Microsoft Word 10.0.3416;
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period Ended March 31, 2003 Commission File Number 1-878
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BLAIR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 25-0691670
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 HICKORY STREET, WARREN, PENNSYLVANIA 16366-0001
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(Address of principal executive offices) (Zip Code)
(814)723-3600 (Registrant's telephone number, including area code)
Not applicable (Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) YES X NO
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As of May 12, 2003 the registrant had outstanding 8,057,065 shares of its common
stock without nominal or par value.
PART I. FINANCIAL INFORMATION -2-
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
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BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
CONSOLIDATED BALANCE SHEETS -3-
BLAIR CORPORATION AND SUBSIDIARIES
March 31 December 31
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $37,707,060 $49,975,503
Customer accounts receivable, less
allowances for doubtful accounts and
returns of $47,481,843 in 2003 and
$47,206,228 in 2002 146,268,676 149,229,882
Inventories - Note H
Merchandise 61,424,995 55,101,925
Advertising and shipping supplies 16,195,136 19,115,380
------------ ------------
77,620,131 74,217,305
Deferred income taxes - Note G 14,165,000 11,623,000
Prepaid federal and state taxes 701,871 -0-
Prepaid expenses 2,289,062 1,937,635
------------ ------------
Total current assets 278,751,800 286,983,325
Property, plant and equipment:
Land 692,144 692,144
Buildings and leasehold improvements 65,366,299 65,280,676
Equipment 59,316,603 58,956,855
Construction in progress 10,989,271 9,376,463
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136,364,317 134,306,138
Less allowances for depreciation 81,904,048 80,000,142
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54,460,269 54,305,996
Assets held for sale, net of accumulated
depreciation 1,669,299 1,669,299
Trademarks 542,347 560,407
Other long-term assets 506,808 578,405
------------ ------------
TOTAL ASSETS $335,930,523 $344,097,432
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - Note J $15,000,000 $15,000,000
Trade accounts payable 42,291,835 40,805,116
Advance payments from customers 4,968,667 3,959,801
Accrued expenses - Note E 14,653,589 19,970,241
Accrued federal and state taxes -0- 4,587,124
Current portion of capital lease
obligations - Note F 355,928 350,016
------------ ------------
Total current liabilities 77,270,019 84,672,298
Capital lease obligations, less current
portion - Note F 388,822 480,320
Deferred income taxes - Note G 1,339,000 1,611,000
Stockholders' equity:
Common Stock without par value:
Authorized 12,000,000 shares; issued
10,075,440 shares (including shares
held in treasury) - stated value 419,810 419,810
Additional paid-in capital 14,333,503 14,428,903
Retained earnings 285,854,604 286,511,847
Accumulated other comprehensive income (2,493) 12,686
------------ ------------
300,605,424 301,373,246
Less 2,023,392 shares in 2003 and
2,032,610 shares in 2002 of common
stock in treasury - at cost (40,995,507) (41,264,330)
Less receivable and deferred compensation
from stock plans (2,677,235) (2,775,102)
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Total stockholders' equity 256,932,682 257,333,814
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $335,930,523 $344,097,432
============ ============
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME -4-
BLAIR CORPORATION AND SUBSIDIARIES
Three Months Ended
March 31
2003 2002
------------ ------------
Net sales $137,013,544 $135,261,455
Other income - Note I 9,788,345 10,073,077
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146,801,889 145,334,532
Costs and expenses:
Cost of goods sold 67,861,612 64,534,996
Advertising 38,583,609 34,184,362
General and administrative 31,580,760 30,563,710
Provision for doubtful accounts 7,892,259 7,270,302
Interest 89,460 121,031
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146,007,700 136,674,401
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INCOME BEFORE INCOME TAXES 794,189 8,660,131
Income tax expense - Note G 294,000 3,059,000
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NET INCOME $ 500,189 $5,601,131
============ ============
Basic and diluted earnings per share based on
weighted average shares outstanding - Note D $.06 $.70
==== ====
See accompanying notes.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -5-
BLAIR CORPORATION AND SUBSIDIARIES
Three Months Ended
March 31
2003 2002
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Common Stock $ 419,810 $ 419,810
Additional paid-in capital:
Balance at beginning of period 14,428,903 14,589,838
Issuance of Common Stock to
Non-employee director (3,544) -0-
Forfeitures of Common Stock
under Omnibus Stock and Employee
Stock Purchase Plans (11,039) -0-
Exercise of non-qualified stock options
Under Omnibus Stock Plan (104,817) -0-
Tax benefit on exercise of non-qualified
stock options 24,000 -0-
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Balance at end of period 14,333,50 14,589,838
Retained earnings:
Balance at beginning of period 286,511,847 271,954,815
Net income 500,189 5,601,131
Cash dividends - Note B (1,157,432) (1,195,480)
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Balance at end of period 285,854,604 276,360,466
Accumulated other comprehensive income:
Balance at beginning of period 12,686 -0-
Foreign currency translation (15,179) 4,465
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Balance at end of period (2,493) 4,465
Treasury Stock:
Balance at beginning of period (41,264,330) (43,187,542)
Issuance of Common Stock to
Non-employee director 8,119 -0-
Forfeitures of Common Stock
Under Omnibus Stock and Employee Stock
Purchase Plans (26,536) -0-
Exercise of non-qualified stock options
under Omnibus Stock Plan 287,240 -0-
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Balance at end of period (40,995,507) (43,187,542)
Receivable and deferred compensation from stock plans:
Balance at beginning of period (2,775,102) (1,987,850)
Forfeitures of Common Stock
Under Omnibus Stock and Employee Stock
Purchase Plans 8,570 -0-
Amortization of deferred compensation 37,677 -0-
Applications of dividends and cash repayments 51,620 52,087
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Balance at end of period (2,677,235) (1,935,763)
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TOTAL STOCKHOLDERS' EQUITY $256,932,682 $246,251,274
============ ============
Comprehensive income:
Net income $ 500,189 $5,601,131
Adjustment from foreign currency translation (15,179) 4,465
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Comprehensive income $ 485,010 $5,605,596
============ ============
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS -6-
BLAIR CORPORATION AND SUBSIDIARIES
Three Months Ended
March 31
2003 2002
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OPERATING ACTIVITIES
Net income $500,189 $ 5,601,131
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation and amortization 2,022,306 1,992,218
Provision for doubtful accounts 7,892,259 7,270,302
Provision for deferred income taxes (2,814,000) (2,114,000)
Compensation expense (net of
forfeitures) for stock awards 13,247 -0-
Changes in operating assets and
liabilities providing (using) cash:
Customer accounts receivable (4,931,447) 1,068,946
Inventories (3,402,826) 10,102,929
Prepaid expenses and other assets (279,387) (1,040,250)
Trade accounts payable 1,486,387 (14,516,738)
Advance payments from customers 1,008,866 1,776,346
Accrued expenses (5,315,433) 1,780,248
Federal and state taxes (5,264,995) 2,008,265
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NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES (9,084,834) 13,929,397
INVESTING ACTIVITIES
Purchases of property, plant and equipment (2,159,376) (1,209,860)
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NET CASH USED IN INVESTING ACTIVITIES (2,159,376) (1,209,860)
FINANCING ACTIVITIES
Net proceeds from bank borrowings -0- 1,275,000
Principal repayments on capital lease
obligations (85,391) (82,442)
Dividends paid (1,157,432) (1,195,480)
Exercise of non-qualified stock options 182,423 -0-
Repayments of notes receivable from
stock plans 51,620 52,087
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NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (1,008,780) 49,165
EFFECT OF EXCHANGE RATE CHANGES ON CASH (15,453) 3,131
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NET (DECREASE)INCREASE IN CASH AND CASH
EQUIVALENTS (12,268,443) 12,771,833
Cash and cash equivalents at beginning of
year 49,975,503 5,712,495
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $37,707,060 $18,484,328
============ ===========
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -7-
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Blair
Corporation and its wholly-owned subsidiaries have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. For further information refer to the financial statements and footnotes
included in the Company's annual report on Form 10-K for the year ended December
31, 2002.
The consolidated financial statements include the accounts of Blair Corporation
and its wholly-owned subsidiaries. All significant intercompany accounts are
eliminated upon consolidation.
NOTE B - DIVIDENDS DECLARED
2-13-02 $.15 per share 2-21-03 $.15 per share
4-16-02 .15 4-15-03 .15
7-16-02 .15
10-15-02 .15
NOTE C - Stock Compensation
In accordance with the provisions of Statement of Financial Accounting
Statements 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. 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:
Three Months Ended
March 31
2003 2002
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Net income as reported $ 500,189 $5,601,131
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net of
related tax effects 116,271 36,285
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Pro forma net income $ 383,918 $5,564,846
========= ==========
Earnings per share:
Basic - as reported $ .06 $ .70
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Basic - pro forma $ .05 $ .70
========= ==========
Diluted - as reported $ .06 $ .70
========= ==========
Diluted - pro forma $ .05 $ .70
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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: risk-free
interest rates of 4.95% and 5.20% for stock options issued 4/15/02 and 4/16/01,
respectively; dividend yields of 3.11% and 3.50% for stock options issued
4/15/02 and 4/16/01, respectively; volatility factors of the expected market
price of the Company's common stock of .564 and .547 for stock options issued
4/15/02 and 4/16/01, respectively; and a weighted-average expected life of 7
years for the stock options issued 4/15/02 and 4/16/01. The per share fair value
of the options granted was $8.83 and $7.40 for stock options issued 4/15/02 and
4/16/01, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued -8-
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
NOTE D - EARNINGS PER SHARE AND WEIGHTED SHARES OUTSTANDING Earnings per share
are computed in accordance with SFAS No. 128, "Earnings per Share." Basic
earnings per share are computed using the weighted average number of shares of
common stock outstanding during the period. For diluted earnings per share, the
weighted average number of shares includes common stock equivalents related to
stock options.
The following table sets forth the computation of basic and diluted earnings per
share as required by Statement No. 128:
Three Months Ended
March 31
2003 2002
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Numerator:
Net income $ 500,189 $5,601,131
Denominator:
Denominator for basic
earnings per share -
weighted average shares outstanding 8,044,760 7,969,869
Effect of diluted securities:
Employee stock options 31,421 4,704
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Denominator for diluted
earnings per share -
weighted average shares outstanding
and assumed conversions 8,076,181 7,974,573
========= ==========
Basic earnings per share $.06 $.70
========= ==========
Diluted earnings per share $.06 $.70
========= ==========
NOTE E - ACCRUED EXPENSES
Accrued expenses consist of:
March 31 December 31
2003 2002
----------- -----------
Employee compensation $ 9,257,762 $12,923,615
Profit sharing contribution 54,902 2,094,327
Health insurance 1,336,558 1,767,850
Voluntary Separation Program 1,090,417 1,098,103
Taxes, other than taxes on income 1,419,575 919,183
Other accrued items 1,494,375 1,167,163
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$14,653,589 $19,970,241
=========== ===========
NOTE F - LEASES
Capital Leases
The Company leases certain data processing and telephone equipment under
agreements that expire in various years through 2005. 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 March 31, 2003:
2003 $ 309,022
2004 407,948
2005 103,336
---------
820,306
Less amount representing interest (75,556)
---------
Present value of minimum lease payments 744,750
Less current portion (355,928)
---------
Long-term portion of capital lease obligations $388,822
========
Operating Leases
The Company leases certain data processing, office and telephone equipment under
agreements that expire in various years through 2008. The Company has also
entered into several lease agreements for buildings, expiring in various years
through 2012.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -Continued -9-
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
NOTE F LEASES - Operating Leases - continued
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 March 31, 2003:
2003 $ 2,209,330
2004 2,439,373
2005 1,899,810
2006 1,538,994
2007 1,256,813
Thereafter 3,884,551
-----------
$13,228,871
===========
NOTE G - INCOME TAXES
The liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
The components of income tax expense are as follows:
Three Months Ended
March 31
2003 2002
---------- -----------
Currently payable:
Federal $2,658,000 $ 4,851,000
Foreign 125,000 40,000
State 325,000 282,000
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3,108,000 5,173,000
Deferred (2,814,000) (2,114,000)
---------- -----------
$ 294,000 $ 3,059,000
========== ===========
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:
Three Months Ended
March 31
2003 2002
---------- -----------
Statutory rate applied to
pre-tax income $277,966 $3,031,046
State income taxes, net
of federal tax benefit (9,100) 22,100
Other items 25,134 5,854
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$294,000 $3,059,000
========== ===========
In a previous year, the Company incurred a net operating loss of approximately
$21 million in the State of Pennsylvania. Only $20 million of the net operating
loss is available to offset future income in the state because Pennsylvania
limits the annual net operating loss carry forward to $2 million for 10 years. A
deferred tax asset has been established based on the $20 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 future to absorb the net operating loss before
they expire in 2011.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -Continued -10-
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
NOTE G - INCOME TAXES continued
Components of the provision for deferred income tax (benefit) expense are as
follows:
Three Months Ended
March 31
2003 2002
----------- -----------
Advertising costs $(1,115,000) $ (884,000)
Provision for doubtful accounts (180,000) (186,000)
Provision for estimated returns (1,022,000) (673,000)
Severance costs 3,000 29,000
Depreciation (272,000) (242,000)
Other items - net (228,000) (158,000)
----------- -----------
$(2,814,000) $(2,114,000)
=========== ===========
Components of the deferred tax asset and liability under the liability method as
of March 31, 2003 and December 31, 2002 are as follows:
March 31 December 31
2003 2002
----------- -----------
Current net deferred tax asset:
Doubtful accounts $14,228,000 $14,048,000
Returns allowances 2,609,000 1,587,000
Inventory obsolescence 1,693,000 1,527,000
Inventory costs (328,000) (328,000)
Vacation pay 1,670,000 1,670,000
Advertising costs (6,256,000) (7,371,000)
State net operating loss 490,000 490,000
Other items 549,000 490,000
----------- -----------
Total deferred tax asset $14,655,000 $12,113,000
State valuation allowance (490,000) (490,000)
----------- -----------
Deferred tax asset,
net of valuation allowance $14,165,000 $11,623,000
=========== ===========
Long-term deferred tax liability:
Property, plant and equipment $ 1,339,000 $ 1,611,000
============ ===========
NOTE H - INVENTORIES
Inventories are valued at the lower of cost or market. Cost of merchandise
inventories is determined principally on the last-in, first-out (LIFO) method.
Cost of advertising and shipping supplies is determined on the first-in,
first-out (FIFO) method. Advertising and shipping supplies include printed
advertising material and related mailing supplies for promotional mailings which
are generally scheduled to occur within two months. These costs are expensed
when mailed. If the FIFO method had been used for all inventories, inventories
would have increased by approximately $5,676,000 at both March 31, 2003 and
December 31, 2002. The Company has a reserve for slow moving and obsolete
inventory amounting to $4,435,000 at March 31, 2003, $4,000,000 at December 31,
2002 and $4,463,000 at March 31, 2002.
NOTE I - OTHER INCOME Other income consists of:
Three Months Ended
March 31
2003 2002
---------- -----------
Finance charges on time
payment accounts $8,735,247 $ 9,134,044
Commissions earned 222,651 398,631
Other items 830,447 540,402
---------- -----------
$9,788,345 $10,073,077
========== ===========
Finance charges on time payment accounts are recognized on an accrual basis of
accounting.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued -11-
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
NOTE J - FINANCING ARRANGEMENTS
On December 20, 2001, the Company entered into a Credit Agreement with PNC Bank,
National Association, as agent, and certain other banks. The Agreement put in
place a syndicated revolving credit facility of up to $30 million, secured by
inventory and certain other assets of the Company and its subsidiaries. The
revolving credit facility expires on December 20, 2004. At the present time, $28
million of the $30 million is available to the Company. The interest rate is, at
the Company's option, based on a base rate option (greater of Prime or Fed Funds
Rate plus .5%), swing loan rate option (as quoted by PNC Bank), or Euro-rate
option (Euro-rate plus 1.50%) as defined in the Credit Agreement. The Company is
required to meet certain covenants that specifically relate to tangible net
worth, maintaining a defined leverage ratio and fixed charge coverage ratio, and
complying with certain indebtedness restrictions. As of March 31, 2003, the
Company was in compliance with all the Agreement's covenants. At March 31, 2003,
the Company had no borrowings (loans) outstanding and had letters of credit
totaling $11.5 million outstanding, which reduces the amount of borrowings
available under the Credit Agreement. At December 31, 2002, the Company had no
borrowings (loans) outstanding and had letters of credit totaling $16.2 million
outstanding. At March 31, 2002, the Company had borrowings of $1,275,000 (swing
loan) and letters of credit totaling $7.3 million outstanding under the Credit
Agreement. The $1,275,000 swing loan was made on Friday, March 29, 2002 and paid
back on Monday, April 1, 2002.
Also, on December 20, 2001, the Company completed a securitization of up to $100
million in accounts receivable with PNC Bank, National Association, as
administrator, and certain conduit purchasers. The Company sold 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. At March 31, 2003, $50 million of the $100 million was available to
the Company. The interest rate approximates 1-month LIBOR plus the appropriate
spread (55 basis points at March 31, 2003) as defined in the Receivables
Purchase Agreement. The securitization requires certain performance standards
for the Company's accounts receivable portfolio in addition to complying with
the covenants in the Credit Agreement. As of March 31, 2003, the Company was in
compliance with all the requirements of the Receivables Purchase Agreement. At
March 31, 2003, December 31, 2002, and March 31, 2002 the Company had $15
million outstanding, the minimum amount required to be outstanding, under the
Receivables Purchase Agreement, all of which was classified as short-term. On
April 9, 2003, the securitization was amended to increase the available purchase
limit to $70 million and extend the term to April 7, 2006. As this amended
securitization goes into effect, the interest rate which approximates 1-month
libor plus the appropriate spread, will increase as the appropriate spread moves
from 55 basis points to 80 basis points.
NOTE K - NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires testing of goodwill and intangible assets with
indefinite lives for impairment rather than amortizing them. The adoption of
this statement in the first quarter of 2002 had no impact on the Company's
financial results.
Effective January 1, 2002, the Company implemented SFAS No. 143, Accounting for
Asset Retirement Obligations which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the related asset retirement costs. The statement requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued -12-
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
it is incurred and capitalized as part of the carrying amount of the long-lived
asset. When a liability is initially recorded, the entity capitalizes the cost
by increasing the carrying value of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, a gain or loss is recorded. The adoption of this statement did not
have an effect on the Company.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets which supersedes SFAS No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
Although retaining many of the provisions of SFAS No. 121, SFAS No. 144
establishes a uniform accounting model for long-lived assets to be disposed. The
Company's adoption of this statement in the first quarter of 2002 did not have
an impact on the Company's financial results, but does impact the accounting
treatment of the pending sale of the Blair Outlet Store in Erie, Pa. (See Note
L)
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities when the liability is incurred and not as a result
of an entity's commitment to an exit plan. The statement is effective for exit
or disposal activities initiated after December 31, 2002. The adoption of SFAS
No. 146 in the first quarter of 2003 did not have a significant impact on the
Company's financial results.
In December 2002, the FASB issued SFAS No 148, Accounting for Stock-Based
Compensation - Transition and Disclosure an amendment of SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148, which is effective for
years ending after December 15, 2002, provides alternative methods for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and requires prominent disclosure about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company's adoption of SFAS No. 148 in 2002
enhanced stock-based employee compensation disclosures and had no effect on the
method of accounting followed by the Company.
NOTE L - Long-lived AssetS Classified as Held for Sale Upon review of the
Company's inventory liquidation strategy, the Company made the decision in
January 2003 to close its outlet store located in Erie, Pa. This closure was
effective at the close of business on March 28, 2003. The Company intends to
sell the building and believes that the sale will be completed by March, 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 growing e-commerce channel have proven to be
more successful and profitable in moving inventory than the traditional outlet
sales process. The $1,669,299 shown as Assets Held for Sale at both March 31,
2003 and December 31, 2002 consists of the net book value of the land, land
improvements and building. This value is less than fair market value of the
assets, less associated selling costs.
NOTE M - VOLUNTARY SEPARATION PROGRAM
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 one-time $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 March 31, 2003, none of the $75,000 has been paid.
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,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued -13-
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
NOTE M - VOLUNTARY SEPARATION PROGRAM - continued
related payroll taxes and medical benefits due the 56 eligible employees who
accepted the voluntary 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 March 31, 2003,
approximately $1.5 million of the $2.5 million has been paid.
NOTE N - CONTINGENCIES
The Company is involved in certain items of litigation, arising in the normal
course of business. While it cannot be predicted with certainty, management
believes that the outcome will not have a material effect on the Company's
financial condition or results of operations.
NOTE O - USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NOTE P - RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
conform with the current year presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL -14-
CONDITION AND RESULTS OF OPERATIONS
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
Results of Operations
Comparison of First Quarter 2003 and First Quarter 2002
Net income for the first quarter ended March 31, 2003 was $500,189, or $.06 per
basic and diluted share, compared to net income of $5,601,131, or $.70 per basic
and diluted share, for the first quarter ended March 31, 2002. Results for the
first quarter of 2003 reflect increases in cost of goods sold and advertising
expenses. Cost of goods sold increased 5.2% in the first quarter of 2003 as
compared to the first quarter of 2002. Advertising expenses increased 12.9% in
the first quarter of 2003 as compared to the first quarter of 2002.
Net sales for the first quarter of 2003 were 1.3% higher than net sales for the
first quarter of 2002. Actual response rates were lower in the first quarter of
2003 than in the first quarter of 2002 and were at less than expected levels for
the first quarter of 2003. External factors such as increased energy costs, an
unusually long and cold winter, war fears and lower consumer confidence have
contributed to the declining response rates. Gross sales revenue generated per
advertising dollar decreased approximately 9% in the first quarter of 2003 as
compared to the first quarter of 2002. The total number of orders shipped
increased 6% while the average order size decreased 4% in the first quarter of
2003 as compared to the first quarter of 2002. The provision for returned
merchandise as a percentage of gross sales decreased slightly in the first
quarter of 2003 as compared to the first quarter of 2002.
Other income decreased 2.8% in the first quarter of 2003 as compared to the
first quarter of 2002. Decreased finance charges and commissions were primarily
responsible for the lower other income. The lower finance charges resulted from
decreased customer accounts receivable and the lower commissions resulted from
decreased continuity program activity.
Cost of goods sold as a percentage of net sales increased to 49.5% in the first
quarter of 2003 from 47.7% in the first quarter of 2002. The increase in cost of
goods sold reflects an increase in sales generated from promotional activities
to address lower response rates, higher inbound air freight expenses and a
greater mix of outbound packages in excess of one pound that increased shipping
costs. In addition, postal rates increased approximately 10% on June 30, 2002,
which also contributes to the year over year increase in cost of goods sold.
Advertising expenses in the first quarter of 2003 increased 12.9% from the first
quarter of 2002. Strategic increases in catalog and letter mailings to current
and prospective customers account for the majority of the increase. The June 30,
2002 postal rate increase also contributes to this variance.
The total number of catalog mailings released in the first quarter of 2003 was
38% greater than in the first quarter of 2002 (52 million vs. 38 million). The
total number of prospect catalog mailings was 41% greater than in the first
quarter of 2002 (19 million vs. 13 million). Print advertising for Crossing
Pointe is all via catalog and is included in the catalog mailings numbers.
The total number of letter mailings released in the first quarter of 2003 was
15% greater than in the first quarter of 2002 (16 million vs. 14 million).
Letter mailings are most productive when targeting the Company's female
customers and are currently used only to promote our women's apparel lines.
Total volume of the co-op and media advertising programs increased 6% in the
first quarter of 2003 as compared to the first quarter of 2002 (302 million vs.
285 million).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL -15-
CONDITION AND RESULTS OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
Results of Operations - continued
Comparison of First Quarter 2003 and First Quarter 2002 - Continued
The Company launched e-commerce sites for Crossing Pointe
www.crossingpointe.com, and the Blair Online Outlet early in the third quarter
of 2000. The Blair website, www.blair.com, incorporating the Online Outlet, was
launched late third quarter/early fourth quarter of 2000. A redesigned Blair
website was introduced in the first quarter of 2001 featuring improved
navigation and quicker access to the Company's expanded product offerings. In
the first quarter of 2003, the Company generated $18.7 million in e-commerce
sales demand as compared to $13.7 million in the first quarter of 2002. In all
of 2002, the Company generated $65.7 million in e-commerce sales demand.
General and administrative expense increased 3.3% in the first quarter of 2003
as compared to the first quarter of 2002. The higher general and administrative
expense in the first quarter of 2003 was primarily attributable to increased
employee costs and cost incurred to service an expanded credit program.
The provision for doubtful accounts as a percentage of gross credit sales
increased 5.4% in the first quarter of 2003 as compared to the first quarter of
2002. 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). The estimated bad debt rate used in the first quarter of 2003
was approximately 9% higher than the bad debt rate used in the first quarter of
2002. The estimated bad debt rate has increased primarily due to increased
credit offers to both Blair and Crossing Pointe prospects, which traditionally
result in higher bad debts. At March 31, 2003, the delinquency rate of open
accounts receivable was approximately 8% higher than at March 31, 2002. The
charge-off rate for the first quarter of 2003 was 3% greater than the charge-off
rate for the first quarter of 2002. 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 decreased
3% at March 31, 2003 as compared to March 31, 2002. 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.
Interest expense decreased 26% in the first quarter of 2003 as compared to the
first quarter of 2002. Interest expense results primarily from the Company's
required borrowings under the Receivables Purchase Agreement. Interest rates
have been lower in the first quarter of 2003.
Income taxes as a percentage of income before income taxes were 37.0% in the
first quarter of 2003 and 35.3% in the first quarter of 2002. The federal income
tax rate was 35% in both years. The difference in the total income tax rate was
caused by a change in the Company's effective state income tax rate.
Liquidity and Sources of Capital
All working capital and cash requirements for the first three months of 2003
were met. Short-term funding was provided by operating activities, a revolving
line of credit and a securitization of receivables.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL -16-
CONDITION AND RESULTS OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
Liquidity and Sources of Capital - Continued
On December 20, 2001, the Company entered into a Credit Agreement with PNC Bank,
National Association, as agent, and certain other banks. The Agreement put in
place a syndicated revolving credit facility of up to $30 million, secured by
inventory and certain other assets of the Company and its subsidiaries. The
revolving credit facility expires on December 20, 2004. At the present time, $28
million of the $30 million is available to the Company. The interest rate is, at
the Company's option, based on a base rate option (greater of Prime or Fed Funds
Rate plus .5%), swing loan rate option (as quoted by PNC Bank), or Euro-rate
option (Euro-rate plus 1.50%) as defined in the Credit Agreement. The Company is
required to meet certain covenants that specifically relate to tangible net
worth, maintaining a defined leverage ratio and fixed charge coverage ratio, and
complying with certain indebtedness restrictions. As of March 31, 2003, the
Company was in compliance with all the Credit Agreement's covenants. At March
31, 2003, the Company had no borrowings (loans) outstanding and had letters of
credit totaling $11.5 million outstanding, which reduces the amount of
borrowings available, under the Credit Agreement. At December 31, 2002, the
Company had no borrowings (loans) outstanding and had letters of credit totaling
$16.2 million outstanding. At March 31, 2002, the Company had borrowings of
$1,275,000 (swing loan) and letters of credit totaling $7.3 million outstanding
under the Credit Agreement. The $1,275,000 swing loan was made on Friday, March
29, 2002 and paid back on Monday, April 1, 2002.
Also, on December 20, 2001, the Company completed a securitization of up to $100
million in accounts receivable with PNC Bank, National Association, as
administrator, and certain conduit purchasers. The Company sold 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 Receivable 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. At March 31, 2003, $50 million of the $100 million was available to
the Company. The interest rate approximates 1-month LIBOR plus the appropriate
spread (55 basis points at March 31, 2003) as defined in the Receivables
Purchase Agreement. The securitization requires certain performance standards
for the Company's accounts receivable portfolio in addition to complying with
the covenants in the Credit Agreement. As of March 31, 2003, the Company was in
compliance with all the requirements of the Receivables Purchase Agreement. At
March 31, 2003, December 31, 2002, and March 31, 2002, the Company had $15
million outstanding, the minimum amount required to be outstanding, under the
Receivables Purchase Agreement, all of which was classified as short-term. On
April 9, 2003, the securitization was amended to increase the available purchase
limit to $70 million and extend the term to April 7, 2006. As this amended
securitization goes into effect, the interest rate which approximates 1-month
libor plus the appropriate spread, will increase as the appropriate spread will
move from 55 basis points to 80 basis points.
The ratio of current assets to current liabilities was 3.61 at March 31, 2003,
3.39 at December 31, 2002 and 3.72 at March 31, 2002. Working capital decreased
$829,246 in the first quarter of 2003 primarily due to the purchases of
property, plant and equipment. The 2003 decrease was primarily reflected in
decreased cash
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL -17-
CONDITION AND RESULTS OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
Liquidity and Sources of Capital - Continued
and cash equivalents exceeding decreased accruals for expenses and federal
and state taxes.
Merchandise inventory turnover was 3.5 at March 31, 2003, 3.4 at December 31,
2002 and 2.6 at March 31, 2002. Merchandise inventory as of March 31, 2003 was
11% higher than at December 31, 2002 and 8% lower than at March 31, 2002. The
merchandise inventory levels are net of the Company's reserve for inventory
obsolescence. The reserve totaled $4.4 million at March 31, 2003, $4.0 million
at December 31, 2002 and $4.5 million at March 31, 2002. Inventory write-offs
and write-downs (reductions to below cost) charged against the reserve for
obsolescence were $0.6 million in the first quarter of 2003 and $1.6 million in
the first quarter of 2002. 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 four product lines. The fourth product line, Crossing Pointe, was
added in the third quarter of 2000 and is becoming a significant revenue source.
Home net sales as a percentage of total net sales were 13.5% ($18.4 million) in
the first quarter of 2003 as compared to 10.2% ($13.8 million) in the first
quarter of 2002. Menswear net sales as a percentage of total net sales were
15.7% ($21.6 million) in the first quarter of 2003 as compared to 17.5% ($23.6
million) in the first quarter of 2002. Womenswear net sales as a percentage of
total net sales were 63.1% ($86.4 million) in the first quarter of 2003 as
compared to 67.6% ($91.5 million) in the first quarter of 2002. Crossing Pointe
net sales as a percentage of total net sales were 7.7% ($10.6 million) in the
first quarter of 2003 as compared to 4.7% ($6.3 million) in the first quarter of
2002. Home merchandise inventory totaled $4.8 million at March 31, 2003, $5.0
million at December 31, 2002 and $4.2 million at March 31, 2002. Menswear
merchandise inventory was $12.6 million at March 31, 2003, $11.0 million at
December 31, 2002 and $11.9 million at March 31, 2002. Womenswear merchandise
inventory was $35.5 million at March 31, 2003, $32.1 million at December 31,
2002 and $46.8 million at March 31, 2002. Crossing Pointe merchandise inventory
was $8.5 million at March 31, 2003, $7.0 million at December 31, 2002 and $3.9
million at March 31, 2002.
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 credit card customers. The benefit from the increased
sales volume achieved by offering Blair Credit is significant and more than
outweighs the cost of the credit program. The cost and/or contribution of the
credit program itself can be quickly assessed by comparing finance charges
(included in other income) to the provision for doubtful accounts. For the first
quarter of 2003, finance charges were $8.7 million and the provision for
doubtful accounts was $7.9 million (net of $0.8 million). For the first quarter
of 2002, finance charges were $9.1 million and the provision for doubtful
accounts was $7.3 million (net of $1.8 million). The assessments do not take
into consideration the administrative cost of the credit program (included in
general and administrative expense), the cost of money and the impact on sales.
The Company's gross credit sales increased 3.0% in the first quarter of 2003 as
compared to the first quarter of 2002.
The Company has added new facilities, modernized its existing facilities and
acquired new cost-saving equipment during the last several years. Capital
expenditures for property, plant and equipment totaled $2.2 million during the
first quarter of 2003 and $1.2 million during the first quarter of 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL -18-
CONDITION AND RESULTS OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
Liquidity and Sources of Capital - Continued
Capital expenditures had been projected to be $15 million plus for each of the
years 2001 and 2002 and nearly $10 million for 2003. However, capital
expenditures for 2001 were delayed due to economic conditions. This included
slowing the implementation of the previously announced modernization and
enhancement of the Company's fulfillment operations. The fulfillment project is
expected to be completed around mid-year 2003 at a total cost of approximately
$15 million, down from earlier estimates of $21 million.
Upon review of the Company's inventory liquidation strategy, the Company made
the decision in January 2003 to close its outlet store located in Erie, Pa. This
closure was effective at the close of business on March 28, 2003. The Company
intends to sell the building and believes that the sale will be completed by
March, 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 growing e-commerce channel have proven
to be more successful and profitable in moving inventory than the traditional
outlet sales process. The $1,669,299 shown as Assets Held for Sale at both March
31, 2003 and December 31, 2002 consists of the net book value of the land, land
improvements and building. This value is less than fair market value of the
assets, less associated selling costs.
The Company has contractual obligations consisting of capital leases for data
processing and telephone equipment, and operating leases for buildings and data
processing, office and telephone equipment.
Payments Due by Period
Contractual
Obligations Total 2003 2004-2005 2006-2007 Thereafter
----------- ----------- ---------- ---------- ---------- ----------
Capital
lease Obligations $ 744,750 $ 264,581 $480,169 --- ---
Operating
leases 13,228,871 2,209,330 4,339,183 2,795,807 3,884,551
----------- ---------- ---------- ---------- ----------
Total $13,973,621 $2,473,911 $4,819,352 $2,795,807 $3,884,551
=========== ========== ========== ========== ==========
The Company has other commercial commitments consisting of a revolving credit
facility of up to $30 million and a securitization of up to $100 million in
accounts receivable.
Amount of Commitment
Expiration Per Period
Other Total
Commercial Amounts Less than 1 - 3 4 - 5 After 5
Commitments Committed 1 year years years Years
---------------- ----------- ---------- ----------- ----- -------
Line of Credit-
Revolving $28,000,000 -0- $28,000,000 -0- -0-
Line of Credit-
Securitization
effective
4/9/2003 70,000,000 -0- 70,000,000 -0- -0-
----------- --- ----------- --- ---
Total $98,000,000 -0- $98,000,000 -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 doesn't expect to
be in default of any of the provisions of the credit facilities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL -19-
CONDITION AND RESULTS OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
Liquidity and Sources of Capital - continued
The Company continues to have significant deferred tax assets primarily
resulting from reserves against accounts receivable. The Company believes these
assets are realizable based upon past earnings and availability in the
carry-back period.
The Company recently declared a quarterly dividend of $.15 per share payable on
June 15, 2003. 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".
The Company has, from the fourth quarter of 1996 through the year 2000,
repurchased a total of 1,620,940 shares of its Common Stock. No shares were
repurchased in 2001, 2002, or in the first quarter of 2003.
Future cash needs will be financed by cash flow from operations, the existing
borrowing arrangement and, if needed, other financing arrangements that may be
available to the Company. The Company's current projection of future cash
requirements, however, may be affected in the future by numerous factors,
including changes in customer payments on accounts receivable, consumer credit
industry trends, sales volume, operating cost fluctuations, 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" in the
Company's 2002 Annual Report. 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 accounts and returns and the reserve for inventory
obsolescence. The Company's senior financial management reviews the critical
accounting policies and estimates with the Audit Committee of the Board of
Directors.
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 2002 level of credit
sales and finance charges, net income would change by approximately $2.5
million, or $.31 per share, from a 1% change in the bad debt rate.
The allowance for returns is a deduction from 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 returns that will occur after March 31, 2003 from sales
prior to April 1, 2003. A change in the returns rate would cause changes in the
provision for returns and the allowance for returns. Based on the Company's 2002
level of sales, net income would change by approximately $2.8 million, or $.35
per share, from a 1% change in the returns rate.
The reserve for inventory obsolescence and related items, inventory levels and
write-downs, are discussed in "Liquidity and Sources of Capital" and "Future
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL -20-
CONDITION AND RESULTS OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
Critical Accounting Policies - continued
Considerations". The Company feels that the reserve for inventory obsolescence
is sufficient to cover the write-offs and write-downs that will occur after
March 31, 2003 on merchandise inventory as of March 31, 2003. 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 2002 level of merchandise subject
to obsolescence, net income would change by approximately $1.8 million, or $.22
per share, from a 1% change in the obsolescence rate.
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 have moderated over the
reporting period. 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
$97 million for postage and delivery services in 2002.
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
remained relatively constant-$5.7 million at March 31, 2003 and at December 31,
2002. At March 31, 2002, the LIFO reserve was $5.4 million.
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
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. Statement No. 142 requires testing of goodwill and intangible assets
with indefinite lives for impairment rather than amortizing them. The
adoption of this statement in the first quarter of 2002 had no impact on the
Company's financial results.
Effective January 1, 2002, the Company implemented SFAS No. 143, Accounting for
Asset Retirement Obligations which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the related asset retirement costs. The statement requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred and capitalized as part of the carrying amount of the long-
lived asset. When a liability is initially recorded, the entity capitalizes the
cost by increasing the carrying value of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL -21-
CONDITION AND RESULTS OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
Accounting Pronouncements - continued
cost is depreciated over the useful life of the related asset. Upon settlement
of the liability, a gain or loss is recorded. The adoption of this statement did
not have an effect on the Company.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets which supersedes SFAS No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
Although retaining many of the provisions of SFAS No. 121, SFAS No. 144
establishes a uniform accounting model for long-lived assets to be disposed. The
Company's adoption of this statement in the first quarter of 2002 did not have
an impact on the Company's financial results, but does impact the accounting
treatment of the pending sale of the Blair Outlet Store in Erie, Pa.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities when the liability is incurred and not as a result
of an entity's commitment to an exit plan. The statement is effective for exit
or disposal activities initiated after December 31, 2002. The adoption of SFAS
No. 146 in the first quarter of 2003 did not have a significant impact on the
Company's financial results.
In December 2002, the FASB issued SFAS No 148, Accounting for Stock-Based
Compensation - Transition and Disclosure an amendment of SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148, which is effective for
years ending after December 15, 2002, provides alternative methods for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and requires prominent disclosure about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company's adoption of SFAS No. 148 in 2002
enhanced stock-based compensation disclosures and had no effect on the method of
accounting followed by the Company.
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, a declining labor pool, 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 60,
low-to-moderate income" market and in the "60+, low-to-moderate income" market.
The "40 to 60" market is the fastest growing segment of the population. Also,
customers in the "low-to-moderate income" market tend to be more credit-needy
and utilize Blair credit to a greater degree. Success of the Company's marketing
strategy requires investment in database management, financial and operating
systems, prospecting programs, catalog marketing, new product lines, telephone
call centers, e-commerce, fulfillment operations and credit management.
Management believes that these investments should improve Blair Corporation's
position in new and existing markets and provide opportunities for future
earnings growth.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL -22-
CONDITION AND RESULTS OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
Future Considerations - continued
The Company has a working arrangement with accomplished actress, artist, author
and mother, Jane Seymour, to launch the "Jane Seymour Signature Collection" of
women's apparel. The Jane Seymour inspired fashions are being sold exclusively
through the Company's Crossing Pointe catalog and website
(www.crossingpointe.com). The first "Jane Seymour Signature Collection" fashions
previewed in early January 2002 on the Crossing Pointe website and debuted in
the Crossing Pointe Spring 2002 Catalog mailed at the end of January 2002.
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, the following sections of the report:
- The paragraph on the provision for doubtful accounts in the Results of
Operations, Comparison of First Quarter 2003 and First Quarter 2002.
- Liquidity and Sources of Capital.
- Critical Accounting Policies.
- The Impact of Inflation and Changing Prices.
- Future Considerations.
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.
ITEM 3. 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.
ITEM 4. CONTROLS AND PROCEDURES -23-
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
As of a date within 90 days of the filing date of this report, based on an
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c)under the Securities Exchange Act of 1934) 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.
PART II. OTHER INFORMATION -24-
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2003
Item 1. Legal Proceedings
-----------------
The Company is from time to time a party to ordinary routine litigation
incidental to various aspects of its operations. Management is not currently
aware of any litigation that will have a material adverse impact on the
Company's financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not Applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable.
Item 5. Other Information
-----------------
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
3.1 Restated Certificate of Incorporation(1)
3.2 Amended Bylaws of Blair Corporation(2)
4 Specimen Common Stock Certificate(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)
11 Statement regarding computation of per share earnings(7)
(b) Reports on Form 8-K
-------------------
On February 7, 2003, the Company filed a Form 8-K announcing the date,
time and location of its annual meeting. The Company further announced
the retirement of Murray K. McComas as Chairman of the Board in
conjunction with the nomination of his successor, Craig N. Johnson.
Finally, the Company announced that four members of the Board of
Directors would be retiring from the Board as of the annual meeting
date. The retiring directors include David A. Blair, Robert W. Blair,
Kent R. Sivillo and Blair T. Smoulder.
On April 24, 2003, the Company filed a Form 8-K announcing its
earnings for the three months ended March 31, 2003.
------------------
(1) Incorporated by reference to Exhibit A to the Quarterly Report on Form 10-Q
of the Company filed with the SEC on August 10, 1995 (SEC File No. 1-878).
(2) Incorporated by reference to Exhibit 4.3 to the Form S-8 Registration
Statement filed with the SEC on July 19, 2000 (SEC File No. 333-41770).
(3) Incorporated by reference to Exhibit 4.1 to the Form S-8 Registration
Statement 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 Exhibit A to the Company's Proxy
Statement filed with the SEC on March 17, 2000 (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 Note D of the financial statements included
herein.
-25-
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLAIR CORPORATION
(Registrant)
Date May 12, 2003 By KENT R. SIVILLO
------------------------ ---------------------------
KENT R. SIVILLO
Vice President-Finance
(Chief Accounting Officer)
By BRYAN J. FLANAGAN
---------------------------
BRYAN J. FLANAGAN
Senior Vice President and Chief
Financial Officer
-26-
CERTIFICATION
I, John E. Zawacki, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Blair Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
John E. Zawacki
-----------------------
John E. Zawacki
President and
Chief Executive Officer
-27-
CERTIFICATION
I, Bryan J. Flanagan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Blair Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
Bryan J. Flanagan
-------------------------------
Bryan J. Flanagan
Senior Vice President and
Chief Financial Officer
-28-
Exhibit 99.1
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 Quarterly Report of Blair Corporation (the "Company") on
Form 10-Q for the period ended March 31, 2003 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.
May 12, 2003 JOHN E. ZAWACKI
------------ -----------------------
John E. Zawacki
President and
Chief Executive Officer
-29-
Exhibit 99.2
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 Quarterly Report of Blair Corporation (the "Company") on
Form 10-Q for the period ended March 31, 2003 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.
May 12, 2003 BRYAN J. FLANAGAN
------------ -------------------------
Bryan J. Flanagan
Senior Vice President and
Chief Financial Officer