Exhibit 13
----------
B.B. WALKER COMPANY AND SUBSIDIARY
FORTY-EIGHTH ANNUAL REPORT TO SHAREHOLDERS
OCTOBER 28, 1995
1995 ANNUAL REPORT
B.B. WALKER COMPANY PROFILE
B.B. WALKER COMPANY is a publicly held manufacturer and distributor of men's
and women's footwear, whose common stock is registered with the Securities and
Exchange Commission and is traded in the Over The Counter Securities Market.
A substantial portion of the Company's common stock is owned by employees
through participation in the Employee Stock Ownership Plan and Trust and by
many employees individually.
Founded in 1947 in Asheboro, North Carolina and incorporated in 1952 in the
State of North Carolina, the Company presently markets high quality, medium-
priced western and work/outdoor boots and shoes. A majority of the Company's
sales are under B.B. Walker trademarked brands. The Company's marketing
efforts are organized into three divisions: Western Boot, Work/Outdoor, and
Private Label. The Company also operates three retail stores.
THE WORK/OUTDOOR DIVISION, markets quality boots and shoes for work, outdoor
and safety use under the WALKER FOOTWEAR THAT WORKS brand. The mainstays of
this line are all-leather lace-up and pull-on utility boots. Through its
GOLDEN RETRIEVER brand, this division offers over 100 styles of work/outdoor
boots, including pull-on, lace-up, lined, insulated and waterproof, in a
variety of heights, soles and constructions. B.B. Walker's work/outdoor lines
are manufactured at the Company's Asheboro facilities.
THE WESTERN BOOT DIVISION, through its ABILENE brand, offers high quality
all-leather boots for the traditional boot wearer. The SAGE brand, also
marketed by this division, is offered at a lower price point and features
bright colors and accents. The ABILENE and SAGE lines are manufactured at
the Company's facility in Somerset, Pennsylvania.
THE PRIVATE LABEL DIVISION, has historically made shoes for large retailers
and other manufacturers. Most of the Company's private label products consist
of work/outdoor footwear.
---------
B.B. WALKER COMPANY and its subsidiary are equal opportunity employers. All
matters regarding recruiting, hiring, training, compensation, benefits,
promotion, transfers and other personnel policies will continue to be free
from all discriminatory practices.
The Company and its subsidiary employ 637 people at October 28, 1995.
Contents
Financial Highlights
Message to Shareholders
Consolidated Financial Statments and Notes
Report of Independent Accountants
Selected Financial Data
Mangement's Discussion and Analysis of Results
of Operations and Financial Condition
Stock Prices
Officers and Directors
B.B. WALKER COMPANY AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
Fiscal Year Ended
---------------------------------------
October 28, October 29, October 30,
1995 1994 1993
----------- ----------- -----------
(In thousands, except per share data)
OPERATIONS
Net sales $ 43,453 $ 51,148 $ 55,777
======== ======== ========
Income (loss) before income taxes
and minority interest (1,868) 812 3,055
Provision for (benefit from)
income taxes (626) 336 1,160
Minority interest (2) (2) (2)
-------- -------- --------
Net income (loss) $ (1,244) $ 474 $ 1,893
======== ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON
STOCK AND COMMON STOCK EQUIVALENTS $ (.72) $ .26 $ 1.14
======== ======== ========
Average number of shares outstanding 1,744 1,783 1,650
======== ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON
STOCK AND COMMON STOCK EQUIVALENTS
-ASSUMING FULL DILUTION $ (.72) $ .26 $ 1.12
======== ======== ========
Average number of shares outstanding 1,744 1,783 1,679
======== ======== ========
FINANCIAL CONDITION
Current assets $ 30,898 $ 30,264 $ 27,672
Current liabilities 21,533 20,510 17,357
Working capital 9,365 9,754 10,315
Current ratio 1.43 to 1 1.48 to 1 1.59 to 1
Long-term obligations,
non-current portion 4,257 3,692 3,189
Shareholders' equity 8,553 9,780 9,447
Book value per common share (1) 4.91 5.56 5.47
(1) Information adjusted for three-for-two stock split paid on March 24, 1994.
B.B. WALKER COMPANY
CHAIRMAN'S MESSAGE
TO OUR SHAREHOLDERS
Fiscal 1995 was a very difficult year for our Company, a year which saw much
of the footwear industry reporting poorer results than prior years. Lower
sales at the retail level have resulted in overstocked inventories which
retailers have to manage and reduce to a workable level. As a Company, we
have had to market and price our products in response to this tough retail
environment which had an impact on our operating results.
Revenues for the fiscal year ended October 28, 1995 were $43,533,000 compared
to $51,264,000 for the fiscal year ended October 29, 1994. The Company
reported a net loss for 1995 of $1,244,000 and net income of $474,000 for
1994.
Revenues for the fourth quarter of fiscal 1995 were $12,239,000 compared to
$14,430,000 in the fourth quarter of fiscal 1994. The net loss for the fourth
quarter of 1995 was $53,000. In 1994, the fourth quarter reflected income of
$454,000.
The Company has taken several positive steps to address our situation and
return to profitability in 1996. For several months now, management has
reviewed the Company's cost structure in relation to its level of operations
and identified cost savings opportunities. Plans have been implemented to cut
operating costs where possible and reduce staffing levels to match our level
of operations. This process will continue into fiscal 1996.
In December 1995, the Company announced a reorganization of its internal
structure. The Company is focusing on serving two markets for footwear,
western boots and work/outdoor boots. Each of these markets have distinctive
characteristics that distinguishes one from the other. The reorganization
will create two separate divisions that will operate independently and be
supported by a small corporate staff. The new divisions will focus on serving
western boot customers and work/outdoor boot customers, respectively, which
will include both instock and private label accounts. Each division will be
vertically integrated and will be led by a general manager who will assume
responsibility for all phases of manufacturing, marketing and distribution of
the respective division's products. By eliminating functional lines, each
division will be more responsive in serving our customers and providing
products to the market on a more timely basis.
Finally, the Company is aggressively pursuing new markets for its products
that have not traditionally been served in the past. There are many
opportunities available to the Company to gain sales volume and better utilize
existing capacity in our two plants. As we begin to capitalize on these
efforts, we will see an improvement in our operating results.
We appreciate the support and loyalty of our customers, shareholders and
employees.
Sincerely,
KENT T. ANDERSON
-------------------------------
Kent T. Anderson
Chairman of the Board, Chief
Executive Officer and President
B.B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Fiscal Year Ended
-------------------------------------
October 28, October 29, October 30,
1995 1994 1993
----------- ----------- -----------
(In thousands, except per share data)
Revenues:
Net sales (Note 11) $ 43,453 $ 51,148 $ 55,777
Interest and other income 80 116 102
------- ------- -------
43,533 51,264 55,879
------- ------- -------
Costs and expenses:
Cost of products sold 32,781 37,506 39,921
Selling and administrative expenses 10,359 11,040 11,226
Depreciation and amortization 667 610 544
Interest expense 1,594 1,156 1,133
Costs of uncompleted securities
offering (Note 13) - 140 -
------- ------- -------
45,401 50,452 52,824
------- ------- -------
Income (loss) before income taxes
and minority interest (1,868) 812 3,055
Provision for (benefit from)
income taxes (Note 7) (626) 336 1,160
Minority interest (2) (2) (2)
------- ------- -------
Net income (loss) $ (1,244) $ 474 $ 1,893
======= ======= =======
Earnings (loss) per share of common stock
and common stock equivalents (Note 1) $ (.72) $ .26 $ 1.14
======= ======= =======
Earnings (loss) per share of common stock
and common stock equivalents - assuming
full dilution (Note 1) $ (.72) $ .26 $ 1.12
======= ======= =======
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
B.B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
October 28, October 29,
1995 1994
----------- -----------
(In thousands, except share data)
CURRENT ASSETS:
Cash $ 1 $ 1
Accounts receivable, less allowance for doubtful
accounts of $521 in 1995 and $778 in 1994 (Note 4) 13,467 13,736
Inventories (Notes 2 and 4) 15,828 15,403
Prepaid expenses 311 240
Income tax recovery receivable (Note 7) 613 -
Deferred income tax benefit, current (Note 7) 678 884
------- -------
Total current assets 30,898 30,264
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization (Notes 3, 5 and 6) 2,968 3,593
DEFERRED INCOME TAX BENEFIT, LONG-TERM (Note 7) 92 80
OTHER ASSETS 419 79
------- -------
$ 34,377 $ 34,016
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
B.B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
October 28, October 29,
1995 1994
----------- -----------
CURRENT LIABILITIES:
Borrowings under finance agreement (Note 4) $ 14,012 $ 12,890
Portion of long-term obligations payable
within one year (Note 5) 1,088 500
Accounts payable, trade 5,210 5,489
Accrued salaries, wages and bonuses 591 678
Other accounts payable and accrued liabilities 632 916
Income taxes payable (Note 7) - 37
------- -------
Total current liabilities 21,533 20,510
------- -------
LONG-TERM OBLIGATIONS (Note 5) 4,257 2,996
SHORT TERM DEBT TO BE REFINANCED (Note 6) - 696
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARY 34 34
SHAREHOLDERS' EQUITY (Notes 10 and 12):
7% cumulative preferred stock, $100 par value,
1,150 shares authorized, 828 shares issued
and outstanding in 1995 and 1994 83 83
Common stock, $1 par value, 6,000,000 shares
authorized, 1,726,535 shares in 1995 and
1,743,520 shares in 1994 issued and outstanding 1,727 1,744
Capital in excess of par value 2,724 2,842
Retained earnings 4,158 5,408
Equity loans collateralized by Company
common stock (139) (297)
------- -------
Total shareholders' equity 8,553 9,780
------- -------
COMMITMENTS AND CONTINGENCIES (Note 9)
$ 34,377 $ 34,016
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
B.B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
-------------------------------------
October 28, October 29, October 30,
1995 1994 1993
----------- ----------- -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,244) $ 474 $ 1,893
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization 667 610 544
Gain on sale of fixed assets - (3) (15)
Deferred income taxes 194 66 (206)
(Increase) decrease in:
Accounts receivable, trade (net) 269 620 (1,829)
Inventories (425) (3,181) (582)
Prepaid expenses (71) (122) (11)
Other assets (8) 74 (3)
Increase (decrease) in:
Accounts payable, trade (279) 1,308 303
Accrued salaries, wages and bonuses (87) (12) (42)
Other accounts payable and
accrued liabilities (284) (612) 625
Income taxes payable (650) (588) 61
------- ------- -------
Net cash provided by (used for)
operating activities (1,918) (1,366) 738
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (43) (2,045) (545)
Proceeds from disposal of property, plant
and equipment 1 3 24
------- ------- -------
Net cash used for investing activities (42) (2,042) (521)
------- ------- -------
(Continued)
B.B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Fiscal Year Ended
-------------------------------------
October 28, October 29, October 30,
1995 1994 1993
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing under finance agreement 1,122 3,201 310
Proceeds from issuance of
long-term obligations 4,232 919 2,347
Payment on long-term obligations (3,079) (570) (2,772)
Payment of debt issue costs (332) - -
Purchase of subsidiary common stock
from minority interest - (1) (7)
Repurchase of Company common stock - (3) (21)
Proceeds from issuance of common stock - 75 256
Loans to shareholders, net of
cash repayments 23 59 (221)
Advance to Employee Stock Ownership
Plan Trust - (135) -
Dividends paid on common stock - (131) (103)
Dividends paid on 7% cumulative
preferred stock (6) (6) (6)
------- ------- -------
Net cash provided by (used for)
financing activities 1,960 3,408 (217)
------- ------- -------
Net change in cash - - -
Cash at beginning of year 1 1 1
------- ------- -------
Cash at end of year $ 1 $ 1 $ 1
======= ======= =======
Supplemental Disclosure of Noncash Investing and Financing Activities:
Capital lease obligations incurred were $10 in 1994 and $171 in 1993. No
capital lease obligations were incurred in 1995.
During 1995, the Company accepted 16,875 shares of its common stock as
repayment of an advance of $135,000 to the Employee Stock Ownership Plan
Trust.
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
B.B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Equity Loans
(In thousands, 7% Cumulative Capital in Collateralized Total
except number Preferred Stock Common Stock Excess of Retained By Common Shareholders'
of shares) Shares Amount Shares Amount Par Value Earnings Stock Equity
------ ------ --------- ------ --------- -------- ------------- -------------
Balance at October 31, 1992 828 $ 83 1,545,145 $ 1,545 $ 2,734 $ 3,287 $ - $ 7,649
Retirement of common stock
repurchased - - (3,968) (4) (17) - - (21)
Issuance of common stock - - 172,500 173 83 - - 256
Loans to shareholders - - - - - - (231) (231)
Repayment of shareholder
loans - - - - - - 10 10
Net income - - - - - 1,893 - 1,893
Dividends on common stock at
$.067 per share - - - - - (103) - (103)
Dividends on 7% preferred
stock - - - - - (6) - (6)
---- ---- --------- ------ ------- ------ ------ --------
Balance at October 30, 1993 828 83 1,713,677 1,714 2,800 5,071 (221) 9,447
Retirement of common stock
repurchased - - (400) - (3) - - (3)
Issuance of common stock - - 30,243 30 45 - - 75
Equity loans collateralized
by common stock - - - - - - (163) (163)
Repayment of equity loans col-
lateralized by common stock - - - - - - 87 87
Net income - - - - - 474 - 474
Dividends on common stock at
$.073 per share - - - - - (131) - (131)
Dividends on 7% preferred
stock - - - - - (6) - (6)
---- ---- --------- ------ ------- ------ ------ --------
Balance at October 29, 1994 828 83 1,743,520 1,744 2,842 5,408 (297) 9,780
Retirement of common stock
repurchased - - (110) - - - - -
Repayment of equity loans col-
lateralized by common stock - - - - - - 23 23
Repayment of equity loans by
retirement of common stock - - (16,875) (17) (118) - 135 -
Net loss - - - - - (1,244) - (1,244)
Dividends on 7% preferred
stock - - - - - (6) - (6)
---- ---- --------- ------ ------- ------ ------ --------
Balance at October 28, 1995 828 $ 83 1,726,535 $ 1,727 $ 2,724 $ 4,158 $ (139) $ 8,553
==== ==== ========= ====== ======= ====== ====== ========
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
B.B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Business
- --------
B.B. Walker Company and Subsidiary (the "Company") is engaged in the design,
manufacture, marketing and distribution of western and work/outdoor footwear.
The significant accounting policies followed by the Company in preparing the
accompanying consolidated financial statements are as follows:
Principles of consolidation
- ---------------------------
The consolidated financial statements include the accounts of B.B. Walker
Company and its subsidiary. All significant intercompany balances and
transactions are eliminated in consolidation.
Inventories
- -----------
Inventories are valued at the lower of cost or market with cost being
determined on the first-in, first-out basis.
Property, plant and equipment
- -----------------------------
All property, plant and equipment, except assets under capital leases, are
reported at cost. Assets under capital leases are reported at the present
value of the minimum lease payments. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets.
Maintenance and repairs which do not improve or extend the life of an asset
are charged to expense as incurred. Any gain or loss on the disposal of
assets is recorded as other income or expense.
Earnings per share
- ------------------
Earnings per common share is computed by deducting preferred dividends from
net earnings to determine net earnings attributable to common shareholders.
This amount is divided by the weighted average number of common shares
outstanding during the year plus any common stock equivalents arising from
stock options. For primary earnings per share, the common stock equivalents
are calculated using the average common stock price for the year. For fully
diluted earnings per share, the common stock equivalents are calculated using
the common stock price at the end of the year if it is greater than the
average price for the year. The weighted average number of shares, including
common stock equivalents, used in earnings per share computations were:
1995 1994 1993
--------- --------- ---------
Primary 1,744,000 1,783,000 1,650,000
Fully diluted 1,744,000 1,783,000 1,679,000
Revenue recognition
- -------------------
The Company recognizes a sale when the goods are shipped or ownership and risk
of loss is otherwise assumed by the customer.
Advertising costs
- -----------------
The Company expenses advertising costs, other than direct response
advertising, as incurred. Direct response advertising is expensed the
first time the advertising appears. Advertising expense for 1995, 1994 and
1993 is $1,118,000, $1,367,000 and $1,590,000, respectively.
Fiscal year
- -----------
The Company's operations are based on a fifty-two, fifty-three week fiscal
year that ends on the Saturday closest to October 31. The 1995, 1994 and 1993
fiscal years consisted of fifty-two weeks each.
New accounting standards
- ------------------------
In December 1991, the Financial Accounting Standards Board (the "FASB")
adopted Statement of Financial Accounting Standards No. 107, DISCLOSURE ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, which requires disclosure about the fair
value of certain financial instruments.
In March 1995, the FASB adopted Statement of Financial Accounting Standards
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, which requires that companies assess potential
impairments of long-lived assets and certain identifiable intangibles when
there is evidence that events or changes in circumstances have made recovery
of an asset's carrying value unlikely, and recognize an impairment loss when
the sum of expected future net cash flows is less than the carrying amount.
In October 1995, the FASB adopted Statement of Financial Accounting Standards
No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, which provides that
companies adopt a method of accounting for stock compensation awards based on
the estimated fair value at the date the awards are granted using an accepted
pricing model. The resulting charge to income is recognized over the period
during which the options or awards vest. The FASB encourages recognition of
such expense in the statement of income but does not require it. If expense
is not recorded in the financial statements, pro forma disclosures are
required regarding the effects on net income and earnings per share had
expense been recognized.
Adoption of FAS No. 107 is required for fiscal 1996. Adoption of FAS No. 121
and FAS No. 123 are required for fiscal 1997. Management is evaluating the
potential effects on the Company's financial statements of adoption of these
statements. While such evaluation is not complete, management currently does
not expect adoption of the statements will have a material effect on its
financial condition or results of operations.
NOTE 2 - INVENTORIES
Inventories on hand at October 28, 1995 and October 29, 1994 consisted of the
following:
(In thousands)
October 28, October 29,
1995 1994
----------- -----------
Finished goods $ 9,574 $ 8,688
Work in process 807 738
Raw materials and supplies 5,447 5,977
--------- ---------
$ 15,828 $ 15,403
========= =========
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, by major class, at October 28, 1995 and October
29, 1994 was as follows:
(In thousands)
October 28, October 29,
1995 1994
----------- -----------
Land $ 425 $ 425
Buildings 2,285 2,276
Leasehold improvements 489 493
Machinery and equipment:
Owned 3,770 4,075
Capital leases 1,143 1,184
Transportation equipment:
Owned 245 212
Capital leases 9 43
Construction in process 14 -
------ ------
8,380 8,708
Less accumulated depreciation
and amortization 5,412 5,115
------ ------
$ 2,968 $ 3,593
====== ======
Included in accumulated depreciation at October 28, 1995 and October 29, 1994
is $908,000 and $813,000, respectively, related to capital leases.
NOTE 4 - BORROWINGS UNDER FINANCE AGREEMENT
On August 15, 1995, the Company entered into a new revolving finance agreement
with a bank which replaced the existing revolving finance agreement. The new
financing provides daily requirements for working capital and refinanced the
existing mortgage note payable on the Asheboro facility. The new agreement
has two primary components, a revolving credit commitment and a term loan.
The revolving credit commitment permits borrowings up to certain percentages
of eligible accounts receivable and inventories, not to exceed $20,000,000 in
aggregate ($11,000,000 for accounts receivable and $6,500,000 to $9,000,000
for inventory which is adjusted seasonally). Interest at the bank's prime
rate plus one-half percent (9.25% at October 28, 1995) is accrued on all
outstanding amounts. The Company pays a commitment fee on a monthly basis
equal to .25% of the unused availability under the agreement. The Company
also incurs other miscellaneous fees related to the operation of the credit
facility.
As discussed more fully in Note 5, the second portion of the agreement
provided a term loan of $3,000,000 with a variable interest rate. Proceeds
from this loan were used to repay the existing mortgage note on the Asheboro
facility with the remainder applied against the outstanding amount under the
revolving finance agreement.
Borrowings under the agreement are secured by all accounts receivable,
inventories, machinery and equipment of the Company. In addition, the bank
has a first lien on the Asheboro land and facilities. The Company has granted
the bank a subordinated security interest in the Somerset facility with the
approval of the other lenders on the Somerset facility.
The agreement contains various restrictive covenants, as amended effective
October 28, 1995, which include, among other things, maintenance of certain
financial ratios, limits on capital expenditures, minimum net worth
requirements and net income requirements. The agreement also restricts
payment of dividends on common stock to payments made with shares of common
stock. At October 28, 1995, the Company was in compliance with its
amended covenants.
The previous financing agreement with a bank permitted borrowings up to
certain percentages of eligible accounts receivable and inventories, not to
exceed $15,000,000 in aggregate ($7,000,000 for accounts receivable and
$8,000,000 for inventory). Interest accrued on outstanding amounts at one-
half percent above the bank's prime rate.
(In thousands)
Fiscal year
-------------------------
1995 1994 1993
------ ------ ------
Average short-term borrowings $ 12,633 $ 10,384 $ 7,906
Maximum short-term borrowings $ 14,717 $ 12,927 $ 10,195
Weighted average interest rate 9.6% 7.9% 7.5%
Interest rate at year-end 9.25% 8.25% 7.5%
The weighted average interest rate is computed by dividing interest expense on
the short-term borrowings by the average borrowings during the fiscal year.
NOTE 5 - LONG TERM OBLIGATIONS
Long-term debt and other non-current obligations consist of the following:
(In thousands)
October 28, October 29,
1995 1994
----------- -----------
Note payable to a bank, due in 84
monthly installments, which include
accrued interest, ranging from $36,000
to $59,000 through July 2002, variable
interest at the bank's prime rate plus
1/2% (9.25% at October 28, 1995),
secured by accounts receivable,
inventories and substantially all
fixed assets $ 2,929 $ -
Note payable to a bank, due in monthly
installments of principal plus accrued
interest of $2,550 through September 2009,
variable interest at the bank's prime
rate plus .75% (9.5% at October 28, 1995),
secured by the Company's land and
building in Somerset, PA 236 -
Note payable to the Pennsylvania Industrial
Development Authority, due in monthly
installments of principal plus accrued
interest of $3,089 through April 2010,
fixed interest at 2% per annum, secured
by the Company's land and building in
Somerset, PA 466 -
Note payable to the Pennsylvania Economic
Revitalization Fund, due in monthly
installments of principal plus accrued
interest of $1,544 through August 2010,
fixed interest at 2% per annum, secured
by the Company's land and buildings in
Somerset, PA 238 -
Mortgage note payable to a bank, due in
monthly installments including interest
of $20,000, interest at 7.75%, paid in 1995 - 2,118
Promissory notes payable to shareholders,
due in varying amounts through 1998,
variable interest based on prime rate 1,233 965
Capital lease obligations, due in monthly
installments through 1998, interest
ranging from 12% to 12.75% 243 413
------- -------
5,345 3,496
Less amounts payable within one year 1,088 500
------- -------
$ 4,257 $ 2,996
======= =======
The effective interest rate on the promissory notes payable to shareholders
averaged 9.9% in 1995 and 9.7% in 1994. Cash paid for interest was $1,574,000
in 1995, $1,153,000 in 1994 and $1,134,000 in 1993.
Principal maturities on long-term obligations are as follows:
Fiscal Year (In thousands)
Ending Amounts
----------- ------------
1996 $ 1,088
1997 1,012
1998 820
1999 484
2000 486
Thereafter 1,455
------
$ 5,345
======
NOTE 6 - SHORT TERM DEBT TO BE REFINANCED
In July 1994, the Company purchased a larger manufacturing facility in
Somerset, Pennsylvania to replace the existing facility also located in
Somerset. During 1994, the Company obtained commitments for permanent
financing on a portion of the purchase cost of the facility. During the
period between the closing date of the purchase and the date the permanent
financing was finalized, the Company temporarily borrowed $696,000 from a bank
on a short-term note to provide the funds for closing. The note carried
interest at prime plus .75%. The Company retired the short-term bank note
with the long-term financing in fiscal 1995.
NOTE 7 - INCOME TAXES (In Thousands)
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes.
FAS 109 requires a change from the deferred method of accounting for income
taxes of APB Opinion 11 to the asset and liability method of accounting for
income taxes. Under the asset and liability method of FAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under FAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Pursuant to the deferred method
under APB Opinion 11, which was applied in 1993 and prior years, deferred
income taxes were recognized for income and expense items that were reported
in different years for financial reporting purposes and income tax purposes
using the tax rate applicable for the year of the calculation. Under the
deferred method, deferred taxes were not adjusted for subsequent changes in
tax rates.
On October 31, 1993, the Company adopted FAS 109 without restating prior
years' financial statements. The cumulative effect of the change in the
method of accounting for income taxes was deemed immaterial to the Company's
financial statements and therefore is not disclosed separately in the
financial statements.
The components of the provision for (benefit from) income taxes are as
follows:
October 28, October 29, October 30,
1995 1994 1993
----------- ----------- -----------
Current:
Federal $ (820) $ 240 $ 1,141
State - 30 225
------ ------ ------
(820) 270 1,366
------ ------ ------
Deferred:
Federal 194 58 (169)
State - 8 (37)
------ ------ ------
194 66 (206)
------ ------ ------
$ (626) $ 336 $ 1,160
====== ====== ======
The Company has state net economic loss carryforwards of $115,000 which expire
in 2000. Cash paid for income taxes, net of refunds, was ($141,000) in 1995,
$853,000 in 1994, and $1,304,000 in 1993.
The provision for (benefit from) income taxes differs from the amount computed
by applying the U.S. federal income tax rate of 34 percent to income (loss)
before income taxes for the three years ended October 28, 1995, October 29,
1994 and October 30, 1993 as follows:
October 28, October 29, October 30,
1995 1994 1993
----------- ----------- -----------
Computed expected income tax
expense (benefit) $ (636) $ 275 $ 1,039
State income taxes (benefit), net
of federal income tax benefit (115) 24 124
Change in the valuation allowance 115 - -
Other, net 10 37 (3)
------ ------ ------
$ (626) $ 336 $ 1,160
====== ====== ======
The significant components of deferred income tax expense for the years ended
October 28, 1995 and October 29, 1994 are as follows:
October 28, October 29,
1995 1994
----------- -----------
Deferred tax expense (exclusive of the
effect of other components listed below) $ 194 $ 66
State deferred tax benefit (115) -
Change in the valuation allowance 115 -
----- -----
$ 194 $ 66
===== =====
For the year ended October 30, 1993, deferred income tax expense of $206,000
resulted from timing differences in the recognition of income and expense for
income tax and financial reporting purposes. The sources and tax effects of
those timing differences are presented below:
October 30,
1993
-----------
Provision for doubtful accounts $ (92)
Reserve for sales discounts (19)
Additional inventory costs 50
Self insurance accrual (35)
Difference in income tax and financial
statement depreciation rates (47)
Change in inventory reserve (83)
Other, net 20
-----
$ (206)
=====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at October 28, 1995 and October 29, 1994
are as follows:
October 28, October 29,
1995 1994
----------- -----------
Deferred tax assets:
Current portion:
Provision for doubtful accounts $ 193 $ 289
Reserve for sales discounts 89 104
Self insurance accrual for claims incurred
but not reported at year-end 84 82
Inventories, principally due to additional
costs inventoried for tax purposes 347 385
Accruals for certain employee benefits 24 24
----- -----
Total current 737 884
----- -----
Long-term portion:
Accruals for certain employee benefits 29 45
State economic loss carryforward 115 -
Other 62 35
----- -----
Total long-term 206 80
----- -----
Total gross deferred tax assets 943 964
Valuation allowance (115) -
----- -----
828 964
----- -----
Deferred tax liabilities:
Current portion:
Prepaid employee benefits (58) -
----- -----
Net deferred tax asset $ 770 $ 964
===== =====
NOTE 8 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS
The Company and its subsidiary sponsor retirement plans which provide benefits
to all qualified employees. Administrative and trustee expenses associated
with these plans are paid by the Company.
The Company provides a non-contributory, defined contribution plan for all
eligible employees that invests in the common stock of the Company.
Contributions to the Employee Stock Ownership Plan of B.B. Walker Company,
which are determined by the Board of Directors, were $65,000 in 1995, $65,000
in 1994 and $120,000 in 1993.
The Retirement Savings Plan of B.B. Walker Company, a Section 401-K plan, is
available to all eligible employees meeting certain age and service
requirements. The plan is not available to employees of the Company's
subsidiary who are covered by a defined benefit pension plan. Employee
contributions are limited to a percentage of their base compensation, as
defined in the plan. The plan does provide for matching contributions by the
Company, but such contributions are made at the discretion of the Company.
Contributions to the plan were $30,000 in 1995, $30,000 in 1994 and $60,000 in
1993.
The Company sponsors a non-contributory, defined benefit pension plan which
covers employees of its subsidiary. The plan provides benefits based on years
of service. The Company's funding policy is to contribute annually the
minimum required contribution. Contributions are intended to provide not only
for benefits attributed to service to date but also for those expected to be
earned in the future.
Net annual pension expense for 1995, 1994 and 1993 included the following
components (in thousands):
1995 1994 1993
---- ---- ----
Service cost - benefits earned
during the period $ 69 $ 65 $ 57
Interest on projected benefit obligation 46 39 31
Actual return on plan assets (47) (42) (40)
Net amortization and deferral (20) (17) (10)
--- --- ---
Net annual pension expense $ 48 $ 45 $ 38
=== === ===
The following table sets forth the plan's funded status at October 28, 1995
and October 29, 1994 (in thousands):
October 28, October 29,
1995 1994
----------- -----------
Actuarial present value of benefit obligations:
Vested benefit obligations $ 648 $ 594
===== =====
Accumulated benefit obligations $ 713 $ 641
===== =====
Projected benefit obligation $ (713) $ (641)
Plan assets at fair value 863 759
----- -----
Plan assets in excess of projected benefit
obligation 150 118
Unrecognized net loss 78 66
Unrecognized net asset at transition (74) (82)
----- -----
Prepaid pension cost $ 154 $ 102
===== =====
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation and the expected long-term rate of
return on assets was 7.5% for 1995, 1994 and 1993.
The Company also has an incentive bonus plan for employees which allows the
Company to pay bonuses based upon certain percentages of operating profit.
Expenses associated with this plan were $86,000 in 1994 and $534,000 in 1993.
No incentive bonuses were accrued for 1995.
In March 1995, the Board of Directors approved, and the shareholders ratified,
the 1995 Incentive Stock Option Plan and Automatic Stock Option Grant Program
for Key Employees and Non-Employee Directors. Under the Incentive Stock
Option Plan for Key Employees, a maximum of 300,000 shares of the Company's
authorized but unissued common stock has been reserved for issuance to key
employees. For employees owning less than 10% of the Company's common stock,
the options are granted at not less than 100% of the fair market value at the
date of grant and expire ten years from the date of grant. For employees
owning 10% or more of the Company's stock, options are granted at not less
than 110% of the fair market value and expire five years from the date of
grant. One-half of the options granted are exercisable at the date of grant;
one-half are exercisable after twelve months.
Under the Automatic Stock Option Grant Program of the 1995 Incentive Stock
Option Plan, a maximum of 50,000 shares of the Company's authorized but
unissued common stock has been reserved for issuance to non-employee directors
of the Company. Non-employee directors will be granted an option to purchase
1,000 shares of common stock on the first business day after the annual
meeting of shareholders where the director is elected or remains a member of
the Board of Directors. The option price for each option granted is 100% of
the fair market value at the date of grant. The options will expire 10 years
from the date of grant. One-half of the options granted are exercisable at
the date of grant; one-half are exercisable after twelve months.
The Company's 1987 Incentive Stock Option Plan, which covered 300,000 shares
of the Company's common stock is still active. All available options under
this plan have been granted. The terms of this plan were substantially the
same as the 1995 Incentive Stock Option Plan described above. A summary of
the activity in the plans is as follows:
Year of Number of Options Price
Grant Shares Per Share
------- --------- -------------
Options outstanding at
October 31, 1992 199,500 $ 1.33 - 2.00
Granted 1993 92,250 4.00 - 5.83
Exercised 1989-1992 (172,500) 1.33 - 2.00
--------
Options outstanding at
October 30, 1993 119,250 1.33 - 5.83
Exercised 1989-1993 (29,700) 1.33 - 4.40
--------
Options outstanding at
October 29, 1994 89,550 1.33 - 5.83
Granted 93,000 3.50
Forfeited 1993 (15,600) 4.00 - 4.40
--------
Options outstanding at
October 28, 1995 166,950 $ 1.33 - 5.83
========
Options available for future grant - 1987 plan -
========
Options available for future grant - 1995 plan 288,350
========
Outstanding options exercisable at October 28, 1995, October 29, 1994 and
October 30, 1993 were 120,450, 89,550, and 73,125, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
- -----------------
The Company has entered into various capital and operating leases for certain
buildings and machinery and equipment. The agreements expire at various dates
through 2000. The future minimum lease payments under capital leases and
noncancelable operating leases with initial terms of one year or more are as
follows:
(In thousands)
Capital Operating
Fiscal year ending Leases Leases
------------------ --------- ---------
1996 $ 183 $ 480
1997 82 347
1998 10 214
1999 - 132
2000 - 40
----- ------
Total minimum lease payments 275 $ 1,213
Amounts representing interest 32 ======
-----
Present value of minimum lease payments
(includes current portion of $159) $ 243
=====
Rental expense amounted to $578,000 in 1995, $606,000 in 1994 and $624,000 in
1993.
LITIGATION
- ----------
From time to time, the Company is a defendant in legal actions involving
claims arising in the normal course of business. In management's opinion,
after consultation with counsel and a review of the facts, the liabilities, if
any, resulting from such legal proceedings will not have a material effect on
the Company's financial position or results of operations.
NOTE 10 - SHAREHOLDERS' EQUITY
The 7% cumulative preferred stock is callable at the option of the Company at
$103 per share plus any unpaid dividends. Preferred shareholders are entitled
to seventy voting rights per share if dividends on preferred stock are not
paid within ninety days after the scheduled due date. At October 28, 1995,
there are no preferred dividends in arrears.
The Company is authorized to issue up to 200,000 shares of Class A preferred
stock having no par value. The Class A preferred stock may be issued in one
or more series with terms, preferences, limitations and relative rights being
established by the Board of Directors. At October 28, 1995, no Class A
preferred stock has been issued.
The Company has made loans to certain key employees for the purchase of the
Company's common stock as stipulated in the 1987 Incentive Stock Option Plan.
The loans are secured by the common stock purchased and shares are released
from collateral as the loan principal is paid down. The loans bear interest
at 4% annually.
NOTE 11 - CREDIT CONCENTRATIONS AND SALES TO MAJOR CUSTOMERS
The Company's trade receivables do not represent significant concentrations of
credit risk because a large number of geographically diverse customers
comprise the customer base. However, a substantial portion of the customer
base is retailers and the Company derived approximately 12% and 10% of its net
sales from one major customer in 1994 and 1993, respectively. In 1995, no
customers comprised more than 10% of sales.
NOTE 12 - CHANGES IN CAPITAL STRUCTURE
In February 1994, the Company's Board of Directors approved a three-for-two
stock split of the Company's common stock. Accordingly, the per share amounts
in the financial statements and related notes thereto have been retroactively
restated to reflect this stock split.
Also in January 1994, the Board of Directors approved an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's common stock from 2.5 million shares to 6 million
shares. The amendment was ratified by shareholders in March 1994.
NOTE 13 - COSTS OF UNCOMPLETED SECURITIES OFFERING
During 1994, the Company filed a Form S-2 registration statement with the
Securities and Exchange Commission covering 911,500 shares of its common stock
to be offered to the public. The public offering was not completed in 1994.
The expenses incurred in preparing and filing the registration statement of
$140,000 were expensed in 1994 by the Company.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of B.B. Walker Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of B.B.
Walker Company and its subsidiary at October 28, 1995 and October 29, 1994,
and the results of their operations and their cash flows for each of the three
years in the period ended October 28, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Winston-Salem, North Carolina
December 1, 1995
B.B. WALKER COMPANY AND SUBSIDIARY
SELECTED FINANCIAL DATA
(In thousands, except for
items denoted by (1) below)
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
RESULTS OF OPERATIONS:
Net sales $ 43,453 $ 51,148 $ 55,777 $ 47,817 $ 40,239
======= ======= ======= ======= =======
Income (loss) from continuing operations
before income taxes, minority interests
and extraordinary item $ (1,868) $ 812 $ 3,055 $ 1,783 $ 445
Provision for (benefit from) income taxes (626) 336 1,160 579 164
Minority interests in continuing operations (2) (2) (2) (2) (2)
------- ------- ------- ------- -------
Income (loss) before extraordinary item (1,244) 474 1,893 1,202 279
Extraordinary item-realization of tax
operating loss carryforwards - - - 477 156
------- ------- ------- ------- -------
Net income (loss) $ (1,244) $ 474 $ 1,893 $ 1,679 $ 435
======= ======= ======= ======= =======
FINANCIAL CONDITION:
Current assets $ 30,898 $ 30,264 $ 27,672 $ 25,099 $ 25,338
Current liabilities 21,533 20,510 17,357 16,253 18,107
Working capital 9,365 9,754 10,315 8,846 7,231
Current ratio (1) 1.43 to 1 1.48 to 1 1.59 to 1 1.54 to 1 1.40 to 1
Total assets 34,377 34,016 30,028 27,234 27,265
Long-term obligations 4,257 3,692 3,189 3,290 3,110
Minority interests in consolidated subsidiary 34 34 35 42 42
Total liabilities 25,824 24,236 20,581 19,585 21,259
Shareholders' equity 8,553 9,780 9,447 7,649 6,006
PER SHARE INFORMATION (1) (2):
Shareholders' equity (book value) $ 4.91 $ 5.56 $ 5.47 $ 4.89 $ 3.80
======= ======= ======= ======= =======
Per share of common stock and common
stock equivalent:
Income (loss) from continuing
operations before extraordinary item $ (.72) $ .26 $ 1.14 $ .75 $ .17
Extraordinary item-realization of tax
operating loss carryforwards - - - .30 .10
------- ------- ------- ------- -------
Net income (loss) $ (.72) $ .26 $ 1.14 $ 1.05 $ .27
======= ======= ======= ======= =======
Per share of common stock and common
stock equivalent-assuming full dilution:
Income (loss) from continuing
operations before extraordinary item $ (.72) $ .26 $ 1.12 $ .73 $ .17
Extraordinary item-realization of tax
operating loss carryforwards - - - .29 .09
------- ------- ------- ------- -------
Net income (loss) $ (.72) $ .26 $ 1.12 $ 1.02 $ .26
======= ======= ======= ======= =======
Cash dividends on preferred stock $ 7.00 $ 7.00 $ 7.00 $ 7.00 $ 7.00
Cash dividends on common stock (2) - .073 .067 - -
OTHER INFORMATION:
Property, plant and equipment, net $ 2,968 $ 3,593 $ 2,148 $ 1,985 $ 1,728
Depreciation and amortization 667 610 544 366 292
Capital additions 43 2,055 716 670 335
Space occupied (square feet) 358 363 325 329 332
Average number of common shares outstanding(2) 1,731 1,737 1,625 1,548 1,589
Number of shareholders (1) 1,229 1,142 1,185 1,370 1,405
Number of employees (1) 637 658 642 599 528
(2) Information adjusted for three-for-two stock split paid on March 24, 1994.
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
- ---------------------
The following summarizes the results of operations for the Company for the
years ended October 28, 1995, October 29, 1994 and October 30, 1993:
October 28, October 29, October 30,
1995 1994 1993
----------- ----------- -----------
Net sales 100.0% 100.0% 100.0%
Cost of products sold 75.4% 73.3% 71.6%
------- ------- -------
Gross margin 24.6% 26.7% 28.4%
Selling and administrative expenses 23.9% 21.6% 20.1%
Depreciation and amortization 1.5% 1.2% 1.0%
Interest expense 3.7% 2.2% 2.0%
Costs of uncompleted securities offering - .3% -
Interest and other income (.2%) (.2%) (.2%)
------- ------- -------
Income (loss) before income taxes
and minority interest (4.3%) 1.6% 5.5%
Provision for (benefit from)
income taxes (1.4%) .7% 2.1%
Minority interest - - -
------- ------- -------
Net income (loss) (2.9%) .9% 3.4%
======= ======= =======
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales
- ---------
Net sales for 1995 were $43,453,000 which was 15.0% lower than net sales of
$51,148,000 in 1994. Sales of branded footwear accounted for 73.8% and
62.3% of net sales in 1995 and 1994, respectively. Private label sales in
1995 and 1994 were 19.1% and 26.1% of net sales, respectively. The remaining
7.1% and 11.6% of net sales in 1995 and 1994, respectively, were primarily
composed of sales from the Company's retail outlets and footwear imported for
customers.
Sales of branded footwear in the Work/Outdoor Division were essentially flat
for the year compared to 1994, showing a decrease of .5%. Domestic sales in
the Work/Outdoor Division were down $500,000, or 3.8% in 1995. A mild winter
in 1995 impacted sales early in the year for this division. In addition, the
popularity of this type of footwear with customers, has led to significant
competition for shelf space. Export sales for this division were up $400,000,
or 19.6%, for 1995. Stronger sales in Europe and additional efforts made to
service new markets overseas led to the growth. Pairs sold in this division
in 1995 were down .4% while the average price per pair rose 1.7%.
Branded footwear sales in the Western Boot Division improved for the year as
compared to 1994. Sales in this division were higher than the prior year by
$1,000,000 or 6.6%. Retail sales of western footwear were sluggish during
most of 1994 which resulted in retailers overstocking inventories. As a
result, orders to replace inventory were slow as retailers worked to turn
their on-hand inventory. During 1995, retailers have worked their inventories
to a more manageable level which has resulted in stronger orders in 1995 than
in 1994. In addition, the Company has more aggressively marketed its footwear
in response to the slower sales of 1994. This has led to greater competition
for market share and more pressure on pricing of its product. For the year,
pairs shipped were up 11.3%, however, the average price per pair fell 8.0%.
Sales in the Private Label Division were down $6,500,000, or 44.1%, in 1995
from 1994 levels. Many of the customers that are part of this division
carried high inventories into the current year and did not achieve expected
sales levels, therefore, orders were significantly lower than the prior year.
Most private label customers only filled in existing lines as needed. The
Company is actively pursuing new private label markets that have not
previously been served in order to secure more shelf space with these
retailers. Pairs shipped in this division were down 47.7% from 1994.
Finally, other sales of the Company, which are primarily retail sales and
sales from shoes imported for customers, were down $2,100,000. Substantially
all of the decrease is a result of the Company no longer importing shoes for
major customers. This service was phased out during the first quarter of
1995. In addition, the Company closed one retail outlet in the third quarter
which impacted sales for the retail division.
Gross Margin
- ------------
The Company's gross profit was $10,672,000 in 1995 and $13,642,000 in 1994.
As a percentage of sales, 1995's gross margin was 24.6% and 1994's gross
margin was 26.7%. The gross margin percentage was impacted by heavy
discounting and other promotional programs in both branded divisions.
Significant competition has led to aggressive pricing and dating terms in
order to induce orders and increase market share. In addition, manufacturing
variances, primarily from fixed expenses, have had an unfavorable impact on
the gross margin. For 1995, the Company's plants produced 13.3% fewer pairs
than 1994. Most of the reduction can be attributed to the reduction in orders
from private label customers.
Selling and Administrative Expenses
- -----------------------------------
Selling and administrative expenses were $10,359,000 for 1995 as compared to
$11,040,000 for 1994, a decrease of $681,000, or 6.2%. Expenses in most areas
were lower in 1995 than in 1994. The Company reviewed its expense structure
and aggressively moved to reduce operating expenses in 1995. Many of the
reductions were implemented in the latter half of the second quarter and their
full impact has not been fully realized. Salary and benefits were down
approximately $383,000 for 1995 as compared to 1994. Several personnel
positions, which are vacant, have not been filled with their work being
redistributed. In addition, lower sales have resulted in lower commissions
expense. Computer costs for the year were down $221,000. During 1994, the
Company implemented an extensive new manufacturing package which required
significant support from the software developer. Much of this package was
operational by the end of 1994 and required less for support expenses in 1995.
In addition, the Company has postponed some new computer-related projects in
1995 in order to reduce expenses. For 1995, advertising and sample expenses
were $249,000 lower than in 1994. The Company has reduced expenditures on its
advertising programs in order to reduce expenses in 1995. In addition, during
1994, the Company was completing the development of its consumer/retailing
advertising program. These programs have been in place during much of 1995,
resulting in lower consumer advertising outlays. These reductions in expenses
were partially offset by higher freight costs and bad debt expenses. Freight
costs were $198,000 higher in 1995 than in 1994 because of special promotional
programs offered by the branded divisions to customers. The increase in bad
debt expense for 1995 is attributed to the economy and retailers having
difficulty in turning their inventories quickly.
Interest Expense
- ----------------
Interest expense incurred in 1995 was $1,594,000, or $438,000 more than
interest expense of $1,156,000 for 1994. The increase for 1995 can be
attributed to the higher average balances on outstanding debt and higher
average interest rates than in the comparable period a year ago. Average
outstanding advances under the revolving finance agreement were approximately
$2,200,000 higher in 1995 than in 1994. Interest rates for this agreement
ranged from 8.25% to 9.5% in 1995 and from 6.75% to 8.25% in 1994. The other
major factor was outstanding amounts for promissory notes to shareholders.
For 1995, the average amount outstanding was $1,150,000 compared to $860,000
for 1994. Interest rates on these notes payable range from 8% to 10%.
The Company anticipates that interest expense from fixed rate debt will
increase due to changes in the Company's debt structure in 1995. The Company
financed the acquisition of a larger facility in Somerset, PA with $960,000 in
financing from two agencies of the Commonwealth of Pennsylvania and a bank
note. The financing from the governmental agencies amounted to $720,000 and
accrues interest at a rate of 2%. The bank note was for $240,000 and bears
interest at the bank's prime rate plus .75% (9.25% at October 28, 1995). In
addition, as part of a new financing agreement with a bank signed on August
15, 1995, the Company replaced the existing mortgage note payable which
amounted to $2,060,000 and carried interest at the bank's prime rate plus .75%
with a cap of 7.75% with a $3,000,000 term loan bearing interest at the new
bank's prime rate plus .5% (9.25% at October 28, 1995).
Depreciation and Amortization
- -----------------------------
Depreciation and amortization rose $57,000 to $667,000 in 1995 from $610,000
in 1994. The increase is the result of a full year of depreciation being
taken in 1995 on assets acquired in 1994 versus only a half year of
depreciation being taken in 1994. Capital expenditures made in 1994 were
$2,055,000. Capital expenditures for 1995 were $43,000.
Provision for Income Taxes
- --------------------------
The Company posted a net loss before income taxes for 1995 of $1,868,000 and,
therefore, recorded a net benefit from income taxes of $626,000. The
provision for income taxes in 1994 was $336,000. The largest part of the
change in the Company's effective income tax rate from 1995 to 1994 was due to
the Company recording a valuation allowance of $115,000 to establish a reserve
against its deferred tax assets.
Net Income
- ----------
For the year ended October 28, 1995, the Company reported a net loss of
$1,244,000, or 2.9% of net sales. For the year ended October 29, 1994, the
Company had net income of $474,000, or .9% of net sales. The change of
$1,718,000 can be attributed primarily to lower sales volume in 1995 compared
to 1994. Retailers were slow to turn their inventories as the market was
soft, and therefore orders to restock inventory were not as strong as the
prior years. In addition, the reduction in demand impacted the ability of the
Company to operate its plants efficiently resulting in unfavorable
manufacturing variances. Another factor that eroded the Company's margins
was significant competition which led to aggressive pricing and dating terms.
Finally, rising interest rates, larger average outstanding balances and
additional long-term debt resulted in significant increases in interest
expense. These higher expenses were partially offset by lower selling and
administrative expenses.
FISCAL 1994 COMPARED TO FISCAL 1993
Net Sales
- ---------
Net sales for the 1994 were $51,148,000 which was 8% lower than net sales of
$55,777,000 in 1993. Sales of branded footwear accounted for 62.3% and 66.8%
of net sales in 1994 and 1993, respectively. Private label sales in 1994 and
1993 were 26.1% and 20.5% of net sales, respectively. The remaining 11.6% and
12.7% of net sales in 1994 and 1993, respectively, are primarily composed of
sales from retail outlets and footwear imported for customers.
Sales of branded footwear in the Work/Outdoor Division were down 1% for the
year due primarily to a decrease in export sales from the prior year. Export
sales of the Work/Outdoor Division were off $2,000,000, or 40%, from 1993. In
1993, export sales jumped significantly when the Company added several new
export accounts with large initial shipments and increased volume with
existing customers. However, development of new international accounts in
1994 was slower. Also, economic recessions in many countries, particularly
some European countries, impacted sales of several of the Company's largest
export customers. Domestic sales in the Work/Outdoor Division rose
$1,700,000, or 16%, in 1994. Growth in domestic branded sales benefited from
a restructuring of the sales force which provided more salesmen and allowed
for more aggressive pursuit of retail accounts. As a result, the Company
added numerous new accounts to this division in 1994. In addition, sales have
reflected the growing popularity of this type of footwear with customers. The
Company has adjusted its styles in order to take advantage of this demand.
Finally, the Company has devoted more resources to developing a coordinated
marketing approach for promoting the brands offered in this line.
Branded footwear sales in the Western Boot Division remained down for the
year. Sales in this division were lower than the prior year by $5,100,000, a
24% decrease. The primary reason for the decrease was a softer market for
western footwear in 1994 than 1993. Flat retail sales of western footwear
during 1994 resulted in retailers overstocking inventories. As a result,
orders to replace inventory were delayed as retailers worked to turn their on-
hand inventory. The Company anticipates good showings at the spring marketing
shows and increasing market share in 1995.
Sales in private label lines increased $2,000,000, or 17%, during the year.
Growth in this division came primarily from volume increases to existing
customers. Growth in this division reflects the growing popularity of
work/outdoor styles of footwear, which comprise a significant portion of the
sales in this division.
Gross Margin
- ------------
The Company's gross margin fell to $13,642,000 in 1994 as compared to
$15,856,000 in 1993. As a percentage of sales, 1994's gross margin was 26.7%
and 1993's gross margin was 28.4%. In 1994, net sales of branded products,
which compose the Company's most profitable lines, made up 62.3% of total net
sales compared to 66.8% in 1993. The percentage of net sales from private
label lines, which contribute lower margins than branded lines, grew to 26.1%
in 1994 from 20.5% in 1993. Gross margins were also negatively impacted by an
increase in discounting programs offered to customers, particularly in the
Western Division, to induce an increase in orders. Finally, operating
variances in the manufacturing division were more significant in 1994 than in
1993 as the Company produced 9% fewer pairs in its plants than in 1993.
Delays associated with implementation of new processes and improvements at
both manufacturing facilities resulted in reduced production. In Asheboro,
the Company invested in modern equipment to improve the flow of production
through the plant. In addition, a more sophisticated cost accounting and
production system was brought on line in 1994. Both additions provide a more
flexible production system which position the Company for growth in the
future. At Somerset, a larger production facility was acquired in August,
1994. With the purchase of the larger building and new equipment, the Company
has provided more efficient manufacturing facilities for its Western Division.
Also, operating variances were unfavorably impacted by rising health insurance
costs. Health insurance for manufacturing operations in 1994 was $191,000
higher than 1993 and significantly higher than amounts budgeted.
Selling and Administrative Expenses
- -----------------------------------
Selling and administrative expenses were $11,040,000 for 1994 as compared to
$11,226,000 for 1993, a decrease of $186,000 (1.7%). Expenses incurred in
1994 were consistent with expenses incurred in 1993 except for the following.
For the year ended October 29, 1994, advertising expense was $223,000 lower
than the same period in 1993. The Company spent heavily during all of 1993
and part of 1994 to develop and refine its consumer/retailing advertising
programs. Many of these programs were in place for the latter part of 1994
resulting in lower advertising outlays. Travel and showroom expenses for 1994
ran $136,000 higher than the comparable period for 1993 as the Company devoted
more resources towards establishing consumer awareness of its branded products
in the market by more brand recognition at trade shows and pursuing new retail
accounts. Bad debt expense in 1994 was $272,000 lower than 1993. The change
from the prior year reflects significant accruals made in 1992 and 1993 in
response to anticipated losses for several large accounts. With these
accruals, adequate reserves were established and maintained in 1994. Finally,
insurance costs in 1994 were up $288,000 over the prior year. Group insurance
costs made up $170,000 of the increase as claims during the year ran
significantly higher than claims in 1993.
Interest Expense
- ----------------
Interest expense incurred in 1994 was $1,156,000, or $23,000 more than
interest expense of $1,133,000 for 1993. Several factors impacted interest
expense in 1994 and served to offset one another, resulting in only a nominal
increase in the expense of 2% for the year. First, the average outstanding
balance of the financing agreement with the bank was approximately $2,500,000
higher in 1994 than 1993. In addition, the prime rate, to which the interest
on the financing agreement is tied, increased 1.75% during the second half of
the fiscal year. However, in March 1994, the Company renegotiated the
financing agreement which lowered the interest rate paid one percentage point
to the bank's prime rate plus .5%. In addition, in October 1993, the Company
refinanced its mortgage note payable which initially lowered the interest rate
on this debt to 6.75% from 10% in 1993. With the increases in the prime rate,
the interest rate on the mortgage note payable eventually reached its cap of
7.75% late in 1994. Finally, lower average balances on the promissory note
and capital leases led to lower interest expense for this debt.
The impact of increases in the prime rate by 1.75%, to which the interest rate
on the finance agreement is tied, did not significantly impact the Company in
1994. Renegotiation of the agreement in March 1994, reduced the interest rate
one percentage point to .5% above the prime rate from 1.5% above prime rate.
Therefore the net effect for the year was a .75% increase in the rate.
However, additional increases in the bank's prime rate could lead to
significantly higher interest expense in 1995.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization rose $66,000 to $610,000 in 1994 from $544,000
in 1993. This is the result of the Company continuing to upgrade its
facilities and equipment to provide more efficient, flexible manufacturing
facilities. Capital expenditures made in 1994 were $2,055,000 compared to
$716,000 in 1993.
Provision for Income Taxes
- --------------------------
The provision for income taxes in 1994 was $336,000 as compared to the
provision for income taxes in 1993 of $1,160,000, a reduction of $824,000.
Lower tax expense was the result of lower pretax earnings of $2,243,000 in
1994. In addition, the Company changed its method of accounting for income
taxes in 1994 which impacted its effective income tax rate.
During 1993, Congress enacted the Omnibus Budget Reconciliation Act of 1993.
The Act adjusted marginal corporate tax rates and changed the deductibility of
certain expenses among other things. The changes did not materially impact
the Company.
Net Income
- ----------
For the year ended October 29, 1994, the Company reported net income of
$474,000, or .9% of net sales. For the year ended October 30, 1993, the
Company had net income of $1,893,000, or 3.4% of net sales. The decrease of
$1,419,000 can be attributed to lower sales volume in 1994 compared to 1993,
particularly in branded western footwear. Retailers have been slow to turn
their inventories as the market is soft, and therefore orders to restock
inventory have not been as strong as the prior year. Further, a reduction in
the gross margin percentage as a result of heavier discounting in marketing
products and unfavorable manufacturing variances incurred as a result of
introduction of new production equipment and relocation of a manufacturing
facility, impacted the Company's net income.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Historically, the Company has funded substantially all of its working capital
and capital expenditure requirements through borrowings under its finance
agreement and other indebtedness. The Company continues to rely on debt to
provide working capital for its day-to-day operations. With its revolving
finance agreement, the Company finances its accounts receivable and
inventories, paying interest at a variable rate. This arrangement provides
adequate working capital to carry on operations as the availability of funds
fluctuates with the seasonal needs of the Company. Generally, the Company's
working capital needs are highest in the fourth fiscal quarter and lowest in
the first fiscal quarter.
On August 15, 1995, the Company entered into a new financing agreement with a
bank which expanded its credit facility and provided additional liquidity for
daily working capital requirements. The new agreement provides a $20,000,000
revolving credit facility which replaces the existing revolving finance
agreement which had a maximum availability of $15,000,000. Under the new
agreement, the amount available to be drawn is determined by a formula based
on certain percentages of eligible accounts receivable and inventories.
Advances up to $11,000,000 are available against eligible accounts receivable.
The Company may also draw advances against eligible inventory amounts.
Depending on the season of the year, from $6,500,000 to $9,000,0000 may be
borrowed against the eligible inventory base. The new agreement computes
interest at a rate based on the bank's prime rate plus .5% (9.25% at October
28, 1995) which is consistent with the facility the Company operated under
during 1993 and 1994. At October 28, 1995, the Company had outstanding
advances of $14,012,000 and an additional $1,549,000 available under the
agreement. The Company believes that its revolving finance agreement will
continue to provide the necessary liquidity and working capital to fund its
current level of operations.
In addition to expanding the revolving credit facility, the new agreement also
provided a $3,000,000 term loan that was used to repay the existing mortgage
note payable to a bank which carried a balance of approximately $2,060,000.
Per the terms of the note, the Company will pay 84 monthly installments of
principal and interest ranging from $36,000 to $59,000. The term loan bears
interest at the bank's prime rate plus .5% whereas the mortgage note payable
bore interest at prime plus .75%, not to exceed 7.75%.
All advances under the revolving credit facility and the term loan are secured
by all accounts receivable, inventories, machinery and equipment of the
Company. In addition, the bank has a first lien on the Asheboro land and
facilities. The Company has granted the bank a security interest in the
Somerset facility with the approval of the other lenders on the Somerset
facility. This security interest is subordinated to the other lenders.
As a condition to providing the financing, the bank requires that the Company
meet various restrictive covenants. These covenants included, among other
things, restrictions on dividend payments, maintenance of certain financial
ratios, limits on capital expenditures, and minimum net worth and net income
requirements.
In July 1994, the Company purchased a larger manufacturing facility in
Somerset, Pennsylvania to replace the existing facility also located in
Somerset. As discussed below, the Company had obtained commitments for
permanent financing on a portion of the purchase cost of the facility. During
the period between the closing date of the purchase and the date the permanent
financing was finalized, the Company temporarily borrowed $696,000 from a bank
on a short term note to provide the funds for closing. The Company refinanced
the note on March 7, 1995 with long-term financing from two sources. The
first source of financing was from the Pennsylvania Industrial Development
Authority ("PIDA"), a program offered by the Department of Commerce of the
Commonwealth of Pennsylvania. The loan was for $480,000 and bears interest at
2% annually. Monthly installments of $3,089, which includes principal and
interest, will be paid over 15 years. The second source of financing came
from a bank note for $240,000. This loan bears interest at .75% above the
bank's prime rate (9.25% at October 28, 1995) and will be repaid in monthly
installments of principal and interest, currently $2,055, for 15 years.
On July 27, 1995, the Company finalized the long-term financing for this
project with a loan from a program offered by the Department of Commerce of
the Commonwealth of Pennsylvania. This financing, which was provided under
the Economic Development Partnership Program, was for $240,000. This note
bears interest at 2% annually with monthly payments of principal and interest
amounting to $1,544 for 15 years.
All notes are secured by the manufacturing facility. Capitalized in fixed
assets at October 28, 1995 are land and buildings with a cost of approximately
$1,052,000 related to the facility. The remainder of the expenditures made
for the facility were paid with borrowings under the revolving finance
agreement.
The level of other capital expenditures in 1995 has been significantly lower
than in prior two years. Capital expenditures for 1995 were $43,000 compared
to $2,055,000 in 1994. The Company made significant upgrades to its equipment
and facilities in 1994, while no such outlays have been made in 1995. The
Company is focusing on improving operations in 1995, making capital
expenditures only to maintain current levels of operations Funding for
capital expenditures other than the building acquisition has primarily come
from the available balance on the finance agreement.
Cash flows generated from operations in 1995 was a net outflow of $1,918,000
compared to a net cash outflow of $1,366,000 in 1994. The increase in the
outflow is attributed to the Company's net loss for the year.
In 1994, the Company used long-term debt and advances under the financing
agreement to fund outlays for capital expenditures. For 1995, the Company
significantly reduced capital outlays, instead only making expenditures that
were necessary to fund the current level of operations. The Company relied on
the revolving finance agreement primarily to fund current losses.
NEW ACCOUNTING STANDARDS
- ------------------------
In December 1991, the Financial Accounting Standards Board (the "FASB")
adopted Statement of Financial Accounting Standards No. 107, DISCLOSURE ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, which requires disclosure about the fair
value of certain financial instruments.
In March 1995, the FASB adopted Statement of Financial Accounting Standards
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, which requires that companies assess potential
impairments of long-lived assets and certain identifiable intangibles when
there is evidence that events or changes in circumstances have made recovery
of an asset's carrying value unlikely, and recognize an impairment loss when
the sum of expected future net cash flows is less than the carrying amount.
In October 1995, the FASB adopted Statement of Financial Accounting Standards
No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, which provides that
companies adopt a method of accounting for stock compensation awards based on
the estimated fair value at the date the awards are granted using an accepted
pricing model. The resulting charge to income is recognized over the period
during which the options or awards vest. The FASB encourages recognition of
such expense in the statement of income but does not require it. If expense
is not recorded in the financial statements, pro forma disclosures are
required regarding the effects on net income and earnings per share had
expense been recognized.
Adoption of FAS No. 107 is required for fiscal 1996. Adoption of FAS No. 121
and FAS No. 123 is required for fiscal 1997. Management is evaluating the
potential effects on the Company's financial statements of adoption of these
statements. While such evaluation is not complete, management currently does
not expect adoption of the statements will have a material effect on its
financial condition or results of operations.
B.B. WALKER COMPANY AND SUBSIDIARY
STOCK PRICES
B.B. Walker company common stock is publicly traded; however, during fiscal
1992, the Company removed its stock from the National Association of Security
Dealers Automated Quotation (NASDAQ) System. Markets in B.B. Walker Company
common stock are maintained by Scott & Stringfellow of Winston-Salem, NC and
Interstate Securities of Charlotte, NC.
Approximately 1,229 shareholders own common stock in B.B. Walker Company, some
shares of which are held by banks, brokers, investment trusts or nominees.
The largest shareholder is the Employee Stock Ownership Plan and Trust of B.B.
Walker Company, which holds approximately 25.74% of the total shares issued
and outstanding. At the last Annual Meeting of the Shareholders held on March
20, 1995, 81.74% of the shares outstanding were represented in person or by
proxy at the meeting. The Company paid a special cash dividend of $.073 per
share on January 4, 1994, on its common stock.
On March 24, 1994, the Company completed a three-for-two split of its common
stock outstanding for shareholders of record as of March 4, 1994. All
fractional shares were paid in cash.
The following are the Bid and Ask quotations for the last two fiscal years.
The amounts are adjusted for a three-for-two stock split paid on March 24,
1994:
Bid Prices Ask Prices
High Low High Low
--------------- ---------------
1995:
First Quarter $ 6 $ 3 $ 7 $ 4
Second Quarter 4 1/4 3 5 1/4 4
Third Quarter 2 3/4 2 3 3/4 3
Fourth Quarter 2 1 3 2
1994:
First Quarter $ 9 $ 8 $ 9 1/3 $ -
Second Quarter 10 9 11 9 2/3
Third Quarter 10 7 11 8
Fourth Quarter 7 6 8 7
These Over-the-Counter market quotations reflect interdealer prices, without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
B.B. WALKER COMPANY
OFFICERS
- --------
KENT T. ANDERSON
Chairman and Chief Executive Officer
FRENCH P. HUMPHRIES
Executive Vice President
WILLIAM C. MASSIE
Executive Vice President
DOROTHY W. CRAVEN
Secretary
REBECCA S. RICH
Assistant Secretary
DIRECTORS
- ---------
KENT T. ANDERSON
Chairman and Chief Executive Officer
ROBERT L. DONNELL, JR.
Retired
JAMES P. McDERMOTT
Retired
EDNA A. WALKER
President of B.B. Walker Foundation
MICHAEL C. MILLER
President
First National Bank and Trust Company
GEORGE M. BALL
Chairman of the Board
Philpott, Ball & Company
TRANSFER AGENT AND REGISTRAR
The Company acts as its own Transfer Agent and Registrar, handling all
securities transfers at its Executive Offices.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
Suite 1800
200 West Second Street
Winston-Salem, NC 27101
FORM NO. 10-K
Each year, B.B. Walker Company files a Form No. 10-K report with the
Securities and Exchange Commission in Washington, DC which contains more
detailed information. If you would like to receive a copy, please send your
request to Corporate Secretary, B.B. Walker Company, Drawer 1167, Asheboro,
North Carolina 27204.
NOTICE OF ANNUAL MEETING
The Annual Meeting of the Company's Shareholders will be held in the executive
offices of B.B. Walker Company at 414 East Dixie Drive, Highway 64 East,
Asheboro, North Carolina, at 7:00 p.m. EST on Monday night, March 18, 1996. A
formal notice of the meeting, together with a proxy statement and proxy, will
be mailed prior to the meeting. Shareholders who cannot attend are urged to
exercise their right to vote by signing and promptly returning the proxy.