United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005 Commission File Number 1-878
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BLAIR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 25-0691670
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
220 HICKORY STREET, WARREN, PENNSYLVANIA 16366-0001
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(Address of principal executive offices) (Zip Code)
(814) 723-3600
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(Registrant's telephone number, including area code)
Not applicable
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(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act.) YES X NO
----- -----
As of April 29, 2005 the registrant had outstanding 8,247,426 shares of its
common stock without nominal or par value.
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
BLAIR CORPORATION AND SUBSIDIARIES
March 31, 2005
-2-
Blair Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
March 31 December 31
2005 2004
------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 65,720,862 $ 50,559,995
Customer accounts receivable, less allowances
for doubtful accounts and returns of
$33,521,058 in 2005 and $48,018,188 in 2004 135,911,132 148,171,292
Inventories: (Note I)
Merchandise 67,108,020 67,597,084
Advertising and shipping supplies 13,747,645 16,697,349
------------------------------
80,855,665 84,294,433
Deferred income taxes (Note W) 10,029,000 10,657,000
Prepaid and refundable federal and state taxes 619,875 -0-
Prepaid expenses 2,740,359 2,210,181
------------------------------
Total current assets 295,876,893 295,892,901
Property, plant and equipment:
Land (Note Z) 1,142,144 1,142,144
Buildings and leasehold improvements (Note Z) 66,814,184 66,803,458
Equipment 73,154,033 74,793,330
Construction in progress 2,406,696 1,686,408
------------------------------
143,517,057 144,425,340
Less allowances for depreciation 94,908,316 95,066,355
------------------------------
48,608,741 49,358,985
Trademark 397,860 415,921
Other long-term assets 408,570 473,037
------------------------------
Total assets $345,292,064 $346,140,844
==============================
See accompanying notes.
-3-
Blair Corporation and Subsidiaries
Consolidated Balance Sheets - Continued
(Unaudited)
March 31 December 31
2005 2004
------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable (Note S) $ 15,000,000 $ 15,000,000
Trade accounts payable 28,077,347 24,831,335
Advance payments from customers 3,157,599 1,854,086
Accrued expenses (Note T) 13,721,032 15,406,631
Accrued federal and state taxes -0- 3,689,994
Current portion of capital lease obligations
(Note U) 43,874 111,254
------------------------------
Total current liabilities 59,999,852 60,893,300
Capital lease obligations, less current portion
(Note U) 9,752 12,270
Deferred income taxes (Note W) 2,330,000 2,668,000
Other long term liability 389,522 -0-
Stockholders' equity:
Common stock without par value:
Authorized 12,000,000 shares
issued 10,075,440 shares (including shares
held in treasury) -- stated value 419,810 419,810
Additional paid-in capital 13,178,632 13,238,311
Retained earnings 305,999,614 306,544,284
Accumulated other comprehensive loss (121,864) (118,634)
------------------------------
319,476,192 320,083,771
Less 1,833,264 shares in 2005 and 1,846,542
shares in 2004 of common stock
in treasury -- at cost 35,577,088 35,955,582
Less receivable and deferred compensation
from stock plans 1,336,166 1,560,915
------------------------------
Total stockholders' equity 282,562,938 282,567,274
------------------------------
Total liabilities and stockholders' equity $345,292,064 $346,140,844
==============================
See accompanying notes.
-4-
Blair Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31
2005 2004
------------------------------
Net sales $107,557,919 $128,642,079
Other revenue (Note X) 10,715,572 12,072,831
------------------------------
118,273,491 140,714,910
Cost and expenses:
Cost of goods sold (Note C ) 52,774,761 63,138,303
Advertising 29,458,705 35,304,500
General and administrative (Note C ) 31,859,818 33,800,842
Provision for doubtful accounts 3,492,632 7,539,859
Interest (income) expense, net (Note D ) (125,229) 9,000
Other (income) expense, net (209,519) 2,353
------------------------------
117,251,168 139,794,857
------------------------------
Income before income taxes 1,022,323 920,053
Income taxes (Note W) 372,000 349,000
------------------------------
Net income $ 650,323 $ 571,053
==============================
Basic earnings per share based on
weighted average shares outstanding (Note V) $.08 $.07
==============================
Diluted earnings per share based on
weighted average shares outstanding
and assumed conversions (Note V) $.08 $.07
==============================
See accompanying notes.
-5-
Blair Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
Three Months Ended
March 31
2005 2004
------------------------------
Common Stock $ 419,810 $ 419,810
Additional Paid-in Capital:
Balance at beginning of period 13,238,311 14,134,983
Issuance of 300 shares in 2005 and 2004 of common
stock to non-employee directors (4,013) (14,591)
Issuance of 7,928 shares in 2005 and 0 shares in
2004 of common stock under Omnibus Stock
Plan-Executive Officer Stock Awards (Note V) (37,198) -0-
Forfeitures of 1,150 shares in 2005 and 2,150 shares
in 2004 of common stock under Omnibus Stock and
Employee Stock Purchase Plans (Note V) (9,144) (25,902)
Exercise of 6,200 shares in 2005 and 18,567 shares
in 2004 of common stock under Omnibus Stock
Plan-Non-Qualified Stock Options (39,324) (176,435)
Tax benefit on exercise of Non-Qualified Stock
Options 30,000 37,000
------------------------------
Balance at end of period 13,178,632 13,955,055
Retained Earnings:
Balance at beginning of period 306,544,284 296,397,999
Net income 650,323 571,053
Cash dividends (Note V) (1,194,993) (1,171,937)
------------------------------
Balance at end of period 305,999,614 295,797,115
Accumulated Other Comprehensive Loss:
Balance at beginning of period (118,634) (20,016)
Foreign currency translation losses (3,230) (50,725)
------------------------------
Balance at end of period (121,864) (70,741)
Treasury Stock:
Balance at beginning of period (35,955,582) (39,514,841)
Issuance of 300 shares in 2005 and 2004 of common
stock to non-employee directors 8,588 19,165
Issuance of 7,928 shares in 2005 and 0 shares in
2004 of common stock under Omnibus Stock
Plan-Executive Officer Stock Awards (Note V) 226,938 -0-
Forfeitures of 1,150 shares in 2005 and 2,150 shares
in 2004 of common stock under Omnibus Stock and
Employee Stock Purchase Plans (Note V) (22,706) (23,373)
Exercise of 6,200 shares in 2005 and 18,567 shares
in 2004 of common stock under Omnibus Stock
Plan-Non-Qualified Stock Options 165,674 531,479
------------------------------
Balance at end of period (35,577,088) (38,987,570)
See accompanying notes.
-6-
Blair Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity - Continued
(Unaudited)
Three Months Ended
March 31
2005 2004
------------------------------
Receivable and Deferred Compensation from Stock
Plans:
Balance at beginning of year (1,560,915) (2,616,826)
Issuance (net of forfeitures) of common stock under
Omnibus Stock Plan - Restricted Stock Awards and
Executive Officer Awards: (Note V)
Receivable 7,347 11,132
Deferred Compensation -0- -0-
Amortization of deferred compensation,
net of forfeitures 47,786 43,039
Amortization of Executive Officer Stock awards,
net of vesting and forfeitures 92,845 142,994
Applications of dividends and cash repayments 76,771 91,834
------------------------------
Balance at end of period (1,336,166) (2,327,827)
------------------------------
Total stockholders' equity $282,562,938 $268,785,842
==============================
Comprehensive Income:
Net income $ 650,323 $ 571,053
Adjustment from foreign currency translation
losses (3,230) (50,725)
------------------------------
Comprehensive income $ 647,093 $ 520,328
==============================
See accompanying notes.
-7-
Blair Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31
2005 2004
------------------------------
Operating activities
Net income $ 650,323 $ 571,053
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 2,161,925 2,168,577
Amortization 82,528 85,589
Gain on disposal of assets (208,366) -0-
Provision for doubtful accounts 3,492,632 7,539,859
Provision for deferred income taxes 290,000 (1,666,000)
Tax benefit on exercise of non-qualified
stock options 30,000 37,000
Compensation expense (net of forfeitures)
for stock awards 351,814 200,025
Changes in operating assets and liabilities
providing (using) cash:
Customer accounts receivable 8,766,993 (1,641,246)
Inventories 3,438,767 5,773,343
Prepaid expenses and other assets (530,591) (383,836)
Trade accounts payable 3,246,439 (5,069,009)
Advance payments from customers 1,303,513 1,390,578
Accrued expenses (1,295,842) (3,303,309)
Federal and state taxes (4,309,869) (4,993,024)
------------------------------
Net cash provided by operating activities 17,470,266 709,600
Investing activities
Purchases of property, plant and equipment (1,708,593) (1,356,616)
Proceeds from sale of assets 505,349 5,250
------------------------------
Net cash used in investing activities (1,203,244) (1,351,366)
Financing activities
Principal repayments on capital lease obligations (69,920) (91,261)
Dividends paid (1,194,993) (1,171,937)
Exercise of non-qualified stock options 126,350 355,043
Repayments of notes receivable from stock plans 35,400 44,276
------------------------------
Net cash used in financing activities (1,103,163) (863,879)
Effect of exchange rate changes on cash (2,992) (53,884)
------------------------------
Net increase (decrease) in cash 15,160,867 (1,559,529)
Cash and cash equivalents at beginning of year 50,559,995 36,380,049
------------------------------
Cash and cash equivalents at end of period $ 65,720,862 $ 34,820,520
==============================
See accompanying notes.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Blair
Corporation and its wholly-owned subsidiaries ("the Company") have been prepared
in accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. All adjustments that were considered necessary for a fair
presentation have been included. These adjustments were of a normal recurring
nature. Operating results for the three months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005. For further information refer to the financial statements and
footnotes included in the Company's annual report on Form 10-K for the year
ended December 31, 2004.
On January 25, 2005, the Company decided to phase out its Allegheny Trail
wholesale business by April 30, 2005. The Company's intention is to more fully
focus new business development efforts on the core Blair brand and its proven
appeal to significant market segments. The decision to focus on core operations
is based in part on the historical success of the Blair brand and an extensive
consumer and brand strategy study undertaken by the company as part of its
efforts to enhance profitability and shareholder value. The Company has
evaluated the impact of phasing out the Allegheny Trail business on all assets
associated with this operation. All appropriate reserves have been recorded.
This decision did not have a significant negative effect on 2004 profitability,
and is not expected to negatively impact 2005 performance.
On August 20, 2003 the Company commenced operations of a new wholly-owned
subsidiary, JLB Service Bank. The establishment of JLB Service Bank enables the
Company to manage its credit portfolio in a more cost-effective and efficient
manner. The bank's products involve the extension of credit on an unsecured
basis to individuals who are customers of Blair Corporation to facilitate their
purchases of Blair's merchandise. As of March 31, 2005, JLB Service Bank's total
assets represented 1.52% of the total consolidated assets of the Company,
compared to 1.51% at March 31, 2004. Gross revenue of JLB Service Bank was .88%
and .98% of the Company's consolidated gross revenue for the three months ended
March 31, 2005 and March 31, 2004, respectively.
NOTE B - REVENUE RECOGNITION
Sales (cash, Blair Credit, or third-party credit card) are recorded when the
merchandise is shipped to the customer, in accordance with the provisions of
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
and Staff Accounting Bulletin No. 104, Revenue Recognition, as issued by the
Securities & Exchange Commission. Blair Credit sales are made under Easy Payment
Plan sales arrangements. Monthly, a provision for doubtful accounts is charged
against income based on management's estimate of realization. Any recoveries of
bad debts previously written-off are credited back against the allowance for
doubtful accounts in the period received. As reported in the balance sheet, the
carrying amount, net of allowances for doubtful accounts and returns, for
customer accounts receivable on Blair Credit sales approximates fair value.
Shipping and processing revenue is included in net sales.
Finance charges on time payment accounts are recognized on an accrual basis of
accounting. The decrease in finance charges compared to the first quarter of
2004 (see NOTE X - OTHER REVENUE) primarily resulted from reduced finance charge
revenues associated with the previously announced discontinuance of the Crossing
Pointe catalog title and lower credit sales.
NOTE C - COSTS AND EXPENSES
The Company includes the following costs in the line items listed below in its
Consolidated Statements of Income:
Cost of Goods Sold
Cost of goods sold consists of merchandise costs, including sourcing, importing
and inbound freight costs. In addition, cost of goods sold includes writedowns,
shipping cartons, shipping supplies, and merchandise samples.
The Company records internally incurred shipping and handling costs in cost of
sales.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
NOTE C - COSTS AND EXPENSES - Continued
General and Administrative Expenses
Occupancy and warehousing costs consist of compensation, employee benefit
expenses and related building costs. Examples of building costs include
depreciation, repairs and maintenance, utilities, rent, real estate taxes and
maintenance contracts. Occupancy and warehousing costs incurred in support of
the Company's order fulfillment process were $9,017,471 and $9,365,806 for the
quarters ended March 31, 2005 and 2004 respectively. The Company does not
separately track purchasing and related costs which are also included in general
and administrative expenses. In addition, the general and administrative costs
incurred to support the Company's product development; circulation planning and
customer file maintenance efforts are also included in general and
administrative expenses.
NOTE D - INTEREST (INCOME) EXPENSE, NET
Interest (income) expense, net, consists of the following:
Three Months ended March 31
2005 2004
------------------------------
Interest expense $ 131,322 85,237
Interest income (256,551) (76,237)
------------------------------
Interest (income) expense, net $(125,229) $ 9,000
==============================
Interest income results from the Company's investment of surplus cash into money
market securities and other investments with a maturity of three months or less
when purchased. Interest expense primarily reflects the impact of $15 million of
borrowings that are required under the receivables securitization.
NOTE E - USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE F - 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 Unaudited Consolidated Balance Sheets approximate fair
values.
NOTE G - 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 Unaudited
Consolidated Statements of Income. Actual returns are charged against the
allowance for returns, which is netted against accounts receivable on the
balance sheet. The provision for returns charged against income for the first
quarter of 2005 and 2004 amounted to $15,809,659 and $20,627,832, respectively.
Management believes these provisions are adequate based upon the relevant
information presently available. However, changes in facts or circumstances
could result an additional adjustment to the Company's provisions.
NOTE H - ACCOUNTS RECEIVABLE AND DOUBTFUL ACCOUNTS
A provision for doubtful accounts is recorded monthly as a percentage of gross
credit sales based upon experience of delinquencies (accounts over 30 days past
due) and charge-offs (accounts removed from accounts receivable for non-payment)
and current credit market conditions. Management believes these provisions are
adequate based upon the relevant information presently available. However,
changes in facts or circumstances could result in additional adjustment to the
Company's provisions.
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
NOTE H - ACCOUNTS RECEIVABLE AND DOUBTFUL ACCOUNTS - Continued
In connection with the discontinuance of the Crossing Pointe catalog title, on
March 30, 2005, the Company sold all open Crossing Pointe credit accounts
receivable to a third party at a discount. After comparing the proceeds of the
sale to the net carrying value of this asset, the Company realized a gain of
approximately $500,000.
NOTE I - 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.
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on management's estimates of expected year-end inventory
levels and costs. Because these are subject to many forces beyond management's
control, interim results are subject to the final year-end LIFO inventory
valuation. If the FIFO method had been used, merchandise inventories would have
increased by approximately $3,776,000 at both March 31, 2005 and December 31,
2004.
Cost of advertising and shipping supplies is determined on the first-in,
first-out (FIFO) method. Advertising and shipping supplies include printed
advertising material and related mailing supplies for promotional mailings,
which are generally scheduled to occur within two months. These direct response
advertising costs are then expensed over the period of expected future benefit,
based on buying patterns, generally nine weeks or less.
The Company has a reserve for slow moving and obsolete inventory amounting to
$4,100,000 at March 31, 2005, $3,600,000 at December 31, 2004, and $1,700,000 at
March 31, 2004. A monthly provision for obsolete inventory is added to the
reserve and expensed to cost of goods sold, based on the levels of merchandise
inventory and merchandise purchases. The March 31, 2005 obsolescence reserve
takes into consideration the Company's decisions to discontinue its Crossing
Pointe catalog title in 2005 and to phase out the Allegheny Trail wholesale
business by April 30, 2005, which created the need to reserve a greater portion
of these inventories due to anticipated lower recovery. The closing of the
Starbrick Outlet Store in January 2004 resulted in $2.4 million of writedowns in
the first quarter of 2004. These writedowns primarily were provided for in the
December 31, 2003 obsolescence reserve.
NOTE J - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Depreciation has
been provided principally by the straight-line method using rates, which are
estimated to be sufficient to depreciate the cost of the assets over their
period of usefulness. Amortization of assets recorded under capital lease
obligations is included with depreciation expense. Estimated useful lives of
property, plant and equipment range from 3 to 39.5 years. Maintenance and
repairs are charged to expense as incurred.
NOTE K - TRADEMARK
Trademark, net of accumulated amortization of $685,789 at March 31, 2005 and
$613,546 at March 31, 2004, is stated on the basis of cost. The Company has one
trademark which is being amortized by the straight-line method for a period of
15 years. Amortization expense amounted to $18,061 for the first quarter of 2005
and 2004, respectively.
NOTE L - 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
March 31, 2005.
NOTE M - 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 the first quarter of 2005
and 2004 amounted to $80,640 and $58,897, respectively.
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
NOTE M - EMPLOYEE BENEFITS - Continued
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 the first quarter of 2005
and 2004 amounted to $495,972 and $345,918, respectively.
NOTE N - 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.
NOTE O - NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment, which is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123(R) supersedes Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS
No. 123(R) is similar to the approach described in SFAS No. 123. However,
SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized on the income statement
based on fair values. Pro forma disclosure is no longer an alternative.
SFAS No. 123(R) must be adopted no later than January 1, 2006. We expect to
adopt SFAS No. 123(R) on January 1, 2006.
As permitted by SFAS No. 123, the Company currently accounts for share-based
payments to employees using Opinion 25's intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have a
significant impact on our results of operations, although it will have no impact
on our overall financial position. The impact of the adoption of SFAS No. 123(R)
cannot be predicted at this time because it will depend on levels of share-based
payments granted in the future. However, had we adopted SFAS No. 123(R) in prior
periods, the impact of that standard would have approximated the impact of SFAS
No. 123 as described in the disclosure of pro forma net income and earnings per
share in Note P to our consolidated financial statements. SFAS No. 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. While the Company cannot estimate what those amounts will be in the
future (because they depend on, among other things, when employees exercise
stock options), the amount of operating cash flows recognized in prior periods
for such excess tax deductions was $30,000 and $37,000 in the first quarter of
2005 and 2004, respectively.
NOTE P - STOCK COMPENSATION
In accordance with the provisions of SFAS No. 123, the Company has elected to
continue applying the provisions of Accounting Principles Board Opinion No. 25
and related interpretations in accounting for its stock-based compensation
plans. Accordingly, the Company does not recognize compensation expense for
stock options when the stock option price at the grant date is equal to or
greater than the fair market value of the stock at that date.
Stock activity in the first quarter of 2005 and 2004 generally includes
transactions pertaining to stock awarded to non-employee directors as well as
stock awarded and forfeited via the Company's Omnibus Stock and Employee Stock
Purchase Plans. Activity is accounted for by comparing the market value of the
awards, as required by the Plans, to the cost of the treasury shares used for
these transactions. The difference is recorded as additional paid-in capital.
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
NOTE P - STOCK COMPENSATION - Continued
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 three months ended March 31:
Pro Forma
---------------------------
2005 2004
---------------------------
Net income as reported $650,323 $571,053
Add: Total stock-based employee
compensation expense recorded
for all awards, net of related
tax effects 403,398 151,834
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax effects (570,571) (363,049)
---------------------------
Pro forma net income $483,150 $359,838
===========================
Earnings per share:
Basic - as reported $0.08 $0.07
===========================
Basic - pro forma $0.06 $0.04
===========================
Diluted - as reported $0.08 $0.07
===========================
Diluted - pro forma $0.06 $0.04
===========================
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of SFAS No. 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
Options Options Options
issued issued issued
4/15/03 4/15/02 4/16/01
------------------------------------------------
Risk-free interest rate 3.49% 4.95% 5.20%
Dividend yields 2.54% 3.11% 3.50%
Volatility .540 .564 .547
Weighted-average 7 years 7 years 7 years
expected life
Per share fair value $10.63 $8.83 $7.40
NOTE Q - RECLASSIFICATIONS
Certain amounts in the prior year Consolidated Statement of Income have been
reclassified to conform with the current year presentation.
NOTE R - 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.
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
NOTE S - FINANCING ARRANGEMENTS
The Company maintains two facilities that collectively provide $110 million of
credit. As of March 31, 2005 the Company was in compliance with all debt
covenants.
The syndicated revolving facility (the "Credit Agreement") was originally signed
on December 20, 2001 and has been amended five times, most recently on March 30,
2005. The amended Credit Agreement provides a commitment of $40 million and is
secured by inventory and certain other assets of the Company and its
subsidiaries. The Company is required to meet certain covenants that relate to
tangible net worth, maintaining a defined leverage ratio and fixed charge
coverage ratio and complying with certain indebtedness restrictions. At March
31, 2005, the Company had no borrowings (loans) outstanding on this credit
facility and had letters of credit totaling $13.7 million outstanding, which
reduces the amount of borrowings available under the Credit Agreement.
Outstanding letters of credit totaled $16.1 million at December 31, 2004, and
$19.1 million at March 31, 2004. Letters of credit are comprised mainly of two
categories. One such category is comprised of commercial letters of credit used
for the purpose of purchasing goods from non-U.S. suppliers. The other category
is comprised of performance guarantees for a consolidated subsidiary and
insurance bonding purposes. All letters of credit have a term of one year or
less. The amended facility is scheduled to expire on September 1, 2007.
The Company also maintains a securitization of up to $100 million in accounts
receivable. At the present time, $70 million has been committed by lenders and
is available to the Company. The Company sells all right, title and interest in
and to certain of its accounts receivable to Blair Factoring Company, a
wholly-owned subsidiary. Blair Factoring Company is a separate, bankruptcy
remote, special purpose entity that entered into a Receivables Purchase
Agreement with PNC Bank, National Association, as administrator, and certain
conduit purchasers. The Company's consolidated financial statements reflect all
of the accounts of Blair Factoring Company, including the receivables and
secured borrowings. Transactions entered into under the Receivables Purchase
Agreement are considered secured borrowings and collateral transactions under
the provisions of Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. The securitization requires certain performance standards for the
Company's accounts receivable portfolio in addition to complying with the
covenants in the Credit Agreement. At March 31, 2005, December 31, 2004 and
March 31, 2004, $15 million had been borrowed under the securitization and is
included on the balance sheet as $15 million of short-term notes payable. $15
million is the minimum amount required to be outstanding under the Receivables
Purchase Agreement. Accordingly, at March 31, 2005, December 31, 2004 and March
31, 2004, $15 million of the $70 million commitment has been utilized under the
terms of the facility, resulting in a remaining unused commitment of $55
million. At March 31, 2005 and March 31, 2004, the weighted average interest
rate was 3.38% and 1.91%, respectively. Interest paid at March 31, 2005 and
March 31, 2004 was approximately $129,000 and $75,000, respectively.
The securitization has a scheduled termination date of April 7, 2006. On April
27, 2005 the Company announced that it signed a definitive agreement to sell its
private label credit portfolio. Therefore, the Company and the lenders intend to
terminate the securitization prior to the closing of the credit portfolio
transaction. See NOTE AB - SUBSEQUENT EVENT.
NOTE T - ACCRUED EXPENSES
Accrued expenses consist of:
March 31 December 31
2005 2004
----------------------------
Employee compensation $9,550,203 9,904,200
Contribution to profit sharing and
retirement plan 80,781 1,525,158
Health insurance 854,872 809,297
Voluntary Separation Program 399,890 494,790
Taxes, other than taxes on income 1,085,975 325,335
Other accrued items 1,749,311 2,347,851
----------------------------
$13,721,032 $15,406,631
============================
-14-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
NOTE U - LEASES
Capital Leases
The Company leases certain data processing and telephone equipment under
agreements that expire in various years through 2007. The following is a
schedule by year of future minimum capital lease payments required under capital
leases that have initial or remaining noncancelable lease terms in excess of one
year as of March 31, 2005:
2005 $ 42,757
2006 11,146
2007 1,858
---------------
55,761
Less amount representing interest (2,135)
---------------
Present value of minimum lease payments 53,626
Less current portion (43,874)
---------------
Long-term portion of capital lease obligation $ 9,752
===============
The Company entered into no new capital lease obligations in the first quarter
of 2005 and 2004, respectively.
Operating Leases
The Company leases certain data processing, office and telephone equipment under
agreements that expire in various years through 2009. The Company has also
entered into several lease agreements for buildings, expiring in various years
through 2012. The following is a schedule by years of future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of March 31, 2005:
2005 $2,242,574
2006 2,392,140
2007 1,590,287
2008 1,066,894
2009 955,689
Thereafter 1,264,415
------------------
$9,511,999
==================
NOTE V - 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:
Three Months Ended
March 31
2005 2004
------------------------------
Numerator:
Net income $650,323 $571,053
Denominator:
Weighted average shares outstanding 8,238,350 8,124,960
Contingently issueable shares -
Omnibus Stock Purchase Plan 1,436 3,836
-------------------------------
Denominator for basic earnings per share 8,176,914 8,051,124
Effect of dilutive securities:
Employee stock options 133,496 61,057
-------------------------------
Denominator for diluted earnings per share 8,310,410 8,112,181
===============================
Basic earnings per share $0.08 $0.07
===============================
Diluted earnings per share $0.08 $0.07
===============================
-15-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
NOTE V - STOCKHOLDERS' EQUITY - Continued
Dividends Declared
2-13-04 $.15 per share 1-18-05 $.15 per share
4-29-04 .15 4-21-05 .15
7-20-04 .15
10-19-04 .15
Blair Corporation has declared a dividend for 286 consecutive quarters.
For the three months ended March 31, 2005, the Company declared dividends of
$1,236,424, of which $1,194,993 were paid directly to shareholders and charged
to retained earnings. For the three months ended March 31, 2004, the Company
declared dividends of $1,219,495, of which $1,171,937 were paid directly to
shareholders and charged to retained earnings. The remaining dividends of
$14,431 and $47,558, for the three months ended March 31, 2005 and the three
months ended March 31, 2004, respectively, 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.
NOTE W - INCOME TAXES
The liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
the enacted tax rate(s) expected to apply to taxable income in the periods in
which the deferred tax liability or asset is expected to be settled or realized.
The Company accounts for the tax benefit from the exercise of non-qualified
stock options by reducing its accrued income tax liability and increasing
additional paid-in capital.
The components of income tax (benefits) expense are as follows:
Three Months Ended
March 31
2005 2004
---------------------------
Currently payable:
Federal $(112,000) $1,782,000
Foreign 17,000 30,000
State 177,000 203,000
---------------------------
82,000 2,015,000
Deferred 290,000 (1,666,000)
---------------------------
$ 372,000 $ 349,000
===========================
The differences between total tax expense and the amount computed by applying
the statutory federal income tax rate of 35% to income before income taxes are
as follows:
Three Months Ended
March 31
2005 2004
---------------------------
Statutory rate applied to pretax income $358,000 $322,019
State income taxes, net of Federal
tax benefit (7,000) (9,100)
Other items 21,000 36,081
---------------------------
$372,000 $349,000
===========================
-16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
NOTE W - INCOME TAXES - Continued
The Company has approximately $2 million of a Pennsylvania net operating loss
carry forward that can be used to offset future Pennsylvania Taxable Income. A
deferred tax asset has been established based on the $2 million net operating
loss available to be carried forward. The deferred tax asset is offset by a
valuation allowance because it is uncertain as to whether the Company will
generate sufficient income in the State of Pennsylvania in the future to absorb
the net operating losses before they expire in 2011.
Components of the deferred tax assets and liabilities under the liability method
as of March 31, 2005 and December 31, 2004 are as follows:
March 31, 2005 December 31,2004
------------------------------------
Current deferred tax assets:
Doubtful accounts $ 9,757,000 $11,737,000
Returns allowance 2,035,000 1,922,000
Inventory obsolescence 1,565,000 1,374,000
State net operating loss 56,000 72,000
Vacation pay 1,497,000 1,466,000
Group insurance 493,000 431,000
Other items 891,000 946,000
------------------------------------
Gross current deferred tax assets 16,294,000 17,948,000
State valuation allowance (138,000) (121,000)
------------------------------------
16,156,000 17,827,000
Current deferred tax liabilities:
Advertising costs $ 5,224,000 $ 6,152,000
Inventory costs 776,000 776,000
Other items 127,000 242,000
------------------------------------
Gross current deferred tax liabilities 6,127,000 7,170,000
------------------------------------
Net current deferred tax asset $10,029,000 10,657,000
====================================
Long term deferred tax liability:
Property, plant and equipment $ 2,330,000 $ 2,668,000
====================================
NOTE X - OTHER REVENUE Three Months Ended
Other revenue consists of: March 31
2005 2004
-------------------------
Finance charges on time payment accounts $10,009,961 $10,712,288
Commissions earned 166,621 803,853
Other items 538,990 556,690
--------------------------
$10,715,572 $12,072,831
=========================
The decrease in finance charges compared to the first quarter of 2004 primarily
resulted from reduced finance charge revenues associated with the previously
announced discontinuance of the Crossing Pointe catalog title and lower credit
sales.
-17-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
NOTE X - OTHER REVENUE - Continued
Commissions earned result from an arrangement under which a third party sells
jewelry to the Company's customers and all related significant activities are
conducted by, and are the responsibility of, the third party. The Company
receives payments from the customer and makes remittances, net of commissions to
the third party. The Company bears the credit risk and recognizes a credit loss
when the customer does not honor its payment obligation. The decrease in
commissions earned is related to a decline in customer response to the
continuity program in the first quarter of 2005 compared to the first quarter of
2004.
Other items are comprised of items such as customer list rentals, dishonored
check service charges and package insert income.
NOTE Y - BUSINESS SEGMENT AND CONCENTRATION OF BUSINESS RISK
The Company operates as one segment in the business of selling women's and men's
fashion apparel and accessories and home furnishing items. Specifically, the
segment includes the Womenswear, Menswear, Home, Crossing Pointe, Stores and
Allegheny Trail product lines. The Stores product line was added in the first
quarter of 2004 reflecting a reclassification within the segment from the other
product lines to this product line. As previously announced on May 3, 2004, the
Company formally discontinued circulation of its Crossing Pointe catalog title
as of March 31, 2005. The Company's intention is to more fully focus new
business development efforts on the core Blair brand and its proven appeal to
significant market segments. The decision to focus on core operations is based
in part on the historical success of the Blair brand and an extensive consumer
and brand strategy study undertaken by the Company as part of its efforts to
enhance profitability and shareholder value. The Company has evaluated the
impact of discontinuing circulation of the Crossing Pointe title on all assets
associated with this operation. All appropriate reserves have been recorded.
This decision did not have a negative effect on 2004 profitability, and is
expected to moderately benefit 2005 performance.
On January 25, 2005, the Company decided to phase out its Allegheny Trail
wholesale business by April 30, 2005. This decision is consistent with the
Company's intention to more fully focus new business development efforts on the
core Blair brand and its proven appeal to significant market segments. The
Company has evaluated the impact of phasing out the Allegheny Trail business on
all assets associated with this operation. All appropriate reserves have been
recorded. This decision did not have a significant negative effect on 2004
profitability, and is not expected to negatively impact 2005 performance.
The Company's segment reporting is consistent with the presentation made to the
Company's chief operating decision-maker. The Company's customer base is
comprised of individuals throughout the United States and is diverse in both
geographic and demographic terms. Advertising is done mainly by means of
catalogs, direct mail letters and the internet, which offer the Company's
merchandise.
The following table illustrates the percent of net sales that each product line
represents:
Three Months Three Months
Ended Ended
3/31/05 Percent of 3/31/04 Percent of
Net Sales Total Net Net Sales Total Net
Product Line (in millions) Sales (in millions) Sales
-------------------- -------------- ------------ -------------- -----------
Womenswear $ 69.8 64.8% $ 82.7 64.3%
Menswear 19.2 17.8% 20.4 15.9%
Home 17.5 16.3% 17.2 13.4%
Crossing Pointe .4 0.4% 7.4 5.7%
Stores .4 0.4% .5 0.4%
Allegheny Trail .3 0.3% .4 0.3%
-------------- ------------ -------------- -----------
Total $107.6 100.0% $128.6 100.0%
============== ============ ============== ===========
-18-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
NOTE Z - LONG-LIVED ASSETS PREVIOUSLY CLASSIFIED AS HELD FOR SALE
In January 2003, the Company made the decision to close its liquidation outlet
store located in Erie, Pennsylvania. This closure was effective at the close of
business on March 28, 2003. While the Company continues to hold the assets for
sale, the sales process has taken longer than anticipated and the assets are no
longer being classified as Held for Sale in accordance with SFAS No. 144. The
building was not depreciated while classified as held for sale. A catch up
journal entry was recorded for depreciation expense when the building was moved
back to property, plant and equipment in the third quarter of 2004. The $1.3
million carrying value of the asset, after considering a $300,773 impairment
charge taken in 2003 to reduce the value of the asset to its fair value less
costs to sell, is deemed to be stated fairly at March 31, 2005. The $300,773
impairment charge was included in Other (income) expense, net, in the 2003
Unaudited Consolidated Statement of Income.
NOTE AA- VOLUNTARY SEPARATION PROGRAM
In the first quarter of 2004, the Company accrued and charged to expense $67,000
in separation costs. The costs were charged to General and Administrative
Expense in the income statement. The $67,000 charge represents severance pay,
related payroll taxes and medical benefits due the 33 eligible employees who
accepted the voluntary separation program offered in connection with closing the
Company's Outlet Store located in Warren, Pennsylvania on January 16, 2004. As
of the end of the first quarter of 2004, $67,000 had been paid. This liability
is considered satisfied.
In the first quarter of 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 $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 the end of the first quarter of 2005, $2.1 million of the $2.5
million has been paid.
The following table summarizes the charges to income and related accruals as of
March 31, 2005, December 31, 2004 and December 31, 2003 pertaining to the
voluntary separation programs described above.
Blair Mailing Starbrick Outlet
Center Store
------------------ ------------------
Accrual at December 31, 2003 $767,000 $ -
Expense - 67,000
Payments 267,000 67,000
------------------ ------------------
Accrual at December 31, 2004 500,000 -
Expense - -
Payments 100,000 -
------------------ ------------------
Accrual at March 31, 2005 $400,000 $ -
================== ==================
NOTE AB- SUBSEQUENT EVENT
On April 27, 2005, the Company announced that the Company, Blair Factoring
Company, Blair Credit Services Corporation and JLB Service Bank, each a
wholly-owned subsidiary of the Company, entered into a Purchase, Sale and
Servicing Transfer Agreement (the "Purchase Agreement") with World Financial
Capital Bank, a wholly-owned subsidiary of Alliance Data Systems Corporation
("Alliance"). Pursuant to the Purchase Agreement, the Company's credit portfolio
will be sold at par plus a premium. Additionally, on April 27, 2005, the Company
and World Financial Capital Bank entered into an agreement to form a long-term
marketing and servicing alliance under a Private Label Credit Card Program
Agreement (the "Program Agreement") having an initial term of ten (10) years.
The transaction has been approved by both parties and is expected to close by
the end of the fourth quarter of fiscal 2005, subject to regulatory review and
approval and customary closing conditions.
Total consideration will be based upon a price equal to the balance of the
consumer credit portfolio plus a premium. As of March 31, 2005, the Company's
consumer receivables balance was $166.3 million. Total consideration will be
approximately $176.3 million.
-19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
NOTE AB- SUBSEQUENT EVENT - Continued
Also under terms of the Program Agreement, Alliance will provide services
including account acquisition and activation, receivables funding, account
authorization, statement generation, marketing services, remittance processing
and customer service functions.
After closing, the Company anticipates that the annual impact of the transaction
to its income before income taxes will be a net reduction in pre-tax income of
$2 to $4 million, as financial benefits from the Alliance partnership will
partially offset the income historically generated by the credit portfolio prior
to divestiture.
The Company currently intends to distribute the net proceeds from the
transaction (after transaction costs, a required debt repayment and a provision
for applicable taxes related to the gain on sale), anticipated to be
approximately 80% of the gross proceeds, to the Company's shareholders in the
form of a stock repurchase, dividend or combination of both. The Company
anticipates that the sale of its credit portfolio will be accretive to its 2005
earnings per share.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
Results of Operations
Comparison of First Quarter 2005 and First Quarter 2004
Net income for the first quarter ended March 31, 2005 was $650,000 or $.08 per
basic and diluted share, compared to net income of $571,000 or $.07 per basic
and diluted share, for the first quarter ended March 31, 2004. Results for the
first quarter of 2005 reflect the discontinuance of the Crossing Pointe catalog
title and a continuing refocus on the Company's core business, both resulting in
the planned elimination of unprofitable sales.
Net sales for the first quarter of 2005 totaled $107.6 million and were 16.4%
lower ($21.1 million) than net sales for the first quarter of 2004. The number
of advertising mailings and incoming orders decreased in the first quarter of
2005 as compared to the first quarter of 2004. This reflects the Company's
strategic decision to focus on more targeted mailings for greater efficiency and
optimized yield. Gross sales revenue generated per advertising dollar decreased
almost 1% in the first quarter of 2005 compared to the first quarter of 2004.
The total number of orders shipped decreased 14.0% and the average order size
decreased 3.7% in the first quarter of 2005 as compared to the first quarter of
2004. The provision for returned merchandise as a percentage of gross sales
decreased 112 basis points in the first quarter of 2005 as compared to the first
quarter of 2004. Management attributes this favorable change to improved product
quality and fit.
Other revenue decreased 11.2% from $12.1 million to $10.7 million in the first
quarter of 2005 versus the first quarter of 2004 primarily due to decreases in
finance charge revenues and commissions earned. Decreased finance charges
resulted from the previously announced discontinuance of the Crossing Pointe
catalog title and lower credit sales. The decrease in commissions earned is
related to a decline in customer response to the Continuity Program in the first
quarter of 2005 compared to the first quarter of 2004.
Cost of goods sold decreased $10.4 million (16.4%) to $52.8 million in the first
quarter of 2005 as compared to the first quarter of 2004. Cost of goods sold as
a percentage of net sales for the first quarter of 2005 was 49.1% unchanged from
49.1% for the first quarter of 2004. The percentage remained constant as
increased outbound postage costs were offset by a continued reduction in the
cost of merchandise.
Advertising expenses in the first quarter of 2005 decreased $5.8 million (16.6%)
to $29.5 million from the first quarter of 2004. The Company's more targeted
mailings led to strategic decreases in catalog and letter mailings. The catalog
reduction includes the reduction in Crossing Pointe mailings as a result of the
Company's decision to discontinue circulation of its five year old Crossing
Pointe catalog title, which was completed as of March 31, 2005.
The total number of catalog mailings released in the first quarter of 2005 was
5.4 million or 10.8% less than in the first quarter of 2004. The total number of
prospect catalog mailings decreased 7.5 million or 51.6% in the first quarter of
2005 as compared to the first quarter of 2004. The reduction in prospect
circulation is primarily attributable to the discontinuance of the Crossing
Pointe catalog title in the first quarter of 2005.
The total number of letter mailings released in the first quarter of 2005
increased by 31.0% (2.3 million) as compared to the first quarter of 2004. The
increase in letter mailings was in support of the Company's customer
reactivation and retention strategy.
Total circulation of the co-op and media advertising programs increased .8% (2.3
million pieces) in the first quarter of 2005 as compared to the first quarter of
2004.
The Company maintains two e-commerce sites, www.blair.com and
www.irvinepark.com. In the first quarter of 2005, the Company generated $24.5
million in e-commerce gross sales demand as compared to $23.7 million in the
first quarter of 2004, a 3.4% increase. The year-over-year increase was
mitigated by the discontinuance of the Crossing Pointe catalog title and related
e-commerce site, which resulted in significantly lower Crossing Pointe
e-commerce gross sales demand in the first quarter of 2005.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
Results of Operations - Continued
Comparison of First Quarter 2005 and First Quarter 2004 - Continued
General and administrative expense decreased 5.7% ($1.9 million) in the first
quarter of 2005 as compared to the first quarter of 2004. The lower general and
administrative expense in the first quarter of 2005 was primarily attributable
to reduced variable employee costs associated with lower sales volume. As a
percent of net sales, general and administrative expenses were 29.6% for the
quarter ended March 31, 2005 compared to 26.3% for the quarter ended March 31,
2004. The increase in percentage of net sales is primarily attributable to
increased employee benefit costs.
The provision for doubtful accounts decreased $4.0 million from $7.5 million to
$3.5 million or 53.3% in the first quarter of 2005 as compared to the first
quarter of 2004. The decrease is primarily related to a 23.0% reduction in
credit sales in the first quarter of 2005 compared to the first quarter of 2004,
implementation of stricter credit requirements, reduced prospecting for non-core
customers and the discontinuance of the Crossing Pointe catalog title in the
first quarter of 2005. Prospect credit offers traditionally result in higher bad
debts. These factors contributed to the estimated bad debt rate used in the
first quarter of 2005 being 270 basis points lower than the bad debt rate used
in the first quarter of 2004.
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 March 31, 2005, the delinquency rate of open accounts
receivable was 195 basis points lower than at March 31, 2004. The charge-off
rate for the first quarter of 2005 was 39 basis points higher than the
charge-off rate for the first quarter of 2004.
At this time, the Company feels that the allowance for doubtful accounts is
sufficient to cover the charge-offs from the current customer accounts
receivable portfolio. Also, credit granting, collection and behavior models
continue to be updated and improved and, along with expanding database
capabilities, provide valuable credit-marketing opportunities and improve the
ability to forecast doubtful accounts.
Interest (income) expense, net; improved by $134,229 in the first quarter of
2005 compared to the first quarter of 2004. Interest income increased due to
higher average cash balances and increased rates. Interest expense results
primarily from the Company's required borrowings under the Receivables Purchase
Agreement. Interest rates have been higher in the first quarter of 2005.
Other (income) expense, net; improved by $211,872 in the first quarter of 2005
compared to the first quarter of 2004. In connection with the discontinuance of
the Crossing Pointe catalog title, on March 30, 2005, the Company sold all open
Crossing Pointe credit accounts receivable to a third party at a discount. After
comparing the proceeds of the sale to the net carrying value of this asset, the
Company realized a gain of approximately $500,000 which was recorded on this
financial statement line item.
Income taxes as a percentage of income before income taxes were 36.4% in the
first quarter of 2005 and 37.9% in the first quarter of 2004. The federal income
tax rate was 35% in both years. The change in the total income tax rate was
caused by a change in the Company's effective state income tax rate.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
Liquidity and Sources of Capital
The Company maintains two facilities that collectively provide $110 million of
credit. As of March 31, 2005, the Company was in compliance with all debt
covenants.
The syndicated revolving facility (the "Credit Agreement") was originally signed
on December 20, 2001 and has been amended five times, most recently on March 30,
2005. The amended Credit Agreement provides a commitment of $40 million and is
secured by inventory and certain other assets of the Company and its
subsidiaries. The Company is required to meet certain covenants that relate to
tangible net worth, maintaining a defined leverage ratio and fixed charge
coverage ratio and complying with certain indebtedness restrictions. At March
31, 2005, the Company had no borrowings (loans) outstanding on this credit
facility and had letters of credit totaling $13.7 million outstanding, which
reduces the amount of borrowings available under the Credit Agreement.
Outstanding letters of credit totaled $16.1 million at December 31, 2004 and
$19.1 million at March 31, 2004. Letters of credit are comprised mainly of two
categories. One such category is comprised of commercial letters of credit used
for the purpose of purchasing goods from non-U.S. suppliers. The other category
is comprised of performance guarantees for a consolidated subsidiary and
insurance bonding purposes. All letters of credit have a term of one year or
less. The amended facility is scheduled to expire on September 1, 2007.
The Company also maintains a securitization of up to $100 million in accounts
receivable. At the present time, $70 million has been committed by lenders and
is available to the Company. The Company sells all right, title and interest in
and to certain of its accounts receivable to Blair Factoring Company, a
wholly-owned subsidiary. Blair Factoring Company is a separate, bankruptcy
remote, special purpose entity that entered into a Receivables Purchase
Agreement with PNC Bank, National Association, as administrator, and certain
conduit purchasers. The Company's consolidated financial statements reflect all
the accounts of Blair Factoring Company, including the receivables and secured
borrowings. Transactions entered into under the Receivables Purchase Agreement
are considered secured borrowings and collateral transactions under the
provisions of Statement of Financial Accounting Standards No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. The securitization requires certain performance standards for the
Company's accounts receivable portfolio in addition to complying with the
covenants in the Credit Agreement. At March 31, 2005, December 31, 2004 and
March 31, 2004, $15 million had been borrowed under the securitization and is
included on the balance sheet as $15 million of short-term notes payable. $15
million is the minimum amount required to be outstanding under the Receivables
Purchase Agreement. Accordingly, at March 31, 2005, December 31, 2004 and March
31, 2004, $15 million of the $70 million commitment has been utilized under the
terms of the facility, resulting in a remaining unused commitment of $55
million. At March 31, 2005 and March 31, 2004, the weighted average interest
rate was 3.38% and 1.91%, respectively. Interest paid at March 31, 2005 and
March 31, 2004 was approximately $129,000 and $75,000, respectively.
The securitization has a scheduled termination date of April 7, 2006. On April
27, 2005 the Company announced that it signed a definitive agreement to sell its
private label credit portfolio. Therefore, the Company and the lenders intend to
terminate the securitization prior to the closing of the credit portfolio
transaction.
The Company was in compliance with all debt covenants as of March 31, 2005. The
Company believes it has adequate financial resources to support anticipated
short-term and long-term capital needs and commitments.
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
Liquidity and Sources of Capital - Continued
The following table and narrative highlight significant changes in cash and cash
equivalents for the three months ended March 31, 2005 and 2004.
Three Months Ended
March 31
Increase/
2005 2004 (decrease)
----------------------------------------
Net cash provided by operating
activities $17,470,266 $ 709,600 $16,760,666
Net cash used in investing
activities (1,203,244) (1,351,366) 148,122
Net cash used in financing
activities (1,103,163) (863,879) (239,284)
Effect of exchange rate changes on
cash (2,992) (53,884) 50,892
----------------------------------------
Net increase (decrease) in cash and
cash equivalents $15,160,867 $(1,559,529) $ 6,720,396
=======================================
The $16.7 million increase in cash and cash equivalents is primarily due to
favorable cash flow from operations. Net cash provided by operating activities
was $17.5 million for the three months ended March 31, 2005, a $16.8 million
increase compared to the same period in fiscal 2004. This increase is primarily
attributable to favorable changes in several components of working capital. The
primary factors of improved working capital are favorable changes to accounts
receivable ($10.4 million), trade accounts payable ($8.3 million) and accrued
expenses ($2.0 million), offset somewhat by lower provisions for doubtful
accounts ($4.0 million).
Anticipated cash requirements during 2005 are primarily to fund capital
expenditures and pay dividends. The Company expects to fund 2005 cash
requirements with cash generated from operations and cash on hand.
Merchandise inventory turnover was 2.45 at March 31, 2005, 2.61 at December 31,
2004 and 3.33 at March 31, 2004. Merchandise inventory as of March 31, 2005 was
.7% lower than at December 31, 2004 and 4.3% higher than at March 31, 2004. The
increase in merchandise inventories from March 31, 2004 is primarily the result
of the Company's efforts to improve initial and final merchandise fill rates
thereby positively impacting profitability and customer service levels.
The merchandise inventory levels are net of the Company's reserve for inventory
obsolescence. The reserve totaled $4.1 million at March 31, 2005, $3.6 million
at December 31, 2004 and $1.7 million at March 31, 2004. The slight increase in
the reserve from December 31, 2004 reflects the Company's decisions to
discontinue the Crossing Pointe catalog title and to phase out the Allegheny
Trail wholesale business. Both decisions have created the need to reserve a
greater portion of these inventories due to lower anticipated recovery.
Inventory write-offs and write-downs (reductions to below cost) charged against
the reserve for obsolescence were $319,000 in the first three months of 2005 and
$3.7 million in the first three months of 2004. The closing of the Starbrick
Outlet Store in January 2004, accounts for $2.4 million of the write-downs in
the first three months of 2004. These write-downs were primarily provided for in
the December 31, 2003 obsolescence reserve. Due to the nonrecurring nature of
the write-downs related to the closing of the Starbrick Outlet Store, the
obsolescence reserve at March 31, 2005 was significantly greater than the
reserve at March 31, 2004. Management believes that the amount of the reserve
for obsolescence is appropriate. A monthly provision for obsolete inventory is
added to the reserve and expensed to cost of goods sold based on the levels of
merchandise inventory and merchandise purchases.
An operating segment is identified as a component of an enterprise for which
separate financial information is available for evaluation by the chief
decision-maker or decision-making group, in deciding on how to allocate
resources and assess performance. The Company operates as one business segment
consisting of the Womenswear, Menswear, Home, Crossing Pointe, Allegheny Trail
and Store product lines. The Store product line was added in the first quarter
of 2004. It was previously included in the Womenswear, Menswear, Home and
Crossing Pointe product lines.
-24-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
Liquidity and Sources of Capital - Continued
The reduction in Crossing Pointe net sales is the result of the discontinuance
of the Crossing Pointe catalog title which was completed in March, 2005.
The following tables illustrate the percent of net sales and merchandise
inventory that each product line represents.
Three Months Three Months
Ended Percent Ended Percent
3/31/05 of Total 3/31/04 of Total
Product Line Net Sales Net Salesl Net Sales Net Sales
(in millions) (in millions)
------------------- -------------- --------- ------------ ---------
Womenswear $ 69.8 64.8% $ 82.7 64.3%
Menswear 19.2 17.8% 20.4 15.9%
Home 17.5 16.3% 17.2 13.4%
Crossing Pointe .4 0.4% 7.4 5.7%
Stores .4 0.4% .5 0.4%
Allegheny Trail .3 0.3% .4 0.3%
-------------- --------- ------------ ---------
Total $107.6 100.0% $128.6 100.0%
============== ========= ============ =========
3/31/05 3/31/04
Merchandise Merchandise
Product Line Inventory Inventory
(in millions) (in millions)
-------------------------- ------------------- ---------------------
Womenswear $41.5 $39.2
Menswear 15.2 9.4
Home 9.1 7.6
Crossing Pointe 0.0 5.9
Stores 0.1 .5
Allegheny Trail 1.2 1.7
------------------- ---------------------
Total $67.1 $64.3
=================== =====================
The Company looks upon its credit granting (Blair Credit) as a marketing
advantage. Blair Credit customers, on average, buy more, buy more often and are
more loyal than cash and credit card customers. The 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
Company's gross credit sales decreased 23.0% in the first three months of 2005
as compared to first three months of 2004. The majority of the decrease is in
line with the strategic decision to refocus on core customers and enhance
shareholder value. In support of this strategy, the Company discontinued the
Crossing Pointe catalog title, implemented stricter credit requirements and
eliminated unprofitable sales.
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 $1.2 million during the
first three months of 2005, compared to $1.4 million during the first three
months of 2004. Most of the $1.2 million capital expenditures in the first
quarter of 2005 were attributable to improving the Company's information
services capabilities as they support the order fulfillment functions.
-25-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
Liquidity and Sources of Capital - Continued
Upon review of the Company's inventory liquidation strategy, the Company made
the following decisions. In January 2004, the Company closed its outlet store
located in Warren, Pennsylvania. 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 building is a sheet metal warehouse design and the Company
has considered the possible impairment of the facility. It is continuing to be
used in other areas and maintained in an operating condition. Several options
for additional and/or alternative uses are being explored for its future use.
For these reasons, management believes the carrying value of the facility is
recoverable.
The Blair Warehouse Outlet building in Erie, Pennsylvania is not currently being
used by the Company. The Company is seeking prospective buyers for the Erie
facility. However, the sales process has taken longer than anticipated and the
assets are no longer being classified as Held for Sale in accordance with SFAS
No. 144. The building was not depreciated while classified as held for sale. A
catch up journal entry was recorded for depreciation expense when the building
was moved back to property, plant and equipment in the third quarter of 2004.
Management believes the carrying value of the asset, after considering a
$300,773 impairment charge taken in 2003 to reduce the value of the asset to its
fair value less costs to sell, is deemed to be stated fairly at March 31, 2005.
The facility will continue to be depreciated.
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 Less than 1 - 3 4 - 5 More than
Obligations Total 1 year years years 5 Years
----------------- ----------- ----------- ---------- ---------- ----------
Capital Lease
Obligations $ 55,761 $ 42,757 $ 13,004 $ -0- $ -0-
Operating Leases 9,511,999 2,242,574 5,049,321 1,824,688 395,416
Unconditional
Purchase
Obligations -
Outstanding 13,700,000 13,700,000 -0- -0- -0-
Letters of Credit
Line of Credit -
Securitization 15,000,000 15,000,000 -0- -0- -0-
----------- ----------- ---------- ---------- ----------
Total $38,267,760 $30,985,331 $5,062,325 $1,824,688 $395,416
=========== =========== ========== ========== =========
The Company has commercial commitments consisting of a revolving credit facility
of $40 million and a receivables securitization of $70 million. At March 31,
2005, $15 million of undivided interests in the receivables pool has been
utilized as required under the terms of the receivables facility.
-26-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
Contractual Obligations - Continued
Amount of Commitment
Expiration Per Period
Total Less than 1 - 3 4 - 5 After 5
Other Commercial Amounts 1 year years years years
Commitments Committed
----------------------------------- ------------ ----------- ------- -------
Line of Credit -
Revolving effective
9/01/04 $ 40,000,000 $ $40,000,000 $ -0- $ -0-
Line of Credit -
Securitizatio
effective 4/9/03 70,000,000 70,000,000 -0- -0- -0-
------------ ------------ ----------- ------- -------
Total $110,000,000 $70,000,000 $40,000,000 $ -0- $ -0-
============ ============ =========== ======= =======
If an event of default should occur, payments and/or maturity of the lines of
credit could be accelerated. The Company is not in default and does not expect
to be in default of any of the provisions of the credit facilities. (See
"Liquidity and Sources of Capital" for details of the Company's credit
facilities).
The Company recently declared a quarterly dividend of $.15 per share payable on
June 15, 2005. The Company has declared dividends for 286 consecutive quarters.
It is the Company's intent to continue paying dividends; however, the Company
will evaluate its dividend practice on an ongoing basis. (See "Future
Considerations").
Future cash needs beyond 2005 will be financed by cash flow from operations,
available cash on hand, existing borrowing arrangements and, if needed, other
financing arrangements that may be available to the Company. However, The
Company's current projection of future cash requirements may be affected by
numerous factors, including changes in sales volume, operating cost fluctuations
and revised capital spending activities.
Critical Accounting Policies
Preparation of the Company's financial statements requires the application of a
number of accounting policies, which are described in "Note 1, Significant
Accounting Policies" in the "Notes to Consolidated Financial Statements" in the
Company's 2004 10-K. 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 review the
critical accounting policies and estimates with the Audit Committee of the Board
of Directors.
The Company's revenue recognition policy is as follows: Sales (cash, Blair
Credit, or third party credit card) are recorded when the merchandise is shipped
to the customer in accordance with the provisions of Staff Accounting Bulletin
No. 104, Revenue Recognition.
Finance charges on time payment accounts are recognized on an accrual basis of
accounting.
The allowance for doubtful accounts and related items, provision for doubtful
accounts and Blair Credit, are discussed in "Results of Operations," "Liquidity
and Sources of Capital" and "Future Considerations". A change in the bad debt
rate would cause changes in the provision for doubtful accounts and the
allowance for doubtful accounts. Based on the Company's 2004 level of credit
sales and finance charges, net income would change by approximately $2.3
million, or $.27 per share, from a one percentage point change in the bad debt
rate.
-27-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
Critical Accounting Policies - Continued
The allowance for returns is a deduction from customer accounts receivable. A
monthly provision for anticipated returns is recorded as a percentage of gross
sales, based upon historical experience. The provision is charged against gross
sales to arrive at net sales, and actual returns are charged against the
allowance for returns. Returns are generally more predictable as they settle
within two-to-three months, but are impacted by season, new products and/or
product lines, type of sale (cash, credit card, Blair Credit) and sales mix
(prospect/customer). Management believes that the allowance for returns is
sufficient to cover the returns that will occur after March 31, 2005 from sales
prior to April 1, 2005. A change in the returns rate would cause changes in the
provision for returns and the allowance for returns. Based on the Company's 2004
level of sales, net income would change by approximately $1.7 million, or $.21
per share, from a one percentage point change in the returns rate.
The reserve for inventory obsolescence and related items, inventory levels and
write-downs, are discussed in "Liquidity and Sources of Capital" and "Future
Considerations". Management believes 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 March 31, 2005. A change in the obsolescence rate
would cause changes in cost of goods sold and the reserve for inventory
obsolescence . Based on the Company's 2004 level of merchandise subject to
obsolescence, net income would change by approximately $1.7 million, or $.21 per
share, from a one percentage point change in the obsolescence rate.
The Company's advertising expense policy is as follows: Advertising and shipping
supply inventories include printed advertising material and related mailing
supplies for promotional mailings, which are generally scheduled to occur within
two months. These direct-response advertising costs are then expensed over the
period of expected future benefit, generally nine weeks.
At March 31, 2005, the Company had total gross deferred tax assets of $16.3
million. These assets relate principally to asset valuation reserves including
bad debts, returns and inventory obsolescence. Based on recent historical
earnings performance and current projections, management believes that a
valuation allowance is not required against these deferred tax assets, except
for the valuation allowance against state net operating losses and the Allegheny
Trail inventory obsolescence reserve. The state net operating loss valuation
allowance was provided due to its uncertainty of realization based upon the
state's net operating loss carryforward rules. The Allegheny Trail inventory
obsolescence reserve valuation allowance was provided due to the Company's
decision to phase out this business by April 30, 2005.
Impact of Inflation and Changing Prices
Although inflation has moderated in the United States economy, the Company is
continually seeking ways to cope with its impact. To the extent permitted by
competition, increased costs are passed on to customers by selectively
increasing selling prices over a period of time. Historically, profit margins
have been pressured by postal and paper rate increases. Paper rates increased 5%
in 2004 and were flat in 2003. Postal rates increased on January 10, 1999, on
January 7, 2001, on July 1, 2001 and again on September 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 $18.6 million for postage and delivery services in the first
three months of 2005 compared to $22 million in the first three months of 2004.
The reduction in postage and delivery costs is related to the lower sales volume
and reduced catalog circulation.
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 declining merchandise costs and the LIFO reserve has fallen to $3.8
million at March 31, 2005 and at December 31, 2004 from $4.5 million at March
31, 2004.
The World Trade Organization members agreed several years ago that starting in
January of 2005, quota on imported textile products would be removed. The
elimination of this quota has resulted in lower priced textile products from
most of the World Trade member countries. Because some member countries did not
charge for quota, not all products will experience lower costs. However, in most
World Trade member countries, lower prices are anticipated to range between 5%
and 20%, depending on the item and the country of origin. These lower prices
will result in lower landed duty paid prices for American importers.
-28-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
Impact of Inflation and Changing Prices- Continued
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 may be replaced at higher costs but this will take place over
many years. New assets, when acquired, will result in higher depreciation
charges, but in many cases, due to technological improvements, savings in
operating costs should result. The charges to operations for depreciation
represent the allocation of historical costs incurred over past years and are
significantly less than if they were based on the current cost of productive
capacity being used.
Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment, which is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123(R) supersedes Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No.
123(R) is similar to the approach described in SFAS No. 123. However, SFAS No.
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on fair
values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R)
must be adopted no later than January 1, 2006. We expect to adopt
SFAS No. 123(R) on January 1, 2006.
As permitted by SFAS No. 123, the Company currently accounts for share-based
payments to employees using Opinion 25's intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have a
significant impact on our result of operations, although it will have no impact
on our overall financial position. The impact of the adoption of SFAS No. 123(R)
cannot be predicted at this time because it will depend on levels of share-based
payments granted in the future. However, had we adopted SFAS No. 123(R) in prior
periods, the impact of that standard would have approximated the impact of SFAS
No. 123 as described in the disclosure of pro forma net income and earnings per
share in Note P to our consolidated financial statements. SFAS No. 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. While the company cannot estimate what those amounts will be in the
future (because they depend on, among other things, when employees exercise
stock options), the amount of operating cash flows recognized in prior periods
for such excess tax deductions was $30,000 and $37,000 in the first quarter of
2005 and 2004, respectively.
Future Considerations
The Company is faced with the ever-present challenge of maintaining and
expanding its customer file. This involves the acquisition of new customers
(prospects), the conversion of new customers to established customers (active
repeat buyers) and the retention and/or reactivation of established customers.
These actions are vital in growing the business but are being negatively
impacted by increased operating costs, a declining labor pool, increased
competition in the retail sector, high levels of consumer debt, varying consumer
response rates and an uncertain economy. The preceding factors can also
negatively impact the Company's ability to properly value accounts receivable
and inventories by making it more difficult to establish proper reserve and
allowance levels, specifically, the allowances for doubtful accounts and returns
and the reserve for inventory obsolescence.
The Company's marketing strategy includes targeting customers in the "40 to 75,
low-to-moderate income" market. Success of the Company's marketing strategy
requires investment in database management, digital asset management, campaign
management, financial and operating systems, prospecting programs, catalog
marketing, new product lines, telephone call centers, e-commerce, fulfillment
operations and the management of credit extension. Management believes that
these investments should improve Blair Corporation's position in new and
existing markets and provide opportunities for future earnings growth.
-29-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
Future Considerations- Continued
The Company announced on May 3, 2004, that it would discontinue circulation of
its four year-old Crossing Pointe catalog title in 2005. The Company's intention
is to more fully focus new business development efforts on the core Blair brand
and its proven appeal to significant market segments. The decision to focus on
core operations is based in part on the historical success of the Blair brand
and an extensive consumer and brand strategy study undertaken by the Company as
part of its efforts to enhance profitability and shareholder value. This
decision did not have a negative effect on 2004 profitability, and is expected
to benefit 2005 performance.
On January 25, 2005, the Company decided to phase out its Allegheny Trail
wholesale business by April 30, 2005. The remaining products will be transferred
to other existing product lines. This decision is consistent with the Company's
intention to more fully focus new business development efforts on the core Blair
brand and its proven appeal to significant market segments. The Company has
evaluated the impact of phasing out the Allegheny Trail business on all assets
associated with this operation. All appropriate reserves have been recorded.
This decision did not have a negative effect on 2004 profitability and is not
expected to negatively impact 2005 performance.
On April 27, 2005, the Company announced that the Company, Blair Factoring
Company, Blair Credit Services Corporation and JLB Service Bank, each a
wholly-owned subsidiary of the Company, entered into a Purchase, Sale and
Servicing Transfer Agreement (the "Purchase Agreement") with World Financial
Capital Bank, a wholly-owned subsidiary of Alliance Data Systems Corporation
("Alliance"). Pursuant to the Purchase Agreement, the Company's credit portfolio
will be sold at par plus a premium. Additionally, on April 27, 2005, the Company
and World Financial Capital Bank entered into an agreement to form a long-term
marketing and servicing alliance under a Private Label Credit Card Program
Agreement (the "Program Agreement") having an initial term of ten (10) years.
The transaction has been approved by both parties and is expected to close by
the end of the fourth quarter of fiscal 2005, subject to regulatory review and
approval and customary closing conditions.
Total consideration will be based upon a price equal to the balance of the
consumer credit portfolio plus a premium. As of March 31, 2005, the Company's
consumer receivables balance was $166.3 million. Total consideration will be
approximately $176.3 million.
Also under terms of the Program Agreement, Alliance will provide services
including account acquisition and activation, receivables funding, account
authorization, statement generation, marketing services, remittance processing
and customer service functions.
After closing, the Company anticipates that the annual impact of the transaction
to its income before income taxes will be a net reduction in pre-tax income of
$2 to $4 million, as financial benefits from the Alliance partnership will
partially offset the income historically generated by the credit portfolio prior
to divestiture.
The Company currently intends to distribute the net proceeds from the
transaction (after transaction costs, a required debt repayment, and a provision
for applicable taxes related to the gain on sale), anticipated to be
approximately 80% of gross proceeds, to the Company's shareholders in the form
of a stock repurchase, dividend, or combination of both. The Company anticipates
that the sale of its credit portfolio will be accretive to its 2005 earnings per
share.
Requirements adopted by the Securities and Exchange Commission in response to
the passage of the Sarbanes-Oxley Act of 2002 require an ongoing review and
evaluation of our internal control systems and attestation of these systems by
our independent auditors. We will review our internal control procedures and
consider further documentation of such procedures that may be necessary in the
future on an ongoing basis. While we currently believe we have identified and
committed the appropriate resources to meet all of the requirements, there is
always a risk inherent in any control system that not all errors or
misstatements will be detected. Any improvements in our internal control systems
or in documentation of such control systems could be costly to prepare or
implement, could divert attention of management of our finance staff, and may
cause our operating expenses to increase over the ensuing year.
-30-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
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 2.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties which could cause actual results to differ materially from those
in the forward-looking statements, including without limitation the following:
(i) the Company's plans, strategies, objectives, expectations and intentions are
subject to change at any time at the discretion of the Company; (ii) the
Company's plans and results of operations will be affected by the Company's
ability to manage its growth, accounts receivable and inventory; (iii) external
factors such as, but not limited to, changes in consumer response rates, changes
in consumer credit trends, success of new business lines and increases in
postal, paper and printing costs; and (iv) other risks and uncertainties
indicated from time to time in the Company's filings with the Securities and
Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The carrying amounts of cash, customer accounts receivable, accounts payable,
and accrued liabilities approximate fair value due to the short-term maturities
of these assets and liabilities. The interest rates on the Company's securitized
and revolving credit facilities are adjusted regularly to reflect current market
rates. Accordingly, the carrying amounts of the Company's borrowings also
approximate fair value.
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 2004 and 2005, of
approximately $150,000 in each year.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, based on an evaluation of
the Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)), each of the Chief Executive Officer and the
Chief Financial Officer of the Company has concluded that the Company's
disclosure controls and procedures are effective to reasonably 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 have been no significant changes in the Company's internal controls or in
any other factors that materially affected, or are reasonably likely to
materially affect, the Company's internal controls, including its internal
controls over financial reporting. As a result, no corrective actions with
regard to any significant deficiencies or material weaknesses were taken.
-31-
PART II. OTHER INFORMATION
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
Item 1. Legal Proceedings
-----------------
The Company is from time to time a party to ordinary routine litigation
incidental to various aspects of its operations. Management is not
currently aware of any litigation that will have a material adverse
impact on the Company's financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
Not Applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable.
Item 5. Other Information
-----------------
Not Applicable.
Item 6. Exhibits
--------
(a) Exhibits
3.1 Restated Certificate of Incorporation (1)
3.2 Amended and Restated Bylaws of Blair Corporation (2)
4 Specimen Common Stock Certificate (3)
10.1 Stock Accumulation and Deferred Compensation Plan for Directors (4)
10.2 Blair Corporation 2000 Omnibus Stock Plan (5)
10.3 Blair Credit Agreement (6)
10.4 Amendment No. 2 to Credit Agreement (7)
10.5 Amendment No. 3 to Credit Agreement (8)
10.6 Amendment No. 4 to Credit Agreement (9)
10.7 Amendment No. 5 to Credit Agreement (10)
10.8 Change in Control Severance Agreement-Vice Presidents (11)
10.9 Change in Control Severance Agreement-CEO and Senior Vice Presidents (12)
10.10 Purchase, Sale and Capital Servicing Transfer Agreement (13)
10.11 Private Label Credit Program Agreement (14)
11 Statement regarding computation of per share earnings (15)
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
-32-
PART II. OTHER INFORMATION - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
March 31, 2005
Item 6. Exhibits - Continued
(1) Incorporated by reference to Exhibit A to the Quarterly Report on Form 10-Q
of the Company filed with the SEC on August 10, 1995 (SEC File No. 1-878).
(2) Incorporated herein by reference to Exhibit 3.2 to the Companies Quarterly
Report on Form 10-Q filed with the SEC on August 14, 2003 (SEC File No. 1-878).
(3) Incorporated by reference to Exhibit 4.1 to the Form S-8 Registration
Statement filed with the SEC on July 19, 2000 (SEC File No. 333-41770).
(4) Incorporated herein by reference to Exhibit A to the Company's Proxy
Statement filed with the SEC on March 20, 1998 (SEC File No. 1-878).
(5) Incorporated herein by reference to Exhibit A to the Company's Proxy
Statement filed with the SEC on March 17, 2000 (SEC File No. 1-878).
(6) Incorporated herein by reference to Exhibit 99.1 to the Company's Form 8-K
filed with the SEC on January 9, 2002 (SEC File No. 1-878).
(7) Incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form
10-Q of the Company filed with the SEC on August 8, 2003 (SEC File No. 1-878).
Certain schedules to the Agreement have been omitted.
(8) Incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form
10-Q of the Company filed with the SEC on November 9, 2004 (SEC File No. 1-878).
Certain schedules to the Agreement have been omitted.
(9) Incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-K
of the Company filed with the SEC on March 1, 2005 (SEC File No. 1-878). Certain
schedules to the Agreement have been omitted.
(10) Certain schedules to the Agreement have been omitted.
(11) Incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form
10-Q of the Company filed with the SEC on November 9, 2004 (SEC File No. 1-878).
(12) Incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form
10-Q of the Company filed with the SEC on November 9, 2004 (SEC File No. 1-878).
(13) Incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K
filed with the SEC on April 27, 2005 (SEC File No. 1-878). Certain schedules to
the agreement have been omitted.
(14) Incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K
filed with the SEC on April 27, 2005 (SEC File No. 1-878). Certain schedules to
the agreement have been omitted.
(15) Incorporated by reference to Note V of the financial statements included
herein.
-33-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BLAIR CORPORATION
-----------------------------------------
(Registrant)
Date: May 6, 2005 By JOHN E. ZAWACKI
--------------------------- -----------------------------------------
JOHN E. ZAWACKI
President and Chief Executive Officer
By BRYAN J. FLANAGAN
-----------------------------------------
BRYAN J. FLANAGAN
Senior Vice President and Chief
Financial Officer
By MICHAEL R. DELPRINCE
-----------------------------------------
MICHAEL R. DELPRINCE
Controller
[Certifications to follow]
-34-
Exhibit 31.1
CERTIFICATION
I, John E. Zawacki, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Blair Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 6, 2005 JOHN E. ZAWACKI
----------------- ----------------------------
JOHN E. ZAWACKI
President and
Chief Executive Officer
-35-
Exhibit 31.2
CERTIFICATION
I, Bryan J. Flanagan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Blair Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 6, 2005 BRYAN J. FLANAGAN
----------------- ---------------------------
BRYAN J. FLANAGAN
Senior Vice President and
Chief Financial Officer
-36-
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Blair Corporation (the "Company") on
Form 10-Q for the period ended March 31, 2005 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, John E. Zawacki, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
Date: May 6, 2005 JOHN E. ZAWACKI
----------------- --------------------------
JOHN E. ZAWACKI
President and
Chief Executive Officer
A signed original of this written statement required by Section 906, or other
document authentication, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Blair Corporation and will be
retained by Blair Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
-37-
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Blair Corporation (the "Company") on
Form 10-Q for the period ended March 31, 2005 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Bryan J. Flanagan,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
Date: May 6, 2005 BRYAN J. FLANAGAN
----------------- ---------------------------
BRYAN J. FLANAGAN
Senior Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906, or other
document authentication, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Blair Corporation and will be
retained by Blair Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
-38-
Exhibit 10.7
WAIVER AND FIFTH AMENDMENT TO CREDIT AGREEMENT
This Waiver and Fifth Amendment to Credit Agreement (the "Fifth
Amendment") is dated as of March 30, 2005 and is made by and among BLAIR
CORPORATION, a Delaware corporation (the "Borrower"), the Guarantors now or
hereafter party thereto, the BANKS under the Credit Agreement (as hereafter
defined) and PNC BANK, NATIONAL ASSOCIATION, in its capacity as agent for the
Banks under the Credit Agreement (hereinafter referred to in such capacity as
the "Agent").
RECITALS:
WHEREAS, the Borrower, the Guarantors, the Banks and the Agent entered
into that certain Credit Agreement dated as of December 20, 2001, as amended by
that Amendment No. 1 to Credit Agreement dated as of July 8, 2002, by that
Amendment No. 2 to Credit Agreement dated as of July 25, 2003, and by that Third
Amendment to Credit Agreement dated as of September 1, 2004 and that Fourth
Amendment to Credit Agreement dated as of October 28, 2004 (as amended to date,
the "Credit Agreement");
WHEREAS, Blair Factoring Company and JLB Service Bank, each of which is a
Subsidiary of the Borrower (collectively, the "Subsidiary Sellers"), propose to
sell their"CrossingPointe" receivables and related rights (as more fully
described in the CrossingPointe Receivables Sales Agreement, the "CrossingPointe
Receivables") for cash consideration pursuant to a Purchase and Sale Agreement ,
among Blair Factoring Company, JLB Service Bank and Shoppers Charge Accounts
Co., a Division of Hudson United Bank (the "CrossingPointe Receivables Sales
Agreement"); and
WHEREAS, section 7.2.7 [Dispositions of Assets or Subsidiaries] of the
Credit Agreement provides in part that "Each of the Loan Parties shall not, and
shall not permit any of its Subsidiaries to, sell . . . any of its properties or
assets . . " except for sales expressly permitted under such section;
WHEREAS, Section 1(b) of the Security Agreement provides in part as
follows:
"Collateral shall not include any 'Receivables' . . . of Blair
Corporation, sold, transferred, and otherwise conveyed to Blair Factoring
Company . . ."
"'Receivables' shall mean the indebtedness arising . . . under a Contract
"'Contract' shall mean an agreement between Blair Corporation . . . and
any person pursuant to or under which such person is obligated to pay for goods
. . . through Blair Corporation's . . . "Crossing Pointe" sales program;
WHEREAS, the parties to the Credit Agreement desire to provide certain
waivers under Section 7.2.7 and amendments to the Credit Agreement relating to
the CrossingPointe Receivables Sales Agreement as set forth herein; and
WHEREAS, capitalized terms used herein and not otherwise defined herein
shall have the meanings given to them under the Credit Agreement.
NOW, THEREFORE, in consideration of the foregoing and intending to be
legally bound, the parties hereto agree as follows:
Waiver and Amendment to Credit Agreement.
Waiver and Amendment.
The Banks hereby waive the prohibitions under Section 7.2.7 of the
Credit Agreement for the sole purpose of permitting the Subsidiary Sellers to
sell the CrossingPointe Receivables pursuant to the CrossingPointe Receivables
Sales Agreement. The parties agree that Borrower shall not be required to apply
the after-tax proceeds or any portion thereof as a mandatory prepayment of the
Loans as provided in such Section 7.2.7 or as otherwise provided under the
Credit Agreement.
-39-
Authorizations.
The Agent is hereby authorized to execute any releases,
confirmations or other documents necessary or appropriate in connection with
such sale in order to permit or facilitate the same.
Termination of Waiver.
The waiver contained in Section 1(A) shall terminate if the Borrower
does not sell the Crossing Pointe Receivables pursuant to the Crossing Pointe
Receivables Sales Agreement on or before December 31, 2005.
Notice of Sale.
The Borrower shall notify the Agent of the closing under the
Crossing Pointe Receivables Sales Agreement and deliver to the Agent a copy of
the signed Crossing Pointe Receivables Sales Agreement within ten (10) days
after the closing under such Crossing Pointe Receivables Sales Agreement.
Representations and Warranties.
A. Warranties Under the Credit Agreement. The representations and
warranties of the Loan Parties contained in the Credit Agreement, after giving
effect to the waivers and amendments thereto on the date hereof, are true and
correct on and as of the date hereof with the same force and effect as though
made by the Loan Parties on such date, except to the extent that any such
representation or warranty expressly relates solely to a previous date. The Loan
Parties are in compliance with all terms, conditions, provisions and covenants
contained in the Credit Agreement.
B. Power and Authority; Validity and Binding Effect; No Conflict.
Each Loan Party has full power to enter into, execute, deliver and carry out
this Fifth Amendment, and such actions have been duly authorized by all
necessary proceedings on its part. This Fifth Amendment has been duly and
validly executed and delivered by each of the Loan Parties. This Fifth Amendment
constitutes the legal, valid and binding obligation of each of the Loan Parties
which is enforceable against such Loan Party in accordance with its terms.
Neither the execution and delivery of this Fifth Amendment, nor the consummation
of the transactions herein contemplated will conflict with, constitute a default
under or result in any breach of (i) the terms and conditions of any
organizational documents of any Loan Party or (ii) any Law or any material
agreement or instrument or other obligation to which any Loan Party or any of
its Subsidiaries is a party or by which any Loan Party or any of its
Subsidiaries is bound, or result in the creation or enforcement of any Lien upon
any property of any Loan Party or any of its Subsidiaries other than as set
forth herein.
C. Consents and Approvals; No Event of Default. No consent,
approval, exemption, order or authorization of any Person other than the parties
hereto is required by any Law or any agreement in connection with the execution,
delivery and carrying out of this Fifth Amendment. No event has occurred and is
continuing and no condition exists or will exist after giving effect to this
Fifth Amendment which constitutes an Event of Default or Potential Default.
Conditions to Effectiveness.
This Fifth Amendment shall be effective on the date (the "Effective
Date") on which each of the following conditions has been satisfied. The
Effective Date shall be the same as the date of this Fifth Amendment first
written above:
Execution.
The Loan Parties, the Banks and the Agent shall have executed this
Fifth Amendment.
Draft Crossing Pointe Receivables Sales Agreement. The Borrower shall have
delivered to the Agent a copy of the current draft of the Crossing Pointe
Receivables Sales Agreement.
-40-
References to Credit Agreement, Loan Documents.
Any reference to the Credit Agreement or other Loan Documents in any
document, instrument or agreement shall hereafter mean and include the Credit
Agreement or such Loan Document, including such schedules and exhibits, as
amended hereby. In the event of irreconcilable inconsistency between the terms
or provisions of this Fifth Amendment and the terms or provisions of the Credit
Agreement or such Loan Document, including such schedules and exhibits, the
terms and provisions of this Fifth Amendment shall control.
Force and Effect.
Each Loan Party, a signatory hereto reconfirms, restates and
ratifies the Credit Agreement, and all other documents executed in connection
therewith except to the extent any such documents are expressly modified by this
Fifth Amendment and each Loan Party confirms that all such documents have
remained in full force and effect since the date of their execution.
Governing Law.
This Fifth Amendment shall be deemed to be a contract under the laws
of the Commonwealth of Pennsylvania and for all purposes shall be governed by,
construed and enforced in accordance with the internal laws of the Commonwealth
of Pennsylvania without regard to its conflict of laws principles.
Counterparts.
This Fifth Amendment may be signed in any number of counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
-41-
The undersigned have executed this Fifth Amendment as of the day and year first
above written.
BORROWER:
BLAIR CORPORATION
By:
---------------------------------
Title:
GUARANTORS:
BLAIR HOLDINGS, INC.
By:
---------------------------------
Title:
BLAIR PAYROLL, LLC
By:
---------------------------------
Title:
BLAIR INTERNATIONAL HOLDINGS, INC.
By:
---------------------------------
Title:
BLAIR CREDIT SERVICES CORPORATION
By:
---------------------------------
Title:
ALLEGHENY TRAIL CORPORATION
By:
---------------------------------
Title:
BANKS:
PNC BANK, NATIONAL ASSOCIATION,
individually and as Agent
By:
---------------------------------
Title:
-42-
LASALLE BANK NATIONAL ASSOCIATION
By:
---------------------------------
Title:
HSBC BANK USA, NATIONAL ASSOCIATION,
successor by merger to HSBC Bank USA
By:
---------------------------------
Title:
-43-