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 28, 1996
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 November 8,
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 SEPTEMBER 28, 1996
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
SEPTMEBER 28, 1996 AND JUNE 29, 1996
(in thousands)
ASSETS
<TABLE>
<CAPTION>
(unaudited)
SEPTEMBER 28, JUNE 29,
1996 1996
------------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash .......................................... $ 1,496 $ 673
Receivables ................................... 4,637 5,242
Inventories-
Finished goods ............................ 1,286 1,296
Work in process ........................... 1,300 1,267
Raw materials ............................. 1,660 1,361
-------- --------
Total ..................................... 4,246 3,924
Deferred taxes and prepaid expenses ........... 417 377
-------- --------
Total ......................................... 10,796 10,216
-------- --------
MACHINERY LEASED TO LICENSEES
(less accumulated depreciation of
$1,463 and $1,456) ............................ 56 63
PROPERTY, PLANT AND EQUIPMENT:
Land .......................................... 107 107
Buildings ..................................... 774 774
Machinery and equipment ....................... 2,486 2,430
Furniture and automobiles ..................... 536 532
Leasehold Improvements ........................ 63 63
-------- --------
Total cost .................................... 3,966 3,906
Less accumulated depreciation and
amortization ............................... (2,839) (2,768)
-------- --------
Net ........................................... 1,127 1,138
-------- --------
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition .................. 228 228
Intangible pension asset ...................... 623 623
-------- --------
Total ......................................... 851 851
DEFERRED TAXES ..................................... 429 429
-------- --------
TOTAL .............................................. $ 13,259 $ 12,697
======== ========
</TABLE>
See Notes to Consolidated Financial Statements .....
-3-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTMEBER 28, 1996 AND JUNE 28, 1996
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(unaudited)
SEPTEMBER 28, JUNE 29,
1996 1996
------------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable .......................... $ 2,041 $ 1,779
Accrued compensation ...................... 812 793
Accrued pension ........................... 134 166
Accrued income taxes ...................... 242 139
Other liabilities ......................... 274 343
Current maturity of note payable .......... 93
-------- --------
Total ................................. 3,596 3,220
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ........................ 1,920 1,939
Note payable (Note 2) ..................... 399 492
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value ............. 374 374
Additional paid-in capital ................ 598 598
Retained earnings ......................... 6,994 6,696
Pension liability adjustment .............. (622) (622)
-------- --------
Total ................................. 7,344 7,046
-------- --------
TOTAL .......................................... $ 13,259 $ 12,697
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-4-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
(in thousands except per share and number of shares)
<TABLE>
<CAPTION>
(unaudited)
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
------------ -------------
<S> <C> <C>
REVENUES (Note 1) ................................... $ 4,990 $ 4,378
--------- ---------
COSTS AND EXPENSES:
Cost of sales and services ..................... 4,086 3,959
General and administrative expenses ............ 523 464
--------- ---------
Total .......................................... 4,609 4,423
--------- ---------
DIVIDEND AND INTEREST INCOME ........................ 17 88
NET INVESTMENT INCOME ............................... -- 18
--------- ---------
TOTAL DIVIDEND, INTEREST & INVESTMENT
INCOME ......................................... 17 106
--------- ---------
INCOME BEFORE EQUITY IN (LOSS)
OF AFFILIATE ................................... 398 61
EQUITY IN (LOSS) OF AFFILIATE (Note 3) .............. -- (122)
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ................... 398 (61)
PROVISION FOR INCOME TAXES .......................... 100 10
--------- ---------
NET INCOME (L0SS) ................................... $ 298 $ (71)
========= =========
PER SHARE OF COMMON STOCK (based on
weighted average number of
shares outstanding) ............................ $ 0.80 $ (0.08)
========= =========
Weighted average number of shares
outstanding (Note 4) ........................... 374,382 884,806
========= =========
</TABLE>
See Notes to Consolidated Financial Statements .
-5-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ............................... $ 298 $ (71)
------- -------
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization ............... 78 83
Net investment (income) ..................... -- (18)
Equity in loss of affiliate ................. 122
(Increase) decrease in-
Accounts receivable ..................... 605 (348)
Inventories ............................. (322) 379
Other current assets .................... (40) 40
Increase (decrease)in-
Accounts payable ........................ 262 294
Accrued liabilities ..................... (82) (336)
Accrued income taxes .................... 103 (79)
Pension obligation ...................... (19) (27)
------- -------
Total adjustments ............................... 585 110
------- -------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES ............................ 883 39
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of noncurrent
marketable securities ....................... -- 39
Purchases of equipment .......................... (60) (155)
------- -------
INVESTING ACTIVITIES ........................... (60) (116)
------- -------
NET INCREASE (DECREASE) IN CASH ...................... 823 (77)
CASH AT BEGINNING OF PERIOD .......................... 673 2,423
------- -------
CASH AT END OF PERIOD ................................ $ 1,496 $ 2,346
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest .................................... $ 1 $ --
Income taxes ................................ 1 --
Noncash increase in marketable
securities to fair value .................... -- 1,215
======= =======
</TABLE>
See Notes to Consolidated Financial Statements .
-6-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 28, 1996
(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 JUNE 29, 1996 374,382 $374 $ 598 $6,696
Net income for the
fiscal three months
ended September 28, 1996 298
-----------------------------------------------
BALANCE AT SEPTEMBER 28, 1996 374,382 $374 $ 598 $6,994
-----------------------------------------------
Pension
Liability
Adjustment
-------------
<S> <C>
BALANCE AT JUNE 29, 1996 $ (622)
Change for the fiscal three
months ended
September 28, 1996
-------------
BALANCE AT SEPTEMBER 28, 1996 $ (622)
-------------
</TABLE>
See Notes to Consolidated Financial Statements.
-7-
WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL THREE MONTHS ENDED SEPTEMBER 28, 1996
1. GOVERNMENT BOOT CONTRACT REVENUES:
Revenues in the three month period ended September 28, 1996 include
$179,109 representing the estimated amount of contract change orders and
adjustments 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.
2. NOTE PAYABLE:
This represents the present value of the expected future payments to be
made under a note payable related to Wellco's repurchase of 510,424 shares
of its common stock from its former majority shareholder on December 29,
1995. Actual payments under the note will only be made for amounts by
which 60% of each fiscal year's net income exceeds certain defined
amounts, calculated on a cumulative basis, with the first payment being
due for the 1997 fiscal year which ends June 28, 1997. 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 2003 fiscal year payment.
Adjustments will be made to the amount recorded based on actual amounts
paid and if future events significantly change estimated future payments.
3. EQUITY IN LOSS OF AFFILIATE:
Wellco owned 400,000 shares of the common stock of Alba-Waldensian, Inc.
(the affiliate) which was accounted for using the equity method. The
$122,000 represents Wellco's equity in the loss of Alba for the quarter
ended September 30, 1995. On December 29, 1995, all 400,000 shares were
used as a part of the consideration paid for the 510,424 share repurchase.
4. WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
The 510,424 shares repurchased reduced total shares outstanding from
884,806 to 374,382.
-8-
<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 28, 1996 and September 30, 1995:
Income before income taxes in the current quarter was $398,000 compared to a
loss of $61,000 in the prior year first quarter. The prior quarter's income was
reduced by a loss of $122,000 representing Wellco's equity in the loss of its
21.4% owned affiliate, Alba-Waldensian, Inc., for that quarter. Wellco owned
400,000 shares of the common stock of Alba from December 30, 1994 until December
29, 1995, when these shares were exchanged as a part of the purchase price for
Wellco's repurchase of 510,424 shares of its common stock. Marketable securities
were sold to provide the cash portion of the stock repurchase price, resulting
in the total of dividend, interest and investment income in the September 28,
1996 period being $89,000 less than the September 30, 1995 period.
Income before Equity in (Loss) of Affiliate and Total Dividend, Interest and
Investment Income was $381,000 in the current period compared to a loss of
$45,000 in the prior period. The major reasons for this change are:
1. Revenues increased $612,000. Pairs of combat boots sold to
the U. S. government were 11,000 more in the current period. In
the three months ended September 28, 1996, Wellco was shipping
combat boots under the second option of its current contract.
For the prior period, shipments were under the first option.
Both options are for the same total pairs, but the delivery
period for the second option is twelve months and for the
first option it was sixteen months.
Revenues from technical assistance fees, equipment rentals and
sales of boot manufacturing raw materials were more in the
current period. Technical assistance fees and equipment rentals
vary with the customer's sales. The sale of boot manufacturing
materials can vary significantly from period to period, depending
on customers' needs.
2. The major categories of fixed and semi-variable manufacturing
costs decreased by $15,000 in the current period. Wellco is
self-insured for it employees group health insurance which was
$27,000 less in the three months ended September 28, 1996.
General and administrative expenses increased $59,000 in the current quarter.
The increased quarter's profit resulted in an increase in the provision for
employee bonuses which are based on profit. Travel costs increased because
Wellco participated in two military equipment shows in the current quarter.
Income taxes were provided at the estimated overall rate for the fiscal year. A
tax provision was recorded in the prior year to provide for state taxes.
Forward Looking Information:
Deliveries under the second and last option of the current U. S. government
combat boot contract will be substantially completed in December 1996.
On September 27, 1996, Wellco submitted a bid against a solicitation for the
next contract with awards estimated to be in mid December 1996. As with the
current contract, the government plans to make awards to each of the expected
four bidders, and will use the best value method of evaluating bids. Under this
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<PAGE>
method, the highest rated bidder receives 35% of total pairs, the second highest
rated bidder gets 25%, and the other two bidders receive 20% each. Under best
value, bidders are rated on their past performance, quality history and other
criteria, and bid prices are not the most important factor. For the current
contract, Wellco is the 25% supplier.
Contracts awarded from the new solicitation will provide for a base year award
and four option years. Prior to each option's exercise, the government will
evaluate each's contractor's performance during the prior period and will make
the 35%/25%/20%/20% option award based on that evaluation, with the best
performing contractor getting the greater percent.
Since 1992, the government has been reducing its inventory of combat boots by
buying fewer pairs than were consumed. The current solicitation establishes
total minimum and maximum pairs to be ordered for each year of the contract of
703,220 and 1,055,828. These amounts are less than estimated consumption and are
less than the total annual pairs ordered under the current contract
(approximately 1,108,000 pairs). The government has stated that their intent is
to purchase total annual pairs of combat boots equal to 78% of consumption,
which would be approximately 880,000 based on estimated consumption. In
addition, during the first year of new contracts resulting from this
solicitation, the government will buy an additional total 205,000 pairs of the
desert combat boot which will be used to establish a war reserve stock. The
Company believes that the government will reach its desired inventory level
between the fourth and fifth year of the contract, at which time we expect
orders to increase to the level of consumption. The effect of reduced total
pairs purchased on future operating results will depend on many factors, with
per pair price and the percent awarded to Wellco being the major ones, and
cannot be estimated until after contract award.
On September 30, 1996, Wellco was awarded a contract from a state to provide up
to 34,000 pairs of six inch work shoes. Deliveries under this contract are to
take place during the October, 1996 through September, 1997 period.
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. In September, 1996, the
government committed funds to the second phase and work will start in the
quarter ending December 28, 1996.
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 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 29, 1996. Actual results may differ materially from
management expectations.
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.
-10-
<PAGE>
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 sources:
<TABLE>
<CAPTION>
(in thousands)
Fiscal Three Months, Fiscal Year
September 28, 1996 June 29, 1996
-------------------- -------------
<S> <C> <C>
Cash ......................................... $1,496 $ 673
Unused Line of Credit ........................ 1,500 1,500
------ ------
Total ........................................ $2,996 $2,173
====== ======
</TABLE>
The following table summarizes this and the other major sources (uses) of cash
for the three months ended September 28, 1996:
<TABLE>
<CAPTION>
(in thousands)
September 28,
1996
-------------
<S> <C>
Net Income Plus Depreciation .................................... $ 376
Net Change in Accounts Receivable, Inventory,
Accounts Payable and Accrued Liabilities ........................ 566
Other ........................................................... (59)
-----
Net Cash Provided By Operations ................................ 883
Cash Used to Purchase Equipment ................................. (60)
-----
Net Increase in Cash ........................................... $ 823
=====
</TABLE>
Accounts receivable decreased because of some improvement in the timeliness of
the U. S. government's payments and because of the receipt of payments from
certain significant June 29, 1996 receivables.
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 2 to the Consolidated Financial Statements provides
information about a commitment to make additional cash payments from the stock
repurchase, contingent upon net income 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.
-11-
<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
-12-
<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
David Lutz, President and Treasurer
(and Principal Financial Officer)
November 11, 1996
-13-
<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, 1996 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-28-1997
<PERIOD-START> JUN-30-1996
<PERIOD-END> SEP-28-1996
<EXCHANGE-RATE> 1
<CASH> 1,496
<SECURITIES> 0
<RECEIVABLES> 4,674
<ALLOWANCES> 37
<INVENTORY> 4,246
<CURRENT-ASSETS> 10,796
<PP&E> 5,485
<DEPRECIATION> 4,302
<TOTAL-ASSETS> 13,259
<CURRENT-LIABILITIES> 3,596
<BONDS> 399
0
0
<COMMON> 374
<OTHER-SE> 6,970
<TOTAL-LIABILITY-AND-EQUITY> 13,259
<SALES> 4,990
<TOTAL-REVENUES> 4,990
<CGS> 4,086
<TOTAL-COSTS> 4,086
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 398
<INCOME-TAX> 100
<INCOME-CONTINUING> 298
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 298
<EPS-PRIMARY> .80
<EPS-DILUTED> 0
</TABLE>
