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 29, 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 November 13,
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 SEPTEMBER 29, 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
SEPTEMBER 29, 2001 AND JUNE 30, 2001
(in thousands)
ASSETS
(unaudited)
SEPTEMBER 29, JUNE 30,
2001 2001
------------- --------
CURRENT ASSETS:
Cash and cash equivalents..................... $ 959 $ 653
Receivables .................................. 1,615 2,042
Inventories-
Finished goods ........................... 1,565 1,617
Work in process .......................... 1,017 1,084
Raw materials ............................ 2,388 2,309
--------- ---------
Total .................................... 4,970 5,010
Deferred taxes and prepaid expenses .......... 433 255
--------- ---------
Total ........................................ 7,977 7,960
--------- ---------
MACHINERY LEASED TO LICENSEES,
net of accumulated depreciation .............. 32 34
PROPERTY, PLANT AND EQUIPMENT:
Land ......................................... 107 107
Buildings .................................... 1,176 1,176
Machinery and equipment ...................... 6,239 6,145
Furniture and automobiles .................... 955 940
Leasehold improvements ....................... 560 557
--------- ---------
Total cost ................................... 9,037 8,925
Less accumulated depreciation and
amortization .............................. (5,209) (4,994)
--------- ---------
Net .......................................... 3,828 3,931
--------- ---------
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition (Note 1) ........ 228 228
Intangible pension asset ..................... 36 36
--------- ---------
Total ........................................ 264 264
DEFERRED TAXES ..................................... 598 598
--------- ---------
TOTAL .............................................. $ 12,699 $ 12,787
========= =========
(continued on next page)
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WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 29, 2001 AND JUNE 30, 2001
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
SEPTEMBER 29, JUNE 30,
2001 2001
------------- --------
CURRENT LIABILITIES:
Accounts payable ............................. $ 1,384 $ 1,177
Accrued compensation ......................... 1,111 1,115
Accrued pension .............................. 64 83
Accrued income taxes ......................... 699 732
Current portion of note payable (Note 5) ..... 347
Other liabilities (Note 4) ................... 729 765
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Total ........................................ 4,334 3,872
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LONG-TERM LIABILITIES:
Pension obligation ........................... 885 885
Note payable ................................. 200 545
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value ................ 1,164 1,164
Additional paid-in capital ................... 192 192
Retained earnings ............................ 6,484 6,689
Accumulated other comprehensive loss ......... (560) (560)
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Total ........................................ 7,280 7,485
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TOTAL .............................................. $ 12,699 $ 12,787
========= =========
See Notes to Consolidated Financial Statements.
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WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000
(in thousands except per share and number of shares)
(unaudited)
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
------------- -------------
REVENUES ....................................... $ 3,570 $ 5,065
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COSTS AND EXPENSES:
Cost of sales and services ............... 3,207 3,932
General and administrative expenses ...... 590 553
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Total .................................... 3,797 4,485
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GRANT INCOME (Note 4) .......................... 20 --
------------ ------------
OPERATING INCOME (LOSS) ........................ (207) 580
INTEREST EXPENSE ............................... (4) (53)
INTEREST INCOME ................................ 11 3
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES .............. (200) 530
PROVISION FOR INCOME TAXES ..................... 5 79
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NET INCOME (LOSS) .............................. $ (205) $ 451
============ ============
BASIC EARNINGS (LOSS) PER SHARE (Note 3)
based on weighted average number of
shares outstanding ....................... $ (0.18) $ 0.39
============ ============
Shares used in computing basic
earnings per share ....................... 1,163,246 1,163,246
============ ============
DILUTED EARNINGS (LOSS) PER SHARE (Note 3)
based on weighted average number of
shares outstanding and dilutive stock
options ................................. $ (0.18) $ 0.38
============ ============
Shares used in computing diluted
earnings per share ....................... 1,163,246 1,186,436
============ ============
See Notes to Consolidated Financial Statements.
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WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000
(in thousands)
(unaudited)
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
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CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ............................... $ (205) $ 451
-------- --------
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization .............. 217 203
(Increase) decrease in-
Receivables .......................... 427 962
Inventories .......................... 40 283
Other current assets ................. (176) (176)
Increase (decrease) in-
Accounts payable ..................... 207 580
Accrued liabilities .................. (4) 73
Accrued income taxes ................. (33) 85
Pension obligation ................... (19) (59)
Other ................................ (36) 28
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Total adjustments ............................... 623 1,979
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............................ 418 2,430
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment ................ (112) (427)
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NET CASH USED IN INVESTING ACTIVITIES ................ (112) (427)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under short-term borrowings ........ -- (1,700)
Principal payments of bank note payable ......... -- (36)
-------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............................ -- (1,736)
-------- --------
NET INCREASE IN CASH ................................. 306 267
CASH AT BEGINNING OF PERIOD .......................... 653 73
-------- --------
CASH AT END OF PERIOD ................................ $ 959 $ 340
======== ========
(continued on next page)
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WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000
(in thousands)
(unaudited)
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
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SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ................................. $ 4 $ 18
Income taxes ............................. 40 --
========= ========
See Notes to Consolidated Financial Statements.
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WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 29, 2001
(in thousands except number of shares)
(unaudited)
Common Stock
---------------- Additional
Par Paid-In Retained
Shares Value Capital Earnings
--------------------------------------------
BALANCE AT JUNE 30, 2001 1,163,246 $ 1,164 $ 192 $ 6,689
Net loss for the fiscal three
months ended September 29, 2001 (205)
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BALANCE AT SEPTEMBER 29, 2001 1,163,246 $ 1,164 $ 192 $ 6,484
-----------------------------------------------
Accumulated
Other
Comprehensive
Loss
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ADDITIONAL PENSION LIABILITY,
NET OF TAX, BALANCE
AT JUNE 30, 2001 $ (560)
Change for the fiscal three
months ended September 29, 2001 -
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BALANCE AT SEPTEMBER 29, 2001 $ (560)
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See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL THREE MONTHS ENDED SEPTEMBER 29, 2001
----------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
New Accounting Pronouncements
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill
from an amortization method to an impairment approach, and is effective
for the Company's 2003 fiscal year which starts June 30, 2002. Under SFAS
No. 142, if the carrying amount of goodwill exceeds its implied fair
value, an impairment loss is recorded equal to that excess. The
Consolidated Balance Sheets include $228,000 of goodwill ("Excess of cost
over net assets of subsidiary at acquisition"). The Company has not yet
determined the probability of an impairment loss being required, once SFAS
No. 142 becomes effective.
In October 2001, SFAS No. 144, "Accounting for Impairment or Disposal of
Long-lived Assets" was issued specifying, among other things, the
financial accounting and reporting for the impairment or disposal of
long-lived assets. The statement is effective for the Company's 2003
fiscal year which starts June 30, 2002. The Company has not yet determined
the impact, if any, that this statement will have on its consolidated
financial position or results of operations.
2. LINES OF CREDIT:
The Company maintains a $3,000,000 bank line of credit. The line, which
expires December 31, 2001, is expected to be renewed. This line of credit
is secured by a blanket lien on all machinery and equipment (carrying
value of $2,693,000) and all non-governmental accounts receivable and
inventory ($656,000). At September 29, 2001 and June 30, 2001, 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 29, 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 (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:
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For the Three Months Ended 9/29/01
----------------------------------
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $205,000 1,163,246 $(0.18)
-----------------------------------
Effect of Dilutive Stock-based Compensation
Arrangements (Note: N/A - Anti-dilutive)
Diluted EPS Available to Shareholders $205,000 1,163,246 $(0.18)
-----------------------------------
For the Three Months Ended 9/30/00
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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
-----------------------------------
4. GRANT INCOME:
The Company has received $400,000 ($100,000 in the 2001 fiscal year and
$300,000 on July 2, 2001) from the government of Puerto Rico under a
Special Incentives Contract related to its 1999 consolidation of footwear
manufacturing operations in Puerto Rico, which was completed in fiscal
year 2001. The grant requires the Company to maintain operations in Puerto
Rico for five years (fiscal years 2000 through 2004). The grant proceeds
have been deferred and are amortized on a straight line basis over the
five year period. The Consolidated Statements of Operations for the three
months ended September 29, 2001 include an income item of $20,000 from
this grant.
5. 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 based on net income through Wellco's fiscal year 2002 may be made
to Coronet and Affiliates.
Although the stock repurchase occurred, the related Stock Repurchase
Agreement was not executed by Coronet and Affiliates, nor have they
performed certain other actions required by the Agreement. Wellco's
counsel has advised that, because the Stock Repurchase Agreement was not
executed by Coronet and Affiliates and other actions required of them by
the Agreement were not performed, and because Coronet Insurance Company is
being liquidated by the Director of Insurance of the State of Illinois,
some uncertainty exists as to: (i) the enforceability of provisions of the
Stock Repurchase Agreement, and (ii) if enforceable, to whom any
additional obligation under the Agreement is owed.
Generally accepted accounting principles require that an obligation be
reflected in the Consolidated Balance Sheets for the estimated additional
payments that would be made based on actual and
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projected cumulative net income through fiscal year 2002. 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 estimated amount due in
fiscal year 2003, discounted at a rate of 8.5%, is $347,000 at September
29, 2001 and has been classified as a current liability.
-11-
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 29, 2001 and September 30, 2000:
For the three months ended September 29, 2001 (current period), Wellco had a net
loss of $205,000 compared to a net income of $451,000 in the prior year three
month period ended September 30, 2000 (prior period). The current period loss
was primarily caused by a significant reduction in revenues.
o Total revenues in the current period decreased by almost 30% as
compared to the prior three month period. The primary reason for
this decrease was a 28% decrease in boot orders received from the
U. S. government. The lower level of orders was a result of
budget limitations at the end of the government's 2001 fiscal
year, which did not exist in the prior period.
Revenues from sales of boot manufacturing equipment and materials
to licensees also decreased in the current period. These sales
vary with the needs of existing licensees and the licensing of
new customers.
o Cost of sales and services in the current period decreased only
18%. Fixed costs such as depreciation and certain semi-variable
costs such as fringe benefits and maintenance expenses do not
decrease proportionately to a temporary decrease in revenues.
Also, the gross profit margin on boot sales was adversely
affected by a significant increase in leather prices. In
addition, the cost of many other raw materials have increased
following a rather lengthy period of little or no increase.
o General and administrative expenses increased $37,000 in the
current period. Legal and travel expenses increased because the
Company is exploring additional product lines.
o The Consolidated Statements of Operations for the three months
ended September 29, 2001 include grant income of $20,000. The
Company has received $400,000 from the government of Puerto Rico
under a Special Incentives Contract related to its 1999
consolidation of footwear manufacturing operations in Puerto
Rico. The grant requires the Company to maintain operations in
Puerto Rico for five years and the grant income is amortized on a
straight line basis over the five year period.
The rate of tax provision for income taxes for the quarter ended September 29,
2001 was 3% compared to a 15% rate of tax for the quarter ended September 30,
2000. The Company is taxable in two jurisdictions and the current period tax
provision represents taxes in the jurisdiction which generated taxable income in
the period. As to the other jurisdiction, a valuation allowance offset the
deferred tax asset related to its loss. General accepted accounting principles
require reducing deferred tax assets when it is more likely than not, that
deferred tax assets will not be used to reduce future taxable income.
Forward Looking Information:
Since the terrorist attacks on September 11, 2001, Wellco has received larger
than normal boot orders from the U. S. Department of Defense totaling 122,000
pairs, with delivery dates extending until mid- February, 2002. To meet this
delivery schedule, Wellco has increased its production rate to a level
approximately double the rate prior to these orders. The Company believes these
larger orders are designed
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to increase the number of immediately available boots, and the events that will
determine if large orders will continue are not known to the Company.
Wellco is presently shipping boots under the fourth and final option year of its
U. S. government Direct Molded Sole (DMS) boot contract which covers the period
from April 16, 2001 to April 15, 2002. The government recently announced a new
solicitation, to be issued about November 30, 2001, which would result in
contracts to supply the DMS boot for the five years following April 15, 2002. It
is expected that solicitation responses will be due on January 30, 2002.
On March 5, 2001 Wellco submitted a solicitation response 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. A subsequent modification to this solicitation extended the contract
award date to January 13, 2002.
In October, 2001 Wellco submitted a response to a U. S. government solicitation
for the supply of berets to U. S. Armed Forces personnel. Two contracts are
expected to be awarded in January, 2002, with the first delivery being ten
months after contract award. Each contract will require the delivery of almost
2,000,000 berets in the base term of twenty-four months following the first
delivery. Each contract will have three options for a term of one year each for
a smaller quantity of berets.
As with any solicitation, the Company cannot predict with certainty its success
in receiving a contract from the above solicitations.
Wellco has received a U.S. government contract to supply 3,800 anti-personnel
mine protective overboots, with delivery in fiscal year 2002 and 2003.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment approach, and is effective for the
Company's 2003 fiscal year which starts June 30, 2002. Under SFAS No. 142, if
the carrying amount of goodwill exceeds its implied fair value, an impairment
loss is recorded equal to that excess. The Consolidated Balance Sheets include
$228,000 of goodwill ("Excess of cost over net assets of subsidiary at
acquisition"). The Company has not yet determined the probability of an
impairment loss being required, once SFAS No. 142 becomes effective.
In October 2001, SFAS No. 144, "Accounting for Impairment or Disposal of
Long-lived Assets" was issued specifying, among other things, the financial
accounting and reporting for the impairment or disposal of long- lived assets.
The statement is effective for the Company's 2003 fiscal year which starts June
30, 2002. The Company has not yet determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.
Except for historical information, this Annual Report 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 June 30, 2001. 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
obligation to update any forward-looking statements.
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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 three
months and the last fiscal year, the amounts of cash and unused line of credit:
(in thousands)
September 29, 2001 June 30, 2001
------------------------------------------
Cash and Cash Equivalents $959 $653
Unused Line of Credit 3,000 3,000
------------------------------------------
Total $3,959 $3,653
The increase in cash at September 29, 2001 resulted primarily from cash provided
by operations during the first quarter of fiscal year 2002.
The following table summarizes the major sources (uses) of cash for the three
months ended September 29, 2001:
(in thousands)
September 29, 2001
------------------
Net Loss Excluding Depreciation $12
Net Change in Accounts Receivable, Inventories,
Accounts Payable, Accrued Liabilities, and Accrued
Income Taxes 637
Other (231)
-----
Net Cash Provided by Operations 418
Cash Used to Purchase Plant and Equipment (112)
-----
Net Increase in Cash and Cash Equivalents $306
In the quarter ended September 29, 2001, cash provided by operations was
$418,000. This primarily resulted from a reduction in accounts receivable
($427,000), an increase in accounts payable ($207,000) and was partially offset
with a decrease in other liabilities ($231,000). Cash from operations was
primarily used to purchase equipment and to invest in short-term interest
earning instruments.
The bank line of credit, which provides for total borrowing of $3,000,000, will
expire and be subject to renewal on December 31, 2001. There was no borrowing
under the line of credit at September 29, 2001. The Company expects to continue
to rely on this bank line of credit.
If the Company receives a contract award from the beret solicitation discussed
above, an investment in machinery of approximately $800,000 will be made.
Existing cash, cash from future operations and the bank line of credit should be
adequate to meet this cash need.
-14-
At September 29, 2001, the Company had no significant commitments 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.
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.
-15-
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
-16-
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 13, 2001
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