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: JANUARY 3, 2004
COMMISSION FILE NUMBER: 1-5555
WELLCO ENTERPRISES, INC.
-------------------------
(Exact name of registrant as specified in charter)
NORTH CAROLINA 56-0769274
- ------------------- ----------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
150 Westwood Circle, P.O. Box 188, Waynesville, NC 28786
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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 .
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X . ----- -----
1,185,746 shares of $1 par value common stock were outstanding on February 17,
2004.
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
----------------------------
WELLCO ENTERPRISES, INC.
------------------------
CONSOLIDATED FINANCIAL STATEMENTS FILED WITH FORM 10-Q
------------------------------------------------------
FOR THE FISCAL QUARTER ENDED JANUARY 3, 2004
--------------------------------------------
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
JANUARY 3, 2004 AND JUNE 28, 2003
(in thousands)
ASSETS
(unaudited)
JANUARY 3, JUNE 28,
2004 2003
------------------------
CURRENT ASSETS:
Cash and cash equivalents .................... $ 51 $ 133
Receivables, net ............................. 5,042 3,450
Inventories-
Finished goods ........................... 3,078 1,247
Work in process .......................... 2,417 1,753
Raw materials ............................ 7,070 4,001
-------- --------
Total .................................... 12,565 7,001
Deferred taxes and prepaid expenses .......... 704 475
-------- --------
Total ........................................ 18,362 11,059
-------- --------
MACHINERY LEASED TO LICENSEES,
net of accumulated depreciation .............. 20 23
PROPERTY, PLANT AND EQUIPMENT:
Land ......................................... 107 107
Buildings .................................... 1,439 1,439
Machinery and equipment ...................... 8,711 7,559
Office equipment ............................. 789 763
Automobiles .................................. 188 188
Leasehold improvements ....................... 772 771
-------- --------
Total cost ................................... 12,006 10,827
Less accumulated depreciation and
amortization .............................. (7,208) (6,708)
-------- --------
Net Property Plant and Equipment ............. 4,798 4,119
-------- --------
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition (Note 2) ........ -- --
Intangible pension asset ..................... 29 29
-------- --------
Total ........................................ 29 29
DEFERRED TAXES ..................................... 80 80
-------- --------
TOTAL .............................................. $ 23,289 $ 15,310
======== ========
(continued on next page)
-3-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 2004 AND JUNE 28, 2003
(in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
JANUARY 3, JUNE 28,
2004 2003
------------------------
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 3) ........ $ 4,465 $ 590
Accounts payable ............................... 6,123 3,138
Accrued compensation ........................... 1,038 810
Accrued income taxes ........................... 962 722
Other liabilities .............................. 503 582
-------- --------
Total .......................................... 13,091 5,842
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ............................. 1,672 1,672
Notes payable .................................. 217 213
Deferred revenues .............................. 83 87
CONTINGENCIES (Note 7):
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value .................. 1,186 1,186
Additional paid-in capital ..................... 357 357
Retained earnings .............................. 8,326 7,596
Accumulated other comprehensive loss ........... (1,643) (1,643)
-------- --------
Total .......................................... 8,226 7,496
-------- --------
TOTAL ................................................ $ 23,289 $ 15,310
======== ========
See Notes to Consolidated Financial Statements.
-4-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 3, 2004 AND DECEMBER 28, 2002
(in thousands except per share and number of shares)
(unaudited)
JANUARY 3, DECEMBER 28,
2004 2002
-------------------------
REVENUES ......................................... $ 20,006 $ 10,506
-------- --------
COSTS AND EXPENSES:
Cost of sales and services ................. 17,612 8,854
General and administrative expenses ........ 1,168 1,136
-------- --------
Total ...................................... 18,780 9,990
-------- --------
GRANT INCOME ..................................... 40 40
-------- --------
OPERATING INCOME ................................. 1,266 556
INTEREST EXPENSE ................................. (62) (16)
INTEREST INCOME .................................. 1 5
-------- --------
INCOME BEFORE INCOME TAXES ....................... 1,205 545
PROVISION FOR INCOME TAXES ....................... 238 87
-------- --------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE .......... 967 458
-------- --------
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Note 2) .............. -- (228)
--------
NET INCOME ....................................... $ 967 $ 230
======== ========
EARNINGS PER SHARE (Note 4):
Basic, before cumulative effect ............ $ 0.82 $ 0.39
Cumulative effect .......................... -- (0.19)
-------- --------
Basic, after cumulative effect ............. $ 0.82 $ 0.20
======== ========
Diluted, before cumulative effect .......... $ 0.80 $ 0.38
Cumulative effect .......................... -- (0.19)
-------- --------
Diluted, after cumulative effect ........... $ 0.80 $ 0.19
======== ========
See Notes to Consolidated Financial Statements.
-5-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
JANUARY 3, 2004 AND DECEMBER 28, 2002
(in thousands except per share and number of shares)
(unaudited)
JANUARY 3, DECEMBER 28,
2004 2002
--------------------------
REVENUES ....................................... $ 11,389 $ 5,248
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............... 10,122 4,604
General and administrative expenses ...... 534 580
----------- -----------
Total .................................... 10,656 5,184
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GRANT INCOME ................................... 20 20
----------- -----------
OPERATING INCOME ............................... 753 84
INTEREST EXPENSE ............................... (36) (12)
INTEREST INCOME ................................ -- 3
----------- -----------
INCOME BEFORE INCOME TAXES .................... 717 75
PROVISION FOR INCOME TAXES .................... 166 11
----------- -----------
NET INCOME ..................................... $ 551 $ 64
=========== ===========
BASIC EARNINGS PER SHARE (Notes 4 and 5)
based on weighted average number of
shares outstanding ....................... $ 0.46 $ 0.05
=========== ===========
Shares used in computing basic
earnings per share ....................... 1,185,746 1,184,931
=========== ===========
DILUTED EARNINGS PER SHARE (Notes 4 and 5)
based on weighted average number of
shares outstanding and dilutive stock
options ................................. $ 0.46 $ 0.05
=========== ===========
Shares used in computing diluted
earnings per share ....................... 1,208,260 1,212,891
=========== ===========
See Notes to Consolidated Financial Statements.
-6-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 3, 2004 AND DECEMBER 28, 2002
(in thousands)
(unaudited)
JANUARY 3, DECEMBER 28,
2004 2002
-----------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ...................................... $ 967 $ 458
------- -------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization ............. 503 480
Non-cash asset impairment ................. -- 45
Non-cash grant income recognized .......... (40) (40)
Non-cash reduction in deferred revenue .... (4) (4)
Non-cash interest expense ................. 4 4
(Increase) decrease in-
Receivables .......................... (1,592) (589)
Inventories .......................... (5,564) 1,103
Other current assets ................. (124) (107)
Increase (decrease) in-
Accounts payable ..................... 2,985 (339)
Accrued compensation ................. 228 (330)
Accrued income taxes ................. 240 82
Pension obligation ................... (105) (88)
Other ................................ (39) (43)
------- -------
Total adjustments ............................... (3,508) 174
------- -------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES ............................ (2,541) 632
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment ................ (1,179) (266)
------- -------
CASH USED IN INVESTING ACTIVITIES .................... (1,179) (266)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings ............. 3,875 --
Cash dividends paid ............................. (237) (237)
Stock option exercised .......................... -- 24
------- -------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES ............................ 3,638 (213)
------- -------
NET INCREASE (DECREASE) IN CASH ...................... (82) 153
CASH AT BEGINNING OF PERIOD .......................... 133 270
------- -------
CASH AT END OF PERIOD ................................ $ 51 $ 423
======= =======
(continued on next page)
-7-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 3, 2004 AND DECEMBER 28, 2002
(in thousands)
(unaudited)
JANUARY 3, DECEMBER 28,
2004 2002
-----------------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ................................ $62 $16
Income taxes ............................ $-- $ 5
=== ===
See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 3, 2004
(in thousands except number of shares)
(unaudited)
Common Stock Additional
Par Paid-In Retained
Shares Value Capital Earnings
----------------------------------------------
BALANCE AT JUNE 28, 2003 1,185,746 $ 1,186 $ 357 $ 7,596
Net income for the fiscal six
months ended January 3, 2004 967
Cash dividend ($.20 per share) (237)
----------------------------------------------
BALANCE AT JANUARY 3, 2004 1,185,746 $ 1,186 $ 357 $ 8,326
==============================================
Accumulated
Other
Comprehensive
Loss
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ADDITIONAL PENSION LIABILITY,
NET OF TAX, BALANCE
AT JUNE 28, 2003 $ (1,643)
Change for the fiscal six
months ended January 3, 2004 -
--------------
BALANCE AT JANUARY 3, 2004 $ (1,643)
==============
See Notes to Consolidated Financial Statements.
-9-
WELLCO ENTERPRISES, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
FOR THE FISCAL SIX MONTHS ENDED JANUARY 3, 2004
-----------------------------------------------
1. BUSINESS AND ORGANIZATION:
Substantially all of the Company's operating activity is from the sale of
military and other rugged footwear, the sale of specialized machinery and
materials for the manufacture of this type of footwear and the rendering
of technical assistance and other services to licensees for the
manufacture of this type of footwear. The majority of revenues were from
sales to the U.S. government, primarily the Defense Supply Center
Philadelphia (DSCP), under contracts for the supply of boots used by the
United States Armed Forces. The loss of this customer would have a
material adverse effect on the Company.
Bidding on DSCP boot solicitations is open to any qualified U. S.
manufacturer. Bidding on contracts is very competitive. U. S. footwear
manufacturers have been adversely affected by sales of footwear made in
low labor cost countries. This has significantly affected the competition
for contracts to supply boots to U. S. Armed Forces, which by law must
be made in the United States.
Most boot contracts are for multi-year periods. Therefore, a bidder not
receiving an award from a significant solicitation could be adversely
affected for several years. In addition, current boot contracts contain
options for additional pairs that are exercisable at the government's
discretion. The Company cannot predict with certainty its success in
receiving a contract from any solicitation.
In late March 2003, DSCP ordered the Company to accelerate its rate of
direct molded sole (DMS) boot production under a contract by exercising
the contract's surge option clause and surge on this production is
expected to last through the fiscal year 2004 and first fiscal quarter of
2005.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting Changes
Statement of Financial Accounting Standards No. 142 (SFAS 142, "Goodwill
and Other Intangible Assets") was effective for the first quarter of
Company's 2003 fiscal year. SFAS No. 142 provides for a specific method to
determine if goodwill is impaired, and the application of this method
resulted in the determination that $228,000 of previously recorded
goodwill was impaired. Under SFAS 142, this $228,000 was measured as of
the beginning of the 2003 fiscal year and was charged against income in
fourth quarter of fiscal year 2003 as the cumulative effect of a change in
accounting principle.
SFAS provides that when presenting prior period information for interim
periods of the fiscal year in which the impairment loss was recorded, and
when that impairment loss was not recorded in the first quarter of that
fiscal year, prior period information shall be restated to reflect the
impairment loss in the first quarter of the fiscal year of adoption.
Accordingly, the Consolidated Statements of Operations for the fiscal six
months ended December 28, 2002 have been restated to reflect as a
cumulative effect of change in accounting principle the goodwill
impairment.
The following table summarizes the impact of adopting SFAS 142 on the
Consolidated Statements of Operations for the six months ended December
28, 2002:
-10-
December
28, 2002
------------
Net income as previously reported $ 458,000
- -------------------------------------------------------------------------------
Cumulative effect of change in accounting principle (228,000)
- -------------------------------------------------------------------------------
Net income as restated $ 230,000
- -------------------------------------------------------------------------------
Per share:
Basic earnings per share as reported $ 0.39
- -------------------------------------------------------------------------------
Cumulative effect of change in accounting principle (0.19)
- -------------------------------------------------------------------------------
Basic earnings per share as restated 0.20
- -------------------------------------------------------------------------------
Diluted earnings per share as reported 0.38
- -------------------------------------------------------------------------------
Cumulative effect of change in accounting principle (0.19)
- -------------------------------------------------------------------------------
Diluted earnings per share as restated $ 0.19
- --------------------------------------------------------------------------------
New Accounting Pronouncements
The Financial Accounting Standards Board is currently working on a new
standard related to employer accounting for stock options issued to
employees. The Company believes that the new standard may require
recording compensation expense for the granting, modifying or settling of
employee stock options. Although the final provisions of the new standard
are not known, the Company may be required to record compensation expense
for certain previously granted stock options. The Company understands that
the new standard will be effective for its 2006 fiscal year.
Other accounting standards that have been issued or proposed by the FASB
or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on our consolidated
financial statements upon adoption.
3. LINE OF CREDIT:
The Company recently renegotiated its bank line of credit. Due to the
Company's increased accounts receivable from shipping DMS boots under
surge, and to increased inventories, caused by both surge and the initial
production of the ICB boot, the Company increased its line of credit on
December 29, 2003 from $4,500,000 to $5,000,000. Subsequently, on February
13, 2004 the line has been increased to $7,000,000. The line, which
expires December 31, 2004, can be renewed annually at the bank's
discretion. This line of credit is secured by a blanket lien on all
machinery and equipment (carrying value of $3,455,000) and all
non-governmental accounts receivable and inventory ($1,429,000). At
January 3, 2004, borrowings on this line of credit were $4,465,000 with
$535,000 available in additional borrowings.
The bank credit agreement contains, among other provisions, defined levels
of net worth and current ratio requirements. The Company was not in
compliance with the current ratio loan covenant at January 3, 2004. The
Company has received from the bank a waiver for the period ended January
3, 2004 regarding this loan covenant violation. The covenants are subject
to review at the end of each fiscal quarter.
-11-
4. 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 Six Months Ended 1/03/04
--------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------
Basic EPS Available to Shareholders $ 967,000 1,185,746 $ 0.82
- -------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 16,302
- -------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $ 967,000 1,202,048 $ 0.80
- -------------------------------------------------------------------------------
For the Six Months Ended 12/28/02
---------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------
Income Before Accounting Change $ 458,000 1,183,857 $ 0.39
- -------------------------------------------------------------------------------
Cumulative Effect of Accounting Change (228,000) (0.19)
- -------------------------------------------------------------------------------
Net Income Available to Shareholders 230,000 0.20
- -------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 32,866
- -------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $ 230,000 1,216,723 0.19
- -------------------------------------------------------------------------------
For the Three Months Ended 1/03/04
----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------
Basic EPS Available to Shareholders $ 551,000 1,185,746 $ 0.46
- -------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 22,514
- -------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $ 551,000 1,208,260 $ 0.46
- -------------------------------------------------------------------------------
-12-
For the Three Months Ended 12/28/02
-----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------------------------------
Income Before Accounting Change $ 64,000 1,184,931 $ 0.05
- -------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 27,960
- -------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $ 64,000 1,212,891 $ 0.05
- -------------------------------------------------------------------------------
5. STOCK-BASED COMPENSATION:
The Company uses Accounting Principles Board Opinion No. 25 (APB 25) to
account for stock options granted to employees. Under APB 25, no
compensation cost is reflected in net income for stock option awards as
all options granted had an exercise price equal to or in excess of the
market value of the underlying common stock on the date of grant.
Under SFAS No. 123 and No. 148, a company that uses APB 25 to account for
stock options must disclose the effect on reported net income of using a
fair value based method of accounting for stock- based employee
compensation.
The following table summarizes the effect on net income and earnings per
share had the accounting for employee stock options been based on the fair
value method.
For the Six Months Ended
January 3, December 28,
2004 2002
- -------------------------------------------------------------------------------
Net income:
- -------------------------------------------------------------------------------
As reported $ 967,000 $ 230,000
- -------------------------------------------------------------------------------
Compensation expense, net of tax 12,000 12,000
- -------------------------------------------------------------------------------
Pro forma $ 955,000 $ 218,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Basic earnings per share:
- -------------------------------------------------------------------------------
As reported $ 0.82 $ 0.20
- -------------------------------------------------------------------------------
Compensation expense, net of tax 0.01 0.01
- -------------------------------------------------------------------------------
Pro forma $ 0.81 $ 0.19
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Diluted earnings per share:
- -------------------------------------------------------------------------------
As reported $ 0.80 $ 0.19
- -------------------------------------------------------------------------------
Compensation expense, net of tax 0.01 0.01
- -------------------------------------------------------------------------------
Pro forma $ 0.79 $ 0.18
- -------------------------------------------------------------------------------
-13-
For the Three Months Ended
January 3, December 28,
2004 2002
- -------------------------------------------------------------------------------
Net income:
- -------------------------------------------------------------------------------
As reported $ 551,000 $ 64,000
- -------------------------------------------------------------------------------
Compensation expense, net of tax 6,000 6,000
- -------------------------------------------------------------------------------
Pro forma $ 545,000 $ 58,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Basic earnings per share:
- -------------------------------------------------------------------------------
As reported $ 0.46 $ 0.05
- -------------------------------------------------------------------------------
Compensation expense, net of tax - -
- -------------------------------------------------------------------------------
Pro forma $ 0.46 $ 0.05
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Diluted earnings per share:
- -------------------------------------------------------------------------------
As reported $ 0.46 $ 0.05
- -------------------------------------------------------------------------------
Compensation expense, net of tax - -
- -------------------------------------------------------------------------------
Pro forma $ 0.46 $ 0.05
- -------------------------------------------------------------------------------
6. GOVERNMENT BOOT CONTRACT REVENUES:
From time to time, the Company records estimates of revenues or costs
associated with certain contract actions before the amount of such actions
are settled with the DSCP. Any differences between these estimates and the
actual amounts agreed to are included in the period of settlement.
The Company has incurred certain contract material costs which are
reimbursable under a contract price adjustment clause. Under this contract
clause, the Company cannot, unless the amount exceeds a specified amount,
submit a claim to the government for these costs until the contract's end.
After a claim is filed, it is reviewed and audited by the government. It
has been several years since the Company has had a claim of this type, and
therefore the Company lacks any recent experience of government audits of
this type of claim. The Company has determined that under the Securities
and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements", the claim amount is not fixed or
determinable, therefore the estimated amount should not be recorded at
this time. The amount of this claim will be recorded in revenues in the
period in which it becomes fixed or determinable.
In late March 2003, DSCP ordered the Company to accelerate its rate of
boot production by exercising a contract's surge option clause. The
Consolidated Statements of Operations for the six months ended January 3,
2004 include surge related costs (overtime, new employee training, etc.),
totaling $519,000. In addition, the Consolidated Statements of Operations
and Comprehensive Income for the year ended June 28, 2003 include surge
-14-
related costs of $279,000. Wellco interprets the related surge option
contract clause to require its submitting and subsequently negotiating
with DSCP a proposal for reimbursement of these costs. DSCP has a
different understanding of this clause under which the Company would not
be reimbursed these costs. The Company's legal counsel has discussed with
DSCP's legal counsel this difference in contract clause interpretation,
without any resolution. The probability of successfully resolving this
issue, or the outcome of any legal action, cannot be reasonably predicted.
The reimbursement of surge costs will be recognized in revenues in the
period when and if DSCP acknowledges Wellco's right to reimbursement, or
when any ensuing legal action awards reimbursement.
7. CONTINGENCIES:
In March 2003 the Defense Supply Center Philadelphia (DSCP) awarded the
Company a contract to supply the Infantry Combat Boot (ICB). The ICB boot
will replace the all-leather combat boot which represented about half of
the total boots sold by the Company to DSCP. This contract is for a one
year period, with four one-year options which are exercisable at the
government's discretion.
The ICB boot is subject to extensive inspection and testing prior to its
sale to DSCP. DSCP is the only approved testing laboratory for one of the
tests; has only one test machine; and, does testing for five contracts. In
addition, it takes two days to test one boot. Because of this, there are
usually several weeks from the Company's presenting boots for testing
until those test results are known. The Company understands that DSCP
recently approved another testing laboratory and this will significantly
reduce the time required to get the Company's ICB boots tested.
To date, 32,000 pairs of boots have been presented to DSCP for inspection
and testing. All of these boots have passed inspection and all except one
of the tests. As to this one test, 20,000 pairs of boots are waiting for
testing; 5,000 pairs have passed; 3,000 pairs are waiting for retesting;
2,000 pairs did not pass; and the Company is waiting to receive for
evaluation test boots representing 2,000 pairs reported by DSCP as not
passing the test.
The Company has the equipment to do this one test and continuously tests
boots. The Company's test results have been significantly better than
those of DSCP. The 3,000 pairs waiting for retest represent boots for
which the Company and its government Quality Assurance Representative,
upon examination of the test boots, could not determine the reason for
test failure reported by DSCP. Despite this, the fact remains that the
DSCP testing laboratory, or another laboratory approved by DSCP, makes the
final determination as to boots passing the test.
There is a possibility that the Company may have several thousands of
pairs of ICB boots that, because they do not pass this one test, cannot be
sold to DSCP. Because of the limited number of boots for which the test
results are known, the Company has not recorded any reserves for potential
inventory write-downs.
The 2,000 pairs of ICB boots that did not pass the test are included in
inventory at what is believed to be a very low estimate of their
commercial market value. ICB boots which do not pass all tests cannot be
sold to DSCP and must be sold on the commercial market. Because of its
limited experience in selling this boot on the commercial market, the
Company cannot reasonably estimate the amount that would be realized from
sales to customers other than DSCP. The sale on the commercial market of
ICB boots at prices significantly less than their cost to manufacture
would have an adverse effect on future operating results.
-15-
There is also the possibility that DSCP will cancel the Company's contract
for failure to supply boots that pass all the tests. Since cancellation of
a contract is the unilateral action of DSCP, the Company cannot predict
the probability of cancellation. DSCP has issued a Cure Notice stating
that the contract may be cancelled if Company does not supply ICB boots
that pass all the tests. Cancellation of this contract would have an
adverse effect on future operating results.
The Company is presently doing a detailed review of all manufacturing
operations that could affect the relevant test. In addition, the supplier
whose material is critical to passing this test, is giving their full
cooperation and assistance in this review.
-16-
PART I. FINANCIAL INFORMATION
Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
=====================
Critical Accounting Policies:
- ----------------------------
The Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles which require the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the Consolidated Financial Statements, and revenues
and expenses during the periods reported. Actual results could differ from those
estimates. The Company believes the following are the critical accounting
policies which could have the most significant effect on the Company's reported
results and require the most difficult, subjective or complex judgements by
management.
o 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. The Company makes estimates of its future cash flows
related to assets subject to impairment review. One of the most
critical estimates is future demand, primarily through U. S.
Department of Defense contracts, for the Company's products.
Changes to this and other estimates could result in an impairment
charge in future periods.
o Inventory Valuation:
Raw materials and supplies are valued at the lower of first-in,
first-out cost or market. Finished goods and work in process are
valued at the lower of actual cost, determined on a specific
identification basis, or market. The Company estimates which
materials may be obsolete and which products in work in process
or finished goods may be sold at less than cost, and adjusts its
inventory value accordingly. Future periods could include either
income or expense items if estimates change and for differences
between the estimated and actual amount realized from the sale of
inventory.
One of the new boots manufactured by the Company, the Infantry
Combat Boot, is subject to extensive inspection and testing
before sale under contract with the U. S. Department of Defense.
Certain tests can take several weeks and therefore delays our
ability to ship to the U.S. Department of Defense. The Company
continually tests boots to assure compliance with required
standards. The inventory value of boots which do not pass testing
is their estimated realizable value. The inventory value of boots
waiting for testing is their cost. The amount actually realized
from the sale of boots which did not pass testing can be
different from their estimated realizable value. Boots which do
not pass testing are subsequently written down from their cost to
estimated realizable value. The Infantry Combat boot is a new
product for the Company. As time passes and historical data is
accumulated, the Company may need to provide a reserve for the
difference between cost and estimated realizable value for boots
projected not to pass testing.
o Income Taxes:
The Company records a liability for potential tax assessments
based on its estimate of the potential exposure. Due to the
subjectivity and complex nature of the underlying issues, actual
payments or assessments may differ from estimates. Income tax
expense in future periods
-17-
could be adjusted for the difference between actual payments and
the Company's recorded liability based on its assessments and
estimates.
The Company has recorded a valuation allowance equal to a
significant part of its deferred tax assets. The valuation
allowance is based on an evaluation of the uncertainty of future
taxable income from certain jurisdictions. An adjustment could be
required if circumstances and events cause the Company to change
these estimates.
Since June 28, 2003, the end of the 2003 fiscal year, there have been no changes
in the nature of the estimates and assumptions related to these critical
accounting policies.
Comparing the Six Months Ended January 3, 2004 and December 28, 2002:
- ---------------------------------------------------------------------
For the six months ended January 3, 2004 (current period), Wellco had net income
of $967,000 compared to a net income of $230,000 in the prior year six month
period ended December 28, 2002 (prior period). The major reasons for this change
are:
o Compared to the prior period, total revenues in the current
period increased by $9,500,000 (90%). In late March, 2003, the
Defense Supply Center Philadelphia (DSCP, the Department of
Defense agency with which the Company contracts for the
manufacture of combat boots) invoked its surge option under a
contract. Invoked in response to the need for desert boots used
by U. S. Armed Forces personnel in Iraq, the surge option
requires Wellco to significantly increase its rate of boot
production. In the current period the Company shipped 126,000
more pairs of combat boots than in the prior period. In
addition, current period revenues increased by $511,000 over the
prior period for sales under a small contract with DSCP to supply
the Extreme Cold Weather (Mukluk) boots. During the current
period, revenues from the new Infantry Combat Boot (ICB) were
only $95,000.
Revenues from technical assistance fees and equipment rentals
from licensees, which vary with licensee sales, were greater in
the current period because of increased sales of certain
licensees.
o Cost of Sales and Services in the current period increased by
$8,803,000 (100%), which resulted in an increase in gross profit
of $697,000.
In order to meet the required surge, the Company has increased
its rate of boot production to 265% of the pre-surge level. This
increase was only possible by adding work shifts, hiring new
employees, working overtime and paying premium freight cost for
air shipments of raw materials.
For the current period, the Company has identified $519,000,
included in Cost of Sales and Services, of additional cost
incurred because of the DSCP surge. Wellco interprets the related
surge option contract clause to require its submitting and
subsequently negotiating with DSCP a proposal for reimbursement
of these costs. DSCP has a different interpretation of this
clause. Based on the advice of its legal counsel, Wellco has
notified DSCP that when total additional costs incurred because
of surge are known, it intends to submit a request for
reimbursement of these costs. As of January 3, 2004, the Company
has not recognized any revenues from any of these identified
costs.
Simultaneously with the surge option being invoked, the Company
was awarded a contract to supply the U. S. Army's new Infantry
Combat Boot (ICB). About two years ago, the Army decided to
replace its all-leather combat boot, one of the three DMS boots
manufactured by
-18-
Wellco which represents about half of Wellco's historical sales
to DSCP, with the ICB boot. Wellco, along with two other
manufacturers, was awarded a contract to supply this boot. During
the current period, the Company incurred significant costs (new
employee training costs, materials for production trials, boot
testing, plant infrastructure costs, etc.) to integrate the
productions of this new boot into the Company's factories.
Cost increases from surge and the integration of ICB boot
manufacturing reduced gross profit in the current period to 12%
of revenues from 16% of revenues in the prior period.
o The $32,000 increase in general and administrative expenses were
primarily caused by increases in administrative compensation and
travel to set up production of the ICB boot. This increase in
revenues, combined with this small increase in general and
administrative expenses, resulted in operating income being 6% of
revenues in the current period compared to 5% in the prior
period.
o Interest expense increased $46,000 primarily because the bank
line of credit was used in the current period to purchase
equipment and increase inventory because of surge and integration
of the ICB boot production.
o The Consolidated Statements of Operations for the current period
and the prior period include grant income of $40,000. 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.
o Prior period net income was reduced by $228,000 of previously
recorded goodwill that was determined to be impaired under
Statement of Financial Accounting Standards No. 142 which became
effective in the fiscal year 2003.
The income tax rate (the percent of Provision for Income Taxes to the Income
Before Income Taxes) for the current period was 20% compared to 16% for the
prior period. The income tax rate increase is primarily due to an increase in
the proportion of total Income Before Income Taxes which is subject to full
federal tax.
Comparing the Three Months Ended January 3, 2004 and December 28, 2002:
- ----------------------------------------------------------------------
For the three months ended January 3, 2004 (current period), Wellco had net
income of $551,000 compared to a net income of $64,000 in the prior year three
month period ended December 28, 2002 (prior period). The major reasons for the
increase in net income are:
o Compared to the prior period, total revenues in the current
period increased by $6,141,000 (117%). In the current period the
Company shipped 82,000 more pairs of combat boots than in the
prior period. In addition, current period revenues increased by
$108,000 over the prior period for sales under a small contract
with DSCP to supply the Extreme Cold Weather (Mukluk) boots.
During the current period, revenues from the Infantry Combat Boot
(ICB) were $95,000.
o Cost of Sales and Services in the current period increased by
$5,543,000 (121%), which resulted in an increase in gross profit
of $598,000.
For the current period, the Company has identified $376,000 of
additional cost incurred because of the DSCP surge. The Company
also incurred significant costs (new employee training costs,
materials for production trials, boot testing, plant
infrastructure costs, etc.) to integrate the new ICB boot into
the Company's factories.
-19-
Cost increases from surge and the integration of ICB boot
manufacturing reduced gross profit in the current period to 11%
of revenues from 13% of revenues in the prior period.
o General and administrative expenses decreased by $46,000. The
increase in revenues, combined with this decrease in general and
administrative expenses, resulted in operating income being 7% of
revenues in the current period, compared to 2% in the prior
period.
o As stated above in the six-month comparison, grant income is being
recognized on a straight line basis over the fiscal years 2000
through 2004.
The income tax rate (the percent of Provision for Income Taxes to the Income
Before Income Taxes) for the current period was 23% compared to 15% for the
prior period. The income tax rate increase is primarily due to an increase in
the proportion of total Income Before Income Taxes which is subject to full
federal tax.
Forward-looking Information:
- ---------------------------
Based on information supplied by DSCP, surge is expected to last at least
through fiscal year 2004, which will end July 3, 2004 and into the first quarter
of fiscal year 2005.
On September 30, 2003, DSCP awarded Wellco a new contract for DMS combat boots.
Wellco's award is for 30% of DSCP total DMS boot purchases. The contract is for
a base period of one year, with two one- year options. Four contracts were
awarded and the quantities to be purchased from each contractor are 35%, 30%,
20% and 15% of DSCP total boot purchases. Under the old DMS contract mentioned
above, Wellco supplied 25% of total DSCP purchases. The total pairs DSCP will
buy under these new contracts will be lower than in the past because of the
Army's replacement of its all-leather DMS combat boot with the Infantry Combat
Boot (ICB). In addition, the new contract, as compared to the old contract, has
lower prices which will result in a lower profit margin per pair of boots.
In March 2003 DSCP awarded the Company a contract to supply the ICB boot. This
contract is for a one year period, with four one-year options which are
exercisable at the government's discretion. The ICB boot is subject to extensive
inspection and testing prior to its sale to DSCP. DSCP is the only approved
testing laboratory for one of the tests; has only one test machine; and, does
testing for five contracts. In addition, it takes two days to test one boot.
Because of this, there are usually several weeks from the Company's presenting
boots for testing until those test results are known. The Company understands
that DSCP recently approved another testing laboratory and this will
significantly reduce the time required to get the Company's ICB boots tested.
To date, 32,000 pairs of boots have been presented to DSCP for inspection and
testing. All of these boots have passed inspection and all except one of the
tests. As to this one test, 20,000 pairs of boots are waiting for testing; 5,000
pairs have passed; 3,000 pairs are waiting for retesting; 2,000 pairs did not
pass; and the Company is waiting to receive for evaluation test boots
representing 2,000 pairs reported by DSCP as not passing the test.
The Company has the equipment to do this one test and continuously tests boots.
The Company's test results have been significantly better than those of DSCP.
The 3,000 pairs waiting for retest represent boots for which the Company and its
government Quality Assurance Representative, upon examination of the test boots,
could not determine the reason for test failure reported by DSCP. Despite this,
the fact remains that the DSCP testing laboratory, or another laboratory
approved by DSCP, makes the final determination as to boots passing the test.
-20-
There is a possibility that the Company may have several thousands of pairs of
ICB boots that, because they do not pass this one test, cannot be sold to DSCP.
Because of the limited number of boots for which the tests results are known,
the Company has not recorded any reserves for potential inventory write-downs.
The 2,000 pairs of ICB boots that did not pass the test are included in
inventory at what is believed to be a very low estimate of their commercial
market value. ICB boots which do not pass all tests cannot be sold to DSCP and
must be sold on the commercial market. Because of its limited experience in
selling this boot on the commercial market, the Company cannot reasonably
estimate the amount that would be realized from sales to customers other than
DSCP. The sale on the commercial market of ICB boots at prices significantly
less than their cost to manufacture would have an adverse effect on future
operating results.
There is also the possibility that DSCP will cancel the Company's contract for
failure to supply boots that pass all the tests. Since cancellation of a
contract is the unilateral action of DSCP, the Company cannot predict the
probability of cancellation. DSCP has issued a Cure Notice stating that the
contract may be cancelled if Company does not supply ICB boots that pass all the
tests. Cancellation of this contract would have an adverse effect on future
operating results.
The Company is presently doing a detailed review of all manufacturing operations
that could affect the relevant test. In addition, the supplier whose material is
critical to passing this test, is giving their full cooperation and assistance
in this review.
Except for historical information, this form 10-Q includes forward-looking
statements that involve risks and uncertainties, including, but not limited to,
the receipt of contracts from the DSCP 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 28, 2003. 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)
January 3, 2004 June 28, 2003
- -------------------------------------------------------------------------------
Cash and Cash Equivalents $51 $133
- -------------------------------------------------------------------------------
Unused Line of Credit * 535 910
- -------------------------------------------------------------------------------
Total Available $586 $1,043
- -------------------------------------------------------------------------------
* As discussed below, the line of credit started the fiscal
year with a limit of $1,500,000 and has been significantly
increased since then.
The decrease in cash available at January 3, 2004 resulted primarily from the
increased use of the bank line of credit.
-21-
The following table summarizes the major sources (uses) of cash for the six
months ended January 3, 2004:
(in thousands)
January 3, 2004
- -------------------------------------------------------------------------------
Income Before Depreciation and Other Non-cash
Adjustments $1,430
- -------------------------------------------------------------------------------
Net Change in Accounts Receivable, Inventories,
Accounts Payable, and Accrued Compensation (3,943)
- -------------------------------------------------------------------------------
Net Change in Income Taxes, Pension Obligation,
and Other (28)
- -------------------------------------------------------------------------------
Net Cash Used by Operations (2,541)
- -------------------------------------------------------------------------------
Cash Used to Purchase Plant and Equipment (1,179)
- -------------------------------------------------------------------------------
Cash Provided by Line of Credit 3,875
- -------------------------------------------------------------------------------
Cash Dividends Paid (237)
- -------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents ($82)
- -------------------------------------------------------------------------------
In the six months ended January 3, 2004, cash used by operations was $2,541,000.
Net income of $967,000; depreciation and amortization of $503,000; and an
increase in accounts payable of $2,985,000 were the main sources of cash from
operations. The main uses of operating cash were an increase in inventories of
$5,564,000 and an increase in accounts receivable of $1,592,000.
Borrowings from the line of credit provided the net cash needed for operations,
equipment purchases and dividend payments. The majority of equipment purchases
were for manufacture of the ICB boot and to increase production to meet the
surge requirement.
At the start of the fiscal year, the bank line of credit provided for borrowing
up to $1,500,000. Since then, the Company has increased inventory to meet the
surge production requirement and to manufacture the ICB boot, as well as
purchased the related equipment. Cash used in ICB boot production has been very
significant (more than $6,000,000), and because of the long time required by
DSCP to test the ICB boot, cashflow from the sale of this boot has not been
significant.
In order to meet the Company's cash needs, by January 3, 2004 the bank increased
its line to $5,000,000, and subsequently as of February 13, 2004 has increased
it to $7,000,000.
The bank is presently completing loan documentation to further change the line
to provide a maximum borrowing of $10,000,000 through April, 2004, and
decreasing thereafter to a maximum of $5,000,000 on August 1, 2004. The actual
amount that can be borrowed under the line for any one month is the lesser of
this maximum or an amount based on certain percents of the Company's accounts
receivable, raw materials and finished goods as of the end of the preceding
month. The bank will have a first lien position on all Company assets.
The ability of the Company to generate cash from operations to offset the
declining amount available under the line of credit is somewhat dependent on
realizing its investment in the ICB boot. The realization of this investment is
-22-
dependent on the Company's boots passing all required tests and being purchased
by DSCP, or, for those boots that do not pass testing, on their sale in the
commercial market.
The backlog of boots to be shipped to DSCP under the Company's surge contract,
which excludes the ICB boot, is 370,000 pairs with monthly deliveries from March
through September, 2004. This seven-month backlog is approximately 1.5 times the
annual pairs of boots sold DSCP in the last few years. The Company's projections
as provided to the bank show that even if the ICB boot is cancelled by DSCP,
cash from sale of boots under the surge contract, as well as cash from the sale
of ICB boots on the commercial market and from sale of ICB raw materials, is
adequate to meet operating needs and to reduce the line of credit. Critical
assumptions relevant to these projections are the timing and amount realized
from these sales.
Historically, the bank has always renewed the line of credit. Under conditions
of substantial reduction in operations, with little basis for projecting a
reversal of such reduction, it is possible that the bank would cancel the line
of credit. Events that would cause a substantial reduction in operations
include: cancellation of existing government contracts; and, receiving
government contracts that do not provide enough revenues to provide adequate
liquidity. In addition, a substantial decrease in sales of the Company's
products would reduce cash generated by operations and result in an increased
need to use the bank line of credit.
Realization of the Company's investment in the ICB boot, primarily the
significant amount invested in inventory, is critical, short of a subsequent
modification to the line of credit agreement, to having adequate operating cash
as the maximum borrowing under the line decreases in the coming months.
At January 3, 2004, the Company was not in compliance with the current ratio
requirement of its bank line of credit agreement. The Company has received from
the bank a waiver of this requirement at January 3, 2004.
The Promissory Note, Loan Agreement and Security Agreement documenting the bank
line of credit provide that:
o All amounts borrowed shall become due and immediately payable upon demand
of the bank.
o The bank's obligation to make advances under the note shall terminate: if
the bank makes a demand for payment; if a default under any loan document
occurs; or, in any event, on December 31, 2004, unless the Note is
extended by the bank under terms satisfactory to the bank.
o All amounts borrowed shall become immediately payable if Wellco
commences or has commenced against it a bankruptcy or insolvency
proceeding, or in the event of default.
Events of default include:
o Having a current ratio less than that prescribed by the bank.
o Having tangible net worth less than that prescribed by the bank.
o Any failure to meet requirements under the Note, Loan Agreement or
Security Agreement.
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.
The following table shows aggregated information about contractual obligations
as of January 3, 2004
-23-
Payments Due by Period
Total Less Than 1 1-3 Years 4-5 Years After 5 Years
Year
- -------------------------------------------------------------------------------
Notes Payable $300,000 $300,000
- -------------------------------------------------------------------------------
Building Lease 915,000 $153,000 $324,000 $348,000 90,000
- -------------------------------------------------------------------------------
Total $1,215,000 $153,000 $324,000 $348,000 $390,000
- -------------------------------------------------------------------------------
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 require disclosures.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
are filed or submitted under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commissions's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the reports that are filed under the Exchange Act is
accumulated and communicated to management, including the chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure. Under the supervision of and with the
participation of management, including the chief executive officer and chief
financial officer, the Company has evaluated the effectiveness of the design and
operation of its disclosure controls and procedures as of January 3, 2004, and
based on its evaluation, our chief executive officer and chief financial officer
have concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation described above, including any corrective actions with regard to
significant deficiencies and material weaknesses.
-24-
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 2003 Annual Stockholders Meeting of Wellco Enterprises, Inc. was held on
November 18, 2003. 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
Claude S. Abernethy, Jr 1,119,075 300
Horace Auberry 1,119,075 300
Rolf Kaufman 1,119,075 300
Item 5. Other Information. N/A
Item 6. Exhibits and Reports on Form 8-K.
a). Exhibits:
(31) Certifications of the Chief Executive Officer and
Chief Financial Officer under Section 302 of
the Sarbanes-Oxley Act of 2002, filed herewith.
(32) Certifications of the Chief Executive Officer and
Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
b). Reports on Form 8-K:
On October14, 2003, the Company filed a current report
on Form 8-K reporting under Item 5 and 12.
On November 10, 2003, the Company filed a current report on Form
8-K reporting under Item 12.
-25-
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, Chief Executive Officer Tammy Francis, Controller and Chief
and President Financial Officer
(Principal Executive Officer)
February 17, 2004
-26-
Exhibit 31
----------
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE SIX MONTHS ENDED JANUARY 3, 2004
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David Lutz, certify that:
1. I have reviewed this report on Form 10-Q of Wellco Enterprises, Inc.(the
registrant);
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d- 15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal controls over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant"s
-27-
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 17, 2004
/s/ David Lutz
- -----------------------------------------------------
By: David Lutz, Chief Executive Officer and President
(Chief Executive Officer)
-28-
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE SIX MONTHS ENDED JANUARY 3, 2004
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Tammy Francis, certify that:
1. I have reviewed this report on Form 10-Q of Wellco Enterprises, Inc.(the
registrant);
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d- 15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal controls over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
-29-
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 17, 2004
/s/ Tammy Francis
- -------------------------------------------
By: Tammy Francis, Controller and Treasurer
(Chief Financial Officer)
-30-
Exhibit 32
----------
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE SIX MONTHS ENDED JANUARY 3, 2004
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, David Lutz, certify that:
1. I am the chief executive officer of Wellco Enterprises, Inc.
2. Attached to this certification is Form 10-Q for the six months ended
January 3, 2004, a periodic report (the "periodic report") filed by the
issuer with the Securities Exchange Commission pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act:),
which contains financial statements.
3. I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that
o the periodic report containing the financial statements
fully complies with the requirements of Section 13(a) or
15(d) of the Exchange Act, and
o the information in the periodic report fairly presents,
in all material respects, the financial condition and
results of operations of the issuer for the periods
presented.
Date: February 17, 2004
/s/ David Lutz
- -----------------------------------------------------
By: David Lutz, Chief Executive Officer and President
(Chief Executive Officer)
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by Wellco Enterprises Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
This certification will not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934 even if the document with which it is submitted to the Securities and
Exchange Commission is so incorporated by reference.
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WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE SIX MONTHS ENDED JANUARY 3, 2004
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Tammy Francis, certify that:
1. I am the chief financial officer of Wellco Enterprises, Inc.
2. Attached to this certification is Form 10-Q for the six months ended
January 3, 2004, a periodic report (the "periodic report") filed by the
issuer with the Securities Exchange Commission pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act:),
which contains financial statements.
3. I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that
o the periodic report containing the financial statements
fully complies with the requirements of Section 13(a) or
15(d) of the Exchange Act, and
o the information in the periodic report fairly presents,
in all material respects, the financial condition and
results of operations of the issuer for the periods
presented.
Date: February 17, 2004
/s/ Tammy Francis
- -------------------------------------------
By: Tammy Francis, Controller and Treasurer
(Chief Financial Officer)
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by Wellco Enterprises Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
This certification will not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934 even if the document with which it is submitted to the Securities and
Exchange Commission is so incorporated by reference.
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