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: SEPTEMBER 30, 1995
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 704-456-3545
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 .
884,806 shares of $1 par value common stock were outstanding on November 10,
1995.
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WELLCO ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1995
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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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND JULY 1, 1995
(in thousands)
ASSETS
<TABLE>
<CAPTION>
(unaudited)
SEPTEMBER 30, JULY 1,
1995 1995
------------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash ........................................ $ 2,346 $ 2,423
Marketable securities,current
(Note 1) ................................ 996 996
Receivables ................................. 3,615 3,267
Inventories-
Finished goods .......................... 1,074 1,723
Work in process ......................... 1,588 1,415
Raw materials ........................... 1,254 1,157
Total ................................... 3,916 4,295
Deferred taxes and prepaid expenses ......... 389 429
-------- --------
Total ....................................... 11,262 11,410
-------- --------
MARKETABLE SECURITIES,non-current
(Note 1) .................................... 4,251 3,787
INVESTMENT IN AFFILIATE (Note 2) ................. 5,407 5,529
MACHINERY LEASED TO LICENSEES
(less accumulated depreciation of
$1,421 and $1,408) .......................... 98 111
PROPERTY, PLANT AND EQUIPMENT:
Land ........................................ 107 107
Buildings ................................... 774 774
Machinery and equipment ..................... 2,338 2,226
Furniture and automobiles ................... 454 411
Leasehold Improvements ...................... 63 63
-------- --------
Total cost .................................. 3,736 3,581
Less accumulated depreciation and
amortization ............................. (2,620) (2,550)
-------- --------
Net ......................................... 1,116 1,031
-------- --------
INTANGIBLE ASSETS
Excess of cost over net assets of
subsidiary at acquisition ................ 228 228
Intangible pension asset .................... 642 642
-------- --------
Total ....................................... 870 870
TOTAL ............................................ $ 23,004 $ 22,738
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND JULY 1, 1995
(in thousands)
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
(unaudited)
SEPTEMBER 30, JULY 1,
1995 1995
------------- -------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowing from bank ............ $ 20 $ 20
Accounts payable .......................... 1,827 1,533
Accrued compensation ...................... 752 744
Accrued pension ........................... 144 286
Accrued income taxes ...................... 128 207
Other liabilities ......................... 186 388
-------- --------
Total ................................. 3,057 3,178
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ........................ 1,860 1,887
Deferred taxes ............................ 175 10
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value ............. 885 885
Additional paid-in capital ................ 1,409 1,409
Retained earnings ......................... 15,341 15,412
Pension liability adjustment .............. (525) (525)
Unrealized gain on marketable
securities ............................ 802 482
-------- --------
Total ................................. 17,912 17,663
TOTAL .......................................... $ 23,004 $ 22,738
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 30, 1995 AND OCTOBER 1, 1994
(in thousands except per share and number of shares)
<TABLE>
<CAPTION>
(unaudited)
SEPTEMBER 30, OCTOBER 1,
1995 1994
------------ ----------
<S> <C> <C>
REVENUES (Note 3) ................................ $ 4,378 $ 4,908
--------- ---------
COSTS AND EXPENSES:
Cost of sales and services .................. 3,959 4,174
General and administrative expenses ......... 464 513
--------- ---------
Total ....................................... 4,423 4,687
--------- ---------
DIVIDEND AND INTEREST INCOME ..................... 88 111
NET INVESTMENT INCOME (LOSS) ..................... 18 (22)
--------- ---------
TOTAL DIVIDEND, INTEREST & INVESTMENT
INCOME (LOSS) ............................... 106 89
INCOME BEFORE EQUITY IN LOSS
OF AFFILIATE ................................ 61 310
EQUITY IN LOSS OF AFFILIATE (Note 2) ............. (122)
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ................ (61) 310
PROVISION FOR INCOME TAXES ....................... 10 90
--------- ---------
NET INCOME (LOSS) ................................ $ (71) $ 220
========= =========
PER SHARE OF COMMON STOCK (based on
weighted average number of
shares outstanding) ......................... $ (0.08) $ 0.25
========= =========
Weighted average number of shares
outstanding ................................. 884,806 884,806
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 30, 1995 AND OCTOBER 1, 1994
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
SEPTEMBER 30, OCTOBER 1,
19 1994
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ............................. $ (71) $ 220
------- -------
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization .............. 83 85
Net investment income (loss) ............... (18) 22
Equity in loss of affiliate ................ 122
(Increase) decrease in-
Accounts receivable .................... (348) 664
Inventories ............................ 379 (156)
Other current assets ................... 40 (52)
Increase (decrease)in-
Accounts payable ....................... 294 60
Accrued liabilities .................... (336) (45)
Accrued income taxes ................... (79) 96
Pension obligation ..................... (27) 9
------- -------
Total adjustments ............................. 110 683
------- -------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES .......................... 39 903
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales (purchases) of current
marketable securities ...................... 0 504
Purchases of noncurrent
marketable securities ...................... 0 (982)
Sales of noncurrent
marketable securities ...................... 39 446
Purchases of equipment ........................ (155) (100)
------- -------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES ......................... (116) (132)
------- -------
NET INCREASE (DECREASE) IN CASH .................... (77) 771
CASH AT BEGINNING OF PERIOD ........................ 2,423 2,528
------- -------
CASH AT END OF PERIOD .............................. $ 2,346 $ 3,299
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ................................... $ 0 $ 0
Income taxes ............................... 0 7
Noncash increase in marketable
securities to fair value ................... 1,215 469
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 30, 1995
(in thousands except number of shares)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
Par Paid-In Retained
Shares Value Capital Earnings
------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT JULY 1, 1995 ............................... 884,806 $ 885 $ 1,409 $ 15,412
Net loss for the
fiscal three months
ended September 30, 1995
(71)
------- -------- -------- ---------
BALANCE AT SEPTEMBER 30, 1995 ......................... 884,806 $ 885 $ 1,409 $ 15,341
======= ======== ======== ========
Pension Unrealized
Liability Investment
Adjustment Gain
---------------------------
<S> <C> <C>
BALANCE AT JULY 1, 1995 ......................... $(525) $ 482
Change for the three
months ended
September 30, 1995 ......................... 320
----- -----
BALANCE AT SEPTEMBER 30, 1995 ................... $(525) $ 802
====== =====
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL THREE MONTHS ENDED SEPTEMBER 30, 1995
1. MARKETABLE SECURITIES:
Marketable Securities, current at September 30, 1995 represents a U. S.
government agency note, purchased at a discount to its face value in
September, 1995 and having a maturity date in October, 1995. This security
is classified as held-to-maturity and is valued in the Consolidated
Balance Sheets at its cost, which is not significantly less than amortized
cost. The difference between cost and the amount realized at maturity will
be recognized as Interest Income in the period of the note's maturity.
Marketable Securities, non-current at September 30, 1995 consist of
corporate equity securities which are classified as available-for-sale.
These securities are valued in the Consolidated Balance Sheets at their
fair value (usually market value). The difference between the fair value
and adjusted cost of these securities, net of the effect of income taxes,
is reflected in Stockholders' Equity.
Adjusted cost, gross unrealized gains and losses and the fair value of all
Marketable Securities at September 30, 1995 is:
(in thousands)
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Adjusted Cost Gain Loss Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Equity Securities ............................ $3,036 $1,251 $ 36 $4,251
U. S. Government Agency Note ........................... 996 996
------ ------ ------ ------
Total .................................................. $4,032 $1,251 $ 36 $5,247
====== ====== ====== ======
</TABLE>
Proceeds from the sale of a Marketable Security classified as
available-for-sale in the fiscal three months ended September 30, 1995 was
$39,000, resulting in a gross realized gain of $18,000. Realized gains and
losses are determined on a specific identification basis.
2. INVESTMENT IN AFFILIATE:
On December 30, 1994 Wellco purchased 400,000 shares of the common stock
of Alba Waldensian, Inc. (Alba) which represents 21.5% of total Alba
common shares. The total market value of these shares, based on the
closing price of Alba common stock on the American Stock Exchange on
September 29, 1995, was $3,600,000.
The investment in Alba is accounted for using the equity method. Operating
results for the fiscal quarter ended September 30, 1995 includes as Equity
in Loss of Affiliate a charge of $122,000 representing Wellco's equity
($155,000) in Alba's loss for this period less the amortization ($33,000)
of the excess of Wellco's equity in the underlying net assets of Alba over
the basis of Wellco's investment.
Alba is a manufacturer of both men's and women's apparel products as well
as medical specialty products. Other than this investment, there are no
business relationships or transactions between Wellco and Alba.
-8-
<PAGE>
Summarized financial information (unaudited) for Alba is as follows:
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
Financial Position at October 1, 1995:
Current Assets ............................................... $ 28,915
Non-Current Assets ........................................... 23,932
--------
Total Assets ................................................. 52,847
Current Liabilities .......................................... 9,491
Non-Current Liabilities ...................................... 14,887
Stockholders' Equity ......................................... 28,469
--------
Total Liabilities and Stockholders' Equity ................... $ 52,847
Operating Results for the Fiscal Nine
Months Ended October 1, 1995:
Net Revenues ................................................. $ 47,399
(Loss) Before Income Taxes .................................. (1,031)
Net (Loss) ................................................... ($ 639)
Operating Results for the Fiscal Three
Months Ended October 1, 1995:
Net Revenues ................................................. $ 16,769
(Loss) Before Income Taxes .................................. (1,175)
Net (Loss) ................................................... ($ 729)
</TABLE>
3. GOVERNMENT BOOT CONTRACT REVENUES:
Revenues in the three month period ended September 30, 1995 include
$112,000 representing the estimated amount of a contract change order that
has not as yet been negotiated with the government. Any difference between
this estimate and the actual amount negotiated will be recorded in the
period in which negotiations are completed.
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<PAGE>
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 September 30, 1995 and October 1, 1994:
Loss before income taxes in the current period was $61,000 compared to an income
of $310,000 in the prior one. The current period loss was caused by the
recording of $122,000 as equity in the loss of an affiliate (Alba Waldensian,
Inc., see Note 2 to the Consolidated Financial Statements). As reported in its
Form 10-Q for the fiscal quarter ended October 1, 1995, Alba recorded an
additional $1,200,000 write-down of inventory in the quarter. The additional
write-down was necessary because of softness in Alba's Consumer Products sales
and because product prices were depressed by other manufacturers closing out
excess inventory throughout the market place. This resulted in Alba having a
pretax loss in the quarter of $1,175,000.
Income before equity in the loss of affiliate in the current period was $61,000,
which compares to $310,000 in the prior period. The following events are the
major reasons for this decrease:
1. The prior period included the shipment of combat boot manufacturing
materials and machinery to a factory in El Salvador, which did not occur in
the current period. From time to time, Wellco supplies materials, machinery
and technical assistance to combat boot manufacturing factories in foreign
countries. The prior period also includes substantial machinery sales to
one new customer and to one long-time customer. These sales can vary
significantly from period to period with the needs of this group of
customers.
2. In the prior period, the U. S. government issued certain contract price
increase adjustments, primarily for the increased cost of leather used in
manufacturing combat boots, which were $54,000 more than estimates recorded
in the 1994 fiscal year. The favorable effect of these adjustments was
included in the three months ended October 1, 1994.
Pairs of combat boots shipped to the U. S. government were unchanged from the
prior period. A significant shipment of combat boots to a foreign customer
caused total pairs of combat boots sold in the current period to increase by
approximately 8%.
Health insurance costs in the current period were $16,000 higher than the prior
one. The Company is self funded for its employees' health insurance and this
cost varies from period to period, depending on the actual amount of health
costs incurred by employees. Other insurance costs increased $9,000. General and
administrative costs decreased $49,000. This was primarily caused by a lower
provision for employee bonuses, which substantially vary with income, and lower
travel and commission expense.
Forward Looking Information:
On August 2, 1995, the government exercised its second and last option under the
Company's current combat boot contract for a minimum 277,000 pairs. On September
26, 1995, the Company agreed to a government request for a contract modification
which reduced this minimum pairs to 30,000. The Company understands that this
request was caused by the government's over-obligation of funds for its fiscal
year ending September 30, 1995, and they were correcting this by reducing their
obligation on items for which delivery orders had not yet been placed. The
Company agreed to this modification because the government could have otherwise
exercised its right to unilaterally ternimate the contract for the convenience
of the government, and because the government agreed that the Company would be
reimbursed for any lost contribution to overhead, general and administrative
costs and profit caused by any reduction in the original
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<PAGE>
277,000 pairs and/or any delay in production.
The government has indicated that their intent is to purchase all of the
original 277,000 pairs, but they will only be able to increase the 30,000
commitment after they get funding appropriations. On October 27, 1995 the
government issued delivery orders raising the 30,000 pairs to 70,000 pairs. This
has meant a return to full boot manufacturing operations, after a suspension in
October of certain production operations lasting approximately two weeks. The
Company believes that the government will purchase all of the original 277,000
pairs, thereby avoiding their reimbursment to Wellco of certain lost costs and
profit.
Since 1992, the government has had a policy of reducing its inventory of combat
boots by buying fewer pairs than were consumed. The government has indicated
that this policy will continue through the next three-year contract which is
expected to be awarded in the middle part of calendar year 1996, and that by the
end of that contract in 1999, the inventory reduction will be completed.
In late August, 1995, the Company was awarded a $1,184,000 development boot
contract from the U. S. government. The objective of this contract is to develop
changes to the combat boot that will result in fewer lower extremity disorders.
Work has started on this contract and could extend over three years.
Wellco, along with two other manufacturers of military clothing, have jointly
bid on a trial contract to procure, warehouse and distribute all of the standard
clothing items to Air Force recruits at Lackland Air Force Base in Texas for one
year, with two options for one year each. The government has been evaluating
bids for many months, and the expected award date has been extended many times,
with the most recent one being November 17, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Wellco uses cash from operations to supply most of its liquidity needs. A bank
line of credit is maintained for supplying any unforeseen cash needs.
The following table summarizes at the end of the most recent fiscal three months
and the last fiscal year the availability of cash from the Company's most liquid
assets and from its existing borrowing capacity:
(in thousands)
<TABLE>
<CAPTION>
Fiscal Three Months Fiscal Year
September 30, 1995 July 1, 1995
------------------- ------------
<S> <C> <C>
Cash ............................................. $2,346 $2,423
Marketable Securities, Current ................... 996 996
Unused Line of Credit ............................ 1,480 1,480
------ ------
Total ............................................ $4,822 $4,899
====== ======
</TABLE>
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<PAGE>
The following table summarizes the major sources (uses) of cash for the three
months ended September 30, 1995:
(in thousands)
<TABLE>
<CAPTION>
September 30,
1995
-------------
<S> <C>
Net Income Plus Depreciation, Less Net Investment Income
and Equity in Loss of Affiliate .................................... $ 116
Net Change in Accounts Receivable, Inventory, Accounts
Payable and Accrued Liabilities .................................... (90)
Other .............................................................. 13
Net Cash Provided By Operations ................................... 39
Net Cash From Sale of Marketable Securities ........................ 39
Cash Used to Purchase Equipment .................................... (155)
Net Decrease in Cash ............................................... $ (77)
</TABLE>
Cash resources are adequate to meet presently known operating activity needs.
The Company has no material commitments for capital equipment. The Company does
not know of any demands, commitments, uncertainties, or trends that will result
in or that are reasonably likely to result in its liquidity increasing or
decreasing in any material way.
The bank line of credit, which provides for total borrowings of $1,500,000, will
expire and be subject to renewal on December 30, 1995.
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<PAGE>
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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<PAGE>
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\
David Lutz, Secretary/Treasurer and
Principal Financial Officer
November 13, 1995
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS FOR THE 1ST QUARTER 10-Q, PERIOD ENDED
SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000105532
<NAME> WELLCO ENTERPRISES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U. S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-START> JUL-02-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 2,346
<SECURITIES> 996
<RECEIVABLES> 3,652
<ALLOWANCES> 37
<INVENTORY> 3,916
<CURRENT-ASSETS> 11,262
<PP&E> 5,255
<DEPRECIATION> 4,041
<TOTAL-ASSETS> 23,004
<CURRENT-LIABILITIES> 3,057
<BONDS> 0
<COMMON> 885
0
0
<OTHER-SE> 17,027
<TOTAL-LIABILITY-AND-EQUITY> 23,004
<SALES> 4,378
<TOTAL-REVENUES> 4,378
<CGS> 3,959
<TOTAL-COSTS> 3,959
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 61
<INCOME-TAX> 10
<INCOME-CONTINUING> (71)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (71)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
<PAGE>
</TABLE>
