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: OCTOBER 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 November 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 OCTOBER 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.
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WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 2, 1999 AND JULY 3, 1999
(in thousands)
ASSETS
(unaudited)
OCTOBER 2, JULY 3,
1999 1999
------------ -------
CURRENT ASSETS:
Cash ........................................ $ 56 $ 89
Receivables ................................. 1,581 4,683
Inventories-
Finished goods ......................... 1,818 1,948
Work in process ........................ 2,097 1,712
Raw materials .......................... 2,087 1,853
-------- ---------
Total .................................. 6,002 5,513
Deferred taxes and prepaid expenses ......... 780 621
Income tax refund receivable ................ 226 226
-------- ---------
Total ....................................... 8,645 11,132
-------- ---------
MACHINERY LEASED TO LICENSEES
(less accumulated depreciation of
$1,514 and $1,513) .......................... 5 6
PROPERTY, PLANT AND EQUIPMENT:
Land ........................................ 107 107
Buildings ................................... 1,176 1,176
Machinery and equipment ..................... 4,889 4,139
Furniture and automobiles ................... 819 792
Leasehold improvements ...................... 583 457
-------- ---------
Total cost .................................. 7,574 6,671
Less accumulated depreciation and
amortization ............................. (3,875) (3,701)
-------- ---------
Net ......................................... 3,699 2,970
-------- ---------
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition ................ 228 228
Intangible pension asset .................... 88 88
-------- ---------
Total ....................................... 316 316
DEFERRED TAXES ................................... 429 429
-------- ---------
TOTAL ............................................ $ 13,094 $ 14,853
========= =========
(continued on next page)
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CONSOLIDATED BALANCE SHEETS
OCTOBER 2, 1999 AND JULY 3, 1999
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
OCTOBER 2, JULY 3,
1999 1999
----------- ---------
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 2) ....... $ 1,310 $ 3,480
Accounts payable .............................. 1,780 1,046
Accrued compensation .......................... 967 908
Accrued restructuring costs (Note 3) .......... 78 119
Accrued pension ............................... 64 161
Accrued income taxes .......................... 471 427
Other liabilities ............................. 317 377
Current maturity of note payable .............. 146 146
-------- ---------
Total ......................................... 5,133 6,664
-------- ---------
LONG-TERM LIABILITIES:
Pension obligation ............................ 1,375 1,375
Notes payable ................................. 309 346
STOCKHOLDERS' EQUITY :
Common stock, $1.00 par value ................. 1,164 1,164
Additional paid-in capital .................... 192 192
Retained earnings ............................. 5,427 5,618
Accumulated other comprehensive loss .......... (506) (506)
-------- ---------
Total ......................................... 6,277 6,468
-------- ---------
TOTAL .............................................. $ 13,094 $ 14,853
========= =========
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
OCTOBER 2, 1999 AND OCTOBER 3, 1998
(in thousands except per share and number of
shares)
(unaudited)
OCTOBER 2, OCTOBER 3,
1999 1998
---------- ----------
REVENUES .................................. $ 4,732 $ 4,957
----------- ------------
COSTS AND EXPENSES:
Cost of sales and services ........... 4,093 4,484
Restructuring and realignment costs
(Note 3) ............................. 359
General and administrative expenses .. 471 573
----------- ------------
Total ................................ 4,923 5,057
----------- ------------
OPERATING LOSS ............................ (191) (100)
NET INTEREST EXPENSE ...................... (48) (78)
----------- ------------
LOSS BEFORE INCOME TAXES .................. (239) (178)
BENEFIT FOR INCOME TAXES .................. (48) (29)
----------- ------------
NET LOSS AND COMPREHENSIVE LOSS .......... $ (191) $ (149)
============= ============
BASIC LOSS PER SHARE
based on weighted average number of
shares outstanding ................... $ (0.16) $ (0.13)
============ ============
Shares used in computing basic
earnings per share ................... 1,163,246 1,163,246
============ ============
DILUTED LOSS PER SHARE based on weighted
average number of shares outstanding
and dilutive stock
options ............................. $ (0.16) $ (0.13)
============ ============
Shares used in computing diluted
earnings per share ................... 1,163,246 1,163,246
============ ============
See Notes to Consolidated Financial Statements.
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WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL THREE MONTHS ENDED
OCTOBER 2, 1999 AND OCTOBER 3, 1998
(in thousands)
(unaudited)
OCTOBER 2, OCTOBER 3,
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ............................... $ (191) $ (149)
-------- --------
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization ..... 175 124
(Increase) decrease in-
Receivables .................. 3,102 (287)
Inventories .................. (489) 1,214
Other current assets ......... (159) (103)
Increase (decrease) in-
Accounts payable ............. 734 (108)
Accrued liabilities .......... 18 25
Accrued income taxes ......... 44 (50)
Pension obligation ........... (97) (73)
Other ........................ (60) (88)
-------- --------
Total adjustments ...................... 3,268 654
-------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................... 3,077 505
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment, net .. (903) (49)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ....... (903) (49)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans from bank ........................
Net payments under short-term agreements (2,170) (335)
Principal payments of bank note payable (37) (36)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ................... (2,207) (371)
-------- --------
NET INCREASE (DECREASE) IN CASH ............. (33) 85
CASH AT BEGINNING OF PERIOD ................. 89 196
-------- --------
CASH AT END OF PERIOD ....................... $ 56 $ 281
======== ========
(continued on next page)
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WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL THREE MONTHS ENDED
OCTOBER 2, 1999 AND OCTOBER 3, 1998
(in thousands)
(unaudited)
OCTOBER 2, OCTOBER 3,
1999 1998
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ............ $ 47 $ 76
Income taxes ........ -- 22
========= =========
See Notes to Consolidated Financial Statements.
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WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL THREE MONTHS ENDED
OCTOBER 2, 1999
(in thousands except number of shares)
(unaudited)
Common Stock Additional
Par Paid-In Retained
Shares Value Capital Earnings
-----------------------------------------------
BALANCE AT JULY 3, 1999 1,163,246 $ 1,164 $ 192 $ 5,618
Net loss for the fiscal three
months ended October 2, 1999 (191)
BALANCE AT OCTOBER 2, 1999 1,163,246 $ 1,164 $ 192 $ 5,427
------------------------------------------------
Accumulated
Other
Comprehensive
Loss
----------------
BALANCE AT JULY 3, 1999 $ (506)
Change for the fiscal three
months ended October 2, 1999 -
----------------
BALANCE AT OCTOBER 2, 1999 $ (506)
----------------
See Notes to Consolidated Financial Statements.
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WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL THREE MONTHS ENDED OCTOBER 2, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Recent Statement of the Financial Accounting Standards Board
In June 1998, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by
requiring that an entity recognize those items as assets or liabilities
in the statement of financial position and measure them at fair value.
SFAS No. 133 was amended by SFAS No. 137 to make the provisions of SFAS
No. 133 effective for the fiscal years beginning after June 15, 2000.
The Company has not yet determined the impact of the implementation of
this standard on the financial statements.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to June 30. The
current year fiscal quarter ending October 2, 1999 contained 13 weeks. The
1999 fiscal year contained 53 weeks and the fiscal quarter ended October
3, 1998 contained 14 weeks.
2. LINES OF CREDIT:
The $4,000,000 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 $2,048,000)
and all non-governmental accounts receivable and inventory ($1,815,000).
At October 2,1999, borrowings on the line of credit were $1,310,000 with
$2,690,000 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 October 2, 1999. The
Company has received from the bank a waiver regarding this loan covenant
violation. The covenants are subject to review at the end of each fiscal
quarter.
3. RESTRUCTURING AND REALIGNMENT COSTS:
In February, 1999, the Board of Directors approved a restructuring plan to
consolidate and realign the Company's footwear manufacturing operations.
Under this plan, the Company consolidated substantially all footwear
manufacturing operations in Aguadilla, Puerto Rico, where the Company has
had operations since 1956.
The execution of this plan, which started in early May 1999, resulted in
the elimination of 77 employment positions at the Company's Waynesville,
North Carolina facility, and in the transfer of a significant amount of
Waynesville machinery and materials to Aguadilla. Approximately 80 new
personnel were added and trained in Aguadilla and the Aguadilla operations
have been moved to a larger facility which incorporates the operations
transferred from Waynesville.
Reconciliations of the Restructuring and Realignment Costs and accrual
activity during fiscal year 1999
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and quarter ending October 2, 1999 is as follows:
1999
Activity July 3,
Charged 1999
1999 Period 1999 1999 Total Against Accrued
Costs Accrual Expenses Accrual Balance
----------- ------- ---------- -------- -------
Severance 764,000 764,000 (645,000) 119,000
Employee Training Costs 104,000 104,000
Equipment Relocation and
Installation 119,000 119,000
Legal and Other 90,000 90,000
Total 313,000 764,000 1,077,000 (645,000) 119,000
October 2,
1999
Activity October
October 2, October 2, October 2, Charged 2, 1999
1999 Period 1999 1999 Total Against Accrued
Costs Accrual Expenses Accrual Balance
----------- ---------- ---------- -------- -------
Severance 32,000 32,000 (73,000) 78,000
Employee Training
Costs 170,000 170,000
Equipment Relocation
and Installation 87,000 87,000
Legal and Other 70,000 70,000
Total 327,000 32,000 359,000 (73,000) 78,000
After October 2, 1999, the Company will incur certain additional
Restructuring and Realignment Costs. These costs will primarily be related
to completion of employee training, and when combined with other
miscellaneous costs, are not expected to exceed $150,000. In addition,
after the Company's actuary has completed certain calculations to reflect
all terminated employees, some adjustment to previously recognized
severance costs may be necessary.
The Company has been informed by the government of Puerto Rico that it
will receive a government grant of up to $400,000 as reimbursement for
certain costs, as approved by the government, related to the increased
operations in Puerto Rico. These amounts will be recorded in the period
received.
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PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Comparing The Three Months Ended October 2, 1999 and October 3, 1998:
Loss before income taxes was $239,000 in the fiscal three months ended October
2, 1999 (the "current period") compared to a loss before income taxes of
$178,000 in the prior year three month period ended October 3, 1998 (the "prior
period").
The current period loss was caused by restructuring and realignment costs
totaling $359,000. These costs relate to a February, 1999 restructuring plan
under which the Company has consolidated substantially all footwear
manufacturing operations at its facility in Aguadilla, Puerto Rico. The
execution of this plan resulted in the elimination of 77 employment positions at
the Company's Waynesville, North Carolina facility, and in the transfer of a
significant amount of Waynesville machinery and materials to Aguadilla.
As detailed in Note 3 to the Consolidated Financial Statements, the
Restructuring and Realignment Costs charged against current period operations
are made up of:
o Restructuring costs of $32,000 to increase the amount previously
accrued for health care costs on terminated employees. A part of
the severance compensation for terminated Waynesville employees
was the continuation of health insurance for two months past
termination. The Company is self funded for its group health
insurance and actual health care costs for the last few months
have been greater than those used to originally estimate this
cost.
o Realignment costs of $327,000 made up of: new employee training
costs ($170,000); cost to move machinery, install machinery and
refurbish and prepare building ($87,000); and legal and other
costs ($70,000). The relocation of operations from its
Waynesville, North Carolina facility to its Aguadilla, Puerto
Rico facility is expected to have a favorable effect on the
effective income tax rate.
Revenues in the current period were $225,000 less than the prior period. The
primary reason for this decrease was a reduction in sales to licensees of boot
making materials and machinery. These types of sales can vary significantly from
period to period with the needs of customers.
An increase in pairs of Direct Molded Sole (DMS) combat boots sold to the U. S.
government resulted in a 9% increase in revenues from the sale of boots. For the
last several years, DMS boot shipments have been adversely affected by the
government's inventory reduction program, and the prior period revenues were
even lower due to an acceleration of that program. The Company believes this
small increase in DMS boot sales in the current period is the result of the
government having substantially completed its inventory reduction program.
The decrease in cost of sales and services was due to the reduced sales of boot
making materials and machinery and lower boot manufacturing costs in Aguadilla.
General and administrative expenses decreased because of lower administrative
personnel compensation. In addition, the prior period included certain legal
costs related to a federal grand jury investigation. This investigation was
subsequently terminated without any action being taken.
Forward Looking Information:
Wellco analyzes DMS combat boot monthly inventories, which are supplied by the
government, and certain
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other information. This information enables the Company to monitor the
government's progress in its inventory reduction program. We understand the
government's target inventory to be a total of 550,000 to 600,000 pairs,
compared to our computation of approximately 590,000 pairs available at October,
1999. These numbers strongly indicate that the government must soon start
ordering pairs of combat boots equaling consumption.
Wellco is presently shipping boots under the second option year of its DMS boot
contract which covers the period of April 16, 1999 to April 15, 2000. The
minimum total pairs the government is required to buy from Wellco during this
option year is 155,000 pairs at the current contract rate of 25% of total
government purchases to be supplied by Wellco. Based on boot consumption for the
last year, the annual purchase of combat boots from Wellco would be
approximately 250,000 pairs if the government purchases at a rate equaling
consumption.
The Company recognizes the need to consider whether its operations will be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company primarily uses packaged software running on
personal computers and file servers, and does not use mainframes. Packaged
software primarily consists of accounting, payroll, bar coding and inventory
control, employee time and attendance, and Microsoft Windows applications. All
of Wellco's packaged software has been updated to Year 2000 compliant versions.
The total cost of this updating was minimal.
A lack of timely Year 2000 compliance by Wellco's major customers, vendors and
suppliers could have a materially adverse affect on Wellco's results of
operations and financial condition, although such adverse effect should not be
long term or permanent. For example, orders received from the DSCP for boot
shipments are received electronically. After shipment, Wellco electronically
invoices boot shipments as well as receiving payment by bank wire transfer. A
lack of timely Year 2000 compliance by DSCP may significantly delay Wellco's
boot shipments. A lack of timely Year 2000 compliance with related computerized
systems, for example the ability to electronically receive invoicing from
Wellco, may significantly delay Wellco's receipt of cash from invoices. There
may be suppliers of materials, machine replacement parts, and other critical
items who may not be Year 2000 compliant. This may mean a delay in getting the
necessary materials and other items to maintain a continuous flow of production.
The Company has sent written requests to all major vendors and customers asking
confirmation as to their Year 2000 compliance status. Responses received to date
do not indicate a problem.
Only a few requests have not been responded to, and Wellco is currently
determining the need for any contingent action, including ordering excess raw
materials, related to these non-responders. Wellco believes that financing any
excess raw materials purchases will not have an adverse effect on its financial
position. Of course, the favorable responses received to date are only as
reliable as the responders. While Wellco feels the responses are reliable, there
can be no absolute assurance that they are.
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 effect of customers and vendors not being timely in Year 2000
compliance, 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 July 3, 1999. Actual results may differ materially from
management expectations.
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 end
and the last fiscal year the
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amount of cash and unused line of credit:
(in thousands)
October 2, 1999 July 3, 1999
--------------- ------------
Cash $56 $89
Unused Line of Credit 2,690 520
------ ----
Total $2,746 $609
====== ====
The increase in unused line of credit was caused by payments made since July 3,
1999 which reduced the amount borrowed.
The following table summarizes the major sources (uses) of cash for the three
months ended October 2, 1999:
(in thousands)
October 2, 1999
---------------
Net Loss Excluding Depreciation ($16)
Net Change in Accounts Receivable, Inventories,
Accounts Payable, Accrued Liabilities, and Accrued
Income Taxes 3,409
Other (316)
Net Cash Provided By Operations 3,077
Cash From Bank Line of Credit 395
Cash Used to Repay Lines of Credit (2,565)
Cash Used to Repay Bank Note Payable (37)
Cash Used to Purchase Plant and Equipment (903)
Net Decrease in Cash $(33)
In June, 1999 a contract modification was received which allowed the shipment of
a significant amount of finished boots which had been completed for a long time.
The receivable from this sale was collected in the quarter ended October 2,
1999. In addition, cash was received in the October 2, 1999 quarter from several
other large boot shipments in the quarter ended July 3, 1999. A significant
amount of this cash was used to pay down the bank line of credit, pay for costs
related to the consolidation of boot manufacturing operations in Puerto Rico,
and to purchase plant and equipment.
Related to the consolidation of boot manufacturing operations in Puerto Rico,
cash was used to purchase machinery, to make leasehold improvements and to pay
for machinery moving and employee training costs. In addition, cash was used to
purchase machinery which will enable the Company to expand its manufacturing
methods.
The bank line of credit, which provides for total borrowing of $4,000,000, will
expire and be subject to renewal on December 31, 1999. The amount outstanding
under the bank line of credit at October 2, 1999 was $1,310,000. The Company
expects to continue to rely on this bank line of credit.
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The additional cash required to complete the consolidation of boot manufacturing
operations in Puerto Rico is not expected to exceed $150,000.
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. N/A
Item 2. Changes in Securities. N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. N/A
Item 5. Other Information. N/A
Item 6. Exhibits and Reports on Form 8-K.
a). Exhibits: None
b). Reports on Form 8-K: None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Wellco Enterprises, Inc., Registrant
\s\ \s\
David Lutz, President and Treasurer Tammy Francis, Controller
November 16, 1999
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