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: DECEMBER 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 .
374,382 shares of $1 par value common stock were outstanding on March 1, 1996.
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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 DECEMBER 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, except those related to the
repurchase of common stock as discussed in Note 3 to the Consolidated Financial
Statements, are of a normal recurring nature.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1995 AND JULY 1, 1995
(in thousands)
ASSETS
<TABLE>
<CAPTION>
(unaudited)
DECEMBER 30, JULY 1,
1995 1995
------------ -------
<S> <C> <C>
CURRENT ASSETS:
Cash .......................................... $ 1,433 $ 2,423
Marketable securities,current
(Note 1) .................................. 3,282 996
Receivables ................................... 5,131 3,267
Inventories-
Finished goods ............................ 1,255 1,723
Work in process ........................... 1,279 1,415
Raw materials ............................. 1,214 1,157
-------- --------
Total ..................................... 3,748 4,295
Deferred taxes and prepaid expenses ........... 242 429
-------- --------
Total ......................................... 13,836 11,410
-------- --------
MARKETABLE SECURITIES, non-current
(Note 1) ...................................... 3,787
INVESTMENT IN AFFILIATE (Note 2) ................... 5,529
MACHINERY LEASED TO LICENSEES
(less accumulated depreciation of
$1,434 and $1,408) ............................ 85 111
PROPERTY, PLANT AND EQUIPMENT:
Land .......................................... 107 107
Buildings ..................................... 774 774
Machinery and equipment ....................... 2,376 2,226
Furniture and automobiles ..................... 463 411
Leasehold Improvements ........................ 63 63
-------- --------
Total cost .................................... 3,783 3,581
Less accumulated depreciation and
amortization ............................... (2,690) (2,550)
-------- --------
Net ........................................... 1,093 1,031
-------- --------
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition .................. 228 228
Intangible pension asset ...................... 642 642
-------- --------
Total ......................................... 870 870
DEFERRED TAXES ..................................... 365
-------- --------
TOTAL .............................................. $ 16,249 $ 22,738
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1995 AND JULY 1, 1995
(in thousands)
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
(unaudited)
DECEMBER 30, JULY 1,
1995 1995
---------- -------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 4) ....... $ 4,520 $ 20
Accounts payable .............................. 1,871 1,533
Accrued compensation .......................... 564 744
Accrued pension ............................... 116 286
Accrued income taxes .......................... 69 207
Cash dividend declared ........................ 47 0
Other liabilities ............................. 185 388
-------- --------
Total ..................................... 7,372 3,178
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ............................ 1,860 1,887
Deferred taxes ................................ 0 10
Note payable (Note 5) ......................... 492 0
CONTINGENCY (Note 6)
STOCKHOLDERS' EQUITY (Note 3):
Common stock, $1.00 par value ................. 374 885
Additional paid-in capital .................... 598 1,409
Retained earnings ............................. 5,807 15,412
Pension liability adjustment .................. (525) (525)
Unrealized gain on marketable
securities ................................ 271 482
-------- --------
Total ..................................... 6,525 17,663
-------- --------
TOTAL .............................................. $ 16,249 $ 22,738
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 30, 1995 AND DECEMBER 31, 1994
(in thousands except per share and number of shares)
<TABLE>
<CAPTION>
(unaudited)
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
REVENUES (Note 6) ................................ $ 9,034 $ 9,953
--------- ---------
COSTS AND EXPENSES:
Cost of sales and services .................. 8,113 8,221
General and administrative expenses ......... 1,006 1,076
--------- ---------
Total ....................................... 9,119 9,297
--------- ---------
DIVIDEND AND INTEREST INCOME ..................... 171 225
NET INVESTMENT INCOME (LOSS) (Note 1) ............ 702 (1)
--------- ---------
INCOME BEFORE LOSS IN AFFILIATE
AND STOCK REPURCHASE CHARGE ................. 788 880
LOSS IN AFFILIATE (Note 2) ....................... (601)
STOCK REPURCHASE CHARGE (Note 3) ................. (110)
--------- ---------
INCOME BEFORE INCOME TAXES ....................... 77 880
PROVISION FOR INCOME TAXES ....................... 30 280
--------- ---------
NET INCOME ....................................... 47 600
--------- ---------
PER SHARE OF COMMON STOCK (based on
weighted average number of
shares outstanding) ......................... $ 0.05 $ 0.68
--------- ---------
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 OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
DECEMBER 30, 1995 AND DECEMBER 31, 1994
(in thousands except per share and number of shares)
<TABLE>
<CAPTION>
(unaudited)
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
REVENUES ........................................ $ 4,656 $ 5,045
--------- ---------
COSTS AND EXPENSES:
Cost of sales and services ................. 4,154 4,047
General and administrative expe ............ 542 563
--------- ---------
Total ...................................... 4,696 4,610
--------- ---------
DIVIDEND AND INTEREST INCOME .................... 83 114
NET INVESTMENT INCOME ........................... 684 21
--------- ---------
INCOME BEFORE LOSS IN AFFILIATE
AND STOCK REPURCHASE CHARGE ................ 727 570
LOSS IN AFFILIATE ............................... (479)
STOCK REPURCHASE CHARGE ......................... (110)
--------- ---------
INCOME BEFORE INCOME TAXES ...................... 138 570
PROVISION FOR INCOME TAXES ...................... 20 190
--------- ---------
NET INCOME ...................................... $ 118 $ 380
========= =========
PER SHARE OF COMMON STOCK (based on
weighted average number of
shares outstanding) ........................ $ 0.13 $ 0.43
--------- ---------
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 SIX MONTHS ENDED
DECEMBER 30, 1995 AND DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ...................................... $ 47 $ 600
------- -------
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization ............... 166 172
Net investment (income) loss ................ (702) 1
Loss in Affiliate ........................... 601
Stock repurchase charge ..................... 110
(Increase) decrease in-
Accounts receivable ..................... (1,014) 193
Inventories ............................. 547 596
Other current assets .................... 187 (140)
Increase (decrease)in-
Accounts payable ........................ 338 56
Accrued liabilities ..................... (553) (260)
Accrued income taxes .................... (138) 50
Pension obligation ...................... (27) 17
Other ................................... (266)
------- -------
Total adjustments ............................... (751) 685
------- -------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES ............................ (704) 1,285
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in affiliate ......................... (4,423)
Net sales (purchases) of current
marketable securities ....................... 996 1,897
Purchases of noncurrent
marketable securities ....................... 0 (2,342)
Sales of noncurrent
marketable securities ....................... 37 937
Purchases of equipment .......................... (202) (144)
------- -------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES ........................... 831 (4,075)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan from bank .................................. 4,500 2,050
Purchase of common stock ........................ (5,617)
------- -------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES ............................ (1,117) 2,050
------- -------
</TABLE>
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 30, 1995 AND DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
DECEMBER 30, DECEMBER 31,
1995 1994
----------- ------------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH ...................... (990) (740)
CASH AT BEGINNING OF PERIOD .......................... 2,423 2,528
------- -------
CASH AT END OF PERIOD ................................ $ 1,433 $ 1,788
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest .................................... $ 18 $ 24
Income taxes ................................ 131 243
Noncash increase in marketable
securities to fair value .................... 410 507
Noncash exchange of investment in
Affiliate for stock repurchase .............. 4,928
Note issued as part of stock repurchase ......... 492
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 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 $15,412
Stock repurchased (510,424) (511) (811) (9,605)
Net income for the
fiscal six months
ended December 30, 1995 47
Cash dividends declared
($.125 per share) (47)
--------------------------------------------
BALANCE AT DECEMBER 30, 1995 374,382 $ 374 $ 598 $5,807
============================================
Pension Unrealized
Liability Investment
Adjustment Gain
---------------------------
<S> <C> <C>
BALANCE AT JULY 1, 1995 $(525) $ 482
Change for the six
months ended
December 30, 1995 (211)
----------------------------
BALANCE AT DECEMBER 30, 1995 $(525) 271
===========================
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL SIX MONTHS ENDED DECEMBER 30, 1995
1. MARKETABLE SECURITIES:
Marketable Securities, current, at December 30, 1995 represent corporate
equity securities. These securities are classified as available-for-sale
and 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. Marketable Securities, current, at July 1, 1995
represents a U. S. government agency note, classified as held-to-maturity
and valued in the Consolidated Balance Sheets at its cost, which is not
significantly less than amortized cost. Marketable Securities,
non-current, at July 1, 1995 consist of corporate equity securities.
Adjusted cost, gross unrealized gains and losses and the fair value of all
Marketable Securities at December 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 $2,872 $443 $33 $3,282
</TABLE>
Proceeds from the sale of a Marketable Security, classified as
available-for-sale, in the fiscal six months ended December 30, 1995 was
$37,000. One security was sold on December 29, 1995, and the $850,000
proceeds from its sale is included in accounts receivable. These sales
resulted in a gross realized gain of $702,000. Realized gains and losses
are determined on a specific identification basis.
All Marketable Securities, current, at December 30, 1995 were sold in
January and February, 1996 and the cash received was used to repay a bank
loan incurred to repurchase 510,424 shares of the common stock of Wellco
(see Note 3). The gain from these sales was $472,000, which will be
recognized in the third quarter of the 1996 fiscal year.
2. INVESTMENT IN AFFILIATE:
On December 30, 1994 Wellco purchased from Coronet Insurance Company
(Coronet) for cash 400,000 shares of the common stock of Alba Waldensian,
Inc. (Alba) which represented 21.5% of total Alba common shares. Because
Coronet owned more than 50% of Wellco's total outstanding common stock,
Wellco recorded as its carrying value of this investment Coronet's basis
in these Alba shares. The excess of that basis over Wellco's cost
increased Additional Paid-In Capital by $650,000, net of the effect of
income taxes. This investment has been accounted for on the equity method.
Operating results for the fiscal six months ended December 30, 1995
includes as Loss in Affiliate a charge of $601,000, representing Wellco's
$305,000 equity in Alba's loss for this period and a $296,000 reduction of
this investment's carring value to fair value . The charge for the fiscal
three months ended December 30, 1995 is $479,000, of which $183,000 is the
equity in Alba's quarterly loss and $296,000 is the fair value adjustment.
On December 29, 1995, these shares were used as part of the consideration
paid for the repurchase of 510,424 shares of the common stock of Wellco
(See Note 3).
Other than this investment, there are no business relationships or
transactions between Wellco and Alba.
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<PAGE>
3. REPURCHASE OF COMMON STOCK:
On December 29, 1995 Wellco repurchased from Coronet Insurance Company
(Coronet) 510,424 shares of Wellco's common stock, which represents 57.69%
of total shares outstanding at that time. Cash of $5,460,000 and the
400,000 shares of Alba-Waldensian, Inc. (Alba) common stock were paid for
these Wellco shares. In addition, for the six years beginning with the
1997 fiscal year which starts June 30, 1996, certain additional payments,
not to exceed $1,531,000, will be made contingent upon cumulative net
income exceeding certain defined amounts. After this repurchase there are
374,382 common shares outstanding. Under North Carolina law the shares
repurchased constitute authorized but unissued shares.
After this repurchase, Coronet owns 25,000 shares of Wellco which
represents approximetely 7% of the remaining shares outstanding. The
Repurchase Agreement provides that for a period of ten years after
December 29, 1995 Coronet will limit its ownership of Wellco common stock
to not more than 20% of total shares outstanding. The Consolidated
Statements of Operations for the three and six months ended December 30,
1995 include as Stock Repurchase Charge $110,000 representing the value
assigned to this limitation.
This repurchase was recorded at the cash paid, the fair value of the Alba
shares, the present value of the additional amount projected to be paid
during the six year period and the amount of investment banker, legal,
accounting and other costs incurred related to this share repurchase, a
total of $10,927,000. The par value of the the common stock repurchased
($511,000) was charged against Common Stock. The excess of total amount
paid over the par value of Wellco's common stock repurchased was charged
to Additional Paid-In Capital ($811,000) and Retained Earnings
($9,605,000). The present value of projected additional payments
($492,000) to be made in the six year period is shown in the Consolidated
Balance Sheets as Note Payable.
4. SHORT-TERM BORROWING FROM BANK:
On December 29, 1995, $4,500,000 was borrowed from a bank and used to
provide part of the cash paid for the stock repurchase. In January and
February, 1996, all Wellco's marketable securities were sold and the bank
loan repaid.
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<PAGE>
5. NOTE PAYABLE:
This represents the present value of the expected future payments to be
made under the stock repurchase referred to in Note 3. The discount rate
used was 10%, and the expected payment schedule for each of the six fiscal
years is:
<TABLE>
<CAPTION>
Present Value of
Fiscal Year Expected Payment
<S> <C>
1997 $93,000
1998 -0-
1999 -0-
2000 43,000
2001 186,000
2002 170,000
Total $492,000
</TABLE>
Actual payments under the note will only be made for amounts by which 60%
of each year's net income exceeds certain defined amounts, calculated on a
cumulative basis. The note does not provide for the payment of interest
and does not require a minimum yearly payment. Total payments under the
note cannot exceed $1,531,000 and all obligations under the note terminate
after the 2002 fiscal year.
Adjustments will be made to the amount recorded based on actual amounts
paid and if future events significantly change estimated future payments.
6. GOVERNMENT BOOT CONTRACT REVENUES:
Revenues in the six month period ended December 30, 1995 include $552,000
representing the estimated amount of contract change orders that have not
as yet been negotiated with the government. Any difference between the
estimates and the actual amounts 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 Six Months Ended December 30, 1995 and December 31, 1994:
Income before income taxes in the current period was $77,000 compared to
$880,000 in the prior one. Current period income was reduced by a $601,000
charge for Loss in Affiliate, representing Wellco's $305,000 equity in the
six-month loss of Alba-Waldensian, Inc. (Alba), and the $296,000 write down to
fair value of that investment. Wellco has owned 400,000 common shares of Alba
(21.5% of total shares) since December 30, 1994. Wellco's investment in Alba was
exchanged on December 29, 1995, as part of the purchase price, for Wellco's
repurchase of 510,424 shares of its common stock. Income was also reduced by a
Stock Repurchase Charge of $110,000, which is the portion of the stock
repurchase price allocated to an agreement limiting the selling shareholders'
ownership of total Wellco shares for a period of ten years (see Note 3 to the
Consolidated Financial Statements).
Income before income taxes, the Loss in Affiliate and the Stock Repurchase
Charge was $788,000, which compares to income of $880,000 in the prior period.
The total of interest, dividend and investment income in the current period is
$873,000 compared to $224,000 in the prior period, primarily because the current
period includes the sale of one marketable security at an amount significantly
greater that its carrying value. Before Loss in Affiliate, Stock Repurchase
Charge and interest, dividend and investment income, the Company had a pretax
loss of $85,000 in the current period compared to income of $656,000 in the
prior period. The major reasons for this decrease are:
1. Pairs of combat boots sold to the U. S. government decreased approximately
13% in the current period. Prior to November, 1994, Wellco was shipping
combat boots under the delivery schedule of the base period of its current
contract . This required the delivery of approximately 277,000 pairs in a
twelve month period. In November, 1994 Wellco started shipping against the
delivery schedule of the first option of this contract. This delivery
schedule called for delivery of another 277,000 pairs over an extended 16
month period. Current period combat boot sales to the U. S. government
fully reflect this extended delivery period whereas only part of this
extended delivery period is reflected in the prior period. Although sales
of boots to customers other than the U. S. government increased in the
current period, lower margins on these sales did not offset the effect of
lower U. S. government sales. This market is dominated by low cost foreign
manufacturers and price, not quality, is frequently the buyers' primary
concern.
2. Shipments of combat boot manufacturing materials and machinery to foreign
customers decreased in the current period. The prior period also includes
significant machinery sales to one new customer and to one long-time
customer, which did not occur in the current period. These sales can vary
significantly from period to period with the needs of this group of
customers. Revenues from technical assistance fees and equipment rentals
from licensees, which vary with their shipments, decreased because
shipments of the Company's U. S. combat boot manufacturing licensees were
also affected the government's longer delivery schedules.
3. 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, whose actual amounts were greater than
previously recorded estimates. This increased pretax profits $54,000 in the
prior period.
While these items resulted in a total revenue decrease of $919,000, the major
categories of fixed and
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<PAGE>
semi- variable costs increased by a total $29,000. Several expenses in this
category went up by small amounts (health and workers' compensation insurance,
utilities, pension) and several went down by small amounts (repairs and
maintenance, manufacturing supplies, travel). The overall increase had a
negative effect on operating results.
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. At that
time, the government indicated that it was their intent to purchase all of the
original 277,000 pairs. The Company agreed to this modification because the
government could have otherwise exercised its right to unilaterally terminate
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 277,000 pairs and/or any delay in production. The government's
delivery orders issued to date against this option are on schedule for their
purchasing the full 277,000 pairs.
Because of limitations imposed by the current contract, deliveries under this
second option will be over a period of twelve months, and Wellco made the first
delivery in January, 1996. Deliveries under the first option, which were
completed in December, 1995, were for the same 277,000 pairs and were over a
period of sixteen months. The second option's shorter delivery period will
increase sales of combat boots to the U.
S. government through December 1996.
Since 1992, the government has had a policy of reducing its inventory of combat
boots by buying fewer pairs than were consumed. One result of this policy was
the sixteen month delivery schedule under the first option of the current
contract. The government has indicated that this policy will continue through
the next three-year contract. This contract is expected to be awarded in August,
1996 with first deliveries in January, 1997, and by the end of that contract in
1999 the inventory reduction should be accomplished. Wellco understands that the
total pairs to be purchased under the new contract will be less than those
purchased under the current one. Wellco will bid on this contract. As with any
bid, there is no assurance that Wellco will be awarded a contract, or that
contract prices will offset the effect on operating results of the reduced
number of pairs.
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.
This work is divided into three phases and will be completed in about two years.
Development, testing and delivery of prototype boots under the first phase of
this contract was completed in late February, 1996, and operating results for
the third fiscal quarter of 1996 will reflect the completion of the first phase
of this work.
As discussed below in the section on liquidity and capital resources, Wellco has
sold all of its marketable securities to provide the cash portion of the total
price paid for the repurchase of 510,424 share of its common stock. The third
fiscal quarter ending March 30, 1996 will include investment income of $472,000
from the sale of these securities. The sale of these securities will have a
negative effect on future periods net income to the extent that interest,
dividends and investment income would have been realized from these securities.
The 400,000 shares of Alba-Waldensian, Inc. common stock owned by Wellco was
exchanged as part of the total price to repurchase these Wellco shares . Future
periods Consolidated Statements of Operations will not include any equity in the
income or loss of Alba.
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<PAGE>
Comparing The Three Months Ended December 30, 1995 and December 31, 1994:
Income before income taxes in the current period was $138,000 compared to
$570,000 in the prior one. Current period income was reduced by a $479,000
charge for Loss in Affiliate, representing Wellco's $183,000 equity in the
three-month loss of Alba-Waldensian, Inc. (Alba), and the $296,000 write down to
fair value of that investment. Income was also reduced by the $110,000 Stock
Repurchase Charge.
Income before income taxes, the Loss in Affiliate and the Stock Repurchase
Charge was $727,000, which compares to income of $570,000 in the prior period.
The total of interest, dividend and investment income in the current period is
$767,000 compared to $135,000 in the prior period, primarily because the current
period includes the sale of one marketable security at an amount significantly
greater that its carrying value. Before Loss in Affiliate, Stock Repurchase
Charge and interest, dividend and investment income, the Company had pretax loss
of $40,000 in the current period compared to income of $435,000 in the prior
period. The major reasons for this decrease are:
1. Pairs of combat boots sold to the U. S. government decreased approximately
22% in the current period for the reasons stated in the six month
comparison. Sales of boots to customers other than the U. S. government
increased in the current period, but lower margins on these sales did not
offset the effect of lower U. S. government sales.
2. The prior period includes significant machinery sales to one new customer
and to one long-time customer, which did not occur in the current period.
The negative effect of these lower revenues was partially offset by an
increase in the sales of materials to a foreign customer. Revenues from
technical assistance fees and equipment rentals from licensees, which vary
with their shipments, decreased because the Company's U. S. Combat boot
manufacturing licensees were also affected the government's longer delivery
schedules.
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 six months
and the last fiscal year the availability of cash from the Company's most liquid
assets and from its existing borrowing sources:
(in thousands)
<TABLE>
<CAPTION>
Fiscal Six Months, Fiscal Year
December 30, 199 July 1, 1995
------------------ ------------
<S> <C> <C>
Cash ............................................. $1,433 $2,423
Marketable Securities, Current ................... 3,282 996
Unused Line of Credit ............................ 1,480 1,480
Total ............................................ $6,195 $4,899
</TABLE>
The increase in the above measurement of liquid assets at December 30, 1995 was
caused by the reclassification of non-current marketable securities to current
because of their sale subsequent to December 30. On December 29, 1995 the
Company repurchased 510,424 shares of its outstanding common stock for a price
consisting partially of a $5,460,000 cash payment. On December 29, Wellco
borrowed $4,500,000 from a bank which, along with $960,000 of cash from the
maturity of a U. S. Government Agency note, was
-15-
<PAGE>
used to make this payment. On December 29, Wellco also sold one marketable
security and since then has sold all of its remaining marketable securities,
using the sale proceeds, $4,194,000 and $306,000 of cash to completely repay the
$4,500,000 bank loan. So, the cash portion of the stock repurchase price was
provided by the sale and maturity of marketable securities totaling $5,154,000
and from $306,000 of existing cash. If the above table was adjusted for this and
the bank borrowing repayment, it would show cash of approximately $1,127,000 and
$1,480,000 of unused line of credit.
The following table summarizes the major sources (uses) of cash for the six
months ended December 30, 1995:
(in thousands)
<TABLE>
<CAPTION>
December 30,
1995
------------
<S> <C>
Net Income Plus Depreciation, Less Net Investment Income,
Loss in Affiliate and Stock Repurchase Charge .................... $ 222
Net Change in Accounts Receivable, Inventory,
Accounts Payable and Accrued Liabilities ......................... (820)
Other ............................................................ (106)
Net Cash Used By Operations ..................................... (704)
Cash from Bank Loan Used to Repurchase Stock ..................... 4,500
Cash Paid to Repurchase Stock and Related Expenses ............... (5,617)
Net Cash From Sale of Marketable Securities ...................... 1,033
Cash Used to Purchase Equipment .................................. (202)
Net Decrease in Cash ............................................. $ (990)
</TABLE>
The most significant, potentially negative effect on liquidity of the stock
repurchase was the sale of marketable securities, to the extent that these
securities, being marketable, could have been sold to meet other liquidity and
capital needs. Liquidity will also be negatively affected to the extent these
securities provided cash from interest and dividends. Because of this, the
Company may, from time to time, use the bank line of credit more frequently than
in the past, but does not anticipate that it will need to borrow significant
amounts for long periods of time.
The Company believes that its cash resources are adequate to meet presently
known operating activity needs. The Company has no material commitments for
capital equipment. Note 5 to the Consolidated Financial Statements provides
information about a commitment to make additional cash payments from the stock
repurchase, contingent upon net incomes for the six fiscal years 1997 through
2002. The Company does not know of any other 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, 1996.
-16-
<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:
The 1995 Annual Stockholders Meting of Wellco Enterprises, Inc.
Was held on November 14, 1995. The only matter voted on at that
meeting was the election of directors. The results of voting
were:
Shares Withheld
Nominee for Director Shares Voted For From
William M. Cousins, Jr. 848,409 3,200
Clyde Wm. Engle 848,409 3,200
J. Aaron Prevost 848,409 3,200
On December 29, 1995 Director Engle, and Directors Lee N. Mortenson and James M.
Fawcett, Jr. resigned. On January 12, 1996 David Lutz, Secretary/Treasurer of
Wellco, James T. Emerson and Fred Webb, Jr. were elected by unanimous written
consent of the Board of Directors to serve these directorships until the 1996
Annual Stockholders Meeting of Wellco to be held in November, 1996.
Item 5. Other Information. N/A
Item 6. Exhibits and Reports on Form 8-K.
a). Exhibits: None
b). Reports on Form 8-K:
On January 16, 1996 a Form 8-K dated December 29, 1995
was filed reporting a Change in Control of Registrant
(Item 1 of Form 8-K) and the Disposition of Assets (Item
2 for Form 8-K), all related to the December 29, 1995
stock repurhcase. Certain pro forma financial information
was filed under Item 7 of the Form 8-K.
-17-
<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
March 7, 1996
-17-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS FOR THE 2ND QUARTER 10-Q, PERIOD ENDED DECEMBER 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> 6-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-START> JUL-02-1995
<PERIOD-END> DEC-30-1995
<EXCHANGE-RATE> 1
<CASH> 1,433
<SECURITIES> 3,282
<RECEIVABLES> 5,168
<ALLOWANCES> 37
<INVENTORY> 3,748
<CURRENT-ASSETS> 13,836
<PP&E> 5,302
<DEPRECIATION> 4,124
<TOTAL-ASSETS> 16,249
<CURRENT-LIABILITIES> 7,372
<BONDS> 492
0
0
<COMMON> 374
<OTHER-SE> 6,151
<TOTAL-LIABILITY-AND-EQUITY> 16,249
<SALES> 9,034
<TOTAL-REVENUES> 9,034
<CGS> 8,113
<TOTAL-COSTS> 8,113
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 788
<INCOME-TAX> 30
<INCOME-CONTINUING> 47
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
<PAGE>
</TABLE>
