels. These positive impacts were offset somewhat by an unfavorable change ($4.6 million) in payables and accrual balances resulting from generally lower costs and expenses coupled with the timing of merchandise purchases. Net cash used in investing activities was lower by $2.6 million due to a lower level of capital expenditures in 2004. In 2003, the Company was in the final stages of a modernization and expansion program of its fulfillment complex. The $1.5 million reduction in net cash used in financing activities for the twelve months ended December 31, 2004 over the comparable period in 2003 is primarily attributable to $1.5 million higher proceeds from exercised stock options. Cash funding requirements in 2004 were primarily for capital expenditures and shareholder dividend payments. The Company expects to fund 2005 requirements with cash provided from operations and cash on hand. The Company was in compliance with all debt covenants as of December 31, 2004. The Company believes it has adequate financial resources to support anticipated short-term and long-term capital needs and commitments. 10 Merchandise inventory turnover was 2.6 at December 31, 2004, 3.4 at December 31, 2003 and 3.4 at December 31, 2002. Merchandise inventory as of December 31, 2004 increased 2.4% from December 31, 2003 and increased 19.8% from December 31, 2002. Merchandise inventory levels have been generally higher from December 31, 2003 through December 31, 2004 due to strategic efforts to increase inventory levels for recurring merchandise items in an effort to improve fill rates and related customer service levels. Inventory liquidation efforts were consistent with the prior year. The merchandise inventory levels are net of the Company's reserve for inventory obsolescence. The reserve totaled $3.6 million at December 31, 2004, $3.6 million at December 31, 2003 and $4.0 million at December 31, 2002. Inventory write-offs and write-downs (reductions to below cost) charged against the reserve for obsolescence were $6.3 million in 2004, $4.9 million in 2003 and $5.7 million in 2002. The closing of the Starbrick Outlet Store in January 2004 accounts for $2.4 million of the write-downs in 2004. These writedowns were primarily provided for in the December 31, 2003 obsolescence reserve. Due to the nonrecurring nature of the write-downs related to the closing of the Starbrick Outlet Store, the obsolescence reserve at December 31, 2004 might be expected to be lower than the reserve at December 31, 2003 on comparable inventory levels. However, the Company's decisions to discontinue its Crossing Pointe catalog title in 2005 and to phase out the Allegheny Trail wholesale business by April 30, 2005 have created the need to reserve a greater portion of these inventories due to anticipated lower recovery. Management believes that the amount of the reserve for obsolescence is appropriate. A monthly provision for obsolete inventory is added to the reserve and expensed to cost of goods sold, based on the levels of merchandise inventory and merchandise purchases. An operating segment is identified as a component of an enterprise for which separate financial information is available for evaluation by the chief decision-maker, or decision-making group, in deciding on how to allocate resources and assess performance. The Company operates as one business segment consisting of the Womenswear, Menswear, Home, Crossing Pointe, Stores and Allegheny Trail product lines. The Stores product line was added in the first quarter of 2004 reflecting a reclassification within the segment from the other product lines to this product line. Allegheny Trail was added in the third quarter of 2003. On January 25, 2005, the Company decided to phase out its Allegheny Trail wholesale business by April 30, 2005. The remaining products will be transferred to other existing product lines. The Company's intention is to more fully focus new business development efforts on the core Blair brand and its proven appeal to significant market segments. The decision to focus on core operations is based in part on the historical success of the Blair brand and an extensive consumer and brand strategy study undertaken by the Company as part of its efforts to enhance profitability and shareholder value. The Company has evaluated the impact of phasing out the Allegheny Trail business on all assets associated with this operation. All appropriate reserves have been recorded. This decision did not have a negative effect on 2004 profitability, and is not expected to negatively impact 2005 performance. The table below illustrates a reduction in Crossing Pointe net sales, which is attributable to reduced circulation in 2004 compared to 2003. The Company will discontinue its 4 year old Crossing Pointe catalog title in early 2005. All appropriate reserves have been recorded. This decision did not have a negative effect on 2004 profitability and is expected to positively impact 2005 performance. The Store product line shows a decrease of $3.4 million in merchandise inventory when comparing the December 31, 2004 balance to the December 31, 2003 balance. This is due to the closing of the Starbrick Outlet Store in January, 2004, which was accounted for in the fourth quarter of 2003. The following tables illustrate the percent of net sales and merchandise inventory that each product line represents.
12/31/04 Percent of 12/31/03 Percent of 12/31/02 Percent of Net Sales Total Net Net Sales Total Net Net Sales Total Net Product Line (in millions) Sales (in millions) Sales (in millions) Sales - --------------- ------------- ---------- ------------- ---------- ------------- ---------- Womenswear $ 310.6 62.6% $365.9 62.9% $ 358.9 63.1% Menswear 96.1 19.4% 100.6 17.3% 107.4 18.9% Home 64.9 13.1% 68.5 11.8% 59.2 10.4% Crossing Pointe 20.0 4.0% 39.6 6.8% 34.7 6.1% Stores 3.1 0.6% 6.5 1.1% 8.3 1.5% Allegheny Trail 1.4 0.3% .8 .1% N/A N/A --------- ------- ------ -------- ---------- ------- Total $ 496.1 100.0% $581.9 100.0% $ 568.5 100.0% ========= ======= ====== ======== ========== =======
11
12/31/04 12/31/03 12/31/02 Merchandise Merchandise Merchandise Inventory Inventory Inventory Product Line (in millions) (in millions) (in millions) - --------------- ------------- ------------- ------------- Womenswear $ 42.9 $ 41.0 $ 29.5 Menswear 14.3 6.9 10.0 Home 8.4 6.5 4.7 Crossing Pointe .2 6.4 6.5 Stores .4 3.8 4.4 Allegheny Trail 1.4 1.4 N/A --------- -------- -------- Total $ 67.6 $ 66.0 $ 55.1 ========= ======== ========
The Company looks upon its credit granting (Blair Credit) as a marketing advantage. Blair Credit customers, on average, buy more, buy more often and are more loyal than cash and third party credit card customers. The Company has determined that the benefit from the increased sales volume achieved by offering Blair Credit is significant and more than offsets the cost of the credit program. The cost of the credit program is comparable to the discount rates of third party credit cards. The Company's gross credit sales decreased 14% in 2004 as compared to 2003 in line with the strategic decision to focus on more targeted mailings for greater efficiency and optimized yield. The Company's gross credit sales increased 4.8% in 2003 as compared to 2002 and decreased 3.3% in 2002 as compared to 2001. On August 20, 2003 the Company commenced operations of a new wholly owned subsidiary, JLB Service Bank. The establishment of JLB Service Bank enables the Company to manage its credit portfolio in a more cost-effective and efficient manner. The bank's products involve the extension of credit on an unsecured basis to individuals who are customers of Blair Corporation to facilitate their purchases of Blair's merchandise. As of December 31, 2004 and December 31, 2003, JLB Service Bank's total assets represented 1.3% of the total consolidated assets of the Company. Gross revenue of JLB Service Bank was .94% and .32% respectively of the Company's consolidated total revenues for the years ended December 31, 2004 and December 31, 2003. 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 $4.6 million during 2004, $7.2 million during 2003 and $12.3 million during 2002. Most of the $4.6 million of capital expenditures in 2004 were attributable to the previously announced modernization and enhancement of the Company's fulfillment operations. This investment has increased the productivity of the Company's fulfillment operations. The reduction in capital expenditures over the three year period is attributable in part to economic conditions. In addition, expenditures incurred for Sarbanes Oxley compliance and the comprehensive brand and market study have led to additional cash requirements of approximately $3 million, which were reflected in the consolidated statement of income. Capital expenditures are projected to be approximately $35 million in total for the years 2005, 2006, 2007. Approximately $18 million of the $35 million is attributable to improving our information services capabilities as they support the order taking and order fulfillment functions. Upon review of the Company's inventory liquidation strategy, the Company made the decision in January 2004 to close its outlet store located in Warren, Pa. This closure was effective at the close of business on January 16, 2004. Evolvement of the Company's inventory liquidation strategy into more rapid and profitable methods of disposing obsolete and excess inventory led to this decision. Over the past three years, package insertions, telephone upsell promotions, sale catalogs and the e-commerce channel have proven to be more successful and profitable in moving inventory than the traditional outlet sales process. The building is a sheet metal warehouse design and the Company has considered the possible impairment of the facility. It is continuing to be used and maintained in an operating condition and several options for additional and/or alternative uses are being explored for its future use. For these reasons, the Company does not believe impairment of the facility is appropriate. The Blair Warehouse Outlet building in Erie Pennsylvania is not currently being used by the Company. The Company is seeking prospective buyers for the Erie facility. However, the sales process has taken longer than anticipated and the assets are no longer being classified as Held for Sale in accordance with SFAS No. 144. The carrying value of the asset, after considering a $300,773 impairment charge taken in 2003 to reduce the value of the asset to its fair value less costs to sell, is deemed to be stated fairly at December 31, 2004. The facility will continue to be depreciated. 12 OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements. CONTRACTUAL OBLIGATIONS The Company has contractual obligations consisting of capital leases for data processing and telephone equipment, operating leases for buildings, data processing, office and telephone equipment and a line of credit securitization for general liquidity, which requires a minimum borrowing level.
PAYMENTS DUE BY PERIOD LESS THAN 1 - 3 4 - 5 MORE THAN 5 CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS - ------------------------- ------------ ------------ ----------- ----------- ----------- Capital Lease Obligations $ 127,706 $ 114,702 $ 13,004 $ -0- $ -0- Operating leases 10,168,629 2,998,902 3,876,093 2,029,219 1,264,415 Unconditional Purchase Obligations - Outstanding Letters of Credit 16,100,000 16,100,000 -0- -0- -0- Line of Credit - Securitization 15,000,000 15,000,000 -0- -0- -0- ------------ ------------ ----------- ----------- ----------- TOTAL $ 41,396,335 $ 34,213,604 $ 3,889,097 $ 2,029,219 $ 1,264,415 ============ ============ =========== =========== ===========
The Company has commercial commitments consisting of a revolving credit facility of up to $40 million and a receivables securitization of up to $70 million. At December 31, 2004, $15 million of undivided interests in the receivables pool has been utilized under the terms of the receivables facility.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD AFTER OTHER COMMERCIAL TOTAL AMOUNTS LESS THAN 1 - 3 4 - 5 5 COMMITMENTS COMMITTED 1 YEAR YEARS YEARS YEARS - ------------------------------- ------------- ------------- ------------ ----- ----- Line of Credit - Revolving effective 9/1/04 $ 40,000,000 $ -0- $ 40,000,000 $ -0- $ -0- Line of Credit - Securitization effective 4/9/03 70,000,000 70,000,000 -0- -0- -0- ------------- ------------- ------------ ----- ----- TOTAL $ 110,000,000 $ 70,000,000 $ 40,000,000 $ -0- $ -0- ============= ============= ============ ===== =====
If an event of default should occur, payments and/or maturity of the lines of credit could be accelerated. The Company is not in default and does not expect to be in default of any of the provisions of the credit facilities. (See "Liquidity and Sources of Capital" for details of the Company's credit facilities). The Company recently declared a quarterly dividend of $.15 per share payable on March 15, 2005. The Company has declared dividends for 285 consecutive quarters. It is the Company's intent to continue paying dividends; however, the Company will evaluate its dividend practice on an ongoing basis. See "Future Considerations." Future cash needs beyond 2005 will be financed by cash flow from operations, existing borrowing arrangements 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 by numerous factors, including changes in customer payments on accounts receivable, consumer credit industry trends, sales volume, operating cost fluctuations, revised capital spending plans and unplanned capital spending. CRITICAL ACCOUNTING POLICIES Preparation of the Company's financial statements requires the application of a number of accounting policies, which are described in "Note 1. Significant Accounting Policies" in the "Notes to Consolidated Financial Statements." The critical accounting policies, which if interpreted differently under different conditions or circumstances could result in material changes to the reported results, deal with properly valuing accounts receivable and inventory. Properly valuing accounts receivable and inventory requires establishing proper reserve and allowance levels, specifically the allowances for doubtful 13 accounts and returns, and the reserve for inventory obsolescence. The Company's senior financial management and the Company's auditors (Ernst & Young) review the critical accounting policies and estimates with the Audit Committee of the Board of Directors. The Company's revenue recognition policy is as follows: Sales (cash, Blair Credit, or third party credit card) are recorded when the merchandise is shipped to the customer in accordance with the provisions of Staff Accounting Bulletin No. 104, Revenue Recognition. Finance charges on time payment accounts are recognized on an accrual basis of accounting. The allowance for doubtful accounts and related items, provision for doubtful accounts and Blair Credit, are discussed in "Results of Operations," "Liquidity and Sources of Capital" and "Future Considerations." A change in the bad debt rate would cause changes in the provision for doubtful accounts and the allowance for doubtful accounts. Based on the Company's 2004 level of credit sales and finance charges, net income would change by approximately $2.3 million, or $.27 per share, from a one percentage point change in the bad debt rate. The allowance for returns is recorded as an offset against customer accounts receivable. A monthly provision for anticipated returns is recorded as a percentage of gross sales, based upon historical experience. The provision is charged against gross sales to arrive at net sales, and actual returns are charged against the allowance for returns. Returns are generally more predictable as they settle within two-to-three months but are impacted by season, new products and/or product lines, type of sale (cash, credit card, Blair Credit) and sales mix (prospect/customer). The Company feels that the allowance for returns is sufficient to cover the actual returns that will occur in 2005 on 2004 sales. A change in the returns rate would cause changes in the provision for returns and the allowance for returns. Based on the Company's 2004 level of sales, net income would change by approximately $1.7 million, or $.21 per share, from a one percentage point change in return rate. The reserve for inventory obsolescence and related items, inventory levels and write-downs, are discussed in "Liquidity and Sources of Capital" and "Future Considerations." The Company feels that the reserve for inventory obsolescence is sufficient to cover the write-offs that will occur in future years on merchandise in inventory as of December 31, 2004. A change in the obsolescence rate would cause changes in cost of goods sold and the reserve for inventory obsolescence. Based on the Company's 2004 level of merchandise subject to obsolescence, net income would change by approximately $1.7 million, or $.21 per share, from a one percentage point change in the obsolescence rate. The Company's advertising expense policy is as follows: Advertising and shipping supply inventories include printed advertising material and related mailing supplies for promotional mailings, which are generally scheduled to occur within two months. These direct-response advertising costs are then expensed over the period of expected future benefit, generally nine weeks. At December 31, 2004, the Company had total net current deferred tax assets of $10.7 million. These assets relate principally to asset valuation reserves including bad debts, returns and inventory obsolescence. Based on recent historical earnings performance and current projections, management believes that a valuation allowance is not required against these deferred tax assets, except for the valuation allowances against state net operating losses and the Allegheny Trail inventory obsolescence reserve. The state net operating loss valuation allowance was provided due to its uncertainty of realization based upon the state's net operating loss carryforward rules. The Allegheny Trail inventory obsolescence reserve valuation allowance was provided due to the Company's decision to phase out this business by April 30, 2005. 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. Historically, profit margins have been pressured by postal and paper rate increases. Paper rates increased approximately 5% in 2004, were flat in 2003 and realized a 19% reduction in 2002. Postal rates increased on January 10, 1999, on January 7, 2001, on July 1, 2001, and again on June 30, 2002. Based on recent public communications by the United States Postal Service, it is anticipated that postal rates will not increase again until 2006. The Company spent approximately $83.7 million for postage and delivery services in 2004. 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. However, the Company has been experiencing consistent to declining merchandise costs and the LIFO reserve has fallen to $3.8 million at December 31, 2004 from $4.5 million at December 31, 2003. The LIFO reserve was $5.7 million at December 31, 2002. 14 The World Trade Organization members agreed several years ago that starting in January of 2005, quota on imported textile products would be removed. The elimination of this quota will result in lower priced textile products from most of the World Trade member countries. Because some member countries did not charge for quota, not all products will experience lower costs. However, in most World Trade member countries, lower prices are anticipated to range between 5% and 20%, depending on the item and the country of origin. These lower prices will result in lower landed duty paid prices for American importers. China is the only World Trade Organization member country that could be required to have quotas reinstated if their imports exceed a set amount per category. 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 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 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. ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) must be adopted no later than July 1, 2005. We expect to adopt SFAS No. 123(R) on July 1, 2005. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using Opinion 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $411,000, $129,000, and $22,000 in 2004, 2003 and 2002, respectively. FUTURE CONSIDERATIONS The Company is faced with the ever-present challenge of maintaining and expanding its 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 negatively impacted by increased operating costs, increased competition in the retail sector, high levels of consumer debt, varying consumer response rates and an uncertain economy. The preceding factors can also negatively impact the Company's ability to properly value accounts receivable and inventories by making it more difficult to establish proper reserve and allowance levels, specifically, the allowances for doubtful accounts and returns and the reserve for inventory obsolescence. The Company's marketing strategy includes targeting customers in the "40 to 75, low-to-moderate income" market. Success of the Company's marketing strategy requires investment in database management, digital asset management, campaign management, financial and operating systems, prospecting programs, catalog marketing, new product lines, telephone call centers, e-commerce, fulfillment operations and the management of credit extension. Management believes that these investments should improve Blair Corporation's position in new and existing markets and provide opportunities for future earnings growth. The Company announced on May 3, 2004, that it will discontinue circulation of its four year-old Crossing Pointe catalog title in 2005. The Company's intention is to more fully focus new business development efforts on the core Blair brand and its 15 proven appeal to significant market segments. The decision to focus on core operations is based in part on the historical success of the Blair brand and an extensive consumer and brand strategy study undertaken by the Company as part of its efforts to enhance profitability and shareholder value. This decision did not have a negative effect on 2004 profitability, and the Company expects it to moderately benefit 2005 performance. On January 25, 2005, the Company decided to phase out its Allegheny Trail wholesale business by April 30, 2005. The remaining products will be transferred to other existing product lines. This decision is consistent with the Company's intention to more fully focus new business development efforts on the core Blair brand and its proven appeal to significant market segments. The Company has evaluated the impact of phasing out the Allegheny Trail business on all assets associated with this operation. All appropriate reserves have been recorded. This decision did not have a negative effect on 2004 profitability and is not expected to negatively impact 2005 performance. 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. Words such as "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. Any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Such forward-looking statements are included in, but not limited to, this ITEM 7. Investors are cautioned that such forward-looking statements involve risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements, 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; (iii) external factors such as, but not limited to, changes in consumer response rates, changes in consumer credit trends, success of new business lines and increases in postal, paper and printing costs; and (iv) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. New requirements adopted by the Securities and Exchange Commission in response to the passage of the Sarbanes-Oxley Act of 2002 will require an annual review and evaluation of our internal control systems and attestation of these systems by our independent auditors. We are currently reviewing our internal control procedures and considering further documentation of such procedures that may be necessary. While we currently believe we have identified and committed the appropriate resources and developed an achievable plan of execution to meet all of the new requirements in a timely manner, there is risk inherent in the significant number of tasks to be completed over the balance of our fiscal year. Any improvements in our internal control systems or in documentation of such control systems could be costly to prepare or implement, could divert attention of management of finance staff, and may cause our operating expenses to increase over the ensuing year. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 securitized and revolving credit facilities are adjusted regularly to reflect current market rates. Accordingly, the carrying amounts of the Company's borrowings also approximate fair value. The Company is subject to market interest rate risk from exposure to changes in interest rates based upon its financing, investing and cash management activities. The Company utilizes variable-rate debt to manage its exposure to changes in interest rates. The Company does not expect changes in interest rates to have a material adverse effect on its income or cash flow in 2005. A change of one percentage point in the interest rate would cause a change in interest expense, based on the Company's levels of debt for the years 2003 and 2004, of approximately $150,000 in each year. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 15 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 16 ITEM 9A. CONTROLS AND PROCEDURES As of the end of the period covered by this report, based on an evaluation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), each of the Chief Executive Officer and the Chief Financial Officer of the Company has concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its Exchange Act reports is recorded, processed, summarized and reported within the applicable time periods specified by the SEC's rules and forms. There were no significant changes in the Company's internal controls or in any other factors that could significantly affect those controls subsequent to the date of the most recent evaluation of the Company's internal controls by the Company, including any corrective actions with regard to any significant deficiencies or material weaknesses. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY On February 26, 2004, the Company adopted a Code of Ethics for its Principal Executive Officer and Senior Financial Officer (the "Code of Ethics"). A copy of the Code of Ethics is filed as exhibit 14 in the 2003 Form 10-K. The Code of Ethics is also available free of charge by writing to the Secretary of Blair Corporation, 220 Hickory Street, Warren, Pennsylvania 16366. Information regarding directors and executive officers of the Company appearing under the caption "Election of Directors" in the 2005 Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on March 21, 2005 is hereby incorporated by reference. Certain information regarding section 16 of the Exchange Act reporting by directors, officers and beneficial owners of more than ten percent (10%) of the Company's common stock appearing under caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2005 Proxy Statement is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION Information appearing under the caption "Executive Compensation" in the 2005 Proxy Statement is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information setting forth the security ownership of certain beneficial owners and management appearing under the captions "Security Ownership of Certain Beneficial Owners," "Security Ownership of Management" and "Equity Compensation Plan Information" in the 2005 Proxy Statement is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information appearing under the caption "Principal Accountant Fees and Services" in the 2005 Proxy Statement is hereby incorporated by reference. 17 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES EXHIBITS AND FINANCIAL STATEMENTS AND SCHEDULES. (1) Financial Statements. The Company's consolidated financial statements are included at pages F-1 to F-21. Management's Annual Report on Internal Control Over Financial Reporting................................ F-1 Report of Independent Registered Public Accounting Firm................................................ F-2 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting... F-3 Consolidated Balance Sheets -- December 31, 2004 and 2003.............................................. F-4 Consolidated Statements of Income -- Years ended December 31, 2004, 2003 and 2002...................... F-6 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 2004, 2003 and 2002........ F-7 Consolidated Statements of Cash Flows -- Years ended December 31, 2004, 2003 and 2002.................. F-9 Notes to Consolidated Financial Statements -- December 31, 2004........................................ F-10
(2) Quarterly Results of Operations (page F-22) (3) Financial Statement Schedules. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS is being filed as part of this report on Form 10-K pursuant to Item 15(c), and should be read in conjunction with the consolidated financial statements of the Company described in Item 15(a)(1) above, which such Schedule II follows at page F-23. 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) List of Exhibits. The exhibits filed as a part of this Form 10-K are as follows (filed herewith unless otherwise noted): 3.1 Restated Certificate of Incorporation of the Company (1) 3.2 Amended and Restated Bylaws of the Company (2) 4 Form of Specimen Common Stock Certificate of Blair Corporation (3) 10.1 Stock Accumulation and Deferred Compensation Plan for Directors (4) 10.2 Blair Corporation 2000 Omnibus Stock Plan (5) 10.3 Blair Credit Agreement (6) 10.4 Amendment No. 2 to Credit Agreement (7) 10.5 Amendment No. 3 to Credit Agreement (8) 10.6 Amendment No. 4 to Credit Agreement (9) 10.7 Change in Control Severance Agreement - Vice Presidents (10) 10.8 Change in Control Severance Agreement - CEO and Senior Vice Presidents (11) 11 Statement regarding computation of per share earnings (12) 14 Code of Ethics (13) 21 Subsidiaries of Blair Corporation 23 Consent of Independent Registered Public Accounting Firm
18 31.1 CEO Certification pursuant to Section 302 31.2 CFO Certification pursuant to Section 302 32.1 CEO Certification pursuant to Section 906 32.2 CFO Certification pursuant to Section 906
- ----------------------- (1) Incorporated herein by reference to Exhibit A to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 10, 1995 (SEC File No. 1-878). (2) Incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 filed with the SEC on July 19, 2000 (SEC File No. 333-41772). (3) Incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed with the SEC on July 19, 2000 (SEC File No. 333-41770). (4) Incorporated herein by reference to Exhibit A to the Company's Proxy Statement filed with the SEC on March 20, 1998 (SEC File No. 1-878). (5) Incorporated herein by reference to Appendix A to the Company's Proxy Statement filed with the SEC on March 14, 2003 (SEC File No. 1-878). (6) Incorporated herein by reference to Exhibit 99.1 to the Company's Form 8-K filed with the SEC on January 9, 2002 (SEC File No. 1-878). (7) Incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of the Company filed with the SEC on August 8, 2003 (SEC File No. 1-878). Certain schedules to the agreement have been omitted. (8) Incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q of the Company filed with the SEC on November 9, 2004 (SEC File No. 1-878). Certain schedules to the agreement have been omitted. (9) Certain schedules to the agreement have been omitted. (10) Incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q of the Company filed with the SEC on November 9, 2004 (SEC File No. 1-878). (11) Incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q of the Company filed with the SEC on November 9, 2004 (SEC File No. 1-878). (12) Incorporated by reference to Note 5 of the financial statements included herein. (13) Incorporated by reference to Exhibit 14 to the 2003 Annual Report on Form 10-K of the Company filed with the SEC on March 15, 2004 (SEC File No. 1-878). 19 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 1, 2005 By: /s/ John E. Zawacki ------------------------------------ John E. Zawacki President and Chief Executive Officer By: /s/ Bryan J. Flanagan ------------------------------------ Bryan J. Flanagan Senior Vice President and Chief Financial Officer By: /s/ Michael R. DelPrince ---------------------------------------- Michael R. DelPrince Controller 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 1, 2005 By: /s/ Craig N. Johnson ---------------------------------------- Craig N. Johnson Chairman of the Board of Directors Date: March 1, 2005 By: /s/ John E. Zawacki ---------------------------------------- John E. Zawacki President, Chief Executive Officer and Director (Principal Executive Officer) Date: March 1, 2005 By: /s/ Bryan J. Flanagan ---------------------------------------- Bryan J. Flanagan Senior Vice President, Chief Financial Officer and Director (Chief Financial Officer) Date: March 1, 2005 By: /s/ Steven M. Blair ---------------------------------------- Steven M. Blair Vice President, Customer Services and Director Date: March 1, 2005 By: /s/ Thomas P. McKeever ---------------------------------------- Thomas P. McKeever Senior Vice President, Operations and Administration and Director Date: March 1, 2005 By: /s/ Robert D. Crowley ------------------------------------------ Robert D. Crowley Senior Vice President, Menswear, Home and Marketing Services and Director Date: March 1, 2005 By: /s/ Murray K. McComas --------------------------------- Murray K. McComas Director 20 Management's Annual Report on Internal Control over Financial Reporting The management of Blair Corporation and Subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's management utilizes the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company's internal control over financial reporting. As of December 31, 2004, based on management's evaluation of the effectiveness of the Company's internal control over financial reporting, the Company has concluded that its internal control over financial reporting is effective for the purpose of providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. In addition, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Ernst & Young, the registered public accounting firm that audited the financial statements included in this annual report, has issued an attestation report on management's assessment of the Company's internal control over financial reporting. F-1 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of Blair Corporation and Subsidiaries We have audited the accompanying consolidated balance sheets of Blair Corporation and Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, 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 have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Blair Corporation and Subsidiaries' internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Buffalo, New York February 23, 2005 F-2 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting The Board of Directors and Stockholders of Blair Corporation and Subsidiaries We have audited management's assessment, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting, that Blair Corporation and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Blair Corporation and Subsidiaries' management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Blair Corporation and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Blair Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Blair Corporation and Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004 and our report dated February 23, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Buffalo, New York February 23, 2005 F-3 Blair Corporation and Subsidiaries Consolidated Balance Sheets
DECEMBER 31 2004 2003 ------------------ --------------- ASSETS Current assets: Cash and cash equivalents $ 50,559,995 $ 36,380,049 Customer accounts receivable, less allowances for doubtful accounts and returns of $38,924,914 in 2004 and $47,473,108 in 2003 148,171,292 154,660,076 Inventories: Merchandise 67,597,084 65,990,631 Advertising and shipping supplies 16,697,349 19,610,207 ------------------ --------------- 84,294,433 85,600,838 Deferred income taxes (Note 6) 10,657,000 12,211,000 Prepaid expenses 2,210,181 2,200,191 ------------------ --------------- Total current assets 295,892,901 291,052,154 Property, plant, and equipment: Land 1,142,144 1,142,144 Buildings and leasehold improvements 66,803,458 67,169,830 Equipment 74,793,330 72,979,845 Construction in progress 1,686,408 1,386,067 ------------------ --------------- 144,425,340 142,677,886 Less allowances for depreciation 95,066,355 88,798,632 ------------------ --------------- 49,358,985 53,879,254 Trademarks 415,921 488,164 Other long-term assets 473,037 556,231 ------------------ --------------- Total assets $ 346,140,844 $ 345,975,803 ================== ===============
See accompanying notes. F-4
DECEMBER 31 2004 2003 ---------------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable (Note 2) $ 15,000,000 $ 15,000,000 Trade accounts payable 24,831,335 35,129,055 Advance payments from customers 1,854,086 2,286,055 Accrued expenses (Note 3) 15,406,631 17,732,395 Accrued federal and state taxes 3,689,994 3,997,935 Current portion of capital lease obligations (Note 4) 111,254 378,632 ---------------- -------------- Total current liabilities 60,893,300 74,524,072 Capital lease obligations, less current portion (Note 4) 12,270 101,622 Deferred income taxes (Note 6) 2,668,000 2,549,000 Stockholders' equity (Note 5): 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 13,238,311 14,134,983 Retained earnings 306,544,284 296,397,999 Accumulated other comprehensive (loss) income (118,634) (20,016) ---------------- -------------- 320,083,771 310,932,776 Less 1,846,542 shares in 2004 and 1,962,439 shares in 2003 of common stock in treasury -- at cost 35,955,582 39,514,841 Less receivable and deferred compensation from stock plans 1,560,915 2,616,826 ---------------- -------------- 282,567,274 268,801,109 ---------------- -------------- Total liabilities and stockholders' equity $ 346,140,844 $ 345,975,803 ================ ==============
See accompanying notes. F-5 Blair Corporation and Subsidiaries Consolidated Statements of Income
YEARS ENDED DECEMBER 31 2004 2003 2002 --------------- ----------------- ---------------- Net sales $ 496,120,207 $ 581,939,971 $ 568,545,582 Other revenue (Note 7) 44,714,912 41,563,467 38,218,673 --------------- ----------------- ---------------- 540,835,119 623,503,438 606,764,255 Cost and expenses: Cost of goods sold 234,972,079 275,708,662 268,736,004 Advertising 128,324,650 156,412,869 145,906,864 General and administrative 131,408,753 136,211,667 130,882,944 Provision for doubtful accounts 22,664,048 31,826,636 29,986,973 Interest (income) expense, net (122,757) (79,613) 108,349 Other expense, net 221,699 260,035 30,565 --------------- ----------------- ---------------- 517,468,472 600,340,256 575,651,699 --------------- ----------------- ---------------- Income before income taxes 23,366,647 23,163,182 31,112,556 Income taxes (Note 6) 8,498,000 8,637,000 11,977,000 --------------- ----------------- ---------------- Net income $ 14,868,647 $ 14,526,182 $ 19,135,556 =============== ================= ================ Basic earnings per share based on weighted average shares outstanding $ 1.83 $ 1.82 $ 2.39 =============== ================= ================ Diluted earnings per share based on weighted average shares outstanding and assumed conversions $ 1.80 $ 1.81 $ 2.38 =============== ================== ================
See accompanying notes. F-6 Blair Corporation and Subsidiaries Consolidated Statements of Stockholders'Equity
YEARS ENDED DECEMBER 31 2004 2003 2002 ---------------- --------------- ---------------- COMMON STOCK $ 419,810 $ 419,810 $ 419,810 ADDITIONAL PAID-IN CAPITAL: Balance at beginning of year 14,134,983 14,428,903 14,589,838 Issuance of 4,050 shares in 2004, 5,375 shares in 2003 and 3,000 shares in 2002 of common stock to non-employee directors (24,358) (6,355) (2,619) Issuance of 0 shares in 2004, 13,350 shares in 2003 and 66,960 shares in 2002 of common stock under Omnibus Stock Plan - Restricted Stock Awards (Note 5) - 10,695 (80,386) Issuance of 3,000 shares in 2004, 0 shares in 2003 and 0 shares in 2002 of common stock under Omnibus Stock Plan - Executive Officer Stock Awards (Note 5) (18,509) - - Forfeitures of 19,700 shares in 2004, 2,700 shares in 2003 and 7,000 shares in 2002 of common stock under Omnibus Stock and Employee Stock Purchase Plans (Note 5) (107,644) (18,055) (17,279) Exercise of 128,547 shares in 2004, 54,146 shares in 2003 and 10,001 shares in 2002 of common stock under Omnibus Stock Plan - Non-Qualified Stock Options (1,157,161) (409,205) (82,651) Tax benefit on exercise of Non-Qualified Stock Options 411,000 129,000 22,000 --------------- --------------- ---------------- Balance at end of year 13,238,311 14,134,983 14,428,903 RETAINED EARNINGS: Balance at beginning of year 296,397,999 286,511,847 271,954,815 Net income 14,868,647 14,526,182 19,135,556 Cash dividends per share - $.60 in 2004, 2003 and 2002 (4,722,362) (4,640,030) (4,578,524) --------------- --------------- ---------------- Balance at end of year 306,544,284 296,397,999 286,511,847 ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME: Balance at beginning of year (20,016) 12,686 - Foreign currency translation (98,618) (32,702) 12,686 --------------- --------------- ---------------- Balance at end of year (118,634) (20,016) 12,686 TREASURY STOCK: Balance at beginning of year (39,514,841) (41,264,330) (43,187,542) Issuance of 4,050 shares in 2004, 5,375 shares in 2003 and 3,000 shares in 2002 of common stock to non-employee directors 126,509 130,219 63,279 Issuance of 0 shares in 2004, 13,350 shares in 2003 and 66,960 shares in 2002 of common stock under Omnibus Stock Plan - Restricted Stock Awards (Note 5) - 275,663 1,740,780 Issuance of 3,000 shares in 2004, 0 shares in 2003 and 0 shares in 2002 of common stock under Omnibus Stock Plan - Executive Officer Stock Awards (Note 5) 85,875 - - Forfeitures of 19,700 shares in 2004, 2,700 shares in 2003 and 7,000 shares in 2002 of common stock under Omnibus Stock and Employee Stock Purchase Plans (Note 5) (332,770) (45,696) (134,515) Exercise of 128,547 shares in 2004, 54,146 shares in 2003 and 10,001 shares in 2002 of common stock under Omnibus Stock Plan - Non-Qualified Stock Options 3,679,645 1,389,303 253,668 --------------- --------------- ---------------- Balance at end of year (35,955,582) (39,514,841) ( 41,264,330)
See accompanying notes. F-7 Blair Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity
YEARS ENDED DECEMBER 31 2004 2003 2002 -------------- --------------- --------------- RECEIVABLE AND DEFERRED COMPENSATION FROM STOCK PLANS: Balance at beginning of year (2,616,826) (2,775,102) (1,987,850) Issuance (net of forfeitures) of common stock under Omnibus Stock Plan - Restricted Stock Awards and Executive Officer Awards: (Note 5) Receivable 100,263 (77,763) (448,333) Deferred compensation - (192,907) (1,070,667) Amortization of deferred compensation, net of forfeitures 245,575 163,495 84,445 Amortization of Executive Officer Stock awards, net of vesting and forfeitures 407,854 35,357 - Applications of dividends and cash repayments 302,219 230,094 647,303 ------------- -------------- --------------- Balance at end of year (1,560,915) (2,616,826) (2,775,102) ------------- -------------- --------------- Total stockholders' equity $ 282,567,274 $ 268,801,109 $ 257,333,814 ============= ============== =============== COMPREHENSIVE INCOME: Net income $ 14,868,647 $ 14,526,182 $ 19,135,556 Adjustment from foreign currency translation (98,618) (32,702) 12,686 ------------- -------------- --------------- Comprehensive income $ 14,770,029 $ 14,493,480 $ 19,148,242 ============= ============== ===============
See accompanying notes. F-8 Blair Corporation and Subsidiaries Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31 2004 2003 2002 -------------- --------------- --------------- OPERATING ACTIVITIES Net income $ 14,868,647 $ 14,526,182 $ 19,135,556 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 8,825,999 8,988,722 8,329,970 Amortization 329,497 342,903 340,547 Impairment of assets held for sale - 300,773 - Loss on disposal of property and equipment 320,905 - - Provision for doubtful accounts 22,664,048 31,826,636 29,986,973 Provision for deferred income taxes 1,673,000 350,000 (1,346,000) Tax benefit on exercise of non-qualified stock options 411,000 129,000 22,000 Compensation expense (net of forfeitures) for stock awards 664,798 470,667 345,313 Changes in operating assets and liabilities providing (using) cash: Customer accounts receivable (16,175,065) (37,257,221) (20,913,273) Inventories 1,306,405 (11,383,533) 21,194,839 Prepaid expenses and other assets (182,206) (509,428) (1,445,772) Trade accounts payable (10,297,653) (5,676,968) (6,828,013) Advance payments from customers (431,969) (1,673,746) 2,034,182 Accrued expenses (2,326,843) (2,365,447) 8,150,694 Federal and state taxes (307,895) (459,152) 1,805,828 -------------- -------------- --------------- Net cash provided by (used in) operating activities 21,342,668 (2,390,612) 60,812,844 INVESTING ACTIVITIES Purchases of property, plant, and equipment (4,623,552) (7,191,272) (12,261,333) -------------- -------------- --------------- Net cash used in investing activities (4,623,552) (7,191,272) (12,261,333) FINANCING ACTIVITIES Principal repayments on capital lease obligations (356,891) (350,171) (331,495) Dividends paid (4,722,362) (4,640,030) (4,578,524) Exercise of non-qualified stock options 2,522,484 980,098 171,017 Repayments of notes receivable from stock plans 120,215 34,081 436,695 -------------- -------------- --------------- Net cash used in financing activities (2,436,554) (3,976,022) (4,302,307) Effect of exchange rate changes on cash (102,616) (37,548) 13,804 -------------- -------------- --------------- Net increase (decrease) in cash 14,179,946 (13,595,454) 44,263,008 Cash and cash equivalents at beginning of year 36,380,049 49,975,503 5,712,495 -------------- -------------- --------------- Cash and cash equivalents at end of year $ 50,559,995 $ 36,380,049 $ 49,975,503 ============== ============== ===============
See accompanying notes. F-9 BLAIR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION The consolidated financial statements include the accounts of Blair Corporation and its wholly owned subsidiaries. All significant intercompany accounts are eliminated upon consolidation. On January 25, 2005, the Company decided to phase out its Allegheny Trail wholesale business by April 30, 2005. The remaining products will be transferred to other existing product lines. The Company's intention is to more fully focus new business development efforts on the core Blair brand and its proven appeal to significant market segments. The decision to focus on core operations is based in part on the historical success of the Blair brand and an extensive consumer and brand strategy study undertaken by the Company as part of its efforts to enhance profitability and shareholder value. The Company has evaluated the impact of phasing out the Allegheny Trail business on all assets associated with this operation. All appropriate reserves have been recorded. This decision did not have a negative effect on 2004 profitability, and is not expected to negatively impact 2005 performance. On August 20, 2003 the Company commenced operations of a new wholly owned subsidiary, JLB Service Bank. The establishment of JLB Service Bank enables the Company to manage its credit portfolio in a more cost-effective and efficient manner. The bank's products involve the extension of credit on an unsecured basis to individuals who are customers of Blair Corporation to facilitate their purchases of Blair's merchandise. As of December 31, 2004 and December 31, 2003, JLB Service Bank's total assets represented 1.3% of the total consolidated assets of the Company. Gross revenue of JLB Service Bank was .95% and .32% respectively of the Company's consolidated total revenues for the years ended December 31, 2004 and December 31, 2003. REVENUE RECOGNITION Sales (cash, Blair credit, or third-party credit card) are recorded when the merchandise is shipped to the customer, in accordance with the provisions of Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements and Staff Accounting Bulletin No. 104, Revenue Recognition, as issued by the Securities & Exchange Commission. 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 sheet, the carrying amount, net of allowances for doubtful accounts and returns, for customer accounts receivable on Blair credit sales approximates fair value. Shipping and processing revenue is included in net sales. Finance charges on time payment accounts are recognized on an accrual basis of accounting. The increase in finance charges compared to the prior year primarily resulted from increased finance charge revenues associated with the credit activities of JLB Service Bank. COSTS AND EXPENSES The Company includes the following costs in the line items listed below in its Consolidated Statements of Income: Cost of Goods Sold Cost of goods sold consists of merchandise costs, including sourcing, importing and inbound freight costs. In addition, cost of goods sold includes writedowns, shipping cartons, shipping supplies, and merchandise samples. The Company records internally incurred shipping and handling costs in cost of sales. General and administrative expenses Occupancy and warehousing costs consist of compensation, employee benefit expenses and related building costs. Examples of building costs include depreciation, repairs and maintenance, utilities, rent, real estate taxes, and maintenance contracts. Occupancy and warehousing costs incurred in support of the Company's order fulfillment process were $37,345,543, $40,845,998 and $37,991,814 for the years ended December 31, 2004, 2003 and 2002 respectively. The Company does not separately track purchasing and related costs which are also included in general and administrative expenses. In addition, the general and administrative costs incurred to support the Company's product development; circulation planning and customer file maintenance efforts are also included in general and administrative expenses. F-10 BLAIR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) INTEREST (INCOME) EXPENSE, NET Interest (income) expense, net, consists of the following:
YEARS ENDED DECEMBER 31 2004 2003 2002 ---------- --------- --------- Interest expense $ 370,474 $ 351,120 $ 958,443 Interest income (493,231) (430,733) (850,094) ---------- --------- --------- Interest (income) expense, net $ (122,757) $ (79,613) $ 108,349 ========== ========= =========
Interest income results from the Company's investment of surplus cash into money market securities and other investments with a maturity of three months or less when purchased. Interest expense primarily reflects the impact of $15 million of borrowings that are required under the receivables securitization. Interest expense for 2002 included an amount attributable to an IRS tax settlement. USE OF ESTIMATES The preparation of financial statements in conformity with U.S. 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. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of available cash, money market securities, and other investments with a maturity of three months or less when purchased. Amounts reported in the Consolidated Balance Sheets approximate fair values. 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 sheet. The provision for returns charged against income in 2004, 2003, and 2002 amounted to $71,666,391, $87,238,648, and $85,734,678, respectively. Management believes these provisions are adequate based upon the relevant information presently available. However, changes in facts or circumstances could result in additional adjustment to the Company's provisions. DOUBTFUL ACCOUNTS A provision for doubtful accounts is recorded monthly as a percentage of gross credit sales based upon experience of delinquencies (accounts over 30 days past due) and charge-offs (accounts removed from accounts receivable for non-payment) and current credit market conditions. Management believes these provisions are adequate based upon the relevant information presently available. However, changes in facts or circumstances could result in additional adjustment to the Company's provisions. 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. If the FIFO method had been used, merchandise inventories would have increased by approximately $3,776,000 and $4,488,000 at December 31, 2004 and 2003, respectively. 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 direct response advertising costs are then expensed over the period of expected future benefit, based on buying patterns, generally nine weeks or less. The Company has a reserve for slow moving and obsolete inventory amounting to $3,600,000 at both December 31, 2004 and 2003. A monthly provision for obsolete inventory is added to the reserve and expensed to cost of goods sold, based on the levels of merchandise inventory and merchandise purchases. The closing of the Starbrick Outlet Store in January 2004 resulted in $2.4 million of writedowns in the first quarter of 2004. These writedowns primarily were provided for in the December 31, 2003 obsolescence reserve. The December 31, 2004 obsolescence reserve takes into consideration the Company's decisions to discontinue its Crossing Pointe catalog title in 2005 and to phase out the Allegheny Trail wholesale business by April 30, 2005, which created the need to reserve a greater portion of these inventories due to anticipated lower recovery. F-11 BLAIR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) During 2004, inventory quantities in certain LIFO pools were reduced resulting in a liquidation of certain LIFO inventory quantities carried at higher costs prevailing in prior years as compared with costs at December 31, 2004. The effect of this liquidation was to decrease net income by approximately $.01 per share in 2004. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are 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 depreciate the cost of the assets over their period of usefulness. Amortization of assets recorded under capital lease obligations is included with depreciation expense. Estimated useful lives of property, plant and equipment range from 3 to 39.5 years. Maintenance and repairs are charged to expense as incurred. TRADEMARKS Trademarks, net of accumulated amortization of $667,728 at December 31, 2004 and $595,485 at December 31, 2003, are stated on the basis of cost. The Company has one trademark which is being amortized by the straight-line method for a period of 15 years. Amortization expense amounted to $72,243, $72,243, and $72,244 in 2004, 2003, and 2002, respectively. ASSET IMPAIRMENT The Company analyzes its long-lived and intangible assets for events and circumstances that might indicate that the assets may be impaired and the undiscounted net cash flows estimated to be generated by those assets are less than their carrying amounts. There are no indications of impairment present at December 31, 2004. 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 2004, 2003, and 2002 amounted to $1,525,408, $1,436,117, and $2,094,327, respectively. As part of the same benefit plan, the Company has a contributory savings feature whereby all eligible employees may contribute up to 25% 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 2004, 2003, and 2002 amounted to $1,826,706, $2,033,288, and $1,921,688, respectively. 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 securitized and revolving credit facilities are adjusted regularly to reflect current market rates. Accordingly, the carrying amounts of the Company's borrowings also approximate fair value. NEW ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) must be adopted no later than July 1, 2005. We expect to adopt SFAS No. 123(R) on July 1, 2005. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using Opinion 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized F-12 BLAIR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $411,000, $129,000, and $22,000 in 2004, 2003 and 2002, respectively. STOCK COMPENSATION In accordance with the provisions of SFAS No. 123 the Company has elected to continue applying the provisions of Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, the Company does not recognize compensation expense for stock options when the stock option price at the grant date is equal to or greater than the fair market value of the stock at that date. Stock activity in 2004, 2003 and 2002 generally includes transactions pertaining to stock awarded to non-employee directors as well as stock awarded and forfeited via the Company's Omnibus Stock and Employee Stock Purchase Plans. Activity is accounted for by comparing the market value of the awards, as required by the Plans, to the cost of the treasury shares used for these transactions. The difference is booked to additional paid-in capital. The following illustrates the pro forma effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 for the years ended December 31:
PRO FORMA ----------------------------------------------- 2004 2003 2002 -------------- ------------- -------------- Net income as reported $ 14,868,647 $ 14,526,182 $ 19,135,556 Add: Total stock-based employee compensation expense recorded for all awards, net of related tax effects 532,104 313,138 511,831 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (1,243,583) (1,057,347) (884,486) -------------- ------------- --------------- Pro forma net income $ 14,157,168 $ 13,781,973 $ 18,762,901 ============== ============= =============== Earnings per share: Basic - as reported $ 1.83 $ 1.82 $ 2.39 ============== ============= =============== Basic - pro forma $ 1.75 $ 1.73 $ 2.34 ============== ============= =============== Diluted - as reported $ 1.80 $ 1.81 $ 2.38 ============== ============= =============== Diluted - pro forma $ 1.74 $ 1.72 $ 2.34 ============== ============= ===============
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its stock options under the fair value method of SFAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
Options issued Options issued Options issued 4/15/03 4/15/02 4/16/01 -------------- ------------- --------------- Risk-free interest rate 3.49% 4.95% 5.20% Dividend yields 2.54% 3.11% 3.50% Volatility .540 .564 .547 Weighted-average expected life 7 years 7 years 7 years Per share fair value $ 10.63 $ 8.83 $ 7.40
RECLASSIFICATIONS Certain amounts in the prior year financial statements have been reclassified to conform with the current year presentation. F-13 BLAIR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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. 2. FINANCING ARRANGEMENTS The Company maintains two facilities that collectively provide $110 million of credit. As of December 31, 2004 the Company was in compliance with all debt covenants. The syndicated revolving facility (the "Credit Agreement") was originally signed on December 20, 2001 and has been amended four times, most recently on October 28, 2004. The amended Credit Agreement provides a commitment of $40 million and is secured by inventory and certain other assets of the Company and its subsidiaries. The Company is required to meet certain covenants that relate to tangible net worth, maintaining a defined leverage ratio and fixed charge coverage ratio, and complying with certain indebtedness restrictions. At December 31, 2004, the Company had no borrowings (loans) outstanding on this credit facility and had letters of credit totaling $16.1 million outstanding, which reduces the amount of borrowings available, under the Credit Agreement. Outstanding letters of credit totaled $20.9 million at December 31, 2003. Letters of credit are comprised mainly of two categories. One such category is comprised of commercial letters of credit used for the purpose of purchasing goods from non-U.S. suppliers. The other category is comprised of a performance guarantee of a consolidated subsidiary of the Company. All letters of credit have a term of one year or less. The amended facility is scheduled to expire on September 1, 2007. The Company also maintains a securitization of up to $100 million in accounts receivable. At the present time, $70 million of the $100 million is available to the Company. The Company sells all right, title and interest in and to certain of its accounts receivable to Blair Factoring Company, a wholly-owned subsidiary. Blair Factoring Company is a separate, bankruptcy remote, special purpose entity that entered into a Receivables Purchase Agreement with PNC Bank, National Association, as administrator, and certain conduit purchasers. The Company's consolidated financial statements reflect all the accounts of Blair Factoring Company, including the receivables and secured borrowings. Transactions entered into under the Receivables Purchase Agreement are considered secured borrowings and collateral transactions under the provisions of SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. The securitization requires certain performance standards for the Company's accounts receivable portfolio in addition to complying with the covenants in the Credit Agreement. At December 31, 2004 and 2003, $15 million had been borrowed under the securitization and is included on the balance sheet as $15 million of short term notes payable. $15 million is the minimum amount required to be outstanding under the Receivables Purchase Agreement. Accordingly, at December 31, 2004 and 2003, $15 million of undivided interests in the receivables pool has been utilized under the terms of the facility, resulting in a remaining unused commitment of $55 million. At December 31, 2004 and 2003, the weighted average interest rate was 2.26% and 1.97%, respectively. Interest paid during 2004, 2003, and 2002 was approximately $339,000, $282,000, and $366,000, respectively. The securitization has a scheduled termination date of April 7, 2006. 3. ACCRUED EXPENSES Accrued expenses consist of:
DECEMBER 31 2004 2003 ----------- ----------- Employee compensation $ 9,904,200 $12,395,998 Contribution to profit sharing and retirement plan 1,525,158 1,436,117 Health insurance 809,297 1,148,038 Voluntary Separation Program 494,790 762,106 Taxes, other than taxes on income 325,335 814,574 Other accrued items 2,347,851 1,175,562 ----------- ----------- $15,406,631 $17,732,395 =========== ===========
F-14 BLAIR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 4. LEASES CAPITAL LEASES The Company leases certain data processing and telephone equipment under agreements that expire in various years through 2007. The following is a schedule by year of future minimum capital lease payments required under capital leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2004: 2005 $ 114,702 2006 11,146 2007 1,858 -------------- 127,706 Less amount representing interest (4,182) -------------- Present value of minimum lease payments 123,524 Less current portion (111,254) -------------- Long-term portion of capital lease obligation $ 12,270 ==============
The Company entered into capital lease obligations amounting to $29,224 and $0 in 2004 and 2003, respectively. OPERATING LEASES The Company leases certain data processing, office, and telephone equipment under agreements that expire in various years through 2009. The Company has also entered into several lease agreements for buildings, expiring in various years through 2012. Rent expense for the Company for 2004, 2003, and 2002 was $3,474,281, $4,099,730, and $4,121,734, respectively. The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2004: 2005 $ 2,998,902 2006 2,338,494 2007 1,537,599 2008 1,070,730 2009 958,489 Thereafter 1,264,415 ----------- $10,168,629 ===========
5. STOCKHOLDERS' EQUITY EARNINGS PER SHARE AND WEIGHTED AVERAGE SHARES OUTSTANDING The following table sets forth the computations of basic and diluted earnings per share as required by Statement of Financial Accounting Standards No. 128:
YEARS ENDED DECEMBER 31 2004 2003 2002 ------------ ------------ ------------ Numerator: Net income $ 14,868,647 $ 14,526,182 $ 19,135,556 Denominator: Weighted average shares outstanding 8,172,711 8,058,039 8,067,293 Contingently issueable shares - Omnibus Stock Purchase Plan (65,136) (74,861) (62,111) ------------ ------------ ------------ Denominator for basic earnings per share 8,107,575 7,983,178 8,005,182 Effect of dilutive securities: Employee stock options 133,940 34,426 26,061 ------------ ------------ ------------ Denominator for diluted earnings per share 8,241,515 8,017,604 8,031,243 Basic earnings per share ============ ============ ============ $ 1.83 $ 1.82 $ 2.39 ============ ============ ============ Diluted earnings per share $ 1.80 $ 1.81 $ 2.38 ============ ============ ============
F-15 BLAIR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DIVIDENDS In 2004, 2003, and 2002, the Company declared dividends of $.60 per share or $4,904,606, $4,835,912, and $4,805,171 of which $4,722,362, $4,640,030 and $4,578,524 was paid directly to shareholders and charged to retained earnings. The remaining dividends declared, $182,244 in 2004, $195,882 in 2003, and $226,647 in 2002 were associated with the shares of stock held by the Company according to the provisions of the restricted stock awards. These remaining dividends were applied against the receivable from stock plans and were charged to compensation in the financial statements. RESTRICTED STOCK AWARDS During 2000, the Company adopted, with stockholder approval, an Omnibus Stock Plan (Omnibus Plan) that provided for 750,000 shares of the Company's treasury stock to be reserved for sale and issuance to employees at a price to be established by the Omnibus Stock Plan Committee. In April 2003, the Company reserved, with stockholder approval, 400,000 additional shares. At December 31, 2004, 2003 and 2002, 562,914, 599,852 and 397,927 shares were available to be issued under the Plan, respectively. The difference between the exercise price and the market price of the shares awarded equals compensation, which $-0-, $-0-, and $90,644 was expensed in 2004, 2003, and 2002, respectively. Under the Omnibus Plan, no awards were granted in 2004, awards were granted on one date in 2003 and three separate dates in 2002. In 2004, 2003 and 2002, under the provisions of certain awards granted, compensation of $-0-, $192,907 and $1,070,667, net of forfeitures, respectively, was recorded as deferred expense and will be amortized over the vesting period of seven years. Amortization expense was $147,145, $153,085 and $68,745 in 2004, 2003 and 2002, respectively. Total compensation expense for the application of dividends to receivable and amortization of deferred compensation from restricted stock awards recognized for 2004, 2003 and 2002 was $329,389, $348,967 and $295,392, respectively. A summary of the restricted stock activity under the Omnibus Plan is as follows:
YEARS ENDED DECEMBER 31 2004 2003 2002 ------------- -------------- -------------------------- Shares granted and issued - 13,350 11,611, 51,500, and 3,849 Grant and issue price per share - $7.00 $7.50, $8.00, and $-0- Market value per share at date of issue - $21.45 $23.20, $25.25, and $23.55 Weighted average market price per share at date of issue - $21.45 $24.80 Shares canceled and forfeited 10,100 1,200 1,000 Original price per share $6.50 - $8.00 $8.00 - $10.50 $7.50 Weighted average price per share $7.21 $7.63 $7.50
EXECUTIVE OFFICER STOCK AWARDS In 2004 and 2003, under the provisions of certain awards granted to executive officers on three and two separate dates, respectively, shares vest at the rate of 20% per year over the five-year vesting period. The Company records equity and expense during the vesting periods of the awards based on the number of eligible shares and the market value of the shares on the grant date. Upon vesting, shares are issued out of treasury stock. The Company recorded expense of $489,232 and $21,344 in 2004 and 2003, respectively. When the awards vest, the Company also pays a cash bonus to the recipient to assist in the income tax obligation related to the awards. Total compensation expense recognized in income was $977,967 and $35,357 in 2004 and 2003, respectively. F-16 BLAIR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) A summary of the executive officer stock activity under the Omnibus Plan is as follows:
YEARS ENDED DECEMBER 31 2004 2003 2002 ------------------------- ----------------- ------ Shares granted 27,275, 15,000 AND 13,925 10,650 and 4,848 - Market valve per share at date of issue $24.20, $26.74 AND 436.50 $21.44 and $24.58 - Weighted average market value per share at date of issue $27.93 $22.42 - Shares canceled and forfeited 1,525 - - Original price per share $21.44 -$24.20 - - Weighted average price per share $23.29 - -
NON-QUALIFIED STOCK OPTIONS Under the Omnibus Plan, the Company also may provide non-qualified stock options. The price of option shares granted under the Omnibus Plan shall not be less than the fair market value of common stock on the date of grant, and the term of the stock option shall not exceed ten years from date of grant. Options vest over a three-year period. The Company did not issue Options in 2004. A summary of the stock options activity in the Company's Omnibus Plan is as follows:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE -------- -------------- Outstanding at January 1, 2002 90,519 $ 17.10 Granted in 2002 167,229 19.30 Exercised in 2002 (10,001) 17.10 Forfeited in 2002 (7,035) 18.57 -------- -------------- Outstanding at December 31, 2002 240,712 18.59 Granted in 2003 170,427 23.60 Exercised in 2003 (54,146) 18.10 Forfeited in 2003 - - -------- -------------- Outstanding at December 31, 2003 356,993 21.05 Granted in 2004 - - Exercised in 2004 (128,547) 19.62 Forfeited in 2004 (7,637) 22.19 -------- -------------- Outstanding at December 31, 2004 220,809 $ 21.85 ======== ==============
The exercise price of options outstanding ranged from $17.10 to $23.60, with a weighted-average remaining contractual life of 7.85 years at December 31, 2004. The Company does not recognize compensation expense on the income statement for any of its stock options.
WEIGHTED AVERAGE EXERCISABLE AT THE END OF THE YEAR: OPTIONS EXERCISE PRICE ------- -------------- December 31, 2002 20,170 $ 17.30 December 31, 2003 71,614 18.19 DECEMBER 31, 2004 69,041 20.58
6. INCOME TAXES The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using the enacted tax rate(s) expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. F-17 BLAIR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Company accounts for the tax benefit from the exercise of non-qualified stock options by reducing its accrued income tax liability and increasing additional paid-in capital. The components of income tax expense are as follows:
YEARS ENDED DECEMBER 31 2004 2003 2002 ------------ ------------ ------------- Currently payable: Federal $ 5,914,000 $ 7,045,000 $ 12,060,000 Foreign 76,000 280,000 300,000 State 835,000 962,000 963,000 ------------ ------------ ------------- 6,825,000 8,287,000 13,323,000 Deferred 1,673,000 350,000 (1,346,000) ------------ ------------ ------------- $ 8,498,000 $ 8,637,000 $ 11,977,000 ============ ============ =============
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:
YEARS ENDED DECEMBER 31 2004 2003 2002 ------------ ------------ ------------- Statutory rate applied to pretax income $ 8,178,000 $ 8,107,000 $ 10,889,000 State income taxes, net of Federal benefit 842,000 825,000 545,000 ------------ ------------ ------------- Other items (522,000) (295,000) 543,000 ------------ ------------ ------------- $ 8,498,000 $ 8,637,000 $ 11,977,000 ============ ============ =============
The Company has approximately $2 million of a Pennsylvania net operating loss carryforward that can be used to offset future Pennsylvania Taxable Income. A deferred tax asset has been established based on the $2 million net operating loss available to be carried forward. The deferred tax asset is offset by a valuation allowance because it is uncertain as to whether the Company will generate sufficient income in the State of Pennsylvania in the future to absorb the net operating losses before they expire in 2011. Income taxes paid during 2004, 2003, and 2002 amounted to $6,703,349, $8,807,997, and $11,400,758, respectively. F-18 BLAIR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Components of the deferred tax assets and liabilities under the liability method are as follows:
DECEMBER 31 2004 2003 --------------- -------------- CURRENT DEFERRED TAX ASSETS: Doubtful accounts $ 11,737,000 $ 14,122,000 Returns allowance 1,922,000 2,306,000 Inventory obsolescence 1,374,000 1,374,000 State net operating loss 72,000 196,000 Vacation pay 1,466,000 1,798,000 Group insurance 431,000 364,000 Other items 946,000 717,000 --------------- -------------- GROSS CURRENT DEFERRED TAX ASSETS 17,948,000 20,877,000 State valuation allowance (121,000) (196,000) --------------- -------------- 17,827,000 20,681,000 CURRENT DEFERRED TAX LIABILITIES: Advertising costs $ 6,152,000 $ 7,542,000 Inventory costs 776,000 372,000 Other items 242,000 556,000 --------------- -------------- GROSS CURRENT DEFERRED TAX LIABILITIES 7,170,000 8,470,000 --------------- -------------- NET CURRENT DEFERRED TAX ASSET $ 10,657,000 $ 12,211,000 =============== ============== LONG TERM DEFERRED TAX LIABILITY: Property, plant, and equipment $ 2,668,000 $ 2,549,000 =============== ==============
7. OTHER REVENUE Other revenue consists of:
YEARS ENDED DECEMBER 31 2004 2003 2002 ------------- ------------- -------------- Finance charges on time payment accounts $ 40,165,327 $ 36,163,981 $ 34,776,872 Commissions earned 1,732,026 1,493,579 2,239,888 Other items 2,817,559 3,905,907 1,201,913 ------------- ------------- -------------- $ 44,714,912 $ 41,563,467 $ 38,218,673 ============= ============= ==============
Commissions earned result from an arrangement under which a third party sells jewelry to the Company's customers and all related significant activities are conducted by, and are the responsibility of, the third party. The Company receives payments from the customer and makes remittances, net of commissions to the third party. The Company bears the credit risk and recognizes a credit loss when the customer does not honor its payment obligation. Other items are comprised of items such as customer list rentals, dishonored check service charges and package insert income. 8. BUSINESS SEGMENT AND CONCENTRATION OF BUSINESS RISK The Company operates as one segment in the business of selling women's and men's fashion wearing apparel and accessories and home furnishing items. Specifically, the segment includes the Womenswear, Menswear, Home, Crossing Pointe, Stores and Allegheny Trail product lines. The Stores product line was added in the first quarter of 2004 reflecting a reclassification within the segment from the other product lines to this product line. Allegheny Trail was added in the third quarter of 2003. The Company announced on May 3, 2004, that they will discontinue circulation of its Crossing Pointe catalog title beginning in 2005. The Company's intention is to more fully focus new business development efforts on the core Blair brand and its proven appeal to significant market segments. The decision to focus on core operations is based in part on the historical success of the Blair brand and an extensive consumer and brand strategy study undertaken by the Company as part of its efforts to enhance profitability and shareholder value. The Company has evaluated the impact of F-19 BLAIR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) discontinuing circulation of the Crossing Pointe title on all assets associated with this operation. All appropriate reserves have been recorded. This decision did not have a negative effect on 2004 profitability, and is expected to moderately benefit 2005 performance. On January 25, 2005, the Company decided to phase out its Allegheny Trail wholesale business by April 30, 2005. The remaining products will be transferred to other existing product lines. This decision is consistent with the Company's intention to more fully focus new business development efforts on the core Blair brand and its proven appeal to significant market segments. The Company has evaluated the impact of phasing out the Allegheny Trail business on all assets associated with this operation. All appropriate reserves have been recorded. This decision did not have a negative effect on 2004 profitability, and is not expected to negatively impact 2005 performance. The Company's segment reporting is consistent with the presentation made to the Company's chief operating decision-maker. 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, direct mail letters and the internet, which offer the Company's merchandise. The following table illustrates the percent of net sales that each product line represents.
12/31/04 Percent 12/31/03 Percent of 12/31/02 Percent Net Sales of Total Net Sales Total Net Net Sales of Total Product Line (in millions) Net Sales (in millions) Sales (in millions) Net Sales - --------------- ------------- --------- ------------- ---------- ------------- ---------- Womenswear $ 310.6 62.6% $ 365.9 62.9% $ 358.9 63.1% Menswear 96.1 19.4% 100.6 17.3% 107.4 18.9% Home 64.9 13.1% 68.5 11.8% 59.2 10.4% Crossing Pointe 20.0 4.0% 39.6 6.8% 34.7 6.1% Stores 3.1 0.6% 6.5 1.1% 8.3 1.5% Allegheny Trail 1.4 0.3% .8 .1% N/A N/A ------------- --------- ------------- ---------- ------------- --------- Total $ 496.1 100.0% $ 581.9 100.0% $ 568.5 100.0% ============= ========= ============= ========== ============= =========
9. LONG-LIVED ASSETS PREVIOUSLY CLASSIFIED AS HELD FOR SALE In January 2003, the Company made the decision to close its liquidation outlet store located in Erie, Pennsylvania. This closure was effective at the close of business on March 28, 2003. While the Company continues to hold the assets for sale, the sales process has taken longer than anticipated and the assets are no longer being classified as Held for Sale in accordance with SFAS No. 144. The $1.3 million carrying value of the asset, after considering a $300,773 impairment charge taken in 2003 to reduce the value of the asset to its fair value less costs to sell, is deemed to be stated fairly at December 31, 2004. The $300,773 impairment charge was included in other expense, net in the 2003 Consolidated Statement of Income. 10. VOLUNTARY SEPARATION PROGRAM In the first quarter of 2004, the Company accrued and charged to expense $67,000 in separation costs. The costs were charged to General and Administrative Expense in the income statement. The $67,000 charge represents severance pay, related payroll taxes and medical benefits due the 33 eligible employees who accepted the voluntary separation program offered in connection with closing the Company's Outlet Store located in Warren, Pennsylvania on January 16, 2004. As of the end of the first quarter of 2004, $67,000 had been paid. This liability is considered satisfied. In the first quarter of 2003, the Company accrued and charged to expense $75,000 in separation costs. The costs were charged to General and Administrative Expense in the income statement. The $75,000 charge represents severance pay, related payroll taxes, and medical benefits due the 32 eligible employees who accepted the voluntary separation program offered in connection with closing the Company's Outlet Store located in Erie, Pennsylvania on March 28, 2003. As of the end of the second quarter of 2003, $53,000 had been paid. This liability is considered satisfied and resulted in $22,000 being taken back to income in the second quarter of 2003. In the first quarter of 2001, the Company accrued and charged to expense $2.5 million in separation costs. The costs were charged to General and Administrative Expense in the income statement. The one-time $2.5 million charge represents severance pay, related payroll taxes, and medical benefits due the 56 eligible employees who accepted the voluntary F-20 BLAIR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) separation program rather than relocate or accept other positions in the Company. The program was offered to eligible employees of the Blair Mailing Center from which the merchandise returns operations have been relocated and the mailing operations have been outsourced. As of December 31, 2004, approximately $2.0 million of the $2.5 million has been paid. Approximately $267,000, $281,000, and $336,000 were paid out during 2004, 2003, and 2002, respectively. The following table summarizes the charges to income and related accruals as of December 31, 2004, 2003 and 2002 pertaining to the voluntary separation programs described above.
Blair Mailing Center Erie Outlet Store Starbrick Outlet Store -------------------- ---------------- ---------------------- Accrual at January 1, 2002 $ 1,384,000 $ - $ - Expense - - - Payments 336,000 - - -------------------- ----------------- ---------------------- Accrual at December 31, 2002 1,048,000 - - Expense - 53,000 - Payments 281,000 53,000 - -------------------- ----------------- ---------------------- Accrual at December 31, 2003 767,000 - - Expense - - 67,000 Payments 267,000 - 67,000 -------------------- ----------------- ---------------------- Accrual at December 31, 2004 $ 500,000 $ - $ - ==================== ================= ======================
F-21 BLAIR CORPORATION AND SUBSIDIARIES QUARTERLY RESULTS OF OPERATIONS The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2004 and 2003.
2004 2003 Quarter Ended Quarter Ended March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31 Net Sales........... $ 128,642 $ 126,993 $ 107,074 $ 133,411 $ 137,014 $ 154,345 $ 124,100 $ 166,481 Cost of goods sold.. 63,087 57,892 51,124 62,869 67,418 72,346 60,441 75,504 Net income.......... 571 5,011 2,941 6,346 500 4,101 793 9,132 Basic earnings per share............... 0.07 0.62 0.36 .78 0.06 0.51 0.10 1.15 Diluted earnings per share........... 0.07 0.61 0.36 .77 0.06 0.51 0.10 1.14
Quarter ended December 31, 2004 includes additional net income of $1,000,000, $.12 per basic and diluted share. The additional net income and increase in basic and diluted earnings per share in the quarter was due to reductions in the provisions for doubtful accounts and returns resulting from actual bad debt and returns experience bettering prior estimates. Quarter ended December 31, 2003 includes additional net income of $600,000, $.07 per basic and diluted share. The additional net income and basic and diluted earnings per share in the quarter was due to reductions in the provisions for doubtful accounts and returns resulting from actual bad debt and returns experience bettering prior estimates. F-22 BLAIR CORPORATION AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 2004
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------------------------------------------------------------------------------- ADDITIONS- BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND DEDUCTIONS- AT END OF PERIOD EXPENSES DESCRIBE OF PERIOD ------------- --------------- --------------- -------------- Description Year ended December 31, 2004: Allowance deducted from asset account (customer accounts receivable): For doubtful accounts $ 40,349,957 $ 22,664,048(A) $ 29,187,091(B) $ 33,826,914 For estimated loss on returns 7,123,151 71,666,392 73,691,543(C) 5,098,000 ------------- --------------- --------------- -------------- Total 47,473,108 94,330,440 102,878,634 38,924,914 Allowance deducted from asset account (merchandise inventories) For obsolete inventory 3,600,000 6,329,398 6,329,398(D) 3,600,000 ------------- --------------- --------------- -------------- Total $ 51,073,108 $ 100,659,838 $ 109,208,032 $ 42,524,914 ============= =============== =============== ============== Year ended December 31, 2003: Allowance deducted from asset account (customer accounts receivable): For doubtful accounts $ 40,138,263 $ 31,826,636(A) $ 31,614,942(B) $ 40,349,957 For estimated loss on returns 7,067,965 87,238,648 87,183,462(C) 7,123,151 ------------- --------------- --------------- -------------- Total 47,206,228 119,065,284 118,798,404 47,473,108 Allowance deducted from asset account (merchandise inventories) For obsolete inventory 4,000,000 4,515,882 4,915,882(D) 3,600,000 ------------- --------------- --------------- -------------- Total $ 51,206,228 $ 123,581,166 $ 123,714,286 $ 51,073,108 ============= =============== =============== ============== Year ended December 31, 2002: Allowance deducted from asset account (customer accounts receivable): For doubtful accounts $ 39,088,189 $ 29,986,973(A) $ 28,936,899(B) $ 40,138,263 For estimated loss on returns 6,878,971 85,734,678 85,545,684(C) 7,067,965 ------------- --------------- --------------- -------------- Total 45,967,160 115,721,651 114,482,583 47,206,228 Allowance deducted from asset account (merchandise inventories) For obsolete inventory 4,150,000 5,562,834 5,712,834(D) 4,000,000 ------------- --------------- --------------- -------------- Total $ 50,117,160 $ 121,284,485 $ 120,195,417 $ 51,206,228 ============= =============== =============== ==============
- ------------------------ 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. Note (D) -- Inventory liquidated, net of proceeds received. F-23 EX-10.6 2 j1146201exv10w6.txt EX-10.6 EXHIBIT 10.6 FOURTH AMENDMENT TO CREDIT AGREEMENT This Fourth Amendment to Credit Agreement (the "Fourth Amendment") is dated as of October 28, 2004 and is made by and among BLAIR CORPORATION, a Delaware corporation (the "Borrower"), the Guarantors now or hereafter party thereto, the BANKS under the Credit Agreement (as hereafter defined) and PNC BANK, NATIONAL ASSOCIATION, in its capacity as agent for the Banks under the Credit Agreement (hereinafter referred to in such capacity as the "Agent"). RECITALS: WHEREAS, the Borrower, the Guarantors, the Banks and the Agent entered into that certain Credit Agreement dated as of December 20, 2001, as amended by that Amendment No. 1 to Credit Agreement dated as of July 8, 2002, by that Amendment No. 2 to Credit Agreement dated as of July 25, 2003, and by that Third Amendment to Credit Agreement dated as of September 1, 2004 (as amended to date, the "Credit Agreement"); WHEREAS, the parties to the Credit Agreement desire to amend the Credit Agreement as set forth herein; and WHEREAS, capitalized terms used herein and not otherwise defined herein shall have the meanings given to them under the Credit Agreement. NOW, THEREFORE, in consideration of the foregoing and intending to be legally bound, the parties hereto agree as follows: AMENDMENTS TO THE CREDIT AGREEMENT. 1. Monthly Borrowing Base Certificates, Schedules of Inventory and Payables (Section 7.3.4) Section 7.3.4 (Monthly Borrowing Base Certificates, Schedules of Inventory and Payables) is hereby amended and restated to read as set forth below. "7.3.4 Monthly Borrowing Base Certificates, Schedules Inventory and Payables. As soon as available but in any event by the fifteenth (15th) Business Day of each fiscal month of the Borrower, a Borrowing Base Certificate as of the last day of the immediately preceding fiscal month in the form of Exhibit 7.3.4 hereto appropriately completed, executed and delivered by an Authorized Officer. Within five (5) Business Days of Borrower's receipt of Agent's reasonable request therefor, a detailed sales register, a cash receipts journal and a purchase journal showing sales, receipts and purchases during the immediately preceding month, together with a monthly Schedule of Inventory and Schedule of Payables as of the end of any such month." 2. Exhibit 7.3.4 - Borrowing Base Certificate. Exhibit 7.3.4 to the Credit Agreement is hereby amended and restated in the form attached to this Fourth Amendment. REPRESENTATIONS AND WARRANTIES. A. Warranties Under the Credit Agreement. The representations and warranties of the Loan Parties contained in the Credit Agreement, after giving effect to the amendments thereto on the date hereof, are true and correct on and as of the date hereof with the same force and effect as though made by the Loan Parties on such date, except to the extent that any such representation or warranty expressly relates solely to a previous date. The Loan Parties are in compliance with all terms, conditions, provisions, and covenants contained in the Credit Agreement. B. Power and Authority; Validity and Binding Effect; No Conflict. Each Loan Party has full power to enter into, execute, deliver and carry out this Fourth Amendment, and such actions have been duly authorized by all necessary proceedings on its part. This Fourth Amendment has been duly and validly executed and delivered by each of the Loan Parties. This Fourth Amendment constitutes the legal, valid and binding obligation of each of the Loan Parties which is enforceable against such Loan Party in accordance with its terms. Neither the execution and delivery of this Fourth Amendment, nor the consummation of the transactions herein contemplated will conflict with, constitute a default under or result in any breach of (i) the terms and conditions of any organizational documents of any Loan Party or (ii) any Law or any material agreement or instrument or other obligation to which any Loan Party or any of its Subsidiaries is a party or by which any Loan Party or any of its Subsidiaries is bound, or result in the creation or enforcement of any Lien upon any property of any Loan Party or any of its Subsidiaries other than as set forth herein. C. Consents and Approvals; No Event of Default. No consent, approval, exemption, order or authorization of any Person other than the parties hereto is required by any Law or any agreement in connection with the execution, delivery and carrying out of this Fourth Amendment. No event has occurred and is continuing and no condition exists or will exist after giving effect to this Fourth Amendment which constitutes an Event of Default or Potential Default. Conditions to Effectiveness. This Fourth Amendment shall be effective on the date (the "Effective Date") on which each of the following conditions have been satisfied. The Effective Date shall be the same as the date of this Fourth Amendment first written above: 1. EXECUTION. The Loan Parties, the Banks and the Agent shall have executed this Fourth Amendment. 2. Fees and Expenses. The borrower shall have paid to the agent all fees and expenses due and payable, including reasonable fees of the agent's counsel. REFERENCES TO CREDIT AGREEMENT, LOAN DOCUMENTS. Any reference to the Credit Agreement or other Loan Documents in any document, instrument, or agreement shall hereafter mean and include the Credit Agreement or such Loan Document, including such schedules and exhibits, as amended hereby. In the event of irreconcilable inconsistency between the terms or provisions of this Fourth Amendment and the terms or provisions of the Credit Agreement or such Loan Document, including such schedules and exhibits, the terms and provisions of this Fourth Amendment shall control. FORCE AND EFFECT. Each Loan Party a signatory hereto reconfirms, restates, and ratifies the Credit Agreement, and all other documents executed in connection therewith except to the extent any such documents are expressly modified by this Fourth Amendment and each Loan Party confirms that all such documents have remained in full force and effect since the date of their execution. GOVERNING LAW. This Fourth Amendment shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the internal laws of the Commonwealth of Pennsylvania without regard to its conflict of laws principles. COUNTERPARTS. This Fourth Amendment may be signed in any number of counterparts each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [SIGNATURE PAGE FOLLOWS] The undersigned have executed this Fourth Amendment as of the day and year first above written. BORROWER: BLAIR CORPORATION By: ____________________________________ Title: GUARANTORS: BLAIR HOLDINGS, INC. By: ____________________________________ Title: BLAIR PAYROLL, LLC By: ____________________________________ Title: BLAIR INTERNATIONAL HOLDINGS, INC. By:_____________________________________ Title: BLAIR CREDIT SERVICES CORPORATION By:_____________________________________ Title: ALLEGHENY TRAIL CORPORATION By:_____________________________________ Title: BANKS: PNC BANK, NATIONAL ASSOCIATION, individually and as Agent By: ____________________________________ Title: LASALLE BANK NATIONAL ASSOCIATION By:_____________________________________ Title: HSBC BANK USA, NATIONAL ASSOCIATION, successor by merger to HSBC Bank USA By:_____________________________________ Title: BORROWING BASE CERTIFICATE DATED AS OF: ____________________ In accordance with the terms of Credit Agreement dated as of December 20, 2001 (the "Credit Agreement"), among Blair Corporation (the "Borrower"), the Guarantors party thereto ("the Guarantors"), the various banks party thereto (the "Banks"), and PNC Bank, National Association, Agent (the "Agent"), the Borrower hereby makes the following certification. Capitalized terms used but not otherwise defined herein shall have the meanings given to such terms in the Credit Agreement. INVENTORY 1. Inventory of the Borrower as of the date of this Certificate. Inventory means all of the "inventory" (as such term is defined in the UCC) of the Borrower, including, but not limited to, all merchandise, raw materials, parts, supplies, work-in-process and finished goods intended for sale. $________ 2. Less Ineligible Inventory (without duplication of deductions) (a) Inventory which is not finished goods, raw materials other than supplies, or work-in-process; and including any goods which have been shipped, delivered, sold by, purchased by or provided to one of the Loan Parties on a bill and hold, consignment sale, guaranteed sale, or sale or return basis, or any other similar basis or understanding other than an absolute sale; $________ (b) Inventory which is not new, or of good and merchantable quality, or which represents more than a twelve (12) month supply of such finished goods or raw materials; $________ (c) Inventory which is not located on, or in transit to and so identified on the relevant Schedule of Inventory, premises listed on Schedule A to the Security Agreement; $________ (d) For all periods after sixty (60) days after the Closing Date, Inventory which is located at locations leased to any Loan Party for which the Agent has not received an executed Landlord's Waiver in favor of the Agent substantially in $________ the form of Exhibit 7.1(p) to the Credit Agreement; (e) Inventory which is stored with a bailee, warehouseman, consignee, or similar party unless the Agent has given its prior written consent and the applicable Loan Party has caused such bailee, warehouseman, consignee, or similar party to issue and deliver to the Agent, in form and substance acceptable to the Agent, warehouse receipts or similar type documentation therefor in the Agent's name; $________ (f) Inventory which is not subject to the Agent's and the Banks' Prior Security Interest, or is not subject to any other Lien; $________ (g) Inventory which was manufactured in violation of any federal minimum wage or overtime laws, including, without limitation, the Fair Labor Standards Act, 29 U.S.C. ss.215(a)(1); $________ (h) Inventory which is, or should be, disqualified for any other reason generally accepted in the commercial finance business. $________ 3. Total Ineligible Inventory (sum of items 2(a) - (g)) $________ 4. Total Qualified Inventory (Inventory less Ineligible Inventory) $________ x.50 5. 50% of Qualified Inventory $________ 6. The lesser of $10,000,000 or 50% of Book Value of Qualifying Fixed Assets (as of the most recently ended $________ fiscal quarter) SUMMARY $________ 7. Lesser of Borrowing Base (item 5 plus item 6) or $40,000,000 $________ 8. Revolving Credit Loans Outstanding $________ 9. Swing Loans Outstanding $________ 10. Letters of Credit Outstanding $________ 11. Sum of items 8 through 10 above $________ 12. Excess (deficiency) (item 7 minus item 11) $________ CERTIFIED BY: _________________________________ TITLE: ________________________________________ EX-21 3 j1146201exv21.txt EX-21 EXHIBIT 21 SUBSIDIARIES OF BLAIR CORPORATION Blair Holdings Incorporated (a Delaware corporation); Blair Factoring Company (a Delaware corporation); Blair Payroll LLC (a Delaware limited liability company); Blair Credit Services Corp. (a Delaware corporation); Blair International Holding, Inc. (a Delaware corporation); Blair International Limited (a Hong Kong corporation); Blair International Singapore Pte. Ltd. (a Singapore corporation); JLB Service Bank (a Delaware corporation); Allegheny Trail Corporation (a Delaware corporation). EX-23 4 j1146201exv23.txt EX-23 EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statement on Form S-8 dated July 19, 2000 pertaining to the Blair Corporation Employee Stock Purchase Plan and in the Registration Statement on Form S-8 dated July 19, 2000 pertaining to the Blair Corporation 2000 Omnibus Stock Plan of our reports dated February 23, 2005, with respect to the consolidated financial statements and schedule of Blair Corporation and Subsidiaries, Blair Corporation and Subsidiaries management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Blair Corporation and Subsidiaries, included in the Annual Report (Form 10-K) for the year ended December 31, 2004. /s/ Ernst & Young LLP Buffalo, New York March 1, 2005 EX-31.1 5 j1146201exv31w1.txt EX-31.1 EXHIBIT 31.1 CERTIFICATION I, John E. Zawacki, certify that: 1. I have reviewed this annual report on Form 10-K of Blair Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 1, 2005 By: /s/ John E. Zawacki ------------------------------------ John E. Zawacki President, Chief Executive Officer and Director (Principal Executive Officer) EX-31.2 6 j1146201exv31w2.txt EX-31.2 EXHIBIT 31.2 CERTIFICATION I, Bryan J. Flanagan, certify that: 1. I have reviewed this annual report on Form 10-K of Blair Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 1, 2005 By: /s/ Bryan J. Flanagan ---------------------------------------------- Bryan J. Flanagan Senior Vice President, Chief Financial Officer and Director (Principal Financial Officer) EX-32.1 7 j1146201exv32w1.txt EX-32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Blair Corporation (the "Company") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John E. Zawacki, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. March 1, 2005 /s/ John E. Zawacki ------------------------------------- John E. Zawacki President and Chief Executive Officer A signed original of this written statement required by Section 906, or other document authentication, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by section 906, has been provided to Blair Corporation and will be retained by Blair Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 8 j1146201exv32w2.txt EX-32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Blair Corporation (the "Company") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bryan J. Flanagan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. March 1, 2005 /s/ Bryan J. Flanagan ---------------------------------- Bryan J. Flanagan Senior Vice President and Chief Financial Officer A signed original of this written statement required by Section 906, or other document authentication, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by section 906, has been provided to Blair Corporation and will be retained by Blair Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----