1 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 SECOND QUARTER ENDED MAY 05, 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 June 1, 2001, 1,735,114 shares of the Registrant's voting common stock with a par value of $1.00 per share were outstanding. Cover 2 B.B. WALKER COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands)

(Continued) 1 3 B.B. WALKER COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS, Continued (In thousands)

The accompanying notes to consolidated financial statements are an integral part of these financial statements. 2 4 B.B. WALKER COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (LOSS) (In Thousands, Except Per Share Data)

The accompanying notes to consolidated financial statements are an integral part of these financial statements. 3 5 B.B. WALKER COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

The accompanying notes to consolidated financial statements are an integral part of these financial statements. 4 6 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 six months ended May 5, 2001 includes twenty-seven weeks of operations and April 29, 2000 includes twenty-six weeks of operations. The second quarter of 2001 includes fourteen weeks of operation and the second quarter of 2000 includes thirteen weeks of operations. Note 2 Basic earnings per share (EPS) are computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. In arriving at income (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 ("FAS") 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 investments in debt and equity securities be presented as separate components of shareholders' equity. FAS 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 May 5, 2001 and April 29, 2000, the Company does not have any items of other comprehensive income to report. 5 7 B.B. WALKER COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Note 4 Long-term obligations consist of the following amounts (in thousands):

Note 5 Inventories are composed of the following amounts (in thousands):

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 six months of 2001 and 2000 are as follows:

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 payment 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. Note 8 The Company has significant borrowings under the finance agreement in the amount of $3,725,000 as of May 5, 2001. The Company is currently operating under an amendment to the credit agreement which will expire on July 15, 2001. 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 8 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 second quarter and six months ended May 5, 2001 and April 29, 2000:

Net Sales For the second quarter of 2001, the Company's net sales were $4,610,000, or $1,443,000 (23.8%) lower than net sales of $6,053,000 in the second quarter of 2000. For the six month period ended May 05, 2001, net sales were $8,951,000, a $2,077,000 (18.8%) decrease from net sales of $11,028,000 in the comparable six month period ended April 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 93.0% of net sales in the second quarter of 2001 and 92.5% of net sales in the second quarter of 2000. Retail sales made up the remaining net sales of 7.0% in 2001 and 7.5% in 2000. For the comparable six month periods, wholesaled footwear comprised 92.3% of net sales in 2001 and 91.7% of net sales in 2000. The remaining net sales of 7.7% in 2001 and 8.3% in 2000 were sales from the Company's retail outlets. 7 9 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 during the second quarter because of cash constraints placed on the Company by our bank. Our order position remains strong and we anticipate sales returning to normal levels when the financing discussed in Note 8 is completed. 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 of approximately 95% 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 second quarter of 2001 were down $961,000, or 21.8%, from 2000's second quarter because of the reasons discussed above. Branded pairs shipped were down 13,054, or 17.0%, in the second quarter while price per pair was down 5.8%. Private label sales in the second quarter of 2001 were down $334,000, or 31.0%, from the second quarter of 2000. The decrease can be attributed to an overall weaker work/outdoor private label business. Pairs shipped were down 9,107, or 31.5% while price per pair was up .7%. 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 second quarter of 2001 were down $172,000, or 47.0%, from the second 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 scheduled to be delivered during the last half of this fiscal 2001. Retail sales decreased $108,000, or 23.9%, from the second 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 10 B.B. WALKER COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued Gross Margin For the second quarter of 2001 and 2000, the gross margin was 21.6% and 30.1%, respectively. The Company's gross margin was 21.5% and 27.7% for the first six months of 2001 and 2000, respectively. This 6.2% decrease from the prior year is due to lower production than budgeted which has not covered the Company's fixed costs in manufacturing as well as expected. 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 $1,617,000 for the second quarter of 2001 as compared to $1,675,000 for the second quarter of 2000, a decrease of $58,000. Year-to-date expenses for 2001 and 2000 are $3,018,000 and $3,237,000 respectively. Even though there has been a $219,000 reduction in the first six months of 2001 over 2000, selling and administrative expenses as a percentage of sales have increased from 29.4% in 2000 to 33.7% in 2001 since these relatively-fixed expenses are being compared to year-to-date sales which have declined 18.8% 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 second quarter of 2001 was $152,000, or $83,000 lower than interest expense of $235,000 for the second quarter of 2000. This 35.3% decrease in interest expense for the second quarter can be attributed to a lower average balance on outstanding loan advances under the revolving loan agreement in the second 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 11 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 second quarter of 2001 was $31,000, or $10,000 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 second quarter of both 2001 and 2000, the Company recorded no bene- fit from income taxes. The Company evaluated the valuation allowance reserved against its deferred income tax asset at the end of the second quarter and determined that the net deferred income tax asset was appropriately recorded at its net realizable value. Net Income (Loss) The Company reported a loss of $798,000 in the second quarter of 2001 compared to a $116,000 loss in the second quarter of 2000. As discussed above, the 23.8% decrease in net sales from the second quarter of 2000 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 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 financing agreement, the Company finances its accounts receivable and inventories, paying interest at a variable rate (prime plus 3.50%, or 11.0%, at May 5, 2001). The Company had outstanding advances of $3,725,000 at May 5, 2001. The Company continues to rely on the revolving financing agreement to provide working capital. The revolving financing agreement as it is currently structured does not provide the necessary liquidity to fund its daily operations going forward. 10 12 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. 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 to due date to July 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 $2,306,000 at May 5, 2001 and $2,066,000 at October 28, 2000. The ratio of current assets to current liabilities was 1.30 to 1 at May 5, 2001 compared to 1.17 to 1 at October 28, 2000. The Company is currently in discussion with an asset based lender to replace the financing facility. This 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 13 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 $3,224,000 at May 5, 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 38.8% decrease in accounts receivable is also related to the 18.8% decrease in year-to-date net sales and continued stronger collection efforts since a new credit manager took over this department in mid-February 2000. Inventories Inventories were $5,287,000 at May 5, 2001, a decrease of $1,643,000, or 23.7%, from the inventories of $6,930,000 held at October 28, 2000. Of this decrease, approximately $1,194,000 is finished goods and $299,000 is raw materials. Work in process inventory is also down $150,000. 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. Borrowings under Finance Agreements The balance outstanding under the financing agreement was $3,725,000 at May 5, 2001 as compared to $5,710,000 at October 28, 2000, a decrease of $1,985,000, or 34.8%. The decrease can be attributed to the cash applied against the outstanding balance from collections of accounts receivable which were down $2,047,000 in the first six months of 2001 and lower inventories. Sale of Property 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. Early in the second quarter, the company signed an Offer to Purchase with a local developer for the sale of its remaining 10 acre tract of land in Asheboro, NC. The company expects this transaction to be concluded prior to the end of its third fiscal quarter. 12 14 B.B. WALKER COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued Forward-Looking Statements The foregoing discussion contains some forward-looking statements about the Company's financial condition and results of operations, which are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's judgment only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events and circumstances that arise after the date hereof. Factors that might cause actual results to differ materially from these forward-looking statements include (1) the effects of general economic conditions, (2) the impact of competitive products and pricing in the footwear industry, (3) failure to achieve anticipated sales results, (4) management's ability to accurately predict the effect of cost reductions, (5) failure to establish financing arrangements with a new lender and, management's ability to accurately predict the adequacy of the Company's financing arrangement to meet its working capital and capital expenditure requirements, and (6) failure to consummate the sale of the remaining 10 acres of its Asheboro, North Carolina property. 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 prevailing 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 15 PART II. OTHER INFORMATION Item 2. Changes in Securities: NONE Item 4. Submission of Matters to a Vote of Security Holders: The Fiftieth Annual Meeting of the Shareholders of the Company was held on Monday, March 19, 2001, as set forth in the Notice of Annual Meeting of Shareholders dated and mailed on February 26, 2001. Of the 1,735,114 shares of common stock issued and outstanding on the record date, 1,300,739 shares or 74.9% of the common stock outstanding were represented in person or by proxy at the meeting. For the issues presented to the shareholders for their consideration, the results were as follows: 1 - The Board of Directors, in accord with the By-laws, established the number of Directors at six. The shareholders elected the six persons nominated by them in the proxy statement mailed February 26, 2001. All director nominees had served as directors during the prior year and all were elected by the shareholders. There were no other nominations for director presented at the meeting. The six nominees were elected with results as follows:

Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Filed: (4)(c)(19)Eleventh Amendment to the Credit Agreement dated March 30, 2001 between B. B. Walker and Mellon Bank. (4)(c)(20)Twelfth Amendment to the Credit Agreement dated May 31, 2001 between B. B. Walker and Mellon Bank (b) Reports on Form 8-K: NONE SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. B.B. Walker Company Date June 18, 2001 KENT T. ANDERSON ------------- -------------------------------- Chairman of the Board, Chief Executive Officer and President Date June 18, 2001 JOYCE C. WALKER ------------- -------------------------------- Chief Accountant 14

Filing Compare · WALKER B B CO