UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FIRST QUARTER ENDED FEBRUARY 1, 1997
Commission File Number 0-934
B.B. WALKER COMPANY
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(Exact name of registrant as specified in its charter)
North Carolina 56-0581797
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
414 East Dixie Drive, Asheboro, NC 27203
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 625-1380
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
On March 14, 1997, 1,726,534 shares of the Registrant's voting common stock
with a par value of $1.00 per share were outstanding.
Cover
B.B. WALKER COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
February 1, November 2,
Assets 1997 1996
------ ----------- -----------
Cash $ 1 $ 1
Accounts receivable, less allowance
for doubtful accounts of $873 in
1997 and $742 in 1996 8,060 10,808
Inventories 10,800 12,511
Prepaid expenses 331 441
Income tax recovery receivable 1,102 1,042
Deferred income tax benefit 180 150
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Total current assets 20,474 24,953
Property, plant and equipment, net of
accumulated depreciation and amortization
of $5,997 in 1997 and $5,906 in 1996 2,083 2,208
Other assets 199 214
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$ 22,756 $ 27,375
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1
(Continued)
B.B. WALKER COMPANY
CONSOLIDATED BALANCE SHEETS, Continued
(In thousands)
(Unaudited)
February 1, November 2,
Liabilities and Shareholders' Equity 1997 1996
------------------------------------ ----------- -----------
Borrowings under finance agreement $ 8,378 $ 11,464
Current portion of long-term obligations 1,239 1,304
Accounts payable, trade 4,028 4,984
Accrued salaries, wages and bonuses 753 1,102
Other accounts payable and accrued liabilities 773 680
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Total current liabilities 15,171 19,534
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Long-term obligations 3,163 3,286
Minority interests in consolidated subsidiary 33 33
Shareholders' equity:
7% cumulative preferred stock, $100 par value,
1,150 shares authorized, 828 shares issued
and outstanding in 1997 and 1996 83 83
Common stock, $1 par value, 6,000,000 shares
authorized, 1,726,534 shares issued and
outstanding in 1997 and 1996 1,727 1,727
Capital in excess of par value 2,724 2,724
Retained earnings (26) 111
Shareholders' loans (119) (123)
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Total shareholders' equity 4,389 4,522
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$ 22,756 $ 27,375
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
2
B.B. WALKER COMPANY
CONSOLIDATED STATEMENTS OF LOSS
(In thousands, except per share data)
(Unaudited)
First Quarter
Ended
------------------------
February 1, February 3,
1997 1996
----------- -----------
Net sales $ 8,289 $ 10,020
Interest and other income 32 6
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Total revenues 8,321 10,026
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Cost of products sold 6,181 7,578
Selling and administrative expenses 1,880 2,513
Depreciation and amortization 125 162
Interest expense 360 440
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Total costs and expenses 8,546 10,693
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Loss before income taxes and
minority interest (225) (667)
Benefit from income taxes (90) (219)
Minority interest 1 1
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Net loss (136) (449)
Retained earnings, beginning of quarter 111 4,158
Dividends on common stock - -
Dividends on preferred stock (1) (1)
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Retained earnings, end of quarter $ (26) $ 3,708
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Net loss per share:
Primary $ (.08) $ (.26)
======= =======
Fully diluted $ (.08) $ (.26)
======= =======
Weighted average common shares outstanding:
Primary 1,727 1,728
======= =======
Fully diluted 1,727 1,728
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The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
3
B.B. WALKER COMPANY
CONSOLIDATED CASH FLOWS STATEMENTS
(In thousands)
(Unaudited)
First Quarter
Ended
------------------------
February 1, February 3,
1997 1996
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Cash Flows From Operating Activities:
Net loss $ (136) $ (449)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 125 162
Gain on sale of fixed assets (17) -
Deferred income taxes (30) -
(Increase) decrease in:
Accounts receivable, net 2,748 3,244
Inventories 1,711 1,188
Prepaid expenses 110 (68)
Other assets 15 25
Increase (decrease) in:
Accounts payable, trade (956) (800)
Accrued salaries, wages and bonuses (349) (288)
Other accounts payable and accrued liabilities 93 451
Income taxes payable (60) (219)
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Net cash provided by operating activities 3,254 3,246
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Cash Flows From Investing Activities:
Capital expenditures - (5)
Proceeds from disposal of property,
plant and equipment 17 -
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Net cash provided by (used for)
investing activities 17 (5)
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Cash Flows From Financing Activities:
Net borrowing under finance agreement (3,086) (3,000)
Proceeds from issuance of long-term obligations 6 14
Payment on long-term obligations (194) (258)
Loans to shareholders, net of repayments 4 4
Dividends paid on 7% cumulative preferred stock (1) (1)
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Net cash used for financing activities (3,271) (3,241)
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Net change in cash - -
Cash at beginning of year 1 1
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Cash at end of quarter $ 1 $ 1
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
4
B.B. WALKER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
- ------
A summary of the Company's significant accounting policies is presented on
page 10 of its 1996 Annual Report to Shareholders. Users of financial
information presented for interim periods are encouraged to refer to the
footnotes contained in the Annual Report to Shareholders when reviewing
interim financial results.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary for a fair presentation
of the financial results of B.B. Walker Company and Subsidiary (the "Company")
for the interim periods included. All such adjustments are of a normal
recurring nature. The results of operations for the interim periods shown in
this report are not necessarily indicative of the results to be expected for
the fiscal year.
The Company's operations are reported on a fifty-two, fifty-three week fiscal
year that ends on the Saturday closest to October 31. The fiscal year that
ends on November 1, 1997 will include fifty-two weeks of operations. The
fiscal year that ended on November 2, 1996 included fifty-three weeks of
operations. For fiscal 1996, the Company elected to include the one extra
week in the first accounting period of the fiscal year. Therefore, the
results for the first quarter ended February 3, 1996 include fourteen weeks of
operations for the Company compared to thirteen weeks for the first quarter
ended February 1, 1997.
Note 2
- ------
Earnings per common share is computed by deducting preferred dividends from
net income to determine net income attributable to common shareholders. This
amount is divided by the weighted average number of common shares outstanding
during the quarter plus the common stock equivalents arising from stock
options. For primary earnings per share, the common stock equivalents are
calculated using the average of the high and low asked price for the period.
For fully diluted earnings per share, the common stock equivalents are
calculated using the asked price at the end of the period if greater than the
average asked price for the period.
5
B.B. WALKER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Note 3
- ------
Long-term obligations consist of the following amounts (in thousands):
(Unaudited)
February 1, November 2,
1997 1996
----------- -----------
Notes payable to banks $ 2,616 $ 2,690
Notes payable to governmental authorities 643 654
Promissory notes payable to shareholders 1,088 1,162
Capital lease obligations 55 84
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4,402 4,590
Less portion payable within one year 1,239 1,304
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$ 3,163 $ 3,286
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Note 4
- ------
Inventories are composed of the following amounts (in thousands):
(Unaudited)
February 1, November 2,
1997 1996
----------- -----------
Finished goods $ 6,588 $ 6,943
Work in process 624 692
Raw materials and supplies 3,588 4,876
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$ 10,800 $ 12,511
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6
B.B. WALKER COMPANY
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
first quarter ended February 1, 1997 and February 3, 1996:
Three
Months Ended
-------------------------
February 3, January 28,
1996 1995
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Net sales 100.0% 100.0%
Cost of products sold 74.6% 75.6%
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Gross margin 25.4% 24.4%
Selling and administrative expenses 22.7% 25.1%
Depreciation and amortization 1.5% 1.6%
Interest expense 4.3% 4.4%
Interest and other income (.4%) -
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Loss before income taxes
and minority interest (2.7%) (6.7%)
Benefit from income taxes (1.1%) (2.2%)
Minority interest - -
------- -------
Net loss (1.6%) (4.5%)
======= =======
Material Changes in Operations
- ------------------------------
During the first quarter of fiscal 1997, the Company implemented many of the
changes put in place at the end of the fourth quarter of the prior year.
Among these changes was the completion of the consolidation of the separate
western and work/outdoor sales forces into a single unit that markets all of
the Company's branded product lines. Management continued to review the
product lines and evaluate individual styles to determine their potential
contribution. Many styles were eliminated while some new styles were
developed to provide a well-focused line of western and work footwear for the
sales force to present to customers. The resulting branded product lines are
leaner and should require less of an investment in both finished goods and raw
materials.
7
B.B. WALKER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION, Continued
Material Changes in Operations, Continued
- -----------------------------------------
The Company has also made other less significant operational changes to
support the repositioning of the product lines. Continued internal focus on
manufacturing, marketing and administrative operations remains a priority for
management. Careful control of these expenses is imperative for returning the
Company to profitability. 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.
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
profitability and cash flow projections. If market conditions do not improve
for the Company and the anticipated sales levels are not achieved, further
material changes and reductions will be required. 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.
Net Sales
- ---------
Net sales for the first quarter of 1997 were $8,289,000 which was 17.3% lower
than net sales of $10,020,000 in the first quarter of 1996. Sales in the
first quarter of 1997 were lower than the prior year as the Company
implemented several operational changes related to the repositioning of its
product lines. A significant change involved the merger of the separate sales
forces that previously marketed work/outdoor boots and western boots,
respectively, into a single sales force. The merged sales force is marketing
both work/outdoor boots and western boots to customers within their territory.
During the first quarter, territorial boundaries for the merged sales force
were established and the salesmen received extensive training on marketing
both lines of footwear. As a result of this transition, salesmen had to
develop relationships with customers that may have been previously served by
another Company salesman. Extensive resources and time were devoted to
establishing the salesmen in their new territories in order to minimize the
disruption to the Company's business. However, orders for footwear were
impacted as the plan was put in place.
Sales of the Company's branded footwear were down 26.7% in 1997's first
quarter from 1996's first quarter. Domestic sales of branded footwear fell
24.4% from the prior year. Orders in this division come primarily from the
Company's sales force, therefore sales were impacted by changes discussed
previously. Pairs shipped for domestic sales were down 34.8% in the first
quarter while price per pair was up 14.9%. The improvement in price per pair
can be attributed to product mix. Export sales dropped 46.0% from the first
quarter results of a year ago. Pairs exported were down 53.7% from 1996's
first quarter shipments as orders from foreign customers slowed while the
price per pair was up slightly.
8
B.B. WALKER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION, Continued
Net Sales, Continued
- --------------------
Private label sales in the first quarter were down 3.3% from the prior year
which is primarily due to the timing of orders. The lower sales were a
combination of a 8.1% decrease in pairs shipped and a 4.8% increase in the
price per pair.
Other sales, which consists primarily of sales from the Company's retail
outlets and sales to institutional customers, increased 12.4% in 1997 over
1996. Retail sales in the Company's three outlets were up 3.7% from the prior
year. Sales to institutional customers increased 27.0% from 1996 levels as
the Company took on more of this business to provide production volume for its
plants.
Gross Margin
- ------------
The Company's gross margin as a percentage of sales increased to 25.4% for the
first three months of 1997 from 24.4% for the first three months of 1996. The
increase can be attributed to higher margins generated by a better product mix
and cost reduction efforts. The Company's gross margin percentage continues
to be impacted by the necessity to compete with discounting programs and
aggressive dating terms in order to induce orders and increase market share.
Selling and Administrative Expenses
- -----------------------------------
Selling and administrative expenses were $1,880,000 for the first quarter of
1997 as compared to $2,513,000 for the first quarter of 1996, a decrease of
25.2%. Expenses in most areas were lower in 1997 than in 1996 as the Company
realizes the benefits of its aggressive cost reduction efforts. In order to
return the Company to profitability, management has implemented many
operational changes in order to improve efficiency and reduce costs. Salary
and benefits were down approximately $433,000 from 1996. To support a lower
sales volume, management has lowered the selling and administrative headcount,
primarily through the reduction and merger of the Company's sales force and
normal attrition. As employees leave, their work is being redistributed and
the positions are not being replaced. Travel and showroom expenses are down
$50,000 from 1996 levels as the Company is more selective about where expenses
for travel are used and a smaller sales force. Advertising expenses have been
lowered by $76,000 from the first quarter of 1996. Management has adjusted
its advertising budget as part of its overall cost reduction program.
9
B.B. WALKER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION, Continued
Interest Expense
- ----------------
Interest expense for the three months ended February 1, 1997 was $360,000, or
$80,000 lower than interest expense of $440,000 for the three months ended
February 3, 1996. The decrease for the three month period can be attributed
to the lower average balance on outstanding debt and was partially offset by
higher average interest rates than in the comparable period of a year ago.
Average outstanding advances under the revolving finance agreement were
approximately $2,800,000 lower in the first quarter of 1997 than in 1996.
Interest rates for this agreement were 10% in 1997 and ranged from 9.25% to 9%
in 1996. Other long-term debt carried lower balances in 1997 when compared to
1996 as the Company continues to amortize the debt according to each issue's
respective terms. No new material debt was added during the past year.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization decreased in amount by $37,000 to $125,000 in
1997 from $162,000 in 1996 for the first three months of the fiscal year. The
Company made minimal capital expenditures during 1996 and the first quarter of
1997 resulting in a small change in depreciation expense. Depreciation on
these capital expenditures has not offset depreciation charges for fixed
assets that have become fully amortized.
Benefit From Income Taxes
- -------------------------
For the first quarter ended February 1, 1997, the Company recorded a benefit
from income taxes of $90,000. For the comparable period in 1996, the Company
had a benefit from income taxes of $219,000. Income tax rates applied to the
current year loss before income taxes were consistent between 1997 and 1996.
Adjustments to the net deferred income tax asset did impact 1997's income tax
benefit and effective income tax rate.
Net Income
- ----------
The Company reported a net loss of $136,000 in the first quarter of 1997. In
the first quarter of 1996, the Company incurred a net loss of $449,000. The
improvement of $313,000 can be attributed to lower operating costs and
interest expense for the Company. These lower costs helped offset a decrease
of $1,731,000 in net sales.
10
B.B. WALKER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION, Continued
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. The Company continues 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
February 1, 1997).
By agreement of the Company's bank, certain restrictive covenants under the
revolving finance agreement have been amended for the period ended November 2,
1996 and thereafter. The Company and its bank entered into a fourth amendment
to its finance agreement on March 14, 1997. Under the terms of the amendment,
which addresses the Company's projections and plans for fiscal 1997, the
amount committed under the revolving credit agreement is reduced from
$13,000,000 to $8,000,000 as of the date of the agreement. The inventory
sublimit will be reduced to $4,000,000 and the advance rate against eligible
accounts receivable will be dropped to 80% from 85%.
As a condition to providing the financing, the bank requires that the Company
meet various restrictive covenants. These covenants include, among other
things, maintenance of certain financial ratios, limits on capital
expenditures, minimum net worth and net income requirements and restrictions
on the amount of borrowings from stockholders.
All 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 and a subordinated lien
on the Somerset facilities.
The Company had approximately $405,000 of unused availability under the
agreement at February 1, 1997. The Company believes that its revolving
finance agreement, as amended, will provide the necessary liquidity to fund
its current level of operations.
The Company has not made any outlays for capital equipment during the first
quarter of 1997. Capital expenditures for the first three months of 1996 were
$5,000. The Company is making capital expenditures only to maintain current
levels of operations because of capital constraints.
11
B.B. WALKER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION, Continued
FINANCIAL CONDITION
- -------------------
Accounts Receivable
- -------------------
Accounts receivable were $8,060,000 at February 1, 1997 compared to
$10,808,000 at November 2, 1996, a decrease of $2,748,000. Trade receivables
are historically at their highest point at the end of the fourth quarter
because of the heavy sales volume related to Christmas buying by retailers.
Second, certain dating programs offered by the Company ended in the first
quarter of 1997, resulting in collection of a significant amount of
outstanding receivables.
Inventories
- -----------
Inventories were $10,800,000 at February 1, 1997, an decrease of $1,711,000
from the inventories held at November 2, 1996 of $12,511,000. Of the
decrease, approximately $355,000 is finished goods, $68,000 is work in
process, and $1,288,000 is raw materials. The Company has experienced a
decline in the demand for its footwear during the past two years. In response
to this decrease, management repositioned its product offerings at the end of
the fourth quarter of fiscal 1996. Accordingly, the investment in inventory
has been decreased as fewer styles are now being carried in finished goods.
Also, with fewer styles in the product lines, raw material inventories include
fewer varieties of components of footwear.
Borrowings Under Finance Agreement
- ----------------------------------
The balance outstanding under the finance agreement was $8,378,000 at February
1, 1997 compared to $11,464,000 at November 2, 1996. The decrease can be
attributed to the cash applied against the outstanding balance from
collections of accounts receivable which were down $2,748,000 in the first
quarter of 1997 and better management of inventories.
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.
12
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Filed:
(4)(c)(8) Fourth Amendment to the Credit Agreement dated March 11,
1997 between B.B. Walker Company and Mellon Bank, N.A.
(27) Financial Data Schedule for the period ended February 1,
1997
(b) Reports on Form 8-K:
NONE
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
B.B. Walker Company
Date March 18, 1997 KENT T. ANDERSON
---------------------------------
Kent T. Anderson
Chairman of the Board, Chief
Executive Officer and President
Date March 18, 1997 WILLIAM C. MASSIE
---------------------------------
William C. Massie
Executive Vice President
13