FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED: APRIL 1, 2000
COMMISSION FILE NUMBER: 1-5555
WELLCO ENTERPRISES, INC.
------------------------
(Exact name of registrant as specified in charter)
NORTH CAROLINA 56-0769274
- --------------------------- --------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
150 Westwood Circle, P.O. Box 188, Waynesville, NC 28786
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(Address of Principal Executive Office)
Registrant's telephone number, including area code 828-456-3545
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
--- ---
1,163,246 shares of $1 par value common stock were outstanding on May 15, 2000.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WELLCO ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR THE FISCAL QUARTER ENDED APRIL 1, 2000
The attached unaudited financial statements reflect all adjustments which are,
in the opinion of management, necessary to reflect a fair statement of the
financial position, results of operations, and cash flows for the interim
periods presented. All significant adjustments are of a normal recurring nature.
-2-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
APRIL 1, 2000 AND JULY 3, 1999
(in thousands)
ASSETS
(unaudited)
APRIL 1, JULY 3,
2000 1999
---------- -------
CURRENT ASSETS:
Cash ....................................... $ 17 $ 89
Receivables ................................ 2,906 4,683
Inventories-
Finished goods ......................... 2,112 1,948
Work in process ........................ 2,110 1,712
Raw materials .......................... 1,957 1,853
-------- --------
Total .................................. 6,179 5,513
Deferred taxes and prepaid expenses ........ 602 621
Income tax refund receivable ............... 255 226
-------- --------
Total ...................................... 9,959 11,132
-------- --------
MACHINERY LEASED TO LICENSEES,
net of accumulated depreciation ............ 19 6
PROPERTY, PLANT AND EQUIPMENT:
Land ....................................... 107 107
Buildings .................................. 1,176 1,176
Machinery and equipment .................... 5,055 4,139
Furniture and automobiles .................. 851 792
Leasehold improvements ..................... 675 457
-------- --------
Total cost ................................. 7,864 6,671
Less accumulated depreciation and
amortization ............................ (4,223) (3,701)
-------- --------
Net ........................................ 3,641 2,970
-------- --------
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition ............... 228 228
Intangible pension asset (Note 5) ......... 116 88
-------- --------
Total ...................................... 344 316
DEFERRED TAXES ................................... 470 429
-------- --------
TOTAL ............................................ $ 14,433 $ 14,853
======== ========
(continued on next page)
-3-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
APRIL 1, 2000 AND JULY 3, 1999
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
APRIL 1, JULY 3,
2000 1999
----------- -------
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 2) ...... $ 2,845 $ 3,480
Accounts payable ............................. 1,276 1,046
Accrued compensation ......................... 940 908
Accrued restructuring costs (Note 3) ......... -- 119
Accrued pension (Note 5) ..................... 124 161
Accrued income taxes ......................... 540 427
Other liabilities ............................ 389 377
Current maturity of note payable ............. 73 146
-------- --------
Total ........................................ 6,187 6,664
-------- --------
LONG-TERM LIABILITIES:
Pension obligation (Note 5) ................. 1,260 1,375
Notes payable ................................ 309 346
STOCKHOLDERS' EQUITY :
Common stock, $1.00 par value ................ 1,164 1,164
Additional paid-in capital ................... 192 192
Retained earnings ............................ 5,907 5,618
Accumulated other comprehensive loss
(Note 5) ..................................... (586) (506)
-------- --------
Total ........................................ 6,677 6,468
-------- --------
TOTAL .............................................. $ 14,433 $ 14,853
======== ========
See Notes to Consolidated Financial Statements.
-4-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL NINE MONTHS ENDED
APRIL 1, 2000 AND APRIL 3, 1999
(in thousands except per share and number of shares)
(unaudited)
APRIL 1, APRIL 3,
2000 1999
-------- --------
REVENUES ....................................... $ 15,582 $ 13,169
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............... 13,262 11,992
Restructuring and realignment costs
(Note 3) ................................. 331 589
General and administrative expenses ...... 1,507 1,662
----------- -----------
Total .................................... 15,100 14,243
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CONTRACT CLAIM (Note 4) ........................ 203 --
----------- -----------
OPERATING INCOME (LOSS) ........................ 685 (1,074)
INTEREST EXPENSE ............................... (187) (189)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES .............. 498 (1,263)
PROVISION (BENEFIT) FOR INCOME TAXES ........... 93 (460)
----------- -----------
NET INCOME (LOSS) .............................. $ 405 $ (803)
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE
based on weighted average number of
shares outstanding ....................... $ 0.35 $ (0.69)
=========== ===========
Shares used in computing basic
earnings per share ....................... 1,163,246 1,163,246
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE based
on weighted average number of shares
outstanding and dilutive stock
options .................................. $ 0.35 $ (0.69)
=========== ===========
Shares used in computing diluted
earnings per share ....................... 1,168,286 1,163,246
=========== ===========
See Notes to Consolidated Financial Statements.
-5-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
APRIL 1, 2000 AND APRIL 3, 1999
(in thousands except per share and number of shares)
(unaudited)
APRIL 1, APRIL 3,
2000 1999
-------- --------
REVENUES ..................................... $ 6,291 $ 4,383
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............. 5,137 3,841
Restructuring and realignment costs
(Note 3) ............................... 19 589
General and administrative expenses .... 567 536
----------- -----------
Total .................................. 5,723 4,966
----------- -----------
CONTRACT CLAIM (Note 4) ...................... (12) --
----------- -----------
OPERATING INCOME (LOSS) ...................... 556 (583)
INTEREST EXPENSE ............................. (68) (40)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............ 488 (623)
PROVISION (BENEFIT) FOR INCOME TAXES ......... 90 (247)
----------- -----------
NET INCOME (LOSS) ............................ $ 398 $ (376)
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE
based on weighted average number of
shares outstanding ..................... $ 0.34 $ (0.32)
=========== ===========
Shares used in computing basic
earnings per share ..................... 1,163,246 1,163,246
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE
based on weighted average number
of shares outstanding and dilutive
stock options .......................... $ 0.34 $ (0.32)
=========== ===========
Shares used in computing diluted
earnings per share ..................... 1,168,056 1,163,246
=========== ===========
See Notes to Consolidated Financial Statements.
-6-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL NINE MONTHS ENDED
APRIL 1, 2000 AND APRIL 3, 1999
(in thousands)
(unaudited)
APRIL 1, APRIL 3,
2000 1999
-------- --------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ............................... $ 405 $ (803)
------- -------
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization .............. 526 371
(Increase) decrease in-
Receivables .......................... 1,777 670
Inventories .......................... (666) 1,743
Other current assets ................. (10) (213)
Increase (decrease) in-
Accounts payable ..................... 230 289
Accrued liabilities .................. (87) 309
Accrued income taxes ................. 113 (241)
Pension obligation ................... (260) 113
Other ................................ (29) (152)
------- -------
Total adjustments ............................... 1,594 2,889
------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............................ 1,999 2,086
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment ................ (1,210) (320)
------- -------
NET CASH USED IN INVESTING ACTIVITIES ................ (1,210) (320)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under short-term agreements ........ (635) (1,590)
Principal payments of bank note payable ......... (110) (109)
Cash dividends paid ............................. (116) (116)
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............................ (861) (1,815)
------- -------
NET DECREASE IN CASH ................................. (72) (49)
CASH AT BEGINNING OF PERIOD .......................... 89 196
------- -------
CASH AT END OF PERIOD ................................ $ 17 $ 147
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(continued on next page)
- 7-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL NINE MONTHS ENDED
APRIL 1, 2000 AND APRIL 3, 1999
(in thousands)
(unaudited)
APRIL 1, APRIL 3,
2000 1999
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ................................. $185 $184
Income taxes ............................. 13 32
==== ====
See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL NINE MONTHS ENDED
APRIL 1, 2000
(in thousands except number of shares)
(unaudited)
Common Stock Additional
------------
Par Paid-In Retained
Shares Value Capital Earnings
------------------------------------------------
BALANCE AT JULY 3, 1999 1,163,246 $ 1,164 $ 192 $ 5,618
Net income for the fiscal nine
months ended April 1, 2000 405
Cash dividend declared
($.10 per share) (116)
-------------------------------------------------
BALANCE AT APRIL 1, 2000 1,163,246 $ 1,164 $ 192 $ 5,907
-------------------------------------------------
Accumulated
Other
Comprehensive
Loss
----------------
BALANCE AT JULY 3, 1999 $ (506)
Change for the fiscal nine
months ended April 1, 2000 (Note 5) (80)
----------------
BALANCE AT APRIL 1, 2000 $ (586)
----------------
See Notes to Consolidated Financial Statements.
-9-
WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL NINE MONTHS ENDED APRIL 1, 2000
----------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Recent Statement of the Financial Accounting Standards Board
In June 1998, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards (SFAS) No. 133,Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 standardize
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. SFAS No. 133 was
amended by SFAS No. 137 to make the provisions of SFAS No. 133 effective
for the Company's first fiscal quarter of the 2001 fiscal year. The
Company has not yet determined the impact of the implementation of this
standard on its financial statements.
2. LINES OF CREDIT:
The bank line, which expires December 31, 2000 can be renewed annually at
the bank's discretion. This line of credit is secured by a blanket lien on
all machinery and equipment (carrying value of $2,135,000) and all
non-governmental accounts receivable and inventory ($1,458,000). At April
1, 2000, borrowings on the line of credit were $2,845,000 with $1,155,000
available in additional borrowings.
The bank credit agreement contains, among other provisions, defined levels
of net worth and current ratio requirements. The Company was in compliance
with the loan covenants at April 1, 2000. The covenants are subject to
review at the end of each fiscal quarter.
3. RESTRUCTURING AND REALIGNMENT COSTS:
In February, 1999, the Board of Directors approved a restructuring plan to
consolidate and realign the Company's footwear manufacturing operations.
Under this plan, the Company consolidated substantially all footwear
manufacturing operations in Aguadilla, Puerto Rico, where the Company has
had operations since 1956.
The execution of this plan, which started in early May 1999, resulted in
the elimination of 77 employment positions at the Company's Waynesville,
North Carolina facility, and in the transfer of a significant amount of
Waynesville machinery and materials to Aguadilla. Approximately 80 new
personnel were added and trained in Aguadilla and the Aguadilla operations
have been moved to a larger facility which incorporates the operations
transferred from Waynesville.
Reconciliations of the Restructuring and Realignment Costs and accrual
activity during fiscal year 1999 and fiscal nine months and quarter ending
April 1, 2000 are as follows:
-10-
Fiscal Year Ending July 3, 1999:
Activity
Charged
Period Total Against Accrued
Costs Accrual Expenses Accrual Balance
- ------------------------- -------- --------- ---------- ----------- ---------
Severance $764,000 $764,000 ($680,000) $84,000
- ------------------------- -------- --------- ---------- ----------- ---------
Employee Training Costs 104,000 104,000
- ------------------------- -------- --------- ---------- ------------ --------
Equipment Relocation and
Installation 84,000 35,000 119,000 35,000
- ------------------------- -------- --------- ---------- ----------- ---------
Legal and Other 90,000 90,000
- ------------------------- -------- --------- ---------- ----------- ---------
Total $278,000 $799,000 $1,077,000 ($680,000) $119,000
- ------------------------- -------- --------- ----------- ----------- ---------
Fiscal Nine Months Ending April 1, 2000:
Activity
Charged
Period Total Against Accrued
Costs Accrual Expenses Accrual Balance
- ------------------------- --------- ------- ------------ ----------- ---------
Severance ($122,000) $32,000 ($90,000) ($116,000)
- ------------------------- --------- ------- ------------ ----------- ---------
Employee Training Costs 186,000 186,000
- ------------------------- --------- ------- ------------ ----------- ---------
Equipment Relocation and
Installation 103,000 5,000 108,000 (40,000)
- ------------------------- --------- ------- ------------ ----------- ---------
Legal and Other 127,000 127,000
- ------------------------- --------- ------- ------------ ----------- ---------
Total $294,000 $37,000 $331,000 ($156,000)
- ------------------------- --------- ------- ------------ ----------- ---------
Quarter Ending April 1, 2000:
Activity
Charged
Period Total Against Accrued
Costs Accrual Expenses Accrual Balance
- ------------------------- --------- -------- ------------- ----------- ---------
Equipment Relocation and
Installation 1,000 1,000 (2,000)
- ------------------------- --------- -------- ------------- ----------- ---------
Legal and Other 18,000 18,000
- ------------------------- --------- -------- ------------- ----------- ---------
Total $19,000 $19,000 ($2,000)
- ------------------------- --------- -------- ------------- ----------- ---------
After April 1, 2000, the Company expects no significant additional restructuring
and realignment costs.
-11-
The Company has been informed by the government of Puerto Rico that it will
receive a government grant of up to $400,000 as reimbursement for certain costs,
as approved by the government, related to the increased operations in Puerto
Rico. The documents have been filed and these amounts will be recorded in the
period received.
4. CONTRACT CLAIM:
In April 1998 Wellco executed an Agreement with Defense Supply Center
Philadelphia (DSCP). The Agreement provides that DSCP will reimburse the Company
for certain costs incurred related to contract performance during the fourth
quarter of the 1997 fiscal year and the first two quarters of the 1998 fiscal
year. Wellco maintained that it was due reimbursement for costs incurred in
performing in accordance with a prior DSCP interpretation of the contract. This
interpretation was later changed to the detriment of Wellco. The Agreement
provided that any disagreement between Wellco and DSCP on an item of cost will
be subject to binding arbitration.
In October, 1998, DSCP agreed to pay Wellco $246,000 under this Agreement. The
1998 fiscal year Consolidated Statements of Operations included $226,000 of
income related to this claim, representing the agreed to $246,000 less $20,000
of related costs. Wellco subsequently filed a contract claim for the additional
amount it felt was due under the Agreement.
In January, 2000 the federal government's Alternative Disputes Resolution (ADR)
procedure was used to reach a final and non-appealable settlement of the claim.
The Consolidated Statements of Operations for the nine months ended April 1,
2000 include $203,000 for the settlement of this claim, which is the amount
awarded Wellco by the ADR Judge less related costs. For the quarter ended April
1, 2000, there were additional legal costs of $12,000.
5. PENSION PLANS:
Footnote 9 to the Company's 1999 Annual Report provides information about the
Company's pension plans as of June 30, 1999 (the date of the most recent
actuarial valuation at the end of the fiscal year 1999). On July 2, 1999, 77
employees were terminated related to the consolidation of substantially all
footwear manufacturing operations in Aguadilla, Puerto Rico. The information in
Footnote 9 of the 1999 Annual Report included estimated pension costs recorded
for the employee terminations, and did not reflect the affect of pension
settlement payments made to these employees after June 30, 1999. In the second
quarter of fiscal year 2000, the Company's actuary completed the final
calculations necessary for updating this June 30, 1999 disclosure for these
terminations.
Below is the June 30, 1999 pension information reflecting those employee
terminations (all amounts are in thousands):
ANALYSIS OF PROJECTED PENSION LIABILITY: 1999 1998
---------------------------------------------- ------------- -----------
Total Projected Liability at Beginning of Year $ 5,815 $ 5,449
---------------------------------------------- ------------- -----------
Current Year Service Cost 159 139
---------------------------------------------- ------------- -----------
Interest Cost on Projected Liability 393 394
---------------------------------------------- ------------- -----------
Benefit Payments (531) (423)
---------------------------------------------- ------------- -----------
Actuarial (Gain) Loss (123) 256
---------------------------------------------- ------------- -----------
-12-
ANALYSIS OF PROJECTED PENSION LIABILITY: 1999 1998
------------------------------------------------ ------------- -----------
Increased Liability from Plan Amendments 9
------------------------------------------------ ------------- -----------
Reduction in Liability for Terminated Employees (450)
------------------------------------------------ ------------- -----------
Total Projected Liability at End of Year $ 5,272 $ 5,815
------------------------------------------------ ------------- -----------
ANALYSIS OF FAIR VALUE OF PENSION PLAN ASSETS: 1999 1998
----------------------------------------------- ----------- -------------
Fair Value of Plan Assets at Beginning of Year $ 3,530 $ 3,261
----------------------------------------------- ----------- -------------
Company Contributions 621 480
----------------------------------------------- ----------- -------------
Actual Return on Plan Assets 262 212
----------------------------------------------- ----------- -------------
Benefit Payments to Retired Employees (531) (423)
----------------------------------------------- ----------- -------------
Settlement Payments to Terminated Employees (478)
----------------------------------------------- ----------- -------------
Fair Value of Plan Assets at End of Year $ 3,404 $ 3,530
----------------------------------------------- ----------- -------------
FUNDED STATUS: 1999 1998
------------------------------------------------- ----------- -------------
Excess of Projected Benefit Obligation Over Fair
Value of Plan Assets $ 1,868 $ 2,285
------------------------------------------------- ----------- -------------
Less Projected Future Salary Increases (306) (333)
------------------------------------------------- ----------- -------------
Equal to Liability Recognized in the Consolidated
Financial Statements $ 1,562 $ 1,952
------------------------------------------------- ----------- -------------
COMPONENTS OF PENSION LIABILITY: 1999 1998
-------------------------------------------------- ----------- -------------
Unamortized Costs Not Yet Charged Against
Operations-
-------------------------------------------------- ----------- -------------
Net Obligation at July 1, 1987 $ 122 $ 284
-------------------------------------------------- ----------- -------------
Net Obligation From Changes to Plan Benefits
Since July 1, 1987 198 276
-------------------------------------------------- ----------- -------------
Net Loss from Actuarial Assumptions Being
Different From Actual 989 1,325
-------------------------------------------------- ----------- -------------
Less Projected Salary Increases That are in Total
Liability (306) (331)
-------------------------------------------------- ----------- -------------
Total Liability Not Yet Charged Against Operations 1,003 1,554
-------------------------------------------------- ----------- -------------
Amount of Total Liability Charged Against
Operations 559 400
-------------------------------------------------- ----------- -------------
Total Pension Liability Recognized in Consolidated
Financial Statements Including Amounts in Accrued
Expenses $ 1,562 $ 1,954
-------------------------------------------------- ----------- -------------
-13-
COMPONENTS OF PENSION LIABILITY THAT HAVE NOT YET BEEN CHARGED AGAINST
OPERATIONS: 1999 1998
------------------------------------ ----------- -------------
Intangible Pension Asset $ 115 $ 440
------------------------------------ ----------- -------------
Deferred Tax Asset 302 379
------------------------------------ ----------- -------------
Accumulated Other Comprehensive Loss 586 735
------------------------------------ ----------- -------------
Total Liability Not Yet Charged
Against Operations $ 1,003 $ 1,554
------------------------------------ ----------- -------------
The Consolidated Statements of Operations and Comprehensive Income (Loss) for
the 1999 fiscal year includes as a part of the Restructuring and Realignment
Costs an estimated cost of $431,000 relating to the curtailment and settlement
of pension liabilities related to these terminated employees ($220,000 of
previously unrecognized prior service cost and $211,000 of previously
unrecognized actuarial losses). The actuary has computed these actual amounts as
$309,000 ($193,000 for prior service cost and $116,000 for actuarial loss), and
the Restructuring and Realignment Costs shown in the Consolidated Statements of
Operations for the nine month fiscal period ended April 1, 2000 include an
income item of $122,000 adjusting the previously recorded estimate to the actual
amount.
6. COMPREHENSIVE INCOME:
Comprehensive income for the nine months and three months ended April 1, 2000
was $325,000 and $318,000, respectively. Net income differed from comprehensive
income as a result of an increase in the minimum pension liability.
7. EARNINGS PER SHARE:
The Company computes its basic and diluted earnings per share amounts in
accordance with Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings per Share." Basic earnings per share is computed by dividing net
earnings by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the period plus the
dilutive potential common shares that would have been outstanding upon the
assumed exercise of dilutive stock options.
The following is the reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
For the Nine Months Ended 4-1-2000
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $405,000 1,163,246 $0.35
----------------------------------- ---------- ------------- -----------
Effect of Dilutive Stock-based
Compensation Arrangements 5,040
----------------------------------- ---------- -------------- -----------
Diluted EPS Available to Shareholders $405,000 1,168,286 $0.35
------------------------------------- ---------- -------------- -----------
-14-
For the Three Months Ended 4-1-2000
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $398,000 1,163,246 $0.34
----------------------------------- ------------ ------------- -----------
Effect of Dilutive Stock-based
Compensation Arrangements 4,810
----------------------------------- ------------ ------------- -----------
Diluted EPS Available to
Shareholders $398,000 1,168,056 $0.34
----------------------------------- ------------ ------------- -----------
For the nine months and three months ended April 3, 1999, there were no
differences between the basic and diluted earnings per share. All outstanding
stock options were anti-dilutive.
-15-
PART I. FINANCIAL INFORMATION
Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Comparing The Nine Months Ended April 1, 2000 and April 3, 1999:
Income before income taxes was $498,000 in the fiscal nine months ended April 1,
2000 (the "current period") compared to a loss before income taxes of $1,263,000
in the prior year nine month period ended April 3, 1999 (the "prior period").
The current period includes restructuring and realignment costs totaling
$331,000. These costs relate to a February, 1999 restructuring plan under which
the Company has consolidated substantially all footwear manufacturing operations
at its facility in Aguadilla, Puerto Rico. The execution of this plan resulted
in the elimination of 77 employment positions at the Company's Waynesville,
North Carolina facility, and in the transfer of a significant amount of
Waynesville machinery and materials to Aguadilla.
As detailed in Note 3 to the Consolidated Financial Statements, the
Restructuring and Realignment Costs charged against current period operations
are made up of:
Restructuring credit of $ 90,000. In the current period, the Company's
actuary completed calculation of actual pension cost for terminated
employees. The estimated cost was originally recorded in the fourth
quarter of the 1999 fiscal year. The actual cost was $122,000 less than
originally estimated. In addition, the current period includes $32,000
for health care costs on terminated employees in addition to the amount
accrued at July 3, 1999. A part of the severance compensation for
terminated Waynesville employees was the continuation of health
insurance for two months past termination. The Company is self funded
for its group health insurance, and actual health care costs for
terminated employees were greater than originally estimated.
Realignment costs of $421,000 consisting of: new employee training
costs ($186,000); cost to move machinery, install machinery and
refurbish and prepare building ($108,000); and legal and other costs
($127,000).
Also included in the current period is a non-recurring income item of $202,000
representing the final settlement of a contract claim (see Note 4 to the
Consolidated Financial Statements). In January, 2000 the federal government's
Alternative Disputes Resolution procedure was used to reach a final and
non-appealable settlement of a contract claim Wellco filed against the U. S.
government. In the 1998 fiscal year, when this claim originated, Wellco
recognized an income item of $226,000, which represented the amount of the claim
acknowledged and paid by the government.
Restructuring and Realignment Costs charged against prior period operations
total $589,000 and are made up of $545,000 employee severance costs and $25,000
of other restructuring costs, and $19,000 of realignment costs.
Revenues in the current period were $2,413,000 greater than in the prior period.
The primary reason for this increase was a significant increase in the number of
pairs of combat boots shipped under contract with the U. S. government. For
several years the government has been reducing its depot inventories of combat
boots by purchasing from contractors fewer pairs than were consumed. For the
past two years, they have accelerated the inventory reduction by further
reducing purchases from contractors. The Company attributes the increase in
pairs shipped to the government to the substantial completion of this inventory
reduction program.
-16-
The increase in revenues resulted in a $1,270,000 increase in cost of sales and
services. The margin resulting from subtracting cost of sales and services from
revenues increased $1,143,000. This margin increase resulted primarily from:
The overall reduction of costs from the consolidation of substantially
all manufacturing operation in Puerto Rico.
Semi-variable costs not increasing in proportion to the increase in
revenues.
A decrease in the number of administrative employees was the primary reason
general and administrative expenses decreased by $155,000.
Sales of boot manufacturing equipment and materials to licensees decreased in
the current period. These sales vary with the needs of existing licensees and
the licensing of new customers. In addition, the sale of lacing system hardware
decreased because of lower customer sales of boots using this hardware, the
closing of one customer's factory and a change in warehousing procedures at
another customer.
The income tax rate (the percent of Provision (Benefit) for Income Taxes to the
Income (Loss) Before Income Taxes) in the current period was 19% compared to 36%
in the prior period. The Company expects a lower income tax rate for fiscal year
2000 because more of its consolidated income will be from earnings in Puerto
Rico which are substantially exempt from both Puerto Rico and federal income
taxes.
Forward Looking Information:
For several years, the U. S. government has been reducing its depot inventories
of DMS combat boots by purchasing from contractors fewer pairs than were
consumed. For the last two years, they have accelerated the reduction. As stated
above, Wellco believes the government has substantially completed its inventory
reduction program.
Wellco recently completed shipments under the second option year of its DMS boot
contract which covered the period from April 16, 1999 to April 15, 2000. During
this option year, the government ordered 178,000 pairs from Wellco compared to
126,000 pairs in the prior option year that ended April 15, 1999. The third
option year of this contract was exercised April 16, 2000.
The last option of the current contract to supply the Intermediate Cold Wet boot
(ICW) to the government expired on February 25, 2000. Wellco has unshipped
orders with required delivery dates that will assure production and shipments
through the end of June, 2000. The government recently issued a new solicitation
for the ICW boot. As with any solicitation, Wellco cannot predict with certainty
its success in receiving a contract from this solicitation.
Since November, 1998 Wellco has been supplying a state prison system with an
inmate work shoe. During this period, a prison in that state was installing a
production facility where inmates would manufacture this shoe. Wellco
understands that this facility is now manufacturing the shoe in substantial
quantities and will soon start replacing Wellco as the supplier of this shoe.
Except for historical information, this Form 10-Q includes forward looking
statements that involve risks and uncertainties, including, but not limited to,
the receipt of contracts from the U. S. government and the performance
thereunder, the effect of customers and vendors not being timely in Year 2000
compliance, the ability to control costs under fixed price contracts, the
cancellation of contracts, and other risks detailed from time to time in the
Company's Securities and Exchange Commission filings, including Form 10-K for
the year ended July 3, 1999. Actual results may differ materially from
management expectations.
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Comparing The Three Months Ended April 1, 2000 and April 3, 1999:
Income before income taxes was $488,000 in the fiscal three months ended April
1, 2000 (the "current period") compared to a loss before income taxes of
$623,000 in the prior year three month period ended April 3, 1999 (the "prior
period").
The current period includes Restructuring costs of $19,000. Realignment and
Restructuring costs in the prior year period were $589,000, the same amount
included in the nine month period discussed above.
As to the contract claim, the current period includes a $12,000 expense item
which represents an adjustment to previously estimated legal costs related to
this claim.
Revenues in the current period were $1,908,000 more that the prior period. In
addition to an increase in DMS combat boot sales, there was an increase in ICW
boots sold to the U. S. government. Cost of sales and services increased
$1,296,000 and general and administrative expenses increased $31,000.
The income tax rate (the percent of Provision (Benefit) for Income Taxes to the
Income (Loss) Before Income Taxes) for current period was 18% compared to 40% in
the prior period. This decrease was primarily caused by a greater portion of
earnings from Puerto Rico, which are substantially exempt from both Puerto Rico
and federal income taxes. In addition, the prior year rate reflects some of the
loss before income taxes being incurred in the Company's Puerto Rico subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Wellco uses cash from operations and a bank line of credit to supply most of its
liquidity needs.
The following table summarizes at the end of the most recent fiscal quarter and
the last fiscal year the amount of cash and unused line of credit:
(in thousands)
April 1, 2000 July 3, 1999
------------- ------------
Cash $17 $89
Unused Line of Credit 1,155 520
------ -----
Total $1,172 $609
====== =====
The increase in the unused line of credit from July 3, 1999 to April 1, 2000
resulted from an increase in cash generated from operations during the nine
month period.
The following table summarizes the major sources (uses) of cash for the nine
months ended April 1,2000:
(in thousands)
April 1, 2000
Net Income Plus Depreciation $931
---------------------------------- -------------
Net Change in Accounts Receivable,
Inventories, Accounts Payable,
Accrued Liabilities, and Accrued
Income Taxes 1,367
----------------------------------- -------------
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(in thousands)
April 1, 2000
Other (299)
----------------------------------- --------------
Net Cash Provided By Operations 1,999
----------------------------------- --------------
Cash From Bank Line of Credit 395
----------------------------------- --------------
Cash Used to Repay Lines of Credit (1,030)
----------------------------------- --------------
Cash Used to Repay Bank Note Payable (110)
------------------------------------- --------------
Cash Used to Purchase Plant and Equipment (1,210)
----------------------------------------- --------------
Cash Dividend (116)
----------------------------------------- --------------
Net Decrease in Cash $(72)
----------------------------------------- --------------
In June, 1999 a contract modification was received which allowed the shipment of
a significant amount of finished boots from existing inventories. The receivable
from this sale was collected in the fiscal nine month period ended April 1,
2000. In addition, cash from several other large boot shipments in the quarter
ended July 3, 1999 was received in these nine months. A significant amount of
cash was used to pay down the bank line of credit, increase work in process
inventory in Puerto Rico, pay for costs related to the consolidation of boot
manufacturing operations in Puerto Rico, and to purchase plant and equipment.
Related to the consolidation of boot manufacturing operations in Puerto Rico,
cash was used to make severance payments to terminated employees, purchase
machinery, to make leasehold improvements, to move machinery and train
employees. In addition, cash was used to purchase machinery which will enable
the Company to expand its technologies for its manufacturing methods. This
consolidation of boot manufacturing operations is now completed and will no
longer be a user of cash.
The bank line of credit, which provides for total borrowing of up to $4,000,000
will be subject to renewal on December 31, 2000. The amount outstanding under
this line at April 1, 2000 was $2,845,000, a reduction of $635,000 from July 3,
1999. The Company will continue relying on this bank line of credit and expects
the average amount borrowed under this line to be less in the future than the
last few years.
The Company has no other material commitments for capital equipment. The Company
believes the continuation of improved operating results will likewise improve
its liquidity. Other than this, the Company does not know of any other demands,
commitments, uncertainties, or trends that will result in or that are
reasonablely likely to result in its liquidity increasing or decreasing in any
material way.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
The Company does not have any financial instruments or derivative commodity
instruments that requires disclosures.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings. N/A
Item 2. Changes in Securities. N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders: N/A
Item 5. Other Information. N/A
Item 6. Exhibits and Reports on Form 8-K.
a). Exhibits: None
b). Reports on Form 8-K: None
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SIGNATURE
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.
Wellco Enterprises, Inc., Registrant
\s\ \s\
---------------------------------- ---------------------------------------
David Lutz, President and Treasurer Tammy Francis, Controller
May 16, 2000
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