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: MARCH 30, 2002
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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1,182,746 shares of $1 par value common stock were outstanding on May 14, 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 MARCH 30, 2002
The attached unaudited consolidated 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 30, 2002 AND JUNE 30, 2001
(in thousands)
ASSETS
(unaudited)
MARCH 30, JUNE 30,
2002 2001
--------- --------
CURRENT ASSETS:
Cash and cash equivalents .................... $ 1,040 $ 653
Receivables, net ............................. 1,594 2,042
Inventories-
Finished goods ........................... 1,749 1,617
Work in process .......................... 989 1,084
Raw materials ............................ 2,599 2,309
--------- ---------
Total .................................... 5,337 5,010
Deferred taxes and prepaid expenses .......... 405 255
--------- --------
Total ........................................ 8,376 7,960
--------- --------
MACHINERY LEASED TO LICENSEES,
net of accumulated depreciation (Note 1) ..... 29 34
PROPERTY, PLANT AND EQUIPMENT (Note 1):
Land ......................................... 107 107
Buildings .................................... 1,176 1,176
Machinery and equipment ...................... 6,512 6,145
Office equipment ............................. 741 720
Automobiles .................................. 220 220
Leasehold improvements ....................... 560 557
--------- --------
Total cost ................................... 9,316 8,925
Less accumulated depreciation and
amortization .............................. (5,638) (4,994)
--------- --------
Net Property Plant and Equipment ............. 3,678 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 .............................................. $ 12,945 $ 12,787
========= =========
(continued on next page)
-3-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 30, 2002 AND JUNE 30, 2001
(in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
MARCH 30, JUNE 30,
2002 2001
--------- --------
CURRENT LIABILITIES:
Accounts payable (Note 1) .................... $ 1,091 $ 1,177
Accrued compensation ......................... 1,110 1,115
Accrued pension .............................. -- 83
Accrued income taxes ......................... 730 732
Other liabilities (Notes 4 and 5 ) ........... 392 663
--------- ---------
Total ........................................ 3,323 3,770
--------- ---------
LONG-TERM LIABILITIES:
Pension obligation ........................... 872 885
Notes payable (Note 5) ....................... 204 545
Other liabilities (Note 1) ................... 96 102
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value ................ 1,184 1,164
Additional paid-in capital ................... 336 192
Retained earnings ............................ 7,490 6,689
Accumulated other comprehensive loss ......... (560) (560)
--------- ---------
Total ........................................ 8,450 7,485
--------- ---------
TOTAL .............................................. $ 12,945 $ 12,787
========= =========
See Notes to Consolidated Financial Statements.
-4-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL NINE MONTHS ENDED
MARCH 30, 2002 AND MARCH 31, 2001
(in thousands except per share and number of shares)
(unaudited)
MARCH 30, MARCH 31,
2002 2001
--------- ---------
REVENUES (Note 1) .............................. $ 15,134 $ 14,250
------------ ------------
COSTS AND EXPENSES:
Cost of sales and services (Note 1)....... 12,632 11,490
General and administrative expenses ...... 1,937 1,801
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Total .................................... 14,569 13,291
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GRANT INCOME (Note 4) .......................... 60 100
------------ ------------
OPERATING INCOME ............................... 625 1,059
INTEREST EXPENSE ............................... (28) (135)
INTEREST INCOME (Note 5) ....................... 257 19
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INCOME BEFORE INCOME TAXES .................... 854 943
PROVISION FOR INCOME TAXES ..................... 46 113
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NET INCOME ..................................... $ 808 $ 830
============ ============
BASIC EARNINGS PER SHARE (Note 3)
based on weighted average number of
shares outstanding ....................... $ 0.69 $ 0.71
============ ============
Shares used in computing basic
earnings per share ....................... 1,170,497 1,163,246
============ ============
DILUTED EARNINGS PER SHARE (Note 3) based on
weighted average number of shares
outstanding and dilutive stock
options .................................. $ 0.67 $ 0.70
============ ============
Shares used in computing diluted
earnings per share ....................... 1,214,299 1,186,510
============ ============
See Notes to Consolidated Financial Statements.
-5-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
MARCH 30, 2002 AND MARCH 31, 2001
(in thousands except per share and number of shares)
(unaudited)
MARCH 30, MARCH 31,
2002 2001
--------- ---------
REVENUES (Note 1) .............................. $ 5,174 $ 4,154
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COSTS AND EXPENSES:
Cost of sales and services (Note 1) ...... 4,176 3,483
General and administrative expenses ...... 634 595
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Total .................................... 4,810 4,078
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GRANT INCOME (Note 4) .......................... 20 --
------------ ------------
OPERATING INCOME ............................... 384 76
INTEREST EXPENSE ............................... (4) (22)
INTEREST INCOME ................................ 3 4
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INCOME BEFORE INCOME TAXES ..................... 383 58
PROVISION FOR INCOME TAXES .................... 15 14
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NET INCOME ..................................... $ 368 $ 44
============ ============
BASIC EARNINGS PER SHARE (Note 3)
based on weighted average number of
shares outstanding ....................... $ 0.31 $ 0.04
============ ============
Shares used in computing basic
earnings per share ....................... 1,180,697 1,163,246
============ ============
DILUTED EARNINGS PER SHARE (Note 3) based on
weighted average number of shares
outstanding and dilutive stock
options .................................. $ 0.30 $ 0.04
============ ============
Shares used in computing diluted
earnings per share ....................... 1,237,577 1,186,946
============ ============
See Notes to Consolidated Financial Statements.
-6-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL NINE MONTHS ENDED
MARCH 30, 2002 AND MARCH 31, 2001
(in thousands)
(unaudited)
MARCH 30, MARCH 31,
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ...................................... $ 808 $ 830
-------- --------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization .............. 649 611
Non-cash reduction in accrued interest ..... (234) --
Non-cash grant income recognized ........... (60) --
Non-cash reduction in deferred revenue...... 6 --
(Increase) decrease in-
Receivables .......................... 448 2,413
Inventories .......................... (327) 166
Other current assets ................. (150) (83)
Increase (decrease) in-
Accounts payable ..................... (86) (118)
Accrued compensation ................. (5) (27)
Accrued income taxes ................. (2) 87
Pension obligation ................... (96) (198)
Other ................................ 17 44
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Total adjustments ............................... 154 2,895
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............................ 962 3,725
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment ................ (391) (1,149)
-------- --------
CASH USED IN INVESTING ACTIVITIES .................... (391) (1,149)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under short-term borrowings ........ -- (1,700)
Principal payments of bank note payable ......... -- (36)
Cash dividends paid ............................. (354) (233)
Stock option exercise ........................... 164 --
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............................ (184) (1,969)
-------- --------
NET INCREASE IN CASH ................................. 387 607
CASH AT BEGINNING OF PERIOD .......................... 653 73
-------- --------
CASH AT END OF PERIOD ................................ $ 1,040 $ 680
======== ========
(continued on next page)
-7-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL NINE MONTHS ENDED
MARCH 30, 2002 AND MARCH 31, 2001
(in thousands)
(unaudited)
MARCH 30, MARCH 31,
2002 2001
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ..................................... $ 28 $ 60
Income taxes ................................. 50 27
NONCASH DECREASE IN NOTE PAYABLE (NOTE 5) .............. $347 $296
===== ====
See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL NINE MONTHS ENDED
MARCH 30, 2002
(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 nine
months ended March 30, 2002 808
--------------------------------------------
Adjustment of note payable issued
for stock repurchase (Note 5) 347
Exercise of stock options 19,500 20 144
Cash dividend ($.30 per share) (354)
--------------------------------------------
BALANCE AT MARCH 30, 2002 1,182,746 $ 1,184 $ 336 $ 7,490
============================================
Accumulated
Other
Comprehensive
Loss
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ADDITIONAL PENSION LIABILITY,
NET OF TAX, BALANCE
AT JUNE 30, 2001 $ (560)
Change for the fiscal nine
months ended March 30, 2002 -
-------------
BALANCE AT MARCH 30, 2002 $ (560)
=============
See Notes to Consolidated Financial Statements.
-9-
WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE FISCAL NINE MONTHS ENDED MARCH 30, 2002
-----------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
On June 1, 2001, the government unilaterally modified the Company's
current boot contract to require a bill and hold procedure. Under bill
and hold, the government issues a specific boot production order which,
when completed and ready for shipment, is inspected and accepted by the
Quality Assurance Representative (QAR), thereby transferring ownership
to the government. Under this contract modification, after inspection
and acceptance by the QAR, the boots become "Government-owned
property". Also, after QAR inspection and acceptance, Wellco invoices
and receives payment from the government, and warehouses and
distributes the related boots against government-issued requisition
orders, which Wellco receives five days per week. Government-owned
boots stored in Wellco's warehouse are complete, including packaging
and labeling. The bill and hold procedure requires physical segregation
and specific identification of government-owned boots and, because they
are owned by the government, Wellco cannot use them to fill any other
customers' order. Wellco has certain custodial responsibilities for
these boots, including loss or damage, which Wellco insures. The
related insurance policies specifically provide that loss payment on
finished stock and sold personal property completed and awaiting
delivery is based on Wellco's selling price. The modification also
provides that at the end of any one-year term and when an option is not
exercised, the government is to take final delivery of any and all of
its remaining inventory within six months. In accordance with guidance
issued under Securities and Exchange Commission Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, revenues
from bill and hold transactions are recognized at the time of
acceptance by the QAR.
Certain shoe-making machinery is leased to licensees under
twenty-year cancelable operating leases. Lease payments are variable
based on the quantity of boots manufactured and sold by the lessee to
its customers and the contractual rental fee per pair of boots. There
are no base rental amounts or contingent rentals contained in the
agreements. Rental income is recognized by the Company when the lessee
manufactures and sells boots to the customer and is based upon the
quantity of boots manufactured or shipped by the lessee times the fixed
rate per pair of boots contained in the lease agreements.
The Company earns service fees for providing customers with technical
assistance in the manufacture of boots. The related agreements under
which these services are provided are for a fixed term and expire in
calendar years 2002-2007. The Company records service fee revenues at a
fixed rate per pair of boots times the quantity of boots manufactured
and sold by the customer when such boots are manufactured and sold by
the Company's customer.
Revenues from the sale of machinery and materials are recorded at the
time of shipment from our factory (FOB factory) or at the time of
receipt by the customer (FOB destination). Other than a one-year
warranty, the Company does not have any continuing responsibility
related to machines sold. Warranty costs are diminimus.
-10-
Shipping and Handling Costs
Shipping and handling costs are charged to Cost of Sales and Services
in the period incurred. Any amounts paid by customers for shipping and
handling are included in Revenues.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest is less than the carrying amount of
the asset, an impairment loss is recognized as the amount by which the
carrying amount of the asset exceeds its fair value. No impairment has
been recognized in the accompanying Consolidated Statements of
Operations.
Self-Funded Group Health Insurance
The cost of employee group health insurance is recorded in the period
in which the health care costs are incurred including an estimate of
the incurred but not reported claims. Third party administrator fees
are recorded in the month to which they apply. The cost of stop loss
insurance is recorded in the month to which it applies. The liability
for incurred but not reported insurance claims is accrued and included
in the Accounts Payable caption in the Consolidated Balance Sheets.
Reclassifications
Certain reclassifications have been made in the prior year's financial
statements to conform to classifications used in the current year.
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") that
currently is not being amortized as the asset arose prior to 1970. 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.
-11-
2. LINE OF CREDIT:
The Company maintains a $3,000,000 bank line of credit. The line will
expire December 31, 2002. This line of credit is secured by a blanket lien
on all machinery and equipment (carrying value of $2,626,000) and all
non-governmental accounts receivable and inventory ($764,000). At March
30, 2002 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 March 30, 2002.
3. EARNINGS PER SHARE:
The Company computes its basic and diluted earnings per share amounts in
accordance with Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings per Share." Basic earnings per share is computed by
dividing net earnings by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net earnings by the weighted average number of common shares
outstanding during the period plus the dilutive potential common shares
that would have been outstanding upon the assumed exercise of dilutive
stock options.
The following is the reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
For the Nine Months Ended 3/30/02
---------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $808,000 1,170,497 $0.69
------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 43,802
------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $808,000 1,214,299 $0.67
------------------------------------------------------------------------------
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
------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $830,000 1,186,510 $0.70
------------------------------------------------------------------------------
-12-
For the Three Months Ended 3/30/02
----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $368,000 1,180,697 $0.31
------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 56,880
------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $368,000 1,237,577 $0.30
------------------------------------------------------------------------------
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
4. GRANT INCOME:
The Company has received $400,000 ($100,000 in November, 2000 and a final
payment of $300,000 on July 2, 2001) from the government of Puerto Rico
under a Special Incentives Contract related to its 1999 consolidation of
boot 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). If this
requirement is not met, the Company is required to refund a pro-rata
portion of the total grant. Grant income was not recognized until the
$100,000 was received in November, 2000, and the prior year nine month
period ended March 31, 2001 includes, as a catch-up adjustment, $100,000
of grant income. After the Contract was executed on May 23, 2001, and
subsequent to receiving the final $300,000 payment, grant income is being
recognized on a straight line basis over this five year period at the rate
of $20,000 per fiscal quarter. The Consolidated Statements of Operations
for the three and nine months ended March 30, 2002 include an income item
from this grant of $20,000 and $60,000 respectively.
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.
-13-
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
$347,000 Note Payable, recorded at June 30, 2001 for the estimated
additional contingent liability, was reversed and Stockholders' Equity was
increased by this amount during the second quarter of fiscal year 2002.
Since its stock repurchase, Wellco, using generally accepted accounting
principles, had accrued imputed interest expense on the estimated
additional contingent 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 for the nine month period ended March 30, 2002 includes
interest income for this amount.
As part of an agreement for the Company providing certain technology and
equipment to a customer, in April, 2001 that customer loaned the Company
$300,000. The loan agreement provides for quarterly interest payments at
an annual rate of 3% with the $300,000 principal due in April, 2011.
Because this interest rate is less than the market rate, the Company
recorded the note payable discounted at a market rate of 8% ($196,000),
and is recording interest expense at this rate. The difference between
interest at the 8% and 3% rates ($104,000) was recorded as deferred
service income, which is being recognized over the 10-year life of the
loan agreement. The Company attributed the difference between the stated
3% rate and the market rate of 8% as part of its compensation for
technology and equipment provided the customer. The Consolidated
Statements of Operations for the three and nine months ended March 30,
2002 include service fee income of $2,000 and $5,000 respectively and
interest expense of $4,000 and $12,000 respectively. At March 30, 2002,
notes payable in the Consolidated Financial Statements includes $204,000
for this note and $96,000 as deferred service income.
6. RELATED PARTY TRANSACTIONS:
The Company has an Agreement with its Chairman of the Board of Directors
(Chairman) under which certain payments are to be made to the Chairman for
a five-year period commencing January 2000. These payments will be
computed as certain fixed percents of revenues earned by the Company and
related to certain products, as defined, that the Chairman has been, or
will be, instrumental in conceiving or developing. The amount due under
this agreement since its inception and through March 30, 2002 is
diminimus.
7. COMMITMENTS:
At March 30, 2002, the Company had a $500,000 commitment to purchase
capital equipment. Of this amount, $150,000 will be paid in the fourth
quarter of fiscal year 2002, and $350,000 will be paid in the first
quarter of fiscal year 2003.
-14-
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 30, 2002 and March 31, 2001:
For the nine months ended March 30, 2002 (current period), Wellco had net
income of $808,000 compared to a net income of $830,000 in the prior year nine
month period ended March 31, 2001 (prior period). The major reasons for the
decrease in net income are:
o Compared to the prior period, total revenues in the current period
increased by $884,000. Since September 11, 2001, pairs of boots sold to the
U.S. Department of Defense have increased (revenue increase $1,433,000).
Somewhat offsetting this increase, sales of certain boot manufacturing
equipment and materials, which vary with the needs of existing licensees
and the licensing of new customers, were significantly less in the current
period (revenue decrease of $549,000).
o Cost of Sales and Services in the current period increased by $1,142,000.
The margin decrease that resulted from lower sales of boot manufacturing
equipment and materials more than offset the margin increase that resulted
from higher boot sales to the Defense Department. In addition, for the last
several months prices of certain materials used in the manufacture of boots
have increased.
o General and Administrative expenses increased $136,000. This increase was
primarily caused by increased professional fees, as well as the addition of
personnel.
o Interest expense decreased $107,000 because a bank line of credit was not
used in the current period and because the prior period expense included
the accrual of imputed interest (see below).
o The Consolidated Statements of Operations for the current period includes
grant income of $60,000 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 boot manufacturing operations in
Puerto Rico. After the Contract was executed on May 23, 2001,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. If this requirement is not met, the Company is required to
refund a pro-rata portion of the total grant. Grant income was not
recognized until the $100,000 was received, and the prior period income
includes this amount as a cumulative catch-up adjustment. Subsequent to
receiving the final $300,000 payment, grant income is being recognized on a
straight line basis over this five year period at the rate of $20,000 per
fiscal quarter.
o Interest income in the current period includes $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 to the Consolidated Financial Statements).
-15-
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 both December 29, 2001 and March 30,
2002, Wellco projects that no additional payments will be made and, at
December 29, 2001, the previously accrued interest, as well as the
previously accrued liability for these payments, were reversed.
The rate of tax provision for income taxes for the current period was 5%
compared to 12% for the prior period. The Company is taxable in two
jurisdictions (United States and Puerto Rico), 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.
Comparing the Three Months Ended March 30, 2002 and March 31, 2001:
For the three months ended March 30, 2002 (current period), Wellco had net
income of $368,000 compared to a net income of $44,000 in the prior year three
month period ended March 31, 2001 (prior period). The major reasons for the
increase in net income are:
o As compared to the prior period, total revenues in the current period
increased by $1,020,000, primarily because of a significant increase in
boots sold to the U. S. Department of Defense (revenue increase of
$1,317,000). The increase in Defense Department orders after September
11, 2001 was the primary reason for this increase. Sales of boot
manufacturing equipment and raw materials decreased, although
substantially less than in the nine month period (revenue decrease of
$297,000).
o Cost of Sales and Services in the current period increased by $693,000.
Since the decrease in boot manufacturing equipment and materials sales
was not as significant as it was in the nine month period, the adverse
effect on margins was not as significant. Overall margins were also
favorably affected by an increase in the sales of protective boot
products.
o For the reasons stated in the nine-month comparison, interest expense
decreased $40,000.
o The nine-month comparison above provides information about Grant
Income. The Consolidated Statements of Operations for the current
period includes grant income of $20,000, which is the pro-rata amount
recognized in the current period. Since the grant was not executed
until the fourth quarter of fiscal year 2001 (May 23, 2001), grant
income was not accrued in the prior period.
Forward Looking Information:
On April 19, 2002, the U. S. Department of Defense (DOD) issued Wellco a
contract modification extending until July 19, 2002 the ordering period under
a contract to provide all-leather combat and hot weather boots manufactured
using the Direct Molded Sole (DMS) process. This contract was originally
scheduled to expire on April 15, 2002. DOD had ordered the maximum quantity of
boots
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allowable in the final year of the contract. This modification increased the
quantity DOD can order by a minimum of 103,000 pairs, and DOD has issued
delivery orders for this minimum. The modification also provides for a maximum
amount of 216,000 pairs.
On March 19, 2002, Wellco submitted a response to a new DOD solicitation for
DMS boots. The government's scheduled award date is presently not later than
July 17, 2002. Contracts will be for a base period of one year with two,
one-year options.
The Company believes that to meet DOD's future needs for DMS boots, they can
either order boots exceeding the minimum on the extended contract, or issue
contract awards followed by delivery orders, under the new solicitation. The
timing of either action on the part of DOD is impossible for the Company to
predict with a reasonable degree of probability. Therefore, there is a slight
possibility that an interruption in production and shipments could occur as
early as the first half of fiscal year 2003.
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 mentioned above is for boot
quantities approximately half those historically purchased. DOD has issued a
solicitation for purchase of the ICB boot, and on April 18, 2002, they
extended indefinitely the response due date. The resulting contracts will be
for a base period of one year with four one-year options.
Based on prior experience, the Company believes that the earliest date for ICB
contract awards will be in the period October through December 2002. Within
90 days after contract award, each contractor is required to manufacture and
submit for testing 2,000 pairs of boots. If testing of these 2,000 pairs of
boots is not satisfactory, it is possible that the contractor will not
receive any additional delivery orders under its contract. For contractors who
successfully pass the testing phase, the first delivery, beyond the 2,000
pairs, is due 240 days after contract award.
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
addition, the carrying amount of certain long-lived assets may be written off,
if a review of the related assets determines that they are not fully
recoverable.
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. On February
21, 2002, the government did a survey to determine Wellco's capability to
successfully perform, should it be awarded a contract. On May 7, 2002, Wellco
agreed to an extension of its offer until June 14, 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.
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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 by May
23, 2002. The solicitation requires first delivery within 90 days after
contract award.
Bidding on government solicitations is very competitive, and the Company
cannot predict with certainty its success in receiving a contract from any of
the above solicitations.
The Company recently received machinery orders from customers totaling almost
$900,000. The Company estimates that delivery will start early in the 2003
fiscal year and extend through the first six to nine months of that year.
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"), which is not currently being amortized. 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.
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:
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(in thousands)
March 30, 2002 June 30, 2001
-------------- -------------
Cash and Cash Equivalents $1,040 $653
------------------------------------------------------------------------------
Unused Line of Credit 3,000 3,000
------------------------------------------------------------------------------
Total $4,040 $3,653
------------------------------------------------------------------------------
The increase in cash at March 30, 2002 resulted primarily from cash provided
by operations during the first nine months of fiscal year 2002. The following
table summarizes the major sources (uses) of cash for the nine months ended
March 30, 2002:
(in thousands)
March 30, 2002
--------------
Net Income Excluding Depreciation, Amortization
and Non-cash Reduction in Accrued Interest $1,223
------------------------------------------------------------------------------
Net Change in Accounts Receivable, Inventories,
Deferred Taxes and Prepaid Expenses, Accounts
Payable, Accrued Liabilities, Accrued Income (255)
------------------------------------------------------------------------------
Taxes, and Other Liabilities
Net Cash Provided by Operations 968
------------------------------------------------------------------------------
Cash Used to Purchase Plant and Equipment (391)
------------------------------------------------------------------------------
Cash Used to Pay Dividends (354)
------------------------------------------------------------------------------
Cash Provided by Exercise of Stock Options 164
------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents $387
------------------------------------------------------------------------------
During the nine months ended March 30, 2002, cash provided by operations was
$968,000. The primary sources of this increase were from net income plus
non-cash depreciation and a non-cash reduction in accrued interest. Cash from
operations was primarily used to purchase equipment and pay cash dividends.
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. In addition, the Company has placed purchase orders
for the purchase of $500,000 of other machinery.
The following table shows aggregated information about contractual obligations
as of March 30, 2002:
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Payments Due by Period
Total Less Than 1-3 Years 4-5 Years After 5
1 Year Years
------------------------------------------------------------------------------
Long-Term
Debt $300,000 $300,000
------------------------------------------------------------------------------
Building
Lease 1,125,000 $135,000 $306,000 $330,000 354,000
------------------------------------------------------------------------------
Unconditional
Equipment
Purchase
Obligations 500,000 500,000
------------------------------------------------------------------------------
Total $1,925,000 $635,000 $306,000 $330,000 $654,000
------------------------------------------------------------------------------
In addition to not receiving a contract from some of the solicitations
mentioned above, delays in the U. S. government's contract award could have
an adverse effect on liquidity during the first half of fiscal year 2003.
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 March 30, 2002. 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. 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 14, 2002
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