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 September 30, 2004 Commission File Number 1-878
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BLAIR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 25-0691670
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 HICKORY STREET, WARREN, PENNSYLVANIA 16366-0001
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(Address of principal executive offices) (Zip Code)
(814) 723-3600
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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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) YES X NO
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As of November 5, 2004 the registrant had outstanding 8,199,480 shares of its
common stock without nominal or par value.
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
-2-
Blair Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
September 30 December 31
2004 2003
-------------------------------
Assets
Current assets:
Cash and cash equivalents $ 35,401,909 $ 36,380,049
Customer accounts receivable, less allowances
for doubtful accounts and returns of
$41,724,563 in 2004 and $47,473,108 in 2003 141,836,923 154,660,076
Inventories: (Note G)
Merchandise 82,255,476 65,990,631
Advertising and shipping supplies 19,116,557 19,610,207
-------------------------------
101,372,033 85,600,838
Deferred income taxes (Note V) 11,715,000 12,211,000
Prepaid expenses 2,726,507 2,200,191
-------------------------------
Total current assets 293,052,372 291,052,154
Property, plant, and equipment:
Land (Note Y) 1,142,144 1,142,144
Buildings and leasehold improvements (Note Y) 67,235,893 67,169,830
Equipment 74,282,810 72,979,845
Construction in progress 1,097,273 1,386,067
-------------------------------
143,758,120 142,677,886
Less allowances for depreciation 93,539,162 88,798,632
-------------------------------
50,218,958 53,879,254
Trademarks 433,982 488,164
Other long-term assets 507,896 556,231
-------------------------------
Total assets $344,213,208 $345,975,803
===============================
See accompanying notes.
-3-
Blair Corporation and Subsidiaries
Consolidated Balance Sheets - continued
(Unaudited)
September 30 December 31
2004 2003
---------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable (Note Q) $ 15,000,000 $ 15,000,000
Trade accounts payable 30,229,323 35,129,055
Advance payments from customers 2,463,492 2,286,055
Accrued expenses (Note R) 15,159,051 17,732,395
Accrued federal and state taxes 2,130,688 3,997,935
Current portion of capital lease obligations
(Note S) 208,932 378,632
---------------------------
Total current liabilities 65,191,486 74,524,072
Capital lease obligations, less current portion
(Note S) 14,730 101,622
Deferred income taxes (Note V) 2,497,000 2,549,000
Stockholders' equity:
Common stock without par value:
Authorized 12,000,000 shares
issued 10,075,440 shares (including shares
held in treasury) -- stated value 419,810 419,810
Additional paid-in capital 13,379,882 14,134,983
Retained earnings 301,388,604 296,397,999
Accumulated other comprehensive (loss) income (5,997) (20,016)
---------------------------
315,182,299 310,932,776
Less 1,884,609 shares in 2004 and 1,962,439
shares in 2003 of common stock
in treasury -- at cost 37,071,930 39,514,841
Less receivable and deferred compensation
from stock plans 1,600,377 2,616,826
---------------------------
276,509,992 268,801,109
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Total liabilities and stockholders' equity $344,213,208 $345,975,803
===========================
See accompanying notes.
-4-
Blair Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
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Net sales $107,074,331 $124,100,444 $362,709,317 $415,458,938
Other income (Note W) 10,887,234 11,001,885 35,298,276 30,664,888
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117,961,565 135,102,329 398,007,593 446,123,826
Cost and expenses:
Cost of goods sold 51,469,350 60,780,989 173,247,355 201,407,864
Advertising 25,947,175 33,746,291 94,955,714 113,821,111
General and administrative 31,232,772 32,530,994 97,727,526 98,991,016
Provision for doubtful accounts 4,476,095 6,702,356 18,067,391 22,950,454
Interest 94,838 72,159 260,893 256,999
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113,220,230 133,832,789 384,258,879 437,427,444
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Income before income taxes 4,741,335 1,269,540 13,748,714 8,696,382
Income taxes (Note V) 1,800,000 477,000 5,225,000 3,303,000
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Net income $ 2,941,335 $ 792,540 $ 8,523,714 $ 5,393,382
=========================================================
Basic earnings per share based on
weighted average shares outstanding (Note T) $.36 $.10 $1.05 $ .67
=========================================================
Diluted earnings per share based on
weighted average shares outstanding
and assumed conversions (Note T) $.36 $.10 $1.04 $ .67
=========================================================
See accompanying notes.
-5-
Blair Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
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Common Stock $ 419,810 $ 419,810 $ 419,810 $ 419,810
Additional Paid-in Capital:
Balance at beginning of period 13,488,871 14,311,675 14,134,983 14,428,903
Issuance of 0 and 575 shares for the three
months ended September 30,
2004 and 2003 and 4,050 and 5,375 shares for
the nine months ended September 30, 2004 and
2003 of common stock to non-employee directors -0- 11,746 (24,358) (6,356)
Forfeitures of 10,850 and 0 shares for the three
months ended September 30, 2004 and 2003 and
16,850 and 2,400 shares for the nine months
ended September 30, 2004 and 2003 of common
stock under Omnibus Stock and Employee Stock
Purchase Plans (71,223) -0- (94,746) (18,576)
Exercise of 6,560 and 0 shares for the three
months ended September 30, 2004 and 2003 and
90,630 and 13,004 shares for the nine months
ended September 30, 2004 and 2003 of
non-qualified stock options under
Omnibus Stock Plan (56,766) -0- (856,997) (109,550)
Tax benefit on exercise of non-qualified stock
options 19,000 -0- 221,000 29,000
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Balance at end of period 13,379,882 14,323,421 13,379,882 14,323,421
Retained Earnings:
Balance at beginning of period 299,630,497 288,795,224 296,397,999 286,511,847
Net income 2,941,335 792,540 8,523,714 5,393,382
Cash dividends (Note U) (1,183,228) (1,160,576) (3,533,109 (3,478,041)
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Balance at end of period 301,388,604 288,427,188 301,388,604 288,427,188
Accumulated Other Comprehensive Loss:
Balance at beginning of period (20,028) (18,562) (20,016) 12,686
Foreign currency translation 14,031 (12,101) 14,019 (43,349)
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Balance at end of period (5,997) (30,663) (5,997) (30,663)
Treasury Stock:
Balance at beginning of period (37,097,422) (40,840,954) (39,514,84) (41,264,330)
Issuance of 0 and 575 shares for the three
months ended September 30,
2004 and 2003 and 4,050 and 5,375 shares for
the nine months ended September 30, 2004 and
2003 of common stock to non-employee directors -0- 1,163 126,509 130,220
Forfeitures of 10,850 and 0 shares for the three
months ended September 30, 2004 and 2003 and
16,850 and 2,400 shares for the nine months
ended September 30, 2004 and 2003 of common
stock under Omnibus Stock and Employee Stock
Purchase Plans (162,288) -0- (277,873) (37,599)
Exercise of 6,560 and 0 shares for the three
months ended September 30, 2004 and 2003 and
90,630 and 13,004 shares for the nine
months ended September 30, 2004 and 2003 of
non-qualified stock options under Omnibus
Stock Plan 187,780 -0- 2,594,275 331,918
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Balance at end of period (37,071,930) (40,839,791) (37,071,930) (40,839,791)
See accompanying notes.
-6-
Blair Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity - continued
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
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Receivable and Deferred Compensation from Stock
Plans:
Balance at beginning of period (1,995,815) (2,581,030) (2,616,826) (2,775,102)
Forfeitures of 10,850 and 0 shares for the three
months ended September 30, 2004 and 2003 and
16,850 and 2,400 shares for the nine months
ended September 30, 2004 and 2003 of common
stock under Omnibus
Stock and Employee Stock Purchase Plans 48,832 -0- 84,350 13,513
Amortization of deferred compensation, net of
forfeitures 63,545 37,493 182,433 117,345
Executive officer restricted stock awards 238,093 -0- 565,984 -0-
Applications of dividends and cash repayments 44,968 48,386 183,682 149,093
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Balance at end of period (1,600,377) (2,495,151) (1,600,377) (2,495,151)
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Total stockholders' equity $276,509,992 $259,804,814 $276,509,992 $259,804,814
============================================================
Comprehensive Income:
Net income $ 2,941,335 $ 792,540 $ 8,523,714 $ 5,393,382
Adjustment from foreign currency translation 14,031 (12,101) 14,019 (43,349)
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Comprehensive income $ 2,955,366 $ 780,439 $ 8,537,733 $ 5,350,033
============================================================
See accompanying notes.
-7-
Blair Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30
2004 2003
--------------------------
Operating activities
Net income $ 8,523,714 $ 5,393,382
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 6,584,394 6,832,317
Amortization 249,922 258,150
Impairment of assets held for sale -0- 300,773
Provision for doubtful accounts 18,067,391 22,950,454
Provision for deferred income taxes 444,000 1,384,000
Tax benefit on exercise of non-qualified stock
options 221,000 29,000
Compensation expense (net of forfeitures)
for stock awards 701,711 344,225
Changes in operating assets and liabilities
providing (using) cash:
Customer accounts receivable (5,244,164) (15,051,162)
Inventories (15,771,195) (16,914,387)
Prepaid expenses and other assets (673,730) (918,317)
Trade accounts payable (4,899,541) 6,051,133
Advance payments from customers 177,437 (248,359)
Accrued expenses (2,571,438) (5,413,061)
Federal and state taxes (1,866,174) (6,755,577)
--------------------------
Net cash provided by (used in) operating activities 3,943,327 (1,757,429)
Investing activities
Purchases of property, plant, and equipment (2,924,292) (5,337,788)
--------------------------
Net cash used in investing activities (2,924,292) (5,337,788)
Financing activities
Principal repayments on capital lease obligations (256,592) (260,809)
Dividends paid (3,533,109) (3,478,041)
Exercise of non-qualified stock options 1,737,278 222,368
Repayments of notes receivable from stock plans 44,270 3,415
--------------------------
Net cash used in financing activities (2,008,153) (3,513,067)
Effect of exchange rate changes on cash 10,978 (48,082)
--------------------------
Net decrease in cash (978,140) (10,656,366)
Cash and cash equivalents at beginning of year 36,380,049 49,975,503
--------------------------
Cash and cash equivalents at end of period $ 35,401,909 $ 39,319,137
==========================
See accompanying notes.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
September 30, 2004
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Blair
Corporation and its wholly-owned subsidiaries have been prepared in accordance
with 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 nine months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. 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, 2003.
As of June 30, 2003 the Company formed a new wholly-owned subsidiary, Allegheny
Trail Corporation, to launch a wholesale business targeted primarily at outdoor
sporting goods and recreational retailers. Allegheny Trail offers a core product
line of men's and women's outdoor apparel basics at entry-level price points
allowing retailers to be more competitive with major brands.
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 September 30, 2004, JLB Service Bank's
total assets represented 1.68% of the total consolidated assets of the Company.
Gross revenue of JLB Service Bank was .96% and .97% of the Company's
consolidated gross revenue for the three months and nine months ended September
30, 2004.
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.
The Company records internally incurred shipping and handling costs in cost of
sales.
Finance charges on time payment accounts are recognized on an accrual basis of
accounting. The increase in finance charges compared to the third quarter of
2003 and nine months ended September 30, 2003 primarily resulted from increased
finance charge revenues associated with the Blair Credit activities of JLB
Service Bank.
NOTE C - 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 D - 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 Sheet approximate fair
values.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
September 30, 2004
NOTE E - 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 in the
balance sheet. The provision for returns charged against income for the three
months ended and the nine months ended September 30, 2004 amounted to
$14,539,609 and $54,125,168, respectively. The provision for returns charged
against income for the three months ended and the nine months ended September
30, 2003 amounted to $18,952,565 and $63,137,875, 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 F - 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 an additional adjustment to the
Company's provisions.
NOTE G - INVENTORIES
Inventories are valued at the lower of cost or market. Cost of merchandise
inventories is determined principally on the last-in, first-out (LIFO) method.
If the FIFO method had been used, merchandise inventories would have increased
by approximately $4,488,000 at both September 30, 2004 and December 31, 2003.
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,
generally nine weeks. The Company has a reserve for slow moving and obsolete
inventory amounting to $2,908,000 at September 30, 2004, $3,600,000 at December
31, 2003 and $3,880,000 at September 30, 2003. The closing of the Starbrick
Outlet Store in January 2004 resulted in $2.4 million of write-downs in the
first quarter 2004. These write-downs primarily were 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 September 30, 2004 is lower than the reserve at December
31, 2003 on higher levels of inventory.
NOTE H - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated on the basis of cost. Depreciation has
been provided principally by the straight-line method using rates, which are
estimated to be sufficient to depreciate the cost of the assets over their
period of usefulness. Amortization of assets recorded under capital lease
obligations is included with depreciation expense. Maintenance and repairs are
charged to expense as incurred.
NOTE I - TRADEMARKS
Trademarks are stated on the basis of cost. All trademarks are being amortized
by the straight-line method for a period of 15 years. Amortization expense
amounted to $18,061 for the three months ended and $54,182 for the nine months
ended in 2004 and 2003, respectively.
NOTE J - 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
September 30, 2004.
NOTE K - EMPLOYEE BENEFITS
The Company's employee benefits include a profit sharing and retirement feature
available to all eligible employees. The Company's 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 for the three months ended
and nine months ended September 30, 2004 amounted to $300,004 and $870,241, and
for the three months ended and nine months ended September 30, 2003 amounted to
$87,627 and $606,016, respectively.
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
September 30, 2004
NOTE K - 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 for the three months ended and
nine months ended September 30, 2004 amounted to $481,407 and $1,339,786, and
for the three months ended and nine months ended September 30, 2003 amounted to
$523,208 and $1,630,380, respectively.
NOTE L - 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 M - NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142, Goodwill and Other Intangible Assets. Statement No. 142 requires
testing of goodwill and intangible assets with indefinite lives for
impairment rather than amortizing them. The adoption of this statement in
the first quarter of 2002 had no impact on the Company's financial results.
Effective January 1, 2002, the Company implemented SFAS No. 143, Accounting for
Asset Retirement Obligations which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the related asset retirement costs. The statement requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred and capitalized as part of the carrying amount of the
long-lived asset. When a liability is initially recorded, the entity capitalizes
the cost by increasing the carrying value of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, a gain or loss is recorded. The adoption of this
statement did not have an effect on the Company.
SFAS No. 145, Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections, and FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others were adopted by the Company effective
January 1, 2003. The adoption of these standards did not have a material impact
on the Company's results of operations or financial condition.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets which supersedes SFAS No. 121 Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. Although retaining many of the provisions of SFAS No. 121, SFAS
No. 144 establishes a uniform accounting model for long-lived assets to be
disposed. The Company's adoption of this statement in the first quarter of
2002 did not have an impact on the Company's financial results for 2002.
During 2003, the provisions of this statement impacted the accounting
treatment of the planned sale of the Blair Outlet Store in Erie,
Pennsylvania. (See Note Y)
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities when the liability is incurred and not as a result
of an entity's commitment to an exit plan. The statement is effective for exit
or disposal activities initiated after December 31, 2002. The adoption of SFAS
No. 146 in the first quarter of 2003 did not have an impact on the Company's
financial results. During 2004 and 2003, the provisions of this statement
impacted the accounting treatment of the voluntary separation of employees due
to the closing of the Blair Outlet Stores in Warren, Pennsylvania and Erie,
Pennsylvania. (See Note Z)
The Company adopted SFAS No. 148, Accounting For Stock-Based Compensation
Transition and Disclosure an amendment of SFAS No. 123, Accounting For
Stock-Based Compensation effective the year ended December 31, 2002. It provides
alternative methods for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and requires prominent
disclosure about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company's adoption of
SFAS No. 148 in 2002 enhanced stock-based employee compensation disclosures and
had no effect on the method of accounting followed by the Company.
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
September 30, 2004
NOTE M - NEW ACCOUNTING PRONOUNCEMENTS - continued
In April 2003, the FASB issued SFAS No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement is generally effective for contracts entered
into or modified after June 30, 2003. The Company adopted the new statement
effective July 1, 2003. The Company has historically not utilized derivative
instruments, and as a result, the adoption of this statement has had no impact
on the financial statements of the Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise at the beginning of
the Company's third quarter 2003. The effective dates of certain provisions of
SFAS No. 150 have been deferred. The Company believes the adoption of this
standard will not have a material impact on its results of operations or
financial condition.
As of December 31, 2003, the Company adopted FASB Interpretation No. 46 R,
Consolidation of Variable Interest Entities, revised in December 2003. The
adoption of this statement has had no impact on the financial statements of the
Company.
On October 13, 2004, the Financial Accounting Standards Board (FASB) concluded
that Statement 123R, Share-Based Payment, which would require all companies to
measure compensation cost for all share-based payments (including employee stock
options) at fair value, would be effective for public companies for interim or
annual periods beginning after June 15, 2005. While the statement has not been
finalized, its current form will require the company to expense the fair value
of stock option grants rather than disclose the impact on its consolidated net
income within the footnotes, as is our current practice.
NOTE N - STOCK COMPENSATION
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123 (SFAS No. 123) the Company has elected to continue applying the
provisions of Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock-based compensation plans.
Accordingly, the Company does not recognize compensation expense for stock
options when the stock option price at the grant date is equal to or greater
than the fair market value of the stock at that date.
Stock activity in the third quarter of 2004 and 2003 generally includes
transactions pertaining to stock awarded to non-employee directors as well as
stock awarded and forfeited via the Company's Omnibus Stock and Employee Stock
Purchase Plans. Activity is accounted for by comparing the market value of the
awards, as required by the Plans, to the cost of the treasury shares used for
these transactions. The difference is booked to additional paid-in capital.
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
September 30, 2004
NOTE N - 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:
Pro Forma
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
-------------------------------------------
Net income as reported $2,941,335 $792,540 $8,523,714 $5,393,382
Add: Total stock-based employee
compensation expense recorded for
all awards, net of related tax
effects 211,165 55,730 536,487 167,956
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects 387,031 266,945 1,105,307 688,206
-------------------------------------------
Pro forma net income $2,765,469 $581,325 $7,954,894 $4,873,132
===========================================
Earnings per share:
Basic - as reported $.36 $.10 $1.05 $.67
===========================================
Basic - pro forma $.34 $.07 $ .98 $.61
===========================================
Diluted - as reported $.36 $.10 $1.04 $.67
===========================================
Diluted - pro forma $.34 $.07 $ .97 $.60
===========================================
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of SFAS No. 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rates of 3.49%, 4.95% and 5.20% for stock options issued 4/15/03,
4/15/02 and 4/16/01, respectively; dividend yields of 2.54%, 3.11% and 3.50% for
stock options issued 4/15/03, 4/15/02 and 4/16/01, respectively; volatility
factors of the expected market price of the Company's common stock of .540, .564
and .547 for stock options issued 4/15/03, 4/15/02 and 4/16/01, respectively;
and a weighted-average expected life of 7 years for the stock options issued
4/15/03, 4/15/02 and 4/16/01. The per share fair value of the options granted
was determined to be $10.63, $8.83 and $7.40 for stock options issued 4/15/03,
4/15/02 and 4/16/01, respectively.
NOTE O - RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
conform with the current year presentation.
NOTE P - CONTINGENCIES
The Company is involved in certain items of litigation, arising in the normal
course of business. While it cannot be predicted with certainty, management
believes that the outcome will not have a material effect on the Company's
financial condition or results of operations.
NOTE Q - FINANCING ARRANGEMENTS
The Company maintains two facilities that collectively provide $110 million of
credit. As of September 30, 2004 the Company was in compliance with all debt
covenants.
The syndicated revolving facility (the "Credit Agreement") was amended on
September 1, 2004. The amended Credit Agreement increases the commitment level
from $30 million to $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 September 30, 2004, the Company had no borrowings
(loans) outstanding on this credit facility and had letters of credit totaling
$16.2 million outstanding, which reduces the amount of borrowings available,
under the Credit Agreement. Outstanding letters of credit totaled $20.9 million
at December 31, 2003, and $20.7 million at September 30, 2003. The amended
facility is scheduled to expire on September 1, 2007.
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
September 30, 2004
NOTE Q - FINANCING ARRANGEMENTS - continued
The Company also maintains a securitization of up to $100 million in accounts
receivable. At the present time, $70 million of the $100 million is available to
the Company. The Company sells all right, title and interest in and to certain
of its accounts receivable to Blair Factoring Company, a wholly-owned
subsidiary. Blair Factoring Company is a separate, bankruptcy remote, special
purpose entity that entered into a Receivables Purchase Agreement with PNC Bank,
National Association, as administrator, and certain conduit purchasers. The
Company's consolidated financial statements reflect all the accounts of Blair
Factoring Company, including the receivables and secured borrowings.
Transactions entered into under the Receivables Purchase Agreement are
considered secured borrowings and collateral transactions under the provisions
of Statement of Financial Accounting Standards No. 140 Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities. The
securitization requires certain performance standards for the Company's accounts
receivable portfolio in addition to complying with the covenants in the Credit
Agreement. At September 30, 2004, December 31, 2003, and September 30, 2003, the
Company had $15 million outstanding, the minimum amount required to be
outstanding, under the Receivables Purchase Agreement, all of which was
classified as short-term. At September 30, 2004 and September 30, 2003, the
weighted average interest rate was 2.05% and 1.98%, respectively. Interest paid
for the three months and nine months ended September 30, 2004 was approximately
$88,000 and $234,000, and for the three months and nine months ended September
30, 2003 was approximately $57,000 and $206,000, respectively. The
securitization has a scheduled termination date of April 7, 2006.
NOTE R - ACCRUED EXPENSES
Accrued expenses consist of:
September 30 December 31
2004 2003
----------------------------
Employee Compensation $11,075,827 $12,395,998
Contribution to profit sharing and
retirement plan 870,241 1,436,117
Health insurance 912,901 1,148,038
Voluntary Separation Program 551,834 762,106
Taxes, other than taxes on income 13,206 814,574
Other accrued items 1,735,042 1,175,562
----------------------------
$15,159,051 $17,732,395
============================
NOTE S - 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 September 30, 2004:
2004 $104,796
2005 114,568
2006 11,146
2007 1,857
-------------
232,367
Less amount representing interest (8,705)
-------------
Present value of minimum lease payments 223,662
Less current portion (208,932)
-------------
Long-term portion of capital lease obligation $ 14,730
=============
-14-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
September 30, 2004
NOTE S - LEASES - continued
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 September 30, 2004:
2004 $ 813,098
2005 2,940,806
2006 2,283,873
2007 1,507,717
2008 1,058,438
Thereafter 3,083,462
-------------
$11,687,394
=============
NOTE T - 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 Nine Months Ended
September 30 September 30
2004 2003 2004 2003
----------------------------------------------
Numerator:
Net income $2,941,335 $ 792,540 $8,523,714 $5,393,382
Denominator:
Weighted-average shares
outstanding 8,190,664 8,120,476 8,156,965 8,114,594
Contingently issueable shares-
Omnibus Stock Purchase Plan (68,536) (61,811) (68,536) (61,811)
----------------------------------------------
Denominator for basic earnings
per share 8,122,128 8,058,665 8,088,429 8,052,783
Effect of dilutive securities:
Employee stock options 82,736 19,211 72,900 24,596
----------------------------------------------
Denominator for diluted
earnings per share 8,204,864 8,077,876 8,161,329 8,077,379
==============================================
Basic earnings per share $.36 $.10 $1.05 $.67
==============================================
Diluted earnings per share $.36 $.10 $1.04 $.67
==============================================
NOTE U - DIVIDENDS DECLARED
2-21-03 $.15 per share 2-13-04 $.15 per share
4-15-03 .15 4-29-04 .15
7-15-03 .15 7-20-04 .15
10-21-03 .15 10-19-04 .15
Blair Corporation has declared a dividend for 284 consecutive quarters.
For the three months and nine months ended September 30, 2004 the company
declared dividends of $1,228,236 and $3,672,520, of which $1,183,228 and
$3,533,109 was paid directly to shareholders and charged to retained earnings.
For the three months and nine months ended September 30, 2003 the company
declared dividends of $1,208,821 and $3,623,588, of which $1,160,576 and
$3,478,041 was paid directly to shareholders and charged to retained earnings.
The remaining dividends declared for the three months and nine months ended
September 30, 2004, $45,008 and $139,411, and the three months and nine months
ended September 30, 2003, $48,245 and $145,547, 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.
-15-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
September 30, 2004
NOTE V - INCOME TAXES
The liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
The components of income tax expense (benefit) are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
--------------------------------------------------
Currently payable:
Federal $(1,936,000) $(4,845,000) $4,006,000 $1,539,000
Foreign 105,000 163,000 147,000 352,000
State (235,000) (734,000) 628,000 28,000
--------------------------------------------------
(2,066,000) (5,416,000) 4,781,000 1,919,000
Deferred 3,866,000 5,893,000 444,000 1,384,000
--------------------------------------------------
$ 1,800,000 $ 477,000 $5,225,000 $3,303,000
==================================================
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 Nine Months Ended
September 30 September 30
2004 2003 2004 2003
---------------------------------------------------
Statutory rate applied to
pretax income $1,659,467 $444,339 $4,812,050 $3,043,734
State income taxes, net of
federal tax benefit 226,200 (3,900) 323,700 142,350
Other items (85,667) 36,561 89,250 116,916
---------------------------------------------------
$1,800,000 $477,000 $5,225,000 $3,303,000
===================================================
The Company has approximately $2.8 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 $2.8 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 loss before they expire in 2011.
Components of the provision for deferred income tax expense are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
-----------------------------------------------
Advertising costs $3,949,000 $4,927,000 $ (262,000) $2,182,000
Provision for doubtful accounts 856,000 216,000 1,437,000 (98,000)
Provision for estimated returns (16,000) 13,000 213,000 (623,000)
Severance costs 22,000 33,000 81,000 95,000
Depreciation 104,000 721,000 (52,000) (44,000)
Inventory writedown (277,000) 23,000 264,000 46,000
Deferred stock compensation (116,000) (16,000) (286,000) (44,000)
Incentive compensation (547,000) -0- (547,000) -0-
Other items - net (109,000) (24,000) (404,000) (130,000)
-----------------------------------------------
$3,866,000 $5,893,000 $ 444,000 $1,384,000
===============================================
-16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
September 30, 2004
NOTE V - INCOME TAXES - continued
Components of the deferred tax asset and liability under the liability method as
of September 30, 2004 and December 31, 2003 are as follows:
September 30 December 31
2004 2003
----------------------------
Current net deferred tax asset:
Doubtful accounts $12,685,000 $14,122,000
Returns allowance 2,093,000 2,306,000
Inventory obsolescence 1,110,000 1,374,000
Inventory costs (372,000) (372,000)
Vacation pay 1,921,000 1,798,000
Advertising costs (7,280,000) (7,542,000)
State net operating loss 139,000 196,000
Other items 1,558,000 525,000
----------------------------
Total deferred tax assets 11,854,000 12,407,000
State valuation allowance (139,000) (196,000)
----------------------------
Deferred tax assets, net of valuation
allowance $11,715,000 $12,211,000
============================
Long-term deferred tax liability
Property, plant and equipment $ 2,497,000 $ 2,549,000
============================
NOTE W - OTHER INCOME
Other income consists of:
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------
Finance charges on time
payment accounts $9,268,447 $9,010,271 $30,401,349 $26,323,846
Commissions earned 229,524 437,783 1,365,945 1,002,762
Other items 1,389,263 1,553,831 3,530,982 3,338,280
----------------------------------------------------
$10,887,234 $11,001,885 $35,298,276 $30,664,888
====================================================
Finance charges on time payment accounts are recognized on an accrual basis of
accounting. The higher finance charges primarily resulted from increased finance
charge revenues associated with the establishment of JLB Service Bank on August
20, 2003.
NOTE X - 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. Allegheny Trail was added in the third quarter of
2003. 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. The Company announced on May 3, 2004, that they will discontinue
circulation of its Crossing Pointe Catalog title beginning in 2005. The
Company's intention is to more fully focus new business development efforts on
the core Blair brand and its proven appeal to significant market segments. The
decision to focus on core operations is based in part on the historical success
of the Blair brand and an extensive consumer and brand strategy study undertaken
by the Company as part of its efforts to enhance profitability and shareholder
value. The Company has evaluated the impact of discontinuing circulation of the
Crossing Pointe title on all assets associated with this operation. All
appropriate reserves have been recorded. The Company does not anticipate that
this decision will have a negative effect on 2004 profitability, but does expect
it to benefit 2005 performance.
-17-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
BLAIR CORPORATION AND SUBSIDIARIES
(Unaudited)
September 30, 2004
NOTE X - BUSINESS SEGMENT AND CONCENTRATION OF BUSINESS RISK - continued
The Company's segment reporting is consistent with the presentation made to the
Company's chief operating decision-maker. The Company's customer base is
comprised of individuals throughout the United States and is diverse in both
geographic and demographic terms. Advertising is done mainly by means of
catalogs, direct mail letters and the internet, which offer the Company's
merchandise.
Sales of the women's and men's fashion apparel and accessories accounted for 86%
of total sales through the three months and nine months ended September 30, 2004
and 88% of total sales through the three months and nine months ended September
30, 2003, respectively. Home products accounted for the remaining sales volume.
NOTE Y - 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
carrying value of the asset, after considering a $300,773 impairment charge
taken in 2003, is deemed to be stated fairly at September 30, 2004.
NOTE Z - VOLUNTARY SEPARATION PROGRAM
In the first quarter of 2004, the Company accrued and charged to expense $67,000
in separation costs. The costs were charged to General and Administrative
Expense in the income statement. The $67,000 charge represents severance pay,
related payroll taxes and medical benefits due the 33 eligible employees who
accepted the voluntary separation program offered in connection with closing the
Company's Outlet Store located in Warren, Pennsylvania on January 16, 2004. As
of the end of the first quarter of 2004, $67,000 had been paid. This liability
is considered satisfied.
In the first quarter of 2003, the Company accrued and charged to expense $75,000
in separation costs. The costs were charged to General and Administrative
Expense in the income statement. The $75,000 charge represents severance pay,
related payroll taxes and medical benefits due the 32 eligible employees who
accepted the voluntary separation program offered in connection with closing the
Company's Outlet Store located in Erie, Pennsylvania on March 28, 2003. As of
the end of the second quarter of 2003, $53,000 had been paid. This liability is
considered satisfied and resulted in $22,000 being taken back to income in the
second quarter of 2003.
In the first quarter of 2001, the Company accrued and charged to expense $2.5
million in separation costs. The costs were charged to General and
Administrative Expense in the income statement. The $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 third quarter of 2004, $1.9 million of the $2.5
million has been paid.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
Results of Operations
Comparison of Third Quarter 2004 and Third Quarter 2003
Net income for the third quarter ended September 30, 2004 was $2.9 million, or
$.36 per basic and diluted share, compared to net income of $793,000, or $.10
per basic and diluted share, for the third quarter ended September 30, 2003.
Results for the third quarter of 2004 reflect a planned decrease in net sales
offset primarily by enhanced efficiencies of core operations and the Company's
continued focus on profitability and enhancing shareholder value.
Net sales for the third quarter of 2004 totaled $107.1 million and were 13.7%
lower ($17.0 million) than net sales for the third quarter of 2003. The number
of advertising mailings and incoming orders decreased in the third quarter of
2004 as compared to the third quarter of 2003. 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 increased
almost 11% in the third quarter of 2004 compared to the third quarter of 2003.
The total number of orders shipped decreased 18.2% while the average order size
increased 4.6% in the third quarter of 2004 as compared to the third quarter of
2003. The provision for returned merchandise as a percentage of gross sales
decreased (135 basis points) in the third quarter of 2004 as compared to the
third quarter of 2003. Management attributes this favorable change to improved
product quality and fit.
Other income decreased 1.0% from $11.0 million to $10.9 million in the third
quarter of 2004 versus the third quarter of 2003. Increased finance charges were
primarily offset by lower continuity program commissions earned. The higher
finance charges resulted primarily from increased finance charge revenues
associated with the Blair Credit activities of JLB Service Bank.
Cost of goods sold decreased $9.3 million (15.3%) to $51.5 million in the third
quarter of 2004 as compared to the third quarter of 2003. Cost of goods sold as
a percentage of net sales decreased to 48.07% in the third quarter of 2004 from
49.0% in the third quarter of 2003. The decrease can be attributed primarily to
reduced customer returns, declining merchandise costs and, to a lesser extent,
lower overall shipping and liquidation costs in the third quarter of 2004 as
compared to the third quarter of 2003.
Advertising expenses in the third quarter of 2004 decreased $7.8 million (23.1%)
to $25.9 million from the third quarter of 2003. The Company's more targeted
mailings lead 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 4 year old Crossing Pointe
title in early 2005.
The total number of catalog mailings released in the third quarter of 2004 was
11.2 million or 23.2% less than in the third quarter of 2003. The total number
of prospect catalog mailings decreased 5.0 million (46.8%) in the third quarter
of 2004 as compared to the third quarter of 2003. The reduction in prospect
circulation is primarily attributable to reduced Crossing Pointe circulation in
the third quarter of 2004 compared to the third quarter of 2003.
The total number of letter mailings released in the third quarter of 2004
decreased by 27.7% (3.2 million) as compared to the third quarter of 2003.
Total circulation of the co-op and media advertising programs decreased 12.0%
(18.2 million pieces) in the third quarter of 2004 as compared to the third
quarter of 2003.
The Company launched e-commerce sites for Blair www.blair.com, and Crossing
Pointe www.crossingpointe.com, in the third quarter of 2000. In the third
quarter of 2004, the Company generated $20.4 million in e-commerce sales demand
as compared to $18.7 million in the third quarter of 2003, a 9.1% increase.
General and administrative expense decreased 4.0% ($1.3 million) in the third
quarter of 2004 as compared to the third quarter of 2003. The lower general and
administrative expense in the third quarter of 2004 was primarily attributable
to reduced variable employee costs associated with lower sales volume. As a
percent of net sales, general and administrative expenses were 29.2% for the
quarter ended September 30, 2004 compared to 26.2% for the quarter ended
September 30, 2003. The increase in percentage of net sales is primarily
attributable to increased fees for professional services which is partially due
to the added expense of complying with Section 404 of the Sarbanes-Oxley Act.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
Results of Operations - Continued
Comparison of Third Quarter 2004 and Third Quarter 2003 - Continued
The provision for doubtful accounts decreased $2.2 million from $6.7 million to
$4.5 million or 33.2% in the third quarter of 2004 as compared to the third
quarter of 2003. The decrease is primarily the result of a 13.0% decrease in
credit sales. The estimated bad debt rate used in the third quarter of 2004 was
185 basis points lower than the bad debt rate used in the third quarter of 2003.
The estimated bad debt rate has decreased primarily due to reduced credit offers
to both Blair and Crossing Pointe prospects as well as improved delinquency and
charge-off experience. Prospect credit offers traditionally result in higher bad
debts.
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 September 30, 2004, the delinquency rate of open accounts
receivable was 192 basis points lower than at September 30, 2003. The charge-off
rate for the third quarter of 2004 was 17 basis points lower than the charge-off
rate for the third quarter of 2003.
At this time, the Company feels that the allowance for doubtful accounts is
sufficient to cover the charge-offs from the current customer accounts
receivable portfolio. Also, credit granting, collection and behavior models
continue to be updated and improved, and, along with expanding database
capabilities, provide valuable credit-marketing opportunities and improve the
ability to forecast doubtful accounts.
Interest expense increased $22,679 (31.4%) in the third quarter of 2004 compared
to the third quarter of 2003. Interest expense results primarily from the
Company's required borrowings under the Receivables Purchase Agreement. Interest
rates have been higher in the third quarter of 2004.
Income taxes as a percentage of income before income taxes were 38.0% in the
third quarter of 2004 and 37.6% in the third quarter of 2003. The federal income
tax rate was 35% in both years. The slight change in the total income tax rate
was caused by a change in the Company's effective state income tax rate.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
Results of Operations - continued
Comparison of Nine Month Periods Ended September 30, 2004 and September 30,
2003
Net income for the nine months ended September 30, 2004 increased 58.0% to $8.5
million, or $1.05 per basic and $1.04 per diluted share, as compared to $5.4
million, or $.67 per basic and diluted share, for the nine months ended
September 30, 2003. Results for the first nine months of 2004 reflect a planned
decrease in net sales offset primarily by enhanced efficiencies of core
operations and the Company's focus on profitability and enhancing shareholder
value.
Net sales for the first nine months of 2004 decreased $52.7 million to $362.7
million or 12.7% less than net sales for the first nine months of 2003. The
decrease in net sales was primarily attributable to the Company's strategic
decision to focus on more targeted mailings for greater efficiency and optimized
yield. Gross sales revenue generated per advertising dollar increased
approximately 4.2% in the first nine months of 2004 as compared to the first
nine months of 2003. The provision for returned merchandise as a percentage of
gross mail order sales decreased slightly (32 basis points) in the first nine
months of 2004 as compared to the first nine months of 2003. Management
attributes this favorable change to improved product quality and fit.
Other income increased approximately $4.6 million or 15.1% to $35.3 million in
the first nine months of 2004 as compared to the first nine months of 2003.
Increased finance charges and commissions were primarily responsible for the
higher other income. The higher finance charges resulted primarily from
increased finance charge revenues associated with the establishment of JLB
Service Bank on August 20, 2003. The higher commissions resulted from increased
continuity program activity.
Cost of goods sold decreased $28.2 million or 14.0% to $173.2 million in the
first nine months of 2004 as compared to the same period in 2003. As a
percentage of net sales, cost of goods sold decreased to 47.8% in the first nine
months of 2004 from 48.5% in the first nine months of 2003. The decrease in cost
of goods sold can be attributed primarily to reduced customer returns, declining
merchandise costs and to a lesser extent, lower overall shipping and liquidation
costs in 2004 as compared to 2003.
Advertising expenses in the first nine months of 2004 decreased $18.9 million or
16.6% to $95.0 million. The Company's more targeted mailings lead 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 4 year old Crossing Pointe title in early 2005.
The total number of catalog mailings released in the first nine months of 2004
was 14.9 million or 9.5% less than those released in the first nine months of
2003. The total number of prospect catalog mailings decreased 9.6 million
(20.5%) in the first nine months of 2004 as compared to the first nine months of
2003.
The total number of letter mailings released in the first nine months of 2004
was 19.1 million or 42.5% less than those released in the first nine months of
2003.
Total circulation of the co-op and media advertising programs decreased 130.7
million pieces or 21.1% in the first nine months of 2004 as compared to the
first nine months of 2003.
The Company launched e-commerce sites for Blair www.blair.com and Crossing
Pointe www.crossingpointe.com in the third quarter of 2000. In the first nine
months of 2004, the Company generated $66.0 million in e-commerce gross sales
demand, an increase of 9.5% over the first nine months of 2003.
General and administrative expense of $97.7 million for the first nine months of
2004 is $1.3 million or 1.3% less than the first nine months of 2003. Reduced
variable employee costs associated with lower sales volume served to lower
general and administrative expense in the first nine months of 2004. Offsetting
the labor related reduction in general and administrative expenses was an
increase in professional fees. The increased professional fees partially reflect
costs associated with the engagement of McKinsey & Company, a national marketing
and strategy consulting firm, to assist the Company in conducting a
comprehensive consumer, brand and strategy study aimed at enhancing shareholder
value. Another contributing factor is fees related to complying with Section 404
of the Sarbanes-Oxley Act
The provision for doubtful accounts decreased $4.9 million from $23.0 million to
$18.1 million or 21.3% for the first nine months of 2004 compared to the same
period in 2003. The estimated bad debt rate used in the first nine months of
2004 was approximately 12% or 100 basis points lower than the bad debt rate used
in the first nine months of 2003. The
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
Results of Operations - continued
Comparison of Nine Month Periods Ended September 30, 2004 and September 30,
2003 - continued
estimated bad debt rate has decreased primarily due to reduced credit offers to
both Blair and Crossing Pointe prospects as well as improved delinquency and
charge-off experience. Prospect credit offers traditionally result in higher bad
debts.
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 September 30, 2004, the delinquency rate of open accounts
receivable was approximately 14% or 192 basis points lower than at September 30,
2003. The charge-off rate for the first nine months of 2004 was 5% or 7 basis
points lower than the charge-off rate for the first nine months of 2003.
At this time, the Company believes that the allowance for doubtful accounts is
sufficient to cover the charge-offs from the current customer accounts
receivable portfolio. Also, credit granting, collection and behavior models
continue to be updated and improved, and, along with expanding database
capabilities, provide valuable credit-marketing opportunities and improve the
ability to forecast doubtful accounts.
Interest expense increased approximately $4,000 to $260,893 or 1.5% in the first
nine months of 2004 as compared to the first nine months of 2003. Interest
expense results primarily from the Company's required borrowings under the
Receivables Purchase Agreement. Interest rates have been higher in the first
nine months of 2004.
Income taxes as a percentage of income before income taxes were 38.0% in the
first nine months of 2004 and 2003. The federal income tax rate was 35% in both
years.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
Liquidity and Sources of Capital
The Company maintains two facilities that collectively provide $110 million of
credit. As of September 30, 2004 the Company was in compliance with all debt
covenants.
The syndicated revolving facility (the "Credit Agreement") was amended on
September 1, 2004. The amended Credit Agreement increases the commitment level
from $30 million to $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 September 30, 2004, the Company had no borrowings
(loans) outstanding on this credit facility and had letters of credit totaling
$16.2 million outstanding, which reduces the amount of borrowings available,
under the Credit Agreement. Outstanding letters of credit totaled $20.9 million
at December 31, 2003, and $20.7 million at September 30, 2003. The amended
facility is scheduled to expire on September 1, 2007.
The Company also maintains a securitization of up to $100 million in accounts
receivable. At the present time, $70 million of the $100 million is available to
the Company. The Company sells all right, title and interest in and to certain
of its accounts receivable to Blair Factoring Company, a wholly-owned
subsidiary. Blair Factoring Company is a separate, bankruptcy remote, special
purpose entity that entered into a Receivables Purchase Agreement with PNC Bank,
National Association, as administrator, and certain conduit purchasers. The
Company's consolidated financial statements reflect all the accounts of Blair
Factoring Company, including the receivables and secured borrowings.
Transactions entered into under the Receivables Purchase Agreement are
considered secured borrowings and collateral transactions under the provisions
of Statement of Financial Accounting Standards No. 140 Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities. The
securitization requires certain performance standards for the Company's accounts
receivable portfolio in addition to complying with the covenants in the Credit
Agreement. At September 30, 2004, December 31, 2003, and September 30, 2003, the
Company had $15 million outstanding, the minimum amount required to be
outstanding, under the Receivables Purchase Agreement, all of which was
classified as short-term. At September 30, 2004 and September 30, 2003, the
weighted average interest rate was 2.05% and 1.98%, respectively. Interest paid
for the three months and nine months ended September 30, 2004 was approximately
$88,000 and $234,000, and for the three months and nine months ended September
30, 2003 was approximately $57,000 and $206,000, respectively. The
securitization has a scheduled termination date of April 7, 2006.
The following table and narrative highlight significant changes in cash and cash
equivalents for the nine months ended September 30, 2004 and 2003.
Nine Months Ended
September 30
Increase/
2004 2003 (decrease)
-------------------------------------------
Net cash provided by (used in)
operating activities $3,943,327 $(1,757,429) $5,700,756
Net cash (used in) investing
activities (2,924,292) (5,337,788) 2,413,496
Net cash (used in) financing
activities (2,008,153) (3,513,067) 1,504,914
Effect of exchange rate changes on
cash 10,978 (48,082) 59,060
-------------------------------------------
Net (decrease) in cash and cash
equivalents $ (978,140) $(10,656,366) $9,678,226
===========================================
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
Liquidity and Sources of Capital - continued
Net cash provided by operating activities was $3.9 million for the nine months
ended September 30, 2004, a $5.7 million increase compared to the same period in
fiscal 2003. This increase is primarily attributable to a $3.1 million
improvement in net income along with favorable changes in several components of
working capital. The primary factors of improved working capital are favorable
changes to accounts receivable ($4.9 million) and accrued taxes ($4.9 million).
These positive impacts were offset somewhat by a $6.8 million change in payables
and accrual balances resulting from the seasonal build in merchandise inventory.
The net cash flow used in investing activities was lower by $2.4 million due to
lower level of capital expenditures. In 2003, the Company was in the final
stages of a modernization and expansion program of its fulfillment complex.
The $1.5 million increase in net cash flows used in financing activities for the
nine months ended September 30, 2004 over the comparable period in 2003, is
primarily due to higher proceeds from exercised stock options.
Anticipated cash requirements during 2004 are primarily to fund capital
expenditures and pay dividends. The Company expects to fund 2004 cash
requirements with cash generated from operations and cash on hand.
The Company was in compliance with all debt covenants as of September 30, 2004.
The Company believes it has adequate financial resources to support anticipated
short-term and long-term capital needs and commitments.
Merchandise inventory turnover was 2.8 at September 30, 2004, 3.4 at December
31, 2003 and 3.5 at September 30, 2003. Merchandise inventory as of September
30, 2004 was 24.7% higher than at December 31, 2003 and 25.9% higher than at
September 30, 2003. The increase in merchandise inventories 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 $2.9 million at September 30, 2004, $3.6
million at December 31, 2003 and $3.9 million at September 30, 2003. Inventory
write-offs and write-downs (reductions to below cost) charged against the
reserve for obsolescence were $5.8 million in the first nine months of 2004 and
$4.0 million in the first nine months of 2003. The closing of the Starbrick
Outlet Store in January 2004, accounts for $2.4 million of the write-downs in
the first nine months of 2004. These write-downs were 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 September 30, 2004 is lower than the reserve at December
31, 2003 on higher levels of inventory. However, 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. Allegheny Trail was added in the third quarter of 2003.
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.
The reduction in Crossing Pointe net sales is the result of reduced circulation
in the first nine months of 2004 compared to the first nine months of 2003. The
Company will discontinue its 4 year old Crossing Pointe catalog title in early
2005.
The Store product line shows a decrease of $3.4 million in merchandise inventory
when comparing the September 30, 2004 balance to the September 30, 2003 balance.
This is due to the closing of the Starbrick Outlet Store in January, 2004, which
was accounted for in the fourth quarter of 2003.
-24-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
Liquidity and Sources of Capital - continued
The following tables illustrate the percent of net sales and merchandise
inventory that each product line represents.
9/30/04 Percent of 9/30/03 Percent of
Net Sales Total Net Net Sales Total Net
Product Line (in millions) Sales (in millions) Sales
------------------- ------------- ---------- ------------- ----------
Womenswear $232.9 64.2% $266.0 64.0%
Menswear 61.0 16.8% 63.6 15.3%
Home 49.2 13.6% 50.4 12.1%
Crossing Pointe 16.4 4.5% 30.6 7.4%
Stores 2.2 0.6% 4.7 1.1%
Allegheny Trail 1.0 0.3% 0.2 0.1%
-------------- ---------- ------------- ----------
Total $362.7 100.0% $415.5 100.0%
============== ========== ============= ==========
9/30/04 9/30/03
Merchandise Merchandise
Inventory Inventory
Product Line (in millions) (in millions)
------------------- -------------- ----------------
Womenswear $49.6 $38.5
Menswear 17.2 8.0
Home 9.5 5.1
Crossing Pointe 3.3 8.3
Stores 0.5 3.9
Allegheny Trail 2.2 1.5
--------------- ----------------
Total $82.3 $65.3
=============== ================
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 10.4% in the first nine months 2004 as
compared to first nine months 2003 in line with the strategic decision to focus
on more targeted mailings for greater efficiency and optimized yield.
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 merchandise. As of September 30, 2004, JLB Service Bank's
total assets represented 1.68% of total consolidated assets of the Company.
Gross revenue of JLB Service Bank was .97% of the Company's consolidated gross
revenue for the nine months ended, September 30, 2004.
The Company has added new facilities, modernized its existing facilities and
acquired new cost-saving equipment during the last several years. Capital
expenditures for property, plant and equipment totaled $2.9 million during the
first nine months 2004, compared to $5.3 million during the first nine months
2003.
-25-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
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. On March 28, 2003, the Company closed its outlet store located in
Erie, Pennsylvania. 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 carrying
value of the asset, after considering a $300,773 impairment charge taken in
2003, is deemed to be stated fairly at September 30, 2004. Evolvement of the
Company's inventory liquidation strategy into more rapid and profitable methods
of disposing obsolete and excess inventory led to these decisions. Over the past
three years, package insertions, telephone upsell promotions, sale catalogs and
the growing e-commerce channel have proven to be more successful and profitable
in moving inventory than the traditional outlet sales process.
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 5
Obligations Total 1 year years years years
---------------- ----------- ----------- ----------- ---------- -----------
Capital Lease
Obligations $ 232,367 $ 104,796 $ 127,571 $ -0- $ -0-
Operating Leases 11,687,394 813,098 6,732,396 2,008,486 2,133,414
Unconditional
Purchase
Obligations -
Outstanding
Letters of
Credit 16,200,000 16,200,000 -0- -0- -0-
Line of Credit -
Securitization 15,000,000 15,000,000 -0- -0- -0-
----------- ----------- ---------- ---------- -----------
Total $43,119,761 $32,117,894 $6,859,967 $2,008,486 $2,133,414
=========== =========== ========== ========== ===========
The Company has commercial commitments consisting of a revolving credit facility
of $40 million and a receivables securitization of $70 million.
Amount of Commitment
Expiration Per Period
Other Commercial Total
Commitments Amounts Less than 1 - 3 4 - 5 After 5
Committed 1 year years years years
---------------- ----------- ----------- ----------- ----- -------
Line of Credit-
Revolving
effective
9/01/04 $ 40,000,000 $40,000,000 $ -0- $ -0- $ -0-
Line of Credit -
Securitization
effective 4/9/03 70,000,000 -0- 70,000,000 -0- -0-
------------ ----------- ---------- ------ -------
Total $110,000,000 $40,000,000 $70,000,000 $ -0- $ -0-
============ =========== =========== ====== =======
-26-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
Contractual Obligations - continued
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
December 15, 2004. The Company has declared dividends for 284 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").
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 2003 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 2003 level of credit
sales and finance charges, net income would change by approximately $2.5
million, or $.32 per share, from a one percentage point change in the bad debt
rate.
The allowance for returns is a deduction from customer accounts receivable. A
monthly provision for anticipated returns is recorded as a percentage of gross
sales, based upon historical experience. The provision is charged against gross
sales to arrive at net sales, and actual returns are charged against the
allowance for returns. Returns are generally more predictable as they settle
within two-to-three months, but are impacted by season, new products and/or
product lines, type of sale (cash, credit card, Blair Credit) and sales mix
(prospect/customer). The Company feels that the allowance for returns is
sufficient to cover the returns that will occur after September 30, 2004 from
sales prior to October 1, 2004. A change in the returns rate would cause changes
in the provision for returns and the allowance for returns. Based on the
Company's 2003 level of sales, net income would change by approximately $2.0
million, or $.26 per share, from a one percentage point change in 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". The Company feels that the reserve for inventory obsolescence
is sufficient to cover the write-offs that will occur in future years on
merchandise in inventory as of September 30, 2004. A change in the obsolescence
rate would cause changes in cost of goods sold and the reserve for inventory
obsolescence . Based on the Company's 2003 level of merchandise subject to
obsolescence, net income would change by approximately $1.9 million, or $.24 per
share, from a one percentage point change in the obsolescence rate.
The Company's advertising expense policy is as follows: Advertising and shipping
supply inventories include printed advertising material and related mailing
supplies for promotional mailings, which are generally scheduled to occur within
two months. These direct-response advertising costs are then expensed over the
period of expected future benefit, generally nine weeks.
-27-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
Critical Accounting Policies - continued
At September 30, 2004, the Company had total gross deferred tax assets of $11.7
million. These assets relate principally to asset valuation reserves including
bad debts, returns and inventory obsolescence. Based on recent historical
earnings performance and current projections, management believes that a
valuation allowance is not required against these deferred tax assets, except
for the valuation allowance against state net operating losses, which was
provided due to its uncertainty of realization based upon the state's net
operating loss carryforward rules.
Impact of Inflation and Changing Prices
Although inflation has moderated in our economy, the Company is continually
seeking ways to cope with its impact. To the extent permitted by competition,
increased costs are passed on to customers by selectively increasing selling
prices over a period of time. Historically, profit margins have been pressured
by postal and paper rate increases. Paper rates have moderated over the
reporting period. Postal rates increased on January 10, 1999, on January 7,
2001, on July 1, 2001 and again on 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
$103.8 million for postage and delivery services in 2003.
The Company principally uses the LIFO method of accounting for its merchandise
inventories. Under this method, the cost of products sold reported in the
financial statements approximates current costs and thus reduces distortion in
reported income due to increasing costs. However, the Company has been
experiencing consistent to declining merchandise costs and the LIFO reserve has
fallen to $4.5 million at September 30, 2004 and at December 31, 2003 from $5.7
million at September 30, 2003.
Property, plant and equipment are continuously being expanded and updated. Major
projects are discussed under "Liquidity and Sources of Capital". Assets acquired
in prior years will be replaced at higher costs but this will take place over
many years. New assets, when acquired, will result in higher depreciation
charges, but in many cases, due to technological improvements, savings in
operating costs should result. The charges to operations for depreciation
represent the allocation of historical costs incurred over past years and are
significantly less than if they were based on the current cost of productive
capacity being used.
Accounting Pronouncements
Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142, Goodwill and Other Intangible Assets. Statement No. 142 requires
testing of goodwill and intangible assets with indefinite lives for
impairment rather than amortizing them. The adoption of this statement in
the first quarter of 2002 had no impact on the Company's financial results.
Effective January 1, 2002, the Company implemented SFAS No. 143, Accounting for
Asset Retirement Obligations which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the related asset retirement costs. The statement requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred and capitalized as part of the carrying amount of the
long-lived asset. When a liability is initially recorded, the entity capitalizes
the cost by increasing the carrying value of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, a gain or loss is recorded. The adoption of this
statement did not have an effect on the Company.
SFAS No. 145, Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections, and FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others were adopted by the Company effective
January 1, 2003. The adoption of these standards did not have a material impact
on the Company's results of operations or financial condition.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets which supersedes SFAS No. 121 Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. Although retaining many of the provisions of SFAS No. 121,
SFAS No. 144 establishes a uniform accounting model
-28-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
Accounting Pronouncements - continued
for long-lived assets to be disposed. The Company's adoption of this
statement in the first quarter of 2002 did not have an impact on the
Company's financial results for 2002. During 2003, the provisions of this
statement impacted the accounting treatment of the planned sale of the Blair
Outlet Store in Erie, Pennsylvania. (See Note Y)
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities when the liability is incurred and not as a result
of an entity's commitment to an exit plan. The statement is effective for exit
or disposal activities initiated after December 31, 2002. The adoption of SFAS
No. 146 in the first quarter of 2003 did not have an impact on the Company's
financial results. During 2004 and 2003, the provisions of this statement
impacted the accounting treatment of the voluntary separation of employees due
to the closing of the Blair Outlet Stores in Warren, Pennsylvania and Erie,
Pennsylvania. (See Note Z)
The Company adopted SFAS No. 148, Accounting For Stock-Based Compensation
Transition and Disclosure an amendment of SFAS No. 123, Accounting For
Stock-Based Compensation effective the year ended December 31, 2002. It provides
alternative methods for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and requires prominent
disclosure about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company's adoption of
SFAS No. 148 in 2002 enhanced stock-based employee compensation disclosures and
had no effect on the method of accounting followed by the Company.
In April 2003, the FASB issued SFAS No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement is generally effective for contracts entered
into or modified after June 30, 2003. The Company adopted the new statement
effective July 1, 2003. The Company has historically not utilized derivative
instruments and, as a result, the adoption of this statement has had no impact
on the financial statements of the Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise at the beginning of
the Company's third quarter. The effective dates of certain provisions of SFAS
No. 150 have been deferred. The Company believes the adoption of this standard
will not have a material impact on its results of operations or financial
condition.
As of December 31, 2003, the Company adopted FASB Interpretation No. 46 R,
Consolidation of Variable Interest Entities, revised in December 2003. The
adoption of this statement has had no impact on the financial statements of the
Company.
On October 13, 2004, the Financial Accounting Standards Board (FASB) concluded
that Statement 123R, Share-Based Payment, which would require all companies to
measure compensation cost for all share-based payments (including employee stock
options) at fair value, would be effective for public companies for interim or
annual periods beginning after June 15, 2005. While the statement has not been
finalized, its current form will require the company to expense the fair value
of stock option grants rather than disclose the impact on its consolidated net
income within the footnotes, as is our current practice.
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.
-29-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
Future Considerations - continued
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 credit management. Management believes that these investments
should improve Blair Corporation's position in new and existing markets and
provide opportunities for future earnings growth.
The Company announced on May 3, 2004, that it will discontinue circulation of
its four year-old Crossing Pointe Catalog title beginning in 2005 and is
presently evaluating the opportunity for maintaining a web based Crossing Pointe
business. 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 does not anticipate that this
decision will have a negative effect on 2004 profitability, but does expect it
to benefit 2005 performance.
Safe Harbor Statement Under the Private Securities Litigation Reform Act
of 1995
Forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Words such as "believes", "anticipates", "plans", "expects", and similar
expressions are intended to identify forward-looking statements. Any statements
contained in this report that are not statements of historical fact may be
deemed to be forward-looking statements. Such forward-looking statements are
included in, but not limited to, the following sections of the report:
- The paragraph on the provision for doubtful accounts in the Results
of Operations, Comparison of Third Quarter 2004 and Third Quarter
2003.
- The paragraph on the provision for doubtful accounts in the Results of
Operations, Comparison of Nine Month Periods Ended September 30, 2004
and September 30, 2003.
- Liquidity and Sources of Capital.
- Critical Accounting Policies.
- The Impact of Inflation and Changing Prices.
- Future Considerations.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties which could cause actual results to differ materially from those
in the forward-looking statements, including without limitation the following:
(i) the Company's plans, strategies, objectives, expectations and intentions are
subject to change at any time at the discretion of the Company; (ii) the
Company's plans and results of operations will be affected by the Company's
ability to manage its growth, accounts receivable and inventory; (iii) external
factors such as, but not limited to, changes in consumer response rates, changes
in consumer credit trends, success of new business lines and increases in
postal, paper and printing costs; and (iv) other risks and uncertainties
indicated from time to time in the Company's filings with the Securities and
Exchange Commission.
New requirements adopted by the Securities and Exchange Commission in response
to the passage of the Sarbanes-Oxley Act of 2002 will require an annual review
and evaluation of our internal control systems and attestation of these systems
by our independent auditors. We are currently reviewing our internal control
procedures and considering further documentation of such procedures that may be
necessary. While we currently believe we have identified and committed the
appropriate resources and developed an achievable plan of execution to meet all
of the new requirements in a timely manner, there is risk inherent in the
significant number of tasks to be completed over the balance of our fiscal year.
Any improvements in our internal control systems or in documentation of such
control systems could be costly to prepare or implement, divert attention of
management of finance staff, and may cause our operating expenses to increase
over the ensuing year.
-30-
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
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 2003 and 2004, 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 Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934), each of the Chief
Executive Officer and the Chief Financial Officer of the Company has concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in its Exchange Act
reports is recorded, processed, summarized and reported within the applicable
time periods specified by the SEC's rules and forms.
There were no significant changes in the Company's internal controls or in any
other factors that could significantly affect those controls subsequent to the
date of the most recent evaluation of the Company's internal controls by the
Company, including any corrective actions with regard to any significant
deficiencies or material weaknesses.
-31-
PART II. OTHER INFORMATION
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
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
On October 22, 2004, the Company announced that it is exploring the possibility
of selling its consumer finance receivable portfolio to a third-party financial
institution. Similar to financial institutions that issue credit cards, Blair
currently offers its domestic customers credit for Blair-related purchases. This
action is responsive to a suggestion made by a small group of shareholders in
July to sell the consumer finance receivable portfolio. The Company has retained
outside advisors to assist in exploring this alternative. The ultimate
determination will be based on what is in the best interest of all Blair
shareholders.
Item 6. Exhibits and Reports on Form 8-K
(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 Change in Control Severance Agreement-Vice Presidents
10.7 Change in Control Severance Agreement-CEO and Senior
Vice Presidents
11 Statement regarding computation of per share earnings 9)
31.1 Section 302 Certification-CEO
31.2 Section 302 Certification-CFO
32.1 Section 906 Certification-CEO
32.2 Section 906 Certification-CFO
-32-
PART II. OTHER INFORMATION - Continued
BLAIR CORPORATION AND SUBSIDIARIES
September 30, 2004
(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) Certain schedules to the agreement have been omitted.
(9) Incorporated by reference to Note T 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: November 9, 2004 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 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: November 9, 2004 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 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: November 9, 2004 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 September 30, 2004 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, John E. Zawacki,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
Date: November 9, 2004 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 September 30, 2004 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Bryan J. Flanagan,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company.
Date: November 9, 2004 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 10.5
THIRD AMENDMENT TO
CREDIT AGREEMENT
This Third Amendment to Credit Agreement (the "Third Amendment") is dated
as of September 1, 2004 and is made by and among BLAIR CORPORATION, a Delaware
corporation (the "Borrower"), the Guarantors now or hereafter party thereto, the
BANKS under the Credit Agreement (as hereafter defined) and PNC BANK, NATIONAL
ASSOCIATION, in its capacity as agent for the Banks under the Credit Agreement
(hereinafter referred to in such capacity as the "Agent").
RECITALS:
WHEREAS, the Borrower, the Guarantors, the Banks and the Agent entered
into that certain Credit Agreement dated as of December 20, 2001, as amended by
that Amendment No.1 to Credit Agreement dated as of July 8, 2002 and by that
Amendment No.2 to Credit Agreement dated as of July 25, 2003 (as amended to
date, the "Credit Agreement");
WHEREAS, the parties to the Credit Agreement desire to amend the Credit
Agreement as set forth herein; and
WHEREAS, capitalized terms used herein and not otherwise defined herein
shall have the meanings given to them under the Credit Agreement.
NOW, THEREFORE, in consideration of the foregoing and intending to be
legally bound, the parties hereto agree as follows:
Amendments to and Waivers Under the Credit Agreement other than Anti-Terrorism
Provisions.
Definitions.
The following new definitions shall be inserted in alphabetical
order in Section 1.1 of the Credit Agreement:
Book Value of Qualifying Fixed Assets shall mean the net book
value of Qualifying Fixed Assets as of the mot recently ended fiscal
quarter.
Consolidated Adjusted Indebtedness shall mean (i) the
consolidated Indebtedness of the Borrower and its Subsidiaries, less (ii)
the positive difference between (A) total cash plus Permitted Investments
of the Borrower and its Subsidiaries on a consolidated
basis less (B) $5,000,000.
Qualifying Fixed Assets shall mean equipment, subject to
-----------------------
the following conditions
(i) the Loan Parties own such equipment;
(ii) such property is located on the owned or leased premises
of the Loan Parties; and
(iii) the Agent has a Prior Security Interest in such
property, free and clear of any Liens except for
Permitted Liens.
The following definitions are hereby amended and restated to read as
set forth below:
Base Tangible Net Worth shall mean, as of any date of
determination, the sum of $245,000,000 (representing approximately
90% of the Consolidated Tangible Net Worth of the Borrower and its
Subsidiaries as of June 30, 2004), plus the sum of the following
amounts earned or received from July 1, 2004 through the last day of
each fiscal quarter after June 30, 2004: (i) 50% of consolidated net
income of the Borrower
-39-
Exhibit 10.5
and its Subsidiaries for each fiscal quarter in which net income was
earned (as opposed to a net loss) plus (ii) 50% of the proceeds received
by Borrower from any sale by Borrower of capital stock of the Borrower
after deducting expenses incurred in connection with such sale
Borrowing Base shall mean at any time the sum of (i) 50%
of Qualified Inventory, (ii) the lesser of (A) $10,000,000 or (B) 50% of
the Book Value of Qualifying Fixed Assets plus (iii) the amount of cash
maintained in the Collateral Account, provided that the Cash Collateral
Condition has been met. Notwithstanding anything to the contrary herein,
upon thirty (30) days prior written notice from the Agent to the Borrower,
the Required Banks may, in their reasonable discretion based on customary
or industry standards, at any time hereafter, increase or decrease the
advance percentage for Qualified Inventory or the Book Value of Qualifying
Fixed Assets, or increase the level of any reserves or ineligibles, or
define or maintain such other reserves or ineligibles, as the Required
Banks may deem necessary or appropriate. Any such change shall become
effective immediately upon written notice from the Agent to the Borrower
for the purpose of calculating the Borrowing Base hereunder.
EBITDA for any period of determination shall mean
------
(i) the sum of net income, depreciation, amortization,
other non-recurring, non-cash charges to net income and losses on the sale
of assets, and interest expense and income tax expense minus (ii)
non-recurring, non-cash credits to net income and gains on the sale of
assets, in each case of the Borrower and its Subsidiaries for such period
determined and consolidated in accordance with GAAP.
Expiration Date shall mean, with respect to the
Commitments, August 31, 2007.
Fixed Charges shall mean the sum of interest expense
(net of cash interest income on Permitted Investments) (including
borrowing, interest capital or equivalent costs under the Trade
Receivables Securitization), scheduled principal payments on Indebtedness
including capital leases, dividends and distributions to shareholders of
the Borrower and capital expenditures .
Leverage Ratio shall mean as of any date of
determination the ratio of Consolidated Adjusted Indebtedness of Borrower
and its Subsidiaries on such date to the EBITDA for the four prior fiscal
quarters ending on such date or immediately before such date if such date
is not a quarter end.
Issuance of Letters of Credit (Section 2.10.1)
Section 2.10.1 (Issuance of Letters of Credit) is hereby amended and
restated to read as set forth below.
"Borrower may request the issuance of a letter of credit (each a
"Letter of Credit") on behalf of itself or another Loan Party by delivering or
having such other Loan Party deliver to the Agent or any other Bank which agrees
to issue Letters of Credit hereunder (each an "Issuing Bank") (with a copy of
such notice to the Agent) a completed application and agreement for letters of
credit in such form as the Issuing Bank may specify from time to time by no
later than 10:00 a.m., Pittsburgh time, at least five (5) Business Days in
advance of the proposed date of issuance of Standby Letters of Credit, or such
shorter period as may be agreed to by the Issuing Bank, or one (1) Business Day
(such notice period may be increased to two (2) Business Days at the request of
the Issuing Bank if it reasonably determines that it requires more notice) in
advance of the proposed date of issuance of Trade Letters of Credit. Each Letter
of Credit shall be a Standby Letter of Credit or a Trade Letter of Credit.
Subject to the terms and conditions hereof and in reliance on the agreements of
the other Banks set forth in this Section 2.10.1, the Issuing Bank or any of the
Issuing Bank's Affiliates will issue a Letter of Credit provided that each
Letter of Credit shall (A) have a maximum maturity of twelve (12) months from
the date of issuance, and (B) in no event expire later than (i) with respect to
Standby Letters of Credit, ten (10) Business Days prior to the Expiration Date
and (ii) with respect to Trade Letters of Credit, one hundred eighty (180) days
after the Expiration Date and providing that, except with respect to Trade
Letters of Credit outstanding after the Revolving Credit Commitments have
expired on the Expiration Date, in no event shall the Revolving Facility Usage
exceed, at any one time, the Revolving Credit Commitments. Each of the Banks and
the Loan Parties acknowledge and agree that notwithstanding that (a) no Loans
shall be made after the Expiration Date and (b) no Letters of Credit (including
Trade Letters of Credit) shall be issued after the Expiration Date: (1)
-40-
Exhibit 10.5
the Reimbursement Obligations of the Loan Parties pursuant to Section 2.10.3 or
elsewhere in this Agreement shall remain in effect after the Expiration Date so
long as any Trade Letter of Credit is outstanding or any Reimbursement
Obligation remains unpaid, (2) the Agent's security interest in all Collateral
shall remain in full force and effect until all Trade Letters of Credit have
expired and all Reimbursement Obligations and other Obligations have been
indefeasibly paid in full, and (3) the obligations of the Banks under Sections
2.10.3 and 2.10.7 of this Agreement to reimburse the Issuing Bank with respect
to Trade Letters of Credit, shall remain in effect after the Expiration Date so
long as any Trade Letter of Credit remains outstanding and any Reimbursement
Obligation remains unpaid. Each Issuing Bank shall notify the Agent within one
(1) Business Day after any new Letter of Credit is issued or the face amount of
Letters of Credit outstanding and issued by such Issuing Bank has changed and
shall from time to time and upon request of the Agent deliver a schedule of the
outstanding Letters of Credit issued by such Issuing Bank."
Investments (Section 7.2.4).
A new clause (x) is hereby added to Section 7.2.4 (Investments) to
follow immediately after clause (ix) and to read as follows:
"(x) Other Investments not included in clauses (i) through
(vi) above, provided that the aggregate amount thereof does not exceed
$15,000,000."
Dividends (Section 7.2.5).
The last clause of Section 7.2.5 (Dividends) (beginning " except for
dividends paid by the Borrower and repurchases") is hereby amended and restated
to read as follows:
"except for dividends paid by the Borrower and repurchases by the Borrower
of its Shares provided that (1) there shall exist no Potential Default or
Event of Default on the date of any such payment of a dividend or stock
repurchase, and (2) the total consideration paid for all stock repurchases
by the Borrower over the term of this Agreement shall not exceed
$10,000,000."
Liquidations, Mergers, Consolidations, Acquisitions (Section 7.2.6).
Clause (i) of Section 7.2.6 (Liquidations, Mergers,
Consolidations, Acquisitions Dividends) is hereby amended and restated to read
as follows:
"(i) the aggregate consideration paid or given, whether in cash, stock, or
other property, and liabilities assumed by the Borrower and its
Subsidiaries in all Transactions during each fiscal year of the Borrower
(the "Transaction Consideration") does not exceed $15,000,000;"
Capital Expenditures and Leases (Section 7.2.14).
The text of Section 7.2.14 (Capital Expenditures and Leases) is
hereby deleted and the words "intentionally omitted" are hereby inserted in lieu
thereof.
-41-
Exhibit 10.5
Minimum Fixed Charge Coverage Ratio (Section 7.2.16).
Section 7.2.16 (Minimum Fixed Charge Coverage Ratio) is hereby
amended and restated to read as set forth below.
"7.2.16 Minimum Fixed Charge Coverage Ratio.
-----------------------------------
The Loan Parties shall not permit the Fixed Charge
Coverage Ratio, calculated as of the end of each fiscal quarter for the
four (4) fiscal quarters then ended, to be less than the minimum ratio
specified below during the period specified below.
------------------------------------------------------------------
Period Minimum Ratio
------------------------------------------------------------------
Date of Third Amendment to Credit 1.15 to 1.0
Agreement through September 30,
2005
------------------------------------------------------------------
After September 30, 2005 1.25 to 1.0"
------------------------------------------------------------------
Monthly Borrowing Base Certificates, Schedules of Accounts,
Inventory and Payables (Section 7.3.4).
The first clause of Section 7.3.4 (Monthly Borrowing Base
Certificates, Schedules of Accounts, Inventory and Payables) which now reads "As
soon as available: by the fifteenth (15th) day of each fiscal month of the
Borrower" is hereby amended and restated to read as follows:
"As soon as available: by the fifteenth (15th) Business Day of each
fiscal month of the Borrower"
Budgets, Forecasts, Other Reports, Insurance Policies and
Information (Section 7.3.8).
Clause (i) of Section 7.3.8 (Budgets, Forecasts, Other Reports,
Insurance Policies and Information) is hereby amended and restated to read as
follows:
"(i) the annual budget and any forecasts or projections of the
Borrower, to be supplied not later than thirty (30) days after the
commencement of the fiscal year to which any of the foregoing may be
applicable,"
Pricing Grid (Schedule 1.1(A).
Schedule 1.1(A) is hereby amended and restated to read as set forth
on Schedule 1.1(A) hereto. The changes to the Applicable Margin and Applicable
Revolving Credit Commitment Fee Rate resulting from the amendment and
restatement of such Schedule 1.1(A) shall be effective on the date of this Third
Amendment.
Schedule of Commitments (Schedule 1.1(B).
Schedule 1.1(B) is hereby amended and restated to read as set forth
on Schedule 1.1(B) hereto. The changes in the Commitments of the Banks resulting
from the amendment and restatement of such Schedule 1.1(B) shall be effective on
the date of this Third Amendment. On the date of this Third Amendment:
1. Revolving Credit Loans. The Borrower shall, on the date of
this Third Amendment, repay all outstanding Revolving Credit Loans (subject to
payment of indemnity under Section 4.6.2 of the Credit Agreement (i.e.
breakage)). The Borrower may borrow new Revolving Credit Loans on the date
hereof and the Banks shall participate in any such new Revolving Credit Loans
according to Ratable Shares after giving effect to the changes in Commitments
set forth on Schedule 1.1(B).
-42-
Exhibit 10.5
2. Swing Loans and Letters of Credit. The Banks shall
participate in outstanding Swing Loans and Letters of Credit according to their
Ratable Shares after giving effect to the changes in Commitments set forth on
Schedule 1.1(B).
Other Schedules and Exhibits
Each of the following additional schedules and exhibits to the
Credit Agreement is hereby amended and restated in the form attached to this
Third Amendment:
Schedules
Schedule 1.1(A) - Pricing Grid
Schedule 1.1(B) - Revolving Credit Commitments Of Banks And
Addresses For Notices
Schedule 5.1.1 - Qualifications To Do Business
Schedule 5.1.2 - Capitalization
Exhibits
Exhibit 7.3.3 - Quarterly Compliance Certificate
Exhibit 7.3.4 - Borrowing Base Certificate
Amendments to Credit Agreement Relating to Anti-Terrorism Laws.
Definitions.
The following new definitions shall be inserted in alphabetical
order in Section 1.1 of the Credit Agreement:
Anti-Terrorism Law(s) shall mean any Law(s) relating to
terrorism or money laundering, including Executive Order No. 13224, the
USA Patriot Act, the Laws comprising or implementing the Bank Secrecy
Act, and the Laws administered by the United States Treasury
Department's Office of Foreign Asset Control (as any of the foregoing Laws
may from time to time be amended, renewed, extended, or replaced).
Blocked Person shall have the meaning assigned to such term in
Section 5.1.27.2.
Executive Order No. 13224 shall mean the Executive Order No.
13224 on Terrorist Financing, effective September 24, 2001, as the same
has been, or shall hereafter be, renewed, extended, amended or replaced.
USA Patriot Act shall mean the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, Public Law 107-56, as the same has been, or shall
hereafter be, renewed, extended, amended or replaced.
Anti-Terrorism Laws Representation (Section 5.1.27).
A new Section 5.1.27 is hereby added to follow immediately after
Section 5.1.26 and to read as follows:
"5.1.27.1 General.
None of the Loan Parties or any Affiliate of any Loan Party,
is in violation of any Anti-Terrorism Law or engages in or conspires to
engage in any transaction that evades or avoids, or has the purpose of
evading or avoiding, or attempts to violate, any of the prohibitions set
forth in any Anti-Terrorism Law.
-43-
Exhibit 10.5
5.1.27.2 Executive Order No. 13224.
None of the Loan Parties, or any Affiliate of any Loan Party,
or their respective agents acting or benefiting in any capacity in
connection with the Loans, Letters of Credit or other transactions
hereunder, is any of the following (each a "Blocked Person"):
(i) a Person that is listed in the annex to, or is
otherwise subject to the provisions of, the Executive Order No. 13224;
(ii) a Person owned or controlled by, or acting for or
on behalf of, any Person that is listed in the annex to, or is otherwise
subject to the provisions of, the Executive Order No. 13224;
(iii) a Person or entity with which any Bank is
prohibited from dealing or otherwise engaging in any transaction by any
Anti-Terrorism Law;
(iv) a Person or entity that commits, threatens or
conspires to commit or supports "terrorism" as defined in the Executive
Order No. 13224;
(v) a Person or entity that is named as a "specially
designated national" on the most current list published by the U.S.
Treasury Department Office of Foreign Asset Control at its official
website or any replacement website or other replacement official
publication of such list, or
(vi) a person or entity who is affiliated or associated
with a person or entity listed above.
No Loan Party or, to the knowledge of any Loan Party, any of
its agents acting in any capacity in connection with the Loans, Letters of
Credit or other transactions hereunder (i) conducts any business or
engages in making or receiving any contribution of funds, goods or
services to or for the benefit of any Blocked Person, or (ii) deals in, or
otherwise engages in any transaction relating to, any property or
interests in property blocked pursuant to the Executive Order No. 13224."
Anti-Terrorism Laws Covenant (Section 7.1.15).
A new Section7.1.15 is hereby added to follow immediately after
Section 7.1.14 and to read as follows:
"7.1.15 Anti-Terrorism Laws.
The Loan Parties and their respective Affiliates and agents
shall not (i) conduct any business or engage in any transaction or dealing
with any Blocked Person, including making or receiving any contribution of
funds, goods or services to or for the benefit of any Blocked Person, (ii)
deal in, or otherwise engage in any transaction relating to, any property
or interests in property blocked pursuant to the Executive Order No.
13224; or (iii) engage in or conspire to engage in any transaction that
evades or avoids, or has the purpose of evading or avoiding, or attempts
to violate, any of the prohibitions set forth in the Executive Order No.
13224, the USA Patriot Act or any other Anti-Terrorism Law. The Borrower
shall deliver to Banks any certification or other evidence requested from
time to time by any Bank in its sole discretion, confirming Borrower's
compliance with this Section 7.1.13. Each Bank hereby notifies the
Borrower that pursuant to the requirements of the USA Patriot Act, each
Bank is required to obtain, verify and record information that identifies
the Borrower, including the name and address of the Borrower and other
information that will allow such Bank to identify the Borrower in
accordance with the Act. The Borrower agrees to provide any such
information to each Bank and otherwise cooperate with each Bank in
obtaining and verifying such information."
-44-
Exhibit 10.5
No Reliance on Agent's Customer Identification Program (Section 9.19).
A new Section 9.19 is hereby added to follow immediately after
Section 9.18 and to read as follows:
"9.19 No Reliance on Agent's Customer Identification
Program.
Each Bank acknowledges and agrees that neither such Bank, nor
any of its Affiliates, participants or assignees, may rely on the Agent to
carry out such Bank's, Affiliate's, participant's or assignee's customer
identification program, or other obligations required or imposed under or
pursuant to the USA Patriot Act or the regulations thereunder, including
the regulations contained in 31 CFR 103.121 (as hereafter amended or
replaced, the "CIP Regulations"), or any other Anti-Terrorism Law,
including any programs involving any of the following items relating to or
in connection with any of the Loan Parties, their Affiliates or their
agents, the Loan Documents or the transactions hereunder or contemplated
hereby: (1) any identity verification procedures, (2) any recordkeeping,
(3) comparisons with government lists, (4) customer notices or (5) other
procedures required under the CIP Regulations or such other Laws."
Certification from Banks and Participants (Section 10.18).
Section 10.18 is hereby amended and restated in its entirety to
read as follows:
"10.18 Certifications from Banks and Participants.
------------------------------------------
10.18.1 Tax Withholding.
Each Bank or assignee or participant of a Bank that is not
incorporated under the Laws of the United States of America or a state
thereof (and, upon the written request of the Agent, each other Bank or
assignee or participant of a Bank) agrees that it will deliver to each of
the Borrower and the Agent two (2) duly completed appropriate valid
Withholding Certificates (as defined under ss. 1.1441-1(c)(16) of the
Income Tax Regulations (the "Regulations")) certifying its status (i.e.
U.S. or foreign person) and, if appropriate, making a claim of reduced, or
exemption from, U.S. withholding tax on the basis of an income tax treaty
or an exemption provided by the Internal Revenue Code. The term
"Withholding Certificate" means a Form W-9; a Form W-8BEN; a Form W-8ECI;
a Form W-8IMY and the related statements and certifications as required
under ss. 1.1441-1(e)(2) and/or (3) of the Regulations; a statement
described in ss. 1.871-14(c)(2)(v) of the Regulations; or any other
certificates under the Internal Revenue Code or Regulations that certify
or establish the status of a payee or beneficial owner as a U.S. or
foreign person. Each Bank, assignee or participant required to deliver to
the Borrower and the Agent a Withholding Certificate pursuant to the
preceding sentence shall deliver such valid Withholding Certificate as
follows: (A) each Bank which is a party hereto on the Closing Date shall
deliver such valid Withholding Certificate at least five (5) Business Days
prior to the first date on which any interest or fees are payable by the
Borrower hereunder for the account of such Bank; and (B) each assignee or
participant shall deliver such valid Withholding Certificate at least five
(5) Business Days before the effective date of such assignment or
participation (unless the Agent in its sole discretion shall permit such
assignee or participant to deliver such valid Withholding Certificate less
than five (5) Business Days before such date in which case it shall be due
on the date specified by the Agent). Each Bank, assignee or participant
which so delivers a valid Withholding Certificate further undertakes to
deliver to each of the Borrower and the Agent two (2) additional copies of
such Withholding Certificate (or a successor form) on or before the date
that such Withholding Certificate expires or becomes obsolete or after the
occurrence of any event requiring a change in the most recent Withholding
Certificate so delivered by it, and such amendments thereto or extensions
or renewals thereof as may be reasonably requested by the Borrower or the
Agent. Notwithstanding the submission of a Withholding Certificate
claiming a reduced rate of or exemption from U.S. withholding tax, the
Agent shall be entitled to withhold United States federal income taxes at
the full 30% withholding rate if in its reasonable judgment it is required
to do so under the due diligence requirements imposed upon a withholding
agent under ss. 1.1441-7(b)
-45-
Exhibit 10.5
of the Regulations. Further, the Agent is indemnified under ss.
1.1461-1(e) of the Regulations against any claims and demands of any Bank
or assignee or participant of a Bank for the amount of any tax it deducts
and withholds in accordance with regulations under ss. 1441 of the
Internal Revenue Code.
10.18.2 USA Patriot Act.
Each Bank or assignee or participant of a Bank that is not
incorporated under the Laws of the United States of America or a state
thereof (and is not excepted from the certification requirement contained
in Section 313 of the USA Patriot Act and the applicable regulations
because it is both (i) an affiliate of a depository institution or foreign
bank that maintains a physical presence in the United states or foreign
county, and (ii) subject to supervision by a banking authority regulating
such affiliated depository institution or foreign bank) shall deliver to
the Agent the certification, or, if applicable, recertification,
certifying that such Bank is not a "shell" and certifying to other matters
as required by Section 313 of the USA Patriot Act and the applicable
regulations: (1) within 10 days after the Closing Date, and (2) as such
other times as are required under the USA Patriot Act.
Representations and Warranties.
A. Warranties Under the Credit Agreement. The representations and
warranties of the Loan Parties contained in the Credit Agreement, after giving
effect to the amendments thereto on the date hereof, are true and correct on and
as of the date hereof with the same force and effect as though made by the Loan
Parties on such date, except to the extent that any such representation or
warranty expressly relates solely to a previous date. The Loan Parties are in
compliance with all terms, conditions, provisions, and covenants contained in
the Credit Agreement.
B. Power and Authority; Validity and Binding Effect; No Conflict.
Each Loan Party has full power to enter into, execute, deliver and carry out
this Third Amendment, and such actions have been duly authorized by all
necessary proceedings on its part. This Third Amendment has been duly and
validly executed and delivered by each of the Loan Parties. This Third 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 Third 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 Third Amendment. No event has occurred and is
continuing and no condition exists or will exist after giving effect to this
Third Amendment which constitutes an Event of Default or Potential Default.
Conditions to Effectiveness.
This Third Amendment shall be effective on the date (the "Effective
Date") on which each of the following conditions have been satisfied. The
Effective Date shall be the same as the date of this Third Amendment first
written above:
Execution.
The Loan Parties, the Banks and the Agent shall have executed
this Third Amendment.
Secretary's Certificate.
Each Loan Party shall have delivered to the Agent for the
benefit of each Bank a certificate dated as of the date hereof and signed by the
Secretary or Assistant Secretary of each Loan Party certifying as appropriate as
to (i) all corporate action taken by each Loan Party in connection with this
Third Amendment together with a copy of the resolutions of each Loan Party
evidencing the same; (ii) the names of the officer or officers authorized to
sign this Third
-46-
Exhibit 10.5
Amendment and the true signatures of such officers and specifying that such
officers are authorized to act on behalf of such Loan Party for purposes of this
Third Amendment, on which the Agent and each Bank may conclusively rely; and
(iv) a certificate from the Secretary or Assistant Secretary stating that each
Loan Party's organizational documents, including its certificate or articles of
incorporation and bylaws have not changed since the Closing Date and are in
effect on the date hereof as on the Closing Date together with certificates of
the appropriate state officials as to the continued existence and good standing
of each Loan Party in each state where organized or qualified to do business.
Opinion of Counsel.
An opinion of outside counsel confirming execution, delivery
and enforceability of this Third Amendment, and the Credit Agreement as amended
hereby, against the Loan Parties.
Fees and Expenses. The Borrower shall have paid to the Agent for the
account of each of the Banks a fee in the amount of .25% times such Bank's
Commitment and all other fees and expenses due and payable, including
reasonable fees of the Agent's counsel.
Covenant Relating to Inventory Appraisal. The Borrower shall deliver to the
Agent and the Banks an appraisal of the inventory of the Borrower within thirty
(30) days after the date of this Third Amendment and such appraisal shall be
satisfactory to the Agent and the Banks.
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 Third 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 Third 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
Third 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 Third Amendment shall be deemed to be a contract under the laws
of the Commonwealth of Pennsylvania and for all purposes shall be governed by
and construed and enforced in accordance with the internal laws of the
Commonwealth of Pennsylvania without regard to its conflict of laws principles.
-47-
Exhibit 10.5
Counterparts.
This Third 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]
-48-
Exhibit 10.5
The undersigned have executed this Waiver and Third 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
-49-
Exhibit 10.5
By:
---------------------------------
Title:
LASALLE BANK NATIONAL ASSOCIATION
By:
---------------------------------
Title:
HSBC BANK USA, NATIONAL
ASSOCIATION, successor by merger
to HSBC Bank USA
By:
---------------------------------
Title:
SCHEDULES AND EXHIBITS
Schedules
Schedule 1.1(A) - Pricing Grid
Schedule 1.1(B) - Revolving Credit Commitments Of Banks And
Addresses For Notices
Schedule 5.1.1 - Qualifications To Do Business
Schedule 5.1.2 - Capitalization
Exhibits
Exhibit 7.3.3 - Quarterly Compliance Certificate
Exhibit 7.3.4 - Borrowing Base Certificate
-50-
Exhibit 10.6
CHANGE IN CONTROL SEVERANCE AGREEMENT
This Agreement is effective , 2004 and is
entered into among Blair Corporation (the "Company"), a Delaware
corporation, and ("Executive"), having an address at
---------------
-----------------------------------------------.
WHEREAS, the Company recognizes the substantial contribution Executive has
made [and is expected to continue to make] to the Company, and the Company
wishes to protect the Executive's position with the Company for the period
provided in this Agreement; and
WHEREAS, Executive has agreed to [serve] [continue to serve] in the employ
of the Company;
NOW, THEREFORE, the parties agree as follows:
1. Term of Agreement.
This Agreement shall continue in effect
through , 2007, and may be extended by the Board of
Directors for additional one-year terms as set forth below; provided,
however, that this Agreement shall terminate and be of no further force or
effect immediately upon Executive's ceasing to be an officer of the Company.
2. Extension by Board.
Commencing on , 2004, and continuing annually thereafter, the Board of
Directors of the Company (the "Board") may extend the term of this Agreement for
an additional year. The Board will review the Agreement and the Executive's
performance annually for purposes of determining whether to extend the term, and
will include the review and extension or non-extension in the minutes of the
Board's meeting.
3. Change in Control followed by Termination of Employment.
Upon occurrence of a Change in Control of the Company, as defined in Section
4(A), followed by termination of Executive's employment within three years
following the Change in Control, the provisions of Section 5 shall apply unless
such termination is because of death, disability, retirement (in accordance with
the Company's policies and practices), or Termination for Cause. Executive shall
have the right to elect to voluntarily terminate the employment within three
years following a Change in Control in the event that Executive suffers any of
the following: (i) any material demotion, (ii) any material loss of title,
office, or significant authority or responsibility, (iii) any material reduction
in annual compensation or benefits, (iv) relocation of Executive's principal
office by more than 50 miles from its location immediately prior to the Change
in Control, (v) failure by the Company to obtain satisfactory agreement from any
successor to assume the obligations and liabilities of this Agreement.
-51-
Exhibit 10.6
4. Definitions.
(A) Change in Control. A "Change in Control" of the Company shall mean the
occurrence of any of the following events:
(1) The acquisition by any individual, entity or group (a "Person")
within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of more than 25% of either (i) the then outstanding shares of common
stock of the Company (the "Outstanding Company Common Stock") or (ii) the
combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities").
The following acquisitions of the Company's voting securities shall
not constitute a Change in Control: (i) any acquisition directly from the
Company, (ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company or (iv) any
acquisition by any corporation pursuant to a transaction which complies
with clauses (a), (b) and (c) of subsection (3) of this Section 4; or
(2) Directors who, as of the date of this Agreement, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least
a majority of the Board; provided, however, that any individual becoming a
director subsequent to the date of this Agreement whose election, or
nomination for election by the Company's shareholders, was approved by a
vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(3) Consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of
the assets of the Company or the acquisition of assets or stock of another
corporation (a "Business Combination").
This Section 4(A)(3) shall not apply if, following such Business
Combination:
(a) all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly,
more than 50% of, respectively, the then outstanding shares of common
stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in
the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation,
a corporation which as a result of such transaction owns the Company or
all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination of
the Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be;
-52-
Exhibit 10.6
(b) A Person (excluding any corporation resulting from such
Business Combination or any employee benefit plan (or related trust) of
the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation, so long as such ownership existed prior to the Business
Combination; and
(C) at least a majority of the members of the board of
directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
(4) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(B) Termination for Cause. The occurrence of any of the following events
or circumstances shall constitute "Cause" for the termination, at the
election of the Board of Directors of the Company, of the employment of
Executive under this Agreement:
(1) the perpetration of defalcations, dishonesty or fraud by
Executive involving the Company or any of its subsidiaries, as established
by certified public accountants employed by the Company, or willful,
reckless or grossly negligent conduct of Executive entailing a substantial
violation of any material provision of the laws, rules, regulations or
orders of any governmental agency applicable to the Company or any of its
subsidiaries;
(2) the repeated and deliberate failure by Executive, after advance
written notice to him, to comply with reasonable policies or directives of
the Company or of any subsidiary of the Company for which Executive is
then serving as an executive officer; or
(3) the breach of this Agreement by Executive in any other material
respect and failure to cure such breach within 30 calendar days after
Executive receives written notice of such breach from the Company.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to
Executive a Notice of Termination which shall include a copy of a resolution
duly adopted by the affirmative vote of not less than a majority of the members
of the Board at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for Executive, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. Executive shall not have the
right to receive compensation or other benefits, other than those accrued
hereunder or under any benefit plans of the Company as of the date of
termination, for any period after the Date of Termination for Cause. During the
period beginning on the date of the Notice of Termination for Cause pursuant to
Section 6 hereof through the Date of Termination for Cause, stock options and
related limited rights granted to Executive under any stock option or other plan
shall not be exercisable nor shall any unvested performance or other stock
awards granted to Executive under any stock plan of the Company vest or be
exercisable. At the Date of Termination for Cause, such stock options and
related limited rights and such unvested performance or other stock awards shall
become null and void and shall not be exercisable by or delivered to Executive
at any time subsequent to such Date of Termination for Cause.
-53-
Exhibit 10.6
5. Termination Benefits.
(A) "Severance Period" shall mean 24.
(B) Sum Payable. Upon the occurrence of a Change in Control, followed by
the termination of the Executive's employment within three years following the
Change in Control due to (1) Executive's voluntary termination pursuant to
Section 3, or (2) Executive's dismissal, unless such dismissal is due to
Termination for Cause, the Company shall pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, a cash lump sum equal to one-twelfth of the Severance Period multiplied
by Executive's base salary at the rate of base salary per annum in effect
immediately prior to the Change in Control or on the date of the termination of
Executive's employment, whichever is higher, plus the greater of (x) the average
annual incentive bonus payment earned by Executive under the Company's Incentive
Compensation Plan (or any successor plan) in respect of the three most recent
complete fiscal years of the Company preceding the date of the termination of
Executive's employment or (y) the target incentive bonus award under the
Company's Incentive Compensation Plan (or any successor plan) for the year in
which the Change in Control occurs or the year in which the termination of
Executive's employment occurs, whichever is higher.
-54-
Exhibit 10.6
(C) Equity Grants. Upon the occurrence of a Change in Control of the
Company, all stock options, warrants, stock and any other security or award
thereof held by the Executive which is subject to vesting shall immediately
become fully vested.
The Company shall also pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, a
cash lump sum equal to one-twelfth of the Severance Period multiplied by
Executive's target award opportunity under the Company's Long-Term Performance
Share Program.
(D) Life and Medical Insurance Coverage. Upon the occurrence of a Change
in Control of the Company followed by Executive's voluntary (pursuant to Section
3) or involuntary termination of employment within three years following the
Change in Control, other than Termination for Cause, the Company shall cause to
be continued life and medical insurance coverage, including any dental, vision,
long-term disability or other insurance-related program, substantially
equivalent to the coverage maintained by the Company for Executive and his
eligible dependents prior to his termination, except to the extent such coverage
may be changed in its application to all Company employees on a
nondiscriminatory basis. Such coverage and payments shall cease upon the
expiration of the number of months in the Severance Period following the Date of
Termination.
(E) Retirement Benefits. Upon the occurrence of a Change in Control of the
Company followed by Executive's voluntary (pursuant to Section 3) or involuntary
termination of employment within three years following the Change in Control,
other than Termination for Cause, the Company shall contribute or credit to
Executive's account under the Company's defined contribution retirement plans
(currently, the Company's Savings Plan and Profit Sharing and 401(k) Plan) an
amount of cash equal to the amount that the Company would have contributed or
credited to such plans (including both profit-sharing contributions and Company
matching contributions in respect of Executive's contributions to the plan) had
Executive continued to be employed by the Company for an additional period of
months equal to the Severance Period at an annual compensation equal to the sum
of (x) Executive's base salary immediately prior to the Change in Control or at
the time of the termination of Executive's employment, whichever is higher and
(y) the greater of (A) the average annual incentive bonus payment earned by
Executive under the Company's Incentive Compensation Plan (or any successor
plan) in respect of the three most recent complete fiscal years of the Company
preceding the date of the termination of Executive's employment or the date of
the Change in Control, whichever is higher, or (B) the target incentive bonus
award under the Company's Incentive Compensation Plan (or any successor plan)
for the year in which the Change in Control occurs or the year in which the
termination of Executive's employment occurs, whichever is higher; (and assuming
for this purpose that Executive made the maximum permissible contributions to
such plans during such period), such contributions being deemed to be made
immediately prior to the termination of Executive's employment. The Company's
contribution shall equal the average contribution based on the Company's
performance over the most recently ended three-year period. All vesting
restrictions on the Company's contributions shall lapse immediately upon a
Change in Control of the Company.
(F) Outplacement Services. Upon the occurrence of a Change in Control of
the Company followed by Executive's voluntary (pursuant to Section 3) or
involuntary termination of employment within three years following the Change in
Control, other than Termination for Cause, the Company shall for the number of
months in the Severance Period, at its sole expense as incurred, not to exceed
10% of Executive's base salary at the rate per annum in effect immediately prior
to the Change in Control or on the date of the termination of Executive's
employment, whichever is higher, reimburse Executive for outplacement services,
the scope and provider of which shall be selected by Executive in Executive's
sole discretion.
(G) Section 280G. Notwithstanding the preceding paragraphs of this Section
5, in no event shall the aggregate payments or benefits to be made or afforded
to Executive under said paragraphs (the "Termination Benefits") constitute an
"excess parachute payment" under Section 280G of the Internal Revenue Code of
1986or
-55-
Exhibit 10.6
any successor thereto, and in order to avoid such a result, Termination Benefits
will be reduced, if necessary, to the largest amount that will result in no
portion of the amount payable or right accruing hereunder being subject to an
excise tax under Section 4999 of the Code. The allocation of the reduction
required hereby among the Termination Benefits provided by the preceding
paragraphs of this Section 5 shall be determined by Executive.
6. Notice of Termination.
(A) Form. Any purported termination by the Company or by Executive in
connection with a Change in Control shall be communicated by a written "Notice
of Termination" which shall include the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(B) Date of Termination. "Date of Termination" shall mean the date
specified in the Notice of Termination (which, in the instance of Termination
for Cause, shall not be less than thirty (30) days from the date such Notice of
Termination is given); provided, however, that if a dispute regarding the
Executive's termination exists, the "Date of Termination" shall be determined in
accordance with Section 6(C) of this Agreement.
(C) Dispute. If, within thirty (30) days after any Notice of Termination
is given, the party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination, except upon the
occurrence of a Change in Control and voluntary termination by the Executive in
which case the Date of Termination shall be the date specified in the Notice,
the Date of Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by a binding
arbitration award, or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected) and provided further that the Date of Termination
shall be extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence. Notwithstanding the pendency of any such dispute in
connection with a Change in Control, in the event that Executive is terminated
for reasons other than Termination for Cause, the Company will continue to pay
Executive the payments and benefits due under this Agreement in effect when the
notice giving rise to the dispute was given (including, but not limited to, his
current annual salary) and continue him or her as a participant in all
compensation, benefit, and insurance plans in which he or she was participating
when the notice of dispute was given, until the earlier of: (1) the resolution
of the dispute in accordance with this Agreement; or (2) the expiration of the
remaining term of this Agreement. Amounts paid under this Section 6(C) are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
7. Source of Payments.
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Company.
8.Effect on Prior Agreements and Existing Benefit Plans.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Company and Executive,
except that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement. Nothing in this Agreement shall confer upon Executive the right to
continue in the employ of Company or shall impose on the Company any obligation
to employ or retain Executive in its employ for any period.
-56-
Exhibit 10.6
9. No Attachment.
(A) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(B) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Company, and their respective successors and assigns.
10. Modification and Waiver.
(A) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(B) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
11. Required Regulatory Provisions.
The Board of Directors may terminate Executive's employment at any time,
but any termination by the Board of Directors, other than Termination for Cause,
shall not prejudice Executive's right to compensation or other benefits under
this Agreement. Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause as defined in Section
4(B) above.
12. Severability.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
13. Headings for Reference Only.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references to the
masculine shall apply equally to the feminine.
14. Governing Law.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the Commonwealth of Pennsylvania, but
only to the extent not preempted by Federal law.
15. Arbitration.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
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Exhibit 10.6
(50) miles from the location of the Company's main office, in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
-58-
Exhibit 10.6
16. Payment of Costs and Legal Fees.
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Company if Executive is successful pursuant to a legal
judgment, arbitration or settlement.
17. Indemnification.
The Company shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and his
heirs, executors and administrators) to the fullest extent permitted under
Federal law against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Company
(whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
18. Successor to the Company.
The Company shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Company, expressly and
unconditionally to assume and agree to perform the Company's obligations under
this Agreement, in the same manner and to the same extent that the Company would
be required to perform if no such succession or assignment had taken place.
19. Release.
Executive hereby acknowledges and agrees that prior to Executive's or his
dependents' right to receive from the Company any compensation or benefit to be
paid or provided to him or his dependents pursuant to Section 5 of this
Agreement, Executive may be required by the Company, in its sole discretion, to
execute and comply with the terms of a release in the form of Exhibit A hereto.
20. Date Signed:
----------------------
ATTEST: THE COMPANY
------------------------------ ------------------------------
WITNESS: EXECUTIVE
------------------------------ ------------------------------
EXHIBIT A
RELEASE
In exchange for the benefits in your Change in Control Severance
Agreement, ____________________, ("you") release and forever discharge the
Released Parties, which include Blair Corporation and its successors,
predecessors, subsidiaries, affiliates, and assigns (collectively "Businesses")
and the Businesses' former or current
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Exhibit 10.6
directors, officers, employees, members, agents, successors, predecessors,
subsidiaries, affiliates, assigns and attorneys, from any and all charges,
claims, damages, injury and actions, in law or equity, which you or your heirs,
successors, executors, or other representatives ever had, now have, or may have
by reason of any act, omission, matter, cause or thing through the date of your
execution of this Release. You understand that this Release is a general release
of all claims you may have against the Released Parties based on any act,
omission, matter, case or thing through the date of your execution of this
Release, whether known or unknown.
You realize there are many laws and regulations governing the employment
relationship. These include, but are not limited to, Title VII of the Civil
Rights Acts of 1964 and 1991; the Americans with Disabilities Act; the Age
Discrimination in Employment Act, the National Labor Relations Act; 42 U.S.C.
ss. 1981; the Family and Medical Leave Act; the Employee Retirement Income
Security Act of 1974 (other than any accrued benefit(s) to which you have a
non-forfeitable right under any pension benefit plan); other state, local, and
federal employment laws; and any amendments to any of the foregoing. You also
understand there may be other statutes and laws of contract and tort that also
relate to your employment. By signing this Release, you waive and release any
rights you may have against the Released Parties under these and any other laws
based on any act, omission, matter, cause or thing through the date of your
execution of this Release. You also agree not to initiate, join, or voluntarily
participate in any action or suit in any court or to accept any damages or other
relief from any such proceeding brought by anyone else based on any act,
omission, matter, cause or thing through the date of your execution of this
Release.
This document is important. We advise you to review it carefully and
consult an attorney, if desired, before signing it, as well as any other
professional whose advice you value, such as an accountant or financial advisor.
If you agree to the terms of this Release, sign in the space below where your
Release is indicated and return the Release to the Chief Executive Officer of
Blair Corporation. The benefits identified in your Change in Control Severance
Agreement are contingent upon your agreeing to this Release. You will have
forty-five (45) calendar days from the date you receive this document to
consider whether to sign this Release. If you choose to sign the Release before
the end of that forty-five day period, you certify that you did so voluntarily
for your own benefit and not because of any coercion.
You should also understand that you will have seven (7) calendar days
after you sign this Release to revoke this Release. To revoke this Release, the
Chief Executive Officer of Blair Corporation must receive written notice before
the end of the seven-day period after you sign this Release. In the event you
revoke or do not sign either this Release, you will not be entitled to any of
the payments or benefits that you would be entitled to by virtue of entering
into this Release. If you do not revoke this Release within seven (7) days after
you sign it, this will be final, binding, and irrevocable.
Date Signed: ____________________
-------------------------
Name of Employee
ACCEPTED AND AGREED
Blair Corporation
By: ________________________
Name: _______________________
Title:
-60-
Exhibit 10.7
CHANGE IN CONTROL SEVERANCE AGREEMENT
This Agreement is effective , 2004 and is
entered into among Blair Corporation (the "Company"), a Delaware
corporation, and ("Executive"), having an address at
--------------
-----------------------------------------------.
WHEREAS, the Company recognizes the substantial contribution Executive has
made [and is expected to continue to make] to the Company, and the Company
wishes to protect the Executive's position with the Company for the period
provided in this Agreement; and
WHEREAS, Executive has agreed to [serve] [continue to serve] in the employ
of the Company;
NOW, THEREFORE, the parties agree as follows:
1. Term of Agreement.
This Agreement shall continue in effect
through , 2007, and may be extended by the Board of Directors for additional
one-year terms as set forth below; provided, however, that this Agreement shall
terminate and be of no further force or effect immediately upon Executive's
ceasing to be an officer of the Company.
2. Extension by Board.
Commencing on , 2004, and continuing annually thereafter, the Board of
Directors of the Company (the "Board") may extend the term of this Agreement for
an additional year. The Board will review the Agreement and the Executive's
performance annually for purposes of determining whether to extend the term, and
will include the review and extension or non-extension in the minutes of the
Board's meeting.
3. Change in Control followed by Termination of Employment.
Upon occurrence of a Change in Control of the Company, as defined in
Section 4(A), followed by termination of Executive's employment within three
years following the Change in Control, the provisions of Section 5 shall apply
unless such termination is because of death, disability, retirement (in
accordance with the Company's policies and practices), or Termination for Cause.
Executive shall have the right to elect to voluntarily terminate the employment
for any reason during a 30 day period commencing on the first anniversary of the
date of a Change in Control or within three years following a Change in Control
in the event that Executive suffers any of the following: (i) any material
demotion, (ii) any material loss of title, office, or significant authority or
responsibility, (iii) any material reduction in annual compensation or benefits,
(iv) relocation of Executive's principal office by more than 50 miles from its
location immediately prior to the Change in Control, (v) failure by the Company
to obtain satisfactory agreement from any successor to assume the obligations
and liabilities of this Agreement.
-61-
Exhibit 10.7
4. Definitions.
(A) Change in Control. A "Change in Control" of the Company shall mean the
occurrence of any of the following events:
(1) The acquisition by any individual, entity or group (a "Person")
within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of more than 25% of either (i) the then outstanding shares of common
stock of the Company (the "Outstanding Company Common Stock") or (ii) the
combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities").
The following acquisitions of the Company's voting securities shall
not constitute a Change in Control: (i) any acquisition directly from the
Company, (ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company or (iv) any
acquisition by any corporation pursuant to a transaction which complies
with clauses (a), (b) and (c) of subsection (3) of this Section 4; or
(2) Directors who, as of the date of this Agreement, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least
a majority of the Board; provided, however, that any individual becoming a
director subsequent to the date of this Agreement whose election, or
nomination for election by the Company's shareholders, was approved by a
vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(3) Consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of
the assets of the Company or the acquisition of assets or stock of another
corporation (a "Business Combination").
This Section 4(A)(3) shall not apply if, following such Business
Combination:
(a) all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly,
more than 50% of, respectively, the then outstanding shares of common
stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially all
of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the
case may be;
(b) A Person (excluding any corporation resulting from such
Business Combination or any employee benefit plan (or related trust) of
the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then
-62-
Exhibit 10.7
outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power of
the then outstanding voting securities of such corporation, so long as
such ownership existed prior to the Business Combination; and
(c) at least a majority of the members of the board of
directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
(4) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(B) Termination for Cause. The occurrence of any of the following events
or circumstances shall constitute "Cause" for the termination, at the
election of the Board of Directors of the Company, of the employment of
Executive under this Agreement:
(1) the perpetration of defalcations, dishonesty or fraud by
Executive involving the Company or any of its subsidiaries, as established
by certified public accountants employed by the Company, or willful,
reckless or grossly negligent conduct of Executive entailing a substantial
violation of any material provision of the laws, rules, regulations or
orders of any governmental agency applicable to the Company or any of its
subsidiaries;
(2) the repeated and deliberate failure by Executive, after advance
written notice to him, to comply with reasonable policies or directives of
the Company or of any subsidiary of the Company for which Executive is
then serving as an executive officer; or
(3) the breach of this Agreement by Executive in any other material
respect and failure to cure such breach within 30 calendar days after
Executive receives written notice of such breach from the Company.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to
Executive a Notice of Termination which shall include a copy of a resolution
duly adopted by the affirmative vote of not less than a majority of the members
of the Board at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for Executive, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. Executive shall not have the
right to receive compensation or other benefits, other than those accrued
hereunder or under any benefit plans of the Company as of the date of
termination, for any period after the Date of Termination for Cause. During the
period beginning on the date of the Notice of Termination for Cause pursuant to
Section 6 hereof through the Date of Termination for Cause, stock options and
related limited rights granted to Executive under any stock option or other plan
shall not be exercisable nor shall any unvested performance or other stock
awards granted to Executive under any stock plan of the Company vest or be
exercisable. At the Date of Termination for Cause, such stock options and
related limited rights and such unvested performance or other stock awards shall
become null and void and shall not be exercisable by or delivered to Executive
at any time subsequent to such Date of Termination for Cause.
5. Termination Benefits.
(A) "Severance Period" shall mean 36.
(B) Sum Payable. Upon the occurrence of a Change in Control, followed by
the termination of the
-63-
Exhibit 10.7
Executive's employment within three years following the Change in Control due to
(1) Executive's voluntary termination pursuant to Section 3, or (2) Executive's
dismissal, unless such dismissal is due to Termination for Cause, the Company
shall pay Executive, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a cash lump sum equal to
one-twelfth of the Severance Period multiplied by Executive's base salary at the
rate of base salary per annum in effect immediately prior to the Change in
Control or on the date of the termination of Executive's employment, whichever
is higher, plus the greater of (x) the average annual incentive bonus payment
earned by Executive under the Company's Incentive Compensation Plan (or any
successor plan) in respect of the three most recent complete fiscal years of the
Company preceding the date of the termination of Executive's employment or (y)
the target incentive bonus award under the Company's Incentive Compensation Plan
(or any successor plan) for the year in which the Change in Control occurs or
the year in which the termination of Executive's employment occurs, whichever is
higher.
-64-
Exhibit 10.7
(C) Equity Grants. Upon the occurrence of a Change in Control of the
Company, all stock options, warrants, stock and any other security or award
thereof held by the Executive which is subject to vesting shall immediately
become fully vested.
The Company shall also pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, a
cash lump sum equal to one-twelfth of the Severance Period multiplied by
Executive's target award opportunity under the Company's Long-Term Performance
Share Program.
(D) Life and Medical Insurance Coverage. Upon the occurrence of a Change
in Control of the Company followed by Executive's voluntary (pursuant to Section
3) or involuntary termination of employment within three years following the
Change in Control, other than Termination for Cause, the Company shall cause to
be continued life and medical insurance coverage, including any dental, vision,
long-term disability or other insurance-related program, substantially
equivalent to the coverage maintained by the Company for Executive and his
eligible dependents prior to his termination, except to the extent such coverage
may be changed in its application to all Company employees on a
nondiscriminatory basis. Such coverage and payments shall cease upon the
expiration of the number of months in the Severance Period following the Date of
Termination.
(E) Retirement Benefits. Upon the occurrence of a Change in Control of the
Company followed by Executive's voluntary (pursuant to Section 3) or involuntary
termination of employment within three years following the Change in Control,
other than Termination for Cause, the Company shall contribute or credit to
Executive's account under the Company's defined contribution retirement plans
(currently, the Company's Savings Plan and Profit Sharing and 401(k) Plan) an
amount of cash equal to the amount that the Company would have contributed or
credited to such plans (including both profit-sharing contributions and Company
matching contributions in respect of Executive's contributions to the plan) had
Executive continued to be employed by the Company for an additional period of
months equal to the Severance Period at an annual compensation equal to the sum
of (x) Executive's base salary immediately prior to the Change in Control or at
the time of the termination of Executive's employment, whichever is higher and
(y) the greater of (A) the average annual incentive bonus payment earned by
Executive under the Company's Incentive Compensation Plan (or any successor
plan) in respect of the three most recent complete fiscal years of the Company
preceding the date of the termination of Executive's employment or the date of
the Change in Control, whichever is higher, or (B) the target incentive bonus
award under the Company's Incentive Compensation Plan (or any successor plan)
for the year in which the Change in Control occurs or the year in which the
termination of Executive's employment occurs, whichever is higher; (and assuming
for this purpose that Executive made the maximum permissible contributions to
such plans during such period), such contributions being deemed to be made
immediately prior to the termination of Executive's employment. The Company's
contribution shall equal the average contribution based on the Company's
performance over the most recently ended three-year period. All vesting
restrictions on the Company's contributions shall lapse immediately upon a
Change in Control of the Company.
(F) Outplacement Services. Upon the occurrence of a Change in Control of
the Company followed by Executive's voluntary (pursuant to Section 3) or
involuntary termination of employment within three years following the Change in
Control, other than Termination for Cause, the Company shall for the number of
months in the Severance Period, at its sole expense as incurred, not to exceed
10% of Executive's base salary at the rate per annum in effect immediately prior
to the Change in Control or on the date of the termination of Executive's
employment, whichever is higher, reimburse Executive for outplacement services,
the scope and provider of which shall be selected by Executive in Executive's
sole discretion.
(G) Section 280G. Notwithstanding the preceding paragraphs of this Section
5, in the event that any payment or benefit, or any combination of payment or
benefits, to Executive under said paragraphs (the "Termination Benefits")
constitute an "excess parachute payment" under Section 280G of the Internal
Revenue Code
-65-
Exhibit 10.7
of 1986, or any successor thereto, then the Company, at the time such
determination becomes final, shall pay to Executive an amount (the "gross-up
payment") which would equal, after deducting all state and federal income and
excise taxes incurred by the Executive with respect to receipt of the gross-up
payment, the excise tax, if any, imposed on Executive pursuant to Section 4999
of the Code. For sake of clarity, the intent of this section is to render the
executive unaffected on a net after-tax basis by the excise tax provision
associated with Section 4999 of the Code.
6. Notice of Termination.
(A) Form. Any purported termination by the Company or by Executive in
connection with a Change in Control shall be communicated by a written "Notice
of Termination" which shall include the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(B) Date of Termination. "Date of Termination" shall mean the date
specified in the Notice of Termination (which, in the instance of Termination
for Cause, shall not be less than thirty (30) days from the date such Notice of
Termination is given); provided, however, that if a dispute regarding the
Executive's termination exists, the "Date of Termination" shall be determined in
accordance with Section 6(C) of this Agreement.
(C) Dispute. If, within thirty (30) days after any Notice of Termination
is given, the party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination, except upon the
occurrence of a Change in Control and voluntary termination by the Executive in
which case the Date of Termination shall be the date specified in the Notice,
the Date of Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by a binding
arbitration award, or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected) and provided further that the Date of Termination
shall be extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence. Notwithstanding the pendency of any such dispute in
connection with a Change in Control, in the event that Executive is terminated
for reasons other than Termination for Cause, the Company will continue to pay
Executive the payments and benefits due under this Agreement in effect when the
notice giving rise to the dispute was given (including, but not limited to, his
current annual salary) and continue him or her as a participant in all
compensation, benefit, and insurance plans in which he or she was participating
when the notice of dispute was given, until the earlier of: (1) the resolution
of the dispute in accordance with this Agreement; or (2) the expiration of the
remaining term of this Agreement. Amounts paid under this Section 6(C) are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
7. Source of Payments.
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Company.
8.Effect on Prior Agreements and Existing Benefit Plans.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Company and Executive,
except that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement. Nothing in this Agreement shall confer upon Executive the right to
continue in the employ of Company or shall impose on the Company any obligation
to employ or retain Executive in its employ for any period.
-66-
Exhibit 10.7
9. No Attachment.
(A) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(B) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Company, and their respective successors and assigns.
10. Modification and Waiver.
(A) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(B) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
11. Required Regulatory Provisions.
The Board of Directors may terminate Executive's employment at any time,
but any termination by the Board of Directors, other than Termination for Cause,
shall not prejudice Executive's right to compensation or other benefits under
this Agreement. Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause as defined in Section
4(B) above.
12. Severability.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
13. Headings for Reference Only.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references to the
masculine shall apply equally to the feminine.
14. Governing Law.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the Commonwealth of Pennsylvania, but
only to the extent not preempted by Federal law.
15. Arbitration.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
-67-
Exhibit 10.7
(50) miles from the location of the Company's main office, in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
-68-
Exhibit 10.7
16. Payment of Costs and Legal Fees.
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Company if Executive is successful pursuant to a legal
judgment, arbitration or settlement.
17. Indemnification.
The Company shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and his
heirs, executors and administrators) to the fullest extent permitted under
Federal law against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Company
(whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
18. Successor to the Company.
The Company shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Company, expressly and
unconditionally to assume and agree to perform the Company's obligations under
this Agreement, in the same manner and to the same extent that the Company would
be required to perform if no such succession or assignment had taken place.
19. Release.
Executive hereby acknowledges and agrees that prior to Executive's or his
dependents' right to receive from the Company any compensation or benefit to be
paid or provided to him or his dependents pursuant to Section 5 of this
Agreement, Executive may be required by the Company, in its sole discretion, to
execute and comply with the terms of a release in the form of Exhibit A hereto.
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Exhibit 10.7
20. Date Signed:
-------------------------
ATTEST: THE COMPANY
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WITNESS: EXECUTIVE
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Exhibit 10.7
EXHIBIT A
RELEASE
In exchange for the benefits in your Change in Control Severance
Agreement, ------------------------, ("you") release and forever discharge the
Released Parties, which include Blair Corporation and its successors,
predecessors, subsidiaries, affiliates, and assigns (collectively "Businesses")
and the Businesses' former or current directors, officers, employees, members,
agents, successors, predecessors, subsidiaries, affiliates, assigns and
attorneys, from any and all charges, claims, damages, injury and actions, in law
or equity, which you or your heirs, successors, executors, or other
representatives ever had, now have, or may have by reason of any act, omission,
matter, cause or thing through the date of your execution of this Release. You
understand that this Release is a general release of all claims you may have
against the Released Parties based on any act, omission, matter, case or thing
through the date of your execution of this Release, whether known or unknown.
You realize there are many laws and regulations governing the employment
relationship. These include, but are not limited to, Title VII of the Civil
Rights Acts of 1964 and 1991; the Americans with Disabilities Act; the Age
Discrimination in Employment Act, the National Labor Relations Act; 42 U.S.C.
ss. 1981; the Family and Medical Leave Act; the Employee Retirement Income
Security Act of 1974 (other than any accrued benefit(s) to which you have a
non-forfeitable right under any pension benefit plan); other state, local, and
federal employment laws; and any amendments to any of the foregoing. You also
understand there may be other statutes and laws of contract and tort that also
relate to your employment. By signing this Release, you waive and release any
rights you may have against the Released Parties under these and any other laws
based on any act, omission, matter, cause or thing through the date of your
execution of this Release. You also agree not to initiate, join, or voluntarily
participate in any action or suit in any court or to accept any damages or other
relief from any such proceeding brought by anyone else based on any act,
omission, matter, cause or thing through the date of your execution of this
Release.
This document is important. We advise you to review it carefully and
consult an attorney, if desired, before signing it, as well as any other
professional whose advice you value, such as an accountant or financial advisor.
If you agree to the terms of this Release, sign in the space below where your
Release is indicated and return the Release to the Chief Executive
Officers/Senior Vice President, Operations and Administration of Blair
Corporation. The benefits identified in your Change in Control Severance
Agreement are contingent upon your agreeing to this Release. You will have
forty-five (45) calendar days from the date you receive this document to
consider whether to sign this Release. If you choose to sign the Release before
the end of that forty-five day period, you certify that you did so voluntarily
for your own benefit and not because of any coercion.
You should also understand that you will have seven (7) calendar days
after you sign this Release to revoke this Release. To revoke this Release, the
Chief Executive Officer of Blair Corporation must receive written notice before
the end of the seven-day period after you sign this Release. In the event you
revoke or do not sign either this Release, you will not be entitled to any of
the payments or benefits that you would be entitled to by virtue of entering
into this Release. If you do not revoke this Release within seven (7) days after
you sign it, this will be final, binding, and irrevocable.
Date Signed: --------------------
-------------------------
Name of Employee
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Exhibit 10.7
ACCEPTED AND AGREED
Blair Corporation
By: ----------------------------
Name:----------------------------
Title: Chief Executive Officer
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