FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
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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: MARCH 31, 2001
COMMISSION FILE NUMBER: 1-5555
WELLCO ENTERPRISES, INC.
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(Exact name of registrant as specified in charter)
NORTH CAROLINA 56-0769274
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(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 .
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1,163,246 shares of $1 par value common stock were outstanding on May 11, 2001.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WELLCO ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR THE FISCAL QUARTER ENDED MARCH 31, 2001
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
MARCH 31, 2001 AND JULY 1, 2000
(in thousands)
ASSETS
(unaudited)
MARCH 31, JULY 1,
2001 2000
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CURRENT ASSETS:
Cash ....................................... $ 680 $ 73
Receivables ................................ 695 3,108
Inventories-
Finished goods ......................... 1,690 1,811
Work in process ........................ 1,004 1,224
Raw materials .......................... 2,237 2,062
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Total .................................. 4,931 5,097
Deferred taxes and prepaid expenses ........ 796 713
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Total ...................................... 7,102 8,991
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MACHINERY LEASED TO LICENSEES,
net of accumulated depreciation ............ 36 24
PROPERTY, PLANT AND EQUIPMENT:
Land ....................................... 107 107
Buildings .................................. 1,176 1,176
Machinery and equipment .................... 6,076 5,034
Furniture and automobiles .................. 934 873
Leasehold improvements ..................... 557 526
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Total cost ................................. 8,850 7,716
Less accumulated depreciation and
amortization ............................ (4,927) (4,319)
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Net ........................................ 3,923 3,397
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INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition ............... 228 228
Intangible pension asset ................... 52 52
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Total ...................................... 280 280
DEFERRED TAXES ................................... 258 258
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TOTAL ............................................ $ 11,599 $ 12,950
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(continued on next page)
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WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND JULY 1, 2000
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited
MARCH 31, JULY 1,
2001 2000
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CURRENT LIABILITIES:
Short-term borrowing from bank (Note 2) ...... $ -- $ 1,700
Accounts payable ............................. 743 861
Accrued compensation ......................... 1,049 1,076
Accrued pension .............................. 96 124
Accrued income taxes ......................... 716 629
Other liabilities ............................ 403 395
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Total ........................................ 3,007 4,785
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LONG-TERM LIABILITIES:
Pension obligation ........................... 722 892
Note payable (Note 6) ........................ 405 701
STOCKHOLDERS' EQUITY (Note 6):
Common stock, $1.00 par value ................ 1,164 1,164
Additional paid-in capital ................... 192 192
Retained earnings ............................ 6,539 5,646
Accumulated other comprehensive loss ......... (430) (430)
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Total ........................................ 7,465 6,572
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TOTAL .............................................. $ 11,599 $ 12,950
======== ========
See Notes to Consolidated Financial Statements.
-4-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL NINE MONTHS ENDED
MARCH 31, 2001 AND APRIL 1, 2000
(in thousands except per share and number of shares)
(unaudited)
MARCH 31, APRIL 1,
2001 2000
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REVENUES ......................................... $ 14,250 $ 15,582
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COSTS AND EXPENSES:
Cost of sales and services ................. 11,490 13,262
Restructuring and realignment costs (Note 4) -- 331
General and administrative expenses ........ 1,801 1,507
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Total ...................................... 13,291 15,100
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INCOME FROM CONTRACT CLAIM AND
GRANT MONEY RECEIVED (Note 5) ................... 100 203
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OPERATING INCOME ................................. 1,059 685
NET INTEREST EXPENSE ............................. (116) (187)
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INCOME BEFORE INCOME TAXES ....................... 943 498
PROVISION FOR INCOME TAXES ...................... 113 93
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NET INCOME ....................................... $ 830 $ 405
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BASIC EARNINGS PER SHARE (Note 3)
based on weighted average number of
shares outstanding ......................... $ 0.71 $ 0.35
=========== ===========
Shares used in computing basic
earnings per share ......................... 1,163,246 1,163,246
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DILUTED EARNINGS PER SHARE (Note 3) based on
weighted average number of shares
outstanding and dilutive stock
options ................................... $ 0.70 $ 0.35
=========== ===========
Shares used in computing diluted
earnings per share ......................... 1,186,510 1,168,286
=========== ===========
See Notes to Consolidated Financial Statements.
-5-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
MARCH 31, 2001 AND APRIL 1, 2000
(in thousands except per share and number of shares)
(unaudited)
MARCH 31, APRIL 1,
2001 2000
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REVENUES ......................................... $ 4,154 $ 6,291
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COSTS AND EXPENSES:
Cost of sales and services ................. 3,483 5,137
Restructuring and realignment costs (Note 4) -- 19
General and administrative expenses ........ 595 567
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Total ...................................... 4,078 5,723
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INCOME FROM CONTRACT CLAIM AND
GRANT MONEY RECEIVED (Note 5) ................... -- (12)
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OPERATING INCOME ................................. 76 556
NET INTEREST EXPENSE ............................. (18) (68)
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INCOME BEFORE INCOME TAXES ....................... 58 488
PROVISION FOR INCOME TAXES ...................... 14 90
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NET INCOME ....................................... $ 44 $ 398
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BASIC EARNINGS PER SHARE (Note 3)
based on weighted average number of
shares outstanding ......................... $ 0.04 $ 0.34
=========== ===========
Shares used in computing basic
earnings per share ......................... 1,163,246 1,163,246
=========== ===========
DILUTED EARNINGS PER SHARE (Note 3) based on
weighted average number of shares
outstanding and dilutive stock
options ................................... $ 0.04 $ 0.34
=========== ===========
Shares used in computing diluted
earnings per share ......................... 1,186,946 1,168,056
=========== ===========
See Notes to Consolidated Financial Statements.
-6-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL NINE MONTHS ENDED
MARCH 31, 2001 AND APRIL 1, 2000
(in thousands)
(unaudited)
MARCH 31, APRIL 1,
2001 2000
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CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ............................. $ 830 $ 405
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Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization ..... 611 526
(Increase) decrease in-
Receivables ................. 2,413 1,777
Inventories ................. 166 (666)
Other current assets ........ (83) (10)
Increase (decrease) in-
Accounts payable ............ (118) 230
Accrued liabilities ......... (27) (87)
Accrued income taxes ........ 87 113
Pension obligation .......... (198) (260)
Other ....................... 44 (29)
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Total adjustments ...................... 2,895 1,594
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................... 3,725 1,999
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment ....... (1,149) (1,210)
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NET CASH USED IN INVESTING ACTIVITIES ....... (1,149) (1,210)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under short-term borrowings (1,700) (635)
Principal payments of bank note payable (36) (110)
Cash dividends paid .................... (233) (116)
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ................... (1,969) (861)
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NET INCREASE (DECREASE) IN CASH ............. 607 (72)
CASH AT BEGINNING OF PERIOD ................. 73 89
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CASH AT END OF PERIOD ....................... $ 680 $ 17
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(continued on next page)
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WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL NINE MONTHS ENDED
MARCH 31, 2001 AND APRIL 1, 2000
(in thousands)
(unaudited)
MARCH 31, APRIL 1,
2001 2000
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SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ............. $ 60 $185
Income taxes ......... 27 13
NONCASH DECREASE IN NOTE PAYABLE 296 --
====== ====
See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL NINE MONTHS ENDED
MARCH 31, 2001
(in thousands except number of shares)
(unaudited)
Common Stock Additional
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Par Paid-In Retained
Shares Value Capital Earnings
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BALANCE AT JULY 1, 2000 1,163,246 $ 1,164 $ 192 $ 5,646
Net income for the fiscal nine
months ended March 31, 2001 830
Adjustment of note payable issued
for stock repurchase (Note 6) 296
Cash dividend ($.20 per share) (233)
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BALANCE AT MARCH 31, 2001 1,163,246 $ 1,164 $ 192 $ 6,539
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Accumulated
Other
Comprehensive
Loss
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BALANCE AT JULY 1, 2000 $ (430)
Change for the fiscal nine
months ended March 31, 2001 -
----------------
BALANCE AT MARCH 31, 2001 $ (430)
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See Notes to Consolidated Financial Statements.
-9-
WELLCO ENTERPRISES, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL NINE MONTHS ENDED MARCH 31, 2001
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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 quarter of the 2001 fiscal year. The
Company has analyzed contracts and instruments outstanding during the nine
months ended and on March 31, 2001 and has determined that there is no
impact from adopting this standard on its consolidated results of
operations or financial position.
2. LINE OF CREDIT:
The Company renewed its bank line of credit at December 31, 2000. Due to
the Company's increased cash from operations, the line was reduced from
$4,000,000 to $3,000,000. The line, which expires December 31, 2001, 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 $2,745,000) and all non-governmental accounts receivable and inventory
($791,000). At March 31, 2001, there was no borrowing on the line of
credit.
The bank credit agreement contains, among other covenants, defined levels
of net worth and current ratio requirements. The Company was in compliance
with all loan covenants at March 31, 2001.
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,
"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 3/31/01
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $830,000 1,163,246 $0.71
Effect of Dilutive Stock-based Compensation
Arrangements 23,264
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Diluted EPS Available to Shareholders $830,000 1,186,510 $0.70
-10-
For the Nine Months Ended 4/1/00
Net 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
For the Three Months Ended 3/31/01
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $44,000 1,163,246 $0.04
Effect of Dilutive Stock-based Compensation
Arrangements 23,700
------------------------------------
Diluted EPS Available to Shareholders $44,000 1,186,946 $0.04
For the Three Months Ended 4/1/00
Net 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
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 in
Aguadilla, Puerto Rico, where the Company has had operations since 1956.
At July 1, 2000, the Company had completed its restructuring plan.
Restructuring and realignment costs (credit) recognized in the fiscal nine
months and quarter ending April1, 2000 were as follows:
-11-
Fiscal Nine
Months Ending Quarter Ending
April 1, 2000 April 1, 2000
Total Expenses Total Expenses
Severance ($90,000)
Employee Training Costs 186,000
Equipment Relocation and
Installation 108,000 $ 1,000
Legal and Other 127,000 18,000
Total Cost $331,000 $19,000
5. GRANT MONEY RECEIVED AND CONTRACT CLAIM:
In November, 2000, $100,000 was received from the government of Puerto
Rico under a Special Incentives Contract which awarded the Company a grant
of up to $400,000 for reimbursement of costs it incurred related to the
consolidation of footwear manufacturing operations in Puerto Rico. The
receipt, and classification in the Company's Consolidated Financial
Statements, of additional amounts under this Contract is dependent upon
audit by and negotiations with the government of Puerto Rico. The
Consolidated Statements of Operations for the nine months ended March 31,
2001 include an income item of $100,000 for the money received to date
from this grant.
In January, 2000 the federal government's Alternative Disputes Resolution
(ADR) procedure was used to reach a final and non-appealable settlement of
the Company's claim against a government contracting agency. 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.
6. NOTE PAYABLE:
On December 29, 1995 Wellco repurchased from Coronet Insurance Company and
some of its affiliates (Coronet and Affiliates) 1,531,272 shares of Wellco
common stock, which represented 57.69% of total shares outstanding at that
time. The Stock Repurchase Agreement provides that certain additional
payments may be made through Wellco's fiscal year 2003.
Since the date of stock repurchase, Wellco's Consolidated Balance Sheets
have included a Note Payable representing the present value of the
estimated amounts that would be paid if the Agreement is enforceable. The
amount of the estimated payment due in fiscal year 2003, discounted at a
rate of 8.5%, is $405,000 at March 31, 2001.
The Stock Repurchase Agreement, as drafted, provides that actual payments,
if any, would only be made in the amount by which 60% of each fiscal
year's net income exceeds a certain defined amount, calculated on a
cumulative basis, and applying to fiscal years 1997 through 2002. During
the third quarter of the 2001 fiscal year, the Company revised its
estimate of the amount that might be paid on this note. This decreased the
Note Payable as shown in the Consolidated Balance Sheet and increased
Retained Earnings by $296,000.
-12-
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 March 31, 2001 and April 1, 2000:
Despite a 9% reduction in revenues, income before income taxes was $943,000 for
the fiscal nine months ended March 31, 2001 (the "current period") compared to
income before income taxes of $498,000 in the prior year nine month period ended
April 1, 2001.
o Revenues decreased $1,332,000 (9%) in the current period as
compared to the prior period. Total pairs of boots shipped under
contracts with the U. S. government decreased 8%.
The primary reason for decreased revenues was significant
shipments to the U. S. government of the Intermediate Cold/Wet
(ICW) boot in the prior period. In August 2000 Wellco made the
final shipment under its three-year contract to supply this boot.
Also included in the prior period, but not included in current
period, are revenues from sales of an inmate work shoe to a state
prison system. In 1999, Ro-Search, a wholly-owned subsidiary of
Wellco, shipped this state the equipment needed for manufacture
of these boots by inmates, and subsequently supplied the training
and technical assistance. Wellco supplied these work shoes until
inmate manufacturing was able to meet the need.
Pairs of Direct Molded Sole (DMS) combat boots shipped to the U.
S. government increased 20%, which is the primary reason for the
increase in income before taxes. 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
nine months 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.
Revenues from sales of boot manufacturing equipment and materials
to licensees increased in the current period because of equipment
shipments to a new foreign licensee and sales to an existing
licensee. These sales vary with the needs of existing licensees
and the licensing of new customers.
o The $1,772,000 decrease in cost of sales and services was
greater than the $1,332,000 decrease in revenues, and gross
profit (revenues less cost of sales and services) increased
$440,000. Cost of sales in the prior period include costs related
to factory set up and labor inefficiencies of new employees,
which resulted from the transfer of certain boot manufacturing
operations from Waynesville, North Carolina to Aguadilla, Puerto
Rico. These costs were over and beyond those shown as
"Restructuring and realignment costs" in the Consolidated
Statements of Operations. In addition, gross profit margins on
the ICW boot and on the inmate work shoe were less than those for
the DMS combat boots.
o General and administrative expenses increased $294,000 in the
current period. Increased provision for employee bonuses, which
is based on the Company's net income, and employee compensation
adjustments contributed to this increase. In addition,
compensation paid in the prior period to administrative employees
who were involved in the transfer of manufacturing operations to
Puerto Rico was classified as "Restructuring and realignment
costs" in the
-13-
Consolidated Statements of Operations. Also, travel costs and
military show expenses increased because the Company participated
in a new military equipment show in the current period.
o In November, 2000, $100,000 was received from the government of
Puerto Rico under a Special Incentives Contract which awarded the
Company a grant of up to $400,000 for reimbursement of costs
related to the consolidation of footwear manufacturing operations
in Puerto Rico (see Note 5 to the Consolidated Financial
Statements).
o The prior period included a non-recurring income item of $203,000
representing the final settlement of a contract claim (see Note 5
to the Consolidated Financial Statements).
o The prior year period also included 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. As detailed in Note 4 to the
Consolidated Financial Statements, the Restructuring and
Realignment Costs charged against prior period operations are
made up of:
Restructuring credit of $90,000. During that 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 estimated. In addition, the
prior period includes a restructuring cost of $32,000 to increase
the amount previously accrued for health care costs on terminated
employees.
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).
o Net interest expense was lower in the current period because of
reduced levels of borrowing under a bank line of credit and due
to a change in the estimated amount due under the Stock
Repurchase Agreement (see Note 6 to the Consolidated Financial
Statements).
The income tax rate (the percent of Provision for Income Taxes to the Income
Before Income Taxes) for the nine months ended March 31, 2001 was 12% compared
to a 19% tax rate for the prior period. The current period rate is lower because
of an increase in the portion of total consolidated pretax income estimated to
be from operations in Puerto Rico.
Comparing The Three Months Ended March 31, 2001 and April 1, 2000:
Income before income taxes was $58,000 for the fiscal three months ended March
31, 2001 (the "current period") compared to income before income taxes of
$488,000 in the prior year three month period ended April 1, 2000 (the "prior
period"). The major reasons for the decrease in income are:
o Revenues decreased $2,137,000 (34%) in the current period as compared
to the prior period. Total pairs of boots shipped under contracts with
the U. S. government decreased 39%.
Because of reduced orders from the U. S. government, pairs of Direct
Molded Sole (DMS) combat boots shipped to the government decreased 16%.
Revenues from DMS boot shipments in the fiscal quarter ended
December 30, 2000 included shipments for the initial stocking of a new
government warehouse, from which clothing and textile items are
subsequently shipped to military facilities. The Company believes that
the current period decrease in orders received for DMS combat boots was
the result of this warehouse not having shipped enough boots to require
-14-
significant restocking.
In addition, revenues in the prior period include significant shipments
to the U. S. government of the Intermediate Cold/Wet (ICW) boot. In
August 2000 Wellco made the final shipment under its three year
contract to supply this boot and current period revenues do not include
any sales of this boot.
As mentioned earlier, revenues from sales of an inmate work shoe to a
state prison system are included in the prior period but not in the
current period.
Revenues from sales of boot manufacturing equipment and materials
increased in the current period because of equipment shipments to a new
foreign licensee. These sales vary with the needs of existing licensees
and the licensing of new customers.
o Because semi-variable and fixed manufacturing costs did not decrease at
the same rate as the decrease in revenues, the percent of decrease in
cost of sales and services (32%) was less than the 39% decrease in
revenues. In addition, leather prices have increased significantly.
These are the primary reasons gross profit (revenues less cost of sales
and services) decreased $483,000.
Net interest expense was lower in the current period because of reduced levels
of borrowing under the bank line of credit and to a change in the estimated
amount due under the Stock Repurchase Agreement (see Note 6).
The income tax rate (the percent of Provision for Income Taxes to the Income
Before Income Taxes) for current period was 24% compared to 18% in the prior
period.
Forward Looking Information:
As stated and discussed above, orders from the U. S. government for DMS boots
were 16% less in the third fiscal quarter ended March 31, 2001 than in prior
year fiscal quarter ended April 1, 2000. However, for the period April 1, 2001
through May 4, 2001, which represents five weeks or 38% of the fourth fiscal
quarter which will end June 30, 2001, orders are already 55% of those for the
fiscal quarter ended March 31, 2001, and 43% of orders for the prior year fourth
fiscal quarter.
Wellco is presently shipping boots under the fourth and final option year of its
U. S. government DMS boot contract which covers the period from April 16, 2001
to April 15, 2002. Wellco believes that the government will issue solicitations
from which contracts will be awarded for purchase of DMS boots beyond April 15,
2002.
Wellco recently submitted responses to three solicitations issued by U. S.
government for boot purchases. The Company cannot predict with certainty its
success of receiving a contract award from these or any other solicitation.
-15-
1. A solicitation response was submitted on March 5, 2001 to supply the
Infantry Combat Boot (ICB) for a one year period with four one-year
options. The solicitation provides for a small annual quantity to be
supplied to the Marine Corps and a larger quantity that may be supplied to
the Army, contingent upon its adoption of the ICB boot as replacement for
a substantial portion of its current usage of the all- leather combat
boot, which is one of the boots supplied under the DMS boot contract
mentioned above. The Company cannot predict with certainty whether the
Army will adopt the ICB boot.
2. A solicitation response was submitted on April 12, 2001 to supply a new
Jungle Desert Boot (JD) to the Marine Corps for one year with two one-year
options.
3. A solicitation response was submitted on April 30, 2001 to supply the HoT
Weather Safety Boot for one year with four one-year options.
In August 2000, Wellco completed shipments under a three-year contract to supply
the U. S. government with the Intermediate Cold/Wet boot (ICW). The government
recently announced awards to other contractors to supply this boot for one year
with four one-year options.
The Company will complete equipment shipments to its new foreign licensee in the
fiscal quarter ending June 30, 2001. The Company has executed agreements with
two existing U. S. customers under which the Company will supply certain new
technology and earn fees which will vary with those customers' use of the
related technology.
The receipt, and classification in the Company's Consolidated Financial
Statements, of additional amounts under the Special Incentives Contract
mentioned earlier is dependent on audit by and negotiations with the government
of Puerto Rico.
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 the nine months ended and on March 31, 2001 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 RESOURCE
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 amounts of cash and unused line of credit:
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(in thousands)
March 31, 2001 July 1, 2000
-------------- ------------
Cash $680 $73
Unused Line of Credit 3,000 2,300
----- -----
Total $3,680 $2,373
The increase in the unused line of credit at March 31, 20001 resulted primarily
from cash provided by operations being used to pay down the line of credit,
which was reduced from $4,000,000 to $3,000,000 at renewal on December 31,
2000.Cash not immediately needed is transferred to an interest earning account
and is available on a daily basis.
The following table summarizes the major sources (uses) of cash for the nine
months ended March 31, 2001:
(in thousands)
March 31, 2001
--------------
Net Income Excluding Depreciation and Amortization $1,441
Net Change in Accounts Receivable, Inventories,
Accounts Payable, Accrued Liabilities, and Accrued
Income Taxes 2,521
Other (primarily payment of the long term pension (237)
obligation)
Net Cash Provided by Operations 3,725
------
Cash Used to Repay Lines of Credit (1,700)
Cash Used to Purchase Plant and Equipment (1,149)
Cash Used to Pay Dividends (233)
Cash Used to Repay Bank Note Payable (36)
-------
Net Increase in Cash $607
In the nine months ended March 31, 2001, cash provided by operations was
$3,725,000. This primarily resulted from net income plus non-cash depreciation
and amortization($1,441,000), and a reduction in accounts receivable
($2,413,000). As stated earlier, reduced orders for the DMS boot in the third
fiscal quarter ended March 31, 2001 and the completion of the ICW contract
resulted in a significant amount of cash from the reduction in accounts
receivable, while cash invested in inventory remained substantially the same.
The Company purchased $1,149,000 of new equipment during the nine month period
ended March 31, 2001. Customer financing of $300,000 in the form of a ten year
note payable was provided after March 31, 2001 to partially offset the cash
required to purchase certain of this machinery.
The Company recently renewed its bank line of credit. Due to the Company's
increased cash from operations, the line was reduced from $4,000,000 to
$3,000,000. The line, which expires December 31,
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2001, can be renewed annually at the bank's discretion. There were no borrowings
on the line of credit at March 31, 2001. The Company expects to continue to rely
on this bank line of credit. The Company was in compliance with all loan
covenants at March 31, 2001.
Information was provided earlier about the Company making responses to three U.
S. government solicitations which are presently under evaluation. If awarded a
contract(s), the Company believes that the line of credit and cash from
operations will be adequate to meet the required cash needs of a new
contract(s).
The Company does not know of any material 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 derivative financial instruments, other 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 11, 2001
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