10-Q 1 bbw10q-801.txt B B WALKER COMPANY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE THIRD QUARTER ENDED AUGUST 04, 2001 Commission File Number 0-934 B.B. WALKER COMPANY ------------------------------------------------------ (Exact name of registrant as specified in its charter) North Carolina 56-0581797 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 414 East Dixie Drive, Asheboro, NC 27203 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (336) 625-1380 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- On September 10, 2001, 1,735,114 shares of the Registrant's voting common stock with a par value of $1.00 per share were outstanding. Cover B.B. WALKER COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) (Audited) Aug 04, October 28, Assets 2001 2000 ------ ----------- ----------- Cash $ 1 $ 1 Accounts receivable, less allowance for doubtful accounts of $590 in 2001 and $495 in 2000 1,458 5,271 Inventories 4,545 6,930 Prepaid expenses 441 550 Property held for sale - 889 Deferred income tax benefit, current - 719 ------- ------- Total current assets 6,445 14,360 Property, plant and equipment, net of accumulated depreciation and amortization of $5,548 in 2001 and $6,812 in 2000 603 1,320 Other assets 48 109 ------- ------- $ 7,096 $ 15,789 ======= ======= (Continued) 1 B.B. WALKER COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS, Continued (In thousands) (Unaudited) (Audited) Aug 04, October 28, Liabilities and Shareholders' Equity 2001 2000 ------------------------------------ ----------- ----------- Borrowings under finance agreement $ 1,640 $ 5,710 Current portion of long-term obligations 760 2,202 Accounts payable, trade 2,674 3,497 Accrued salaries, wages and bonuses 85 333 Other accounts payable and accrued liabilities 319 552 ------- ------- Total current liabilities 5,478 12,294 ------- ------- Long-term obligations 804 1,158 Minority interests in consolidated subsidiary 31 31 Shareholders' equity: 7% cumulative preferred stock, $100 par value, 1,150 shares authorized, 828 shares issued and outstanding in 2001 and 2000 83 83 Common stock, $1 par value, 6,000,000 shares authorized, 1,735,114 shares in 2001 and 1,745,954 in 2000 issued and outstanding 1,735 1,746 Capital in excess of par value 2,706 2,712 Retained (deficit) (3,697) (2,177) Shareholders' loans (44) (58) ------- ------- Total shareholders' equity 783 2,306 ------- ------- $ 7,096 $ 15,789 ======= ======= The accompanying notes to consolidated financial statements are an integral part of these financial statements. 2 B.B. WALKER COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (LOSS) (In Thousands, Except Per Share Data)

(Unaudited) (~~Audited~~Unaudited) ~~May~~Third 05Quarter Ended Nine Months Ended -------------------------- -------------------------- Aug 04, ~~October~~July 2829, ~~Assets~~Aug 04, July 29, 2001 2000 2001 2000 ----------- ----------- ----------- ~~Cash~~----------- Net sales $ 1,922 $ 15,014 ~~Accounts~~$ ~~receivable~~10,873 ~~less~~$ ~~allowance~~16,042 ~~for~~Gain ~~doubtful~~(loss) ~~accounts~~on sale of ~~$549~~property in(Note ~~2001~~7) (98) - 1,943 - Interest and ~~$495~~other inincome ~~2000~~4 35 16 33 ----------- ----------- ----------- ----------- Total revenues 1,~~224~~828 5,~~271~~019 ~~Inventories~~12,832 516,~~287~~075 6----------- ----------- ----------- ----------- Cost of products sold 1,~~930~~897 ~~Prepaid~~3,694 8,926 11,664 Selling and administrative expenses ~~505~~1,344 ~~550~~1,636 ~~Property~~4,362 ~~held~~4,873 ~~for~~Depreciation ~~sale~~and ~~889~~amortization ~~889~~29 ~~Deferred~~41 ~~income~~91 ~~tax~~122 ~~benefit,~~Interest ~~current~~expense 103 254 430 733 ----------- ~~719~~----------- ----------- ----------- Total ~~current~~costs ~~assets~~and 9expenses 3,~~906~~373 145,~~360~~625 ~~Property~~13,809 ~~plant~~17,392 ~~and~~----------- ~~equipment,~~----------- ~~net~~----------- of----------- ~~accumulated~~Loss ~~depreciation~~before income taxes and ~~amortization~~minority ofinterest $5(1,~~525~~545) in(606) ~~2001~~(977) ~~and~~(1,317) $6Provision for income taxes - - 537 - Minority interest 1 1 2 2 ----------- ----------- ----------- ----------- Net loss (1,~~812~~546) in(607) ~~2000~~(1,516) ~~818~~(1,319) Retained deficit at beginning of quarter (2,150) (1,~~320~~115) ~~Other~~(2,177) ~~assets~~(400) ~~123~~Dividends ~~109~~on preferred stock (1) (1) (4) (4) ----------- ----------- ----------- ----------- Retained deficit at end of quarter $ 10(3,~~847~~697) $ 15(1,~~789~~723) $ (3,697) $ (1,723) =========== =========== =========== =========== Net loss per share: Basic $ (.89) $ (.35) $ (.88) $ (.76) =========== =========== =========== =========== Diluted $ (.89) $ (.35) $ (.88) $ (.76) =========== =========== =========== =========== Weighted average common shares outstanding: Basic 1,736 1,746 1,736 1,746 =========== =========== =========== =========== Diluted 1,736 1,746 1,736 1,746 =========== =========== =========== ===========

The accompanying notes to consolidated financial statements are an integral part of these financial statements. 3 B.B. WALKER COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended ----------------------- Aug 4, July 29, 2001 2000 ----------- ---------- Cash Flows From Operating Activities: Net loss $ (1,516) $ (1,319) Adjustments to reconcile net (loss) to net cash provided by operating activities: Depreciation and amortization 91 122 Gain on sale of property and equipment (1,946) (18) Deferred income tax expense 719 - (Increase) decrease in: Accounts receivable, net 3,813 2,275 Inventories 2,385 795 Prepaid expenses 109 (55) Other assets 61 2 Increase (decrease) in: Accounts payable, trade (823) 116 Accrued salaries, wages and bonuses (248) (181) Other accounts payable and accrued liabilities (233) (12) -------- ------- Net cash provided by operating activities 2,412 1,725 -------- ------- Cash Flows From Investing Activities: Capital expenditures - (6) Proceeds from disposal of fixed assets 2,644 23 Sale (purchase) of property held for sale 817 (86) -------- -------- Net cash provided by (used in) investing activities 3,458 (69) -------- -------- Cash Flows From Financing Activities: Net payments under finance agreement (4,070) (1,331) Payment on long-term obligations (1,798) (457) Proceeds from issuance of short-term obligations - 84 Proceeds from issuance of long-term obligations 2 39 Repurchase of common stock (17) - Repayments from shareholders, net of borrowings 14 13 Dividends paid on 7% cumulative preferred stock (4) (4) -------- -------- Net cash used in financing activities (5,873) (1,656) -------- -------- Net change in cash - - Cash at beginning of year 1 1 -------- ------- Cash at end of third quarter $ 1 $ 1 ======== ======== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 4 B.B. WALKER COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 ------ A summary of the Company's significant accounting policies is presented on page 9 of its 2000 Annual Report to Shareholders. Users of financial information presented for interim periods are encouraged to refer to the footnotes contained in the Annual Report to Shareholders when reviewing interim financial results. In the opinion of management, the accompanying unaudited consolidated finan- cial statements contain all adjustments necessary for a fair presentation of the financial results of B.B. Walker Company and Subsidiary (the "Company") for the interim periods included. All such adjustments are of a normal recurring nature. The results of operations for the interim periods shown in this report are not necessarily indicative of the results to be expected for the fiscal year. The Company's operations are reported on a fifty-two, fifty-three week fiscal year that ends on the Saturday closest to October 31. The results for the first nine months ended August 4, 2001 includes forty weeks of operations and July 29, 2000 includes thirty-nine weeks of operations. The third quarters of 2001 and 2000 each include thirteen weeks of operations. Note 2 ------ Basic earnings per share (EPS) are computed by dividing loss available to common shareholders by the weighted-average number of common shares outstanding for the period. In arriving at loss available to common shareholders, preferred stock dividends of $1,449 were deducted in each quarter 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. Note 3 ------ Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" requires that certain items such as foreign currency translation adjustments, unrealized gains and losses on certain investments in debt and equity securities, minimum pension liability adjustments, net gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments, and unrealized gains and losses on certain invest- ments in debt and equity securities be presented as separate components of shareholders' equity. SFAS 130 defines these as items of other comprehensive income and as such must be reported in a financial statement that is displayed with the same prominence as other financial statements. At August 4, 2001 and July 29, 2000, the Company does not have any items of other comprehensive income to report. 5 B.B. WALKER COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Note 4 ------ Long-term obligations consist of the following amounts (in thousands): (Unaudited) (Audited) Aug 04, October 28, 2001 2000 ----------- ---------- Notes payable to banks $ 168 $ 1,802 Notes payable to governmental authorities 442 476 Promissory notes payable to shareholders 954 1,082 ------- ------- 1,564 3,360 Less portion payable within one year 760 2,202 ------- ------- $ 804 $ 1,158 ======= ======= Note 5 ------ Inventories are composed of the following amounts (in thousands): (Unaudited) (Audited) Aug. 04, October 28, 2001 2000 ----------- ----------- Finished goods $ 2,546 $ 4,418 Work in process 424 510 Raw materials and supplies 1,575 2,002 ------- ------- $ 4,545 $ 6,930 ======= ======= Note 6 ------ The Company's reportable segments are wholesale and retail sales. Whereas wholesale sales are made to major chain stores, retail stores, and governmental entities, retail sales are made directly to the public from the Company's two retail outlets in Asheboro, NC, and Lancaster, PA. The segments are managed separately because each business unit requires different marketing strategies. Segment information for the first nine months of 2001 and 2000 are as follows: WHOLESALE RETAIL TOTAL --------------------------------------------- 2001 (in 000s) --------------------------------------------- Net sales $ 9,877 $ 996 $ 10,873 Cost of sales 8,374 552 8,926 Gross profit 1,503 444 1,947 Gain on sale of property 1,943 0 1,943 Loss before income taxes and minority interests (865) (112) (977) Depreciation and amortization 91 0 91 WHOLESALE RETAIL TOTAL --------------------------------------------- 2000 (in 000s) --------------------------------------------- Net sales $ 14,749 $ 1,293 $ 16,042 Cost of sales 10,903 761 11,664 Gross profit 3,846 532 4,378 Loss before income taxes and minority interests (1,248) (69) (1,317) Depreciation and amortization 122 0 122 Note 7 ------ On November 8, 2000, the Company sold approximately 15 acres of its real property located in Asheboro, NC for a cash price of $2,500,000, which purchase price was determined by arms-length negotiations of the parties. This sale resulted in a gain of $2,041,000. The sale included a building on this property in Asheboro, NC, which houses manufacturing operations, warehousing, corporate offices and a retail store of the Company. A portion of the proceeds from this property sale was used to pay off certain note balances. Concurrent with the sale of this property, the Company signed a five-year lease agreement with the buyer to rent the facility. This lease, as amended, calls for monthly payments of $27,500. Notice of an intention to terminate the lease by the Company prior to the expiration of the initial term or any renewal term must be made in writing ninety days prior to the Company's vacating the premises. At the expiration of the lease term on November 7, 2005, the Company shall have the option to extend this lease on a month to month basis with a ninety day notice to vacate. On July 18, 2001, the Company sold approximately 10 acres of real property located in Asheboro, NC to Schwarz Properties, LLC for a cash purchase price $990,000, which purchase price was determined by arms-length negotiations of parties. This property included parking lots, three rental houses, and a non-related manufacturing facility which is no longer in use. This property was not a part of the daily operations of the Company. Note 8 ------ The Company has significant borrowings under the finance agreement in the amount of $1,640,000 as of August 4, 2001. 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. At August 4, 2001, the amount available was $1,722,000, of which $82,000 was unused. The Company is currently operating under an amendment to the credit agreement which will expire on October 15, 2001. The Company is in violation of certain covenants of the amended credit Agreement. The Company is currently in discussions with asset-based lenders to replace this financing. This replacement has not been accomplished. The Company's continuation as a going concern is dependent upon its ability to successfully establish the necessary financial arrangements and to comply with the terms thereof and to restore profitability to the Company. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Although no assurance can be given, management believes that the Company will be able to obtain the necessary financing and continue operating as a going concern. 6 B.B. WALKER COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations --------------------- The following summarizes the results of operations for the Company for the third quarter and nine months ended August 4, 2001 and July 29, 2000: Third Nine Quarter Ended Months Ended Aug. 4, July 29, Aug. 4, July 29, 2001 2000 2001 2000 --------- -------- --------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 98.7% 73.7% 82.1% 72.7% ------- ------- ------- ------- Gross margin 1.3% 26.3% 17.9% 27.3% Selling and administrative expenses 69.9% 32.6% 40.1% 30.4% Depreciation and amortization 1.5% .8% .8% .7% Interest expense 5.4% 5.1% 4.0% 4.6% Gain (loss)on sale of property 5.1% - (17.9%) - Interest and other income (.2%) (.1%) (.1%) (.2%) ------- ------- ------- ------- Loss before income taxes and minority interest (80.4%) (12.1%) (9.0%) (8.2%) Provision for income taxes - - 4.9% - Minority interest - - - - ------- ------- ------- ------- Net loss (80.4%) (12.1%) (13.9%) (8.2%) ======= ======= ======= ======= Net Sales --------- For the third quarter of 2001, the Company's net sales were $1,922,000, or $3,092,000 (61.7%) lower than net sales of $5,014,000 in the third quarter of 2000. For the nine month period ended August 04, 2001, net sales were $10,873,000, a $5,169,000 (32.2%) decrease from net sales of $16,042,000 in the comparable nine months period ended July 29, 2000. The Company's revenues include sales of footwear both manufactured and purchased by the Company and sales from the Company's retail outlets. Footwear wholesaled by the Company, which includes branded, private label and institutional sales, comprised 83.9% of net sales in the third quarter of 2001 and 91.0% of net sales in the third quarter of 2000. Retail sales made up the remaining net sales of 16.1% in 2001 and 9.0% in 2000. For the comparable nine month periods, wholesaled footwear comprised 90.8% of net sales in 2001 and 91.9% of net sales in 2000. The remaining net sales of 9.2% in 2001 and 8.1% in 2000 were sales from the Company's retail outlets. 7 B.B. WALKER COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued The decrease in net sales can be attributed to two factors. First, our inability to purchase raw materials and run our factories because of cash constraints placed on the Company by our bank during the first nine months of this fiscal year. However, late in the third quarter an agreement was reached with our bank permitting the sale of additional property as discussed in Note 7 which provided needed cash to purchase raw materials and resume production in our factories. Our order position remains strong and we anticipate shipments will exceed previous fourth quarter levels. Also, during late 2000, a decision was made to begin importing high end, handmade western product from Spain along with a line of mid-priced footwear from China. These new introductions have been well received in the marketplace and should translate into increased sales in the fall of calendar 2001. Second, import penetration in excess of 96% into the U.S. footwear market has made it easier for competitors to enter the work shoe market. This increase in low-priced imports has caused a dramatic adverse effect on the Company's work/outdoor shipments. Sales of the Company's branded footwear in the third quarter of 2001 were down $1,955,000, or 59.7%, from 2000's third quarter because of the reasons discussed above. Branded pairs shipped were down 32,002, or 55.3%, in the third quarter while price per pair was down 9.9%. Private label sales in the third quarter of 2001 were down $894,000, or 81.2%, from the third quarter of 2000. The decrease can be attributed to an overall weaker work/outdoor private label business. Pairs shipped were down 24,342, or 82.7% while price per pair was up 8.9%. This segment of our business has also been dramatically affected by imported footwear. In the second quarter, we made a decision to begin phasing out our business with a major discount retailer due to our inability to pass along needed price increases. Sales to institutional customers in the third quarter of 2001 were down $163,000, or 56.8%, from the third quarter of 2000. 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. Unfortunately, there is an increasing trend toward being underbid by import suppliers on new institutional business. In January 2001, the Company was awarded a contract by the Defense Personnel Supply Agency for the production of 6,000 pairs per year for the next three years of a mountain ski boot. The first order for 4,680 pairs is now in production and scheduled to be completed prior to the end of the calendar year. Retail sales decreased $160,000, or 32.9%, from the third quarter of the prior year. The two retail outlets, one in Asheboro, NC and one in Lancaster, PA, continue to experience increased competition from major discount retailers surrounding their locations. 8 B.B. WALKER COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued Gross Margin ------------ For the third quarter of 2001 and 2000, the gross margin was 1.3% and 26.3%, respectively. The Company's gross margin was 17.9% and 27.3% for the first nine months of 2001 and 2000, respectively. This 9.4% decrease from the prior year is due to high manufacturing variances created by our inability to run our plants at capacity. We expect to be running at full capacity by the end of the fourth quarter which will result in our margins improving considerably. In addition, we have eliminated some of our private label sales to concentrate on more profitable branded sales which will result in improved margins in the fourth quarter. The gross margin percentage continues to be impacted by competitive pressure at the retail level which requires that the Company remain competitive in the pricing and terms offered. Selling and Administrative Expenses ----------------------------------- Selling and administrative expenses were $1,344,000 for the third quarter of 2001 as compared to $1,636,000 for the third quarter of 2000, a decrease of $292,000. Year-to-date expenses for 2001 and 2000 are $4,362,000 and $4,873,000, respectively. Even though there has been a $511,000 reduction in the first nine months of 2001 over 2000, selling and administrative expenses as a percentage of sales have increased from 30.4% in 2000 to 40.1% in 2001 since these relatively-fixed expenses are being compared to year-to-date sales which have declined 32.2% from the previous year. Management continues to emphasize cost control and operational efficiency in the selling and administrative areas. Interest Expense ---------------- Interest expense in the third quarter of 2001 was $103,000, or $151,000 lower than interest expense of $254,000 for the third quarter of 2000. This 59.4% decrease in interest expense for the third quarter can be attributed to a lower average balance on outstanding loan advances under the revolving loan agreement in the third quarter due to lower sales. Also, during the first quarter of 2001, the term loan which was a part of the bank financing agreement was paid in full with the proceeds from the property sale (see note 7) which significantly reduced the amount of interest incurred. Other long-term debt carried lower balances in 2001 when compared to 2000, as the Company continued to amortize the debt according to each issue's respective terms. 9 B.B. WALKER COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued Depreciation and Amortization ----------------------------- Depreciation and amortization in the third quarter of 2001 was $29,000, or $12,000 less than 2000 expenses of $41,000. With minimal amounts invested in fixed assets in recent years, depreciation charges on fixed assets that are becoming fully depreciated are not being replaced, resulting in lower depreciation expense. Benefit from Income Taxes ------------------------- For the third quarter of both 2001 and 2000, the Company recorded no benefit from income taxes. The Company evaluated the valuation allowance reserved against its deferred income tax asset at the end of the third quarter and determined that the net deferred income tax asset was appropriately recorded at its net realizable value. Net Loss ----------------- The Company reported a loss of $1,546,000 in the third quarter of 2001 compared to a $607,000 loss in the third quarter of 2000. As discussed above, the 61.7% decrease in net sales from the third quarter of 2001 has adversely affected gross margins as lower production than budgeted has not covered the Company's fixed manufacturing costs. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Historically, the Company has funded substantially all of its working capital and capital expenditure requirements through borrowings under its financing agreement and other indebtedness. The revolving financing agree- ment 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 financing agreement, the Company finances its accounts receivable and inventories, paying interest at a variable rate (prime plus 3.50%, or 10.25%, at Aug 4, 2001). The Company had outstanding advances of $1,640,000 at Aug 4, 2001. The Company continues to rely on the revolving financing agreement to provide working capital. 10 B.B. WALKER COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued Under the Company's financing agreement with the bank, the amount available to be drawn is determined by a formula based on certain percentages of eligible accounts receivable and inventories. At August 4, 2001, the amount available was $1,722,000, of which $82,000 was unused. The Company signed the eleventh amendment to the financing agreement on March 30, 2001 which lowered the credit line available under the agreement to $5,000,000 and extended the maturity date to May 31, 2001. This amendment also reduced the borrowing base on raw materials from the previous 50% to a net value of 0% using a phase-out method completed by May 31, 2001. On May 31, 2001, the Company signed the twelfth amendment to the credit agreement which lowered the credit line available under the agreement to $4,000,000 and extended the due date to July 15, 2001. On July 16, 2001, the Company signed the Thirteenth Amendment to the Credit Agreement which increased the credit line available under the agreement to $5,000,000 and extended the due date to October 15, 2001. In addition to the revolving credit facility, the financing agreement also provided a $3,000,000 term loan bearing interest at the bank's prime rate plus 1.50%(10.5% at January 27, 2001). During the first quarter of 2001, this loan was paid in full using the proceeds from the property sale as discussed in Note 7. 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 subordinated lien on the Somerset facilities. The Company made significant upgrades to its equipment and facilities in 1993 and 1994 but has made only minimal capital expenditures during the past six years. Because of cash flow considerations and restrictions under the financing agreement, the Company has made capital expenditures only to maintain current levels of operations during the past six years. Funding for capital expenditures, other than the acquisition of the Somerset, Pennsylvania facility in July 1994, has primarily come from the available balance on the financing agreement and cash from operations. Net working capital, which consists primarily of accounts receivable and inventories less current liabilities, was $967,000 at Aug 4, 2001 and $2,066,000 at October 28, 2000. The ratio of current assets to current liabilities was 1.18 to 1 at Aug 4, 2001 compared to 1.17 to 1 at October 28, 2000. The Company is currently in discussion with asset based lenders to replace the financing facility or renew with the current lender. This renewal or replacement has not been accomplished. The continued viability of the Company in its present form is dependent upon, among other factors, its ability to successfully establish the necessary financing arrangements and to generate sufficient cash from operations to meet on-going obligations over a sustained period. Although, no assurance can be given, management believes that the Company will be able to obtain the necessary financing to continue operating as a going concern. 11 B.B. WALKER COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued FINANCIAL CONDITION ------------------- Accounts Receivable ------------------- Accounts receivable were $1,458,000 at Aug 4, 2001 compared to $5,271,000 at October 28, 2000. Trade receivables are historically at their highest point at the end of the fiscal year because of the heavy sales volume related to seasonal buying by retailers. This 72.3% decrease in accounts receivable is also related to the 32.2% decrease in year-to-date net sales. Inventories ----------- Inventories were $4,545,000 at Aug 4, 2001, a decrease of $2,385,000, or 34.4%, from the inventories of $6,930,000 held at October 28, 2000. Of this decrease, approximately $1,872,000 is finished goods and $427,000 is raw materials. Work in process inventory is also down $86,000. The major decreases in inventories were caused by the cash constraints placed on the Company by our bank resulting in our plants not being able to run at full capacity. As previously mentioned, late in the third quarter an agreement was reach with our bank and our plants have resumed production. We do not anticipate dramatic changes in our inventory levels during the fourth quarter as our order position is strong and we are entering our busiest selling season. Borrowings under Finance Agreements ----------------------------------- The balance outstanding under the financing agreement was $1,640,000 at Aug 4, 2001 as compared to $5,710,000 at October 28, 2000, a decrease of $4,070,000, or 71.3%. The decrease can be attributed to the cash applied against the outstanding balance from the property sales in the first and third quarters, collections from accounts receivable, lower inventories and loan agreement modifications. Sale of Properties ---------------- On November 8, 2000, the Company sold approximately 15 acres of its real property located in Asheboro, NC for a cash purchase price of $2,500,000, which purchase price was determined by arms-length negotiations of the parties. The sale included a building on this property in Asheboro, NC, which houses manufacturing operations, warehousing, corporate offices and a retail store of the Company. A portion of the proceeds from this sale was used to pay off certain debt. Concurrent with the sale of this property, the Company signed a five year lease with the buyer to rent the facility. This lease, as amended, calls for monthly payments of $27,500. Notice of an intention to terminate the lease by the Company prior to the expiration of the initial term or any renewal term must be made in writing ninety days prior to the Company's vacating the premises. At the expiration of the lease term on November 7, 2005, the Company shall have the option to extend this lease on a month to month basis with a ninety day notice to vacate. On July 18, 2001, the Company sold approximately 10 acres of its real property located in Asheboro, NC to Schwarz Properties, LLC for a cash purchase price of $990,000, which purchase price was determined by arms length negotiations with the parties. This property included parking lots, three rental houses, and a non-related manufacturing facility which was no longer in use. This property was not a part of the daily operations of the Company. 12 B.B. WALKER COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued Forward-Looking Statements -------------------------- The foregoing discussion contains some forward-looking statements about the Company's financial condition and results of operations, which are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's judgment only as of the date hereof. The Company undertakes no obligation to publicly revise these forward- looking statements to reflect events and circumstances that arise after the date hereof. Factors that might cause actual results to differ materially from these forward-looking statements include (1) the effects of general economic conditions, (2) the impact of competitive products and pricing in the footwear industry, (3) failure to achieve anticipated sales results, (4) management's ability to accurately predict the effect of cost reductions, (5) failure to establish financing arrangements with a new lender or renew the agreement with the current lender and,(6) management's ability to accurately predict the adequacy of the Company's financing arrangement to meet its working capital and capital expenditure requirements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- Because the Company's obligations under the bank credit agreement bear interest at floating rates, the Company is sensitive to changes in pre- vailing interest rates. A 10% increase or decrease in market interest rates would not have a material impact on earnings during the next fiscal year. 13 PART II. OTHER INFORMATION --------------------------- Item 2. Changes in Securities: NONE Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Filed: (4)(c)(21)Thirteenth Amendment to the Credit Agreement dated July 16, 2001 between B. B. Walker Company and Michigan National Bank, as successor in interest to Mellon Bank, N.A., LaSalle Business Credit, Inc., Its Agent (b) Reports on Form 8-K: Yes - Sale of property SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. B.B. Walker Company Date September 17, 2001 S/KENT T. ANDERSON--- Chairman of the Board, Chief Executive Officer and President Date September 17, 2001 S/JOYCE C. WALKER Chief Accountant 14

(Unaudited) (Audited) May 05, October 28, Liabilities and Shareholders' Equity 2001 2000 ------------------------------------ ----------- ----------- Borrowings under finance agreement $ 3,725 $ 5,710 Current portion of long-term obligations 689 2,202 Accounts payable, trade 2,640 3,497 Accrued salaries, wages and bonuses 173 333 Other accounts payable and accrued liabilities 373 552 -------- -------- Total current liabilities 7,600 12,294 -------- -------- Long-term obligations 890 1,158 Minority interests in consolidated subsidiary 31 31 Shareholders' equity: 7% cumulative preferred stock, $100 par value, 1,150 shares authorized, 828 shares issued and outstanding in 2001 and 2000 83 83 Common stock, $1 par value, 6,000,000 shares authorized, 1,735,114 shares in 2001 and 1,745,954 in 2000 issued and outstanding 1,735 1,746 Capital in excess of par value 2,706 2,712 Retained (deficit) (2,150) (2,177) Shareholders' loans (48) (58) -------- -------- Total shareholders' equity 2,326 2,306 -------- -------- $ 10,847 $ 15,789 ======== ========

(Unaudited) (Unaudited) Second Quarter Ended Six Months Ended ---------------------------- --------------------------- May 05, April 29, May 05, April 29, 2001 2000 2001 2000 ---------- ----------- --------- --------- Net sales $ 4,610 $ 6,053 $ 8,951 $ 11,028 Gain on sale of property (Note 7) -- -- 2,041 -- Interest and other income 5 11 12 28 --------- --------- --------- --------- Total revenues 4,615 6,064 11,004 11,056 --------- --------- --------- --------- Cost of products sold 3,613 4,229 7,029 7,970 Selling and administrative expenses 1,617 1,675 3,018 3,237 Depreciation and amortization 31 41 62 81 Interest expense 152 235 327 479 --------- --------- --------- --------- Total costs and expenses 5,413 6,180 10,436 11,767 --------- --------- --------- --------- Income (loss) before income taxes and minority interest (798) (116) 568 (711) Provision for income taxes -- -- 537 -- Minority interest -- -- 1 1 --------- --------- --------- --------- Net income (loss) (798) (116) 30 (712) Retained deficit at beginning of quarter (1,350) (997) (2,177) (400) Dividends on preferred stock (2) (2) (3) (3) --------- --------- --------- --------- Retained deficit at end of quarter $ (2,150) $ (1,115) $ (2,150) $ (1,115) ========= ========= ========= ========= Net income (loss) per share: Basic $ (.46) $ (.07) $ .02 $ (.41) ========= ========= ========= ========= Diluted $ (.46) $ (.07) $ .02 $ (.41) ========= ========= ========= ========= Weighted average common shares outstanding: Basic 1,735 1,746 1,736 1,746 ========= ========= ========= ========= Diluted 1,735 1,746 1,736 1,746 ========= ========= ========= =========

(Unaudited) Six Months Ended ------------------------- May 5, April 29, 2001 2000 -------- --------- Cash Flows From Operating Activities: Net income (loss) $ 30 $ (712) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 62 81 Gain on sale of fixed assets (2,044) (17) Deferred income tax expense 719 -- (Increase) decrease in: Accounts receivable, net 2,047 1,337 Inventories 1,643 823 Prepaid expenses 45 66 Other assets (14) 2 Increase (decrease) in: Accounts payable, trade (857) (177) Accrued salaries, wages and bonuses (160) (72) Other accounts payable and accrued liabilities (179) (50) -------- -------- Net cash provided by operating activities 1,292 1,281 -------- -------- Cash Flows From Investing Activities: Capital expenditures -- (2) Proceeds from disposal of fixed assets 2,484 22 Purchase of property held for sale -- (86) -------- -------- Net cash provided by (used in) investing activities 2,484 (66) -------- -------- Cash Flows From Financing Activities: Net payments under finance agreement (1,985) (1,020) Payment on long-term obligations (1,782) (318) Proceeds from issuance of short-term obligations -- 84 Proceeds from issuance of long-term obligations 1 33 Repurchase of common stock (17) -- Repayments from shareholders, net of borrowings 10 9 Dividends paid on 7% cumulative preferred stock (3) (3) -------- -------- Net cash used in financing activities (3,776) (1,215) -------- -------- Net change in cash -- -- Cash at beginning of year 1 1 -------- -------- Cash at end of second quarter $ 1 $ 1 ======== ========

(Unaudited) (Audited) May 05, October 28, 2001 2000 ----------- ----------- Notes payable to banks $ 172 $ 1,802 Notes payable to governmental authorities 453 476 Promissory notes payable to shareholders 954 1,082 ---------- ---------- 1,579 3,360 Less portion payable within one year 689 2,202 ---------- ---------- $ 890 $ 1,158 ========== ==========

(Unaudited) (Audited) May 05, October 28, 2001 2000 ----------- ----------- Finished goods $ 3,224 $ 4,418 Work in process 360 510 Raw materials and supplies 1,703 2,002 --------- --------- $ 5,287 $ 6,930 ========= =========

WHOLESALE RETAIL TOTAL -------------------------------------------- 2001 (in 000s) -------------------------------------------- Net sales $ 8,265 $ 686 $ 8,951 Cost of sales 6,643 386 7,029 Gross profit 1,622 300 1,922 Gain on sale of property 2,041 0 2,041 Income (loss) before income taxes and minority interests 641 (73) 568 Depreciation and amortization 62 0 62

WHOLESALE RETAIL TOTAL -------------------------------------------- 2000 (in 000s) -------------------------------------------- Net sales $ 10,184 $ 844 $ 11,028 Cost of sales 7,473 497 7,970 Gross profit 2,711 347 3,058 Income (loss) before income taxes and minority interests (663) (48) (711) Depreciation and amortization 81 0 81

Second Six Quarter Ended Months Ended May 5, April 29, May 5, April 29, 2001 2000 2001 2000 ------ -------- ------ --------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 78.4% 69.9% 78.5% 72.3% ----- ----- ----- ----- Gross margin 21.6% 30.1% 21.5% 27.7% Selling and administrative expenses 35.1% 27.7% 33.7% 29.4% Depreciation and amortization .6% .7% .7% .7% Interest expense 3.3% 3.9% 3.7% 4.3% Gain on sale of property -- -- (22.8)% -- Interest and other income (.1)% (.2)% (.1)% (.2)% ----- ----- ----- ----- Income (loss) before income taxes and minority interest (17.3)% (2.0)% 6.3% (6.5)% Provision for income taxes -- -- 6.0% -- Minority interest -- -- -- -- ----- ----- ----- ----- Net income (loss) (17.3)% (2.0)% .3% (6.5)% ===== ===== ===== =====

Shares Shares Shares Marked Director For Against Withhold Authority -------- --------- ------- ------------------ Kent Anderson 1,146,682 -- 154,057 George M. Ball 1,287,926 -- 12,813 Robert L. Donnell, Jr. 1,287,823 -- 12,916 James P. McDermott 1,287,926 -- 12,813 Michael C. Miller 1,294,633 -- 6,106 Edna A. Walker 1,295,436 -- 5,303

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