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 THIRD QUARTER ENDED AUGUST 1, 1998
Commission File Number 0-934
----------------------------
B. B. WALKER COMPANY
(Exact name of registrant as specified in its charter)
North Carolina 56-0581797
------------------------------- ----------------
(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
--------------
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 September 11, 1998, 1,720,954 shares of the Registrant's voting common
stock with a par value of $1.00 per share were outstanding.
B.B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
August 1, November 1,
Assets 1998 1997
-------- ----------- -----------
Cash $ 1 $ 1
Accounts receivable, less allowance for doubtful
accounts of $560 in 1998 and $503 in 1997 6,876 9,084
Inventories 9,791 9,533
Prepaid expenses 377 413
Deferred income tax benefit, current 237 237
----------- -----------
Total current assets 17,282 19,268
Property, plant and equipment, net of accumulated
depreciation and amortization of $6,459 in 1998
and $6,256 in 1997 1,686 1,750
Other assets 128 156
----------- -----------
$ 19,096 $ 21,174
=========== ===========
(Continued)
1
B.B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, Continued
(In Thousands)
(Unaudited)
August 1, November 1,
Liabilities and Shareholders' Equity 1998 1997
------------------------------------ ----------- -----------
Borrowings under finance agreement $ 6,853 $ 7,364
Accounts payable, trade 3,404 3,937
Accrued salaries, wages and bonuses 207 468
Other accounts payable and accrued liabilities 564 489
Current portion of long-term obligations 2,500 1,087
Income taxes payable 193 23
----------- -----------
Total current liabilities 13,722 13,368
----------- -----------
Long-term obligations, net of current portion 1,439 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, 1,720,954 shares in 1998 and
1,726,534 shares in 1997 issued and outstanding 1,721 1,727
Capital in excess of par value 2,717 2,724
Retained earnings (deficit) (537) 129
Shareholders' loans (81) (106)
----------- -----------
Total shareholders' equity 3,903 4,557
----------- -----------
$ 19,096 $ 21,174
=========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
2
B.B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited) (Unaudited)
Third Quarter Ended Nine Months Ended
-------------------------- --------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales $ 5,617 $ 6,902 $ 21,128 $ 23,290
Interest and other income 23 7 207 54
----------- ----------- ----------- -----------
Total revenues 5,640 6,909 21,335 23,344
----------- ----------- ----------- -----------
Cost of products sold 4,247 5,062 15,769 17,244
Selling and administrative expenses 1,386 1,593 5,209 5,195
Depreciation and amortization 66 112 205 351
Interest expense 271 276 812 930
----------- ----------- ----------- -----------
Total costs and expenses 5,970 7,043 21,995 23,720
----------- ----------- ----------- -----------
Loss before benefit from income taxes and
minority interest (330) (134) (660) (376)
Benefit from income taxes - (20) - (100)
Minority interest 1 1 2 2
----------- ----------- ----------- -----------
Net loss (331) (115) (662) (278)
Retained earnings (deficit)at beginning of period (205) (55) 129 111
Dividends on preferred stock (1) (1) (4) (4)
----------- ----------- ----------- -----------
Retained earnings (deficit) at end of period $ (537) $ (171) $ (537) $ (171)
=========== =========== =========== ===========
Net loss per share:
Basic $ (.19) $ (.07) $ (.39) $ (.16)
=========== =========== =========== ===========
Diluted $ (.19) $ (.07) $ (.38) $ (.16)
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 1,721 1,727 1,724 1,727
=========== =========== =========== ===========
Diluted 1,767 1,730 1,748 1,733
=========== =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
3
B.B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
--------------------------
August 1, August 2,
1998 1997
----------- -----------
Cash Flows From Operating Activities:
Net loss $ (662) $ (278)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 205 351
Gain on sale of property, plant and equipment (3) (26)
Deferred income taxes - 150
(Increase) decrease in:
Accounts receivable, net 2,208 3,404
Inventories (258) 2,981
Prepaid expenses 36 105
Other assets 28 38
Increase (decrease) in:
Accounts payable, trade (533) (1,568)
Accrued salaries, wages and bonuses (261) (560)
Other accounts payable and accrued liabilities 75 (167)
Income taxes 170 813
----------- -----------
Net cash provided by operating activities 1,005 5,243
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (141) -
Proceeds from disposal of property, plant
and equipment 3 26
----------- -----------
Net cash provided by (used for)
investing activities (138) 26
----------- -----------
Cash Flows From Financing Activities:
Net borrowing under finance agreement (511) (5,021)
Proceeds from issuance of long-term obligations 52 198
Payment on long-term obligations (416) (455)
Loans to shareholders, net of repayments 12 13
Dividends paid on 7% cumulative preferred stock (4) (4)
----------- -----------
Net cash used for financing activities (867) (5,269)
----------- -----------
Net change in cash - -
Cash at beginning of year 1 1
----------- -----------
Cash at end of third quarter $ 1 $ 1
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1998, the Company accepted 5,580 shares of its common stock as
repayment of a loan to a shareholder of $13.
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
4
B.B. WALKER COMPANY AND SUBSIDIARY
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 nine months ended August 1, 1998 and August 2, 1997 each include thirty-
nine weeks of operations. The third quarters for 1998 and 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 AND SUBSIDIARY
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
per share for the third quarters and nine months ended August 1, 1998 and
August 2, 1997, respectively, is provided as follows (amounts in thousands,
except share amounts):
THIRD QUARTER ENDED
August 1, 1998 August 2, 1997
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Net loss $ (331) $ (115)
Less: Dividends on
preferred stock (1) (1)
--------- ---------
BASIC EPS
Net loss attributable
to common
shareholders (332) 1,720,954 $ (.19) (116) 1,726,534 $ (.07)
Effect of dilutive
securities 46,135 3,115
--------- ------------ ------ --------- ------------ ------
DILUTED EPS
Net loss attributable
to common
shareholders $ (332) 1,767,089 $ (.19) $ (116) 1,729,649 $ (.07)
========= ============ ====== ========= ============ ======
NINE MONTHS ENDED
August 1, 1998 August 2, 1997
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Net loss $ (662) $ (278)
Less: Dividends on
preferred stock (4) (4)
--------- ---------
BASIC EPS
Net loss attributable
to common
shareholders (666) 1,724,470 $ (.39) (282) 1,726,534 $ (.16)
Effect of dilutive
securities 23,990 6,021
--------- ------------ ------ --------- ------------ ------
DILUTED EPS
Net loss attributable
to common
shareholders $ (666) 1,748,460 $ (.38) $ (282) 1,732,555 $ (.16)
========= ============ ====== ========= ============ ======
6
B.B. WALKER COMPANY AND SUBSIDIARY
Notes To Consolidated Financial Statements, Continued
NOTE 3
- ------
Long-term obligations consist of the following amounts (in thousands):
(Unaudited)
August 1, November 1,
1998 1997
----------- -----------
Notes payable to banks $ 2,171 2,502
Notes payable to governmental authorities 578 610
Promissory notes payable to shareholders 1,190 1,182
Capital lease obligations - 9
----------- -----------
3,939 4,303
Less portion payable within one year 2,500 1,087
----------- -----------
$ 1,439 3,216
=========== ===========
NOTE 4
- ------
Inventories are composed of the following amounts (in thousands):
(Unaudited)
August 1, November 1,
1998 1997
----------- -----------
Finished goods $ 5,798 4,883
Work in process 803 884
Raw materials and supplies 3,190 3,766
----------- -----------
$ 9,791 9,533
=========== ===========
7
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
third quarters and nine months ended August 1, 1998 and August 2, 1997:
Third Nine
Quarter Ended Months Ended
------------------- -------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
--------- --------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 75.6% 73.3% 74.6% 74.0%
------ ------ ------ ------
Gross margin 24.4% 26.7% 25.4% 26.0%
Selling and administrative
expenses 24.7% 23.1% 24.7% 22.3%
Depreciation and amortization 1.2% 1.6% 1.0% 1.5%
Interest expense 4.8% 4.0% 3.8% 4.0%
Interest and other income (.4%) (.1%) (1.0%) (.2%)
------ ------ ------ ------
Loss before income taxes
and minority interest (5.9%) (1.9%) (3.1%) (1.6%)
Benefit from income taxes - (.3%) - (.4%)
Minority interest - - - -
------ ------ ------ ------
Net loss (5.9%) (1.6%) (3.1%) (1.2%)
====== ====== ====== ======
NET SALES
- ---------
Third quarter net sales in 1998 were $5,617,000, or $1,285,000 (18.6%) less
than third quarter net sales in 1997 of $6,902,000. For the nine month period
ended August 1, 1998, net sales were $21,128,000, a $2,162,000 (9.3%) decrease
from the net sales of $23,290,000 in the comparable nine month period ended
August 2, 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 89.4% of net sales in the third
quarter of 1998 and 90.8% of net sales in the third quarter of 1997. Retail
sales made up the remaining net sales of 10.6% in 1998 and 9.2% in 1997. For
the comparable nine month periods, manufactured footwear comprised 91.8% of
net sales in 1998 and 91.9% of net sales in 1997. The remaining net sales of
8.2% in 1998 and 8.1% in 1997 were sales from retail outlets.
8
B.B. WALKER COMPANY AND SUBSIDIARY
Management's Discussion and Analysis of
Results of Operations and Financial Condition, Continued
NET SALES, Continued
- --------------------
Sales of branded footwear were $632,000 (14.6%) lower in the third quarter of
1998 when compared to the same period of 1997. Pairs shipped were off 13.4%
while the sales price per pair was comparable to the prior year. For the nine
month period, 1998 branded sales were $1,230,000 (8.6%) lower than 1997
branded sales. Pairs shipped in the first nine months were down 14.6% from
the prior year while the sales price per pair rose 6.1%. The changes in price
per pair can be attributed to the following reasons. For the year-to-date,
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. The
Company has also introduced new styles that are priced in a higher range than
previous offerings. In addition, during the first six months of 1997, the
Company closed out many styles at lower prices and at significant discounts.
A significant factor impacting the decrease in branded sales comes from moves
the Company made in the prior year. In 1997, the Company repositioned its
product lines and dramatically reduced the number of outdoor styles in its
line. Most of this adjustment to the product lines was accomplished in the
first six months of 1997 with the closeout of numerous styles, particularly
outdoor styles. Accordingly, no comparable sales were made in the first six
months of 1998. These styles were not replaced as the Company focused on its
strengths, western and work footwear. The loss in sales from outdoor footwear
has been partially replaced by an increase in western branded business. Year-
to-date, the Company's western branded business has improved 6.2% over the
prior year.
Private label sales for the third quarter and nine month period in 1998 were
down $264,000 (19.2%) and $570,000 (10.2%), respectively. Pairs shipped were
down 21.6% and 11.4% in the third quarter and nine months, respectively. The
price per pair remained comparable to the prior year in both the third quarter
and the nine month period. The results of this division reflect the activity
of several large accounts and is determined by the timing of shipments. A
soft retail sector and the introduction of new styles resulted in lower orders
from several key accounts in the first half of 1998. In addition, one large
contract for the manufacture of footwear was not renewed in 1998 as the
customer elected to use offshore production.
Other sales, which consist primarily of sales from the Company's retail
outlets and sales to institutional customers, decreased $361,000 (10.7%) in
the first nine months of 1998 from the prior year. In the third quarter of
1998, net sales decreased $390,000 (32.2%) over the prior year. The decrease
is attributed primarily to lower institutional sales. A significant contract
with one customer ended during the second quarter and the Company was not
successful in its bid to retain the contract. Retail sales were down
primarily because of the closing of its retail outlet in Myrtle Beach, SC at
the end of the first quarter of 1997. This retail store contributed
approximately $79,000 to net sales before closing. In addition, same store
sales for the remaining two retail stores were down approximately 4.2%.
9
B.B. WALKER COMPANY AND SUBSIDIARY
Management's Discussion and Analysis of
Results of Operations and Financial Condition, Continued
GROSS MARGIN
- ------------
For the first nine months of 1998, the Company's gross margin was 25.4%, a
decrease of .6% from the gross margin of 26.0% for the comparable period in
1997. For the third quarter of 1998 compared to 1997, the gross margin
decreased to 24.4% from 26.7%. The decrease, particularly in the third
quarter, can be attributed to adjustments made to the production facilities of
the Company. During the third quarter of 1998, the Company moved all welt
production in the Asheboro plant to the Somerset plant. This primarily
consisted of branded and private label work shoes. Western footwear with welt
construction were being produced in Somerset. At the same time, the cement
production line in the Somerset plant was transferred to the Asheboro plant.
As a result, the Company incurred unfavorable variances in its manufacturing
operations. Gross margins from sales of product continue to run ahead of the
prior year as a result of a more favorable product mix.
SELLING AND ADMINISTRATIVE EXPENSES
- -----------------------------------
Selling and administrative expenses in the third quarter of 1998 were
$1,386,000, or $207,000 (13.0%) less than the third quarter of 1997 of
$1,593,000. In the first nine months of 1998, selling and administrative
expenses were $5,209,000 as compared to the first nine months of 1997 of
$5,195,000, an increase of $14,000 (.3%). While the expenses for the first
nine months were comparable, the decrease in the third quarter can be
attributed to adjustments made to advertising accruals. Advertising expenses
are down $41,000 and $233,000 in the first nine months and third quarter,
respectively. The Company reviewed its advertising budget and adjusted several
programs in response to the lower sales volume and business conditions.
Salary and benefits were up $128,000 and $15,000 for the nine months and third
quarter, respectively. The Company has replaced some positions that were
unfilled in the first half of the prior year as well as providing merit
increases to key employees. All other selling and administrative expenses are
comparable to the prior year.
INTEREST EXPENSE
- ----------------
Interest expense for the nine months ended August 1, 1998 was $812,000, or
$118,000 (12.7%) lower than interest expense of $930,000 for the nine months
ended August 2, 1997. For the third quarter, 1998 expense was $271,000, or
$5,000 (1.8%) lower than 1997 expense of $276,000. The decrease for the nine
month can be attributed to the lower average balances on outstanding debt,
mainly the revolving credit line. Average outstanding advances for the first
nine months of 1998 under the revolving credit line were approximately
$1,300,000 lower than in 1997. The average outstanding balance for the
revolving credit line was comparable for the third quarter. The slight decrease
in interest expense was from the lower balances for long-term debt during the
period. Fixed 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 nine months
of 1998.
10
B.B. WALKER COMPANY AND SUBSIDIARY
Management's Discussion and Analysis of
Results of Operations and Financial Condition, Continued
DEPRECIATION AND AMORTIZATION
- -----------------------------
Depreciation and amortization was $205,000 in 1998 as compared to $351,000 in
1997 for the first nine months of the year. In the third quarter,
depreciation expense was $66,000 in 1998 compared to $112,000 in 1997. The
Company continues to invest in capital assets only as necessary to maintain
the current level of operations. With the low level of capital expenditures
made in recent years, depreciation charges on fixed assets that are becoming
fully depreciated are not being replaced, resulting in lower depreciation
expense.
BENEFIT FROM INCOME TAXES
- -------------------------
For the first nine months of 1998, the Company recorded no benefit from income
taxes as compared to the first nine months of 1997 when the Company recorded a
benefit from income taxes of $100,000. 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 reviewed the valuation allowance reserved
against its deferred income tax asset at the end of the third quarter and
determined that the net deferred income tax asset was appropriately recorded
at its net realizable value.
NET LOSS
- --------
The Company reported a net loss of $331,000 for the third quarter and a net
loss of $662,000 for the first nine months of 1998. For the comparable
periods of 1997, the Company had a net loss of $115,000 for the third quarter
and a net loss of $278,000 for the nine month period. The higher losses are
primarily attributed to the lower sales volume when compared to the prior
year.
11
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 1.5%, or 10%, at August 1, 1998). The Company had outstanding advances
of $6,853,000 at August 1, 1998 and an additional $352,000 available under the
agreement.
During the first nine months of 1998, the Company generated $1,005,000 of cash
from operations which was used to reduce the advances under the revolving
finance agreement by $511,000 and reduce other long-term obligations by
$364,000. 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.
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 signed an amendment to the credit agreement during the third
quarter that extended the revolving credit maturity date to March 31, 2001.
The revolving credit agreement was set to expire on July 31, 1998. In
addition, certain restrictive covenants under the revolving finance agreement
were amended for the period ended November 1, 1997 and thereafter and the
interest rate was reduced from prime plus 1.75% to prime plus 1.5%. Finally,
the amendment adjusted the amortization and maturity date of the term loan.
The balance of the term loan outstanding on the amendment date was refinanced
on a seven year amortization schedule which lowered the monthly payments for
principal approximately $12,000. The term loan maturity date was extended to
December 31, 1998 and the entire balance of the term loan was classified as
short-term debt. By separate agreement, the bank agreed that $1,500,000 of the
amount outstanding to them would be considered long-term for purposes of
calculating the financial covenants. The term loan bears interest at the bank's
prime rate plus 1.5% (10% at August 1, 1998).
12
B.B. WALKER COMPANY AND SUBSIDIARY
Management's Discussion and Analysis of
Results of Operations and Financial Condition, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
- ------------------------------------------
As discussed above, the Company must meet certain restrictive financial
covenants that were amended effective November 1, 1997 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 as
amended. 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, an inventory turnover ratio of not less than 2.0 to 1, a consolidated
tangible net worth, as defined in the agreement, of not less than $5,000,000
at August 1, 1998 and consolidated working capital of not less than $5,000,000
at August 1, 1998. In addition, the Company cannot make capital expenditures
in excess of $150,000 during the fiscal year without the agreement of the bank
and must report net income of at least $50,000 for the 1998 fiscal year. Because
of losses in the first nine months of 1998, the Company will need a strong
fourth quarter to meet the consolidated tangible net worth and net income
covenants. Historically, the Company's fourth quarter has been its most
profitable quarter of the fiscal year. At August 1, 1998, the Company was in
compliance with each of the financial covenants as defined in the amendment.
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 $5,060,000 at August 1, 1998 and
$5,900,000 at November 1, 1997. The ratio of current assets to current
liabilities increased to 1.41 to 1 at August 1, 1998 compared to 1.44 to 1 at
November 1, 1997.
FINANCIAL CONDITION
ACCOUNTS RECEIVABLE
- -------------------
Accounts receivable were $6,876,000 at August 1, 1998 compared to $9,084,000
at November 1, 1997, a decrease of $2,208,000. Trade receivables have
historically been at their highest point at the end of the fourth quarter
because of the heavy sales volume related to Christmas buying by retailers.
The Company had $560,000 and $503,000 reserved as an allowance for
uncollectible accounts at August 1, 1998 and November 1, 1997, respectively.
13
B.B. WALKER COMPANY AND SUBSIDIARY
Management's Discussion and Analysis of
Results of Operations and Financial Condition, Continued
INVENTORIES
- -----------
Inventories were $9,791,000 at August 1, 1998, an increase of $258,000 from
the inventories held at November 1, 1997 of $9,533,000. Finished goods have
increased $915,000. This has been offset by an $81,000 decrease in work in
process and a $576,000 decrease in raw materials and supplies. The investment
in work in process and raw materials are down as the Company has focused on
improving the efficiency of materials procurement and plant utilization. The
increase in finished goods is attributed to a lower than expected sales volume
and the buildup of inventory for the Christmas selling season.
BORROWINGS UNDER FINANCE AGREEMENT
- ----------------------------------
The balance outstanding under the finance agreement was $6,853,000 at August
1, 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 $2,208,000 in the first
nine months of 1998.
YEAR 2000 DISCLOSURE
- --------------------
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems to accurately process
information that may be date-sensitive. Any of the Company's programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. The Company utilizes a number of computer
programs across its entire operation. The Company has allocated internal
resources to addressing the Year 2000 issues on its critical systems and
currently believes that the costs of addressing the issue will not have a
material adverse impact on the Company's financial position. The Company
anticipates completing this project in the time period from March 1999 to
June 1999. However, if the Company and third parties upon which it relies are
unable to address this issue in a timely manner, it could result in a material
financial risk to the Company. In order to assure that this does not occur, the
Company plans to devote all resources required to resolve any significant year
2000 issues in a timely manner.
14
B.B. WALKER COMPANY AND SUBSIDIARY
Management's Discussion and Analysis of
Results of Operations and Financial Condition, Continued
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, (5) management's
ability to accurately predict the adequacy of the Company's financing
arrangement to meet its working capital and capital expenditure requirements or
the inability of the Company to meet its financial covenants under its financing
arrangement, and (6) uncertainties related to the Company's efforts to prepare
its systems and technology for the Year 2000, as well as uncertainties related
to the ability of third parties with whom the Company has business relationships
to address the Year 2000 issues in a timely and adequate manner.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits Filed:
(4)(c)(9) Fifth Amendment to the Credit Agreement between B.B. Walker
Company and Mellon Bank, N.A.
(4)(c)(10) Separate Agreement with Mellon Bank Regarding Calculation
of Financial Covenants
(27) Financial Data Schedule for the Third Quarter ended August 1, 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 September 11, 1998 KENT T. ANDERSON
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Kent T. Anderson
Chairman of the Board, Chief
Executive Officer and President
Date September 11, 1997 JOHN R. WHITENER
------------------ --------------------
John R. Whitener
Vice President and Controller
15