Exhibit 13
----------
B.B. WALKER COMPANY AND SUBSIDIARY
FORTY-NINTH ANNUAL REPORT TO SHAREHOLDERS
NOVEMBER 2, 1996
1996 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. In addition, the Company
manufactures footwear under major retailers' private labels and on contract
for other footwear manufacturers. The Company also operates three retail
stores.
For western boot customers, the Company offers quality western boots through
two proprietary brands. Through its ABILENE brand, the Company manufactures
and markets high quality all-leather boots for the traditional boot wearer.
The SAGE brand 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.
For work/outdoor footwear customers, the Company 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, the Company offers many 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 Company has historically served the private label market, manufacturing
footwear for large retailers and other footwear manufacturers on a contract
basis. 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 521 people at November 2, 1996.
Contents Page
-------- ----
Financial Highlights 1
Message to Shareholders 2
Consolidated Financial Statments and Notes 4
Report of Independent Accountants 25
Selected Financial Data 26
Mangement's Discussion and Analysis of Results
of Operations and Financial Condition 27
Stock Prices 39
Officers and Directors Back Cover
Inside Front Cover
B.B. WALKER COMPANY AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
Fiscal Year Ended
---------------------------------------
November 2, October 28, October 29,
1996 1995 1994
----------- ----------- -----------
(In thousands, except per share data)
OPERATIONS
Net sales $ 37,506 $ 43,453 $ 51,148
======== ======== ========
Income (loss) before income taxes
and minority interest (4,659) (1,868) 812
Provision for (benefit from)
income taxes (620) (626) 336
Minority interest (2) (2) (2)
-------- -------- --------
Net income (loss) $ (4,041) $ (1,244) $ 474
======== ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON
STOCK AND COMMON STOCK EQUIVALENTS $ (2.34) $ (.72) $ .26
======== ======== ========
Average number of shares outstanding 1,727 1,744 1,783
======== ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON
STOCK AND COMMON STOCK EQUIVALENTS
-ASSUMING FULL DILUTION $ (2.34) $ (.72) $ .26
======== ======== ========
Average number of shares outstanding 1,728 1,744 1,783
======== ======== ========
FINANCIAL CONDITION
Current assets $ 24,953 $ 30,898 $ 30,264
Current liabilities 19,534 21,533 20,510
Working capital 5,419 9,365 9,754
Current ratio 1.28 to 1 1.43 to 1 1.48 to 1
Long-term obligations,
non-current portion 3,286 4,257 3,692
Shareholders' equity 4,522 8,553 9,780
Book value per common share (1) 2.57 4.91 5.56
(1) Information adjusted for three-for-two stock split paid on March 24, 1994.
1
CHAIRMAN'S MESSAGE TO SHAREHOLDERS
TO OUR SHAREHOLDERS
B.B. Walker Company's fiscal year ended on November 2, 1996. During 1996, our
Company experienced a year of weak sales as our customers struggled to
generate sales volume with consumers. Slow consumer spending at the retail
level has impacted our customers' operations and their ability to turn their
inventories at profitable rates. With smaller orders for new footwear being
placed, we have not been able to operate our plants efficiently. In addition,
to be competitive in the marketplace, we have had to offer discounting and
other promotional programs to customers. These factors have adversely
impacted the Company's gross margins.
Revenues for the fiscal year ended November 2, 1996 were $37,549,000 compared
to $43,533,000 for the fiscal year ended October 28, 1995. The Company
reported net losses for 1996 and 1995 of $4,041,000 and $1,244,000,
respectively.
In the fourth quarter of 1996, the Company recorded revenues of $9,906,000 and
a net loss of $2,382,000, which included adjustments to recognize expenses to
be incurred as the Company repositions its product lines and implements other
changes to improve operations. For the same period in 1995, revenues were
$12,239,000 with a net loss of $53,000.
During the year, management reduced operating expenses at all levels within
the Company in an effort to match expenses with sales and operations.
However, sales continued their negative trend and we were unable to return to
profitability in 1996. In the fourth quarter, management made a critical
assessment of our situation and the best way to address the retail environment
we are facing currently. Management felt our Company needed to refocus on our
strengths and concentrate on serving our niche markets better than our
competition. Basically, our Company has traditionally been a strong
competitor in western boots and work boots. In recent years, efforts have
been made to broaden our markets to include other products such as outdoor
boots, but these efforts have met with mixed success. Therefore, management
has decided to devote our valuable resources towards being the best western
boot and work boot company possible. In order to accomplish this in an
efficient manner, changes were made to consolidate some operations and
services and reduce other parts of our business. Going forward, B.B. Walker
Company will be a smaller company but will be focused on earning profits in
those lines where we know we can be competitive.
During the fourth quarter, we carefully reviewed the existing styles in our
product lines and eliminated those styles that we felt would not generate
minimum acceptable returns. Most of the styles eliminated were part of our
outdoor line. We wrote down inventories by $511,000 to the lower of cost or
market to recognize losses to be incurred in disposal of these styles. We
will continue to offer styles within all of our existing branded lines;
however, we will be more selective about new styles that are developed. With
fewer styles, less investment should be required in finished goods and raw
material inventories.
2
At the same time these changes were being made in our product lines, the
separate sales forces which previously served the Work/Outdoor Division and
the Western Division were merged into a single sales force under the
supervision of one national sales manager. Several new sales territories were
established to concentrate efforts in larger metropolitan areas. With
additional training, the new sales force will market both western and
work/outdoor footwear to customers in their established territories, thereby
eliminating overlap that existed with separate sales forces.
We anticipate making other operational changes to support our new direction
for the Company. The efficient use of manufacturing capacity is one area that
holds strong promise for improving our operating results. We are carefully
examining options related to current manufacturing operations. In addition,
reviews of corporate and administrative operations have identified areas for
further cost reductions. Accruals related to personnel and benefit costs to
be incurred as changes to these operations are implemented amounted to
approximately $571,000.
Another significant impact on our financial results came from a reserve for
deferred income tax assets as required by generally accepted accounting
principles. Because of this reserve, we had to reduce our reported benefit
from income taxes by approximately $1,075,000 which lowered our effective tax
rate for 1996 to 13.3%.
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
3
B. B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Fiscal Year Ended
-------------------------------------
November 2, October 28, October 29,
1996 1995 1994
----------- ----------- -----------
(In thousands, except per share data)
Revenues:
Net sales (Note 12) $ 37,506 $ 43,453 $ 51,148
Interest and other income 43 80 116
------- ------- -------
37,549 43,533 51,264
------- ------- -------
Costs and expenses:
Cost of products sold (Note 1) 29,702 32,781 37,506
Selling and administrative
expenses (Notes 1 and 13) 10,377 10,359 11,040
Depreciation and amortization 637 667 610
Interest expense 1,492 1,594 1,156
Costs of uncompleted securities
offering (Note 14) - - 140
------- ------- -------
42,208 45,401 50,452
------- ------- -------
Income (loss) before income taxes
and minority interest (4,659) (1,868) 812
Provision for (benefit from)
income taxes (Note 8) (620) (626) 336
Minority interest (2) (2) (2)
------- ------- -------
Net income (loss) $ (4,041) $ (1,244) $ 474
======= ======= =======
Earnings (loss) per share of common stock
and common stock equivalents (Note 2) $ (2.34) $ (.72) $ .26
======= ======= =======
Earnings (loss) per share of common stock
and common stock equivalents - assuming
full dilution (Note 2) $ (2.34) $ (.72) $ .26
======= ======= =======
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
4
B. B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
November 2, October 28,
1996 1995
----------- -----------
(In thousands, except share data)
CURRENT ASSETS:
Cash $ 1 $ 1
Accounts receivable, less allowance for doubtful
accounts of $742 in 1996 and $521 in 1995 (Note 5) 10,808 13,467
Inventories (Notes 3 and 5) 12,511 15,828
Prepaid expenses 441 311
Income tax recovery receivable (Note 8) 1,042 613
Deferred income tax benefit, current (Note 8) 150 678
------- -------
Total current assets 24,953 30,898
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization (Notes 4,5 and 6) 2,208 2,968
DEFERRED INCOME TAX BENEFIT, LONG-TERM (Note 8) - 92
OTHER ASSETS 214 419
------- -------
$ 27,375 $ 34,377
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
5
B. B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, Continued
LIABILITIES AND SHAREHOLDERS' EQUITY
November 2, October 28,
1996 1995
----------- -----------
CURRENT LIABILITIES:
Borrowings under finance agreement (Note 5) $ 11,464 $ 14,012
Portion of long-term obligations payable
within one year (Note 6) 1,304 1,088
Accounts payable, trade 4,984 5,210
Accrued salaries, wages and bonuses 1,102 591
Other accounts payable and accrued liabilities 680 632
Income taxes payable (Note 8) - -
------- -------
Total current liabilities 19,534 21,533
------- -------
LONG-TERM OBLIGATIONS (Note 6) 3,286 4,257
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARY 33 34
SHAREHOLDERS' EQUITY (Notes 11):
7% cumulative preferred stock, $100 par value,
1,150 shares authorized, 828 shares issued
and outstanding in 1996 and 1995 83 83
Common stock, $1 par value, 6,000,000 shares
authorized, 1,726,534 shares in 1996 and
1,726,535 shares in 1995 issued and outstanding 1,727 1,727
Capital in excess of par value 2,724 2,724
Retained earnings 111 4,158
Equity loans collateralized by Company
common stock (123) (139)
------- -------
Total shareholders' equity 4,522 8,553
------- -------
COMMITMENTS AND CONTINGENCIES (Note 1 and 10)
$ 27,375 $ 34,377
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
6
B. B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
-------------------------------------
November 2, October 28, October 29,
1996 1995 1994
----------- ----------- -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,041) $ (1,244) $ 474
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization 637 667 610
(Gain) loss on sale of fixed assets 138 - (3)
Deferred income taxes 620 194 66
(Increase) decrease in:
Accounts receivable, trade (net) 2,659 269 620
Inventories 3,317 (425) (3,181)
Prepaid expenses (130) (71) (122)
Other assets 205 (8) 74
Increase (decrease) in:
Accounts payable, trade (226) (279) 1,308
Accrued salaries, wages and bonuses 511 (87) (12)
Other accounts payable and
accrued liabilities 48 (284) (612)
Income taxes payable (429) (650) (588)
------- ------- -------
Net cash provided by (used for)
operating activities 3,309 (1,918) (1,366)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (21) (43) (2,045)
Proceeds from disposal of property, plant
and equipment 6 1 3
------- ------- -------
Net cash used for investing activities (15) (42) (2,042)
------- ------- -------
(Continued)
7
B. B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Fiscal Year Ended
-------------------------------------
November 2, October 28, October 29,
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing under finance agreement $ (2,548) $ 1,122 $ 3,201
Proceeds from issuance of
long-term obligations 45 4,232 919
Payment on long-term obligations (800) (3,079) (570)
Payment of debt issue costs - (332) -
Purchase of subsidiary common stock
from minority interest (1) - (1)
Repurchase of Company common stock - - (3)
Proceeds from issuance of common stock - - 75
Loans to shareholders, net of
cash repayments 16 23 59
Advance to Employee Stock Ownership
Plan Trust - - (135)
Dividends paid on common stock - - (131)
Dividends paid on 7% cumulative
preferred stock (6) (6) (6)
------- ------- -------
Net cash provided by (used for)
financing activities (3,294) 1,960 3,408
------- ------- -------
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. No capital
lease obligations were incurred in 1996 and 1995.
During 1995, the Company accepted 16,875 shares of its common stock as
repayment of an advance of $135 to the Employee Stock Ownership Plan
Trust.
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
8
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 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
Retirement of common stock
repurchased - - (1) - - - - -
Repayment of equity loans col-
lateralized by common stock - - - - - - 16 16
Net loss - - - - - (4,041) - (4,041)
Dividends on 7% preferred
stock - - - - - (6) - (6)
---- ---- --------- ------ ------- ------ ------ --------
828 $ 83 1,726,534 $ 1,727 $ 2,724 $ 111 $ (123) $ 4,522
==== ==== ========= ====== ======= ====== ====== ========
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
9
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - MATERIAL UNCERTAINTY AND UNUSUAL CHARGES
For the years ended November 2, 1996 and October 28, 1995, the Company has
reported net losses of $4.041 million and $1.244 million, respectively. These
losses have resulted in the depletion of retained earnings such that retained
earnings are $111,000 at November 2, 1996. With reduced orders for new
footwear being placed each year, the Company has not been able to operate its
plants at efficient levels and has had to offer discounting and other
promotional programs to customers. Together, these factors have adversely
impacted the Company's gross margins. The Company is highly leveraged and the
recent operating results have had a material adverse impact on the Company's
liquidity and ability to meet the covenants of its outstanding debt. As
discussed in Note 5, the finance agreement with the bank was amended twice
during fiscal 1996 and twice subsequent to November 2, 1996 in reaction to the
changing financial conditions of the Company.
During the fourth quarter of fiscal 1996, the Company repositioned its product
offerings in order to direct the Company's limited resources towards those
styles that display the most potential for the Company. Management reviewed
the existing lines offered by the Company and eliminated styles that would not
generate acceptable returns for the Company. To recognize the impairment to
inventory for the elimination of styles from certain product lines, the
Company wrote down inventories by $511,000 to the lower of cost or market.
Such amount is included as cost of products sold in the accompanying statement
of income (loss).
In addition, the Company determined that consolidation and/or reduction of
various operations related to the manufacturing, marketing and administrative
functions of the Company was required to support the elimination of the
product styles. Accruals related to personnel and benefit costs to be
incurred as changes to these operations are implemented amounted to
approximately $571,000. Of such amount, $359,000 and $212,000 are reported as
cost of products sold and selling and administrative expenses, respectively,
in the accompanying statement of income (loss).
The assumptions underlying management's plans are contingent on the Company
achieving anticipated sales levels. Management will analyze the progress of
the current consolidation and reduction of operations in achieving improved
profitability and cash flow projections. If market conditions do not improve
for the Company and the anticipated sales levels are not achieved, further
changes and reductions will be required. Among these changes may be the
discontinuance of certain operations or elimination of certain product lines.
However, if the Company is unable to implement the necessary changes in a
timely manner or unforseen problems occur, there can be no assurances as to
when the Company will return to a profitable level of operations and positive
cash flow.
10
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 2 - THE BUSINESS AND ITS 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 Company's sales come primarily from sales of branded footwear to small
independent retail chains and private label products to selected large
retailers. The Company has manufacturing facilities in North Carolina and
Pennsylvania. 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.
Use of estimates in the preparation of financial statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
that affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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.
11
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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:
1996 1995 1994
--------- --------- ---------
Primary 1,727,000 1,744,000 1,783,000
Fully diluted 1,728,000 1,744,000 1,783,000
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 1996, 1995 and 1994 is
$1,349,000, $1,118,000 and $1,367,000, 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 fiscal year ended
November 2, 1996 includes fifty-three weeks of operations. The 1995 and 1994
fiscal years consisted of fifty-two weeks each.
New accounting standards
- ------------------------
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.
12
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
New accounting standards, continued
- -----------------------------------
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. 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 the adoption of the statements
will have a material effect on its financial condition or results of
operations.
NOTE 3 - INVENTORIES
Inventories on hand at November 2, 1996 and October 28, 1995 consisted of the
following:
(In thousands)
November 2, October 28,
1996 1995
----------- -----------
Finished goods $ 6,943 $ 9,574
Work in process 692 807
Raw materials and supplies 4,876 5,447
--------- ---------
$ 12,511 $ 15,828
========= =========
13
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, by major class, at November 2, 1996 and October
28, 1995 was as follows:
(In thousands)
November 2, October 28,
1996 1995
----------- -----------
Land $ 425 $ 425
Buildings 2,285 2,285
Leasehold improvements 459 489
Machinery and equipment:
Owned 3,802 3,770
Capital leases 888 1,143
Transportation equipment:
Owned 255 245
Capital leases - 9
Construction in process - 14
--------- ---------
8,114 8,380
Less accumulated depreciation
and amortization 5,906 5,412
--------- ---------
$ 2,208 $ 2,968
========= =========
Included in accumulated depreciation at November 2, 1996 and October 28, 1995
is $804,000 and $908,000, respectively, related to capital leases.
NOTE 5 - BORROWINGS UNDER FINANCE AGREEMENT
On August 15, 1995, the Company entered into a revolving finance agreement
with a bank which permits borrowings up to certain percentages of eligible
accounts receivable and inventories. The agreement was amended twice during
the fiscal year and twice subsequent to year end. Under the terms of
the amended agreement, advances are available not to exceed $13,000,000 in
aggregate. Advances against accounts receivable cannot exceed $11,000,000,
and advances against inventory are limited to $7,000,000 to $8,000,000, which
is adjusted seasonally. Interest at the bank's prime rate plus 1.75% (10.0%
at November 2, 1996) is accrued on all outstanding amounts. The Company pays
a monthly commitment fee 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 6, 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.
14
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 5 - BORROWINGS UNDER FINANCE AGREEMENT, Continued
Borrowings under the agreement are secured by all accounts receivable,
inventories and machinery and equipment of the Company. In addition, the bank
has a first lien on the Asheboro land and facilities. The bank also has a
subordinated security interest in the facilities in Somerset.
The agreement contains various restrictive covenants, as amended effective
November 2, 1996, 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 November 2, 1996, the Company was in compliance with its amended
covenants.
(In thousands)
Fiscal year
1996 1995 1994
---------- ---------- ----------
Average short-term borrowings $ 11,159 $ 12,633 $ 10,384
Maximum short-term borrowings $ 14,467 $ 14,717 $ 12,927
Weighted average interest rate 9.5% 9.6% 7.9%
Interest rate at year-end 10.0% 9.3% 8.3%
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 6 - LONG TERM OBLIGATIONS
Long-term debt and other non-current obligations consist of the following:
(In thousands)
November 2, October 28,
1996 1995
----------- -----------
Note payable to a bank, due in 69 monthly
installments ranging from $36,000 to $55,000
through July 2002, variable interest at the
bank's prime rate plus 1.75% (10.0% at November
2, 1996), secured by accounts receivable,
inventories and substantially all fixed assets
including the Company's land and building
in Asheboro, NC $ 2,464 $ 2,929
Note payable to a bank, due in monthly
installments of $2,550 through January 2009,
variable interest at the bank's prime rate
plus .75% (9.0% at November 2, 1996), secured
by the Company's land and building in Somerset, PA 226 236
15
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 6 - LONG TERM OBLIGATIONS, Continued
(In thousands)
November 2, October 28,
1996 1995
----------- -----------
Note payable to the Pennsylvania Industrial
Development Authority, due in monthly
installments of $3,089 through February 2010,
fixed interest at 2% per annum, secured by
the Company's land and building in Somerset, PA 431 466
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 223 238
Promissory notes payable to shareholders, due in
varying amounts through 1999, variable interest
based on prime rate 1,162 1,233
Capital lease obligations, due in monthly
installments through 1998, interest ranging from
12% to 12.75% 84 243
------- -------
4,590 5,345
Less amounts payable within one year 1,304 1,088
------- -------
$ 3,286 $ 4,257
======= =======
The effective interest rate on the promissory notes payable to shareholders
averaged 9.5% in 1996 and 9.9% in 1995. Cash paid for interest was $1,507,000
in 1996, $1,574,000 in 1995 and $1,153,000 in 1994.
Principal maturities on long-term obligations are as follows:
Fiscal Year (In thousands)
Ending Amounts
----------- --------------
1997 $ 1,304
1998 867
1999 527
2000 488
2001 490
Thereafter 914
--------
$ 4,590
========
16
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
At November 2, 1996 and October 28, 1995, the carrying amounts and fair values
of the Company's financial instruments are as follows:
(In thousands)
November 2, 1996 October 28, 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Assets:
Accounts receivable $ 10,400 $ 10,400 $ 12,840 $ 12,840
Notes receivable:
Short-term 292 292 627 627
Long-term 243 243 - -
Liabilities:
Borrowings under finance
agreement 11,464 11,464 14,012 14,012
Long-term debt 4,590 4,346 5,345 5,086
Long-term notes receivable include $127,000 which is recorded in other assets
at November 2, 1996. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practicable to estimate that value. The carrying amounts of accounts
receivable, short-term notes receivable and borrowings under finance agreement
approximate fair value because of the short maturity of those instruments.
The fair value of the Company's long-term notes receivable are based on the
expected future cash flows discounted at risk adjusted rates. Valuations for
long-term debt are determined based on expected future payments discounted at
risk adjusted rates.
NOTE 8 - INCOME TAXES (In Thousands)
At the beginning of fiscal 1994, the Company adopted Statement of Financial
Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes. Under
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. 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.
17
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 8 - INCOME TAXES, Continued
The components of the provision for (benefit from) income taxes are as
follows:
November 2, October 28, October 29,
1996 1995 1994
----------- ----------- -----------
Current:
Federal $ (1,240) $ (820) $ 240
State - - 30
-------- -------- --------
(1,240) (820) 270
Deferred:
Federal 620 194 58
State - - 8
-------- -------- --------
620 194 66
-------- -------- --------
$ (620) $ (626) $ 336
======== ======== ========
The Company has state net economic loss carryforwards of $285,000 which expire
from 2000 to 2001. Cash paid for income taxes, net of refunds, was ($806,000)
in 1996, ($141,000) in 1995, and $853,000 in 1994.
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 November 2, 1996, October 28,
1995 and October 29, 1994 as follows:
November 2, October 28, October 29,
1996 1995 1994
----------- ----------- -----------
Computed expected income tax
expense (benefit) $ (1,584) $ (636) $ 275
State income taxes (benefit),
net of federal income tax
benefit (170) (115) 24
Change in the valuation allowance 1,075 115 -
Other, net 59 10 37
-------- -------- --------
$ (620) $ (626) $ 336
======== ======== ========
18
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 8 - INCOME TAXES, Continued
The significant components of deferred income tax expense for the years ended
November 2, 1996, October 28, 1995 and October 29, 1994 are as follows:
November 2, October 28, October 29,
1996 1995 1994
----------- ----------- -----------
Deferred tax expense (exclusive
of the effect of other components
listed below) $ (285) $ 194 $ 66
State deferred tax benefit (170) (115) -
Change in the valuation allowance 1,075 115 -
-------- -------- --------
$ 620 $ 194 $ 66
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at November 2, 1996 and October 28, 1995
are as follows:
November 2, October 28,
1996 1995
----------- -----------
Deferred tax assets:
Current portion:
Provision for doubtful accounts $ 252 $ 193
Reserve for sales discounts 48 89
Self insurance accrual for claims incurred
but not reported at year-end 131 84
Inventories, principally due to additional
costs inventoried for tax purposes 450 347
Accruals for certain personnel costs 113 23
-------- --------
Total current 994 736
-------- --------
Long-term portion:
Accruals for certain personnel costs 16 29
State economic loss carryforward 285 115
Fixed assets 115 63
-------- --------
Total long-term 416 207
-------- --------
Total gross deferred tax assets 1,410 943
Valuation allowance (1,190) (115)
-------- --------
220 828
Deferred tax liabilities:
Current portion:
Prepaid employee benefits (70) (58)
-------- --------
Net deferred tax asset $ 150 $ 770
======== ========
19
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 9 - 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 1996, 1995 and
1994.
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 1996, 1995 and 1994.
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 1996, 1995 and 1994 included the following
components (in thousands):
1996 1995 1994
---- ---- ----
Service cost - benefits earned during the period $ 78 $ 69 $ 65
Interest on projected benefit obligation 56 46 39
Actual return on plan assets (56) (47) (42)
Net amortization and deferral (19) (20) (17)
--- --- ---
Net annual pension expense $ 59 $ 48 $ 45
=== === ===
20
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 9 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS, Continued
The following table sets forth the plan's funded status at November 2, 1996
and October 28, 1995 (in thousands):
November 2, October 28,
1996 1995
----------- -----------
Actuarial present value of benefit obligations:
Vested benefit obligations $ 791 $ 691
======= =======
Accumulated benefit obligations $ 868 $ 747
======= =======
Projected benefit obligation $ (868) $ (747)
Plan assets at fair value 1,017 863
------- -------
Plan assets in excess of projected
benefit obligation 149 116
Unrecognized net loss 123 112
Unrecognized net asset at transition (66) (74)
------- -------
Prepaid pension cost $ 206 $ 154
======= =======
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 1996, 1995 and 1994.
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. No incentive bonuses
were accrued for 1996 or 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.
21
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 9 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS, Continued
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 are substantially the
same as the 1995 Incentive Stock Option Plan described above. A summary of
the activity is as follows:
Year of Number of Options Price
Grant Shares Per Share
------- --------- -------------
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
Granted 5,000 1.75
Forfeited 1993 (12,500) 3.50 - 5.83
--------
Options outstanding at
November 2, 1996 159,450 $ 1.33 - 4.00
========
Options available for future grant - 1987 plan -
========
Options available for future grant - 1995 plan 287,000
========
Outstanding options exercisable at November 2, 1996, October 28, 1995 and
October 29, 1994 were 156,950, 120,450, and 89,550, respectively.
22
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 10 - 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 2001. 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
------------------ ------- ---------
1997 $ 81 $ 623
1998 10 377
1999 - 210
2000 - 80
2001 - 1
---- ------
Total minimum lease payments 91 $ 1,291
======
Amounts representing interest 7
----
Present value of minimum lease payments
(includes current portion of $75) $ 84
====
Rental expense amounted to $630,000 in 1996, $578,000 in 1995 and $606,000 in
1994.
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 11 - 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 November 2, 1996,
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 November 2, 1996, no Class A
preferred stock has been issued.
23
B. B. WALKER COMPANY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 11 - SHAREHOLDERS' EQUITY, Continued
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 12 - 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. In 1996 and 1995, no customer comprised more than 10% of
net sales. The Company derived approximately 12% of its net sales from one
major customer in 1994.
NOTE 13 - RELATED PARTY TRANSACTIONS
The advertising agency and public relations firm employed by the Company is
owned by an officer and director of the Company and his wife, who also manages
the daily operations of the agency. The agency renders technical and creative
services to the Company in the areas of design, layout, photography and other
services of its advertising programs. The agency also places Company
advertisements and ad copy in trade publications, footwear magazines and other
related media sources and coordinates public relations events and press
releases for the Company. In 1996 and 1995, the Company paid the agency
$456,000 and $495,000, respectively.
NOTE 14 - 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.
24
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 November 2, 1996 and October 28, 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended November 2, 1996, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and has violated certain bank debt covenants that raise substantial
doubt about its ability to continue as a going concern. Management's plans,
including operating adjustments recorded in fiscal 1996, to address these
issues are described in Note 1. The accompanying financial statements do not
include other adjustments related to the carrying value of reported assets or
liabilities that might be necessary should the Company be unable to continue
as a going concern.
PRICE WATERHOUSE LLP
Winston-Salem, North Carolina
December 2, 1996
25
B.B. WALKER COMPANY AND SUBSIDIARY
SELECTED FINANCIAL DATA
(In thousands, except for
items denoted by (1) below)
1996 1995 1994 1993 1992
RESULTS OF OPERATIONS: ------ ------ ------ ------ ------
Net sales $ 37,506 $ 43,453 $ 51,148 $ 55,777 $ 47,817
======= ======= ======= ======= =======
Income (loss) from continuing operations
before income taxes, minority interests
and extraordinary item $ (4,659) $ (1,868) $ 812 $ 3,055 $ 1,783
Provision for (benefit from) income taxes (620) (626) 336 1,160 579
Minority interests in continuing operations (2) (2) (2) (2) (2)
------- ------- ------- ------- -------
Income (loss) before extraordinary item (4,041) (1,244) 474 1,893 1,202
Extraordinary item-realization of tax
operating loss carryforwards - - - - 477
------- ------- ------- ------- -------
Net income (loss) (4,041) $ (1,244) $ 474 $ 1,893 $ 1,679
======= ======= ======= ======= =======
FINANCIAL CONDITION:
Current assets $ 24,953 $ 30,898 $ 30,264 $ 27,672 $ 25,099
Current liabilities 19,534 21,533 20,510 17,357 16,253
Working capital 5,419 9,365 9,754 10,315 8,846
Current ratio (1) 1.28 to 1 1.43 to 1 1.48 to 1 1.59 to 1 1.54 to 1
Total assets 27,375 34,377 34,016 30,028 27,234
Long-term obligations 3,286 4,257 3,692 3,189 3,290
Minority interests in consolidated subsidiary 33 34 34 35 42
Total liabilities 22,853 25,824 24,236 20,581 19,585
Shareholders' equity 4,522 8,553 9,780 9,447 7,649
PER SHARE INFORMATION (1) (2):
Shareholders' equity (book value) $ 2.57 $ 4.91 $ 5.56 $ 5.47 $ 4.89
======= ======= ======= ======= =======
Per share of common stock and common
stock equivalent:
Income (loss) from continuing
operations before extraordinary item $ (2.34) $ (.72) $ .26 $ 1.14 $ .75
Extraordinary item-realization of tax
operating loss carryforwards - - - - .30
------- ------- ------- ------- -------
Net income (loss) (2.34) $ (.72) $ .26 $ 1.14 $ 1.05
======= ======= ======= ======= =======
Per share of common stock and common
stock equivalent-assuming full dilution:
Income (loss) from continuing
operations before extraordinary item $ (2.34) $ (.72) $ .26 $ 1.12 $ .73
Extraordinary item-realization of tax
operating loss carryforwards - - - - .29
------- ------- ------- ------- -------
Net income (loss) $ (2.34) $ (.72) $ .26 $ 1.12 $ 1.02
======= ======= ======= ======= =======
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 $ 2,208 $ 2,968 $ 3,593 $ 2,148 $ 1,985
Depreciation and amortization 637 667 610 544 366
Capital additions 21 43 2,055 716 670
Space occupied (square feet) 358 358 363 325 329
Average number of common shares outstanding (2) 1,727 1,731 1,737 1,625 1,548
Number of shareholders (1) 1,169 1,229 1,142 1,185 1,370
Number of employees (1) 521 637 658 642 599
(2) Information adjusted for three-for-two stock split paid on March 24, 1994.
26
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 November 2, 1996, October 28, 1995 and October 29, 1994:
November 2, October 28, October 29,
1996 1995 1994
----------- ----------- -----------
Net sales 100.0% 100.0% 100.0%
Cost of products sold 79.2% 75.4% 73.3%
------- ------- -------
Gross margin 20.8% 24.6% 26.7%
Selling and administrative expenses 27.7% 23.9% 21.6%
Depreciation and amortization 1.7% 1.5% 1.2%
Interest expense 4.0% 3.7% 2.2%
Costs of uncompleted securities offering - - .3%
Interest and other income (.1%) (.2%) (.2%)
------- ------- -------
Income (loss) before income taxes
and minority interest (12.5%) (4.3%) 1.6%
Provision for (benefit from)
income taxes (1.7%) (1.4%) .7%
Minority interest - - -
------- ------- -------
Net income (loss) (10.8%) (2.9%) .9%
======= ======= =======
FISCAL 1996 COMPARED TO FISCAL 1995
Material Changes in Operations
- ------------------------------
For the third consecutive year, the Company has reported lower sales and lower
profits or increased losses. Weak consumer spending at the retail level has
impacted the operations of the Company's customers and their ability to turn
their inventories at profitable rates. With reduced orders for new footwear
being placed each year, the Company has not been able to operate its plants at
efficient levels and has had to offer discounting and other promotional
programs to customers to generate sales volume and maintain market share.
Each of these factors has adversely impacted the Company's gross margins. The
Company has reduced operating expenses at all levels within the Company in an
effort to match the level of expenses with the current level of operations.
However, in the opinion of management, more significant steps were required in
order to return the Company to profitability.
27
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Prior to year-end, the Company repositioned its product offerings to direct
the Company's limited resources towards those styles that show the most
promise. Management reviewed the existing product lines and eliminated styles
that would not generate acceptable returns. Most of the styles eliminated
were part of the work/outdoor line. The Company will continue to offer styles
within all of its existing branded lines. With fewer styles in the Company's
product lines, less investment should be required in finished goods and raw
material inventories. In addition, the rate of turns in existing inventories
should improve.
As part of this new direction for the Company, the separate sales forces which
previously served the Work/Outdoor Division and the Western Division were
merged into a single sales force under the supervision of one national sales
manager. Several new sales territories were established to concentrate
efforts in larger metropolitan areas. With additional training, the new sales
force will market both western and work/outdoor footwear to customers in their
established territories, thereby eliminating overlap that existed with
separate sales forces.
The Company anticipates making other operational changes to support the new
direction of the Company. The efficient use of manufacturing capacity is one
area that holds strong potential for improving the Company's operations.
Management is examining its options related to current manufacturing
operations to maximize use of manufacturing capacity. In addition, reviews of
corporate and administrative operations have identified areas for cost
reductions, primarily in personnel and benefit costs.
For the fiscal year ended November 2, 1996, the Company recorded certain
accruals to recognize the impact of these changes on the Company's operations.
The first significant accrual related to recognizing the impairment on
inventories for the elimination of styles from certain lines. The Company
wrote down inventories by $511,000 to restate inventories at lower of cost or
market. The other significant accrual related to personnel and benefit costs
to be incurred as changes to certain operations are implemented to support the
consolidation and reduction of the Company's product lines. These personnel
and benefit costs amounted to approximately $571,000, with $359,000 charged to
cost of products sold and $212,000 charged to selling and administrative
expenses.
The Company anticipates completing plans for increasing efficiency during the
first half of the new fiscal year. However, many of the assumptions
underlying the changes are contingent on the Company achieving anticipated
sales levels. If market conditions do not improve for the Company and the
anticipated sales levels are not achieved, further changes and reductions will
be required. Among these changes may be discontinuance of certain operations
or elimination of certain product lines.
28
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Net Sales
- ---------
The Company recorded net sales of $37,506,000 in 1996 compared to $43,453,000
in 1995, a reduction of 13.7%. Branded footwear sales and private label
footwear sales comprised 65.9% and 22.0% of net sales in 1996, respectively.
For 1995, branded footwear accounted for 73.8% and private label footwear
accounted for 19.1% of net sales. The remaining 12.1% and 7.1% of net sales
in 1996 and 1995, respectively, were primarily composed of sales from the
Company's retail outlets and sales to institutional customers.
Net sales for the Western Boot Division fell $2,040,000, or 11.5%, from 1995's
net sales. Weak consumer spending at the retail level depressed sales of this
division. Although the Company develops products that appeal to the
traditional western boot wearer, western boot sales tend to be cyclical.
Sales in 1996 reflect the slower turns at the retail level. The Company has
aggressively marketed its footwear to counter stronger competition for market
share which has impacted the pricing of its product. Branded footwear sales
in the Western Boot Division for 1996 were approximately $3,093,000, or 18.0%,
lower when compared to 1995 results. For the year, pairs shipped were down
13.7%, and the average price per pair fell 4.1%. Private label sales were up
$1,053,000, or 204.0%, for the year as the Company placed more emphasis on
serving this sector of the market. However, since this division comprises
less than 5% of the Company's net sales, its impact on results has been
minimal. Pairs shipped in this division were up 164.4% from 1995 and the
average price per pair rose 13.4%.
The Work/Outdoor Division reflected a $3,617,000, or 16.0%, decrease in net
sales from the prior year. Sales in this division have been impacted by soft
retail sales. Demand for this style of footwear was stronger in 1995 than in
1996. To maintain market share and generate sales, competitive pricing and
retail programs were introduced during the year. However, orders from
customers did not keep pace with the prior year. Branded footwear sales in
this division were off $3,111,000, or 20.1%, from 1995 levels. Of this
decrease, 13.0% was the result of lower domestic sales and 7.1% from lower
export sales. Export shipments have lagged as customers have been slow to
turn their inventories and place new orders. The Company continues to serve
the same primary base of export customers that it served in 1995. Private
label sales in this division decreased $506,000, or 7.0%, from the prior year.
As with customers of branded footwear, these retailers have also been impacted
by the soft retail environment for this type of footwear. Private label
results reflect the activity of several large accounts. Pairs shipped by this
division in 1996 were down 15.1% and the average price per pair fell 1.7%.
Other sales in the Work/Outdoor Division came from retail sales and sales to
institutional customers. Sales to these customers were comparable to the
prior year and do not constitute a significant portion of the Company's
operations.
29
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Gross Margin
- ------------
The Company's gross margin was $7,804,000 in 1996 and $10,672,000 in 1995. As
a percentage of sales, the gross margin for 1996 fell to 20.8% from 1995's
gross margin of 24.6%. Several factors impacted gross margins during the
year. As more fully discussed in Note 1 to the financial statements and in
the Liquidity and Capital Resources section of this Management's Discussion
and Analysis, the Company made certain adjustments to its product lines which
resulted in inventory writedowns and other expenses which lowered its gross
margins. These adjustments accounted for approximately 2% of the decrease
from the prior year. Before making these adjustments, the Company's gross
margins were down approximately 1.5% from 1995. The majority of this decrease
can be attributed to discounting and other promotional programs implemented
during the year in both branded divisions. Significant competition has led to
aggressive pricing and dating terms to induce orders.
Selling and Administrative Expenses
- -----------------------------------
Selling and administrative expenses were $10,377,000 for 1996 as compared to
$10,359,000 for 1995, an increase of $18,000, or .2%. The Company has
evaluated its cost structure in relation to the level of current operations
and is working to reduce costs. Salary and benefits were down approximately
$455,000 for the year as compared to 1995. Several vacant personnel positions
were intentionally not filled. In addition, better claims experience and a
new third party administrator contract have contributed to a decrease in
health care costs. This decrease was partially offset by $212,000 of accruals
for personnel and benefit costs to be incurred as changes to certain
operations are implemented. The Company monitored travel and showroom
expenses carefully to identify cost reductions. For the year, travel and
showroom expenses were down $249,000. Finally, shipping costs were down
$209,000 from 1995 levels. The prior year had higher than normal freight
expenses because of reduced freight promotions offered to customers. These
cost reductions were offset by increases in other items. In 1996, bad debt
expense rose $481,000 from 1995 expense. This increase is a result of the
weak consumer spending at the retail level affecting the Company's customers,
many of which are small chains and independent retailers who were not
financially strong enough to withstand the slowdown. Professional fees rose
$219,000 over the prior year, primarily due to higher bank fees from the new
financing agreement signed in late 1995. In addition, advertising and sample
expense increased $230,000 over 1995 expenses. The Company devoted more
resources towards building brand awareness than it did in 1995 as a means of
countering the strong competition in the marketplace. Finally, the Company
incurred losses from disposals of fixed assets of $138,000 in 1996 versus
$1,000 in 1995.
30
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Interest Expense
- ----------------
Interest expense incurred in 1996 was $1,492,000, or $102,000 less than
interest expense of $1,594,000 for 1995. Lower interest expense in 1996 is a
result of a lower average outstanding balance and a lower average interest
rate on the revolving finance agreement. The average outstanding balance on
the revolving finance agreement was approximately $1,500,000 less in 1996 than
in 1995. In addition, the weighted average interest rate for 1996 was 9.5%
compared to 9.6% for 1995. This decrease was partially offset by an increase
in interest paid on long-term debt. During 1995, the Company completed
financing of its facilities in Somerset, PA as well as refinancing its
facilities in Asheboro, NC. The Company incurred a full year of interest
charges on this higher debt in 1996 versus a partial year in 1995.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization decreased $30,000 to $637,000 in 1996 from
$667,000 in 1995. The Company has made capital expenditures of $21,000 and
$43,000 in 1996 and 1995, respectively. Depreciation on these minimal
expenditures has not been large enough to offset depreciation charges for
assets that have become fully amortized resulting in lower depreciation
expense.
Provision for Income Taxes
- --------------------------
Net losses before income taxes were $4,659,000 in 1996 and $1,868,000 in 1995.
Accordingly, the Company recorded a net benefit from income taxes of $620,000
and $626,000 in 1996 and 1995, respectively. The primary difference between
1996's effective tax rate of 13.3% and 1995's effective tax rate of 33.5%
derives from an increase in the valuation allowance recorded to establish a
reserve against the net deferred income tax asset. Under Financial Accounting
Standard No. 109, whose guidelines the Company follows in accounting for
income taxes, deferred income tax assets must be recorded at a value that
reflects their net realizable value determined to be the amount that "more
likely than not" will be recovered in future periods. Based on an analysis at
November 2, 1996, an increase of $1,075,000 was required in the reserve with a
corresponding charge to income tax expense. The increase was necessary to
reflect the amount of the asset that could be recovered through carryback of
deductible losses against taxable income reported during the carryback period.
Net Income
- ----------
For the year ended November 2, 1996, the Company reported a net loss of
$4,041,000, or 10.8% of net sales. For the year ended October 28, 1995, the
Company reported a net loss of $1,244,000, or 2.9% of net sales. The change
of $2,797,000 can be attributed to lower sales volume in 1996 compared to 1995
and adjustments made to reposition the Company's product lines.
31
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
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. 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.
32
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Gross Margin
- ------------
The Company's gross margin 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 vacant personnel
positions were not 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
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 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 were 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.
33
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
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%.
Interest expense from fixed rate debt will increase in 1996 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.
34
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
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.
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 revolving finance agreement provides
flexibility to the Company 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. As of year-end, the Company continued to rely on the revolving
finance agreement 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 (prime plus
1.75%, or 10%, at November 2, 1996).
For the years ended November 2, 1996 and October 28, 1995, the Company
reported net losses of $4.041 million and $1.244 million, respectively. These
losses have resulted in the depletion of retained earnings such that retained
earnings are $111,000 at November 2, 1996. The Company is highly leveraged
and the recent operating results have had a material adverse impact on the
Company's liquidity and ability to meet the covenants of its outstanding debt,
primarily the revolving finance agreement. As discussed below, the finance
agreement with the bank was amended twice during fiscal 1996 and again
subsequent to November 2, 1996 in reaction to the changing financial
conditions of the Company. The Company has currently agreed upon a fourth
amendment with its bank that addresses the Company's projections and plans for
fiscal 1997. The Company continues to fund its daily operations with advances
under the agreement and management anticipates that the finance agreement
should continue to provide the necessary working capital. However, the
assumptions underlying management's plans are contingent on the Company
achieving anticipated sales levels. If market conditions do not improve for
the Company and the anticipated sales levels are not achieved, further changes
35
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
and reductions will be required. The continued viability of the Company in
its present form is dependent upon, among other factors, the Company's ability
to generate sufficient cash from operations to meet ongoing obligations over a
sustained period.
Under the Company's financing agreement with the bank, the amount available to
be drawn is determined by a formula based on certain percentages of eligible
accounts receivable and inventories. Because of violations of certain
restrictive financial covenants made as part of the agreement, the agreement
was amended two times during fiscal 1996. Subsequent to year end, a third
amendment to the agreement was signed. As discussed above, the Company is
currently in agreement with the bank on a fourth amendment that incorporates
the significant changes to operations implemented by management and the
Company's 1997 financial projections. Although the terms of the fourth
amendment will significantly alter the availability of funds under the finance
agreement, the terms of the amendment will reflect the changing needs of the
Company and correlate with the Company's projections. Among other changes,
the fourth amendment will amend certain restrictive financial covenants under
the revolving finance agreement effective November 2, 1996 and thereafter.
The credit line available under the agreement will be reduced
systematically over a six month period from $13,000,000 to $7,000,000 and
advance rates against eligible accounts receivable and inventories will be
adjusted downward at predetermined rates during the same time frame. In
addition, the sublimit for inventory will be lowered to $4,000,000. The first
three amendments to the agreement also had a significant impact on the
structure of the finance agreement. The first amendment, signed April 15,
1996, amended certain restrictive covenants under the revolving finance
agreement for the period ended October 28, 1995 and thereafter. Under the
terms of the first three amendments, the line of credit based on eligible
accounts receivable and inventories was reduced from $20,000,000 to
$13,000,000. The seasonal adjustment for inventories was amended from a range
of $6,500,000 to $9,000,000 to a range of $7,000,000 to $8,000,000. The
interest rate under the revolving finance agreement was raised from prime plus
.5% to prime plus 1.75%. The second amendment, which became effective on
October 18, 1996, included a forbearance agreement between the bank and the
Company which expired as of November 2, 1996. Under the terms of the
forbearance agreement, the bank agreed not to take any action against the
Company for violation of its financial covenants through November 2, 1996.
At November 2, 1996, the Company had outstanding advances of $11,464,000 and
an additional $285,000 available under the agreement.
In addition to the revolving credit facility, the new financing 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 has 69 monthly installments of
principal and interest ranging from $36,000 to $55,000 remaining. The term
loan bears interest at the bank's prime rate plus 1.75% (10.0% at November 2,
1996).
36
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
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 and a subordinated lien on the Somerset facilities.
As a condition to providing the financing, the bank requires that the Company
meet various restrictive covenants. These covenants include, 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. The Company paid for the acquisition with financing from three
sources. The Company completed two sources of long-term financing on March 7,
1995. 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 (9.0% at November 2, 1996) 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 November 2, 1996 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 capital expenditures in 1996 has been comparable to 1995, but
significantly lower than in the prior two years. Capital expenditures for
1996 were $21,000 and in 1995 were $43,000. Capital expenditures in the prior
two years combined were $2,771,000. The Company made significant upgrades to
its equipment and facilities in 1993 and 1994. Because of cash flow
considerations and restrictions under the finance agreement with a bank
discussed above, the Company has only been making capital expenditures to
maintain current levels of operations during the past two years. 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 1996 was a net inflow of $3,309,000
compared to a net cash outflow of $1,918,000 in 1995. The improvement can be
attributed to better management of inventories.
37
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains some forward-looking statements about the
Company's financial condition and results of operations, which are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's judgment only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements
to reflect events and circumstances that arise after the date hereof.
Factors that might cause actual results to differ materially from these
forward-looking statements include (1) the effects of general economic
conditions, (2) the impact of competitive products and pricing in the
footwear industry, (3) failure to achieve anticipated sales results,
(4) management's ability to accurately predict the effect of cost reductions,
and (5) management's ability to accurately predict the adequacy of the Company's
financing arrangement to meet its working capital and capital expenditure
requirements.
NEW ACCOUNTING STANDARDS
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. 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.
38
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 1,169 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 24.18% of the total shares
issued and outstanding. At the last Annual Meeting of the Shareholders held
on March 18, 1996, 83.65% of the shares outstanding were represented in person
or by proxy at the meeting.
The following are the Bid and Ask quotations for the last two fiscal years:
Bid Prices Ask Prices
High Low High Low
-------------- --------------
1996:
First Quarter $ 1 3/4 $ 1 1/2 $ 2 1/2 $ 2
Second Quarter 1 1/2 1 1/2 2 2
Third Quarter 1 1/2 1/2 2 1 1/4
Fourth Quarter 1 1/4 1/2 2 1 1/4
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
These Over-the-Counter market quotations reflect interdealer prices, without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
39
B.B. WALKER COMPANY
OFFICERS
- --------
KENT T. ANDERSON
Chairman and Chief Executive Officer
FRENCH P. HUMPHRIES WILLIAM C. MASSIE
Executive Vice President Executive Vice President
DOROTHY W. CRAVEN REBECCA S. RICH
Secretary Assistant Secretary
DIRECTORS
- ---------
KENT T. ANDERSON EDNA A. WALKER
Chairman and Chief Executive Officer President
B.B. Walker Foundation
ROBERT L. DONNELL, JR. MICHAEL C. MILLER
Retired President
First National Bank and Trust Co.
JAMES P. McDERMOTT GEORGE M. BALL
Retired 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 17, 1997. 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.
Inside Back Cover