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 2, 1999
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
(Address of Principal Executive Office)
Registrant's telephone number, including area code 828-456-3545
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
1,163,246 shares of $1 par value common stock were outstanding on February 16,
1999
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 2, 1999
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 2, 1999 AND JUNE 27, 1998
(in thousands)
ASSETS
(unaudited)
JANUARY 2, JUNE 27,
1999 1998
----------- --------
CURRENT ASSETS:
Cash ........................................ $ 41 $ 196
Receivables ................................. 1,635 2,247
Inventories-
Finished goods ......................... 4,261 4,747
Work in process ........................ 1,515 2,077
Raw materials .......................... 2,276 2,684
-------- --------
Total .................................. 8,052 9,508
Deferred taxes and prepaid expenses ......... 366 292
Income tax refund receivable ................ 202 292
-------- --------
Total ....................................... 10,296 12,535
-------- --------
MACHINERY LEASED TO LICENSEES
(less accumulated depreciation of
$1,506 and $1,501) .......................... 11 16
PROPERTY, PLANT AND EQUIPMENT:
Land ........................................ 107 107
Buildings ................................... 1,159 1,155
Machinery and equipment ..................... 3,716 3,632
Furniture and automobiles ................... 719 709
Leasehold improvements ...................... 63 63
-------- --------
Total cost .................................. 5,764 5,666
Less accumulated depreciation and
amortization ............................. (3,575) (3,333)
-------- --------
Net ......................................... 2,189 2,333
-------- --------
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition ................ 228 228
Intangible pension asset .................... 440 440
-------- --------
Total ....................................... 668 668
DEFERRED TAXES ................................... 468 468
-------- --------
TOTAL ............................................ $ 13,632 $ 16,020
======== ========
See Notes to Consolidated Financial Statements.
-3-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1999 AND JUNE 27, 1998
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
JANUARY 2, JUNE 27,
1999 1998
---------- --------
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 2) ....... $ 1,800 $ 2,885
Accounts payable .............................. 1,567 1,696
Accrued compensation .......................... 725 988
Accrued pension ............................... 135 191
Accrued income taxes .......................... -- 241
Cash dividend declared ........................ 116 --
Other liabilities ............................. 231 311
Current maturity of note payable .............. 146 146
-------- --------
Total ................................. 4,720 6,458
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ............................ 1,728 1,762
Notes payable ................................. 418 491
STOCKHOLDERS' EQUITY :
Common stock, $1.00 par value ................. 1,164 1,164
Additional paid-in capital .................... 192 192
Retained earnings ............................. 6,145 6,688
Accumulated other comprehensive income
(Note 1) ...................................... (735) (735)
-------- --------
Total ................................. 6,766 7,309
-------- --------
TOTAL .............................................. $ 13,632 $ 16,020
======== ========
See Notes to Consolidated Financial Statements.
-4-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 2, 1999 AND DECEMBER 27, 1997
(in thousands except per share and number of shares)
(unaudited)
JANUARY 2, DECEMBER 27,
1999 1997
---------- ------------
REVENUES (Note 3) ............................ $ 8,786 $ 13,602
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services .............. 8,151 12,752
General and administrative expenses ..... 1,126 1,050
----------- -----------
Total ................................... 9,277 13,802
----------- -----------
OPERATING LOSS ............................... (491) (200)
NET INTEREST EXPENSE ......................... (149) (87)
----------- -----------
LOSS BEFORE INCOME TAXES ..................... (640) (287)
BENEFIT FOR INCOME TAXES ..................... (213) (69)
----------- -----------
NET LOSS AND COMPREHENSIVE LOSS (Note 1) ..... $ (427) $ (218)
=========== ===========
BASIC LOSS PER SHARE
based on weighted average number of
shares outstanding ...................... $ (0.37) $ (0.19)
=========== ===========
Shares used in computing basic
earnings per share ...................... 1,163,246 1,158,929
=========== ===========
DILUTED LOSS PER SHARE based on weighted
average number of shares outstanding
and dilutive stock
options ................................ $ (0.37) $ (0.19)
=========== ===========
Shares used in computing diluted
earnings per share ...................... 1,163,246 1,158,929
=========== ===========
See Notes to Consolidated Financial Statements.
-5-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
JANUARY 2, 1999 AND DECEMBER 27, 1997
(in thousands except per share and number of shares)
(unaudited)
JANUARY 2, DECEMBER 27,
1999 1997
---------- ------------
REVENUES (Note 3) ............................ $ 3,829 $ 7,926
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services .............. 3,667 7,317
General and administrative expenses ..... 553 512
----------- -----------
Total ................................... 4,220 7,829
----------- -----------
OPERATING INCOME (LOSS) ...................... (391) 97
NET INTEREST EXPENSE ......................... (71) (65)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............ (462) 32
PROVISION (BENEFIT) FOR INCOME TAXES ......... (184) 17
----------- -----------
NET INCOME (LOSS) AND COMPREHENSIVE
INCOME (LOSS) (Note 1) .................. $ (278) $ 15
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE
based on weighted average number of
shares outstanding ...................... $ (0.24) $ 0.01
=========== ===========
Shares used in computing basic
earnings per share ...................... 1,163,246 1,160,910
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE based
on weighted average number of shares
outstanding and dilutive stock
options ................................ $ (0.24) $ 0.01
=========== ===========
Shares used in computing diluted
earnings per share ...................... 1,163,246 1,189,843
=========== ===========
See Notes to Consolidated Financial Statements.
-6-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 2, 1999 AND DECEMBER 27, 1997
(in thousands)
(unaudited)
JANUARY 2, DECEMBER 27,
1999 1997
---------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ............................................ $ (427) $ (218)
------- -------
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization .................. 247 182
(Increase) decrease in-
Accounts receivable ....................... 612 1,883
Inventories ............................... 1,456 (598)
Other current assets ...................... 16 (60)
Increase (decrease) in-
Accounts payable .......................... (129) 390
Accrued liabilities ....................... (263) (213)
Accrued income taxes ...................... (241) (300)
Pension obligation ........................ (90) (33)
Other ..................................... (80) (74)
------- -------
Total adjustments ................................... 1,528 1,177
------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................................ 1,101 959
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment, net ............... (98) (972)
------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ............................... (98) (972)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under short-term agreements (1,085) .. (237)
Principal payments of bank note payable ............. (73) --
Exercise of stock options ........................... -- 82
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ................................ (1,158) (155)
------- -------
NET INCREASE (DECREASE) IN CASH .......................... (155) (168)
CASH AT BEGINNING OF PERIOD .............................. 196 181
------- -------
CASH AT END OF PERIOD .................................... $ 41 $ 13
======= =======
-7-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 2, 1999 AND DECEMBER 27, 1997
(in thousands)
(unaudited)
JANUARY 2, DECEMBER 27,
1999 1997
---------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ................................. $146 $ 73
Income taxes ............................. 27 131
Noncash dividend accrual ...................... 116 116
==== ====
See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 2, 1999
(in thousands except number of shares)
(unaudited)
Common Stock Additional
------------
Par Paid-In Retained
Shares Value Capital Earnings
------------------------------------------
BALANCE AT JUNE 27, 1998 1,163,246 $ 1,164 $ 192 $ 6,688
Net loss for the fiscal six
months ended January 2, 1999 (427)
Cash dividend declared
($.10 per share) (116)
-------------------------------------------
BALANCE AT JANUARY 2, 1999 1,163,246 $ 1,164 $ 192 $ 6,145
===========================================
Accumulated
Other
Comprehensive
Income
-------------
BALANCE AT JUNE 27, 1998 (Note 1) $ (735)
Change for the fiscal six
months ended January 2, 1999 -
--------------
BALANCE AT JANUARY 2, 1999 $ (735)
==============
See Notes to Consolidated Financial Statements.
-9-
WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL SIX MONTHS ENDED JANUARY 2, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Recent Statements of the Financial Accounting Standards Board
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," which is effective for the Company's current fiscal
year ending July 3, 1999. This statement establishes standards for
reporting and display of comprehensive income and its components and
accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Under SFAS 130, the Company's pension liability
adjustment is now reported in the equity section of the balance sheet as
accumulated other comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
the Company's current fiscal year ending July 3, 1999. SAFS 131 provides
that any new disclosures in the fiscal year in which the statement becomes
effective need not be made until the end of that year. This Statement
supersedes Financial Accounting Standards Board Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise", which
presently determines the Company's segment and related reporting, and
under which the Company has one segment. SFAS 131 requires disclosure of
financial and descriptive information about reportable operating segments,
revenues by products or services, and revenues and assets by geographic
areas. The Company believes that the only significant effects on its
disclosures resulting from SFAS 131 would be the additional disclosures if
it has more than one reportable operating segment. The Company has not as
yet determined if it has more than one reportable operating segment under
SFAS 131.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 (SFAS 132),
"Employers' Disclosures About Pensions and Other Postretirement Benefits,"
which is effective for the Company's current fiscal year ending July 3,
1999. This Statement supersedes the disclosure requirements of Financial
Accounting Standards Board Statement No. 87, "Employer's Accounting for
Pensions", No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits", and No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". SFAS 132 standardizes the disclosure requirements for pensions
and other postretirement benefits and does not address measurement or
recognition of such items. Disclosures required by SFAS 132 will not
significantly change the Company's present pension disclosure.
2. LINES OF CREDIT:
The Company recently renewed its $4,000,000 secured bank line of credit .
The bank line, which expires December 31, 1999, 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 $1,515,000) and all
non-governmental accounts receivable and inventory ($1,329,000). At
January 2,1999, borrowings on the line of credit were $1,800,000 with
$2,200,000 available in additional borrowings.
The bank credit agreement contains, among other provisions, defined levels
of net worth and current ratio requirements. The Company was in compliance
with both covenants at January 2, 1999. The covenants are subject to
review at the end of each fiscal quarter.
-10-
3. GOVERNMENT BOOT CONTRACT REVENUES:
Revenues in the three-month period ended January 2, 1999 include $173,000
representing the estimated amount of contract change orders that have not
as yet been negotiated with the government. Any differences between the
estimates and the actual amounts negotiated will be recorded in the period
in which negotiations are completed. There were no significant differences
for the fiscal quarter ended January 2, 1999.
4. CONTRACT CLAIM:
In April 1998 Wellco executed an Agreement with Defense Supply Center
Philadelphia (DSCP). The Agreement provides that DSCP will reimburse the
Company for certain costs incurred related to contract performance during
the fourth quarter of the 1997 fiscal year and the first two quarters of
the 1998 fiscal year. Wellco maintained that it was due reimbursement for
costs incurred in performing in accordance with a prior DSCP
interpretation of the contract. This interpretation was later changed to
the detriment of Wellco. The Agreement provides that any disagreement
between Wellco and DSCP on an item of cost will be subject to binding
arbitration. The cost reimbursement is limited to $1,000,000.
Wellco submitted its claim under the Agreement in late May 1998
documenting more than $1,000,000 in costs incurred. In an early October,
1998 meeting with Wellco, DSCP agreed to pay Wellco $246,000 of the
$1,000,000 claim. Therefore, the 1998 Consolidated Statements of
Operations included $226,000 of income related to this claim, representing
the agreed to $246,000 less $20,000 of related costs.
Binding arbitration will be used to determine how much, if any, of the
remaining $754,000 will be paid by DSCP to Wellco, and the process of
picking an arbitrator is now in progress. It is expected that this
arbitration procedure will take several months and Wellco, although
confident that a significant amount of the $754,000 will ultimately be
paid, cannot reasonably predict what the arbitrator will decide. Any
amount Wellco will receive beyond $246,000 will be recorded at the time of
the arbitration decision.
5. LITIGATION:
In March 1998 the Company was served with a civil action complaint. The
Plaintiff alleged that the Company, during the period October, 1995
through September, 1996 and acting as a subcontractor to the Plaintiff,
untimely delivered defective work shoes which resulted in certain losses
for the Plaintiff as well as precluding Plaintiff from competing on a
subsequent contract.
The Company believed that it was not at fault and would have prevailed in
this case if it had gone to court. However, in order to avoid further
litigation costs, a settlement has been reached resolving all matters
between the Plaintiff and the Company. The Company's general and
administrative expenses for the three and six month periods ended January
2, 1999 include $20,000 for settlement of this action.
-11-
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Comparing The Six Months Ended January 2, 1999 and December 27, 1997
- ---------------------------------------------------------------------
For the six months ended January 2, 1999, Wellco had a net loss of $427,000
compared to a net loss of $218,000 in the prior year six month period ended
December 27, 1997. Total revenues in the current year six month period were 35%
lower than the prior year period. The current period loss was primarily caused
by a reduction in the sale of boots to the U.S. Defense Supply Center
Philadelphia (DSCP), by a significant reduction in revenues from technical
assistance fees and lack of a reduction in certain semi-variable and fixed
production and administrative expenses. The prior year loss was primarily caused
by costs incurred in the initial production of the new Infantry Combat Boot
(ICB).
Pairs of Direct Molded Sole (DMS) combat boots sold to DSCP in the current six
month period were approximately 42% less than the pairs sold in the prior year
six month period. On April 10, 1998 DSCP exercised its first option on the
current DMS boot contract covering the period April 15, 1998 to April 15, 1999.
Under this option, Wellco will receive delivery orders for 25% of total DMS
pairs purchased during this year. For several years, DSCP has been reducing its
depot inventory of DMS boots. Prior to option exercise, in late February, 1998,
DSCP met with all DMS boot contractors informing them that inventory reduction
was behind schedule and needed to be accelerated. Out of this meeting came a
contract modification reducing the total guaranteed minimum pairs to be
purchased by DSCP during the first option year. For Wellco, this was a reduction
in the minimum pairs from 155,000 to 125,000 pairs. The price per pair for the
first 155,000 pairs during the first option was increased to partially
compensate for the reduced pairs.
Pairs of the Intermediate Cold/Wet (ICW) boot sold to DSCP in the current six
month period were approximately 45% less than the pairs sold in the prior year
six month period. This is Wellco's first contract for the production of this
boot, and the contract provides for a base year with two option years. The
contract provides that total pairs purchased by DSCP during the first and second
option years are approximately 45% less than pairs purchased during the first
year. Sales of this boot included in the current six month period were under the
first option year of that contract, and sales included in the prior year six
month period were under the base contract year.
Pairs of the ICB boot sold to DSCP were approximately 86% less than than the
pairs sold in the prior year six month period. This was Wellco's first contract
for the production of this boot, and the contract provided for a base year with
two option years. Shipments under the base year were substantially completed in
the fiscal year ended June 27, 1998, and DSCP did not exercise Wellco's first
option. Instead of exercising the option, DSCP will be awarding Wellco a
contract to provide 27,000 pairs of the ICB boot. The contract award was
delayed, and should be awarded in March 1999.
Revenues from technical assistance fees from licensees were lower in the
current six month period. Prior year fees include an additional fee related to
supplying certain customers with additional services. Wellco completed providing
these additional services by June, 1998. In addition, fees earned from other DMS
combat boot manufacturers were lower because of the DSCP inventory reduction
program.
Because of the fewer DMS boot sales, Wellco has been reducing its inventory of
DMS combat boots by producing fewer pairs than were shipped. Some direct labor
and salaried personnel have been laid off. However, during the six month period
ending January 2, 1999, several categories of semi-variable costs did not
decrease proportionately with the decrease in direct labor costs. The cost of
group health insurance, for which the Company is self funded and which varies
with actual health care cost incurred by employees, increased $18,000. Pension
cost will not be reduced by employee layoffs unless those
-12-
layoffs become long term. Salaried personnel layoffs were not proportional to
the decrease in revenues, and most categories of general and administrative
expenses were unaffected by the reduced revenues.
The prior year loss included start up costs related to first production of the
ICB boot of approximately $700,000. Because the ICB boot incorporates several
technologies and manufacturing methods which are significantly different than
those of other boots made by Wellco and because this contract gave a very short
time period between the date of award and first shipment, Wellco incurred
significant costs related to rearranging its production line, employee training
and developing new manufacturing methods and procedures.
The rate of income tax benefit to loss before income taxes is lower for the six
months ended December 27, 1997 period than the current six month period because
some of the loss for the prior year was incurred in the Company's Puerto Rican
subsidiary which is substantially exempt from both federal and Puerto Rican
income taxes. The benefit results from the taxable loss being carried back for a
refund of taxes paid in prior years.
Forward Looking Information:
The Management's Discussion and Analysis section of the Company's 1998 Annual
Report contains information about DSCP's inventory reduction program for the DMS
combat boot, including their acceleration of this program in the current
contract for option one year. This means that the minimum pairs DSCP must buy
from Wellco in the year April 15, 1998 through April 15, 1999 was reduced from
155,000 to 125,000.
Orders received by Wellco to date under the current contract option year for DMS
combat boots are less than a proportional allocation of the 125,000 pairs over
the option year. Therefore, an increase in the ordering rate will occur before
the option year ends on April 15, 1999. Last year, DSCP stated in writing their
non-binding intent to purchase more than the minimum pairs in the first option
year if their total sales to military installations during that year exceeded
900,000 pairs. If they do this, projected DSCP sales indicate this would mean
additional sales for Wellco of approximately 9,000 pairs prior to the end of the
first option year on April 15, 1999. This increase in revenues will help improve
operating results, but the increase will not be enough to return the Company to
substantial profitability.
Wellco has received a DSCP letter stating their intent to exercise the second
option of the current DMS contract, which should occur in April 1999. The
minimum pairs to be purchased from Wellco during this option year is 155,000,
compared to 125,000 under the current option year. DSCP has provided Wellco with
data showing that substantial progress has been made in reducing their DMS
combat boot inventory. For the period July through December 1998, their total
inventory was reduced by 348,000 pairs to 831,000 pairs. Wellco understands that
DSCP's goal is to reduce inventory to between 400,000 and 450,000 pairs. Prior
to the exercise of the second option, Wellco will have discussions with DSCP
about increasing their second option year purchases beyond the minimum. The
success of these discussions cannot be predicted, but if they are successful,
this could mean second option year pairs sold by Wellco of approximately
180,000.
Wellco uses DSCP-supplied data on their inventory levels and sales to project
when their inventory goal will be reached. If DSCP only buys the minimum during
the second option, Wellco, using this DSCP data, projects that their goal will
be reached by the end of the second option. If, as hoped by Wellco, DSCP buys
approximately 75% of their projected sales during the second option year, their
goal would be reached during the third contract option year extending from April
16, 2000 to April 16, 2001. After reaching their goal, DSCP's purchases of DMS
combat boots will equal their sales. When this occurs, Wellco's sales of DMS
combat boots will significantly increase from those of recent periods, and
operating results should significantly improve.
Initially, DSCP did not intend to exercise the second and final option under
Wellco's ICW boot contract. However, Wellco has now been told that they will
exercise the option and Wellco, as a condition of option exercise, has agreed to
a 50% reduction in the minimum pairs to be purchased during that option year.
-13-
If DSCP awards the 27,000 pair ICB contract to Wellco in the next few weeks,
Wellco, having already manufactured the majority of these 27,000 pairs, will be
able to have significant shipments before the end of the fiscal quarter ending
April 3, 1999. However, the margin on this boot is such that the effect on
operating results will not be significant.
In October, 1998 Wellco was awarded a contract to provide an inmate work shoe to
a state prison system through September 30, 1999. Wellco had previously supplied
this shoe for the year ended September 30, 1997.
Note 4 to the Consolidated Financial Statements contains information about a
contract claim. Part of the claim has been settled and $754,000 remains to be
settled by binding arbitration. The amount, if any, that Wellco receives from
the $754,000 will be recorded as an item of income at the time of the
arbitration decision. Wellco hopes that an arbitrator will be soon be agreed to,
so this matter can be settled.
Except for historical information, this Form 10-Q includes forward looking
statements that involve risks and uncertainties, including, but not limited to,
the receipt of contracts from the U. S. government and the performance
thereunder, the total pairs of boots bought by the U. S. government, 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 27, 1998. Actual
results may differ materially from management expectations.
Comparing The Three Months Ended January 2, 1999 and December 27, 1997
- ------------------------------------------------------------------------
For the fiscal quarter ended January 2, 1999, Wellco had a net loss of $278,000
compared to a net profit of $15,000 in the prior year three month period ended
December 27, 1997. Total revenues in the current year three month period were
52% lower than the prior year period.
The January 2, 1999 quarter reflects the same boots sales trend as the six month
period discussed above. Pairs of DMS combat boots sold decreased 41%, sales of
the ICW boots decreased by 59% and there were no sales of the ICB boots. For the
reasons stated above, technical assistance fees decreased by 73% for the current
quarter compared to the December 27, 1997 quarter. As was the case with the six
month period, the effect of fixed and semi-variable costs had a negative affect
on the current period operating results.
For the quarter ending January 2, 1999 Wellco sold 11,000 pairs of the inmate
work shoe to a state prison system compared to fewer than 1,000 pairs for the
quarter ended December 27, 1997. These sales help but do not significantly
offset the large reduction in military boots sold to DSCP.
The operating results for the prior year quarter ending December 27, 1997
reflect ICB boot start-up costs of approximately $100,000.
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 six months
and the last fiscal year the amount of cash and unused line of credit:
-14-
(in thousands)
January 2, 1999 June 27, 1998
--------------- -------------
Cash ......................................... $ 41 $ 196
Unused Line of Credit ........................ 2,200 1,115
------ ------
Total ........................................ $2,241 $1,311
====== ======
The increase in unused line of credit was caused by payments made since June 27,
1998 which reduced the amount borrowed.
The following table summarizes the major sources (uses) of cash for the six
months ended January 2, 1999:
(in thousands)
January 2, 1999
---------------
Net Loss Plus Depreciation ...................................... $ (180)
Net Change in Accounts Receivable, Inventories,
Accounts Payable, Accrued Liabilities, and Accrued
Income Taxes .................................................... 1,435
Other ........................................................... (154)
Net Cash Provided By Operations ................................. 1,101
Cash From Bank Line of Credit ................................... 50
Cash Used to Repay Lines of Credit .............................. (1,135)
Cash Used to Repay Bank Loan .................................... (73)
Cash Used to Purchase Plant and Equipment ....................... (98)
Net Decrease in Cash ........................................... $ (155)
The Management's Discussion and Analysis section of the Company's 1998 Annual
Report contains information about the increase in combat boot inventories that
occurred during the 1998 fiscal year. Since then, Wellco has been reducing its
inventory by reducing the production level and by having short periods of
suspended manufacturing operations. This resulted in cash from a $1,456,000
reduction in inventories during the first six months of the fiscal year 1999 and
it was used primarily to pay down the bank line of credit by $1,135,000.
DSCP will soon award Wellco the 27,000 pair ICB boot contract. Since most of
these boots are finished, the cash required to manufacture them has already been
spent. Since Wellco presently has no other ICB boot contract and will not need
to replace this inventory, cash receipts from the sale of the 27,000 pairs
should significantly improve liquidity by reducing borrowing under the bank line
of credit.
The bank line of credit, which provides for total borrowings of $4,000,000, will
expire and be subject to
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renewal on December 31, 1999. The amount outstanding under the bank line of
credit at January 2, 1999 was $1,800,000.
The Company has no other material commitments for capital equipment. The Company
does not know of any other demands, commitments, uncertainties, or trends that
will result in or that are reasonablely likely to result in its liquidity
increasing or decreasing in any material way.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not have any derivative financial instruments, other financial
instruments, or derivative commodity instruments that requires disclosures.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 5 to the Consolidated Financial Statements in Part I of
this Form 10-Q.
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 1998 Annual Stockholders Meeting of Wellco Enterprises, Inc.
was held on November 17, 1998. The only matter voted on at that
meeting was the election of directors. The results of voting
were:
Shares Withheld Shares Voted
Nominee for Director Shares Voted For From Against
William M. Cousins, Jr. 1,110,658 600 7
J. Aaron Prevost 1,109,951 600 714
William D. Schubert 1,110,665 600 0
Item 5. Other Information. N/A
Item 6. Exhibits and Reports on Form 8-K.
a). Exhibits: None
b). Reports on Form 8-K: None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Wellco Enterprises, Inc., Registrant
\s\ \s\
David Lutz, President and Treasurer Tammy Francis, Controller
February 16, 1999
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