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: SEPTEMBER 30, 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
(Address of Principal Executive Office)
Registrant's telephone number, including area code 828-456-3545
------------
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 November 14,
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 SEPTEMBER 30, 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
SEPTEMBER 30, 2000 AND JULY 1, 2000
(in thousands)
ASSETS
(unaudited)
SEPTEMBER 30, JULY 1,
2000 2000
------------- -------
CURRENT ASSETS:
Cash ....................................... $ 340 $ 73
Receivables ................................ 2,146 3,108
Inventories-
Finished goods ......................... 1,435 1,811
Work in process ........................ 1,119 1,224
Raw materials .......................... 2,260 2,062
-------- --------
Total .................................. 4,814 5,097
Deferred taxes and prepaid expenses ........ 889 713
-------- --------
Total ...................................... 8,189 8,991
-------- --------
MACHINERY LEASED TO LICENSEES,
net of accumulated depreciation ............ 23 24
PROPERTY, PLANT AND EQUIPMENT:
Land ....................................... 107 107
Buildings .................................. 1,176 1,176
Machinery and equipment .................... 5,420 5,034
Furniture and automobiles .................. 883 873
Leasehold improvements ..................... 557 526
-------- --------
Total cost ................................. 8,143 7,716
Less accumulated depreciation and
amortization ............................ (4,521) (4,319)
-------- --------
Net ........................................ 3,622 3,397
-------- --------
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition ............... 228 228
Intangible pension asset ................... 52 52
-------- --------
Total ...................................... 280 280
DEFERRED TAXES ................................... 258 258
-------- --------
TOTAL ............................................ $ 12,372 $ 12,950
======== ========
(continued on next page)
-3-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND JULY 1, 2000
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
SEPTEMBER 30, JULY 1,
2000 2000
------------- --------
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 2) ...... $ -- $ 1,700
Accounts payable ............................. 1,441 861
Accrued compensation ......................... 1,149 1,076
Accrued pension .............................. 140 124
Accrued income taxes ......................... 714 629
Other liabilities ............................ 387 359
Current maturity of note payable ............. -- 36
-------- --------
Total ........................................ 3,831 4,785
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ........................... 817 892
Note payable ................................. 701 701
STOCKHOLDERS' EQUITY :
Common stock, $1.00 par value ................ 1,164 1,164
Additional paid-in capital ................... 192 192
Retained earnings ............................ 6,097 5,646
Accumulated other comprehensive loss ......... (430) (430)
-------- --------
Total ........................................ 7,023 6,572
-------- --------
TOTAL .............................................. $ 12,372 $ 12,950
======== ========
See Notes to Consolidated Financial Statements.
-4-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 30, 2000 AND OCTOBER 2,
1999 (in thousands except per share and
number of shares)
(unaudited)
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
REVENUES ....................................... $ 5,065 $ 4,732
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............... 3,932 4,093
Restructuring and realignment costs ...... -- 359
General and administrative expenses ...... 553 471
----------- -----------
Total .................................... 4,485 4,923
----------- -----------
OPERATING INCOME (LOSS) ........................ 580 (191)
INTEREST EXPENSE ............................... (50) (48)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES .............. 530 (239)
PROVISION (BENEFIT) FOR INCOME TAXES ........... 79 (48)
----------- -----------
NET INCOME (LOSS) .............................. $ 451 $ (191)
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE
based on weighted average number of
shares outstanding ....................... $ 0.39 $ (0.16)
=========== ===========
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 ................................. $ 0.38 $ (0.16)
=========== ===========
Shares used in computing diluted
earnings per share ....................... 1,186,436 1,163,246
=========== ===========
See Notes to Consolidated Financial Statements.
-5-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(in thousands)
(unaudited)
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ............................... $ 451 $ (191)
------- -------
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization .............. 203 175
(Increase) decrease in-
Receivables .......................... 962 3,102
Inventories .......................... 283 (489)
Other current assets ................. (176) (159)
Increase (decrease) in-
Accounts payable ..................... 580 734
Accrued liabilities .................. 73 18
Accrued income taxes ................. 85 44
Pension obligation ................... (59) (97)
Other ................................ 28 (60)
------- -------
Total adjustments ............................... 1,979 3,268
------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............................ 2,430 3,077
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment ................ (427) (903)
------- -------
NET CASH USED IN INVESTING ACTIVITIES ................ (427) (903)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under short-term agreements ........ (1,700) (2,170)
Principal payments of bank note payable ......... (36) (37)
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............................ (1,736) (2,207)
------- -------
NET INCREASE (DECREASE) IN CASH ...................... 267 (33)
CASH AT BEGINNING OF PERIOD .......................... 73 89
------- -------
CASH AT END OF PERIOD ................................ $ 340 $ 56
======= =======
(continued on next page)
-6-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(in thousands)
(unaudited)
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ................................. $18 $47
=== ===
See Notes to Consolidated Financial Statements.
-7-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 30, 2000
(in thousands except number of shares)
(unaudited)
Common Stock Additional
Par Paid-In Retained
Shares Value Capital Earnings
----------------------------------------------
BALANCE AT JULY 1, 2000 1,163,246 $ 1,164 $ 192 $ 5,646
Net income for the fiscal three
months ended September 30, 2000 451
----------------------------------------------
BALANCE AT SEPTEMBER 30, 2000 1,163,246 $ 1,164 $ 192 $ 6,097
----------------------------------------------
Accumulated
Other
Comprehensive
Loss
--------------
BALANCE AT JULY 1, 2000 $ (430)
Change for the fiscal three
months ended September 30, 2000 -
--------------
BALANCE AT SEPTEMBER 30, 2000 $ (430)
--------------
See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL THREE MONTHS ENDED SEPTEMBER 30, 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 standardizes
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
effective for the Company's first fiscal quarter of the 2001 fiscal year,
the fiscal quarter ended September 30, 2000. The Company has analyzed
contracts and instruments outstanding at September 30, 2000 and has
determined that there is no impact from adopting this standard on its
consolidated results of operations or financial position.
2. LINES OF CREDIT:
The Company maintains a $4,000,000 bank line of credit. The 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 $2,402,000) and all
non-governmental accounts receivable and inventory ($1,032,000). At
September 30, 2000, there was no borrowing on the line of credit.
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 September 30, 2000.
3. 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 Three Months Ended 9/30/00
----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $451,000 1,163,246 $0.39
-------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 23,190
-------------------------------------------------------------------------
Diluted EPS Available to Shareholders $451,000 1,186,436 $0.38
-------------------------------------------------------------------------
-9-
For the Three Months Ended 10/2/99
----------------------------------
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $191,000 1,163,246 $(0.16)
-------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements
(Note: N/A - Anti-dilutive)
-------------------------------------------------------------------------
Diluted EPS Available to Shareholders $191,000 1,163,246 $(0.16)
-------------------------------------------------------------------------
4. 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.
Restructuring and realignment costs recognized in the quarter ending
October 2, 1999 were as follows:
October 2, 1999
Restructuring and
Realignment Costs
----------------------------------------
Severance $32,000
----------------------------------------
Employee Training Costs 170,000
----------------------------------------
Equipment Relocation and
Installation 87,000
----------------------------------------
Legal and Other 70,000
----------------------------------------
Total $359,000
----------------------------------------
-10-
PART I. FINANCIAL INFORMATION
Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Comparing the Three Months Ended September 30, 2000 and October 2, 1999:
Income before income taxes was $530,000 for the fiscal three months ended
September 30, 2000 (the "current period") compared to a loss before income taxes
of $239,000 in the prior year three month period ended October 2, 1999 (the
"prior period"). The major reasons for the improvement in income are:
* Revenues increased $333,000 in the current period as compared
to the prior period. Total pairs of boots shipped under contracts
with the U. S. government increased 9%.
Pairs of Direct Molded Sole (DMS) combat boots shipped to the U.
S. government increased 33%. For several years the government has
been reducing its depot inventories of DMS combat boots by
purchasing from contractors fewer pairs than were consumed. The
Company attributes the increase in DMS pairs shipped in the first
quarter of fiscal 2001 to the fact that this inventory reduction
program was completed in the Company's 2000 fiscal year which
ended July 1, 2000. However, pairs of Intermediate Cold/Wet (ICW)
boots shipped to the U. S. government decreased 75%. In August
2000 Wellco completed shipments under a three-year contract to
supply the U.S. government with the ICW boot. The government is
presently evaluating responses, including those of Wellco, to two
new ICW boot solicitations.
Revenues from sales of boot manufacturing equipment and materials
to licensees increased in the current period. These sales vary
with the needs of existing licensees and the licensing of new
customers.
* Cost of sales and services in the current period was $161,000 less
than the prior period. Semi-variable costs such as freight,
factory supplies and maintenance expenses did not increase in
proportion to the increase in revenues. In addition, cost of sales
in the prior period includes costs related to factory set up and
labor inefficiencies of new employees, which were related to the
transfer of certain boot manufacturing operations from
Waynesville, North Carolina to Aguadilla, Puerto Rico.
The increase in revenues, combined with the reduction in cost of
sales and services, resulted in gross profit for the quarter ended
September 30, 2000 increasing by $494,000 over the prior period.
* General and administrative expenses increased $82,000 in the
current period. An increased provision for employee bonuses, which
is based on the Company's net income, was the primary reason for
this increase.
* The prior period loss was caused by restructuring and realignment
costs totaling $359,000. These costs related to a February 1999
restructuring plan, under which the Company consolidated
substantially all footwear manufacturing operations at its
facility in Aguadilla, Puerto Rico. The restructuring and
realignment costs charged against prior period operations are made
up of restructuring costs of $32,000 that increased the amount
previously accrued for health care costs on terminated employees,
and realignment costs of $327,000 consisting of: new employee
training costs ($170,000); cost to move machinery, install
machinery and refurbish and prepare building ($87,000); and legal
and other costs ($70,000).
-11-
The rate of tax provision for income taxes for the quarter ended September 30,
2000 was 15% compared to a 20% rate of tax benefit for the quarter ended October
2, 1999. The current income tax rate is lower because a greater proportion of
consolidated pretax income was from operations in Puerto Rico which is
substantially exempt from both Puerto Rican and federal income taxes. The prior
period tax benefit recognizes the reduction of future taxable income from that
period's loss.
Forward Looking Information:
Wellco is presently shipping boots under the third option year of its DMS boot
contract which covers the period from April 16, 2000 to April 15, 2001. This
contract has one more one-year option period after April 15, 2001. It is not
known whether the U. S. Government intends to exercise the fourth and final
option, which would cover the year April 16, 2001 through April 15, 2002. If the
government does not exercise this fourth option, there should be another
solicitation issued to procure boots.
In August 2000, Wellco completed shipments under a three-year contract to supply
the U. S. government with the ICW boot. The government is presently evaluating
responses, including those of Wellco, to two ICW boot solicitations. As with any
solicitation, Wellco cannot predict with certainty its success in receiving a
contract from these solicitations.
On September 28, 2000, Wellco was awarded a contract to supply 20,000 pairs of
combat boots to a foreign military agency. Delivery under this contract will
take place during the second and third quarters of fiscal year 2001.
The Company has filed for a $400,000 reimbursement from the government of Puerto
Rico, under an incentive grant, relating to certain costs incurred in
consolidating substantially all footwear manufacturing operations in Puerto
Rico. Any amounts collected will be recorded in the period received.
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 standardizes 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 effective for the Company's first fiscal quarter of the
2001 fiscal year. The Company has analyzed contracts and instruments outstanding
during and on September 30, 2000 and has determined that there is no impact from
adopting this standard on its consolidated results of operations or financial
position.
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 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 1, 2000. Those statements include, but may not be limited
to, all statements regarding intent, beliefs, expectations, projections,
forecasts, and plans of the Company and its management. Actual results may
differ materially from management expectations. The Company assumes no
obligations to update any forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
Wellco uses cash from operations and a bank line of credit to supply most of its
liquidity needs.
-12-
The following table summarizes, at the end of the most recent fiscal three
months and the last fiscal year, the amounts of cash and unused line of credit:
(in thousands)
September 30, 2000 July 1, 2000
-------------------------------------------------------------
Cash $340 $73
-------------------------------------------------------------
Unused Line of Credit 4,000 2,300
-------------------------------------------------------------
Total $4,340 $2,373
-------------------------------------------------------------
The increase in the unused line of credit at September 30, 2000 resulted
primarily from cash provided by operations during the first quarter of fiscal
year 2001, which was primarily used to pay down the line of credit.
The following table summarizes the major sources (uses) of cash for the three
months ended September 30, 2000:
(in thousands)
September 30, 2000
-------------------------------------------------------------
Net Income Excluding Depreciation $654
-------------------------------------------------------------
Net Change in Accounts Receivable,
Inventories, Accounts Payable,
Accrued Liabilities, and Accrued
Income Taxes 1,983
-------------------------------------------------------------
Other (207)
-------------------------------------------------------------
Net Cash Provided by Operations 2,430
-------------------------------------------------------------
Cash Used to Repay Lines of Credit (1,700)
-------------------------------------------------------------
Cash Used to Repay Bank Note Payable (36)
-------------------------------------------------------------
Cash Used to Purchase Plant and Equipment (427)
-------------------------------------------------------------
Net Increase in Cash $267
-------------------------------------------------------------
In the quarter ended September 30, 2000, cash provided by operations was
$2,430,000. This resulted from net income excluding non-cash
depreciation($654,000), a reduction in accounts receivable and inventory
($1,245,000) and an increase in accounts payable ($580,000). Cash from
operations was primarily used to pay down the bank line of credit and purchase
equipment.
The bank line of credit, which provides for total borrowing of $4,000,000, will
expire and be subject to renewal on December 31, 2000. There was no borrowing
under the line of credit at September 30, 2000. The Company expects to continue
to rely on this bank line of credit.
At September 30, 2000, the Company had a $500,000 commitment to purchase capital
equipment. 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.
-13-
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
The Company does not have any derivative financial instruments, other financial
instruments, or derivative commodity instruments that requires disclosures.
-14-
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
-15-
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
- --------------------------------------------------------------------------------
November 14, 2000
-16-