Exhibit 13
----------
B.B. WALKER COMPANY AND SUBSIDIARY
FIFTY-FIRST ANNUAL REPORT TO SHAREHOLDERS
OCTOBER 31, 1998
1998 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 cushion insole.
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.
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.
Made for the working consumer, DURATUFF[REGISTERED]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.
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 392 people at October 31, 1998.
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
---------------------------------------
October 31, November 1, November 2,
1998 1997 1996
(52 weeks) (52 weeks) (53 weeks)
----------- ----------- -----------
(In thousands, except per share data)
OPERATIONS
Net sales $ 28,813 $ 32,648 $ 37,506
======== ======== ========
Income (loss) before income taxes
and minority interest (736) (54) (4,659)
Provision for (benefit from)
income taxes (813) (80) (620)
Minority interest (2) (2) (2)
-------- -------- --------
Net income (loss) $ 75 $ 24 $ (4,041)
======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE $ .04 $ .01 $ (2.34)
======== ======== ========
Average number of shares outstanding 1,724 1,729 1,727
======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ .04 $ .01 $ (2.34)
======== ======== ========
Average number of shares outstanding 1,727 1,732 1,728
======== ======== ========
FINANCIAL CONDITION,
Current assets $ 18,314 $ 19,268 $ 24,953
Current liabilities 14,102 13,368 19,534
Working capital 4,212 5,900 5,419
Current ratio 1.30 to 1 1.44 to 1 1.28 to 1
Long-term obligations,
non-current portion 1,303 3,216 3,286
Shareholders' equity 4,642 4,557 4,522
Book value per common share 2.65 2.59 2.57
1
CHAIRMAN'S MESSAGE TO SHAREHOLDERS
TO OUR SHAREHOLDERS
B. B. Walker Company's fiscal year ended on October 31, 1998. We are happy
to report a net income of $75,000 in 1998 compared to $24,000 in 1997, even
though the loss from operations in 1998 was $736,000 compared to a $54,000
loss in 1997. Since we anticipate significant net income in 1999 (which will
allow the Company to offset related income tax liabilities with net operating
loss carryforwards from prior years), we were able to adjust our tax valuation
allowance by $609,000 in 1998 compared to only $62,000 in 1997.
Late in the fourth quarter of 1998, the Company received an attractive offer
to sell all of its approximately 22.3 acres of real property in Asheboro,
North Carolina. This land is in one of the prime commercial sections of
Randolph County. In January 1999, the Company entered into a contract to sell
its Asheboro, NC property. Under this contract, the purchaser will have until
February 26, 1999 to examine the suitability of the property for its needs.
During that period, the contract may be terminated by the purchaser without
further obligation to the Company. Accordingly, there can be no assurances
that the sale of the Asheboro, NC property will be consummated. If the
transaction closes, part of the purchase price will be paid in cash and part
will be paid by purchase money promissory note. A portion of the property
sold to the purchaser, including the tract of land on which the plant is
located, will be leased back to the Company for up to one year. The rent
under the lease equals the interest due under the promissory note. While
there will be costs associated with relocating the Asheboro facility and some
interruption in the Company's manufacturing operations, the Company has taken
steps to limit the effects of these matters and does not expect the relocation
to have a material adverse effect on the operations of the Company.
The Company operates two manufacturing facilities, the aforementioned one in
Asheboro, North Carolina, and one in Somerset, Pennsylvania. To make the
Company more competitive, we decided to move all of the production of footwear
with cement construction from the Somerset plant to the Asheboro plant. At
the same time, all of the footwear with welt construction was moved from the
Asheboro plant to the Somerset plant at a cost of over $190,000 late in the
third quarter of 1998. Since there was not enough product demand to support
two welt operations, this consolidation of operations in two separate locations
should create substantial manufacturing efficiencies in both production and
inventory costs beginning in fiscal 1999.
After the transfer of the welt operations to the Somerset plant was made in
1998, it was determined that a 282,000 square foot building was no longer
necessary to conduct business in Asheboro at our current level. Therefore,
the Company decided to sell the property and move its operations to a more
efficient operating space. Once the final contract is signed, we will begin
exploring suitable options and follow with an announcement detailing the next
phase of our operations.
2
Our increase in operating losses from the prior year was $682,000. Revenues
for 1998 were $28,813,000, a $3,835,000 (or 11.7%) decrease from 1997 revenues
of $32,648,000. Some of this decline in shipments was expected due to the
additional impact from the major changes made in 1997 to combine the sales
forces of the western boots and work/outdoor boots. We also attribute a
decrease in sales to some erosion in our Company's channel of distribution over
the past year. Many of our western retail customers either were in the process
of liquidation or went out of business during the past twelve months, which
severely hampered our Company's attempt to increase sales. While the
work/outdoor shoe shipments fell 22.9% in 1998, we did show a modest 2.4%
increase in western branded shipments, therefore allowing us to increase
western market share. Management is taking steps to address this deterioration
in revenues.
The coming year will be another one of major transition for B. B. Walker
Company, as we look forward to the relocation of our facilities in this area.
In the meantime, 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
Fiscal Year Ended
-------------------------------------
October 31, November 1, November 2,
1998 1997 1996
(52 weeks) (52 weeks) (53 weeks)
----------- ----------- -----------
(In thousands, except per share data)
Revenues:
Net sales (Note 11) $ 28,813 $ 32,648 $ 37,506
Interest and other income 39 77 43
------- ------- -------
28,852 32,725 37,549
------- ------- -------
Costs and expenses:
Cost of products sold (Note 13) 21,507 24,121 29,702
Selling and administrative
expenses (Notes 12 and 13) 6,736 6,996 10,377
Depreciation and amortization 269 458 637
Interest expense 1,076 1,204 1,492
------- ------- -------
29,588 32,779 42,208
------- ------- -------
Loss before income taxes
and minority interest (736) (54) (4,659)
Benefit from income taxes (Note 7) (813) (80) (620)
Minority interest (2) (2) (2)
------- ------- -------
Net income (loss) $ 75 $ 24 $ (4,041)
======= ======= =======
Basic and diluted earnings (loss)
per share (Note 1) $ .04 $ .01 $ (2.34)
======= ======= =======
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
October 31, November 1,
1998 1997
----------- -----------
(In thousands, except share data)
CURRENT ASSETS:
Cash $ 1 $ 1
Accounts receivable, less allowance for doubtful
accounts of $557 in 1998 and $503 in 1997 (Note 4) 7,157 9,084
Inventories (Notes 2 and 4) 9,660 9,533
Prepaid expenses 446 413
Deferred income tax benefit, current (Note 7) 1,050 237
------- -------
Total current assets 18,314 19,268
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization (Notes 3, 4, 5 and 14) 1,622 1,750
OTHER ASSETS 144 156
------- -------
$ 20,080 $ 21,174
======= =======
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
October 31, November 1,
1998 1997
----------- -----------
(In thousands, except share data)
CURRENT LIABILITIES:
Borrowings under finance agreement (Note 4) $ 6,885 $ 7,364
Accounts payable, trade 3,536 3,937
Accrued salaries, wages and bonuses 367 468
Other accounts payable and accrued liabilities 555 489
Portion of long-term obligations payable
within one year (Note 5) 2,566 1,087
Income taxes payable (Note 7) 193 23
------- -------
Total current liabilities 14,102 13,368
------- -------
LONG-TERM OBLIGATIONS (Note 5) 1,303 3,216
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 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 198 129
Equity loans collateralized by Company
common stock (77) (106)
------- -------
Total shareholders' equity 4,642 4,557
------- -------
COMMITMENTS AND CONTINGENCIES (Note 9)
$ 21,174 $ 21,174
======= =======
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
-------------------------------------
October 31, November 1, November 2,
1998 1997 1996
52 weeks) (52 weeks) (53 weeks)
----------- ----------- -----------
(In thousands, except share data)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 75 $ 24 $ (4,041)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization 269 458 637
(Gain) loss on sale of fixed assets (3) (29) 138
(Increase) decrease in:
Accounts receivable, trade (net) 1,927 1,724 2,659
Inventories (127) 2,978 3,317
Prepaid expenses (33) 28 (130)
Deferred income tax benefit (813) (87) 620
Other assets 12 58 205
Increase (decrease) in:
Accounts payable, trade (401) (1,047) (226)
Accrued salaries, wages and bonuses (101) (634) 511
Other accounts payable and
accrued liabilities 66 (191) 48
Income taxes payable 170 1,065 (429)
------- ------- -------
Net cash provided by
operating activities 1,041 4,347 3,309
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (141) - (21)
Proceeds from disposal of property, plant
and equipment 3 29 6
------- ------- -------
Net cash provided by (used for)
investing activities (138) 29 (15)
------- ------- -------
(Continued)
7
B. B. WALKER COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Fiscal Year Ended
-------------------------------------
October 31, November 1, November 2,
1998 1997 1996
(52 weeks) (52 weeks) (53 weeks)
----------- ----------- -----------
(In thousands, except share data)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under
finance agreement $ (479) $ (4,100) $ (2,548)
Proceeds from issuance of
long-term obligations 75 241 45
Payment on long-term obligations (509) (528) (800)
Payment of debt issue costs - - -
Purchase of subsidiary common stock
from minority interest - - (1)
Cash repayments from loans to shareholders 16 17 16
Dividends paid on 7% cumulative
preferred stock (6) (6) (6)
------- ------- -------
Net cash used for financing activities (903) (4,376) (3,294)
------- ------- -------
Net change in cash - - -
Cash at beginning of year 1 1 1
------- ------- -------
Cash at end of year $ 1 $ 1 $ 1
======= ======= =======
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 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
Repayment of equity loans by
retirement of common stock - - (5,580) (6) (7) - 13 -
Repayment of equity loans col-
lateralized by common stock - - - - - - 16 16
Net loss - - - - - 75 - 75
Dividends on 7% preferred
stock - - - - - (6) - (6)
---- ---- --------- ------ ------- ------ ------ --------
Balance at October 31, 1998 828 $ 83 1,720,954 $ 1,721 $ 2,717 $ 198 $ (77) $ 4,642
==== ==== ========= ====== ======= ====== ====== ========
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 Asheboro, North
Carolina and Somerset, Pennsylvania. A subsequent event relating to the
Asheboro, North Carolina property is discussed in Note 14. 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
- ------------------
Basic earnings per share (EPS) is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding for the year. In arriving at income available to common
shareholders, preferred stock dividends of $5,796 were deducted in each year
presented. Diluted EPS reflects the potential dilution that could occur if
dilutive securities and other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company. The weighted average number
of shares, including common stock equivalents, used in earnings per share
computations were:
1998 1997 1996
--------- --------- ---------
Primary 1,724,000 1,729,000 1,727,000
Fully diluted 1,727,000 1,732,000 1,728,000
Revenue recognition
- -------------------
The Company recognizes a sale when the goods are shipped or ownership and
risk of loss is otherwise assumed by the customer.
Advertising costs
- -----------------
The Company expenses advertising costs, other than direct response
advertising, as incurred. Direct response advertising was expensed the first
time the advertising appears. Advertising expense for 1998, 1997 and 1996 is
$925,000, $1,011,000, and $1,349,000, respectively.
Fiscal year
- -----------
The Company's operations are based on a fifty-two, fifty-three week fiscal
year that ends on the Saturday closest to October 31. The fiscal years ended
October 31, 1998 and November 1, 1997 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.
11
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 1 - ACCOUNTING POLICIES, 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
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 October 31, 1998 and November 1, 1997 consisted of the
following:
(In thousands)
October 31, November 1,
1998 1997
----------- -----------
Finished goods $ 5,167 $ 4,883
Work in process 945 884
Raw materials and supplies 3,548 3,766
-------- --------
$ 9,660 $ 9,533
======== ========
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, by major class, at October 31, 1998 and
November 1, 1997 was as follows:
(In thousands)
October 31, November 1,
1998 1997
----------- -----------
Land $ 531 $ 425
Buildings 2,287 2,285
Leasehold improvements 459 459
Machinery and equipment:
Owned 4,710 4,322
Capital leases - 357
Transportation equipment 158 158
-------- --------
8,145 8,006
Less accumulated depreciation
and amortization 6,523 6,256
-------- --------
$ 1,622 $ 1,750
======== ========
Included in accumulated depreciation at October 31, 1998 and November 1, 1997
is $-0- and $348,000, 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
(the "Agreement") with a bank which permits borrowings up to certain
percentages of eligible accounts receivable and inventories. Advances
available to the Company cannot exceed $8,000,000 in the aggregate, of which
no more than $4,000,000 may be borrowed against inventory. The Agreement was
amended effective July 8, 1998. Under the terms of the amended Agreement,
interest at the bank's prime rate plus 1.50% (9.50% at October 31, 1998) is
accrued on all outstanding amounts. The Company pays a monthly commitment
fee equal to .25% of the unused availability under the Agreement along with
other miscellaneous fees related to its operation.
As discussed more fully in Note 5, the Agreement also provides a term loan
of $3,000,000 with a variable interest rate at the bank's prime rate plus
1.50%. 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. Subsequent to fiscal year
ending October 31, 1998, the Agreement was amended effective December 28,
1998 and sets the maturity date at June 30, 1999.
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
as a subordinated security interest in the manufacturing facility in Somerset.
The Agreement contains various restrictive covenants, as amended effective
July 8, 1998, 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 October 31, 1998, the Company was in compliance with its
restrictive covenants.
A summary of activity for borrowings under the finance agreement for the
year is as follows:
(In thousands)
Fiscal year
----------------------------
1998 1997 1996
-------- -------- --------
Average short-term borrowings $ 6,900 $ 7,780 $ 11,159
Maximum short-term borrowings $ 7,592 $ 11,526 $ 14,467
Weighted average interest rate 10.3% 10.4% 9.5%
Interest rate at year-end 9.5% 10.3% 10.0%
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)
October 31, November 1,
1998 1997
----------- -----------
Note payable to a bank, payable in monthly
installments of $23,384 with a balloon
payment of $1,707,058 due June 30, 1999,
variable interest at the bank's prime rate
plus 1.50% (9.5% at October 31, 1998) $ 1,894 $ 2,286
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% (8.75% at October 31, 1998),
secured by the Company's land and building
in Somerset, PA 205 216
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 373 402
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 194 208
Promissory notes payable to shareholders,
due in varying amounts through 2003, variable
interest based on prime rate 1,203 1,182
Capital lease obligations, due in monthly
installments through 1998, interest ranging
from 12% to 12.75% - 9
-------- --------
3,869 4,303
Less amounts payable within one year 2,566 1,087
-------- --------
$ 1,303 $ 3,216
======== ========
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 1998 and 1997. Cash paid for interest was $1,089,000 in
1998, $1,124,000 in 1997 and $1,507,000 in 1996.
Principal maturities on long-term obligations are as follows:
Fiscal Year (In thousands)
Ending Amounts
----------- ------------
1999 $ 2,566
2000 479
2001 160
2002 120
2003 84
Thereafter 460
---------
$ 3,869
=========
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
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 carrying amount of long-term debt
approximates fair value because the interest rate is variable based on the
bank's prime rate.
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)
October 31, November 1, November 2,
1998 1997 1996
----------- ----------- -----------
Current:
Federal $ - $ 7 $ (1,240)
State - - -
------- ------- -------
- 7 (1,240)
------- ------- -------
Deferred:
Federal (533) (87) 620
State (280) - -
------- ------- -------
(813) (87) 620
------- ------- -------
$ (813) $ (80) $ (620)
======= ======= =======
The Company has net operating loss carryforwards available to offset future
U.S. tax liabilities of approximately $1,370,000, of which $450,000 will
expire in 2012 and $920,000 will expire in 2018. The Company has state net
operating loss carryforwards of $4,420,000, which expire from 1999 to 2013.
Due to the uncertainty surrounding the ability of the Company to utilize
these loss carryforwards, a valuation allowance of $1,190,000 was recorded in
fiscal 1996. During fiscal 1998, the Company began negotiating the sale of
its manufacturing facility in Asheboro, NC, along with an adjacent piece of
property. The projected gain on this sale is expected to be sufficient to
utilize all of the net operating loss carryforwards. Based on the more likely
than not probability that this income will be realized during 1999, the Company
decreased the valuation reserve relating to the loss carryforwards to zero at
October 31, 1998. The effect of reducing the valuation allowance provides an
income tax benefit of $609,000 for fiscal 1998.
Cash paid for income taxes, net of refunds, was ($166,000) in 1998,
($1,061,000) in 1997, and ($806,000) in 1996.
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 October 31, 1998, November 1,
1997, and November 2, 1996 as follows:
(In thousands)
October 31, November 1, November 2,
1998 1997 1996
----------- ----------- -----------
Computed expected income tax
expense (benefit) $ (251) $ (18) $ (1,584)
State income taxes (benefit), net
of federal income tax benefit (37) (40) (170)
Change in the valuation allowance (609) (62) 1,075
Other, net 84 40 59
------- ------- -------
$ (813) $ (80) $ (620)
======= ======= =======
The significant components of deferred income tax expense for the years ended
October 31, 1998, November 1, 1997, and November 2, 1996 are as follows:
(In thousands)
October 31, November 1, November 2,
1998 1997 1996
----------- ----------- -----------
Deferred tax expense (exclusive of
the effect of other components
listed below) $ 21 $ 275 $ (285)
State deferred tax benefit (20) (40) (170)
Federal operating loss and
credit carryforwards (205) (260) -
Change in the valuation allowance (609) (62) 1,075
------- ------- -------
$ (813) $ (87) $ 620
======= ======= =======
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 October 31, 1998 and November 1, 1997
are as follows:
(In thousands)
October 31, November 1,
1998 1997
----------- -----------
Deferred tax assets:
Current portion:
Provision for doubtful accounts $ 219 $ 171
Reserve for sales discounts 36 35
Self insurance accrual for claims incurred
but not reported at year-end 41 51
Inventories, principally due to additional
costs inventoried for tax purposes 319 361
Accruals for certain personnel costs 22 17
Federal net operating loss carryforward 465 260
State economic loss carryforward 348 325
Other 29 61
------- -------
Total current 1,479 1,281
------- -------
Long-term portion:
Accruals for certain personnel costs - 6
Fixed assets 206 166
Other 4 -
------- -------
Total long-term 210 172
------- -------
Total gross deferred tax assets 1,689 1,453
Valuation allowance (519) (1,128)
------- -------
1,170 325
------- -------
Deferred tax liabilities:
Current portion:
Prepaid employee benefits (120) (88)
------- -------
Net deferred tax asset $ 1,050 $ 237
======= =======
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 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 1998, 1997, and 1996.
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 $20,800 in 1998,
$16,500 in 1997, and $23,500 in 1996.
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.
Net annual pension expense for 1998, 1997, and 1996 included the following
components:
(In thousands)
1998 1997 1996
------ ------ ------
Service cost - benefits earned during the period $ 88 $ 91 $ 78
Interest on projected benefit obligation 76 66 56
Actual return on plan assets (77) (67) (56)
Net amortization and deferral (18) (17) (19)
---- ---- ----
Net annual pension expense $ 69. $ 73 $ 59
==== ==== ====
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 October 31, 1998
and November 1, 1997:
(In thousands)
October 31, November 1,
1998 1997
----------- -----------
Actuarial present value of benefit obligations:
Vested benefit obligations $ 1,068 $ 937
======= =======
Accumulated benefit obligations $ 1,155 $ 1,027
======= =======
Projected benefit obligation $ (1,155) $ (1,027)
Plan assets at fair value 1,330 1,182
------- -------
Plan assets in excess of projected
benefit obligation 175 155
Unrecognized net loss 181 162
Unrecognized net asset at transition (50) (57)
------- -------
Prepaid pension cost $ 306 $ 260
======= =======
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 1998, 1997 and 1996.
21
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 8 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS, Continued
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 1998, 1997, or 1996.
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.
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)
1998 1997
------ ------
Net income (loss) As reported $ 75 $ 24
Pro forma 56 7
Basic earnings per share As reported $ .04 $ .01
Pro forma .03 .00
Diluted earnings per share As reported $ .04 $ .01
Pro forma .03 .00
23
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 8 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS, Continued
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 1998, 1997, and 1996, respectively: no expected
dividend yield for each year; expected volatility of 55.7% for each year; risk
free interest rates of 6.00%, 6.76%, and 6.14%; and expected lives of ten years.
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 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
Granted 10,000 0.63 - 1.00 0.81
Forfeited 1987-1995 (27,250) 0.75 - 4.00 2.90
--------
Options outstanding at
October 31, 1998 208,950 0.63 - 4.00 2.45
========
Options available for future grant - 1995 plan 216,000
=======
Outstanding options exercisable at October 31, 1998, November 1, 1997, and
November 2, 1996 were 203,950, 185,700, and 156,950, respectively.
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 operating leases for certain buildings
and machinery and equipment. The agreements expire at various dates
through 2003. The future minimum lease payments under noncancellable
operating leases with initial terms of one year or more are as follows:
(In thousands)
Operating
Fiscal year ending Leases
------------------ ---------
1999 $ 483
2000 187
2001 73
2002 51
2003 16
-------
Total minimum lease payments $ 810
=======
Rental expense amounted to $558,000 in 1998, $589,000 in 1997, and $630,000
in 1996.
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 October 31, 1998,
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 October 31, 1998, no Class A
preferred stock has been issued.
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.
25
B. B. WALKER COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 1998 and 1997, one major customer comprised 11.89% and
10.25% of net sales, respectively. In 1996, 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
four 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 as previously provided
by the external agency.
In 1998, 1997, and 1996, the Company paid the external advertising agency
$100,000, $373,000, and $456,000, 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.
NOTE 14 - SUBSEQUENT EVENT
In January 1999, the Company entered into a contract to sell its manufacturing
facility in Asheboro, NC, along with an adjacent piece of property. The sale
is expected to close in the second quarter of fiscal 1999.
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 cash flows, and of changes in
shareholders' equity present fairly, in all material respects, the financial
position of B.B. Walker Company and its subsidiary at October 31, 1998 and
November 1, 1997, and the results of their operations and their cash flows
for each of the three years in the period ended October 31, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
- --------------------------
PricewaterhouseCoopers LLP
Greensboro, North Carolina
December 4, 1998
28
B.B. WALKER COMPANY AND SUBSIDIARY
SELECTED FINANCIAL DATA
(In thousands, except for
items denoted by (1) below)
1998 1997 1996 1995 1994
(52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks)
---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS:
Net sales $ 28,813 $ 32,648 $ 37,506 $ 43,453 $ 51,148
======= ======= ======= ======= =======
Income (loss) from continuing operations
before income taxes, minority interests
and extraordinary item $ (736) $ (54) $ (4,659) $ (1,868) $ 812
Provision for (benefit from) income taxes (813) (80) (620) (626) 336
Minority interests in continuing operations (2) (2) (2) (2) (2)
------- ------- ------- ------- -------
Net income (loss) $ 75 $ 24 $ (4,041) $ (1,244) $ 474
======= ======= ======= ======= =======
FINANCIAL CONDITION:
Current assets $ 18,314 $ 19,268 $ 24,953 $ 30,898 $ 30,264
Current liabilities 14,102 13,368 19,534 21,533 20,510
Working capital 4,212 5,900 5,419 9,365 9,754
Current ratio (1) 1.30 to 1 1.44 to 1 1.28 to 1 1.43 to 1 1.48 to 1
Total assets 20,080 21,174 27,375 34,377 34,016
Long-term obligations 1,303 3,216 3,286 4,257 3,692
Minority interests in consolidated subsidiary 33 33 33 34 34
Total liabilities 15,438 16,617 22,853 25,824 24,236
Shareholders' equity 4,642 4,557 4,522 8,553 9,780
PER SHARE INFORMATION (1) (2):
Shareholders' equity (book value) $ 2.65 $ 2.59 $ 2.57 $ 4.91 $ 5.56
======= ======= ======= ======= =======
Per share of common stock and common
stock equivalent:
Net income (loss) $ .04 $ .01 $ (2.34) $ (.72) $ .26
======= ======= ======= ======= =======
Per share of common stock and common
stock equivalent-assuming full dilution:
Net income (loss) $ .04 $ .01 $ (2.34) $ (.72) $ .26
======= ======= ======= ======= =======
Cash dividends on preferred stock $ 7.00 $ 7.00 $ 7.00 $ 7.00 $ 7.00
Cash dividends on common stock (2) - - - - .073
OTHER INFORMATION:
Property, plant and equipment, net $ 1,622 $ 1,750 $ 2,208 $ 2,968 $ 3,593
Depreciation and amortization 269 458 637 667 610
Capital additions 141 - 21 43 2,055
Space occupied (square feet) 355 355 358 358 363
Average number of common shares outstanding (2) 1,724 1,727 1,727 1,731 1,737
Number of shareholders (1) 1,166 1,177 1,169 1,229 1,142
Number of employees (1) 392 423 521 637 658
(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 October 31, 1998, November 1, 1997, and November 2, 1996:
October 31, November 1, November 2,
1998 1997 1996
----------- ----------- -----------
Net sales 100.0% 100.0% 100.0%
Cost of products sold 74.6% 73.9% 79.2%
------- ------- -------
Gross margin 25.4% 26.1% 20.8%
Selling and administrative expenses 23.4% 21.4% 27.7%
Depreciation and amortization .9% 1.4% 1.7%
Interest expense 3.7% 3.7% 4.0%
Interest and other income (.1%) (.2%) (.1%)
------- ------- -------
Loss before income taxes
and minority interest (2.5%) (.2%) (12.5%)
Benefit from income taxes (2.8%) (.3%) (1.7%)
Minority interest - - -
------- ------- -------
Net income (loss) .3% .1% (10.8%)
======= ======= =======
FISCAL 1998 COMPARED TO FISCAL 1997
Material Changes in Operations
- ------------------------------
The Company operates two manufacturing facilities, one in Asheboro, North
Carolina, and one in Somerset, Pennsylvania. To make the Company more
competitive, management decided to move all of the production of footwear with
cement construction from the Somerset plant to the Asheboro plant. At the same
time, all of the footwear with welt construction was moved from the Asheboro
plant to the Somerset plant. Since there was not enough product demand to
support two welt operations, this consolidation of operations in two separate
locations in July, 1998 should create substantial manufacturing efficiencies
in both production and inventory costs during fiscal 1999.
In January 1999, the Company entered into a contract to sell its manufacturing
facility in Asheboro, NC, along with an adjacent piece of property (see
"Potential Sale of Property" discussion in the Liquidity and Capital Resources
section). Management anticipates that the contract will be finalized in the
second quarter of 1999. The increase in capital and income created by this
sale will result in substantial benefits to the Company. Subsequent
relocation of the manufacturing, retail, and administrative operations is not
expected to adversely affect operations of the Company.
30
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
Net Sales
- ---------
Net sales for the Company were $28,813,000 in 1998 as compared to $32,648,000
in 1997. This was a reduction of $3,835,000, or 11.7%, from the prior year.
Management attributes this decrease to the additional impact from the major
changes made in 1997 to combine the sales forces of the western boots and
work/outdoor boots. Also, there was some erosion in the Company's channel of
distribution over the past year. This trend is a continuation of the soft
retail environment that the western footwear market has experienced for
several years. Recent steps have been taken to address this deterioration in
revenues. 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 91.8% of net sales in 1998
and 92.0% of net sales in 1997. The remaining 8.2% and 8.0% of net sales in
1998 and 1997, respectively, were sales from the Company's retail outlets.
Sales of branded footwear were down $1,713,000, or 8.8%, in 1998 from 1997.
Pairs shipped were off 14.6% while the price per pair shipped increased 6.2%.
While the work branded and exports were down $1,323,000, or 20.8%, and
$639,000, or 49.8%, respectively, western branded sales were up $280,000, or
2.4%, in 1998 over 1997. The increase in western boot sales is encouraging
during a year when many western retailers went out of business, therefore
increasing the Company's western footwear market share in 1998. Weak consumer
spending for work footwear depressed sales of the Company's branded products,
and most of the export decrease is due to the loss of a major account in Japan.
The increase in price per pair can be attributed to a more favorable mix of
inventory shipped.
Private label sales in 1998 reflected a decrease of $1,636,000, or 19.1%,
compared to 1997 private label sales. Private label pairs shipped were off
20.3% while the average price per pair was up .6%. Sales in this division have
been impacted by soft retail sales, as orders from customers did not keep pace
with the prior year. The one exception is the Company's largest customer, a
major discount retailer, whose shipments rose $78,000, or 2.3%, over the prior
year. 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 fell by $353,000, or 16.9%, under 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 success in bidding on new business.
Retail sales for the year were $227,000, or 8.7%, lower than the results for
two retail outlets, one in Asheboro, NC and one in Lancaster, PA,
experienced increased competition from major discount retailers
surrounding the retail outlets. Another reason for the loss in volume from
1997 to 1998 was our January, 1997 closing of a retail store in Myrtle Beach,
SC.
31
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 $7,306,000 in 1998 and $8,527,000 in 1997, a
decrease of $1,221,000. As a percentage of sales, the gross margin for 1998
decreased to 25.4% from 1997's gross margin of 26.1%. Most of this decrease
can be attributed to the $190,000 cost in moving the welt division from the
Asheboro, NC plant to the Somerset, PA plant during the third quarter of 1998.
Selling and Administrative Expenses
- -----------------------------------
Selling and administrative expenses were $6,736,000 for 1998 as compared to
$6,996,000 for 1997, a decrease of $260,000, or 3.7%. The Company continued
to reduce expenses in most functional areas to more appropriately reflect the
level at which the Company intended to operate. Management lowered the general
and administrative headcount and realigned significant responsibilities in the
administrative functions. The largest savings came from advertising and
promotional expenses, which were down $133,000, or 14.5%, from 1997, as the
Company continued to redefine its advertising strategy with the intention of
maintaining its brand awareness using cost effective methods. Personnel
related expenses in the sales department were down $69,000, or 2.9%, from the
prior year. Professional fees were $38,000, or 33.0%, less in 1998. One
expense item that increased in 1998 was software services by $12,000, or 22.0%,
as the Company continued to address the Year 2000 conversion of its computer
system.
Interest Expense
- ----------------
Interest expense incurred in 1998 was $1,076,000, or $128,000 less than
interest expense of $1,204,000 for 1997. Lower interest expense in 1998 is
a result of a lower average outstanding balance on the revolving finance
agreement as compared to 1997's average balance. The average outstanding
balance on the revolving finance agreement was approximately $880,000, or
11.3%, less in 1998 than in 1997. Interest on other borrowings remained at
similar levels to the prior year.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization decreased $189,000 to $269,000 in 1998 from
$458,000 in 1997. For the previous four years, the Company has made only
minimal fixed asset additions. With minimal amounts invested in fixed assets
in recent years, depreciation charges are lower because fixed assets are
becoming fully depreciated and are not being replaced. See additional
discussion in the Liquidity and Capital Resources section.
32
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
Provision for Income Taxes
- --------------------------
The Company had a net loss before income taxes of $736,000 in 1998. In 1997,
the net loss before income taxes was $54,000. Accordingly, the Company
recorded a net benefit from income taxes of $813,000 and $80,000 in 1998 and
1997, 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 October 31, 1998, a net asset of $1,050,000 was recorded which was
an increase of $813,000 over the prior year.
Net Income
- ----------
For the year ended October 31, 1998, the Company reported net income of
$75,000, or .3% of net sales, whereas for the year ended November 1, 1997,
the Company reported a net income of $24,000, or .1% of net sales. The
improvement of $51,000 can be attributed to the effect of the valuation
allowance adjustment in 1998. This adjustment was made due to the impact of
the property sale which was previously discussed.
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.
33
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.
34
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.
35
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.
36
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.
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.
37
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 9.5%, at October 31, 1998). The Company had outstanding advances
of $6,885,000 at October 31, 1998, and an additional $680,000 available under
the agreement.
During fiscal 1998, the Company generated $1,041,000 of cash from operations
which was used to reduce the advances under the revolving finance agreement by
$479,000. Approximately $1,927,000 was generated from reductions in accounts
receivable. 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. The credit line available under the
current agreement is $8,000,000, with the sublimit for inventory at $4,000,000.
In addition to the revolving credit facility, the financing agreement also
provides a $3,000,000 term loan that was used to repay an existing mortgage
note payable to a bank which and which carries a balance of $1,894,000
at October 31, 1998. Per the terms of the note, the Company has monthly
installments of $23,384 with a balloon payment of $1,707,058 due
June 30, 1999. The term loan bears interest at the bank's prime rate plus
1.5% (9.5% at October 31, 1998).
The due date of the original term loan was July 31, 1998, but the
financing agreement was amended on July 8, 1998, to extend the due date to
December 31, 1998. The primary reason for this extension was the Company's
receipt of an attractive offer to sell all of its 22.3 acres of property in
Asheboro, NC (see following section entitled "Potential Sale of Property").
Since both the Company's management and the bank felt that the sale of this
property would substantially benefit the Company, it was decided to postpone
the due date of the term loan until the actual close of the sale. This fifth
amendment amended certain restrictive financial covenants under the revolving
finance agreement effective July 8, 1998, and thereafter. The covenants
require the satisfaction of certain financial tests and the maintenance of
certain financial ratios as defined in the agreement. At October 31, 1998,
the Company was in compliance with its restrictive financial covenants.
38
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
Since the actual close of the property's sale had not occurred as of
October 31, 1998, a sixth amendment to the financing agreement was made on
December 29, 1998, which extends the due date of the term loan to
June 30, 1999. Management expects that the contract will be finalized in
the second quarter of 1999.
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 (8.75% at October 31, 1998) 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
October 31, 1998 are land and buildings with a cost of approximately
$1,062,000 related to the facility. The remainder of the expenditures made
for the facility were paid with borrowings under the revolving finance
agreement.
The Company made capital expenditures of $141,000 in 1998 and has made only
minimal capital expenditures during the past four 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 four years. Funding
for capital expenditures other than the building acquisition in 1994 has come
primarily from the available balance on the finance agreement. The Company
anticipates raising the level of capital expenditures in 1999 due to costs
associated with relocating the Asheboro, NC administrative, manufacturing,
and retail operations of the business, but it is premature to estimate those
costs at this time. Funding is expected to be provided by the bank under
mutually-suitable arrangements.
39
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
Net working capital, which consists primarily of accounts receivable and
inventories less current liabilities, was $4,212,000 at October 31, 1998 and
$5,900,000 at November 1, 1997. The ratio of current assets to current
liabilities decreased to 1.30 to 1 at October 31, 1998, compared to 1.44 to 1
at November 1, 1997. Cash flows generated from operations in 1998 was a net
inflow of $1,041,000 compared to a net cash inflow of $4,347,000 in 1997.
Potential Sale of Property
- --------------------------
Late in the fourth quarter of 1998, the Company received an attractive offer
to sell all of its approximately 22.3 acres of real property in Asheboro,
North Carolina. This land is in one of the prime commercial sections of
Randolph County. The Company has entered into a Contract for Purchase and
Sale of Real Property Located in Asheboro, North Carolina, dated as of
January 28, 1999. Under this contract, the purchaser will have until
February 26, 1999 to examine the suitability of the property for its needs.
During that period, the contract may be terminated by the purchaser without
further obligation to the Company. Accordingly, there can be no assurances
that the sale of the Asheboro, North Carolina property will be consummated.
If the transaction closes, part of the purchase price will be paid in cash
and part will be paid by purchase money promissory note. A portion of the
property sold to the purchaser, including the tract of land on which the
plant is located, will be leased back to the Company for up to one year. The
rent under the lease equals the interest due under the promissory note. While
there will be costs associated with relocating the Asheboro facility and some
interruption in the Company's manufacturing operations, the Company has taken
steps to limit the effects of these matters and does not expect the relocation
to have a material adverse effect on the operations of the Company.
Readiness for Year 2000 Compliance
- ----------------------------------
The Company has initiated a program to minimize the risk of potential
disruption from the "Year 2000 ('Y2K') problem." This problem is a result
of computer programs having been written using two digits (rather than four)
to define the applicable year. Any information technology ("IT") systems
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000, which could result in miscalculations and
system failures. The problem also extends to "non-IT" systems; that is,
operating and control systems that rely on embedded chip systems. In
addition, like every other business enterprise, the Company is at risk
from Y2K failures on the part of its major business counterparts, including
suppliers, distributors, and manufacturers, as well as potential failures in
public and private infrastructure services, including electricity, water,
gas, transportation, and communications.
The Company began developing a plan in November 1997 to resolve the Y2K
issues that are reasonably within its control. These efforts are being
coordinated through the Company's data processing department and chaired by
the information systems programming manager ("ISPM"). With respect to the
Company's Y2K efforts, the ISPM reports periodically to the Company's
president, who in turn updates the Audit Committee of the Board of Directors.
In January 1998, the ISPM completed an identification of those IT systems
which would require detailed program changes to be Y2K compliant. An
employee programmer already familiar with the Company's computer system has
been assigned full-time to modify those identified programs. Program changes
and testing are made in a test directory specifically created for the Y2K
modifications so that there are no conflicts with live data. When testing
is completed for a system, files are then converted, and modified programs
are copied to live directories on a weekend when no users are on the system.
The Company's current timetable anticipates completion of all conversions,
necessary testing, and full implementation by June 30, 1999. At this time,
the Company has not deemed it necessary to develop contingency plans for any
of the applications being converted; however, the Company will continue to
assess this and will develop contingency plans for any applications not
converted and operating by June 30, 1999.
With respect to Electronic Data Interchange ("EDI") applications, a Company
manager with extensive computer experience is assessing the Company's impact
from four customers who transmit orders via EDI. All but three of these
customers utilize a third-party EDI service bureau, while the fourth one
(the Company's largest customer) is expected to be changed from being an
internal EDI user to an external user by June 30, 1999. No significant EDI
transmission problems are anticipated.
With regard to non-IT systems, the Company's phone and security systems are
both Y2K compliant. The Company is in the process of assessing personal
computers and manufacturing machines that are not Y2K compliant, especially
those with programs that involve stitching patterns on western boots. Major
suppliers to the Company have been contacted by questionnaire, and the
Company has received confirmations of either Y2K compliance or a timetable
to be compliant from such suppliers. The Company has also contacted its
major customers by questionnaire to assess their status with regard to the
Y2K issue. Contingency plans will be developed for any significant suppliers
or customers that are not Y2K compliant by June 30, 1999, or earlier if the
Company becomes aware that such entities may not be Y2K compliant in a timely
manner.
40
B.B. WALKER COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, Continued
It is important to note that the description of the Company's efforts
necessarily involves estimates and projections with respect to activities
required in the future. The required code changes, testing, and
implementation necessary to address the Y2K issue are expected to cost
approximately $100,000, and the Company has incurred approximately $45,000
through October 31, 1998. The Company estimates that it is approximately
40% complete with the efforts required to be Y2K compliant. These estimates
and projections are subject to change as work continues.
Even though the Company's Y2K plan should adequately address the Y2K issue,
there can be no assurance that unforeseen difficulties will not arise. If
the Company does not identify and fix all Y2K problems, or if a major
supplier or customer is unable to adequately address its Y2K issue, the
Company's results of operations or financial condition could be materially
impacted.
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.
41
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,
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.
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,
North Carolina.
Approximately 1,166 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 21.76% of the total shares issued
and outstanding. At the last Annual Meeting of the Shareholders held on March
16, 1998, 80.00% 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
-------------- ---------------
1998:
First Quarter $ 1/2 $ 3/8 $ 1 1/4 $ 7/8
Second Quarter 3/8 3/8 7/8 7/8
Third Quarter 1 1/4 3/8 2 1/4 7/8
Fourth Quarter 1 1/4 1/2 2 1/4 1 1/4
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
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 CAREY M. DURHAM
Executive Vice President Chief Financial Officer
DOROTHY W. CRAVEN REBECCA S. RICH
Secretary Assistant Secretary
DIRECTORS
- ---------
KENT T. ANDERSON EDNA A. WALKER
Chairman and Chief Executive Officer President, B.B. Walker Foundation
ROBERT L. DONNELL, JR. MICHAEL C. MILLER
Retired President
First National Bank and Trust Co.
JAMES P. McDERMOTT GEORGE M. BALL
Retired Chairman of the Board
Philpott, Ball & Company
TRANSFER AGENT AND REGISTRAR
The Company acts as its own Transfer Agent and Registrar, handling all
securities transfers at its Executive Offices.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
101 Centreport Drive
Suite 250
Greensboro, NC 27409
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 15, 1999. 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