Exhibit 13
----------
B.B. WALKER COMPANY AND SUBSIDIARY
FIFTIETH ANNUAL REPORT TO SHAREHOLDERS
NOVEMBER 1, 1997
1997 ANNUAL REPORT OF
B.B. WALKER COMPANY
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 currently markets high quality, medium-
priced western and work/outdoor boots and shoes under the ABILENE BOOT COMPANY
name. A majority of the Company's sales are under trademarked brands. In
addition, the Company manufactures footwear under major retailers' private
labels and on contract for other footwear manufacturers. The Company also
operates two retail stores.
For western boot customers, the Company offers quality western boots through
two proprietary brands. Through its ABILENE[REGISTERED] brand, the Company
manufactures and markets high quality all-leather boots for the traditional
boot wearer that look and feel great. Abilene Boots[REGISTERED] feature the
AIR RIDE[REGISTERED] Comfort System which is designed to deliver comfort from
every part of the boot by utilizing a technologically advanced
Poron[REGISTERED] cushion insole. Poron[REGISTERED] is a registered trademark
of Rogers Corporation. Abilene Boots[REGISTERED] definitely live up to their
"AFFORDABLE QUALITY"[REGISTERED] slogan. The SAGE COLLECTION[REGISTERED] is
offered at a lower price point and features bright colors and accents which
can be worn on most any occasion by the metro fashion consumer or the
traditional boot wearer. Sage[REGISTERED] styles offer the same craftmanship
and superior fit that Abilene[REGISTERED] styles do. The ABILENE[REGISTERED]
and SAGE[REGISTERED] brands are manufactured at the Company's facility in
Somerset, Pennsylvania.
For work/outdoor footwear customers, the Company markets quality boots through
its GOLDEN RETRIEVER[REGISTERED] brand, including pull-on, lace-up, lined,
insulated and waterproof, in a variety of heights, soles and constructions.
The Golden Retriever[REGISTERED] Easy Comfort[REGISTERED] System features a
specially contoured cushioned insole that is guaranteed to never give out.
New in 1997, the Company introduced its new line of DURATUFF<Trademark> Work
Boots. Made for the working consumer, DuraTuff<Trademark> Work Boots feature
double cushioned insoles and are built to work for a living. The Company
continues to manufacture boots and shoes for work and safety use under the
WALKER FOOTWEAR THAT WORKS[REGISTERED] brand and the SAFETY FIRST[REGISTERED]
brand. The mainstays of this line are all-leather lace-up and pull-on utility
boots. B.B. Walker's work/outdoor lines are manufactured primarily 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. In addition, the Company also produces several styles purchased in
large quantities by institutional customers such as prison systems and work
camps.
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 423 people at November 1, 1997.
Contents Page
-------- ----
Financial Highlights.....................................1
Message to Shareholders..................................2
Consolidated Financial Statements and Notes..............4
Report of Independent Accountants.......................28
Selected Financial Data.................................29
Management's Discussion and Analysis of Results
of Operations and Financial Condition.................30
Stock Prices............................................43
Officers and Directors..........................Back Cover
Inside Front Cover
B.B. WALKER COMPANY AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
Fiscal Year Ended
---------------------------------------
November 1, November 2, October 28,
1997 1996 1995
(52 weeks) (53 weeks) (52 weeks)
----------- ----------- -----------
(In thousands, except per share data)
OPERATIONS
Net sales $ 32,648 $ 37,506 $ 43,453
======== ======== ========
Income (loss) before income taxes
and minority interest (54) (4,659) (1,868)
Provision for (benefit from)
income taxes (80) (620) (626)
Minority interest (2) (2) (2)
-------- -------- --------
Net income (loss) $ 24 $ (4,041) $ (1,244)
======== ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON
STOCK AND COMMON STOCK EQUIVALENTS $ .01 $ (2.34) $ (.72)
======== ======== ========
Average number of shares outstanding 1,729 1,727 1,744
======== ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON
STOCK AND COMMON STOCK EQUIVALENTS
-ASSUMING FULL DILUTION $ .01 $ (2.34) $ (.72)
======== ======== ========
Average number of shares outstanding 1,732 1,728 1,744
======== ======== ========
FINANCIAL CONDITION
Current assets $ 19,268 $ 24,953 $ 30,898
Current liabilities 13,368 19,534 21,533
Working capital 5,900 5,419 9,365
Current ratio 1.44 to 1 1.28 to 1 1.43 to 1
Long-term obligations,
non-current portion 3,216 3,286 4,257
Shareholders' equity 4,557 4,522 8,553
Book value per common share 2.59 2.57 4.91
1
CHAIRMAN'S MESSAGE TO SHAREHOLDERS
TO OUR SHAREHOLDERS
Another year has passed and it was a very busy one for our Company and our
employees. Faced with a difficult retail market, we made some tough decisions
in the fourth quarter of fiscal 1996 that were discussed in last year's annual
report. We devoted much of this year to implementing those decisions and
making adjustments to our operations accordingly. These improvements were
major undertakings and will impact the direction of our Company for several
years to come. Many of the more significant changes were put in place in the
first and second quarters of the year and took time before their impact was
fully realized. During the first two quarters of 1997, we basically
redesigned the method in which our product lines would be marketed to our
customers and began remaking our Company by focusing on our strengths.
The first thing you will notice when you analyze the results of our year to
determine the success of these changes is that our sales fell a little less
than five million dollars. Though unfavorable, this decrease was anticipated
by management and was in line with our forecasts. We felt that given the
degree of changes we were making, there would be some disruption to our
operations that would impact sales volume. In addition, one of the more
important changes we made involved reducing the volume of business from our
work/outdoor branded lines. Despite the reduction in sales volume, a more
important financial indicator of our year was our return to profitability.
From a loss of $4,041,000 in 1996, we are pleased to report net income of
$24,000 for 1997. This was a major accomplishment for the Company and did not
come without sacrifice. Through cost cutting and realignment of duties, we
reduced selling and administrative expenses by $3,381,000. More importantly,
we repositioned our product lines, eliminating poor performing styles and
improving our product mix. The result was a 5.3% improvement in our gross
margin percentage.
Among the many changes we implemented, two stand out because of their overall
impact on the operations of the Company. The first involved restructuring our
sales force. We took two independent sales forces, one marketing western
boots and one marketing work/outdoor boots, and consolidated them into a
single marketing team working under the direction of a national sales manager.
This turned out to be very efficient for our Company as we eliminated the
overlap that existed under the old system. Under the new structure, one
salesman can now sell all of our product lines to a customer and represent our
Company in an entire territory. Our sales force is a more flexible team
and our coverage of the territories we serve is more complete. This change
did not come without a cost. The transition required significant retraining
of our sales force and took time for them to develop skills in marketing both
branded product lines. Our sales were impacted well into the second quarter
as the new sales force got comfortable carrying both western and work/outdoor
footwear lines.
2
CHAIRMAN'S MESSAGE TO SHAREHOLDERS, Continued
The second major change dealt more with focusing on the strengths of our
Company. In the past few years, we had devoted resources towards creating
brand awareness and expanding our outdoor boot business. However, this proved
to be a highly competitive market with competition that was better capitalized
than our Company. Although we were making some inroads into this market, it
was at a significant cost and one we could not afford. Therefore, at the end
of fiscal 1996, we began the process of extensively reviewing the styles
offered in our product lines, primarily the outdoor styles, and dropped a
significant portion of them. The styles that were discontinued were not
generating acceptable returns for the Company and by carrying these styles in
our lines, we were spending valuable resources to warehouse and promote them.
We narrowed our focus and during the first two quarters of the year, many
styles were eliminated while some new styles were developed to provide a well-
rounded line of western and work footwear for the sales force to market to
customers. The resulting branded product lines are leaner and require less of
an investment in both finished goods and raw materials.
Finally, one other change we made this year impacts our image in the
marketplace. We decided to market our Company as Abilene Boot Company. To
the consumer and the retailer, this new name will define the type of Company
we are and where our expertise lies. We chose the name, Abilene Boot Company,
to capitalize on the solid foundation provided by the strength and reputation
of the Abilene Boot brand.
Next year is shaping up to be as busy and exciting as this year was. With the
introduction of a new line of "affordable" work shoes called DuraTuff and
fresh styling in our western line, we hope to maintain our momentum and make
more operational adjustments as needed to improve our Company. 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 1, November 2, October 28,
1997 1996 1995
(52 weeks) (53 weeks) (52 weeks)
----------- ----------- -----------
(In thousands, except per share data)
Revenues:
Net sales (Note 11) $ 32,648 $ 37,506 $ 43,453
Interest and other income 77 43 80
------- ------- -------
32,725 37,549 43,533
------- ------- -------
Costs and expenses:
Cost of products sold (Note 13) 24,121 29,702 32,781
Selling and administrative
expenses (Notes 12 and 13) 6,996 10,377 10,359
Depreciation and amortization 458 637 667
Interest expense 1,204 1,492 1,594
------- ------- -------
32,779 42,208 45,401
------- ------- -------
Income (loss) before income taxes
and minority interest (54) (4,659) (1,868)
Provision for (benefit from)
income taxes (Note 7) (80) (620) (626)
Minority interest (2) (2) (2)
------- ------- -------
Net income (loss) $ 24 $ (4,041) $ (1,244)
======= ======= =======
Earnings (loss) per share of common stock
and common stock equivalents (Note 1) $ .01 $ (2.34) $ (.72)
======= ======= =======
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 1, November 2,
1997 1996
----------- -----------
(In thousands, except share data)
CURRENT ASSETS:
Cash $ 1 $ 1
Accounts receivable, less allowance for doubtful
accounts of $503 in 1997 and $742 in 1996 (Note 4) 9,084 10,808
Inventories (Notes 2 and 4) 9,533 12,511
Prepaid expenses 413 441
Income tax recovery receivable (Note 7) - 1,042
Deferred income tax benefit, current (Note 7) 237 150
------- -------
Total current assets 19,268 24,953
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization (Notes 3, 4 and 5) 1,750 2,208
OTHER ASSETS 156 214
------- -------
$ 21,174 $ 27,375
======= =======
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 1, November 2,
1997 1996
----------- -----------
(In thousands, except share data)
CURRENT LIABILITIES:
Borrowings under finance agreement (Note 4) $ 7,364 $ 11,464
Accounts payable, trade 3,937 4,984
Accrued salaries, wages and bonuses 468 1,102
Other accounts payable and accrued liabilities 489 680
Portion of long-term obligations payable
within one year (Note 5) 1,087 1,304
Income taxes payable (Note 7) 23 -
------- -------
Total current liabilities 13,368 19,534
------- -------
LONG-TERM OBLIGATIONS (Note 5) 3,216 3,286
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARY 33 33
SHAREHOLDERS' EQUITY (Notes 10):
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 129 111
Equity loans collateralized by Company
common stock (106) (123)
------- -------
Total shareholders' equity 4,557 4,522
------- -------
COMMITMENTS AND CONTINGENCIES (Note 9)
$ 21,174 $ 27,375
======= =======
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 1, November 2, October 28,
1997 1996 1995
(52 weeks) (53 weeks) (52 weeks)
----------- ----------- -----------
(In thousands, except share data)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 24 $ (4,041) $ (1,244)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization 458 637 667
(Gain) loss on sale of fixed assets (29) 138 -
Deferred income taxes (87) 620 194
(Increase) decrease in:
Accounts receivable, trade (net) 1,724 2,659 269
Inventories 2,978 3,317 (425)
Prepaid expenses 28 (130) (71)
Other assets 58 205 (8)
Increase (decrease) in:
Accounts payable, trade (1,047) (226) (279)
Accrued salaries, wages and bonuses (634) 511 (87)
Other accounts payable and
accrued liabilities (191) 48 (284)
Income taxes payable 1,065 (429) (650)
------- ------- -------
Net cash provided by (used for)
operating activities 4,347 3,309 (1,918)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - (21) (43)
Proceeds from disposal of property, plant
and equipment 29 6 1
------- ------- -------
Net cash provided by (used for)
investing activities 29 (15) (42)
------- ------- -------
(Continued)
7
B. B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Fiscal Year Ended
-------------------------------------
November 1, November 2, October 28,
1997 1996 1995
(52 weeks) (53 weeks) (52 weeks)
----------- ----------- -----------
(In thousands, except share data)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing (payments) under
finance agreement $ (4,100) $ (2,548) $ 1,122
Proceeds from issuance of
long-term obligations 241 45 4,232
Payment on long-term obligations (528) (800) (3,079)
Payment of debt issue costs - - (332)
Purchase of subsidiary common stock
from minority interest - (1) -
Cash repayments from loans to shareholders 17 16 23
Dividends paid on 7% cumulative
preferred stock (6) (6) (6)
------- ------- -------
Net cash provided by (used for)
financing activities (4,376) (3,294) 1,960
------- ------- -------
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:
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 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)
---- ---- --------- ------ ------- ------ ------ --------
Balance at November 2, 1996 828 83 1,726,534 1,727 2,724 111 (123) 4,522
Repayment of equity loans col-
lateralized by common stock - - - - - - 17 17
Net income - - - - - 24 - 24
Dividends on 7% preferred
stock - - - - - (6) - (6)
---- ---- --------- ------ ------- ------ ------ --------
Balance at November 1, 1997 828 $ 83 1,726,534 $ 1,727 $ 2,724 $ 129 $ (106) $ 4,557
==== ==== ========= ====== ======= ====== ====== ========
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
9
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Business
- --------
B.B. Walker Company and Subsidiary (the "Company") is engaged in the design,
manufacture, marketing and distribution of western and work/outdoor footwear.
The 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 amounts reported in the consolidated financial statements and
the accompanying notes. 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. 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.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets. The depreciable lives for various classes of property,
plant and equipment are as follows:
Buildings and improvements 5 to 40 years
Machinery and equipment 3 to 10 years
10
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 1 - ACCOUNTING POLICIES, 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 and
dividing this amount by the weighted average number of common shares
outstanding during the year plus any common stock equivalents arising from
stock options. The weighted average number of shares, including common stock
equivalents, used in earnings per share computations were:
1997 1996 1995
--------- --------- ---------
Primary 1,729,000 1,727,000 1,744,000
Fully diluted 1,732,000 1,728,000 1,744,000
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "EARNINGS PER SHARE"
("FAS 128"), which replaces the presentation of primary and fully diluted
earnings per share ("EPS") with basic and diluted EPS, respectively. FAS 128
simplifies the standards for computing earnings per share and makes them
comparable to international EPS standards. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator
of the diluted EPS computation.
This Statement is effective for the Company in the first quarter of fiscal
1998. Pro forma basic and diluted EPS were each $.01, ($2.34) and ($.72) for
the years ended November 1, 1997, November 2, 1996 and October 28, 1995,
respectively.
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 was expensed the first
time the advertising appears. Advertising expense for 1997, 1996 and 1995 is
$1,011,000, $1,349,000 and $1,118,000, respectively.
11
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 1 - ACCOUNTING POLICIES, Continued
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 years ended
November 1, 1997 and October 28, 1995 consisted of fifty-two weeks each. The
fiscal year ended November 2, 1996 included fifty-three weeks of operations.
The impact on operations of the extra week in 1996 was not significant.
New accounting standards
- ------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "REPORTING COMPREHENSIVE
INCOME". This Statement requires that changes in the amounts of comprehensive
income items, which are currently reported as separate components of equity,
be shown in a financial statement, displayed as prominently as other financial
statements. The common components of other comprehensive income would include
items such as foreign currency translation adjustments, minimum pension
liability adjustments and/or unrealized gains or losses on available-for-sale
securities. The Statement does not require a specific format for the
financial statement in which comprehensive income is reported, but does
require that an amount representing total comprehensive income be reported in
that statement.
In June 1997, the FASB issued FAS 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION". This Statement will change the way
companies report information about segments of their business in their annual
financial statements and require companies to report selected segment
information in their quarterly reports issued to shareholders. It also
requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports
revenues, and its major customers. The Statement also requires companies to
disclose segment data based on how management makes decisions about allocating
resources to segments and measuring their performance.
Adoption of FAS No. 130 and FAS No. 131 are required for the Company in fiscal
1999. 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 disclosure requirements.
12
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 2 - INVENTORIES
Inventories on hand at November 1, 1997 and November 2, 1996 consisted of the
following:
(In thousands)
November 1, November 2,
1997 1996
----------- -----------
Finished goods $ 4,883 $ 6,943
Work in process 884 692
Raw materials and supplies 3,766 4,876
-------- --------
$ 9,533 $ 12,511
======== ========
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, by major class, at November 1, 1997 and
November 2, 1996 was as follows:
(In thousands)
November 1, November 2,
1997 1996
----------- -----------
Land $ 425 $ 425
Buildings 2,285 2,285
Leasehold improvements 459 459
Machinery and equipment:
Owned 4,322 3,802
Capital leases 357 888
Transportation equipment 158 255
-------- --------
8,006 8,114
Less accumulated depreciation
and amortization 6,256 5,906
-------- --------
$ 1,750 $ 2,208
======== ========
Included in accumulated depreciation at November 1, 1997 and November 2, 1996
is $348,000 and $804,000, respectively, related to capital leases.
13
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 4 - 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 subsequently amended.
Under the terms of the amended agreement effective November 2, 1996, advances
available to the Company can not exceed $8,000,000 in the aggregate, of which
no more than $4,000,000 may be borrowed against inventory. Interest at the
bank's prime rate plus 1.75% (10.25% at November 1, 1997) 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 5, the credit facility also provided a term
loan of $3,000,000 with a variable interest rate at the bank's prime rate plus
1.75%. Proceeds from this loan were used to repay the existing deed of trust
on the Asheboro facility with the remainder applied against the outstanding
amount under the revolving finance agreement.
Borrowings under the agreement are secured by all accounts receivable,
inventories 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 manufacturing facility 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 1, 1997, the Company was in compliance with its
restrictive covenants.
A summary of activity for borrowings under the finance agreement is as
follows:
(In thousands)
Fiscal year
----------------------------
1997 1996 1995
-------- -------- --------
Average short-term borrowings $ 7,780 $ 11,159 $ 12,633
Maximum short-term borrowings $ 11,526 $ 14,467 $ 14,717
Weighted average interest rate 10.4% 9.5% 9.6%
Interest rate at year-end 10.3% 10.0% 9.3%
The weighted average interest rate is computed by dividing interest expense
and other borrowing costs on the short-term borrowings by the average
borrowings during the fiscal year.
14
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 5 - LONG TERM OBLIGATIONS
Long-term debt and other non-current obligations consist of the following:
(In thousands)
November 1, November 2,
1997 1996
----------- -----------
Note payable to a bank, due in 64 monthly
installments ranging from $36,000 to
$56,000 through January 2003, variable
interest at the bank's prime rate plus
1.75% (10.25% at November 1, 1997),
secured by accounts receivable,
inventories and substantially all fixed
assets including the Company's land and
building in Asheboro, NC $ 2,286 $ 2,464
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% (9.25% at November 1, 1997),
secured by the Company's land and building
in Somerset, PA 216 226
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 402 431
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 208 223
Promissory notes payable to shareholders,
due in varying amounts through 2002, variable
interest based on prime rate 1,182 1,162
Capital lease obligations, due in monthly
installments through 1998, interest ranging
from 12% to 12.75% 9 84
-------- --------
4,303 4,590
Less amounts payable within one year 1,087 1,304
-------- --------
$ 3,216 $ 3,286
======== ========
15
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 5 - LONG TERM OBLIGATIONS, Continued
The effective interest rate on the promissory notes payable to shareholders
averaged 9.5% in 1997 and 1996. Cash paid for interest was $1,124,000 in
1997, $1,507,000 in 1996 and $1,574,000 in 1995.
Principal maturities on long-term obligations are as follows:
Fiscal Year (In thousands)
Ending Amounts
----------- ------------
1998 $ 1,087
1999 867
2000 638
2001 490
2002 547
Thereafter 674
---------
$ 4,303
=========
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
At November 1, 1997 and November 2, 1996, the carrying amounts and fair values
of the Company's financial instruments are as follows:
(In thousands)
November 1, 1997 November 2, 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Assets:
Accounts receivable $ 8,572 $ 8,572 $ 10,400 $ 10,400
Notes receivable:
Short-term 442 442 292 292
Long-term 132 132 243 243
Liabilities:
Borrowings under finance
agreement 7,364 7,364 11,464 11,464
Long-term debt 4,303 4,082 4,590 4,346
Long-term notes receivable include $62,000 and $127,000 which is recorded in
other assets at November 1, 1997 and November 2, 1996, respectively. 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.
16
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 7 - INCOME TAXES
The components of the provision for (benefit from) income taxes are as
follows:
(In thousands)
November 1, November 2, October 28,
1997 1996 1995
----------- ----------- -----------
Current:
Federal $ 7 $ (1,240) $ (820)
State - - -
------- ------- -------
7 (1,240) (820)
------- ------- -------
Deferred:
Federal (87) 620 194
State - - -
------- ------- -------
(87) 620 194
------- ------- -------
$ (80) $ (620) $ (626)
======= ======= =======
The Company has net operating loss carryforwards available to offset future
U.S. tax liabilities of approximately $760,000 which expire in 2012. The
Company has state net economic loss carryforwards of $4,860,000 which expire
from 2000 to 2002. Cash paid for income taxes, net of refunds, was
($1,061,000) in 1997, ($806,000) in 1996, and ($141,000) in 1995.
17
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 7 - INCOME TAXES, Continued
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 1, 1997, November 2,
1996 and October 28, 1995 as follows:
(In thousands)
November 1, November 2, October 28,
1997 1996 1995
----------- ----------- -----------
Computed expected income tax
expense (benefit) $ (18) $ (1,584) $ (636)
State income taxes (benefit), net
of federal income tax benefit (40) (170) (115)
Change in the valuation allowance (62) 1,075 115
Other, net 40 59 10
------- ------- -------
$ (80) $ (620) $ (626)
======= ======= =======
The significant components of deferred income tax expense for the years ended
November 1, 1997, November 2, 1996 and October 28, 1995 are as follows:
(In thousands)
November 1, November 2, October 28,
1997 1996 1995
----------- ----------- -----------
Deferred tax expense (exclusive of
the effect of other components
listed below) $ 275 $ (285) $ 194
State deferred tax benefit (40) (170) (115)
Federal operating loss and
credit carryforwards (260) - -
Change in the valuation allowance (62) 1,075 115
------- ------- -------
$ (87) $ 620 $ 194
======= ======= =======
18
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 7 - INCOME TAXES, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at November 1, 1997 and November 2, 1996
are as follows:
(In thousands)
November 1, November 2,
1997 1996
----------- -----------
Deferred tax assets:
Current portion:
Provision for doubtful accounts $ 171 $ 252
Reserve for sales discounts 35 48
Self insurance accrual for claims incurred
but not reported at year-end 51 131
Inventories, principally due to additional
costs inventoried for tax purposes 361 450
Accruals for certain personnel costs 17 113
Federal net operating loss carryforward 260 -
State economic loss carryforward 325 285
Other 61 -
------- -------
Total current 1,281 1,279
------- -------
Long-term portion:
Accruals for certain personnel costs 6 16
Fixed assets 166 115
------- -------
Total long-term 172 131
------- -------
Total gross deferred tax assets 1,453 1,410
Valuation allowance (1,128) (1,190)
------- -------
325 220
------- -------
Deferred tax liabilities:
Current portion:
Prepaid employee benefits (88) (70)
------- -------
Net deferred tax asset $ 237 $ 150
======= =======
19
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 8 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS
The Company and its subsidiary sponsor retirement plans which provide benefits
to all qualified employees. Administrative and trustee expenses associated
with these plans are paid by the Company. The Company also has an incentive
bonus plan for employees which allows the Company to pay bonuses based upon
certain percentages of operating profit. No incentive bonuses were granted in
1997, 1996 or 1995.
The Company provides a non-contributory, defined contribution plan that
invests in the common stock of the Company. The plan covers all eligible
employees excluding employees of the Company's subsidiary who are covered by a
defined benefit pension plan. Contributions to the Employee Stock Ownership
Plan of B.B. Walker Company, which are determined by the Board of Directors,
were $65,000 in 1997, 1996 and 1995.
The Retirement Savings Plan of B.B. Walker Company, a Section 401-K plan, is
available to all eligible employees of the Company who meet certain age and
service requirements. This plan was opened to employees of the Company's
subsidiary during 1997. 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 $16,500 in 1997,
$23,500 in 1996 and $28,000 in 1995.
For the benefit of the employees of its subsidiary, the Company sponsors a
non-contributory, defined benefit pension plan. 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.
20
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 8 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS, Continued
The following table sets forth the plan's funded status at November 1, 1997
and November 2, 1996:
(In thousands)
November 1, November 2,
1997 1996
----------- -----------
Actuarial present value of benefit obligations:
Vested benefit obligations $ 937 $ 833
======= =======
Accumulated benefit obligations $ 1,027 $ 898
======= =======
Projected benefit obligation $ (1,027) $ (898)
Plan assets at fair value 1,182 1,017
------- -------
Plan assets in excess of projected
benefit obligation 155 119
Unrecognized net loss 162 153
Unrecognized net asset at transition (57) (66)
------- -------
Prepaid pension cost $ 260 $ 206
======= =======
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 1997, 1996 and 1995.
Net annual pension expense for 1997, 1996 and 1995 included the following
components:
(In thousands)
1997 1996 1995
------ ------ ------
Service cost - benefits earned during the period $ 91 $ 78 $ 69
Interest on projected benefit obligation 66 56 46
Actual return on plan assets (67) (56) (47)
Net amortization and deferral (17) (19) (20)
---- ---- ----
Net annual pension expense $ 73 $ 59 $ 48
==== ==== ====
21
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 8 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS, Continued
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 have been reserved for issuance to key
employees. For employees owning less than 10% of the Company's common stock,
the options are granted at not less than 100% of the fair market value at the
date of grant and expire ten years from the date of grant. For employees
owning 10% or more of the Company's stock, options are granted at not less
than 110% of the fair market value and expire five years from the date of
grant. One-half of the options granted are exercisable at the date of grant;
one-half are exercisable after twelve months.
Under the Automatic Stock Option Grant Program of the 1995 Incentive Stock
Option Plan, a maximum of 50,000 shares of the Company's authorized but
unissued common stock has been reserved for issuance to non-employee directors
of the Company. Non-employee directors will be granted an option to purchase
1,000 shares of common stock on the first business day after the annual
meeting of shareholders where the director is elected or remains a member of
the Board of Directors. The option price for each option granted is 100% of
the fair market value at the date of grant. The options will expire ten 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, expired during 1997 according to the terms of
the plan. All options under the plan that have been granted but not exercised
will expire ten years from the date of grant and no additional options will be
granted under this plan. The terms governing this plan are substantially the
same as the 1995 Incentive Stock Option Plan described above.
Outstanding options exercisable at November 1, 1997, November 2, 1996 and
October 28, 1995 were 185,700, 156,950, and 120,450, respectively.
22
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 8 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS, Continued
During 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" (FAS
123). FAS 123 encourages but does not require a fair value based method of
accounting for stock compensation plans. Therefore, as allowed by FAS 123,
the Company has elected to continue to follow Accounting Principles Board
Opinion No. 25 and related Interpretations in accounting for its fixed stock
option plans. Accordingly, no compensation cost has been recognized for these
plans in the Consolidated Statements of Income (Loss). Had compensation cost
for the Company's fixed stock option plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method of FASB Statement No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts in the following table:
(In thousands)
1997 1996
------ ------
Net income (loss) As reported $ 24 $(4,041)
Pro forma 7 (4,043)
Primary earnings per share As reported $ .01 $ (2.34)
Pro forma .00 (2.34)
Fully diluted earnings per share As reported $ .01 $ (2.34)
Pro forma .00 (2.34)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: no expected
dividend yield for each year; expected volatility of 48.7% for each year, risk
free interest rates of 6.76% and 6.14%; and expected lives of five years.
23
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 8 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS, Continued
A summary of the activity in the fixed stock option plans is as follows:
Year of Number of Options Price Weighted-Average
Grant Shares Per Share Exercise Price
------- --------- ------------- ----------------
Options outstanding at
October 29, 1994 89,550 $ 1.33 - 5.83 3.99
Granted 93,000 3.50 3.50
Forfeited 1993 (15,600) 4.00 - 4.40 4.13
--------
Options outstanding at
October 28, 1995 166,950 1.33 - 5.83 3.70
Granted 5,000 1.75 1.75
Forfeited 1993 (12,500) 3.50 - 5.83 4.90
--------
Options outstanding at
November 2, 1996 159,450 1.33 - 4.00 3.55
Granted 81,000 0.75 0.75
Forfeited 1992-1995 (11,250) 2.00 - 4.00 3.47
Expired 1987 (3,000) 1.33 1.33
--------
Options outstanding at
November 1, 1997 226,200 0.75 - 4.00 2.58
========
Options available for future grant - 1995 plan 215,000
=======
24
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 9 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company has entered into various capital and operating leases for certain
buildings and machinery and equipment. The agreements expire at various dates
through 2002. 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
------------------ ------- ---------
1998 $ 10 $ 545
1999 - 302
2000 - 147
2001 - 35
2002 - 18
--- -----
Total minimum lease payments 10 $ 1,047
=====
Amounts representing interest 1
---
Present value of minimum lease payments $ 9
===
Rental expense amounted to $589,000 in 1997, $630,000 in 1996 and $578,000 in
1995.
LITIGATION
From time to time, the Company is a defendant in legal actions involving
claims arising in the normal course of business. In management's opinion,
after consultation with counsel and a review of the facts, the liabilities, if
any, resulting from such legal proceedings will not have a material effect on
the Company's financial position or results of operations.
NOTE 10 - SHAREHOLDERS' EQUITY
The 7% cumulative preferred stock is callable at the option of the Company at
$103 per share plus any unpaid dividends. Preferred shareholders are entitled
to seventy voting rights per share if dividends on preferred stock are not
paid within ninety days after the scheduled due date. At November 1, 1997,
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 1, 1997, no Class A
preferred stock has been issued.
25
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 10 - 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 11 - CREDIT CONCENTRATIONS AND SALES TO MAJOR CUSTOMERS
The Company's trade receivables do not represent significant concentrations of
credit risk because a large number of geographically diverse customers
comprise the customer base. However, a substantial portion of the customer
base is retailers. In 1997, one major customer comprised 10.25% of net sales.
In 1996 and 1995, no single customer comprised more than 10% of net sales.
NOTE 12 - RELATED PARTY TRANSACTIONS
Through July 1997, the Company employed an advertising agency and public
relations firm that was owned by an officer and director of the Company and
his wife, who also managed and directed the daily operations of the agency.
The agency rendered technical and creative services to the Company in the
areas of design, layout, photography and other services essential to its
advertising programs. The agency also placed Company advertisements and ad
copy in trade publications, footwear magazines and other related media sources
and coordinated public relations events and press releases for the Company.
In August 1997, the Company created an in-house advertising agency to provide
more focus to its advertising programs. The in-house agency is staffed by
three employees who were formerly employed by the Company's external
advertising agency. The manager of the external advertising agency, who is
also the wife of an officer and director of the Company, is managing the
operations for the in-house agency and is providing consultation regarding the
implementation of advertising programs. The manager, who still manages the
external advertising agency, is on a monthly retainer to the Company and is
supervised by management of the Company. The in-house agency will provide
comparable technical and creative services, as well as fulfilling other
functions related to the Company's advertising programs, that the external
agency provided.
In 1997, 1996, and 1995, the Company paid the external advertising agency
$373,000, $456,000 and $495,000, respectively, for services rendered.
Included in the above amounts were payments for placing advertisements, which
funds were then subsequently paid to the publications, net of the agency's
standard commission.
26
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 13 - UNUSUAL CHARGES
During the fourth quarter of fiscal 1996, in response to business conditions
and a deteriorating financial position, the Company repositioned its product
offerings in order to direct the Company's limited resources towards those
styles that displayed 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) for the fiscal year ended November 2, 1996.
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 at November 2, 1996. 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) for the
fiscal year ended November 2, 1996.
27
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 (loss), 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 1, 1997 and November 2, 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended November 1, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Winston-Salem, North Carolina
December 1, 1997
28
B.B. WALKER COMPANY AND SUBSIDIARY
SELECTED FINANCIAL DATA
(In thousands, except for
items denoted by (1) below)
1997 1996 1995 1994 1993
(52 weeks) (53 weeks) (52 weeks) (52 weeks) (52 weeks)
---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS:
Net sales $ 32,648 $ 37,506 $ 43,453 $ 51,148 $ 55,777
======= ======= ======= ======= =======
Income (loss) from continuing operations
before income taxes, minority interests
and extraordinary item $ (54) $ (4,659) $ (1,868) $ 812 $ 3,055
Provision for (benefit from) income taxes (80) (620) (626) 336 1,160
Minority interests in continuing operations (2) (2) (2) (2) (2)
------- ------- ------- ------- -------
Net income (loss) $ 24 $ (4,041) $ (1,244) $ 474 $ 1,893
======= ======= ======= ======= =======
FINANCIAL CONDITION:
Current assets $ 19,268 $ 24,953 $ 30,898 $ 30,264 $ 27,672
Current liabilities 13,368 19,534 21,533 20,510 17,357
Working capital 5,900 5,419 9,365 9,754 10,315
Current ratio (1) 1.44 to 1 1.28 to 1 1.43 to 1 1.48 to 1 1.59 to 1
Total assets 21,174 27,375 34,377 34,016 30,028
Long-term obligations 3,216 3,286 4,257 3,692 3,189
Minority interests in consolidated subsidiary 33 33 34 34 35
Total liabilities 16,617 22,853 25,824 24,236 20,581
Shareholders' equity 4,557 4,522 8,553 9,780 9,447
PER SHARE INFORMATION (1) (2):
Shareholders' equity (book value) $ 2.59 $ 2.57 $ 4.91 $ 5.56 $ 5.47
======= ======= ======= ======= =======
Per share of common stock and common
stock equivalent:
Net income (loss) $ .01 $ (2.34) $ (.72) $ .26 $ 1.14
======= ======= ======= ======= =======
Per share of common stock and common
stock equivalent-assuming full dilution:
Net income (loss) $ .01 $ (2.34) $ (.72) $ .26 $ 1.12
======= ======= ======= ======= =======
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 $ 1,750 $ 2,208 $ 2,968 $ 3,593 $ 2,148
Depreciation and amortization 458 637 667 610 544
Capital additions - 21 43 2,055 716
Space occupied (square feet) 355 358 358 363 325
Average number of common shares outstanding (2) 1,727 1,727 1,731 1,737 1,625
Number of shareholders (1) 1,177 1,169 1,229 1,142 1,185
Number of employees (1) 423 521 637 658 642
(2) Information adjusted for three-for-two stock split paid on March 24, 1994.
29
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 1, 1997, November 2, 1996 and October 28, 1995:
November 1, November 2, October 28,
1997 1996 1995
----------- ----------- -----------
Net sales 100.0% 100.0% 100.0%
Cost of products sold 73.9% 79.2% 75.4%
------- ------- -------
Gross margin 26.1% 20.8% 24.6%
Selling and administrative expenses 21.4% 27.7% 23.9%
Depreciation and amortization 1.4% 1.7% 1.5%
Interest expense 3.7% 4.0% 3.7%
Interest and other income (.2%) (.1%) (.2%)
------- ------- -------
Income (loss) before income taxes
and minority interest (.2%) (12.5%) (4.3%)
Provision for (benefit from)
income taxes (.3%) (1.7%) (1.4%)
Minority interest - - -
------- ------- -------
Net income (loss) .1% (10.8%) (2.9%)
======= ======= =======
FISCAL 1997 COMPARED TO FISCAL 1996
Material Changes in Operations
- ------------------------------
Prior to the end of the 1996 fiscal year, the Company began implementing a
plan to return the Company to profitability, primarily through a repositioning
of the Company's product lines. The Company focused its limited resources on
designing, manufacturing and promoting those styles in its branded lines that
would generate acceptable returns for the Company. This required eliminating
a significant number of styles from the product lines, primarily the
work/outdoor line.
In addition, operational changes were required to match the selling and
administrative support with the new initiatives implemented by the Company.
The most significant of these changes was the merger and reduction of the
separate sales forces that previously served the Work/Outdoor Division and the
Western Division. The Company dedicated extensive resources to retraining the
new sales team to market both western and work/outdoor footwear. This change
impacted the Company's sales during the first quarter and into the second
quarter as this transition was implemented. Management also reviewed and
refined how the sales team markets the product lines to customers and what
customers the Company wants to serve in order to take full advantage of the
new sales structure.
30
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
In relation to manufacturing, management examined its operations to identify
changes needed to maximize use of manufacturing capacity. Limited
modifications to the work flow at the plants in Asheboro, NC and Somerset, PA
were made which resulted in gains in efficiency. Also, a reorganization in
the structure of the raw materials management was implemented with an emphasis
on improving procedures and reducing the Company's investment in inventory.
Efforts in these areas have identified additional areas for improvement and
management continues to review its options for the manufacturing function.
Overall, the processes initiated during the year had a positive impact on the
Company's financial condition and operations. A reduction in receivables of
approximately $1,700,000 and a reduction in inventories of approximately
$3,000,000 generated enough cash flow to allow for a reduction in the advances
against the revolving credit facility of approximately $4,100,000 during the
year. More importantly, the Company reported a net loss of $56,000 before an
income tax benefit of $80,000 in fiscal 1997 versus a net loss of $4,661,000
before an income tax benefit of $620,000 in the prior year. This was
accomplished through an improvement in gross margins from 20.8% to 26.1% and a
reduction in selling and administrative expenses of approximately $3,400,000.
Net Sales
- ---------
Net sales for the Company were $32,648,000 in 1997 as compared to $37,506,000
in 1996. This was a reduction of $4,858,000 or 13.0% from the prior year.
The decrease was anticipated because of the repositioning of the Company's
product lines and the restructuring of the sales force. In addition, demand
for the Company's branded western boots continued to reflect the poor retail
environment for western apparel. The Company's sales include sales of
footwear manufactured and wholesaled by the Company and sales from the
Company's retail outlets. Footwear manufactured and wholesaled by the
Company, which includes branded, private label and institutional sales,
comprised 92.0% of net sales in 1997 and 92.6% of net sales in 1996. The
remaining 8.0% and 7.4% of net sales in 1997 and 1996, respectively, were
sales from the Company's retail outlets.
Sales of branded footwear were down $5,307,000, or 21.5%, in 1997 from 1996.
Pairs shipped were off 27.8% while the price per pair shipped increased 9.5%.
The increase in price per pair can be attributed to a more favorable mix of
inventory shipped. The decrease in sales of branded footwear was anticipated
as a result of the significant changes implemented during the first half of
the fiscal year. First, a significant change involved the merger of the two
separate sales forces for 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 they may not have previously served
and orders for footwear were impacted as the plan was implemented.
31
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
Second, the Company has repositioned its product lines to direct its limited
resources towards promoting styles that will generate acceptable returns for
the Company. Part of this process involved eliminating various styles from
the branded line. A significant number of the eliminated styles were
work/outdoor styles. Although these styles generated sales volume in the
prior year, they did not provide adequate margins to support their inclusion
in the product line.
Finally, branded sales have also been impacted by a weak retail sector,
particularly in western markets, during the year. Demand at the retail level
for western boots remains soft and orders have been lower than the prior year.
Private label sales in 1997 were up $297,000, or 3.6%, over 1996 private label
sales. Private label pairs shipped rose 1.5% while the average price per pair
was up 1.2%. The results of private label sales are dictated by activity of
several large accounts and the timing of shipments to those accounts.
Sales to institutional customers improved by $347,000, or 20.0%, over the
prior year. Much of this business is solicited through a formal bidding
process with governmental entities and the results of this division are
impacted by the Company's aggressiveness in bidding on new business. During
1997, the Company obtained more of this business to provide production volume
for its plants.
Retail sales for the year were $195,000, or 7.0%, lower than the results for
1996. In January 1997, the Company closed its retail outlet in Myrtle Beach,
SC because of declining profitability for the outlet. Significant additions
of newer retail space in the region surrounding the retail outlet resulted in
fewer customers visiting the mall where the retail outlet was located.
Management elected not to attempt to lease more favorable retail space because
of the significant competition in the area. This loss in volume was partially
offset by increases in sales in the remaining two retail outlets, one in
Asheboro, NC and one in Lancaster, PA. Same store sales for these two outlets
rose 6.0% from 1996 sales.
32
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
Gross Margin
- ------------
The Company's gross margin was $8,527,000 in 1997 and $7,804,000 in 1996, an
increase of $723,000. As a percentage of sales, the gross margin for 1997
increased to 26.1% from 1996's gross margin of 20.8%. The increase can be
attributed to a variety of factors related to the repositioning of the product
lines and other operational changes implemented during 1997. The Company
managed a higher margin product mix by eliminating from the product lines many
styles that were not making adequate contributions. In addition, by focusing
on stronger product offerings, the Company was able to lower the rate of
returned goods in relation to gross sales. Another positive factor was better
productivity from manufacturing personnel and reduction in manufacturing
variances. However, the Company's gross margin continues to be affected by
the necessity to use discounting programs and aggressive dating terms in order
to induce orders and maintain market share. In addition, the Company's gross
margin for 1997 also reflects the impact of discontinuing a significant number
of styles.
Selling and Administrative Expenses
- -----------------------------------
Selling and administrative expenses were $6,996,000 for 1997 as compared to
$10,377,000 for 1996, a decrease of $3,381,000, or 32.6%. The Company reduced
expenses in most functional areas to more appropriately reflect the level at
which the Company intended to operate. Adjustments to operations, including
the consolidation of the separate work/outdoor and western sales forces,
generated most of the decrease. In addition, management lowered the general
and administrative headcount and realigned significant responsibilities in the
administrative functions. The largest savings came from personnel related
expenses. Salary and benefits were down approximately $1,620,000 from the
prior year. The selling and administrative headcount was lowered
approximately 23% because of the changes implemented in operations. In
addition, with fewer employees, travel and showroom expenses were down
$203,000. Advertising and sample expenses were lowered $338,000 as the
Company redefined its advertising strategy with the intention of maintaining
its brand awareness using cost effective methods. Professional fees were
$377,000 less than 1996 because of larger expenses in the prior year related
to the amortization of fees for the bank financing agreement. Finally, bad
debt expense was $589,000 less than the prior year. Evaluation of specific
accounts required larger accruals in 1996 than were necessary in 1997.
33
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
Interest Expense
- ----------------
Interest expense incurred in 1997 was $1,204,000, or $288,000 less than
interest expense of $1,492,000 for 1996. Lower interest expense in 1997 is a
result of a lower average outstanding balance on the revolving finance
agreement as compared to 1996's average balance. The average outstanding
balance on the revolving finance agreement was approximately $3,380,000, or
30.3%, less in 1997 than in 1996. This decrease was partially offset by an
increase in weighted average interest paid on the revolving finance agreement
of approximately 1.0%. Interest on other borrowings remained at similar
levels to the prior year.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization decreased $179,000 to $458,000 in 1997 from
$637,000 in 1996. For the previous three years, the Company has only made
minimal fixed asset additions. With minimal amounts invested in fixed assets
in recent years, depreciation charges on fixed assets that are becoming fully
depreciated are not being replaced, resulting in lower depreciation expense.
See additional discussion in the Liquidity and Capital Resources section.
Provision for Income Taxes
- --------------------------
The Company had a net loss before income taxes of $54,000 in 1997. In 1996,
the net loss before income taxes was $4,659,000. Accordingly, the Company
recorded a net benefit from income taxes of $80,000 and $620,000 in 1997 and
1996, respectively. The primary difference between the Company's income tax
benefit and the federal statutory rate of 34% represents a change in
management's estimate of the amount to be recorded in the valuation allowance
that established 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 1, 1997, a net asset of $237,000 was recorded which was
an increase of $87,000 over the prior year. In 1996, the Company had an
effective tax rate of 13.3%. This rate was substantially lower than the
federal statutory rate of 34% as the Company added $1,075,000 to the valuation
allowance in response to losses incurred during 1996.
Net Income
- ----------
For the year ended November 1, 1997, the Company reported net income of
$24,000, or .1% of net sales. For the year ended November 2, 1996, the
Company reported a net loss of $4,041,000, or 10.8% of net sales. The
improvement of $4,065,000 can be attributed to stronger gross margins,
significant reductions in selling and administrative expenses from operational
changes, and lower interest expense from reduced borrowings under the
revolving finance agreement.
34
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
Fiscal 1996 Compared to Fiscal 1995
Material Changes in Operations
- ------------------------------
For the third consecutive year, the Company reported lower sales and lower
profits or increased losses. Weak consumer spending at the retail level
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 was not able to operate its plants at
efficient levels and had to offer discounting and other promotional programs
to customers to generate sales volume and maintain market share. These
factors adversely impacted the Company's gross margins. The Company reduced
operating expenses at all levels within the Company in an effort to match the
level of expenses with the level of operations. However, in the opinion of
management, more significant steps were needed to return the Company to
profitability.
Prior to the end of the 1996 fiscal year, the Company repositioned its product
offerings to direct the Company's limited resources towards those styles that
were most profitable. 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 continued
to offer styles within all existing branded lines. With fewer styles in the
Company's product lines, less investment was to be required in finished goods
and raw material inventories. In addition, the rate of turns in existing
inventories was expected to 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 markets both western and work/outdoor footwear to customers in their
established territories, thereby eliminating overlap that existed with
separate sales forces.
The Company anticipated making other operational changes to support the new
direction of the Company. The efficient use of manufacturing capacity is one
area that held strong potential for improved Company operations. Management
examined its options related to manufacturing operations to identify ways to
maximize use of manufacturing capacity. In addition, the Company conducted
reviews of corporate and administrative operations and identified areas for
cost reductions, primarily in personnel and benefit costs.
35
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
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.
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 of branded footwear fell $7,939,000, or 24.3%, from 1995's net
sales. Weak consumer spending at the retail level for western style footwear
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 and are subject to trends in men's and women's fashions. 1996's
sales reflect the slower turns at the retail level. For work/outdoor
footwear, 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. For the year, pairs shipped were down
29.2%, and the average price per pair rose 7.5%, primarily due to product mix.
Private label sales were up $547,000, or 7.1%, for the year. The increase is
attributed to strong growth in its western private label business as the
Company placed more emphasis on serving this sector of the market. The
Company had lower sales in its work/outdoor private label business. 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 for
work/outdoor style of footwear primarily reflect the activity of several large
accounts. Private label pairs shipped in 1996 were up .8% and the average
price per pair rose 6.5%. The increase in the average price per pair can be
attributed to more sales coming from private label western footwear which
carries a higher average price per pair.
Other sales 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.
36
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
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 the notes to the financial statements, 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 branded footwear sales. 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%. 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.
37
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
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.
38
B.B. WALKER COMPANY AND SUBSIDIARY
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. With its revolving finance agreement, the Company finances its
accounts receivable and inventories, paying interest at a variable rate (prime
plus 1.75%, or 10.25%, at November 1, 1997). The Company had outstanding
advances of $7,364,000 at November 1, 1997 and an additional $636,000
available under the agreement.
During fiscal 1997, the Company generated $4,347,000 of cash from operations
which was used to reduce the advances under the revolving finance agreement by
$4,100,000. Approximately $4,700,000 was generated from reductions in
accounts receivable and inventories. In addition, the Company returned to
profitability by improving its gross margin percentage from 20.8% in the prior
year to 26.1% in the current year and reducing selling and administrative
expenses $3,381,000 from the prior year. As of year-end, the Company
continued to rely on the revolving finance agreement to provide working
capital and management anticipates that the revolving finance agreement will
continue to provide the necessary liquidity to fund its daily operations going
forward.
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 at the end of fiscal 1996 made as part of the
agreement, the agreement was amended twice during fiscal 1997. The amendments
addressed the financial results of the Company for the 1996 fiscal year and
were effective as of November 2, 1996. The first amendment executed in 1997,
which represented the third amendment made to the financing agreement, lowered
the amount of the revolving line of credit from $20,000,000 to $13,000,000.
The second amendment executed in 1997, which was the fourth amendment to the
financing agreement, made significant alterations to the agreement. However,
these changes incorporated the significant changes to operations implemented
by management as part of the repositioning of the product lines and the
Company's 1997 financial projections. Although the terms of the fourth
amendment significantly reduced the availability of funds under the finance
agreement, the terms of the amendment reflected the changing needs of the
Company and correlated with the Company's projections. The credit line
available under the agreement was reduced systematically over a six month
period from $13,000,000 to $8,000,000 and advance rates against eligible
accounts receivable and inventories were adjusted downward at predetermined
rates during the same time frame. In addition, the sublimit for inventory was
lowered to $4,000,000.
39
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
Among other changes, the fourth amendment amended certain restrictive
financial covenants under the revolving finance agreement effective November
2, 1996 and thereafter. The covenants require the satisfaction of certain
financial tests and the maintenance of certain financial ratios as defined in
the agreement. The Company is required to maintain a consolidated current
ratio of not less than 1.35 to 1, a consolidated debt leverage ratio of not
more than 3 to 1, a consolidated tangible net worth, as defined in the
agreement, of not less than $5,600,000 and consolidated working capital of not
less than $5,250,000. In addition, at the end of the fiscal year, the Company
must be at break even or report net income and can not make capital
expenditures in excess of $150,000 during a fiscal year without permission
from the bank. At November 1, 1997, the Company was in compliance with its
restrictive financial covenants.
In addition to the revolving credit facility, the financing agreement also
provided a $3,000,000 term loan that was used to repay an existing mortgage
note payable to a bank which carried a balance of approximately $2,060,000.
During 1997, the bank suspended principal payments on the loan for six months.
The Company resumed paying down the principal in September 1997. Per the
terms of the note, the Company has 64 monthly installments of principal and
interest ranging from $36,000 to $56,000 remaining. The term loan bears
interest at the bank's prime rate plus 1.75% (10.25% at November 1, 1997).
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.
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 (9.25% at November 1, 1997) and will be
repaid in monthly installments of principal and interest, currently $2,550,
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 1, 1997 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.
40
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
The Company made no capital expenditures in 1997 and has made only minimal
capital expenditures during the past three years. 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, the Company has only been making capital expenditures
to maintain current levels of operations during the past three years. The
Company anticipates raising the level of capital expenditures in 1998, but due
to the restrictions in the financing agreement, any increases will not be
material. Funding for capital expenditures other than the building
acquisition has primarily come from the available balance on the finance
agreement.
Net working capital, which consists primarily of accounts receivable and
inventories less current liabilities, was $5,900,000 at November 1, 1997 and
$5,419,000 at November 2, 1996. The ratio of current assets to current
liabilities increased to 1.44 to 1 at November 1, 1997 compared to 1.28 to 1
at November 2, 1996. Cash flows generated from operations in 1997 was a net
inflow of $4,347,000 compared to a net cash inflow of $3,309,000 in 1996. The
improvement can be attributed to better management of inventories and accounts
receivable.
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.
41
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
New Accounting Standards
- ------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "REPORTING COMPREHENSIVE
INCOME". This Statement requires that changes in the amounts of comprehensive
income items, which are currently reported as separate components of equity,
be shown in a financial statement, displayed as prominently as other financial
statements. The common components of other comprehensive income would include
foreign currency translation adjustments, minimum pension liability
adjustments and/or unrealized gains or losses on available-for-sale
securities. The Statement does not require a specific format for the
financial statement in which comprehensive income is reported, but does
require that an amount representing total comprehensive income be reported in
that statement.
In June 1997, the FASB issued FAS 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION". This Statement will change the way
companies report information about segments of their business in their annual
financial statements and require companies to report selected segment
information in their quarterly reports issued to shareholders. It also
requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports
revenues, and its major customers. The Statement also requires companies to
disclose segment data based on how management makes decisions about allocating
resources to segments and measuring their performance.
Adoption of FAS No. 130 and FAS No. 131 are required for the Company in fiscal
1999. 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 disclosure requirements.
42
B.B. WALKER COMPANY AND SUBSIDIARY
STOCK PRICES
B.B. Walker Company common stock is publicly traded. Markets in B.B. Walker
Company common stock are maintained by Scott & Stringfellow of Winston-Salem,
NC and Interstate Securities of Charlotte, NC.
Approximately 1,177 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 21.27% of the total shares issued
and outstanding. At the last Annual Meeting of the Shareholders held on March
17, 1997, 79.77% 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
-------------- ---------------
1997:
First Quarter $ 1 $ 3/4 $ 1 1/2 $ 1 1/4
Second Quarter 3/4 1/4 1 1/4 3/4
Third Quarter 3/8 1/4 7/8 3/4
Fourth Quarter 1/2 3/8 1 1/4 7/8
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
These Over-the-Counter market quotations reflect interdealer prices, without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
43
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
JOHN R. WHITENER
Controller
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 16, 1998. 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