UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FIRST QUARTER ENDED JANUARY 31, 1998
Commission File Number 0-934
B.B. WALKER COMPANY
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(Exact name of registrant as specified in its charter)
North Carolina 56-0581797
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
414 East Dixie Drive, Asheboro, NC 27203
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (336) 625-1380
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
On March 13, 1998, 1,726,534 shares of the Registrant's voting common stock
with a par value of $1.00 per share were outstanding.
Cover
B.B. WALKER COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
January 31, November 1,
Assets 1998 1997
------ ----------- -----------
Cash $ 1 $ 1
Accounts receivable, less allowance
for doubtful accounts of $540 in
1998 and $503 in 1997 7,536 9,084
Inventories 9,157 9,533
Prepaid expenses 233 413
Deferred income tax benefit, current 237 237
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Total current assets 17,164 19,268
Property, plant and equipment, net of
accumulated depreciation and amortization
of $6,330 in 1998 and $6,256 in 1997 1,787 1,750
Other assets 159 156
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$ 19,110 $ 21,174
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1
(Continued)
B.B. WALKER COMPANY
CONSOLIDATED BALANCE SHEETS, Continued
(In thousands)
(Unaudited)
January 31, November 1,
Liabilities and Shareholders' Equity 1998 1997
------------------------------------ ----------- -----------
Borrowings under finance agreement $ 6,395 $ 7,364
Accounts payable, trade 3,105 3,937
Accrued salaries, wages and bonuses 250 468
Other accounts payable and accrued liabilities 746 489
Current portion of long-term obligations 1,009 1,087
Income taxes payable 23 23
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Total current liabilities 11,528 13,368
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Long-term obligations 3,170 3,216
Minority interests in consolidated subsidiary 33 33
Shareholders' equity:
7% cumulative preferred stock, $100 par value,
1,150 shares authorized, 828 shares issued
and outstanding in 1998 and 1997 83 83
Common stock, $1 par value, 6,000,000 shares
authorized, 1,726,534 shares issued and
outstanding in 1998 and 1997 1,727 1,727
Capital in excess of par value 2,724 2,724
Retained earnings (deficit) (53) 129
Shareholders' loans (102) (106)
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Total shareholders' equity 4,379 4,557
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$ 19,110 $ 21,174
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
2
B.B. WALKER COMPANY
CONSOLIDATED STATEMENTS OF LOSS
(In thousands, except per share data)
(Unaudited)
First Quarter
Ended
------------------------
January 31, February 1,
1998 1997
----------- -----------
Net sales $ 7,732 $ 8,289
Interest and other income 131 32
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Total revenues 7,863 8,321
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Cost of products sold 5,792 6,181
Selling and administrative expenses 1,901 1,880
Depreciation and amortization 74 125
Interest expense 276 360
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Total costs and expenses 8,043 8,546
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Loss before income taxes and
minority interest (180) (225)
Benefit from income taxes - (90)
Minority interest 1 1
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Net loss (181) (136)
Retained earnings, beginning of quarter 129 111
Dividends on preferred stock (1) (1)
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Retained earnings, end of quarter $ (53) $ (26)
======= =======
Net loss per share:
Basic $ (.11) $ (.08)
======= =======
Diluted $ (.10) $ (.08)
======= =======
Weighted average common shares outstanding:
Basic 1,727 1,727
======= =======
Diluted 1,738 1,728
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
3
B.B. WALKER COMPANY
CONSOLIDATED CASH FLOWS STATEMENTS
(In thousands)
(Unaudited)
First Quarter
Ended
------------------------
January 31, February 1,
1998 1997
----------- -----------
Cash Flows From Operating Activities:
Net loss $ (181) $ (136)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 74 125
Gain on sale of fixed assets - (17)
Deferred income taxes - (30)
(Increase) decrease in:
Accounts receivable, net 1,548 2,748
Inventories 376 1,711
Prepaid expenses 180 110
Other assets (3) 15
Increase (decrease) in:
Accounts payable, trade (832) (956)
Accrued salaries, wages and bonuses (218) (349)
Other accounts payable and accrued liabilities 257 93
Income taxes payable - (60)
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Net cash provided by operating activities 1,201 3,254
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Cash Flows From Investing Activities:
Capital expenditures (111) -
Proceeds from disposal of property,
plant and equipment - 17
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Net cash provided by (used for)
investing activities (111) 17
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Cash Flows From Financing Activities:
Net borrowing under finance agreement (969) (3,086)
Proceeds from issuance of long-term obligations 11 6
Payment on long-term obligations (135) (194)
Loans to shareholders, net of repayments 4 4
Dividends paid on 7% cumulative preferred stock (1) (1)
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Net cash used for financing activities (1,090) (3,271)
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Net change in cash - -
Cash at beginning of year 1 1
------- -------
Cash at end of quarter $ 1 $ 1
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
4
B.B. WALKER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
- ------
A summary of the Company's significant accounting policies is presented on
page 9 of its 1997 Annual Report to Shareholders. Users of financial
information presented for interim periods are encouraged to refer to the
footnotes contained in the Annual Report to Shareholders when reviewing interim
financial results.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary for a fair presentation of the
financial results of B.B. Walker Company and Subsidiary (the "Company") for the
interim periods included. All such adjustments are of a normal recurring
nature. The results of operations for the interim periods shown in this report
are not necessarily indicative of the results to be expected for the fiscal
year.
The Company's operations are reported on a fifty-two, fifty-three week fiscal
year that ends on the Saturday closest to October 31. The results for the
first quarters ended January 31, 1998 and February 1, 1997 each include
thirteen weeks of operations.
Note 2
- ------
The Company has adopted the provisions of the Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS No. 128) effective January 31,
1998. SFAS No. 128 requires the presentation of basic and diluted earnings per
share. Basic EPS is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed giving effect to all
dilutive potential common shares that were outstanding during the period.
Dilutive potential common shares consist of the incremental common shares
issuable upon exercise of stock options. All prior period earnings per share
amounts have been restated to comply with SFAS No. 128.
5
B.B. WALKER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
In accordance with the disclosure requirements of SFAS No. 128, a
reconciliation of the numerator and denominator of basic and diluted earnings
is provided as follows (amounts in thousands, except share amounts):
January 31, 1998 February 1, 1997
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Net loss $ (181) $ (136)
Less: Dividends on
preferred stock (1) (1)
--------- ---------
BASIC EPS
Net loss attributable
to common
shareholders (182) 1,726,534 $ (.11) (137) 1,726,534 $ (.08)
Effect of Dilutive
Securities 11,912 1,325
--------- ------------ ------ --------- ------------ ------
DILUTED EPS
Net loss attributable
to common
shareholders $ (182) 1,738,446 $ (.10) $ (137) 1,727,859 $ (.08)
========= ============ ====== ========= ============ ======
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B.B. WALKER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Note 3
- ------
Long-term obligations consist of the following amounts (in thousands):
(Unaudited)
January 31, November 1,
1998 1997
----------- -----------
Notes payable to banks $ 2,391 $ 2,502
Notes payable to governmental authorities 600 610
Promissory notes payable to shareholders 1,188 1,182
Capital lease obligations - 9
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4,179 4,303
Less portion payable within one year 1,009 1,087
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$ 3,170 $ 3,216
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Note 4
- ------
Inventories are composed of the following amounts (in thousands):
(Unaudited)
January 31, November 1,
1998 1997
----------- -----------
Finished goods $ 5,308 $ 4,883
Work in process 603 884
Raw materials and supplies 3,246 3,766
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$ 9,157 $ 9,533
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B.B. WALKER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
- ---------------------
The following summarizes the results of operations for the Company for the
first quarters ended January 31, 1998 and February 1, 1997:
Three
Months Ended
-------------------------
January 31, February 1,
1998 1997
----------- -----------
Net sales 100.0% 100.0%
Cost of products sold 74.9% 74.6%
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Gross margin 25.1% 25.4%
Selling and administrative expenses 24.6% 22.7%
Depreciation and amortization 1.0% 1.5%
Interest expense 3.5% 4.3%
Interest and other income (1.7%) (.4%)
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Loss before income taxes
and minority interest (2.3%) (2.7%)
Benefit from income taxes - (1.1%)
Minority interest - -
------- -------
Net loss (2.3%) (1.6%)
======= =======
Net Sales
- ---------
Net sales for the first quarter of 1998 were $7,732,000, or 6.7% lower than net
sales of $8,289,000 in the first quarter of 1997. 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 92.6%
of net sales in the first quarter of 1998 and 91.8% of net sales in the first
quarter of 1997. The remaining 7.4% and 8.2% of net sales in 1998 and 1997,
respectively, were sales from the Company's retail outlets.
8
B.B. WALKER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION, Continued
The decrease in net sales can be attributed to two factors. First, the Company
repositioned its product lines in the first quarter of 1997 by evaluating all
styles in its branded lines and eliminating many underperforming styles. The
majority of the styles dropped from the branded lines were outdoor styles. In
line with the Company's new approach, many of these styles were not replaced as
the Company elected to focus on western boots and work boots. The Company
spent the first quarter of 1997 closing these styles out of the line and,
accordingly, no comparable sales were made in the first quarter of 1998.
Second, the Company's western branded business continues to be impacted by a
weak western retail sector. Historically, western footwear has proven to be a
cyclical business. Demand reached a peak in 1993 and 1994 but has declined
during the past three years. With the repositioning of its product lines, the
Company's sales are more dependent on its western branded business.
Sales of the Company's branded footwear in the first quarter of 1998 were down
$751,000, or 15.2%, from 1997's first quarter because of the reasons discussed
above. Branded pairs shipped were down 19.1% in the first quarter while price
per pair was up 7.9%. The improvement in price per pair can be attributed to
product mix. More of the Company's branded net sales are coming from its
western styles that carry a higher price per pair than its work or outdoor
styles. In addition, during the first quarter of 1997, the Company closed out
many styles at low prices.
Private label sales in the first quarter were up $299,000, or 13.8%, from the
prior year. The increase can be attributed to stronger work and outdoor
private label business. Much of this business is dependent on the timing of
orders for several large customers. Pairs shipped were up 14.5% while the
price per pair remained fairly unchanged.
Other sales, which consist primarily of sales from the Company's retail outlets
and sales to institutional customers, decreased $106,000, or 9.0%, from the
prior year. The Company closed its retail outlet in Myrtle Beach, SC at the
end of the 1997 first quarter. In addition, same store sales for the remaining
two retail stores were down approximately 6.6%. Sales to institutional
customers were relatively the same as the prior year.
9
B.B. WALKER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION, Continued
Gross Margin
- ------------
The Company's gross margin as a percentage of sales was 25.1% for the first
three months of 1998 and 25.4% for the first three months of 1997. The
Company's gross margins showed a slight decrease from the prior year primarily
because of the sources from which net sales were derived. For the first
quarter of 1998, 54.3% of net sales came from branded sales and 31.9% came from
private label sales. For the comparable period in 1997, 59.8% of net sales
were branded sales and 26.1% were private label sales. Since private label
sales carry lower margins, an overall decrease was experienced. This was
partially offset by better operating results from our manufacturing divisions.
The Company's gross margin percentage continues to be impacted by competitive
pressure at the retail level that requires that the Company remain competitive
in the pricing and terms offered.
Selling and Administrative Expenses
- -----------------------------------
Selling and administrative expenses were $1,901,000 for the first quarter of
1998 as compared to $1,880,000 for the first quarter of 1997, an increase of
$21,000, or 1.1%. Expenses in all categories were comparable with the prior
year. Management continues to place emphasis on controlling costs and
improving operations in the selling and administrative areas. Many reductions
in expenses were realized in the prior year as the Company restructured its
sales force and implemented other operational changes in the first quarter.
Interest Expense
- ----------------
Interest expense in the first quarter of 1998 was $276,000, or $84,000 lower
than interest expense of $360,000 for the first quarter of 1997. The decrease
for the three month period can be attributed to the lower average balance on
outstanding debt. Average outstanding advances under the revolving finance
agreement were approximately $3,000,000 lower in the first quarter of 1998 than
in 1997. Interest and other fees incurred for this agreement were
approximately the same rate for each year. Other long-term debt carried lower
balances in 1998 when compared to 1997 as the Company continues to amortize the
debt according to each issue's respective terms. No new material debt was
added during the first quarter.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization in the first quarter of 1998 was $74,000, or
$51,000 less than 1997 expenses of $125,000. 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.
10
B.B. WALKER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION, Continued
Benefit From Income Taxes
- -------------------------
For the first quarter of 1998, the Company recorded no benefit from income
taxes as compared to the first quarter ended February 1, 1997 where the Company
recorded a benefit from income taxes of $90,000. The Company exhausted all
potential recoveries of income taxes in 1997 and no more carryback exists.
Therefore, the Company's net losses before income taxes are being accounted for
as income tax loss carryforwards. The Company evaluated the valuation
allowance reserved against its deferred income tax asset at the end of the
first quarter and determined that the net deferred income tax asset was
appropriately recorded at its net realizable value.
Net Income
- ----------
The Company reported a net loss of $181,000 in the first quarter of 1998 and
$136,000 in the first quarter of 1997. The primary difference was the income
tax benefit of $90,000 recorded in 1997 and no such benefit being recorded in
1998.
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 January 31, 1998). The Company had outstanding
advances of $6,395,000 at January 31, 1998 and an additional $1,071,000
available under the agreement.
During the first quarter of 1998, the Company generated $1,201,000 of cash from
operations which was used to reduce the advances under the revolving finance
agreement by $969,000. The Company continues 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.
11
B.B. WALKER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION, Continued
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. The credit line available under the
agreement is currently $8,000,000. In addition, the sublimit for inventory,
the maximum advances that can be taken against inventory under the revolving
credit agreement, is $4,000,000. The Company must also meet certain
restrictive financial covenants that were amended effective November 2, 1996
and for periods 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 the agreement
of the bank. At January 31, 1998, the Company was in technical default of its
consolidated tangible net worth covenant. The Company has orally agreed with
the bank to the principal terms of an amendment which addresses its financial
covenants. Upon signing the amendment, the Company will be in compliance with
all of its 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 that carried a balance of approximately $2,060,000. The
term loan bears interest at the bank's prime rate plus 1.75% (10.25% at January
31, 1998).
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.
The Company 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. 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 $5,636,000 at January 31, 1998 and
$5,900,000 at November 1, 1997. The ratio of current assets to current
liabilities increased to 1.49 to 1 at January 31, 1998 compared to 1.44 to 1 at
November 1, 1997.
12
B.B. WALKER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION, Continued
FINANCIAL CONDITION
- -------------------
Accounts Receivable
- -------------------
Accounts receivable were $7,536,000 at January 31, 1998 compared to $9,084,000
at November 1, 1997, a decrease of $1,548,000. Trade receivables are
historically at their highest point at the end of the fourth quarter because of
the heavy sales volume related to Christmas buying by retailers. Second,
certain dating programs offered by the Company ended in the first quarter of
1998, resulting in collection of a significant amount of outstanding
receivables.
Inventories
- -----------
Inventories were $9,157,000 at January 31, 1998, a decrease of $376,000 from
the inventories held at November 1, 1997 of $9,533,000. Of the decrease,
approximately $281,000 is work in process and $520,000 is raw materials. These
were offset by an increase of $425,000 in finished goods. The Company
continues to focus on improving turns in inventory and improving the efficiency
of raw material procurement.
Borrowings Under Finance Agreement
- ----------------------------------
The balance outstanding under the finance agreement was $6,395,000 at January
31, 1998 compared to $7,364,000 at November 1, 1997. The decrease can be
attributed to the cash applied against the outstanding balance from collections
of accounts receivable which were down $1,548,000 in the first quarter of 1998
and better management of inventories.
FORWARD-LOOKING STATEMENTS
- --------------------------
The foregoing discussion contains some forward-looking statements about the
Company's financial condition and results of operations, which are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's judgment only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements
to reflect events and circumstances that arise after the date hereof.
Factors that might cause actual results to differ materially from these
forward-looking statements include (1) the effects of general economic
conditions, (2) the impact of competitive products and pricing in the footwear
industry, (3) failure to achieve anticipated sales results, (4) management's
ability to accurately predict the effect of cost reductions, and (5)
management's ability to accurately predict the adequacy of the Company's
financing arrangement to meet its working capital and capital expenditure
requirements.
13
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Filed:
(27) Financial Data Schedule for the first quarter ended January
31, 1998
(b) Reports on Form 8-K:
NONE
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
B.B. Walker Company
Date March 17, 1998 KENT T. ANDERSON
---------------------------------
Kent T. Anderson
Chairman of the Board, Chief
Executive Officer and President
Date March 17, 1998 JOHN R. WHITENER
---------------------------------
John R. Whitener
Controller
14