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 27, 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 .
1,163,246 shares of $1 par value common stock were outstanding on February 10,
1998.
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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 27, 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.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 27, 1997 AND JUNE 28, 1997
(in thousands)
ASSETS
<TABLE>
<CAPTION>
(unaudited)
DECEMBER 27, JUNE 28,
1997 1997
------------ --------
<S> <C> <C>
CURRENT ASSETS:
Cash ........................................ $ 13 $ 181
Receivables ................................. 3,043 4,926
Inventories-
Finished goods .......................... 2,541 2,551
Work in process ......................... 2,420 2,647
Raw materials ........................... 3,314 2,479
-------- --------
Total ................................... 8,275 7,677
Deferred taxes and prepaid expenses ......... 476 347
-------- --------
Total ....................................... 11,807 13,131
-------- --------
MACHINERY LEASED TO LICENSEES
(less accumulated depreciation of
$1,493 and $1,483) .......................... 26 36
PROPERTY, PLANT AND EQUIPMENT:
Land ........................................ 107 107
Buildings ................................... 876 774
Machinery and equipment ..................... 3,592 2,797
Furniture and automobiles ................... 661 610
Leasehold Improvements ...................... 63 63
-------- --------
Total cost .................................. 5,299 4,351
Less accumulated depreciation and
amortization ............................. (3,186) (3,038)
-------- --------
Net ......................................... 2,113 1,313
-------- --------
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition ................ 228 228
Intangible pension asset .................... 511 511
-------- --------
Total ....................................... 739 739
DEFERRED TAXES ................................... 364 433
-------- --------
TOTAL ............................................ $ 15,049 $ 15,652
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 27, 1997 AND JUNE 28, 1997
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(unaudited)
DECEMBER 27, JUNE 28,
1997 1997
------------ --------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 2) ....... $ 1,450 $ 1,687
Accounts payable .............................. 2,454 2,064
Accrued compensation .......................... 849 1,062
Accrued pension ............................... 140 133
Accrued income taxes .......................... 57 357
Cash dividend declared ........................ 116
Other liabilities ............................. 300 375
Current maturity of note payable .............. 260 107
-------- --------
Total ..................................... 5,626 5,785
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ............................ 1,719 1,759
Note payable .................................. 878 1,030
CONTINGENCY (Note 5)
STOCKHOLDERS' EQUITY :
Common stock, $1.00 par value ................. 1,163 1,151
Additional paid-in capital .................... 189 119
Retained earnings ............................. 6,096 6,430
Pension liability adjustment .................. (622) (622)
-------- --------
Total ..................................... 6,826 7,078
-------- --------
TOTAL .............................................. $ 15,049 $ 15,652
======== ========
</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 27, 1997 AND DECEMBER 28, 1996
(in thousands except per share and number of shares)
<TABLE>
<CAPTION>
(unaudited)
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
REVENUES (Note 4) ............................ $ 13,602 $ 9,728
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services .............. 12,752 7,954
General and administrative expenses ..... 1,050 1,098
----------- -----------
Total ................................... 13,802 9,052
----------- -----------
OPERATING INCOME (LOSS) ...................... (200) 676
----------- -----------
INTEREST EXPENSE ............................. (94) (49)
INTEREST INCOME .............................. 7 29
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............ (287) 656
PROVISION (BENEFIT) FOR INCOME TAXES ........ (69) 150
----------- -----------
NET INCOME (LOSS) ............................ $ (218) $ 506
=========== ===========
BASIC EARNINGS PER SHARE
based on weighted average number of
shares outstanding) (Note 1) ............ $ (0.19) $ 0.45
=========== ===========
Shares used in computing basic
earnings per share ...................... 1,158,929 1,123,146
=========== ===========
DILUTED EARNINGS PER SHARE based on
weighted average number of shares
outstanding and dilutive stock
options) (Note 1) ...................... $ (0.19) $ 0.44
=========== ===========
Shares used in computing diluted
earnings per share ...................... 1,158,929 1,147,815
=========== ===========
</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 27, 1997 AND DECEMBER 28, 1996
(in thousands except per share and number of shares)
<TABLE>
<CAPTION>
(unaudited)
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
REVENUES (Note 4) ............................ $ 7,926 $ 4,738
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services .............. 7,317 3,917
General and administrative expenses ..... 512 527
----------- -----------
Total ................................... 7,829 4,444
----------- -----------
OPERATING INCOME (LOSS) ...................... 97 294
----------- -----------
INTEREST EXPENSE ............................. (68) (48)
INTEREST INCOME .............................. 3 12
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............ 32 258
PROVISION (BENEFIT) FOR INCOME TAXES ......... 17 50
----------- -----------
NET INCOME (LOSS) ............................ $ 15 $ 208
=========== ===========
BASIC EARNINGS PER SHARE
based on weighted average number of
shares outstanding) (Note 1) ............ $ 0.01 $ 0.19
=========== ===========
Shares used in computing basic
earnings per share ...................... 1,160,910 1,123,146
=========== ===========
DILUTED EARNINGS PER SHARE based on
weighted average number of shares
outstanding and dilutive stock
options) (Note 1) ...................... $ 0.01 $ 0.18
=========== ===========
Shares used in computing diluted
earnings per share ...................... 1,189,843 1,152,315
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 27, 1997 AND DECEMBER 28, 1996
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ........................... $ (218) $ 506
------- -------
Adjustments to reconcile net income
to net cash provided (used)
Depreciation and amortization ........... 182 155
(Increase) decrease in-
Accounts receivable ................. 1,883 1,317
Inventories ......................... (598) (1,202)
Other current assets ................ (60) 43
Increase (decrease)in-
Accounts payable .................... 390 (43)
Accrued liabilities ................. (213) (256)
Accrued income taxes ................ (300) (38)
Pension obligation .................. (33) (35)
Other ............................... (74) --
------- -------
Total adjustments ........................... 1,177 (59)
------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ........................ 959 447
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment ........... (972) (154)
------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ....................... (972) (154)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank loans, net ................ (237) --
Exercise of stock options ................... 82 --
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ........................ (155) --
NET INCREASE (DECREASE) IN CASH .................. (168) 293
CASH AT BEGINNING OF PERIOD ...................... 181 673
------- -------
CASH AT END OF PERIOD ............................ $ 13 $ 966
======= =======
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 27, 1997 AND DECEMBER 28, 1996
(in thousands)
(unaudited)
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ........................................ $ 73 $ 16
Income taxes .................................... 131 187
Noncash dividend accrual ............................ 116 112
Noncash adjustment of stock repurchase note ......... 798
==== ====
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 27, 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 28, 1997 1,150,646 $ 1,151 $ 119 $ 6,430
Net loss for the
fiscal six months
ended December 27, 1997 (218)
Exercise of stock options 12,000 12 70
Cash dividend declared
($.10 per share) (116)
----------------------------------------------
BALANCE AT DECEMBER 27, 1997 1,162,646 $ 1,163 $ 189 $ 6,096
==============================================
Pension
Liability
Adjustment
----------------
<S> <C>
BALANCE AT JUNE 28, 1997 $ (622)
Change for the fiscal six
months ended
December 27, 1997 -
BALANCE AT DECEMBER 27, 1997 $ (622)
----------------
</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 27, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Earnings Per Share Data
In February 1997 the Financial Accounting Standards Board issued
the Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share" effective for financial statements issued
for periods ending after December 15, 1997. This Statement
requires companies to present basic earnings per share and
diluted earnings per share.
Basic earnings per share is computed by dividing net earnings by
the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed by dividing
net earnings by the weighted average number of common shares
outstanding during the period plus the dilutive potential common
shares that would have been outstanding upon the assumed exercise
of dilutive stock options. As required by SFAS No. 128, all
earnings per share data has been restated for all periods
presented.
The following is the reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
For the Six Months Ended 12-27-97
Income Shares Per-Share
(Numerator)(Denominator) Amount
Basic EPS
Loss available to shareholders $ (218,000) 1,158,929 $ (0.19)
Effect of Dilutive Securities
Stock-based compensation
arrangements - -
Note: Zero shares included due
to loss in the fiscal
six months
ended December 27, 1997
Diluted EPS
Loss available to
shareholders $ (218,000) 1,158,929 $ (0.19)
For the Six Months Ended 12-28-96
Income Shares Per-Share
(Numerator)(Denominator) Amount
Basic EPS
Income available to
shareholders $ 506,000 1,123,146 $ 0.45
Effect of Dilutive Securities
Stock-based compensation
arrangements 24,669
Diluted EPS
Income available to
shareholders $ 506,000 1,147,815 $ 0.44
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<PAGE>
For the Three Months Ended 12-27-97
Income Shares Per-Share
(Numerator)(Denominator) Amount
Basic EPS
Income available to
shareholders $ 15,000 1,160,910 $ 0.01
Effect of Dilutive Securities
Stock-based compensation
arrangements 28,933
Diluted EPS
Income available to
shareholders $ 15,000 1,189,843 $ 0.01
For the Three Months Ended 12-28-96
Income Shares Per-Share
(Numerator)(Denominator) Amount
Basic EPS
Income available to
shareholders $ 208,000 1,123,146 $ 0.19
Effect of Dilutive Securities
Stock-based compensation
arrangements 29,169
Diluted EPS
Income available to
shareholders $ 208,000 1,152,315 $ 0.18
2. LINES OF CREDIT:
During the second quarter of the 1998 fiscal year, the Company renewed and
increased its bank line of credit from $1,500,000 to $2,000,000. The
increased line, which expires December 31, 1998, can be renewed annually
at the bank's discretion. This line of credit is secured by a blanket lien
on all machinery and equipment ($1,430,000) and all non-governmental
accounts receivable and inventory ($ 2,012,000). At December 27, 1997,
borrowings on the bank line of credit were $1,450,000.
The bank credit agreement contains, among other provisions, defined levels
of net worth and current ratio requirements and the Company was not in
compliance with the current ratio loan covenant at December 27, 1997. The
Company has received from the bank a waiver regarding this loan covenant
violation.
In September 1997, the Company began construction of a warehouse addition
adjoining its existing facilities in Waynesville, North Carolina, at an
estimated cost of between $350,000 and $400,000. A bank has provided a
$400,000 three-year term loan commitment to finance the construction if
needed.
As of December 27, 1997, there were no borrowings under this loan.
3. YEAR 2000 DATE CONVERSION:
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due
to processing errors potentially arising from calculations using the Year
2000 date are a known risk. The Company is addressing this risk to the
availability and integrity
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<PAGE>
of financial systems and the reliability of operational systems. The
Company primarily uses packaged software and our suppliers assure the
Company their upgraded software will be compatible with the Year 2000 date
and the costs will not be material. The total cost of compliance and its
effect on the Company's future results of operations is not expected to be
significant.
4. GOVERNMENT BOOT CONTRACT REVENUES:
Revenues in the six-month period ended December 27, 1997 include $47,000
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.
5. 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
documents for the period January 1, 1990 until April 29, 1997. The
subpoena was subsequently modified to provide that the initial production
of documents would start with documents dated January 1, 1993. In October,
1997, Wellco completed this initial document production by submitting more
than 200,000 documents. 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 is cooperating in this
investigation, 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.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Comparing The Six Months Ended December 27, 1997 and December 28, 1996
- ------------------------------------------------------------------------
For the six months ended December 27, 1997, Wellco had an operating loss of
$200,000 compared to an operating profit of $676,000 in the prior year six month
period ended December 28, 1996. The current period loss was primarily caused by
start-up costs incurred in the initial production of the new Infantry Combat
Boot (ICB), lower margins on this boot and another new boot and by a significant
reduction in the pairs of Direct Molded Sole (DMS) combat boots sold to the U.
S. government.
On June 25, 1997 the U.S. Defense Personnel Support Center (DPSC) awarded Wellco
a contract to supply the new ICB boot which will be used by the Marine Corps. A
total of two contracts were awarded and Wellco's contract is for 60% of total
pairs to be bought in the first year. The contract required that Wellco, within
90 days after contract award, manufacture and have in inventory a significant
quantity of this boot. At the end of this 90 period, the contract also required
Wellco to have the capacity to quickly deliver orders for this boot to all
Marine recruit induction centers and major Marine clothing stores. This 90 day
period compares to a normal "make ready" time in government boot contracts of
165 days or longer.
The ICB boot has several technologies and manufacturing methods which are
significantly different than those in the DMS boot. During this 90 day period,
Wellco rearranged its production lines, purchased and installed significant new
manufacturing equipment, hired and trained new employees, tested new materials,
and developed many new manufacturing procedures and methods. If time had
permitted, this should have been done with small trial production runs. With
only 90 days, Wellco had to simultaneously do all of this and reach full
production without the benefit and efficiencies of trial production runs.
ICB boot start-up costs, estimated to be approximately $700,000, were charged
against operating income in the six months ended December 27, 1997. In addition
to labor inefficiencies in training new employees, significant overtime premiums
were paid. Bonuses were paid to direct labor personnel for meeting production
quotas. Instead of using ocean freight, expensive air freight costs were
incurred to send materials to the Company's plant in Puerto Rico and then to
send completed boot uppers to the North Carolina plant for bottoming and
finishing. Because the 90 day period did not give enough time to develop
manufacturing procedures and methods using small trial production runs,
significant material losses were incurred. Full production quantities of
materials were purchased and a significant amount was scrapped when either the
material did not perform as expected and had to be replaced, or when
manufacturing procedures and methods had to be modified.
The start-up of ICB production proved to be more expensive than initially
anticipated. Management's judgement is that, if Wellco had included an adequate
amount of start-up costs in its bid prices, those prices would have been so much
higher than the prices of other bidders that Wellco would not have received the
contract award.
The persistence of Wellco's employees did result in a successful, although
costly, start-up. The first customer delivery orders were received in early
October, 1997, and Wellco has timely-shipped all orders to date.
In addition to the contract for the new ICB boot, Wellco, in fiscal year 1997,
was awarded a U. S. government contract to supply the Intermediate Cold/Wet boot
(ICW). This boot was first purchased for use by U. S. armed forces in the early
1990's and is also a new boot for the Company. As is often the case when
entering the manufacture of new products, margins on both the ICB and ICW boots
are less than those on the DMS boots.
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<PAGE>
On April 15, 1997, Wellco and three other contractors were awarded DMS combat
boot contracts from DPSC for the one year period starting April 15, with options
for each of the ensuing four years. Wellco's award is for 25% of total combat
boot purchases in this first year, with the other three contractors receiving
35%, 20% and 20% of total purchases. DPSC had estimated award to be in December,
1996, and Wellco substantially completed shipments under its prior contract in
that month. Instead of ceasing combat boot manufacturing operations from
January, 1997 to contract award, Wellco continued to manufacture and inventory
boots in anticipation of a contract award.
This resulted in Wellco having a significant inventory of combat boots at the
date of contract award, and in Wellco being the only contractor which was in
position to start shipping immediately upon contract award. During the fourth
quarter of the 1997 fiscal year and continuing into part of the quarter ended
September 27, 1997, Wellco was allowed to accelerate its first year shipments.
Starting in late October, 1997, DPSC significantly reduced the pairs ordered
from Wellco under this contract in order to allow the other three contractors,
who did not start shipping until months after Wellco started shipping , to
"catch up".
Compared to the six month period of last year, pairs of DMS combat boots sold in
the six months ended December 27, 1997 decreased by 37%. This was offset by
sales of the ICB and ICW boot, resulting in a net increase in total revenues of
$3,874,000. The start-up costs incurred on the ICB boot, the lower margin on ICB
and ICW boots and the reduction in pairs of DMS boots shipped were the primary
reasons for the operating loss in the six months ended December 27, 1997.
A tax benefit was recognized at December 27, 1997 for the loss incurred. This
benefit will be realized by either offsetting taxes on taxable income earned in
the remainder of the 1998 fiscal year or the refund of taxes paid in prior
years.
Forward Looking Information:
ICB boot start-up costs were significantly reduced in the quarter ended December
27, 1997. Wellco is continuing to improve its manufacturing methods which should
further lower this boot's cost. After the most efficient manufacturing methods
are established , an evaluation will be made of this boot's cost compared to the
fixed contract price.
Since December 27, 1997, DMS combat boot shipments have remained at the low
level. DPSC had previously estimated that a normal level of orders to Wellco for
the DMS boot would resume in mid-February, 1998, which was the expected time the
other three contractors "caught up". Based on information presently available,
the time required for this "catch up" will probably extend for several weeks
beyond this date.
This temporary reduction in pairs of combat boots ordered from Wellco will have
a negative effect on operating results through the third quarter of fiscal year
1998 ending March 28, 1998. The first year of this five year DMS boot contract
will end on April 15, 1998, which is the date scheduled for DPSC to exercise its
first option. Therefore, the latest date expected for the return to a more
normal level of DMS boot shipments is the latter half of April, 1998. The
allocation pairs among the four contractors under this option, with one
contractor receiving 35% of total pairs purchased by DPSC in the year, one 25%
and 20% to the two remaining contractors, will be based on an evaluation of each
contractors' performance in the first year and their option price.
See Note 3 to the Consolidated Financial Statements for information about the
Company's Year 2000 conversion. Likewise, see Note 5 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,
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<PAGE>
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 28,
1997. Actual results may differ materially from management expectations.
Comparing The Three Months Ended December 27, 1997 and December 28, 1996
- --------------------------------------------------------------------------
For the fiscal quarter ended December 27, 1997, Wellco had an operating profit
of $97,000 compared to an operating profit of $294,000 in the prior year three
month period ended December 28, 1996.
ICB boot start-up costs, estimated to be approximately $100,000, were charged
against operating income in the December 27, 1997 quarter. The Company continued
to incur, especially in the early part of this period, excess costs related to
labor inefficiencies, overtime, excess freight and material losses.
The December 27, 1997 quarter reflects the same boot sales trend as the six
month period discussed above. The reduction in pairs of DMS boots DPSC ordered
from Wellco first occurred in late October and continued through December 27,
1997. Pairs of DMS combat boots sold decreased 44%, while sales of the ICB and
ICW boots resulted in total pairs of boots sold increasing by 42%. Lower margins
on the ICB and ICW boots, compared to those on the DMS boot, had a significant
negative affect on operating results for the December 27, 1997 quarter.
LIQUIDITY AND CAPITAL RESOURCES
Wellco uses cash from operations and a bank line of credit to supply most of its
liquidity needs.
The following table summarizes at the end of the most recent fiscal six 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)
December 27, 1997 June 28, 1997
------------------ -------------
<S> <C> <C>
Cash ......................................... $ 13 $ 181
Unused Lines of Credit ....................... 550 2,813
------ ------
Total ........................................ $ 563 $2,994
====== ======
</TABLE>
The following table summarizes the major sources (uses) of cash for the six
months ended December 27, 1997:
<TABLE>
<CAPTION>
(in thousands)
December 27,
1997
------------
<S> <C>
Net Loss Plus Depreciation ...................................... ($ 36)
Net Change in Accounts Receivable, Inventories,
Accounts Payable, Accrued Liabilities, and Accrued
Income Taxes .................................................... 1,162
Other ........................................................... (167)
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<PAGE>
December 27,
1997
------------
<S> <C>
Net Cash Provided By Operations ................................ 959
Cash Used to Repay Lines of Credit ............................. (237)
Cash Used to Purchase Plant and Equipment ...................... (972)
Cash Provided By Exercise of Stock Options ..................... 82
Net Decrease in Cash .......................................... ($168)
</TABLE>
As stated in the Results of Operations section, Wellco accelerated shipments of
combat boots in the fourth quarter of the 1997 fiscal year, which resulted in a
significant increase in accounts receivable at June 28, 1997. Cash for this
increase in accounts receivable was provided by the bank line of credit. Cash
from a $1,883,000 reduction in accounts receivable in the December 27, 1997 six
month period was used to repay $237,000 of the bank lines of credit, to purchase
$972,000 of plant and equipment and to pay various liabilities. Equipment
purchases for production of the ICB boot and the construction of a new warehouse
caused the amount of cash used for the purchase of plant and equipment in the
quarter ended December 27, 1997 to be greater than normal.
In addition to a $1,500,000 unsecured line of credit which has been available
for many years, Wellco's bank provided a second $3,000,000 secured line of
credit which was used to finance the build up in combat boot inventories during
the period of delay in awarding the April 15, 1997 DMS boot contract and the
subsequent increase in accounts receivable as Wellco accelerated its shipments
after contract award. The bank's commitment to provide this second line expired
on September 24, 1997. The bank renewed until December 31, 1998 the original
line of credit commitment and increased it to $2,000,000. Wellco and its bank
will be meeting later in February to discuss an increase in this commitment
which would be used, if needed, to supply monies until shipments of the DMS
combat boot return to normal levels.
The Company recently began construction of a warehouse addition adjoining its
existing facilities in Waynesville, North Carolina, at a cost of between
$350,000 and $400,000 of which approximately $102,000 was incurred through
December 27, 1997. Wellco's bank has provided a $400,000 three-year term loan
which is being used to finance this addition.
Other than the warehouse addition mentioned above, the Company has no other
material commitments for capital equipment. The Company does not know of any
other demands, commitments, uncertainties, or trends that will result in or that
are reasonablely likely to result in its liquidity increasing or decreasing in
any material way.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not have any derivative financial instruments, other financial
instruments, or derivative commodity instruments that requires disclosures.
-16-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 5 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:
The 1997 Annual Stockholders Meeting of Wellco Enterprises, Inc.
was held on November 18, 1997. Three items were voted on and the
results of that voting is shown below.
1. Directors were elected as follows:
Nominee for Director Shares Voted For Shares Withheld From
Horace Auberry 1,042,473 318
Rolf Kaufman 1,041,273 1,518
Claude S. Abernethy, Jr. 1,042,473 318
2. The 1997 Stock Option Plan for Key Employees was approved
and the voting was as follows:
Shares Voted For Shares Voted Against Shares Abstained
864,354 37,610 29,837
3. The 1997 Stock Option Plan for Non-employee Directors was
approved and the voting was as follows:
Shares Voted For Shares Voted Against Shares Abstained
887,487 18,592 31,314
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
-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\ \s\
David Lutz, President and Treasurer Tammy Francis, Controller
February 11, 1997
-18-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS FOR THE SECOND QUARTER 10-Q, PERIOD ENDED DECEMBER
27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<NAME> WELLCO ENTERPRISES, INC.
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