<PAGE> 1
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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, 1998 Commission file number 1-878
BLAIR CORPORATION
Incorporated in Delaware I.R.S. Employer Identification Number:
220 Hickory Street
Warren, Pennsylvania 16366 25-0691670
(814) 723-3600
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
<S> <C>
Common Stock, without nominal or par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of February 26, 1999 was $139,605,085. There were 8,407,043
shares of common stock outstanding as of February 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1998 (the "Annual Report") are incorporated by reference into Part
II and Part IV of this Form 10-K. Portions of the Proxy Statement for the 1999
Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by
reference into Part III of this Form 10-K.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
(a) GENERAL.
Blair Corporation (the "Company") was founded in 1910 by John L. Blair,
Sr., and was incorporated in 1924 under the laws of the State of Delaware. The
Company's business consists of the sale of fashion apparel for men and women,
plus a wide range of home products, primarily through direct mail merchandising.
The Company operates two retail stores, one in Pennsylvania and one in Delaware,
and two outlet stores in Pennsylvania. The Company employs approximately 2,300
people. None of the Company's employees are subject to collective bargaining
agreements.
(b) INFORMATION REGARDING INDUSTRY SEGMENTS.
The Company's business consists of only one industry segment, which is
the direct mail and retail merchandising of men's and women's fashion apparel
and home products.
(c) DESCRIPTION OF BUSINESS.
The Company markets a wide range of merchandise, manufactured by a
number of independent suppliers, both domestic and foreign. Most of these
suppliers have been associated with the Company for many years and manufacture
products based upon the Company's specifications. Suppliers are selected in
accordance with their ability to produce high quality products in a
cost-effective manner.
The Company markets its products mainly by direct mail. Catalogs and
letters containing color folders depict the current styles of womenswear (such
as coordinates, dresses, tops, pants, skirts, lingerie, sportswear, suits,
jackets, outerwear and shoes), menswear (such as suits, shirts, outerwear,
active wear, slacks, shoes, and accessories), and home products (such as
bedspread ensembles, draperies, furniture covers, area rugs, bath accessories,
kitchenware, tools, exercise and personal care items) and are mailed directly to
existing and prospective customers. Sales of the menswear and womenswear
products accounted for approximately 88% of the Company's total sales in 1998,
and sales of home products accounted for the remaining 12% (approximately).
Media and co-op prospect advertising programs continue to be used as components
of the Company's customer acquisition strategy. The Company had minimal presence
on the Internet in 1998, but will be expanding its Internet presence in 1999.
Catalog mailings are mailed from commercial printers engaged by the
Company and letter mailings originate from the Company's Mailing Center in
nearby Irvine, Pennsylvania. Orders for merchandise are processed at the Company
corporate offices in Warren, Pennsylvania (telephone orders via the call
centers) and orders are filled and mailed from the Company's Distribution center
in Irvine, Pennsylvania. The Company serves customers throughout the fifty
states.
The Company's outlet stores enable it to more efficiently promote and
liquidate discontinued, overstocked and returned merchandise. The Delaware
retail store is the only Company retail facility located outside of its home
state of Pennsylvania.
The Company considers its merchandise to be low/medium-priced and
competes for sales with other direct mail businesses, retail department stores,
specialty shops and discount store chains. The Company competes based on its
sales expertise, customer service, pricing, customer credit privileges and
diverse product mix.
During 1998, the Company continued to broaden its customer information
systems. The marketing and credit departments are continually updated in order
to enhance the Company's ability to market to both customers and prospects.
(d) FOREIGN OPERATIONS AND EXPORT SALES.
The Company does not derive any revenue from sales of merchandise
outside of the United States.
-2-
<PAGE> 3
ITEM 2. PROPERTIES
The Company owns the following properties:
1. Blair Headquarters (220 Hickory Street, Warren, Pennsylvania).
2. Blair Distribution Center (Route 62, Irvine, Pennsylvania).
3. Blair Mailing Center (Route 62, Irvine, Pennsylvania).
4. Blair Warehouse Outlet (Route 62, Starbrick, Pennsylvania).
5. Blair Warehouse Outlet (Millcreek Mall, Erie, Pennsylvania).
6. Bell Warehouse Building (Liberty Street, Warren, Pennsylvania).
7. Starbrick Warehouse Building (Route 62, Starbrick, Pennsylvania).
The Company leases the following properties:
1. Blair Retail Store (Wilmington, Delaware).
2. Warehouse Building (Route 62, Starbrick, Pennsylvania).
3. Telephone Call Center (Erie, Pennsylvania).
4. Telephone Call Center (Franklin, Pennsylvania).
In addition, the Company's wholly-owned subsidiary, Blair Holdings,
Inc., leases office space in Newark, Delaware, which it uses as its principal
office.
Management believes that these properties are capable of meeting the
Company's anticipated needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
legal proceedings occurring in the ordinary course of business. Management
believes that none of these legal proceedings, individually or in the aggregate,
will have a material adverse impact on the results of operations or financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to
page 14 of the Company's 1998 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to
page 14 of the Company's 1998 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to
pages 15 through 18 of the Company's 1998 Annual Report to Stockholders.
-3-
<PAGE> 4
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
pages 8 through 14 of the Company's 1998 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding directors and executive officers of the Company
appearing under the caption "Election of Directors" in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders (the "1999 Proxy
Statement") is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Executive Compensation" in the
1999 Proxy Statement is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information setting forth the security ownership of certain beneficial
owners and management appearing under the captions "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" in the 1999
Proxy Statement is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) EXHIBITS AND FINANCIAL STATEMENTS AND SCHEDULES.
(1) Financial Statements. The Company's consolidated financial
statements to be included in Part II, Item 8 are incorporated herein by
reference to the Company's 1998 Annual Report to Stockholders, a copy of which
accompanies this report on Form 10-K.
(2) Financial Statement Schedules. SCHEDULE II -- VALUATION AND
QUALIFYING ACCOUNTS is being filed as part of this report on Form 10-K, and
should be read in conjunction with the consolidated financial statements of the
Company described in Item 14(a)(1) above.
All other schedules set forth in the applicable accounting regulations
of the Securities and Exchange Commission either are not required under the
related instructions or are not applicable and, therefore, have been omitted.
-4-
<PAGE> 5
(3) List of Exhibits.
3 (i) Certificate of Incorporation of the Company
3 (ii) Bylaws of the Company
10 Stock Accumulation and Deferred Compensation Plan for
Directors
*11 Computation of Earnings per Share (incorporated by
reference to page 8 of the 1998 Annual Report to
Stockholders)
*13 1998 Annual Report to Stockholders
21 Subsidiaries of Registrant
*23 Consents of Experts and Counsel
*27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
The registrant has filed no Forms 8-K during the quarter ended December
31, 1998.
(c) EXHIBITS.
All exhibits listed above were previously filed with the Commission,
except for those marked with an asterisk, which are being filed with this Form
10-K.
-5-
<PAGE> 6
CONFORMED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
BLAIR CORPORATION
(Registrant)
Date: March 19, 1999 By: /s/ KENT R. SIVILLO
-----------------------------------
Kent R. Sivillo
Vice President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
Date: March 19, 1999 By: /s/ MURRAY K. MCCOMAS
-----------------------------------
Murray K. McComas
President and Director
(Principal Executive Officer)
Date: March 19, 1999 By: /s/ BLAIR T. SMOULDER
-----------------------------------
Blair T. Smoulder
Executive Vice President
and Director
Date: March 19, 1999 By: /s/ MICHAEL J. SAMARGYA
-----------------------------------
Michael J. Samargya
Vice President, Information
Services, and Director
Date: March 19, 1999 By: /s/ STEVEN M. BLAIR
-----------------------------------
Steven M. Blair
Vice President, Order
Handling, and Director
Date: March 19, 1999 By: /s/ JOHN E. ZAWACKI
-----------------------------------
John E. Zawacki
Vice President, Womenswear,
and Director
Date: March 19, 1999 By: /s/ DAVID A. BLAIR
-----------------------------------
David A. Blair
Secretary and Director
-6-
<PAGE> 7
Date: March 19, 1999 By: /s/ KENT R. SIVILLO
-----------------------------------
Kent R. Sivillo
Vice President,
Treasurer and Director
(Principal Financial and
Accounting Officer)
Date: March 19, 1999 By: /s/ ROBERT D. CROWLEY
-----------------------------------
Robert D. Crowley
Vice President, Menswear,
and Director
Date: March 19, 1999 By: /s/ THOMAS P. MCKEEVER
-----------------------------------
Thomas P. McKeever
Vice President, Corporate Affairs
and Human Resources, and Director
-7-
<PAGE> 8
Annual Report on Form 10-K
Item 14(a) (1) and (2), and (d)
List of Financial Statements and Financial Statement Schedules
Blair Corporation and Subsidiary
Warren, Pennsylvania
Year ended December 31, 1998
-8-
<PAGE> 9
Blair Corporation and Subsidiary
List of Financial Statements and Financial Statement Schedules
Form 10-K -- Item 14(a)(1) and (2), and (d)
The following consolidated financial statements of Blair Corporation, included
in the annual report of the registrant to its stockholders for the year ended
December 31, 1998, are incorporated by reference in Item 8:
-- Consolidated Balance Sheets -- December 31, 1998 and 1997
-- Consolidated Statements of Income -- Years ended December 31,
1998, 1997 and 1996
-- Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1998, 1997 and 1996
-- Consolidated Statements of Cash Flows -- Years ended December
31, 1998, 1997 and 1996
-- Notes to Consolidated Financial Statements -- December 31,
1998
The following financial statement schedule of Blair Corporation is included in
Item 14(d):
-- Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
-9-
<PAGE> 10
Blair Corporation and Subsidiary
Schedule II
Valuation and Qualifying Accounts
December 31, 1998
<TABLE>
<CAPTION>
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
- ----------- --------- -------- -------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance deducted from
asset accounts (customer
accounts receivable):
For doubtful accounts $ 31,984,888 $ 22,033,466(A) $ 24,794,032(B) $ 29,224,323
For estimated loss on returns 6,495,000 88,927,593 89,172,593(C) 6,250,000
============ ============ ============ ============
Totals $ 38,479,888 $110,961,059 $113,966,625 $ 35,474,323
============ ============ ============ ============
Year ended December 31, 1997:
Allowance deducted from
asset accounts (customer
accounts receivable):
For doubtful accounts $ 37,272,572 $ 32,222,092(A) $ 37,509,776(B) $ 31,984,888
For estimated loss on returns 7,192,000 94,114,182 94,811,182(C) 6,495,000
============ ============ ============ ============
Totals $ 44,464,572 $126,336,274 $132,320,958 $ 38,479,888
============ ============ ============ ============
Year ended December 31, 1996:
Allowance deducted from
asset accounts (customer
accounts receivable):
For doubtful accounts $ 40,508,071 $ 47,550,310(A) $ 50,785,809(B) $ 37,272,572
For estimated loss on returns 6,676,000 100,976,722 100,460,722(C) 7,192,000
============ ============ ============ ============
Totals $ 47,184,071 $148,527,032 $151,246,531 $ 44,464,572
============ ============ ============ ============
</TABLE>
- ----------
Note (A) -- Current year provision for doubtful accounts, charged against
income.
Note (B) -- Accounts charged off, net of recoveries.
Note (C) -- Sales value of merchandise returned.
-10-
<PAGE> 1
Exhibit 13
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
- ---------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Net sales ................................... $506,803,591 $486,581,737 $544,129,005
Other income-- Note 5 ....................... 43,862,320 39,931,577 44,291,914
------------ ------------ ------------
550,665,911 526,513,314 588,420,919
Costs and expenses:
Cost of goods sold ....................... 251,832,019 242,828,539 268,757,869
Advertising .............................. 132,274,259 128,117,432 141,035,288
General and administrative ............... 108,567,387 98,352,175 102,209,670
Provision for doubtful accounts .......... 22,033,466 32,222,092 47,550,310
Interest ................................. 2,116,772 4,102,148 5,524,561
------------ ------------ ------------
516,823,903 505,622,386 565,077,698
------------ ------------ ------------
INCOME BEFORE INCOME TAXES .................. 33,842,008 20,890,928 23,343,221
Income taxes--Note 6 ........................ 11,553,000 7,637,000 8,617,000
------------ ------------ ------------
NET INCOME .................................. $ 22,289,008 $ 13,253,928 $ 14,726,221
============ ============ ============
Basic and diluted earnings per share based on
weighted average shares outstanding ...... $2.49 $1.45 $1.58
===== ===== =====
</TABLE>
See accompanying notes.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- -------------------------------------------------------------------------------
Board of Directors and Stockholders
Blair Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of Blair
Corporation and Subsidiary as of December 31, 1998 and 1997 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of Blair Corporation management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Blair Corporation
and Subsidiary at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Buffalo, New York
February 1, 1999
8
<PAGE> 2
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
==========================================================================================
DECEMBER 31 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ............................................ $ 3,211,376 $ 3,468,483
Customer accounts receivable, less
allowances for doubtful accounts and
returns of $35,474,323 in 1998 and
$38,479,888 in 1997 .......................... 158,191,826 157,636,096
Inventories:
Merchandise .................................. 102,152,680 68,143,275
Advertising and shipping supplies ............ 12,982,870 10,584,134
------------ ------------
115,135,550 78,727,409
Deferred income taxes -- Note 6 .................... 7,781,000 9,910,000
Prepaid and refundable federal and state taxes .. 12,455,216 6,499,412
Prepaid expenses ................................ 344,482 391,532
------------ ------------
TOTAL CURRENT ASSETS ............................... 297,119,450 256,632,932
PROPERTY, PLANT AND EQUIPMENT
Land ............................................ 1,142,144 1,142,144
Buildings ....................................... 63,433,347 63,263,399
Equipment ....................................... 39,255,983 38,859,725
------------ ------------
103,831,474 103,265,268
Less allowances for depreciation ................ 55,787,582 51,322,255
------------ ------------
48,043,892 51,943,013
TRADEMARKS ......................................... 849,380 921,623
------------ ------------
TOTAL ASSETS ....................................... $346,012,722 $309,497,568
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable -- Note 2 ......................... $ 22,750,000 $ 38,600,000
Trade accounts payable .......................... 52,135,922 46,358,297
Advance payments from customers ................. 1,182,829 1,393,814
Accrued expenses -- Note 3 ...................... 12,074,736 9,033,411
------------ ------------
TOTAL CURRENT LIABILITIES .......................... 88,143,487 95,385,522
DEFERRED INCOME TAXES -- Note 6 .................... 1,368,000 1,683,000
LONG-TERM DEBT -- Note 2 ........................... 30,000,000 -0-
STOCKHOLDERS' EQUITY -- Note 4
Common Stock without par value:
Authorized 12,000,000 shares; issued
10,075,440 shares (including shares held
in treasury) -- stated value ................. 419,810 419,810
Additional paid-in capital ...................... 14,278,828 13,230,251
Retained earnings ............................... 240,798,008 223,868,940
------------ ------------
255,496,646 237,519,001
Less 1,168,097 shares in 1998 and 1,067,724
shares in 1997 of Common Stock in
treasury -- at cost .......................... 26,756,067 23,161,169
Less receivable from Employee Stock Purchase Plan 2,239,344 1,928,786
226,501,235 212,429,046
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $346,012,722 $309,497,568
============ ============
</TABLE>
See accompanying notes.
9
<PAGE> 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK ..................................... $ 419,810 $ 419,810 $ 419,810
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year .................. 13,230,251 12,928,260 12,372,697
Issuance (net of forfeitures)
of Common Stock under
Employee Stock Purchase
Plan -- Note 4 ............................ 1,025,989 288,303 555,563
Issuance of Common Stock to
non-employee directors ..................... 22,588 13,688 -0-
------------ ------------ ------------
Balance at end of year ........................ 14,278,828 13,230,251 12,928,260
RETAINED EARNINGS:
Balance at beginning of year .................. 223,868,940 216,068,537 211,588,111
Net income .................................... 22,289,008 13,253,928 14,726,221
Cash dividends declared per share --
$0.60 in 1998; $0.60 in 1997;
$1.10 in 1996 .............................. (5,359,940) (5,453,525) (10,245,795)
------------ ------------ ------------
Balance at end of year ........................ 240,798,008 223,868,940 216,068,537
TREASURY STOCK:
Balance at beginning of year .................. (23,161,169) (19,013,814) (16,927,008)
Purchase of 147,573 shares in 1998;
276,866 shares in 1997; and 120,300 shares..
in 1996 of Common Stock for treasury ...... (4,001,471) (4,551,438) (2,267,655)
Issuance (net of forfeitures)
of Common Stock under
Employee Stock Purchase
Plan-- Note 4 .............................. 393,536 395,646 180,849
Issuance of 1,500 shares in 1998 and 1997 of
Common Stock to non-employee directors ..... 13,037 8,437 -0-
------------ ------------ ------------
Balance at end of year ....................... (26,756,067) (23,161,169) (19,013,814)
RECEIVABLE FROM EMPLOYEE STOCK PURCHASE PLAN:
Balance at beginning of year .................. (1,928,786) (1,803,910) (1,887,595)
Issuance (net of forfeitures)
of Common Stock under
Employee Stock Purchase
Plan -- Note 4 ............................. (494,285) (362,765) (177,635)
Repayments .................................... 183,727 237,889 261,320
------------ ------------ ------------
Balance at end of year ........................ (2,239,344) (1,928,786) (1,803,910)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY ....................... $226,501,235 $212,429,046 $208,598,883
============ ============ ============
</TABLE>
See accompanying notes.
10
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................. $22,289,008 $ 13,253,928 $ 14,726,221
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Depreciation and amortization ........................... 4,979,582 5,369,394 5,418,237
Provision for doubtful accounts ......................... 22,033,466 32,222,092 47,550,310
Provision for deferred income taxes ..................... 1,814,000 6,816,000 1,599,000
Compensation expense for stock awards ................... 1,094,025 375,525 559,538
Changes in operating assets and liabilities
providing (using) cash:
Customer accounts receivable ...................... (22,589,196) 3,913,868 (49,922,884)
Inventories ....................................... (36,408,141) 9,121,189 (7,455,793)
Prepaid expenses .................................. 47,050 264,383 (127,624)
Trade accounts payable ............................ 5,777,625 5,860,935 (7,725,784)
Advance payments from customers ................... (210,985) 248,432 (9,777)
Accrued expenses .................................. 3,041,325 (503,070) (1,859,605)
Federal and state taxes ........................... (5,955,804) 3,642,597 (9,501,748)
----------- ------------ ------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES ....................................... (4,088,045) 80,585,273 (6,749,909)
INVESTING ACTIVITIES
Purchases of property, plant and equipment ................. (1,008,218) (3,033,033) (3,249,030)
----------- ------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES ....................... (1,008,218) (3,033,033) (3,249,030)
FINANCING ACTIVITIES
Net proceeds (repayments) from bank borrowings ............. 14,150,000 (68,400,000) 22,700,000
Dividends paid ............................................. (5,359,940) (5,453,525) (10,245,795)
Purchase of Common Stock for treasury ...................... (4,001,471) (4,551,438) (2,267,655)
Decrease in notes receivable from
Employee Stock Purchase Plan ............................ 50,567 205,673 260,559
----------- ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ....................................... 4,839,156 (78,199,290) 10,447,109
----------- ------------ ------------
NET (DECREASE) INCREASE IN CASH ................................ (257,107) (647,050) 448,170
Cash at beginning of year .................................. 3,468,483 4,115,533 3,667,363
----------- ------------ ------------
CASH AT END OF YEAR ........................................... $ 3,211,376 $ 3,468,483 $ 4,115,533
=========== ============ ============
</TABLE>
See accompanying notes.
11
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The consolidated financial statements include the accounts of Blair Corporation
and its wholly-owned subsidiary, Blair Holdings, Inc., a Delaware Corporation
(Company). All significant intercompany accounts are eliminated upon
consolidation.
REVENUE RECOGNITION
Sales (cash, Blair credit, or third party credit card) are recorded when the
merchandise is shipped to the customer. Blair credit sales are made under Easy
Payment Plan sales arrangements. Monthly, a provision for potentially doubtful
accounts is charged against income based on management's estimate of
realization. Any recoveries of bad debts previously written-off are credited
back against the allowance for doubtful accounts in the period received. As
reported in the balance sheets, the carrying amount, net of allowances for
doubtful accounts and returns for customer accounts receivable on Blair credit
sales, approximates fair value.
Finance charges on time payment accounts are recognized on an accrual basis of
accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RETURNS
A provision for anticipated returns is recorded monthly as a percentage of gross
sales based upon historical experience. This provision is charged directly
against gross sales to arrive at net sales as reported in the consolidated
statements of income. Actual returns are charged against the allowance for
returns which is netted against accounts receivable in the balance sheets. The
provision for returns charged against income in 1998, 1997 and 1996 amounted to
$88,927,593, $94,114,182 and $100,976,722 respectively. Management believes
these provisions are adequate based upon the relevant information presently
available. However, it is reasonably possible that the Company's provisions may
change in the near term.
DOUBTFUL ACCOUNTS
A provision for doubtful accounts is recorded monthly as a percentage of gross
sales based upon experience of delinquencies and charge-offs and current credit
market conditions. Management believes these provisions are adequate based upon
the relevant information presently available. However, it is reasonably possible
that the Company's provisions may change in the near term.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost of merchandise
inventories is determined principally on the last-in, first-out (LIFO) method.
Cost of advertising and shipping supplies is determined on the first-in,
first-out (FIFO) method. Advertising and shipping supplies include printed
advertising material and related mailing supplies for promotional mailings which
are generally scheduled to occur within two months. These costs are expensed
when mailed. If the FIFO method had been used, inventories would have increased
by approximately $7,662,000 and $8,538,000 at December 31, 1998 and 1997,
respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated on the basis of cost. Depreciation has
been provided principally by the straight-line method using rates which are
estimated to be sufficient to amortize the cost of the assets over their period
of usefulness.
TRADEMARKS
Trademarks are stated on the basis of cost. All trademarks are being amortized
by the straight-line method for a period of 15 years. Amortization expense
amounted to $72,243, $72,244 and $71,852 in 1998, 1997 and 1996, respectively.
EMPLOYEE BENEFITS
The Company's employee benefits include a profit sharing and retirement feature
available to all eligible employees. Contributions are dependent on net income
of the Company and recognized on an accrual basis of accounting. The
contributions to the plan charged against income in 1998, 1997 and 1996 amounted
to $2,371,992, $1,407,745 and $1,568,137, respectively.
As part of the same benefit plan, the Company has a contributory savings feature
whereby all eligible employees may contribute up to 10% of their annual base
salaries. The Company's matching contribution to the plan is based upon a
percentage formula as set forth in the plan agreement. The Company's matching
contributions to the plan charged against income in 1998, 1997 and 1996 amounted
to $1,871,906, $1,852,557 and $1,925,675, respectively.
INCOME TAXES
The liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
FINANCIAL INSTRUMENTS
The carrying amounts of cash, customer accounts receivable, accounts payable and
accrued liabilities approximate fair value due to the short-term maturities of
these assets and liabilities. The interest rates on the Company's revolving
credit facility is adjusted regularly to reflect current market rates.
Accordingly, the carrying amounts of the Company's borrowings also approximate
fair value.
NEW ACCOUNTING PRONOUNCEMENTS
Comprehensive Income
In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Comprehensive Income," was issued. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS 130 was adopted in the financial statements
for the year ended December 31, 1998 and had no impact on the financial
statements of the Company.
Disclosures About Segments of an Enterprise and Related Information
In June 1997, Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures about Segments of an Enterprise and Related Information," was
issued. SFAS 131 establishes standards for the way that a public enterprise
reports information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. SFAS 131 was
adopted in the financial statements for the year ended December 31, 1998 and had
no impact on the financial statements of the Company.
Accounting for the Costs of Computer Software Developed For or Obtained For
Internal Use
Statement of Position 98-1, (SOP 98-1) "Accounting for the Costs of
Computer Software Developed For or Obtained For Internal Use," requires
capitalization of costs to purchase or develop internal use software and
amortization of those costs to income over the software's estimated useful
life. These costs include external direct costs, payroll and
payroll-related costs for employees who are directly associated with the
project and interest costs. Training and research and development costs are
to be expensed as incurred. Allocations of overhead are not permitted. The
SOP is effective for fiscal years beginning after December 15, 1998, on a
prospective basis. Management does not believe the adoption of this SOP
will have a significant impact on the financial statements of the Company.
CONTINGENCIES
The Company is involved in certain items of litigation, arising in the normal
course of business. While it cannot be predicted with certainty, management
believes that the outcome will not have a material effect on the Company's
financial condition or results of operations.
12
<PAGE> 6
2. FINANCING ARRANGEMENTS
On November 13, 1998, the Company entered into an amended and restated
$95,000,000 Revolving Credit Facility, which expires on November 13, 2001. This
agreement replaced the $125,000,000 Revolving Credit facility which expired on
November 17, 1998. The interest rate is, at the Company's option, based on a
base rate option, swing loan rate option or Euro-rate option as defined in the
agreement. The Revolving Credit Facility is unsecured and requires the Company
to meet certain covenants as outlined in the agreement. These covenants
specifically relate to tangible net worth, maintaining a defined leverage ratio,
interest coverage ratio and fixed charge coverage ratio and complying with
certain indebtedness restrictions. As of December 31, 1998 and 1997, the Company
was in compliance with all the agreement's covenants. At December 31, 1998 and
1997, the Company had borrowed $52,750,000 and $38,600,000, respectively, of
which $30,000,000 and $-0- was classified as long-term, respectively.
On January 22, 1999, the Company repurchased 500,000 shares of their Common
Stock. The Company used their revolving credit facility to pay for these shares.
Interest paid during 1998, 1997 and 1996 amounted to $2,030,379, $4,186,967 and
$5,506,851, respectively. The weighted average interest rate on average debt
outstanding was 5.97%, 5.96% and 5.89% for the years ended December 31, 1998,
1997 and 1996, respectively.
Additionally, the Company has available a $25 million line for letters of
credit. Outstanding letters of credit amounted to approximately $12,725,000 at
December 31, 1998 and related primarily to inventory purchases.
3. ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses consist of:
1998 1997
----------- ----------
<S> <C> <C>
Employee compensation $ 7,537,456 $5,674,054
Contribution to Profit Sharing and
Retirement Plan 2,371,992 1,407,745
Taxes, other than taxes on income 524,687 297,457
Other accrued items 1,640,601 1,654,155
----------- ----------
$12,074,736 $9,033,411
=========== ==========
</TABLE>
4. EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (Plan) (amended in 1992) which
provides for 400,000 shares of the Company's treasury stock to be reserved for
sale and issuance to employees at a price to be established by the Stock
Purchase Plan Committee. At December 31, 1998 and 1997, 101,000 and 146,700
shares, respectively, were available to be issued under the Plan. The Company
follows APB Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations and Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123) in accounting for its
Employee Stock Purchase Plan. Compensation expense equals the difference between
the exercise price and the market price of the shares at the date of grant.
Compensation expense related to these awards amounted to $1,058,400, $353,400,
and $559,538 for the years ended December 31, 1998, 1997 and 1996, respectively.
A summary of the activity under the Plan is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Shares granted and issued 50,400 49,600 34,700
Grant and issue price per share $10.50 $7.50 $7.50
Market value per share
at date of issue $31.50 $14.625 $23.625
Shares cancelled and forfeited 4,700 1,050 2,000
Original issue price per share $7.50 TO $7.50 to $13.00 to
$16.00 $16.00 $15.00
Weighted average price per share $11.75 $11.75 $14.00
</TABLE>
5. OTHER INCOME
<TABLE>
<CAPTION>
Other income consists of:
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Finance charges on time
payment accounts $34,006,347 $36,416,174 $42,503,052
Insurance proceeds 2,800,000 -0- -0-
Miscellaneous 7,055,973 3,515,403 1,788,862
----------- ----------- -----------
$43,862,320 $39,931,577 $44,291,914
=========== =========== ===========
</TABLE>
6. INCOME TAXES
<TABLE>
<CAPTION>
The components of income tax expense are as follows:
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Currently payable:
Federal $ 8,949,000 $2,012,000 $6,682,000
State 790,000 (1,191,000) 336,000
----------- ---------- ----------
9,739,000 821,000 7,018,000
Deferred 1,814,000 6,816,000 1,599,000
----------- ---------- ----------
$11,553,000 $7,637,000 $8,617,000
=========== ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Statutory rate applied to
pretax income $11,844,703 $7,311,825 $8,170,127
State income taxes, net
of federal benefit 643,500 256,100 365,950
Non taxable insurance
proceeds (980,000) -0- -0-
Other items 44,797 69,075 80,923
----------- ---------- ----------
$11,553,000 $7,637,000 $8,617,000
=========== ========== ==========
</TABLE>
Components of the deferred tax asset and liability under the liability method as
of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Current net deferred tax asset:
Doubtful accounts $6,913,000 $6,960,000
Returns allowance 1,823,000 2,013,000
Inventory obsolescence 1,997,000 1,937,000
Inventory costs 130,000 778,000
Vacation pay 1,399,000 1,321,000
Advertising costs (4,939,000) (4,113,000)
Other items 458,000 1,014,000
---------- ----------
$7,781,000 $9,910,000
========== ==========
Long-term deferred tax liability:
Property, plant and equipment $1,368,000 $1,683,000
========== ==========
</TABLE>
Income taxes paid (refunded) during 1998, 1997 and 1996 amounted to $14,985,120,
($2,224,794) and $15,553,202, respectively.
7. BUSINESS SEGMENT AND CONCENTRATION
OF BUSINESS RISK
The Company operates as one segment in the business of selling men's and women's
fashion wearing apparel and accessories and home product items. The Company's
customer base is comprised of individuals throughout the United States and is
diverse in both geographic and demographic terms. Advertising is done mainly by
means of catalogs and direct mail letters which offer the Company's merchandise.
Sales of the men's and women's fashion wearing apparel and accessories accounted
for 88%, 87% and 83% of total 1998, 1997 and 1996 sales, respectively. Home
products accounted for the remaining sales volume.
13
<PAGE> 7
QUARTERLY RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
QUARTER ENDED QUARTER ENDED
MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31 31 30 30 31
------------------------------------------------ -----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $115,887 $126,727 $111,873 $152,317 $110,882 $127,546 $102,810 $145,344
Cost of goods
sold 56,915 61,241 57,684 75,992 55,117 63,639 52,630 71,443
Net income 5,518 7,092 2,588 7,090 1,965 3,620 2,256 5,413
Basic and diluted
earnings
per share .61 .80 .29 .79 .21 .40 .25 .59
</TABLE>
Quarter ended September 30, 1998 includes non-taxable insurance proceeds of $2.8
million ($.31 per share). Quarter ended December 31, 1998 includes additional
net income of $2.7 million ($.31 per share) due to reductions in the provisions
for doubtful accounts and returns resulting from improved bad debt and returns
experience. Quarter ended December 31, 1997 includes an additional provision for
doubtful accounts of $3.1 million (pretax), $.20 net income per share, due to
actual bad debt experience exceeding prior estimates.
COMMON STOCK MARKET PRICES AND DIVIDENDS
DECLARED PER SHARE
- --------------------------------------------------------------------------------
The Company's Common Stock is traded on the American Stock Exchange (symbol BL).
The number of record holders of the Company's Common Stock at December 31, 1998
was 2,630.
<TABLE>
<CAPTION>
1998 1997
SALES PRICE DIVIDENDS SALES PRICE DIVIDENDS
HIGH LOW DECLARED HIGH LOW DECLARED
---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
FIRST QUARTER $23 5/8 $17 1/8 $.15 $20 3/4 $15 3/4 $.15
Second Quarter 32 5/8 20 5/8 .15 17 3/4 13 5/16 .15
Third Quarter 33 1/2 24 13/16 .15 18 1/4 15 1/16 .15
Fourth Quarter 30 1/4 17 1/4 .15 20 1/4 16 5/8 .15
</TABLE>
The payment of dividends is not subject to any restrictions. The payment of
dividends is dependent on future earnings, capital requirements and financial
condition. The Company intends to continue its policy of paying regular cash
dividends; however, the company will evaluate its dividend policy on an on-going
basis.
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $506,803,591 $486,581,737 $544,129,005 $560,889,612 $535,792,222
Net income 22,289,008 13,253,928 14,726,221 25,267,910 37,678,710
Total assets 346,012,722 309,497,568 368,757,108 353,333,548 288,881,909
Long-term debt 30,000,000 -0- 80,000,000 80,000,000 -0-
Per share:
Basic and diluted
earnings 2.49 1.45 1.58 2.72 4.07
Cash dividends
declared .60 .60 1.10 2.30 2.05
</TABLE>
14
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
RESULTS OF OPERATIONS
COMPARISON OF 1998 AND 1997
Net income for 1998 increased 68% as compared to 1997. The year 1998 was
favorably impacted by improving bad debt and return experience and by
non-recurring insurance proceeds of $2,800,000, $.31 per share.
Net sales for 1998 were 4.2% higher than net sales for 1997. Response
rates overall were slightly better in 1998 than in 1997. Total advertising
volume was slightly higher in 1998. Gross sales revenue generated per
advertising dollar was approximately the same in both 1998 and 1997. The total
number of orders shipped increased while the average order size remained
approximately the same in 1998 as compared to 1997. Returns as a percentage of
adjusted gross sales improved to 15.1% in 1998 from 16.4% in 1997. A change in
return policy was primarily responsible for the improvement in the returns
percentage.
Other income increased 9.8% in 1998 as compared to 1997. Insurance
proceeds and commissions earned more than offset the drop in finance charges
resulting from strengthened credit procedures. Insurance proceeds of $2,800,000
were the result of the Company-owned term life policy on John L. Blair, former
President and Chairman of the Company. Mr. Blair died on August 29, 1998.
Cost of goods sold as a percentage of net sales decreased to 49.7% in 1998
from 49.9% in 1997. The improvement in returns was primarily responsible for
lower cost of goods in 1998.
Advertising expense in 1998 increased 3.2% from 1997. The increase in
catalog mailings was responsible for the higher advertising expense.
The total number of catalog mailings released in 1998 was 27% higher than
in 1997 (128.2 million vs. 100.7 million). Catalogs have been the primary
advertising format for Home Products for over four years. The Company began full
release, to both customers and prospects, of Menswear catalogs in September 1996
and Womenswear catalogs in March 1997. Catalog mailings from all three product
lines, including combined product line offerings, are continually reviewed as to
mailing frequency, page density, product content, number of pages and trim size.
The total number of circular letter mailings released in 1998 was 22% less
than in 1997 (88.5 million vs. 114.0 million). Circular letter mailings have
decreased due to the expansion of catalog advertising.
Total volume of the co-op and media advertising programs decreased 4% in
1998 as compared to 1997 (1.41 billion vs. 1.47 billion).
General and administrative expense increased 10.4% in 1998 as compared to
1997. The higher general and administrative expense was primarily the result of
a 9.8% increase in wages and benefits and the costs associated with implementing
and maintaining expanded database capabilities in marketing, credit management
and advertising. The higher wages and benefits resulted from normal pay
increases, an increase in the number of employees and increases in net income
related benefits.
The provision for doubtful accounts as a percentage of credit sales was
35% lower in 1998 as compared to 1997. The estimated provision for doubtful
accounts is based on current expectations, sales mix (prospect/customer) and
prior years' experience. Due to improvement in the delinquency and charge-off
rates in 1998, the estimated bad debt rate for 1998 credit sales and finance
charges has been lowered slightly. 1997 included an additional provision for
doubtful accounts of $8.3 million (pretax), $.52 net income per share. At
December 31, 1998, the allowance for doubtful accounts as a percentage of
delinquencies was 5.3% higher than at December 31, 1997. Recoveries of bad debts
previously charged off have been credited back against the allowance for
doubtful accounts. The Company has continued to strengthen its credit
procedures. Revised credit granting and collection policies have resulted in
turning down more bad credit risks and in shortening and strengthening the
collection cycle. Credit granting, collection and behavior models continue to
gain effectiveness and, along with expanding database capabilities, should
provide valuable credit marketing opportunities.
Interest expense decreased 48% in 1998 as compared to 1997. Interest
expense results primarily from the Company's borrowings necessary to finance
customer accounts receivable and inventories. While customer accounts receivable
have changed little as of December 31, 1998 ($158.2 million) and December 31,
1997 ($157.6 million), inventories have grown 46% ($115.1 million vs. $78.7
million). Average borrowings outstanding have been lower in 1998 ($34.9 million
vs. $66.5 million), but inventory growth has caused higher borrowings
outstanding at year-end 1998 than at year-end 1997.
Income taxes as a percentage of income before income taxes were 34.1% in
1998 and 36.6% in 1997. The federal income tax rate was 35% in both years. The
reduction in the total tax rate in 1998 was due to the non-taxable insurance
proceeds ($2,800,000).
COMPARISON OF 1997 AND 1996
Net income for 1997 decreased 10.0% as compared to 1996. The year 1997 was
negatively impacted by lower net sales and deteriorating bad debt experience.
Net sales for 1997 were 10.6% lower than 1996 net sales. Sales declined in
1997 due to a reduction in the volume of advertising mail, tightened credit
management and elimination of high-dollar, high-credit-risk electronics items in
the Home Products line. Advertising mail volume was reduced as a result of the
elimination of pre-approved credit offers to prospects and, to a lesser extent,
the early stage implementation of mail stream optimization and segmentation.
Response rates were mixed - reduced by tighter credit management, improved by
mail stream optimization and segmentation - but remained about the same overall.
Gross sales revenue generated per advertising dollar decreased 1.7%. In 1997,
the average order size ($60) remained approximately the same but the total
number of orders shipped dropped (reduction in advertising) as compared to 1996.
Returns as a percentage of adjusted gross sales increased to 16.4% in 1997 from
15.7% in 1996. Returns are higher on Blair Credit (Easy Payment Plan) and credit
card sales and these sales (combined) grew to 71% of gross mail order sales in
1997 from 68% in 1996. Returns are also higher on Womenswear sales and
Womenswear sales grew to 65% of gross mail order sales in 1997 from 59% in 1996.
Other income decreased 9.8% in 1997 as compared to 1996 due to a 14.3%
drop in finance charges assessed on Easy Payment Plan accounts receivable.
Average Easy Payment Plan accounts receivable decreased 15.2%, approximately
$37,000,000.
15
<PAGE> 9
Cost of goods sold as a percentage of net sales increased to 49.9% in 1997
from 49.4% in 1996. Increased returns and liquidation of the electronics items
in the Home Products line were primarily responsible for the higher cost of
goods in 1997.
Advertising expense in 1997 decreased 9.2% from 1996. Increased catalog
mailings were more than offset by reductions in circular letter mailings, co-op
and media volume and paper costs.
The total number of catalog mailings released in 1997 was 67% higher than
in 1996 (100.7 million vs. 60.3 million). The catalog has been the primary
advertising format for Home Products for over three years. The Company released
initial test mailings of Menswear catalogs in July 1995 and began full mailings
to prospects and customers in September 1996. The Company released initial test
mailings of Womenswear catalogs in January 1996 and began full mailings in the
first quarter of 1997. The increased catalog volume and lower paper prices
resulted in a net catalog mailing cost increase of $18,523,000 over 1996.
Catalog mailings from all three product lines, including combined line
offerings, are continually reviewed as to mailing frequency, page density,
product mix, number of pages and trim size.
The total number of circular mailings released in 1997 was 35% less than
in 1996 (114.0 million vs. 176.0 million). The decreased circular volume and
lower paper prices resulted in a circular mailing cost decrease of $28,247,000
from 1996. Circular mailings have decreased primarily due to the expansion of
the catalog advertising program.
Total volume of the co-op and media advertising programs decreased 20% in
1997 as compared to 1996 (1.47 billion vs. 1.83 billion). The decreased co-op
and media volume and lower paper prices resulted in a co-op and media cost
decrease of $3,155,000 from 1996. The co-op and media advertising volume has
declined because the unproductive advertising placements have been eliminated.
General and administrative expense decreased 3.8% in 1997 as compared to
1996. The lower general and administrative expense was primarily the result of
declines in wages and benefits and in professional service fees. Wages and
benefits were down due to a 4.9% drop in the average number of employees in 1997
as compared to 1996. The Company's study of its existing marketing programs, in
support of the strategic plan to target the "over 40 low-to-moderate income"
market, is coming to a conclusion and thus professional service fees have
declined.
The provision for doubtful accounts as a percentage of credit sales was
1.9% lower in 1997 as compared to 1996. A reduction in the provision due to
lower credit sales and finance charges was nearly offset by an additional
provision due to actual bad debt experience exceeding prior estimates. Credit
sales decreased 27% and finance charges decreased 14% in comparison to 1996. The
estimated provision for doubtful accounts is based on current expectations,
sales mix (prospect/customer) and prior years' experience. Due to increases in
the delinquency and charge-off rates experienced in 1997 on prior receivables,
1997 included an additional provision for doubtful accounts of $8.3 million
(pretax), $.52 net income per share. Due to increases in the delinquency and
charge-off rates experienced in 1996 on prior receivables, 1996 included an
additional provision for doubtful accounts of $11.5 million (pre-tax), $.71 net
income per share. The 1997 provision for doubtful accounts increased the
allowance for doubtful accounts to a higher percentage of delinquencies at
year-end 1997 than at year-end 1996. Recoveries of bad debts previously charged
off, which more than doubled in 1997 over 1996, have been credited back against
the allowance for doubtful accounts. The Company, having previously completed a
study of its credit policies, continues to implement improved credit policies.
Revised credit granting and collection policies already implemented have
resulted in turning down more bad credit risks and in shortening and
strengthening the collection cycle. After some delay, credit granting models
addressing prospects (first-time buyers) were implemented in mid-September and
early-October 1997. Plans for the first quarter of 1998 include the
implementation of behavior and collection models to further strengthen credit
procedures. The full impact of the credit policies is not likely to be realized
until later in 1998.
Interest expense decreased 25.7% in 1997 as compared to 1996. Interest
expense has resulted primarily from the Company's borrowings necessary to
finance customer accounts receivable. Average borrowings outstanding have
decreased to $66,543,000 during 1997 from $92,806,000 during 1996. The reduction
in Blair Credit (Easy Payment Plan) sales, the increase in credit card sales and
improved credit policies are greatly responsible for lowering the levels of
customer accounts receivable and borrowings. The weighted average interest rate
on average debt outstanding was 5.96% for 1997 and 5.89% for 1996.
Income taxes as a percentage of income before income taxes were 36.6% in
1997 and 36.9% in 1996. The federal income tax rate was 35% in both years. The
difference in the total income tax rate was caused by a reduction in the
Company's effective state income tax rate.
LIQUIDITY AND SOURCES OF CAPITAL
- --------------------------------------------------------------------------------
All working capital and cash requirements were met. In November 1998, the
Company entered into an amended and restated $95,000,000 Revolving Credit
Facility, which expires on November 13, 2001. This agreement replaced the
$125,000,000 Revolving Credit Facility which expired on November 17, 1998. The
unsecured Revolving Credit Facility requires the Company to meet certain
covenants, and as of December 31, 1998 the Company was in compliance with all
the covenants. Borrowings outstanding at December 31, 1998 were $52,750,000 of
which $30,000,000 was classified as long-term. Borrowings outstanding at
December 31, 1997 were $38,600,000, all classified as current.
The ratio of current assets to current liabilities was 3.37 at December
31, 1998, 2.69 at December 31, 1997 and 4.01 at December 31, 1996. Working
capital increased $47,728,553 in 1998 primarily due to increases in long-term
debt and net income. Working capital decreased $74,129,476 in 1997 due to the
reduction in long-term debt. The 1998 increase was primarily reflected in
increased inventories and decreased notes payable. The 1997 decrease was
primarily reflected in decreased customer accounts receivable, inventories,
deferred income taxes and prepaid federal and state taxes and increased notes
payable and trade accounts payable.
16
<PAGE> 10
Merchandise inventory turnover was 2.4 in 1998, 2.6 in 1997 and 2.9 in
1996. Merchandise inventory as of December 31, 1998 increased 49.9% from
December 31, 1997 and 37.0% from December 31, 1996. Inventory levels have been
impacted by the transition to a larger catalog operation and by the continuing
effort to improve customer service. The Company's new catalog inventory
management system is not yet fully operational.
The Company operates as one business segment consisting of three product
lines. Home Products net sales as a percentage of total net sales were 13.9 %
($70.3 million) in 1998, 13.4% ($65.3 million) in 1997 and 17.3% ($94.1 million)
in 1996. Menswear net sales were 24.0% ($121.6 million) in 1998, 23.2% ($112.7
million) in 1997 and 25.1% ($136.5 million) in 1996. Womenswear net sales were
62.1% ($314.9 million) in 1998, 63.4% ($308.5 million) in 1997 and 57.6% ($313.5
million) in 1996. Home Products inventory totaled $18.2 million at December 31,
1998, $6.8 million at December 31, 1997 and $18.5 million at December 31, 1996.
Menswear inventory was $26.6 million at December 31, 1998, $17.6 million at
December 31, 1997 and $21.6 million at December 31, 1996. Womenswear inventory
was $57.4 million at December 31, 1998, $43.7 million at December 31, 1997 and
$34.4 million at December 31, 1996.
The Company has added new facilities, modernized its existing facilities
and acquired new cost saving equipment during the last several years. Capital
expenditures for property, plant and equipment totaled $1,008,218, $3,033,033
and $3,249,030 during 1998, 1997 and 1996. Capital expenditures for 1999, 2000
and 2001 are projected to be approximately $5,000,000 a year in order to support
the Company's marketing strategy. The increased capital expenditures will result
primarily from expanding database capabilities in target marketing, credit
management and mail stream optimization. Delays in the database project kept
capital expenditures well below projected levels in 1998.
In August 1995, the Company's second call center was opened in Erie,
Pennsylvania. A 75% expansion of the Erie Call Center was completed in September
1996. A third call center, located in Franklin, Pennsylvania, was added in
January 1997. Further expansion and refinement of all three call centers -
Warren, Erie and Franklin - was completed by September 1997. See "Future
Considerations."
The Company recently declared a quarterly dividend of $.15 per share
payable on March 15, 1999. It is the Company's intent to continue paying
dividends; however, the Company will evaluate its dividend practice on an
on-going basis. See "Future Considerations."
The Company has, from the fourth quarter of 1996 to the present,
repurchased on the open market 544,739 shares of its common stock. In January
1999, the Company repurchased 500,000 shares of its common stock from the Estate
of John L. Blair. The Company intends to repurchase approximately 100,000
additional shares from John Blair's Estate in March 1999.
Future cash needs will be financed by cash flow from operations, the
current borrowing arrangement and, if needed, other financing arrangements that
may be available to the Company. The Company's current projection of future cash
requirements, however, may be affected in the future by numerous factors,
including changes in customer payments on accounts receivable, consumer credit
industry trends, sales volume, operating cost fluctuations and unplanned capital
spending.
IMPACT OF INFLATION AND CHANGING PRICES
- --------------------------------------------------------------------------------
Although inflation has moderated in our economy, the Company is
continually seeking ways to cope with its impact. To the extent permitted by
competition, increased costs are passed on to customers by selectively
increasing selling prices over a period of time. Profit margins have been
pressured by paper cost and postal rate increases. Paper prices have fluctuated
since 1994 - reached their high point at 1995 year-end, retreated below 1995
levels during the third quarter of 1996, reached their low point during the
first quarter of 1997, increased quarterly throughout the rest of 1997 and the
first quarter of 1998, decreased in late 1998 and decreased in early 1999.
Overall, paper prices were lower in 1997 than in 1996, were higher in 1998 than
in 1997 and, based on current trends, are expected to be lower in 1999 than in
1998. Postal rates increased in 1995, increased again in 1996 (slight increase
due to the USPS Classification Reform) and increased again on January 10, 1999.
The Company's estimate is that the January 10, 1999 postal rate increase will
increase the Company's 1999 postage bill by approximately 4.7%.
The Company principally uses the LIFO method of accounting for its
merchandise inventories. Under this method, the cost of products sold reported
in the financial statements approximates current costs and thus reduces
distortion in reported income due to increasing costs. The charges to operations
for depreciation represent the allocation of historical costs incurred over past
years and are significantly less than if they were based on the current cost of
productive capacity being used.
Property, plant and equipment are continuously being expanded and updated.
Recent major projects are discussed under Liquidity and Sources of Capital.
Assets acquired in prior years will, of course, be replaced at higher costs but
this will take place over many years. New assets, when acquired, will result in
higher depreciation charges, but in many cases, due to technological
improvements, savings in operating costs should result. The Company considers
these matters in setting pricing policies.
ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In June 1997, Statement of Financial Accounting standards No. 130,
"Comprehensive Income," was issued. Statement No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Company adopted Statement No. 130
in the 1998 financial statements, and the adoption had no impact on the
Company's financial statements.
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," was
issued. Statement No. 131 establishes standards for the way that a public
enterprise reports information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments
17
<PAGE> 11
in interim financial reports issued to stockholders. The Company adopted
Statement No. 131 in the 1998 financial statements, and the adoption had no
impact on the Company's financial statements.
In March 1998, Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," was issued. SOP 98-1
requires capitalization of costs to purchase or develop internal use software
and amortization of those costs to income over the software's estimated useful
life. The SOP is effective for fiscal years beginning after December 15, 1998.
The Company believes that adoption of SOP 98-1 will not have a significant
impact on its financial statements.
FUTURE CONSIDERATIONS
- --------------------------------------------------------------------------------
The Company is faced with the ever-present challenge of maintaining and
expanding the customer file. This involves the acquisition of new customers
(prospects), the conversion of new customers to established customers (active
repeat buyers) and the retention and/or reactivation of established customers.
These actions are vital in growing the business but are being impacted by
increased operating costs and a declining labor pool and by increased
competition in the retail sector, high levels of consumer debt and erratic
consumer response rates.
A prime aspect of the Company's marketing strategy involves targeting
customers in the "over 40, low-to-moderate income" market. This redefinition of
our target customer from "over 50" to "over 40" has been made possible by the
ability of our catalog advertising to reach younger buyers within our
traditional list sources. This market, though younger in age than our
traditional customer file, is the fastest growing segment of the population.
Success of the marketing strategy requires investment in database management,
operating systems, prospecting programs, catalog marketing, telephone call
centers, and, possibly, a second distribution center. Management believes that
these investments should improve Blair Corporation's position in new and
existing markets and provide opportunities for future earnings growth.
IMPACT OF YEAR 2000
- --------------------------------------------------------------------------------
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment of its IT systems and has been
modifying or replacing portions of its software so that its computer systems
will function properly with respect to dates in the year 2000 and thereafter.
The total Year 2000 project cost is estimated at $700,000 to $850,000 all of
which will be expensed as incurred. To date, the Company has incurred and
expensed approximately $525,000.
The project is estimated to be completed not later than September 30,
1999, which is prior to any anticipated impact on its operating systems. The
Company believes that with modification to existing software and conversions to
new software, the Year 2000 Issue will not pose significant operational problems
for its computer systems. At this time, all software has been modified and/or
converted but has not been fully tested - testing is approximately 70% complete.
However, if the software installations are not completed timely, the Year 2000
Issue could have a material impact on the operations of the Company. Operations
could be disrupted or stopped for some period of time. Should this occur, the
Company would direct all available resources at the situation in order to
resolve it in as short a time as possible.
The Company has initiated formal communications with all of its
significant suppliers (includes suppliers of non IT systems) to determine the
extent to which the Company's interface systems are vulnerable to those third
parties' failure to remediate their own Year 2000 Issues. The Company has
received favorable response from nearly all of these suppliers, however, there
is no guarantee that the systems of suppliers on which the Company relies will
be timely converted and would not have an adverse effect on the Company's
systems. Non-responding and/or non-compliant suppliers are being further
assessed by the Company.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
Forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) the Company's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of the Company; (ii) the Company's plans and
results of operations will be affected by the Company's ability to manage its
growth, accounts receivable and inventory; and (iii) other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission.
18
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Blair Corporation
We consent to the incorporation by reference in this Form 10-K of Blair
Corporation and Subsidiary of our report dated February 1, 1999, included in the
1998 Annual Report to Stockholders of Blair Corporation.
Our audits also included the financial statement schedule of Blair Corporation
and Subsidiary listed in Item 14(a). This schedule is the responsibility of
Blair Corporation's management. Our responsibility is to express an opinion
based on our audits. In our opinion, the financial statement schedule referred
to above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
We also consent to the incorporation by reference in the Registration Statement
on Form S-8 dated July 22, 1998, pertaining to the Blair Corporation Employee
Stock Purchase Plan, of our report dated February 1, 1999, with respect to the
consolidated financial statements incorporated herein by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedule included in this Form 10-K of Blair Corporation.
/s/ ERNST & YOUNG LLP
Buffalo, New York
March 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BLAIR
CORPORATION'S 12/31/98 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH YEAR END, 1998 10-K FILING FOR BLAIR CORPORATION.
</LEGEND>
<CIK> 0000071525
<NAME> BLAIR CORPORATION
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,211,376
<SECURITIES> 0
<RECEIVABLES> 158,191,826<F1>
<ALLOWANCES> 35,474,323
<INVENTORY> 115,135,550
<CURRENT-ASSETS> 297,119,450
<PP&E> 103,831,474
<DEPRECIATION> 55,787,582
<TOTAL-ASSETS> 346,012,722
<CURRENT-LIABILITIES> 88,143,487
<BONDS> 0
0
0
<COMMON> 419,810
<OTHER-SE> 226,081,425<F2>
<TOTAL-LIABILITY-AND-EQUITY> 346,012,722
<SALES> 506,803,591
<TOTAL-REVENUES> 550,665,911
<CGS> 251,832,019
<TOTAL-COSTS> 516,823,903
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 22,033,466
<INTEREST-EXPENSE> 2,116,772
<INCOME-PRETAX> 33,842,008
<INCOME-TAX> 11,553,000
<INCOME-CONTINUING> 22,289,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,289,008
<EPS-PRIMARY> 2.49
<EPS-DILUTED> 2.49
<FN>
<F1>AMOUNT REPRESENTS NET ACCOUNTS RECEIVABLE.
<F2>AMOUNT INCLUDES ADDITIONAL PAID-IN-CAPITAL, RETAINED EARNINGS, TREASURY STOCK,
AND THE EMPLOYEE STOCK PURCHASE PLAN RECEIVABLE.
</FN>
</TABLE>
