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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, 2003 Commission file number 1-878
BLAIR CORPORATION
Incorporated in Delaware I.R.S. Employer Identification Number:
220 Hickory Street 25-0691670
Warren, Pennsylvania 16366
(814) 723-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS ON WHICH REGISTERED NAME OF EACH EXCHANGE
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. [ ]
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, 2003 was approximately $178,892,795. There were
8,126,401 shares of common stock outstanding as of March 5, 2004 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 March 5, 2004 was $217,299,963.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2004 Annual Meeting of Stockholders (the
"Proxy Statement") are incorporated by reference into Part III of this Form
10-K.
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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 12% in 2003, 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 2,600
people. None of the Company's employees are subject to collective bargaining
agreements.
(b) INFORMATION REGARDING INDUSTRY SEGMENTS.
The Company's business consists of one reportable segment, which is direct mail,
e-commerce and retail merchandising of men's and women's fashion apparel and
home products. The Company's segment reporting is consistent with the
presentation made to the Company's chief operating decision makers.
(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) and are mailed directly to existing and
prospective customers. Sales of the Menswear and Womenswear products, including
the Crossing Pointe product line which was introduced in 2000 and the Allegheny
Trail business which was introduced in June 2003, accounted for 88% of the
Company's total sales in 2003, and sales of home products accounted for the
remaining 12%. 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 2003 generating over $84 million in
sales demand, approximately 12% of the Company's total gross sales, as compared
to approximately $66 million in sales demand or 10% in 2002. The Company
launched e-commerce Web sites for Blair www.blair.com and Crossing Pointe
www.crossingpointe.com 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. Prior to the second quarter of 2001, letter mailings
originated from the Company's former Mailing Center in nearby Irvine,
Pennsylvania. In the second quarter of 2001, the mailing operations were
outsourced and in the third quarter of 2001, the merchandise returns operations
that were located in the former Mailing Center were relocated to the Company's
new Returns Center in Erie, Pennsylvania. 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. The Company serves customers throughout the United States.
The Company's Web sites enable it to more efficiently promote and liquidate
discontinued, overstocked and returned merchandise. The Delaware retail store is
the only Company retail facility located outside of the Company's home state of
Pennsylvania.
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 - its unique combination of product, quality,
price, credit, guarantee and service.
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During 2003, 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.
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 core 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.
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.
In October 2001, the Company announced a partnership with actress, artist and
author, Jane Seymour, to launch the "Jane Seymour Signature Collection" of
women's apparel. The Jane Seymour fashions have been sold exclusively through
the Company's Crossing Pointe catalog and Web site (www.crossingpointe.com). The
Company will not be renewing its partnership agreement with Ms. Seymour when it
expires in September 2004.
(d) FOREIGN OPERATIONS AND EXPORT SALES.
The Company does not derive any revenue from sales of merchandise outside of the
United States.
The Company's International Trade Offices, the Company's only foreign
operations, directly source more than 33% 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.
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 (former Mailing Center) (Route 62, Irvine,
Pennsylvania).
4. Blair Warehouse Outlet (Route 62, Starbrick, Pennsylvania).
5. Blair Warehouse Outlet (Millcreek Mall, Erie, Pennsylvania).
6. Bell Warehouse Building (Liberty Street, Warren, Pennsylvania).
7. Starbrick Warehouse Building (Route 62, Starbrick, Pennsylvania).
The Blair Warehouse Outlet buildings in Starbrick and Erie Pennsylvania are not
currently being used by the Company. The Company is currently seeking
alternative uses for the Starbrick facility and holds the Erie Outlet as an
asset held for sale. The Company leases the following properties:
1. Blair Retail Store (Wilmington, Delaware).
2. Telephone Call Center (Erie, Pennsylvania).
3. Telephone Call Center (Franklin, Pennsylvania).
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4. Blair Retail Store (Grove City, Pennsylvania).
5. Blair Returns Center (Erie, Pennsylvania).
6. International Trade Offices (Hong Kong, Taiwan, Singapore, India, Korea and
China).
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. However, the Company's marketing strategy
and potential sales growth may require expansion of the Company's customer
service and call center capabilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than legal
proceedings occurring in the ordinary course of business. Management believes
that none of these legal proceedings, individually or in the aggregate, will
have a material adverse impact on the results of operations or financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The 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, 2003
was 2,356.
2003 2002
----------------------------- ----------------------------
Sales Price Dividends Sales Price Dividends
High Low Declared High Low Declared
---- --- --------- ---- --- ---------
First Quarter $24.800 $21.720 $.15 $22.450 $16.500 $.15
Second Quarter 24.730 20.600 .15 25.580 18.250 .15
Third Quarter 23.000 20.220 .15 26.800 19.250 .15
Fourth Quarter 25.700 21.150 .15 25.450 18.250 .15
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 2003 2002 2001 2000 1999
- ---------------------- ---- ---- ---- ---- ----
Net sales.................. $581,939,971 $568,545,582 $580,700,163 $574,595,907 $522,197,334
Net income................. 14,526,182 19,135,556 9,292,146 21,104,444 15,312,689
Total assets .............. 345,975,803 344,097,432 324,113,329 356,506,152 312,954,542
Long-term debt ............ -0- -0- -0- -0- 10,000,000
Per share:
Basic earnings.......... 1.82 2.39 1.17 2.63 1.84
Diluted earnings ....... 1.81 2.38 1.17 2.63 1.84
Cash dividends
declared............ .60 .60 .60 .60 .60
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The year 2003 was the third consecutive difficult year for the direct marketing
industry. During this period, the Company has continued to invest in operational
enhancements as well as its customer file in order to better position itself to
meet near-term challenges and achieve long-term growth. During 2003, the Company
completed its enhanced automated fulfillment project which significantly
contributed to an overall improvement in the operating efficiencies of its
distribution capabilities and a reduction in backlog. In addition, the Company
incurred additional selling expenses in 2003 as a result of its strategic
advertising initiatives including additional catalog mailings to current and
prospective customers intended to maintain the customer file and improve
inventory management. A decline in response rates compared to the prior year
resulted in a reduction of advertising efficiency.
During 2003, the Company laid the groundwork for two new initiatives planned for
2004. These initiatives include Allegheny Trail Corporation, the Company's
wholesale business targeting outdoor sporting goods and recreational retailers,
and the re-launch of the Company's Irvine Park catalog, aimed at a younger, more
affluent menswear customer. Start-up costs associated with these initiatives are
anticipated to adversely impact earnings in the first quarter of 2004.
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
strategic 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 $2.9 million or 7.2% to $43.6 million in
2003 as compared to 2002. 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 increased $7.2 million or 2.7% to $277.5 million in 2003
compared to 2002. As a percentage of net sales, cost of goods sold increased to
47.7% in 2003 from 47.5% 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 shipments 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
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circulation of the co-op and media advertising programs increased by 89.4
million pieces or 9.8% in 2003 as compared to 2002.
The Company launched e-commerce sites for Blair www.blair.com and Crossing
Pointe www.crossingpointe.com in the third quarter of 2000. In 2003, the Company
generated $84.3 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, 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. Both
statistics reflect 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 expense decreased $607,000 or 63.4% to $351,000 in 2003 as compared to
2002. Interest expense for 2002 included an amount attributable to an IRS tax
settlement. Interest expense results primarily from the Company's borrowings
necessary to finance customer accounts receivable, inventories and growth
initiatives. 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.
Income taxes as a percentage of income before income taxes were 37.3% in 2003
and 38.5% in 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.
COMPARISON OF 2002 AND 2001
Net income for 2002 increased 106% to $19. 1 million , or $2.39 basic earnings
per share, $2.38 diluted earnings per share, as compared to $9.3 million, or
$1.17 basic and diluted earnings per share, in 2001. The improved net income in
2002 resulted primarily from decreases in operating costs, cost of goods sold
and the provision for doubtful accounts. Operating costs, which include
advertising, general and administrative and interest expenses, decreased 7.0% in
2002 as compared to 2001. Cost of goods sold as a percentage of net sales
decreased to 47.5% for 2002 from 49.2% for 2001. The provision for the doubtful
accounts decreased 4.3% in 2002 as compared to 2001. The year 2001 included $4
million of interest income resulting from a
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favorable Internal Revenue tax settlement. The one-time gain in interest income
increased net income for 2001 by $2.6 million, $.32 basic and diluted earnings
per share. In addition, 2001 also included a $2.5 million charge attributable to
the Company's voluntary separation program. The one-time charge decreased net
income for 2001 by $1.5 million, $.19 basic and diluted earnings per share.
Net sales for 2002 decreased $12.2 million to $568.5 million or 2.1% lower than
net sales for 2001. Actual response rates in 2002 were higher than in 2001 and
were higher than expected levels for 2002. Gross sales revenue generated per
advertising dollar increased 12.7% in 2002 as compared to 2001. The provision
for returned merchandise as a percentage of gross sales decreased slightly in
2002 as compared to 2001. The decrease in sales was attributable to several
factors, including weaker economic conditions and a softer retail market .
Additionally, the Company intentionally reduced advertising expenditures and did
not mail to less productive and less profitable customers, who are greater
credit risks.
Other income decreased approximately $7.1 million or 14.9% to $40.6 million in
2002 as compared to 2001. Decreased finance charges and commissions in 2002 and
a one-time $4 million interest payment received on an Internal Revenue tax
settlement in 2001 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 decreased $15.6 million to $270.3 million in 2002 compared to
2001. As a percentage of net sales, cost of goods sold decreased to 47.5% for
2002 from 49.2% for 2001. The improvement in cost of goods sold is attributable
to stable or declining product costs, the Company's efforts to improve gross
margins, the lower rate of merchandise returned and more effective inventory
management resulting in lower inventory liquidation costs. The Company's
International Trade Offices, the Company's only foreign operations, directly
source more than 30% of the Company's merchandise from foreign suppliers. 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
amounts are converted to U.S. dollars for financial statement purposes.
Advertising expense in 2002 decreased $23.2 million or 13.7% to $145.9 million.
Reductions in advertising volume and paper costs were primarily responsible for
the lower advertising cost in 2002. The Company's cost of paper fell more than
20% from the beginning of 2001 up to December 31, 2002.
The total number of catalog mailings released in 2002 was 1 million or .5% less
than those released in 2001. The total number of letter mailings released in
2002 was 28.6 million or 34.5% less than those released in 2001. Total
circulation of the co-op and media advertising programs decreased 272.8 million
pieces or 23.0% in 2002 as compared to 2001.
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 Web site, www.blair.com, incorporating the Online Outlet, was
launched late third quarter/early fourth quarter of 2000. A redesigned Blair Web
site was introduced in the first quarter of 2001 featuring improved navigation
and quicker access to the Company's expanded product offerings. In 2002, the
Company generated $65.6 million in e-commerce sales demand as compared to over
$37 million in 2001.
General and administrative expense increased by $3.6 million or 2.8% to $130.9
million in 2002 as compared to 2001. The increase in general and administrative
expense in 2002 is attributable to increased employee costs, primarily benefits
determined by corporate performance (profit sharing and incentive bonus) and
health insurance. General and administrative expense in 2001 was affected by the
one-time $2.5 million charge for the Company's voluntary separation program. The
$2.5 million charge represents the cost of the severance pay, 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 former Blair
Mailing Center from which the merchandise returns operations have been relocated
and the mailing operations have been outsourced. As of December 31, 2002, $1.4
million of the $2.5 million charge had been paid.
The provision for doubtful accounts decreased $1.3 million from $31.3 million to
$30.0 million or 4.3% in 2002 compared to 2001. The provision for doubtful
accounts as a percentage of gross credit sales decreased 65 basis points in 2002
as compared to 2001.
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, excluding Crossing Pointe credit
sales, used in 2002 was approximately 21 basis points lower in 2002 as compared
to 2001. At December 31, 2002, the delinquency rate of open accounts receivable,
excluding Crossing Pointe, was 21 basis points lower than at December 31, 2001.
The delinquency rate for Crossing Pointe was 251 basis points higher. Crossing
Pointe is more weighted to prospects and Crossing Pointe credit sales increased
more than 123% in 2002 as compared to 2001. The charge-off rate for 2002 was
approximately the same as the charge-off rate for 2001.
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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 was approximately the same at December 31,
2002 as at December 31, 2001.
Credit granting, collection and behavioral 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 expense decreased $1.2 million or 55.3% to $1 million in 2002 as
compared to 2001. Interest expense results primarily from the Company's
borrowings necessary to finance customer accounts receivable, inventories and
growth initiatives. At December 31, 2002, inventories were 22.2% lower and gross
customer accounts receivable were 3.8% lower as compared to December 31, 2001.
As a result, average borrowings were much lower in 2002 than in 2001. Also,
interest rates were substantially lower throughout 2002.
Income taxes as a percentage of income before income taxes were 38.5% in 2002
and 26.9% in 2001. The federal income tax rate was 35% in both years. Income
taxes in 2001 were reduced by $1.5 million due to an Internal Revenue tax
settlement. In total, the Company recovered approximately $11 million in federal
and state tax refunds in 2001.
LIQUIDITY AND SOURCES OF CAPITAL
All working capital and cash requirements for the year 2003 were met using funds
from operations and surplus cash.
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. The Credit Agreement was
amended on July 25, 2003 to increase the commitments to the facility from $28
million to $30 million. As of December 31, 2003, the facility had lender
commitments of $30 million. For each borrowing tranche, the Company may select
from three options to determine the interest rate. The options are: a base rate
option (greater of Prime or Fed Funds Rate plus .5% as of December 31, 2003);
swing loan rate option (as quoted by PNC Bank); or Euro-rate option as defined
in the Credit Agreement. The Company is required to meet certain covenants that
relate to tangible net worth, maintain a defined leverage ratio and fixed charge
coverage ratio, and comply with certain indebtedness restrictions. As of
December 31, 2003, the Company was in compliance with all the Agreement's
covenants. At December 31, 2003, the Company had no borrowings (loans)
outstanding and had letters of credit totaling $20.9 million outstanding, which
reduces the amount of borrowings available, under the Credit Agreement. At
December 31, 2002, the Company had no borrowings (loans), but had letters of
credit outstanding of $16.2 million.
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. At December 20, 2001, the
securitization had initial lender commitments of $50 million. On April 9, 2003,
the lender commitment level increased to $70 million. Also, the securitization
was amended to extend the term to April 7, 2006 and the interest rate charged
was amended from 1-month LIBOR plus 55 basis points to 1-month LIBOR plus 80
basis points. The Company sells all right, title and interest in and to certain
of its accounts receivables 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 the
present time, $70 million of the $100 million is available to the Company. The
remaining $30 million is not subscribed to at the present time. 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 December 31, 2003, the Company was in compliance with all the
requirements of the Receivables Purchase Agreement. At both December 31, 2003
and December 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. At December 31, 2003 and 2002, the
weighted average interest rate was 1.97% and 2.38%, respectively. Interest paid
during 2003, 2002 and 2001 was approximately $282,000, $366,000, and $2,050,000,
respectively.
The ratio of current assets to current liabilities was 3.92 at December 31,
2003, 3.41 at December 31, 2002, and 3.41 at December 31, 2001. Working capital
increased $13.9 million to $217.9 million in 2003. The 2003 increase was
primarily attributable to an $11.4 million increase in inventories, a $5.4
million increase in customer accounts receivable and a $9.6 million reduction in
accounts payable and related accruals, offset partially by a $13.6 million
reduction in cash and cash equivalents.
8
Merchandise inventory turned 3.4 times in 2003, 3.4 times in 2002, and 2.4 times
in 2001. Merchandise inventory as of December 31, 2003 increased 19.8% from
December 31, 2002 and decreased 24.8% from December 31, 2001. Merchandise
inventory levels have been generally higher from December 31, 2002 through
December 31, 2003 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,
2003, $4.0 million at December 31, 2002 and $4.2 million at December 31, 2001.
The decrease in the obsolescence reserve is attributable principally to more
effective means of liquidating obsolete inventory. Inventory write-offs and
write-downs (reductions to below cost) charged against the reserve for
obsolescence were $4.9 million in 2003, $5.7 million in 2002 and $11.2 million
in 2001. 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 and Allegheny
Trail product lines. Allegheny Trail was added in the third quarter of 2003. The
following tables illustrate the percent of net sales and merchandise inventory
that each product line represents.
12/31/03 Percent of 12/31/02 Percent of 12/31/01 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 $370.0 63.6% $364.2 64.1% $374.3 64.5%
Menswear 102.0 17.5% 109.3 19.2% 119.6 20.6%
Home 69.0 11.9% 59.9 10.5% 68.6 11.8%
Crossing Pointe 40.1 6.9% 35.2 6.2% 18.2 3.1%
Allegheny Trail .8 .1% N/A N/A N/A N/A
------ ----- ------ ----- ------ -----
Total $581.9 100.0% $568.6 100.0% $580.7 100.0%
====== ===== ====== ===== ====== =====
12/31/03 12/31/02 12/31/01
Merchandise Merchandise Merchandise
Inventory Inventory Inventory
Product Line (in millions) (in millions) (in millions)
- --------------------- ------------- ------------- -------------
Womenswear $ 43.3 $ 32.1 $ 51.9
Menswear 8.1 11.0 13.1
Home 6.6 5.0 4.0
Crossing Pointe 6.7 7.0 4.2
Allegheny Trail 1.3 N/A N/A
------- ----- -----
Total $ 66.0 $ 55.1 $ 73.2
======= ===== =====
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 outweighs 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 increased 4.8% in
2003 as compared to 2002, decreased 3.3% in 2002 as compared to 2001, and
decreased 2.7% in 2001 as compared to 2000.
On August 20, 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 involve the extension of credit on an
unsecured basis to individuals who are customers of Blair Corporation to
facilitate their purchases of Blair merchandise. As of December 31, 2003, JLB
Service Bank's total assets represented 1.3% of total consolidated assets of the
Company. Gross revenue of JLB Service Bank was .32% of the Company's
consolidated gross revenue for the year ended December 31, 2003.
9
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 $7.2 million during 2003,
$12.3 million during 2002 and $4.9 million during 2001.
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 was
completed in the second quarter of 2003 at a total cost of $13.2 million, down
from earlier estimates of $21 million. The company anticipates that this
equipment will increase the productivity of its fulfillment operations.
Capital expenditures are projected to be approximately $34 million in total for
the years 2004, 2005, 2006. Approximately $24 million of the $34 million is
attributable to improving our information services capabilities. Most of the
$7.2 million of capital expenditures in 2003 were attributable to the
fulfillment project.
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. The
Company is considering alternative uses for the building. 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 Company continues to hold for sale its liquidation outlet store located in
Erie, Pa. The Company believes the sale will be completed by June 30, 2004.
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
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 - 3 4 - 5 MORE THAN 5
1 YEAR YEARS YEARS YEARS
- -----------------------------------------------------------------------------------------------------------------------------
Capital Lease Obligations $ 511,440 $ 408,027 $ 103,413 -0- -0-
Operating leases 12,825,820 3,131,118 4,514,611 1,286,920 3,893,171
Unconditional Purchase
Obligations - Outstanding
Letters of Credit 20,900,000 20,900,000 -0- -0- -0-
Line of Credit - Securitization
15,000,000 15,000,000 -0- -0- -0-
----------- ----------- ----------- ---------- -----------
TOTAL $49,237,260 $39,439,145 $ 4,618,024 $1,286,920 $ 3,893,171
=========== =========== =========== ========== ===========
The Company has 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 COMMERCIAL TOTAL AMOUNTS LESS THAN 1 - 3 4 - 5 AFTER 5
COMMITMENTS COMMITTED 1 YEAR YEARS YEARS YEARS
- ---------------------------------------------------------------------------------------------------------------------------------
Line of Credit - Revolving $ 30,000,000 $ 30,000,000 -0- -0- -0-
effective 7/25/03
Line of Credit - Securitization 70,000,000 -0- 70,000,000 -0- -0-
effective 4/9/03
------------ ------------ ------------ ------------ ------------
TOTAL $100,000,000 $ 30,000,000 $ 70,000,000 -0- -0-
============ ============ ============ ============ ============
10
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, 2004. The Company has declared dividends for 281 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 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 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". 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 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. 101, Revenue Recognition in Financial Statements.
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 2003 level of credit
sales and finance charges, net income would change by approximately $2.5
million, or $.32 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 2004 on 2003 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 2003
level of sales, net income would change by approximately $2.0 million, or $.26
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, 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 2003 level of merchandise subject to
obsolescence, net income would change by approximately $1.9 million, or $.24 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, 2003, the Company had total gross deferred tax assets of $12.2
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
11
assets, except for the valuation allowance against state net operating losses,
which was provided due to its uncertainty of realization based upon the state's
net operating loss carryforward rules.
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
$103.8 million for postage and delivery services in 2003.
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 $4.5 million at December 31, 2003 from $5.7 million at December 31,
2002. The LIFO reserve was $5.4 million at December 31, 2001.
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
Effective January 1, 2002, the Company adopted the provisions of 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 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.
SFAS No. 145, Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections, and FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others were adopted by the Company effective
January 1, 2003. The adoption of these standards did not have a material impact
on the Company's results of operations or financial condition.
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 for 2002. During 2003, the
provisions of this statement impacted the accounting treatment of the planned
sale of the Blair Outlet Store in Erie, Pennsylvania. (See Note 9)
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 an impact on the Company's
financial results. During 2003, the provisions of this statement impacted the
accounting treatment of the voluntary separation of employees due to the closing
of the Blair Outlet Store in Erie, Pennsylvania. (See Note 10)
The Company adopted SFAS No. 148, Accounting For Stock-Based Compensation
Transition and Disclosure an amendment of SFAS No. 123, Accounting For
Stock-Based Compensation effective the year ended December 31, 2002. It provides
12
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.
In April 2003, the FASB issued SFAS No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement is generally effective for contracts entered
into or modified after June 30, 2003. The Company adopted the new statement
effective July 1, 2003. The Company has historically not utilized derivative
instruments, and as a result, the adoption of this statement has had no impact
on the financial statements of the Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise at the beginning of
the Company's third quarter. The effective dates of certain provisions of SFAS
No. 150 have been deferred. The Company believes the adoption of this standard
will not have a material impact on its results of operations or financial
condition.
As of December 31, 2003, the Company adopted FASB Interpretation No. 46 R,
Consolidation of Variable Interest Entities, revised in December 2003. The
adoption of this statement has had no impact on the financial statements of 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, 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.
The Company has had a working arrangement with actress, artist and author, Jane
Seymour, to launch the "Jane Seymour Signature Collection" of women's apparel.
The Jane Seymour inspired fashions have been sold exclusively through the
Company's Crossing Pointe catalog and Web site www.crossingpointe.com. The
Company will not be renewing its partnership agreement with Ms. Seymour when it
expires in September 2004.
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.
13
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 2004. 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.
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 Rules 13a-15(e)
and 15d-15(e) 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 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 an exhibit to this 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 Company's Proxy Statement for
the 2004 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission on March 29, 2004 (the "2004 Proxy Statement") is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Executive Compensation" in the 2004
Proxy Statement is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information setting forth the security ownership of certain beneficial owners
and management appearing under the captions "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the 2004 Proxy
Statement is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
14
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information appearing under the caption "Principal Accounting Fees and Services"
in the 2004 Proxy Statement is hereby incorporated by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS AND FINANCIAL STATEMENTS AND SCHEDULES.
(1) Financial Statements. The Company's consolidated financial statements are
included at pages F-1 to F-16.
Independent Auditor's Report......................................................................... F-1
Consolidated Balance Sheets -- December 31, 2003 and 2002............................................ F-2
Consolidated Statements of Income -- Years ended December 31, 2003, 2002 and 2001.................... F-4
Consolidated Statements of Stockholders' Equity -- Years ended December 31, 2003, 2002 and 2001...... F-5
Consolidated Statements of Cash Flows -- Years ended December 31, 2003, 2002 and 2001................ F-6
Notes to Consolidated Financial Statements -- December 31, 2003...................................... F-7
(2) Quarterly Results of Operations (page F-17)
(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(d), 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-18.
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)
11 Statement regarding computation of per share earnings (8)
14 Code of Ethics
21 Subsidiaries of Blair Corporation
23 Consent of Independent Auditors
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
15
(b) REPORTS ON FORM 8-K.
The following Form 8-K was furnished pursuant to Item 12 of Form 8-K and is
therefore not deemed to be, nor intended by the Company to be, "filed" for the
purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise
subject to the liability of that section:
On October 22, 2003 the Company furnished a Form 8-K announcing its
earnings for the quarter and nine months ended September 30, 2003.
- ---------------------
(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 Note 5 of the financial statements
included herein.
16
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 15, 2004 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 15, 2004 By: /s/Craig N. Johnson
-----------------------------------
Craig N. Johnson
Chairman of the Board of Directors
Date: March 15, 2004 By: /s/John E. Zawacki
-----------------------------------
John E. Zawacki
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: March 15, 2004 By: /s/Bryan J. Flanagan
-----------------------------------
Bryan J. Flanagan
Senior Vice President,
Chief Financial Officer
and Director
(Chief Financial Officer)
Date: March 15, 2004 By: /s/Steven M. Blair
-----------------------------------
Steven M. Blair
Vice President, Customer
Services and Director
Date: March 15, 2004 By: /s/Thomas P. McKeever
-----------------------------------
Thomas P. McKeever
Senior Vice President,
Operations and
Administration and Director
Date: March 15, 2004 By: /s/Robert D. Crowley
-----------------------------------
Robert D. Crowley
Senior Vice President,
Menswear, Home and
Marketing Services and Director
Date: March 15, 2004 By: /s/Murray K. McComas
-----------------------------------
Murray K. McComas
Director
17
Report of Independent Auditors
Board of Directors and Stockholders
Blair Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Blair
Corporation and Subsidiaries as of December 31, 2003 and 2002 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2003 listed in the index at
Item 15(a). Our audits also included the financial statement schedule listed in
the index at Item 15(a). These financial statements and schedule are the
responsibility of Blair Corporation 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 auditing standards generally accepted
in the 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States. 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.
/s/ Ernst & Young LLP
Buffalo, New York
February 6, 2004
F-1
Blair Corporation and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 36,380,049 $ 49,975,503
Customer accounts receivable, less allowances
for doubtful accounts and returns of
$47,473,108 in 2003 and $47,206,228 in 2002 154,660,076 149,229,882
Inventories:
Merchandise 65,990,631 55,101,925
Advertising and shipping supplies 19,610,207 19,115,380
------------ ------------
85,600,838 74,217,305
Deferred income taxes (Note 6) 12,211,000 11,623,000
Prepaid expenses 2,200,191 1,937,635
Assets held for sale (Note 9) 1,368,526 1,669,299
------------ ------------
Total current assets 292,420,680 288,652,624
Property, plant, and equipment:
Land 692,144 692,144
Buildings and leasehold improvements 65,559,992 65,280,676
Equipment 72,979,845 58,956,855
Construction in progress 1,386,067 9,376,463
------------ ------------
140,618,048 134,306,138
Less allowances for depreciation 88,107,320 80,000,142
------------ ------------
52,510,728 54,305,996
Trademarks 488,164 560,407
Other long-term assets 556,231 578,405
------------ ------------
Total assets $345,975,803 $344,097,432
============ ============
F-2
DECEMBER 31
2003 2002
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 2) $ 15,000,000 $ 15,000,000
Trade accounts payable 35,129,055 40,805,116
Advance payments from customers 2,286,055 3,959,801
Accrued expenses (Note 3) 17,732,395 19,970,241
Accrued federal and state taxes 3,997,935 4,587,124
Current portion of capital lease obligations (Note 4) 378,632 350,016
------------- -------------
Total current liabilities 74,524,072 84,672,298
Capital lease obligations, less current portion (Note 4) 101,622 480,320
Deferred income taxes (Note 6) 2,549,000 1,611,000
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 14,134,983 14,428,903
Retained earnings 296,397,999 286,511,847
Accumulated other comprehensive (loss) income (20,016) 12,686
------------- -------------
310,932,776 301,373,246
Less 1,962,439 shares in 2003 and 2,032,610
shares in 2002 of common stock
in treasury -- at cost (39,514,841) (41,264,330)
Less receivable and deferred compensation
from stock plans (2,616,826) (2,775,102)
------------- -------------
268,801,109 257,333,814
------------- -------------
Total liabilities and stockholders' equity $ 345,975,803 $ 344,097,432
============= =============
See accompanying notes.
F-3
Blair Corporation and Subsidiaries
Consolidated Statements of Income
YEARS ENDED DECEMBER 31
2003 2002 2001
------------ ------------ ------------
Net sales $581,939,971 $568,545,582 $580,700,163
Other income (Note 7) 43,566,444 40,644,415 47,766,066
------------ ------------ ------------
625,506,415 609,189,997 628,466,229
Cost and expenses:
Cost of goods sold 277,540,941 270,342,217 285,923,186
Advertising 156,412,869 145,906,864 169,102,381
General and administrative 136,211,667 130,882,944 127,260,554
Provision for doubtful accounts 31,826,636 29,986,973 31,333,326
Interest 351,120 958,443 2,142,636
------------ ------------ ------------
602,343,233 578,077,441 615,762,083
------------ ------------ ------------
Income before income taxes 23,163,182 31,112,556 12,704,146
Income taxes (Note 6) 8,637,000 11,977,000 3,412,000
------------ ------------ ------------
Net income $ 14,526,182 $ 19,135,556 $ 9,292,146
============ ============ ============
Basic earnings per share based on
weighted average shares outstanding $ 1.82 $ 2.39 $ 1.17
============ ============ ============
Diluted earnings per share based on
weighted average shares outstanding
and assumed conversions $ 1.81 $ 2.38 $ 1.17
============ ============ ============
See accompanying notes.
F-4
Blair Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
YEARS ENDED DECEMBER 31
2003 2002 2001
------------- ------------- -------------
COMMON STOCK $ 419,810 $ 419,810 $ 419,810
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 14,428,903 14,589,838 14,612,333
Issuance of common stock to non-employee directors (6,355) (2,619) (6,872)
Issuance of common stock under Omnibus Stock Plan (Note 5) 10,695 (80,386) --
Forfeitures of common stock under
Omnibus Stock Plan (Note 5) (18,055) (17,279) (15,623)
Exercise of non-qualified stock options under
Omnibus Stock Plan (409,205) (82,651) --
Tax benefit on exercise of non-qualified stock options 129,000 22,000 --
------------- ------------- -------------
Balance at end of year 14,134,983 14,428,903 14,589,838
RETAINED EARNINGS:
Balance at beginning of year 286,511,847 271,954,815 267,444,414
Net income 14,526,182 19,135,556 9,292,146
Cash dividends per share - $.60 in 2003, 2002 and 2001 (4,640,030) (4,578,524) (4,781,745)
------------- ------------- -------------
Balance at end of year 296,397,999 286,511,847 271,954,815
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Balance at beginning of year 12,686 -- --
Foreign currency translation (32,702) 12,686 --
------------- ------------- -------------
Balance at end of year (20,016) 12,686 --
TREASURY STOCK:
Balance at beginning of year (41,264,330) (43,187,542) (43,218,782)
Issuance of 5,375 shares in 2003, 3,000 shares in 2002
and 1,825 shares in 2001 of common stock to
non-employee directors 130,219 63,279 38,630
Issuance of common stock under Omnibus Stock Plan (Note 5) 275,663 1,740,780 --
Forfeitures of common stock under
Omnibus Stock Plan (Note 5) (45,696) (134,515) (7,390)
Exercise of non-qualified stock options under
Omnibus Stock Plan 1,389,303 253,668 --
------------- ------------- -------------
Balance at end of year (39,514,841) (41,264,330) (43,187,542)
RECEIVABLE AND DEFERRED COMPENSATION FROM STOCK PLANS:
Balance at beginning of year (2,775,102) (1,987,850) (2,231,623)
Issuance (net of forfeitures) of common stock under
Omnibus Stock Plan: (Note 5)
Receivable (77,763) (464,033) 7,525
Deferred compensation (192,907) (1,054,967) --
Amortization of deferred compensation, net of forfeitures 163,495 68,745 --
Executive officer restricted stock awards 35,357 -- --
Applications of dividends and cash repayments 230,094 663,003 236,248
------------- ------------- -------------
Balance at end of year (2,616,826) (2,775,102) (1,987,850)
------------- ------------- -------------
Total stockholders' equity $ 268,801,109 $ 257,333,814 $ 241,789,071
============= ============= =============
COMPREHENSIVE INCOME:
Net income $ 14,526,182 $ 19,135,556 $ 9,292,146
Adjustment from foreign currency translation (32,702) 12,686 --
------------- ------------- -------------
Comprehensive income $ 14,493,480 $ 19,148,242 $ 9,292,146
============= ============= =============
See accompanying notes.
F-5
Blair Corporation and Subsidiaries
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31
2003 2002 2001
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 14,526,182 $ 19,135,556 $ 9,292,146
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 8,718,062 8,066,536 7,827,698
Amortization 342,903 335,454 77,336
Impairment of assets held for sale 300,773 -- --
Loss on disposal of property and equipment -- -- 36,846
Provision for doubtful accounts 31,826,636 29,986,973 31,333,326
Provision for deferred income taxes 350,000 (1,346,000) 1,916,000
Tax benefit on exercise of non-qualified stock options 129,000 22,000 --
Compensation expense (net of forfeitures)
for stock awards 470,667 345,313 226,886
Changes in operating assets and liabilities
providing (using) cash:
Customer accounts receivable (37,257,221) (20,913,273) (17,241,959)
Inventories (11,383,533) 21,194,839 14,160,495
Prepaid expenses and other assets (238,768) (1,176,303) (379,723)
Trade accounts payable (5,676,968) (6,828,013) (28,340,729)
Advance payments from customers (1,673,746) 2,034,182 (151,434)
Accrued expenses (2,365,447) 8,150,694 (2,470,772)
Federal and state taxes (459,152) 1,805,828 1,847,884
------------ ------------ ------------
Net cash (used in) provided by operating activities (2,390,612) 60,813,786 18,134,000
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (7,191,272) (12,262,275) (4,910,485)
------------ ------------ ------------
Net cash used in investing activities (7,191,272) (12,262,275) (4,910,485)
FINANCING ACTIVITIES
Net repayments of bank borrowings -- -- (10,000,000)
Principal repayments on capital lease obligations (350,171) (331,495) (252,814)
Dividends paid (4,640,030) (4,578,524) (4,781,745)
Exercise of non-qualified stock options 980,098 171,017 --
Repayments of notes receivable from stock plans 34,081 436,695 25,632
------------ ------------ ------------
Net cash used in financing activities (3,976,022) (4,302,307) (15,008,927)
Effect of exchange rate changes on cash (37,548) 13,804 --
------------ ------------ ------------
Net (decrease) increase in cash (13,595,454) 44,263,008 (1,785,412)
Cash and cash equivalents at beginning of year 49,975,503 5,712,495 7,497,907
------------ ------------ ------------
Cash and cash equivalents at end of year $ 36,380,049 $ 49,975,503 $ 5,712,495
============ ============ ============
See accompanying notes.
F-6
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.
As of June 30, 2003 the Company formed a new wholly owned subsidiary, Allegheny
Trail Corporation, to launch a wholesale business targeted primarily at outdoor
sporting goods and recreational retailers. Allegheny Trail will offer a core
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 August 20, 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. As of 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 .32% of the Company's
consolidated total revenues for the year ended 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.
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.
The Company records internally incurred shipping and handling costs in cost of
sales.
Finance charges on time payment accounts are recognized on an accrual basis of
accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 2003, 2002 and 2001 amounted to
$87,238,648, $85,734,678 and $89,930,958, respectively. Management believes
these provisions are adequate based upon the relevant information presently
available. However, it is reasonably possible that the Company's provisions may
change in the near term.
F-7
BLAIR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, it is
reasonably possible that the Company's provisions may change in the near term.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost of merchandise
inventories is determined principally on the last-in, first-out (LIFO) method.
If the FIFO method had been used, inventories would have increased by
approximately $4,488,000 and $5,676,000 at December 31, 2003 and 2002,
respectively. Cost of advertising and shipping supplies is determined on the
first-in, first-out (FIFO) method. 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. The Company has a reserve for
slow moving and obsolete inventory amounting to $3,600,000 and $4,000,000 at
December 31, 2003 and 2002, respectively.
During 2003, 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, 2003. The
effect of this liquidation was to increase net income by approximately $.02 per
share in 2003.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment is stated on the basis of cost. Depreciation has
been provided principally by the straight-line method using rates, which are
estimated to be sufficient to amortize the cost of the assets over their period
of usefulness. Amortization of assets recorded under capital lease obligations
is included with depreciation expense. Maintenance and repairs are charged to
expense as incurred.
TRADEMARKS
Trademarks are stated on the basis of cost. All trademarks are being amortized
by the straight-line method for a period of 15 years. Amortization expense
amounted to $72,243, $72,244 and $72,244 in 2003, 2002 and 2001, 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, 2003.
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 2003, 2002 and 2001 amounted
to $1,436,117, $2,094,327 and $880,397, 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 2003, 2002 and 2001 amounted
to $2,033,288, $1,921,688 and $1,992,715, respectively.
F-8
BLAIR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INCOME TAXES
The Company accounts for deferred taxes by recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. 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
enacted tax rates in effect for the year in which the differences are expected
to reverse. 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.
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
Effective January 1, 2002, the Company adopted the provisions of 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 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.
SFAS No. 145, Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections, and FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others were adopted by the Company effective
January 1, 2003. The adoption of these standards did not have a material impact
on the Company's results of operations or financial condition.
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. During 2003, the provisions of
this statement impact the accounting treatment of the planned sale of the Blair
Outlet Store in Erie, Pennsylvania. (Note 9).
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 an impact on the Company's
financial results. During 2003, the provisions of this statement impact the
accounting treatment of the voluntary separation of employees due to the closing
of the Blair Outlet Store in Erie, Pennsylvania (Note 10).
The Company adopted SFAS No. 148, Accounting For Stock-Based Compensation
Transition and Disclosure an amendment of SFAS No. 123, Accounting For
Stock-Based Compensation effective the year ended December 31, 2002. It 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
F-9
BLAIR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
In April 2003, the FASB issued SFAS No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement is generally effective for contracts entered
into or modified after June 30, 2003. The Company adopted the new statement
effective July 1, 2003. The Company has historically not utilized derivative
instruments, and as a result, the adoption of this statement has had no impact
on the financial statements of the Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise at the beginning of
the Company's third quarter. The effective dates of certain provisions of SFAS
No. 150 have been deferred. The Company believes the adoption of this standard
will not have a material impact on its results of operations or financial
condition.
As of December 31, 2003, the Company adopted FASB Interpretation No. 46 R,
Consolidation of Variable Interest Entities, revised in December 2003. The
adoption of this statement has had no impact on the financial statements of the
Company.
STOCK COMPENSATION
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123 (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.
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
-----------------------------------------------------
2003 2002 2001
-------------- ----------- -----------
Net income as reported $ 14,526,182 $19,135,556 $ 9,292,146
Add: Total stock-based employee compensation
expense recorded for all awards, net of
related tax effects 313,138 511,831 --
Deduct: Total stock-based employee
compensation expense determined under fair
value method for all awards, net of related
tax effects (1,057,347) (884,486) (102,808)
-------------- ----------- -----------
Pro forma net income $ 13,781,973 $18,762,901 $ 9,189,338
============== =========== ===========
Earnings per share:
Basic - as reported $ 1.82 $ 2.39 $ 1.17
============== =========== ===========
Basic - pro forma $ 1.73 $ 2.34 $ 1.15
============== =========== ===========
Diluted - as reported $ 1.81 $ 2.38 $ 1.17
============== =========== ===========
Diluted - pro forma $ 1.72 $ 2.34 $ 1.15
============== =========== ===========
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 3.49%, 4.95% and 5.20% for stock options issued 4/15/03,
4/15/02 and 4/16/01, respectively; dividend yields of 2.54%, 3.11% and 3.50% for
stock options issued 4/15/03, 4/15/02 and 4/16/01,
F-10
BLAIR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
respectively; volatility factors of the expected market price of the Company's
common stock of .540, .564 and .547 for stock options issued 4/15/03, 4/15/02
and 4/16/01, respectively; and a weighted-average expected life of 7 years for
the stock options issued 4/15/03, 4/15/02 and 4/16/01. The per share fair value
of the options granted was determined to be $10.63, $8.83 and $7.40 for stock
options issued 4/15/03, 4/15/02 and 4/16/01, respectively.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
conform with the current year presentation.
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
On December 20, 2001, the Company entered into a Credit Agreement with PNC Bank,
National Association, as agent, and certain other banks. The Agreement puts 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. The Credit Agreement was
amended on July 25, 2003 to increase the lender commitments to the facility from
$28 million to $30 million. As of December 31, 2003, the facility had lender
commitments of $30 million. For each borrowing tranche, the Company may select
from three options to determine the interest rate. The options are: a base rate
option (greater of Prime or Fed Funds Rate plus .5% as of December 31, 2003);
swing loan rate option (as quoted by PNC Bank); or Euro-rate option as defined
in the Credit Agreement. 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. As
of December 31, 2003, the Company was in compliance with all the Agreement's
covenants. At December 31, 2003, the Company had no borrowings (loans)
outstanding and had letters of credit totaling $20.9 million outstanding, which
reduces the amount of borrowings available, under the Credit Agreement. At
December 31, 2002, the Company had no borrowings (loans), but had letters of
credit outstanding of $16.2 million.
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. At December 20, 2001, the
securitization had initial lender commitments of $50 million. On April 9, 2003,
the lender commitment level increased to $70 million. Also, the securitization
was amended to extend the term to April 7, 2006. The interest rate charged was
amended from 1-month LIBOR plus 55 basis points to 1-month LIBOR plus 80 basis
points. The Company sells all right, title and interest in and to certain of its
accounts receivables 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 the present time, $70 million of
the $100 million is available to the Company. 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 December
31, 2003, the Company was in compliance with all the requirements of the
Receivables Purchase Agreement. At December 31, 2003 and 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.
At December 31, 2003 and 2002, the weighted average interest rate was 1.97% and
2.38%, respectively. Interest paid during 2003, 2002 and 2001 was approximately
$282,000, $366,000 and $2,050,000, respectively.
F-11
BLAIR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. ACCRUED EXPENSES
Accrued expenses consist of:
DECEMBER 31
2003 2002
----------- -----------
Employee compensation $12,395,998 $12,923,615
Contribution to profit sharing and retirement plan 1,436,117 2,094,327
Health insurance 1,148,038 1,767,850
Voluntary Separation Program 762,106 1,098,103
Taxes, other than taxes on income 814,574 919,183
Other accrued items 1,175,562 1,167,163
----------- -----------
$17,732,395 $19,970,241
=========== ===========
4. 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 December 31, 2003:
2004 $ 408,027
2005 103,413
---------
511,440
Less amount representing interest (31,186)
---------
Present value of minimum lease payments 480,254
Less current portion (378,632)
---------
Long-term portion of capital lease obligation $ 101,622
=========
The Company entered into capital lease obligations amounting to $0 and $7,086 in
2003 and 2002, respectively.
OPERATING LEASES
The Company leases certain data processing, office and telephone equipment under
agreements that expire in various years through 2008. The Company also has
entered into several lease agreements for buildings, expiring in various years
through 2012. Rent expense for the Company for 2003, 2002 and 2001 was
$4,099,730, $4,121,734 and $5,183,281, 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, 2003:
2004 $ 3,131,118
2005 2,558,997
2006 1,955,614
2007 1,283,409
2008 3,511
Thereafter 3,893,171
-----------
$12,825,820
===========
F-12
BLAIR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
2003 2002 2001
----------- ----------- -----------
Numerator:
Net income $14,526,182 $19,135,556 $ 9,292,146
Denominator:
Denominator for basic earnings per share -
weighted average shares outstanding 7,983,178 8,005,182 7,969,556
Effect of dilutive securities:
Employee stock options 34,426 26,061 380
----------- ----------- -----------
Denominator for diluted earnings per share -
Weighted average shares outstanding and
assumed conversions $ 8,017,604 $ 8,031,243 $ 7,969,936
=========== =========== ===========
Basic earnings per share $ 1.82 $ 2.39 $ 1.17
=========== =========== ===========
Diluted earnings per share $ 1.81 $ 2.38 $ 1.17
=========== =========== ===========
DIVIDENDS
In 2003 and 2002, the company declared dividends of $4,835,912 and $4,805,171,
of which $4,640,030 and $4,578,524 was paid directly to shareholders and charged
to retained earnings. The remaining dividends declared, $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. Prior to 2002, all dividends
declared were charged to retained earnings.
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,
2003 and 2002, 599,852 shares 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-, $90,644 and
$-0- was expensed in 2003, 2002 and 2001, respectively. Under the Omnibus Plan,
awards were granted on one date in 2003 and three separate dates in 2002. In
2003 and 2002, under the provisions of certain awards granted, compensation of
$192,908 and $1,054,967, net of forfeitures, respectively, was recorded as
deferred expense and will be amortized over the vesting period of seven years.
Amortization expense was $153,085 and $68,745 in 2003 and 2002, respectively.
A summary of the restricted stock activity under the Omnibus Plan is as follows:
YEARS ENDED DECEMBER 31
2003 2002 2001
-------------- ------------------ ----------
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
Shares canceled and forfeited 1,200 1,000 -
Original price per share $8.00 - $10.50 $7.50 -
Weighted average price per share $7.63 $7.50 -
F-13
BLAIR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In 2003, under the provisions of certain awards granted to executive officers on
two separate dates, 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 $35,357 in 2003. A summary of
the executive officer stock activity under the Omnibus Plan is as follows:
YEARS ENDED DECEMBER 31
2003 2002 2001
---------------- ---------- ----------
Shares granted 10,650 AND 4,848 - -
Market value per share at date of issue $21.45 - -
Shares canceled and forfeited - - -
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. On April 15, 2003, April 15, 2002 and April 16,
2001, the Company issued 170,427, 167,229 and 90,519 options to employees at an
exercise price of $23.60, $19.30 and $17.10 per share, respectively.
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, 2001 - $ -
Granted in 2001 90,519 17.10
Exercised in 2001 - -
Forfeited in 2001 - -
--------- -------
Outstanding at December 31, 2001 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
========= =======
Of the options outstanding, 186,566, 20,172 and 0 were exercisable at December
31, 2003, 2002 and 2001, respectively. The exercise price of options outstanding
ranged from $17.10 to $23.60, with a weighted-average remaining contractual life
of 8.64 years at December 31, 2003.
6. INCOME TAXES
The components of income tax expense are as follows:
YEARS ENDED DECEMBER 31
2003 2002 2001
---------- ----------- ----------
Currently payable:
Federal $7,045,000 $12,060,000 $1,424,000
Foreign 280,000 300,000 42,000
State 962,000 963,000 30,000
---------- ----------- ----------
8,287,000 13,323,000 1,496,000
Deferred 350,000 (1,346,000) 1,916,000
---------- ----------- ----------
$8,637,000 $11,977,000 $3,412,000
========== =========== ==========
F-14
BLAIR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
2003 2002 2001
------------ ------------ ------------
Statutory rate applied to pretax income $ 8,107,114 $ 10,889,394 $ 4,446,709
State income taxes, net of federal benefit 825,000 544,700 42,295
Tax refund -- -- (1,539,000)
Other items (295,114) 542,906 461,996
------------ ------------ ------------
$ 8,637,000 $ 11,977,000 $ 3,412,000
============ ============ ============
The Company has approximately $4 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 $4 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 losses
before they expire in 2011.
Income taxes paid (refunded) during 2003, 2002 and 2001 amounted to $8,807,997,
$11,400,758 and $(126,245), respectively.
Components of the deferred tax asset and liability under the liability method as
of December 31, 2003 and 2002 are as follows:
DECEMBER 31
2003 2002
------------ ------------
Current net deferred tax asset
Doubtful accounts $ 14,122,000 $ 14,048,000
Returns allowance 2,306,000 1,587,000
Inventory obsolescence 1,374,000 1,527,000
Inventory costs (372,000) (328,000)
Vacation pay 1,798,000 1,670,000
Advertising costs (7,542,000) (7,371,000)
State net operating loss 196,000 490,000
Other items 525,000 490,000
------------ ------------
Total deferred tax assets 12,407,000 12,113,000
State valuation allowance (196,000) (490,000)
------------ ------------
Deferred tax assets, net of valuation allowance $ 12,211,000 $ 11,623,000
============ ============
Long-term deferred tax liability
Property, plant, and equipment $ 2,549,000 $ 1,611,000
============ ============
7. OTHER INCOME
Other income consists of:
YEARS ENDED DECEMBER 31
2003 2002 2001
----------- ----------- -----------
Finance charges on time payment accounts $36,163,981 $34,776,872 $37,791,524
Commissions earned 1,493,579 2,239,888 3,658,633
Interest from tax settlement -- -- 4,061,253
Other items 5,908,884 3,627,655 2,254,656
----------- ----------- -----------
$43,566,444 $40,644,415 $47,766,066
=========== =========== ===========
F-15
BLAIR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 and
Allegheny Trail product lines. Allegheny Trail was added in the third quarter of
2003. 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.
Sales of the women's and men's fashion wearing apparel and accessories accounted
for 88%, 90% and 89% of total 2003, 2002 and 2001 sales, respectively. Home
products accounted for the remaining sales volume.
9. LONG-LIVED ASSETS 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. The Company intends to sell the building and
believes that the sale will be completed in 2004. Assets Held for Sale of
$1,368,526 and $1,669,299 at December 31, 2003 and 2002, respectively, consist
of the net book value of the land, land improvements and building. The carrying
value of the asset was reduced in 2003 as a result of the level of interest in
the asset.
10. 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 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 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, 2003, approximately $1.7 million of the $2.5
million has been paid. Approximately $281,000, $336,000 and $1,083,000 were paid
out during 2003, 2002 and 2001, respectively.
F-16
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, 2003 and 2002.
2003 2002
Quarter Ended Quarter Ended
-------------------------------------------------- --------------------------------------------------
March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31
-------- -------- ------------ ----------- -------- ------- ------------- -----------
Net Sales.......... $137,014 $154,345 $124,100 $166,481 $135,261 $147,513 $117,830 $167,941
Cost of goods sold. 67,862 72,765 60,781 76,133 64,535 68,945 58,054 78,808
Net income......... 500 4,101 793 9,132 5,601 7,033 279 6,222
Basic earnings per
share.............. 0.06 0.51 0.10 1.15 0.70 0.88 0.03 0.78
Diluted earnings
per share.......... 0.06 0.51 0.10 1.14 0.70 0.88 0.03 0.77
Quarter ended September 30, 2003 includes additional net income of $260,000,
$.03 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. Quarter ended September 30, 2002
includes additional net income of $241,000, $.03 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.
F-17
BLAIR CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2003
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------------------------------
ADDITIONS-
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS- AT END
Description OF PERIOD EXPENSES DESCRIBE OF PERIOD
----------- ------------ ------------ -----------
Year ended December 31, 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
=========== ============ ============ ===========
Year ended December 31, 2001:
Allowance deducted from asset account
(customer accounts receivable):
For doubtful accounts $39,771,673 $ 31,333,326(A) $ 32,016,810(B) $39,088,189
For estimated loss on returns 6,993,000 89,930,958 90,044,987(C) 6,878,971
----------- ------------ ------------ -----------
Total 46,764,673 121,264,284 122,061,797 45,967,160
Allowance deducted from asset account
(merchandise inventories)
For obsolete inventory 6,250,000 9,123,081 11,223,081(D) 4,150,000
----------- ------------ ------------ -----------
Total $53,014,673 $130,387,365 $133,284,878 $50,117,160
=========== ============ ============ ===========
- ---------------------
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-18