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: MARCH 29, 1997
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 .
1,125,646 shares of $1 par value common stock were outstanding on May 12, 1997.
-1-
<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 MARCH 29, 1997
The attached unaudited financial statements reflect all adjustments which are,
in the opinion of management, necessary to reflect a fair statement of the
financial position, results of operations, and cash flows for the interim
periods presented. All significant adjustments are of a normal recurring nature.
-2-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 29, 1997 AND JUNE 29, 1996
(in thousands)
ASSETS
<TABLE>
<CAPTION>
(unaudited)
MARCH 29, JUNE 29,
1,997 1996
--------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash ........................................ $ 295 $ 673
Receivables ................................. 2,715 5,242
Inventories-
Finished goods .......................... 4,727 1,296
Work in process ......................... 2,455 1,267
Raw materials ........................... 2,132 1,361
-------- --------
Total ................................... 9,314 3,924
Deferred taxes and prepaid expenses ......... 349 377
-------- --------
Total ....................................... 12,673 10,216
-------- --------
MACHINERY LEASED TO LICENSEES
(less accumulated depreciation of
$1,476 and $1,446) .......................... 43 63
PROPERTY, PLANT AND EQUIPMENT:
Land ........................................ 107 107
Buildings ................................... 774 774
Machinery and equipment ..................... 2,687 2,430
Furniture and automobiles ................... 584 532
Leasehold Improvements ...................... 63 63
-------- --------
Total cost .................................. 4,215 3,906
Less accumulated depreciation and
amortization ............................. (2,957) (2,768)
-------- --------
Net ......................................... 1,258 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 ............................................ $ 15,254 $ 12,697
======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
-3-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 29, 1997 AND JUNE 29, 1996
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(unaudited)
MARCH 29, JUNE 29,
1997 1996
---------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowing from bank .............. $ 2,190 $ 0
Accounts payable ............................ 1,904 1,779
Accrued compensation ........................ 818 793
Accrued pension ............................. 133 166
Accrued income taxes ........................ 85 139
Other liabilities ........................... 382 343
Current maturity of note payable ............ 368 0
-------- --------
Total ................................... 5,880 3,220
-------- --------
LONG-TERM LIABILITIES:
Pension obligation .......................... 1,887 1,939
Note payable (Note 2) ....................... 954 492
CONTINGENCY (Note 6)
STOCKHOLDERS' EQUITY (Notes 1, 2, and 3):
Common stock, $1.00 par value ............... 1,126 374
Additional paid-in capital .................. 10 598
Retained earnings ........................... 6,019 6,696
Pension liability adjustment ................ (622) (622)
-------- --------
Total ................................... 6,533 7,046
-------- --------
TOTAL ............................................ $ 15,254 $ 12,697
======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
-4-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL NINE MONTHS ENDED
MARCH 29, 1997 AND MARCH 30, 1996
(in thousands except per share and number of shares)
<TABLE>
<CAPTION>
(unaudited)
MARCH 29, MARCH 30,
1997 1996
--------- ---------
<S> <C> <C>
REVENUES (Note 4) ............................. $ 12,229 $ 14,518
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............... 10,011 12,761
General and administrative expenses ...... 1,697 1,519
----------- -----------
Total .................................... 11,708 14,280
----------- -----------
OPERATING PROFIT .............................. 521 238
----------- -----------
DIVIDEND AND INTEREST INCOME .................. 34 191
NET INVESTMENT INCOME ......................... 0 1,203
----------- -----------
TOTAL DIVIDEND, INTEREST & INVESTMENT
INCOME ................................... 34 1,394
----------- -----------
INCOME BEFORE EQUITY IN (LOSS) OF
AFFILIATE AND STOCK REPURCHASE CHARGE .... 555 1,632
EQUITY IN (LOSS) OF AFFILIATE ................. 0 (601)
STOCK REPURCHASE CHARGE ....................... 0 (110)
----------- -----------
INCOME BEFORE INCOME TAXES .................... 555 921
PROVISION FOR INCOME TAXES .................... 140 290
----------- -----------
NET INCOME .................................... $ 415 $ 631
=========== ===========
PER SHARE OF COMMON STOCK (based on
weighted average number of
shares outstanding) ...................... $ 0.37 $ 0.30
=========== ===========
Weighted average number of shares
outstanding (Note 3) ..................... 1,123,952 2,138,379
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
-5-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
MARCH 29, 1997 AND MARCH 30, 1996
(in thousands except per share and number of shares)
<TABLE>
<CAPTION>
(unaudited)
MARCH 29, MARCH 30,
1997 1996
--------- ---------
<S> <C> <C>
REVENUES ...................................... $ 2,501 $ 5,484
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............... 2,008 4,648
General and administrative expenses ...... 599 513
----------- -----------
Total .................................... 2,607 5,161
----------- -----------
OPERATING (LOSS) PROFIT ....................... (106) 323
----------- -----------
DIVIDEND AND INTEREST INCOME .................. 5 20
NET INVESTMENT INCOME ......................... 0 501
----------- -----------
TOTAL DIVIDEND, INTEREST & INVESTMENT
INCOME ................................... 5 521
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............. (101) 844
PROVISION (BENEFIT) FOR INCOME TAXES .......... (10) 260
----------- -----------
NET INCOME (LOSS) ............................. $ (91) $ 584
=========== ===========
PER SHARE OF COMMON STOCK (based on
weighted average number of
shares outstanding) ...................... $ (0.08) $ 0.52
=========== ===========
Weighted average number of shares
outstanding (Note 3) ..................... 1,125,564 1,123,146
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
-6-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL NINE MONTHS ENDED
MARCH 29, 1997 AND MARCH 30, 1996
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
MARCH 29, MARCH 30,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ........................... $ 415 $ 631
------- -------
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation and amortization ........... 234 248
Net investment (income) ................. 0 (1,203)
Equity in loss of affiliate ............. 0 601
Stock repurchase charge ................. 0 110
(Increase) decrease in-
Accounts receivable ................. 2,527 (1,422)
Inventories ......................... (5,390) 514
Other current assets ................ 28 166
Increase (decrease)in-
Accounts payable .................... 125 381
Accrued liabilities ................. (8) (323)
Accrued income taxes ................ (54) (179)
Pension obligation .................. (52) (27)
Other ............................... 39 (127)
------- -------
Total adjustments ........................... (2,551) (1,261)
------- -------
NET CASH USED IN OPERATING
ACTIVITIES .................................. (2,136) (630)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales of current marketable
securities .............................. 0 996
Sales of noncurrent
marketable securities ................... 0 4,260
Purchases of equipment ...................... (333) (291)
------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ....................... (333) 4,965
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans from bank ............................. 2,190 4,500
Repayment of bank loan ...................... 0 (4,520)
Cash dividends paid ......................... (112) (47)
Exercise of stock options ................... 13 0
Purchase of common stock .................... 0 (5,574)
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ........................ 2,091 (5,641)
------- -------
</TABLE>
-7-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL NINE MONTHS ENDED
MARCH 29, 1997 AND MARCH 30, 1996
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
MARCH 29, MARCH 30,
1997 1996
--------- ---------
<S> <C> <C>
NET DECREASE IN CASH ................................. (378) (1,306)
CASH AT BEGINNING OF PERIOD .......................... 673 2,423
------- -------
CASH AT END OF PERIOD ................................ $ 295 $ 1,117
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest .................................... $ 25 $ 35
Income taxes ................................ 193 378
Adjustment of stock repurchase note ............. 829
Note issued as part of stock repurchase ......... 492
Noncash exchange of investment in
affiliate from stock repurchase ............. 4,928
======= =======
See Notes to Consolidated Financial Statements.
</TABLE>
-8-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE FISCAL NINE MONTHS ENDED
MARCH 30, 1997
(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 nine months
ended March 29, 1997 415
Common stock issued in
stock split 748,764 749 (598) (151)
Adjustment of note payable
issued for stock
repurchase (829)
Exercise of stock options 2,500 3 10
Cash dividend declared
($.10 per share) (112)
-------------------------------------------------
BALANCE AT MARCH 29, 1997 1,125,646 1,126 10 6,019
===================================================
Pension
Liability
Adjustment
-----------
<S> <C>
BALANCE AT JUNE 29, 1996 (622)
Change for the fiscal nine
months ended
March 29, 1997
-----------
BALANCE AT MARCH 29, 1997 (622)
-----------
See Notes to Consolidated Financial Statements.
</TABLE>
-9-
<PAGE>
WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL NINE MONTHS ENDED MARCH 29, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Stock Options-
In October 1995 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." This standard defines
a fair value-based method of accounting for employee stock
options, and gives companies a choice of measuring stock-based
compensation expense by adopting the fair value method or
continuing to measure compensation using the intrinsic value
approach of Accounting Principles Board (APB) Opinion No. 25, the
former standard. If a company elects to continue using APB 25,
SFAS 123 requires, among other things, disclosure of pro forma
net income and earnings per share as if the fair value based
accounting method in SFAS 123 had been adopted. This statement is
effective for the Company's 1997 fiscal year and, as permitted by
SFAS 123, the new disclosures will first be made in the 1997
fiscal year annual report. The Company will continue using APB 25
to record stock-based compensation expense. The Company has stock
options outstanding for 50,000 shares of its Common stock to
which this disclosure will apply. Under Wellco's present stock
option plan, the option price is the same as the market price on
the date of an option award. Therefore, Wellco has not recognized
compensation expense for these options under APB 25.
Earnings per Share-
In February 1997 the Financial Accounting Standards Board issued
the Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share." This Statement changes the computation,
presentation and disclosure of earnings per share, and is
effective for the Company's fiscal quarter ending December 27,
1997. Under SFAS 128, the Company will compute and disclose both
basic and diluted earnings per share. The Company's outstanding
stock options will affect the computation of diluted earnings per
share, and this effect is not expected to be significant.
2. NOTE PAYABLE:
This represents the present value of estimated 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. 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 that 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.
In the fiscal nine months ending March 29, 1997, Wellco revised its
estimate of the amount that will be paid under this note payable, and
adjusted the note's recorded amount accordingly. This increased the Note
Payable as shown in the Consolidated Balance Sheet by $798,000 for quarter
ending December 28, 1997 and an additional $31,000 for quarter ending
March 29, 1997, and reduced Retained Earnings by the same amount. The
present value of total estimated note payments of $1,531,000 discounted at
8.5% is as follows:
-10-
<PAGE>
<TABLE>
<CAPTION>
Present Value of
Paid in Fiscal Year Expected Payments
- ------------------- -----------------
<S> <C>
1997 $ 367,690
1998 758,944
1999 194,654
----------
Total $1,321,288
==========
</TABLE>
An imputed amount of interest is being charged against operations using
the same 8.5% discount rate. Adjustments will be made to the estimated
liability based on actual amounts paid and if future events significantly
change estimated future payments.
3. STOCK SPLIT AND STOCK OPTION EXERCISE:
A three-for-one stock split was declared by the Board of Directors on
November 19, 1996 payable on January 3, 1997 to stockholders of record on
December 6, 1996. The par value of the new shares issued, $749,000, was
transferred to Common Stock from Additional Paid-In Capital ($598,000) and
Retained Earnings ($151,000). All share and per share amounts in the
financial statements have been retroactively adjusted to give effect to
this stock split.
On December 31, 1996, options for the purchase of 2,500 shares of the
Company's Common stock were exercised. The Company received $12,500 from
the exercise of options of which $2,500 was credited to par value and
$10,000 to Additional Paid-In Capital.
4. GOVERNMENT BOOT CONTRACT REVENUES:
Revenues in the nine-month period ended March 29, 1997 include $210,000
representing the estimated amount of contract change orders that have not
as yet been negotiated with the government. Any differences between the
estimates and the actual amounts negotiated will be recorded in the period
in which negotiations are completed. Revenues in this nine-month period
was reduced by $73,000 representing adjustments to such estimates
previously recorded in the 1996 fiscal year.
5. LINES OF CREDIT:
The Company has increased its bank line of credit availability from
$1,500,000 to $4,500,000 in order to finance a significant increase in
combat boot inventory. The Company, in order to be prepared for quick
response requirement under a new U.S. government combat boot contract,
continued to produce boots while awaiting a contract award. The contract
was awarded, almost four months later than anticipated, on April 15, 1997.
The bank's commitment for the $3,000,000 increase will expire on September
24, 1997. All borrowing under this line is at the bank's prime interest
rate.
This line is secured by a blanket lien on all machinery and equipment and
all non-governmental accounts receivable and inventory. As of March 29,
1997, the Company was not in compliance with the current ratio and
tangible net worth loan covenants. The Company has received from the bank
a waiver regarding these loan covenant violations.
6. CONTINGENCY
In April 1997, the Company was served with a subpoena issued by a grand
jury empaneled in the United States District Court for the Eastern
District of Pennsylvania which requires the production of certain
-11-
<PAGE>
documents for the period January 1, 1990 until April 29, 1997. The Company
has been informed through its legal counsel that the grand jury
is investigating possible violations of antitrust laws primarily involving
alleged collusive activities among manufacturers of combat boots for the U.
S. government. The Company believes that this investigation includes all U.
S. manufacturers of combat boots for the U. S. government. The Company does
not believe it has engaged in any illegal conduct and does not believe that
this matter will have a material adverse effect on the Company's financial
position or results of future operations. However, the Company cannot
predict what the final outcome of this matter will be.
In 1988, the Company and the other military combat boot manufacturers
responded to subpoenas which investigated possible violation of antitrust
laws involving bids submitted on military combat boot procurements for
January 1, 1979 through May 6, 1988. This investigation was closed in
February, 1992 and no legal action of any kind resulted from it.
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Comparing The Nine Months Ended March 29, 1997 and March 30, 1996
Year-to-date income before income taxes was $555,000 compared with $921,000 in
the first nine months of the prior fiscal year. The prior year included several
non-recurring items which were:
1. 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 had 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 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.
2. The total of interest, dividend and investment income was
$1,394,000 in the first nine months of the previous year compared
with $34,000 in the current period. The prior period included the
sale of all marketable securities at amounts significantly
greater than their carrying value. All marketable securities were
sold to pay for the stock repurchase. The current period only
includes interest income earned on excess operating funds.
Comparative operating income, before the above items, was $521,000 as compared
with $238,000 for the prior period. Several factors resulted in the $283,000
increase, the more significant ones being:
1. Manufacturing capacity in 1997 was improved over 1996. Total pairs of
combat boots produced for U.S. government contracts increased approximately 31%,
resulting in an increased use of boot manufacturing capacity. The Company
substantially completed production under its prior contract in October, 1996. It
submitted a bid on a new solicitation in late September, 1996, and the
government originally estimated the contract to be awarded in December, 1996.
The contract was not awarded until April 15, 1997. Instead of having an
interruption in production and to be ready to ship boots immediately upon
contract award, management continued combat boot production in anticipation of
the contract award based on the number of pairs estimated to be awarded to
Wellco, which was greater than pairage produced in the prior year. This resulted
in a significant increase in finished goods inventory at March 29, 1997, which
caused an increase in the total amount of fixed and semi-variable manufacturing
costs included in inventory, that would otherwise have been charged against
operations. Better manufacturing capacity was also experienced in regards to
boot mold manufacturing, which has been producing a significant addition to the
number of molds used by military combat boot manufacturing customers.
2. Revenues decreased approximately 16%. The primary reason for this was a
21% decrease in pairs of combat boots sold to the U.S. government. In December
1996, Wellco substantially completed combat boot shipments under the prior
contract mentioned above, and since it was not awarded a new contract until
April 15, 1997, pairs of combat boots shipped in the quarter ended March 29,
1997 were significantly less than the prior year quarter. Certain other sales,
on which margins are higher than those for combat boots, increased. However,
this was substantially offset by a decrease in sales of boot manufacturing raw
materials and machinery. These sales can vary significantly from period to
period, depending on customers' needs.
-13-
<PAGE>
3. Health and workers' compensation insurance costs decreased by $121,000.
The Company is self-funded for health insurance and is realizing the benefit of
its extensive employee safety program.
General and administrative costs increased because of higher employee
compensation costs, and increased participation in military equipment shows.
Interest expense increased by $74,000, primarily because of interest on the Note
Payable (see Note 2 to the Consolidated Financial Statements) and interest on
the increased bank line of credit usage.
Income taxes are provided at the estimated overall rate for the fiscal year.
The rate estimated for the current year is about 25%, compared to 31% for the
prior year.
Forward Looking Information:
On April 15, 1997, Wellco was awarded a contract from the U.S. Defense Personnel
Support Center (DPSC) for 25% of their purchases of combat boots for the year
period starting April 15, with options for each of the ensuing four years. Also
on that date three other contract awards were made, with one competitor
receiving an award for 35%, and two competitors receiving 20% each. This
contract was awarded using the government's best value method of bid evaluation
under which technical merit is more important than price. Both Wellco and the
35% awardee were rated with the highest possible technical rating. However,
since Wellco bid higher prices than this competitor, Wellco was awarded the 25%
at its higher prices. For the prior contract which was completed in December,
1996, Wellco was also the 25% supplier.
Before each option exercise, the government will evaluate each contractor's
performance during the prior period and its option prices, and will make the
35%/25%/20%/20% option award again based on that evaluation. These options are
exercisable at the unilateral discretion of the government.
Since completing its prior contract, Wellco has continued to manufacture and
stock combat boots in anticipation of the new award. The Company now has a
significant inventory of boots ready to ship and has already received the first
two delivery orders under the new contract, one for approximately 36,000 pairs
that Wellco will invoice the government and then hold in inventory per the
government's request, and one for approximately 50,000 pairs representing a
one-time purchase of desert combat boots for the government's war reserve stock.
A significant amount of these total pairs will be invoiced in the fourth quarter
ending June 28, 1997. Beyond this, boot shipments will be for orders going to
recruit induction centers, government clothing stores and other government
locations. Since Wellco has a significant boot inventory, it is attempting to
assist the government in finalizing its procedures for placing these orders.
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 prior contract (approximately
1,108,000 pairs). The government initially stated their intent, but not their
binding commitment, to purchase total annual pairs of combat boots equal to 78%
of consumption, which would be approximately 880,000 based on estimated
consumption. To offset the extreme lateness in making the contract award, the
government has also indicated, without making a binding commitment, that they
would exceed this level in the first year. The Company estimates that the
government will reach its desired inventory level between the fourth and fifth
year of the contract, when we expect orders to increase to the level of
consumption.
In February, 1997 Wellco was awarded a contract to supply the U.S. Armed Forces
with the intermediate cold/wet boot. The is the first award to Wellco for this
type of boot. The contract requires delivery over a one year period of between
80,002 and 121,600 pairs of this boot, which equates to a total contract value
in the first year of between approximately $6,400,000 and $9,600,000. This
contract also gives DPSC two options, each providing for the purchase of between
44,000 and 66,000 pairs of this boot. Wellco expects first
-14-
<PAGE>
shipments to be in its fourth quarter of fiscal year 1997.
On September 30, 1996, Wellco was awarded a contract from a state to provide an
estimated 45,000 pairs of six inch work shoes. Deliveries under this contract
are for the period October, 1996 through September, 1997.
Ro-Search, Inc., Wellco's machinery and licensing subsidiary, is in the final
stages of contract negotiation for the installation of a footwear manufacturing
facility at a domestic location. Ro-Search also has received from its oldest
customer an order ($900,000) for footwear molds which will be the largest single
order ever placed with Ro-Search. Performance under both of these will be
primarily in the 1998 fiscal year.
See Note 6 to the Consolidated Financial Statements for information about a
subpoena served on the Company in April, 1997.
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.
Comparing The Three Months Ended March 29, 1997 and March 30, 1996:
The prior year quarter includes investment income of $501,000 which resulted
from the sale of marketable securities to provide funds to pay for the stock
repurchase mentioned above. Before dividend, interest and investment income, the
Company had an operating loss of $106,000 in the current three months compared
to an operating profit of $323,000 in the prior year.
Revenues in the current period were $2,501,000 compared to $5,484,000 last year.
As stated above, Wellco substantially completed shipments under its prior combat
boot contract with the U. S. government in December, 1996, and the new contract
award, originally scheduled for December, 1996, was delayed until April 15,
1997. This resulted in pairs of combat boots shipped to the U. S. government in
the current quarter being significantly less than the prior year quarter. This
was partially offset by an increase in combat boot shipments to customers other
than the U. S. government.
As stated above, Wellco continued to produce combat boots in the March, 1997
quarter in anticipation of a contract based on the number of pairs estimated to
be awarded to the Company. Total pairs of boots produced for U. S. government
contracts increased approximately 13%, which helped reduce the negative effect
of reduced revenues on operating results. Boot mold manufacturing, as it did in
the current year's first nine fiscal months, also operated at a high level
manufacturing capacity making new military combat boot molds.
General and administrative costs increased because of higher employee
compensation costs. Interest expense increased representing interest on the Note
Payable (see Note 2 to the Consolidated Financial Statements) and interest on
the increased bank line of credit usage. The rate of tax benefit from the loss
in the March, 1997 quarter is less than the rate of tax provided in the March,
1996 quarter because of an increase at March 29, 1997 in the estimated overall
tax rate for fiscal year 1997.
-15-
<PAGE>
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 nine 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)
March 29, 1997 June 29, 1996
-------------- -------------
<S> <C> <C>
Cash ......................................... $ 295 $ 673
Unused Line of Credit ........................ 2,310 1,500
------ ------
Total ........................................ $2,605 $2,173
====== ======
</TABLE>
The following table summarizes the major sources (uses) of cash for the nine
months ended March 29, 1997
<TABLE>
<CAPTION>
(in thousands)
March 29, 1997
--------------
<S> <C>
Net Income Plus Depreciation ................................... $ 649
Net Change in Accounts Receivable, Inventory,
Accounts Payable, Accrued Liabilities, Accrued
Income Taxes, and Pension Obligation ........................... (2,852)
Other .......................................................... 67
Net Cash Used In Operations .................................... (2,136)
Cash Provided By Exercise of Stock Options ..................... 13
Cash From Line of Credit ....................................... 2,190
Cash Used to Purchase Equipment ................................ (333)
Cash Dividends Paid ............................................ (112)
Net Decrease in Cash .......................................... $ (378)
</TABLE>
As discussed in the results of operations section, a delay in the award of the
U.S. government contract resulted in a significant increase in inventory
($5,390,000) at March 29, 1997. This delay also caused a reduction in combat
boot sales in the quarter ended March 29, 1997 which resulted in a reduction in
accounts receivable ($2,527,000). The significant amount of cash invested in
inventory, reduced somewhat by cash from the reduction in accounts receivable,
are the two primary reasons for the decrease in cash.
The Company has increased its bank line of credit availability from $1,500,000
to $4,500,000 in order to finance the increased combat boot inventory.
$3,000,000 of the present bank line of credit will expire on September 24, 1997.
The remaining $1,500,000 of the line of credit is subject to renewal on December
31, 1997. During the quarter, cash from the line of credit ($2,190,000 at March
29, 1997) was used to finance the increased inventory. The new contract for
combat boots with the U.S. government was awarded April
-16-
<PAGE>
15, 1997, and the first shipments were made in early May. With the start of
shipments from the new contract, the Company believes that the current line of
credit is adequate to meet presently known needs.
Wellco has made a verbal commitment to a contractor for the construction of a
warehouse adjoining its existing facilities in Waynesville, North Carolina, at a
cost of approximately of $325,000. A bank has provided a three-year term loan
commitment if needed to finance the construction. The Company has no other
material commitments for capital equipment. Note 2 to the Consolidated Financial
Statements provides information about a commitment to make additional cash
payments from a stock repurchase, with the amount of payments 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, and it expects to significantly reduce the line
of credit usage in the next few months.
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.
-17-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 to the Consolidated Financial Statements in Part I of
this Form 10-Q.
Item 2. Changes in Securities. N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. 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
-18-
<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\ \s\
David Lutz, President and Treasurer Tammy Francis, Controller
May 12, 1997
-19-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE 3RD QUARTER 10-Q, PERIOD ENDED MARCH 29, 1997
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> 9-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-START> JUN-30-1996
<PERIOD-END> MAR-29-1997
<EXCHANGE-RATE> 1
<CASH> 295
<SECURITIES> 0
<RECEIVABLES> 2,752
<ALLOWANCES> 37
<INVENTORY> 9,314
<CURRENT-ASSETS> 12,673
<PP&E> 5,734
<DEPRECIATION> 4,433
<TOTAL-ASSETS> 15,254
<CURRENT-LIABILITIES> 5,880
<BONDS> 954
0
0
<COMMON> 1,126
<OTHER-SE> 5,407
<TOTAL-LIABILITY-AND-EQUITY> 15,254
<SALES> 12,229
<TOTAL-REVENUES> 12,229
<CGS> 10,011
<TOTAL-COSTS> 10,011
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 555
<INCOME-TAX> 140
<INCOME-CONTINUING> 415
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 415
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
