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: DECEMBER 29, 2001
COMMISSION FILE NUMBER: 1-5555
WELLCO ENTERPRISES, INC.
-------------------------
(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 .
--- ---
1,180,746 shares of $1 par value common stock were outstanding on February 12,
2002.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WELLCO ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR THE FISCAL QUARTER ENDED DECEMBER 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
DECEMBER 29, 2001 AND JUNE 30, 2001
(in thousands)
ASSETS
(unaudited)
DECEMBER 29, JUNE 30,
2001 2001
------------ --------
CURRENT ASSETS:
Cash and cash equivalents .................... $ 900 $ 653
Receivables .................................. 1,922 2,042
Inventories-
Finished goods ........................... 1,799 1,617
Work in process .......................... 1,041 1,084
Raw materials ............................ 2,639 2,309
-------- --------
Total .................................... 5,479 5,010
Deferred taxes and prepaid expenses .......... 391 255
-------- --------
Total ........................................ 8,692 7,960
-------- --------
MACHINERY LEASED TO LICENSEES,
net of accumulated depreciation .............. 31 34
PROPERTY, PLANT AND EQUIPMENT:
Land ......................................... 107 107
Buildings .................................... 1,176 1,176
Machinery and equipment ...................... 6,447 6,145
Furniture and automobiles .................... 957 940
Leasehold improvements ....................... 560 557
-------- --------
Total cost ................................... 9,247 8,925
Less accumulated depreciation and
amortization .............................. (5,423) (4,994)
-------- --------
Net .......................................... 3,824 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 .............................................. $ 13,409 $ 12,787
======== ========
(continued on next page)
-3-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 2001 AND JUNE 30, 2001
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
DECEMBER 29, JUNE 30,
2001 2001
------------ --------
CURRENT LIABILITIES:
Accounts payable ............................. $ 1,783 $ 1,177
Accrued compensation ......................... 957 1,115
Accrued pension .............................. 25 83
Accrued income taxes ......................... 715 732
Cash dividend payable ........................ 235 --
Other liabilities (Notes 4 and 5 ) ........... 452 765
-------- --------
Total ........................................ 4,167 3,872
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ........................... 885 885
Notes payable (Note 5) ....................... 200 545
COMMITMENTS (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value ................ 1,178 1,164
Additional paid-in capital ................... 298 192
Retained earnings ............................ 7,241 6,689
Accumulated other comprehensive loss ......... (560) (560)
-------- --------
Total ........................................ 8,157 7,485
-------- --------
TOTAL .............................................. $ 13,409 $ 12,787
======== ========
See Notes to Consolidated Financial Statements.
-4-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 29, 2001 AND DECEMBER 30, 2000
(in thousands except per share and number of shares)
(unaudited)
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
REVENUES ....................................... $ 9,960 $ 10,096
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............... 8,456 8,007
General and administrative expenses ...... 1,303 1,206
----------- -----------
Total .................................... 9,759 9,213
----------- -----------
GRANT INCOME (Note 4) .......................... 40 100
----------- -----------
OPERATING INCOME ............................... 241 983
INTEREST EXPENSE ............................... (24) (113)
INTEREST INCOME (Note 5) ....................... 254 15
----------- -----------
INCOME BEFORE INCOME TAXES .................... 471 885
PROVISION FOR INCOME TAXES ..................... 31 99
----------- -----------
NET INCOME ..................................... $ 440 $ 786
=========== ===========
BASIC EARNINGS PER SHARE (Note 3)
based on weighted average number of
shares outstanding ....................... $ 0.38 $ 0.68
=========== ===========
Shares used in computing basic
earnings per share ....................... 1,165,313 1,163,246
=========== ===========
DILUTED EARNINGS PER SHARE (Note 3) based on
weighted average number of shares
outstanding and dilutive stock
options ................................. $ 0.37 $ 0.66
=========== ===========
Shares used in computing diluted
earnings per share ....................... 1,200,610 1,186,289
=========== ===========
See Notes to Consolidated Financial Statements.
-5-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
DECEMBER 29, 2001 AND DECEMBER 30, 2000
(in thousands except per share and number of shares)
(unaudited)
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
REVENUES ....................................... $ 6,390 $ 5,031
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............... 5,249 4,075
General and administrative expenses ...... 713 653
----------- -----------
Total .................................... 5,962 4,728
----------- -----------
GRANT INCOME (Note 4) .......................... 20 100
----------- -----------
OPERATING INCOME ............................... 448 403
INTEREST EXPENSE ............................... (20) (60)
INTEREST INCOME (Note 5) ....................... 243 12
----------- -----------
INCOME BEFORE INCOME TAXES ..................... 671 355
PROVISION FOR INCOME TAXES .................... 26 20
----------- -----------
NET INCOME ..................................... $ 645 $ 335
=========== ===========
BASIC EARNINGS PER SHARE (Note 3)
based on weighted average number of
shares outstanding ....................... $ 0.55 $ 0.29
=========== ===========
Shares used in computing basic
earnings per share ....................... 1,167,312 1,163,246
=========== ===========
DILUTED EARNINGS PER SHARE (Note 3) based on
weighted average number of shares
outstanding and dilutive stock
options ................................. $ 0.53 $ 0.28
=========== ===========
Shares used in computing diluted
earnings per share ....................... 1,219,485 1,186,068
=========== ===========
See Notes to Consolidated Financial Statements.
-6-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 29, 2001 AND DECEMBER 30, 2000
(in thousands)
(unaudited)
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ...................................... $ 440 $ 786
------- -------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization .............. 433 407
Non-cash reduction in accrued
interest ................................... (234) --
(Increase) decrease in-
Receivables .......................... 120 1,355
Inventories .......................... (469) (403)
Other current assets ................. (134) (131)
Increase (decrease) in-
Accounts payable ..................... 606 174
Accrued liabilities .................. (158) (169)
Accrued income taxes ................. (17) 97
Pension obligation ................... (59) (135)
Other ................................ (79) 36
------- -------
Total adjustments ............................... 9 1,231
------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............................ 449 2,017
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment ................ (322) (575)
------- -------
NET CASH USED IN INVESTING ACTIVITIES ................ (322) (575)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under short-term borrowings ........ -- (1,015)
Principal payments of bank note payable ......... -- (36)
Stock option exercise ........................... 120 --
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............................ 120 (1,051)
------- -------
NET INCREASE IN CASH ................................. 247 391
CASH AT BEGINNING OF PERIOD .......................... 653 73
------- -------
CASH AT END OF PERIOD ................................ $ 900 $ 464
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(continued on next page)
-7-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 29, 2001 AND DECEMBER 30, 2000
(in thousands)
(unaudited)
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ..................................... $ 24 $ 42
Income taxes ................................. 50 9
NONCASH DIVIDEND ACCRUAL ............................... $235 $233
NONCASH DECREASE IN NOTE PAYABLE (NOTE 5) .............. $347
==== ====
See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 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 income for the fiscal six
months ended December 29, 2001 440
----------------------------------------------
Adjustment of note payable issued
for stock repurchase (Note 5 ) 347
Exercise of stock options 14,000 14 106
Cash dividend ($.20 per share) (235)
----------------------------------------------
BALANCE AT DECEMBER 29, 2001 1,177,246 $ 1,178 $ 298 $ 7,241
----------------------------------------------
Accumulated
Other
Comprehensive
Loss
----------------
ADDITIONAL PENSION LIABILITY,
NET OF TAX, BALANCE
AT JUNE 30, 2001 $ (560)
Change for the fiscal six
months ended December 29, 2001 -
----------------
BALANCE AT DECEMBER 29, 2001 $ (560)
----------------
See Notes to Consolidated Financial Statements.
-9-
WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE FISCAL SIX MONTHS ENDED DECEMBER 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 was
renewed recently and will expire December 31, 2002 . This line of credit
is secured by a blanket lien on all machinery and equipment (carrying
value of $2,728,000) and all non-governmental accounts receivable and
inventory ($624,000). At December 29, 2001 and June 30, 2001, there were
no borrowings 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 December 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:
-10-
For the Six Months Ended 12/29/01
---------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS Available to Shareholders $440,000 1,165,313 $0.38
Effect of Dilutive Stock-based
Compensation Arrangements 35,297
-------------------------------------
Diluted EPS Available to Shareholders $440,000 1,200,610 $0.37
For the Six Months Ended 12/30/00
---------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------
Basic EPS Available to Shareholders $786,000 1,163,246 $0.68
Effect of Dilutive Stock-based
Compensation Arrangements 23,043
-------------------------------------
Diluted EPS Available to Shareholders $786,000 1,186,289 $0.66
For the Three Months Ended 12/29/01
-----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------
Basic EPS Available to Shareholders $645,000 1,167,312 $0.55
Effect of Dilutive Stock-based
Compensation Arrangements 52,173
--------------------------------------
Diluted EPS Available to Shareholders $645,000 1,219,485 $0.53
For the Three Months Ended 12/30/00
------------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------
Basic EPS Available to Shareholders $335,000 1,163,246 $0.29
Effect of Dilutive Stock-based
Compensation Arrangements 22,822
-------------------------------------
Diluted EPS Available to Shareholders $335,000 1,186,068 $0.28
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
-11-
over the five year period. The Consolidated Statements of Operations for
the three and six months ended December 29, 2001 include an income item
from this grant of $20,000 and $40,000 respectively, and the prior year
three and six month periods ended December 30,2000 included $100,000.
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. This repurchase provided for certain additional payments, without
interest, to be made if cumulative net income for the six fiscal years
1997 through 2002 exceeded a defined amount.
Generally accepted accounting principles require that an obligation be
reflected in the Consolidated Balance Sheets for the estimated additional
payments that would be made. Actual and projected cumulative net income
through fiscal year 2002 (the current fiscal year) is less than the
defined amount cumulative net income has to exceed. Consequently, the
previously recorded $347,000 Note Payable for the estimated additional
payment liability was reversed and Stockholders' Equity was increased by
this amount.
Since its stock repurchase, Wellco, using generally accepted accounting
principles, has accrued imputed interest expense on the estimated
additional payment. At December 29, 2001, the previously accrued $234,000
interest liability was reversed in connection with the elimination of the
Note Payable and the Consolidated Statements of Operations includes
interest income for this amount.
6. COMMITMENTS:
At December 29, 2001, the Company had a $180,000 commitment to purchase
capital equipment.
-12-
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Comparing the Six Months Ended December 29, 2001 and December 30, 2000:
For the six months ended December 29, 2001 (current period), Wellco had net
income of $440,000 compared to a net income of $786,000 in the prior year six
month period ended December 30, 2000 (prior period). The major reasons for the
decrease in net income are:
o Total revenues in the current period decreased by $136,000 as
compared to the prior period. The large increase in boot sales to
the U.S. Department of Defense that occurred after September 11,
2001 was offset by a low level of sales to them during the first
three months of this six month period. In addition, sales of
certain footwear manufacturing equipment and raw materials, which
vary with the needs of existing licensees and the licensing of
new customers, were significantly less in the current period.
o Although revenues decreased only $136,000, Cost of Sales and
Services in the current period increased by $449,000. For the
last several months, the price of leather, which fluctuates with
hide markets, increased significantly. In addition, the cost of
many other raw materials have increased following a rather
lengthy period of little or no increase. In addition, employee
group health insurance costs, for which the Company is self
funded, increased $78,000.
o Interest expense decreased $89,000 primarily because a bank line
of credit was not used in the current period.
o The Consolidated Statements of Operations for the current period
includes grant income of $40,000 and the prior period included
$100,000. In the prior period the Company received $100,000
representing partial payment from the government of Puerto Rico
under a Special Incentives Contract related to its 1999
consolidation of footwear manufacturing operations in
Puerto Rico. Final payment of $300,000 was received on July 2,
2001. This grant requires the Company to maintain operations in
Puerto Rico for its five fiscal years 2000 through 2004, and
the grant income is being recognized on a straight line basis
over this five year period, thus, resulting in a cumulative
catch-up adjustment when the proceeds were received in the prior
period.
o Net income in the current period includes interest income of
$234,000 which represents the reversal of previously accrued
imputed interest related to a December 29, 1995 repurchase by
Wellco of 1,531,272 shares of its common stock (see Note 5).
This repurchase provided for certain additional payments, without
interest, to be made if cumulative net income for the six fiscal
years 1997 through 2002 exceeded certain defined amounts. Since
its stock repurchase, Wellco, using generally accepted accounting
principles, accrued imputed interest for estimated additional
payments. At December 29, 2001, Wellco projects that no
additional payments will be made and the previously accrued
interest, as well as the previously accrued liability for these
payments, were reversed in the current period.
The rate of tax provision for income taxes for the current period was 6%
compared to 12% for the prior period. 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.
-13-
Comparing the Three Months Ended December 29, 2001 and December 30, 2000:
For the three months ended December 29, 2001 (current period), Wellco had net
income of $645,000 compared to a net income of $335,000 in the prior year three
month period ended December 30, 2000 (prior period). The major reasons for the
increase in net income are:
o Total revenues in the current period increased by $1,359,000 as
compared to the prior period, primarily because of a significant
increase in boots sold to the U. S. Department of Defense. After
the terrorist attacks on September 11, 2001, Wellco received
larger than normal boot orders from the U. S. Department of
Defense along with a request to expedite production of these
orders. In response, Wellco increased its production rate through
December, 2001 to a level approximately double the rate prior to
these orders.
o Cost of Sales and Services in the current period increased by
$1,174,000, resulting in a $185,000 increase in gross profit.
Compared to the prior period, the current period was adversely
affected by leather price increases and increased costs for other
raw materials.
o Interest expense decreased $40,000 primarily because a bank line
of credit was not used in the current period.
o The Consolidated Statements of Operations for the current period
includes grant income of $20,000 and the prior period included
$100,000. In the prior period the Company received $100,000
representing partial payment from the government of Puerto Rico
under a Special Incentives Contract related to its 1999
consolidation of footwear manufacturing operations in Puerto
Rico. Final payment $300,000 was received on July 2, 2001. The
grant requires the Company to maintain operations in Puerto Rico
for its five fiscal years 2000 through 2004, and the grant income
is being recognized on a straight line basis over this five year
period.
o Net income in the current period includes interest income of
$234,000 which represents the reversal of previously accrued
imputed interest related to a December 29, 1995 repurchase by
Wellco of 1,531,272 shares of its common stock (see Note 5). This
repurchase provided for certain additional payments, without
interest, to be made if cumulative net income for the six
fiscal years 1997 through 2002 exceeded certain defined amounts.
During these six fiscal years, Wellco, using generally accepted
accounting principles, accrued imputed interest for estimated
additional payments. At December 29, 2001, Wellco projects that
no additional payments will be made and the previously accrued
interest, as well as the previously accrued liability for these
payments, were reversed in the current period.
Forward Looking Information:
Wellco is in the fifth and final year of its U. S. Department of Defense
(DOD)contract to provide all-leather combat and hot weather boots manufactured
using the Direct Molded Sole (DMS) process. For the last four years, this
contract has been the major source of the Company's operations.
The final year of this contract expires on April 15, 2002 and, with contractor
agreement, shipment can be made after that date for boots ordered prior to that
date. As of January 1, 2002, Wellco had un-shipped orders under this contract
for approximately 80,000 pairs of DMS boots, and DOD has the option to order an
additional 10,000 pairs before reaching the maximum pairs that can be ordered in
the final year. The maximum 90,000 pairs is 26% less than the pairs Wellco
shipped DOD in the period July through December, 2001, the first six months of
fiscal year 2002.
-14-
DOD has announced that it will soon issue a new solicitation to purchase DMS
boots. Based on the most recently availabe information, the Company believes
that any period of time between the completion of shipments under the current
contract and the award of contracts from the new soliciation will not be
extensive. However, if this period is extensive, operating results, starting
in the fourth quarter of fiscal year 2002, would be adversely effected.
The U. S. Army has approved replacing its all-leather combat boot, one of the
three DMS boots supplied by Wellco under its current contract, with the Infantry
Combat Boot (ICB), which is presently used only by the Marine Corps. As a result
of this change, the DMS solicitation announcement shows that total pairs of
boots to be purchased under the resulting contracts are approximately half the
totals purchased under Wellco's current contract. However, DOD has also
announced that it will soon issue a new solicitation to purchase the ICB boot
for the U. S. Army.
Wellco believes that if it is awarded a contract from both the DMS and ICB boot
solicitations, any adverse effect on future operating results, related to the
Army's replacement of the all-leather combat boot with the ICB boot, will not be
substantial. If a contract is awarded Wellco from only one of these
solicitations, or if Wellco does not receive a contract from either
solicitation, future operating results would be adversely affected.
In October, 2001 Wellco submitted a response to a U. S. government solicitation
for the supply of berets to U. S. Armed Forces personnel. More recently, Wellco
was informed that its response is in the competitive range, and on February 5,
2002, Wellco submitted its final bid prices. Award is expected by March 5, 2002.
Under the resulting contract, delivery will begin not later than ten months
after contract award and will require the delivery of almost 2,000,000 berets in
the base term of twenty-four months. The contract will have three options,
exercisable at the sole discretion of the government, each for a term of one
year for a smaller quantity of berets.
In January, 2002 Wellco submitted a solicitation response to provide an extreme
cold weather boot used by the U. S. Air Force. The solicitation requires the
contractor to supply 18,384 pairs of this boot during the first year. It also
provides for two option years, exercisable at the sole discretion of the
government, each for a term of one year for a smaller quantity of boots. Wellco
believes that the contract will be awarded in thirty to sixty days.
As with any solicitation, the Company cannot predict with certainty its success
in receiving a contract from any of 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.
-15-
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.
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 amounts of cash and unused line of credit:
(in thousands)
December 29, 2001 June 30, 2001
----------------- -------------
Cash and Cash Equivalents $900 $653
Unused Line of Credit 3,000 3,000
----- -----
Total $3,900 $3,653
The increase in cash at December 29, 2001 resulted primarily from cash provided
by operations during the first six months of fiscal year 2002. The following
table summarizes the major sources (uses) of cash for the six months ended
December 29, 2001:
(in thousands)
December 29, 2001
-----------------
Net Income Excluding Depreciation, Amortization and
Non-cash Reduction in Accrued Interest $639
Net Change in Accounts Receivable, Inventories,
Deferred Taxes and Prepaid Expenses, Accounts
Payable, Accrued Liabilities, Accrued
Income Taxes, and Other Liabilities (190)
Net Cash Provided by Operations 449
Cash Used to Purchase Plant and Equipment (322)
Cash Provided by Exercise of Stock Options $120
Net Increase in Cash and Cash Equivalents $247
During the six months ended December 29, 2001, cash provided by operations was
$449,000. The primary
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increases in operating cash arose from net income plus non-cash depreciation,
amortization and non-cash reduction in accrued interest ($639,000), increased
accounts payable ($606,000) and a reduction in accounts receivable ($120,000).
The primary decreases in operating cash arose from an increase in inventory
($469,000), and a reduction in accrued compensation ($158,000).Cash from
operations was primarily used to purchase equipment, and excess cash is invested
in short-term interest earning instruments.
If the Company receives a contract award from the beret solicitation discussed
above, an investment in machinery, estimated to be between $600,000 and $800,000
will be made. A bank has expressed interest in arranging a term loan to finance
this equipment.
Liquidity would be adversely affected if there is a significant period of time
between the completion of Wellco's current DMS contract and the government's
award of contracts from the new solicitation. Although Wellco believes this
period of time will not be significant, it cannot reasonably estimate how long
it will be.
The bank line of credit, which provides for total borrowing of $3,000,000, was
recently renewed and will expire on December 31, 2002. There was no borrowing
under the line of credit at December 29, 2001. The Company expects to use this
bank line of credit from time to time. Since the Company's first source of
liquidity is operating cash flow, a decrease in sales of the Company's products
would reduce this source of liquidity and result in increased use of the bank
line of credit.
Other than the above, Wellco 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.
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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:
The 2001 Annual Stockholders Meeting of Wellco Enterprises, Inc.
was held on November 13, 2001. The only matter voted on at that
meeting was the election of directors. The results of voting
were:
Directors were elected as follows:
Nominee for Director Shares Voted For Shares Withheld From
- -------------------- ---------------- --------------------
William M. Cousins, Jr. 1,082,315 360
John D. Lovelace 1,082,315 360
Katherine J. Emerson 1,082,315 360
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
February 12, 2002
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