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: OCTOBER 3, 1998
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 828-456-3545
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 November 17,
1998.
<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 OCTOBER 3, 1998
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
OCTOBER 3, 1998 AND JUNE 27, 1998
(in thousands)
ASSETS
<TABLE>
<CAPTION>
(unaudited)
OCTOBER 3, JUNE 27,
1998 1998
---------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash ........................................ $ 281 $ 196
Receivables ................................. 2,534 2,247
Inventories-
Finished goods ......................... 4,543 4,747
Work in process ........................ 1,308 2,077
Raw materials .......................... 2,443 2,684
-------- --------
Total .................................. 8,294 9,508
Deferred taxes and prepaid expenses ......... 395 292
Income tax refund receivable ................ 292 292
-------- --------
Total ....................................... 11,796 12,535
-------- --------
MACHINERY LEASED TO LICENSEES
(less accumulated depreciation of
$1,506 and $1,503) .......................... 13 16
PROPERTY, PLANT AND EQUIPMENT:
Land ........................................ 107 107
Buildings ................................... 1,159 1,155
Machinery and equipment ..................... 3,669 3,632
Furniture and automobiles ................... 717 709
Leasehold improvements ...................... 63 63
-------- --------
Total cost .................................. 5,715 5,666
Less accumulated depreciation and
amortization ............................. (3,454) (3,333)
-------- --------
Net ......................................... 2,261 2,333
-------- --------
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition ................ 228 228
Intangible pension asset .................... 440 440
-------- --------
Total ....................................... 668 668
DEFERRED TAXES ................................... 468 468
-------- --------
TOTAL ............................................ $ 15,206 $ 16,020
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 3, 1998 AND JUNE 27, 1998
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(unaudited)
OCTOBER 3, JUNE 27,
1998 1998
----------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 2) ....... $ 2,550 $ 2,885
Accounts payable .............................. 1,588 1,696
Accrued compensation .......................... 1,013 988
Accrued pension ............................... 135 191
Accrued income taxes .......................... 191 241
Other liabilities ............................. 223 311
Current maturity of note payable .............. 146 146
-------- --------
Total ................................. 5,846 6,458
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ............................ 1,745 1,762
Notes payable ................................. 455 491
CONTINGENCY (Note 5)
STOCKHOLDERS' EQUITY :
Common stock, $1.00 par value ................. 1,164 1,164
Additional paid-in capital .................... 192 192
Retained earnings ............................. 6,539 6,688
Accumulated other comprehensive income
(Note 1) ...................................... (735) (735)
-------- --------
Total ................................. 7,160 7,309
-------- --------
TOTAL .............................................. $ 15,206 $ 16,020
======== ========
</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
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(in thousands except per share and number of shares)
<TABLE>
<CAPTION>
(unaudited)
OCTOBER 3, SEPTEMBER 27,
1998 1997
---------- -------------
<S> <C> <C>
REVENUES (Note 3) .............................. $ 4,957 $ 5,676
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ................ 4,484 5,435
General and administrative expenses ....... 573 538
----------- -----------
Total ..................................... 5,057 5,973
----------- -----------
OPERATING LOSS ................................. (100) (297)
NET INTEREST EXPENSE ........................... (78) (22)
----------- -----------
LOSS BEFORE INCOME TAXES ....................... (178) (319)
BENEFIT FOR INCOME TAXES ....................... (29) (86)
----------- -----------
NET LOSS AND COMPREHENSIVE LOSS (Note 1) ....... $ (149) $ (233)
=========== ===========
BASIC LOSS PER SHARE
based on weighted average number of
shares outstanding) ....................... $ (0.13) $ (0.20)
----------- -----------
Shares used in computing basic
earnings per share ........................ 1,163,246 1,156,855
=========== ===========
DILUTED LOSS PER SHARE based on weighted
average number of shares outstanding
and dilutive stock
options) ................................. $ (0.13) $ (0.20)
=========== ===========
Shares used in computing diluted
earnings per share ........................ 1,163,246 1,156,855
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL THREE MONTHS ENDED
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
OCTOBER 3, SEPTEMBER 27,
1998 1997
---------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ........................................ $ (149) $ (233)
------- -------
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization .............. 124 91
(Increase) decrease in-
Accounts receivable ................... (287) 2,593
Inventories ........................... 1,214 (507)
Other current assets .................. (103) (202)
Increase (decrease) in-
Accounts payable ...................... (108) 423
Accrued liabilities ................... 25 15
Accrued income taxes .................. (50) (105)
Pension obligation .................... (73) (17)
Other ................................. (88) (105)
------- -------
Total adjustments ............................... 654 2,186
------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............................ 505 1,953
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment, net ........... (49) (581)
------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ........................... (49) (581)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under short-term
agreements .................................... (335) (1,387)
Principal payments of bank note payable ......... (36) --
Exercise of stock options ....................... -- 58
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............................ (371) (1,329)
------- -------
NET INCREASE IN CASH ................................. 85 43
CASH AT BEGINNING OF PERIOD .......................... 196 181
------- -------
CASH AT END OF PERIOD ................................ $ 281 $ 224
======= =======
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WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL THREE MONTHS ENDED
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(in thousands)
(unaudited)
OCTOBER 3, SEPTEMBER 27,
1998 1997
---------- -------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ................................. $ 76 $ 4
Income taxes ............................. 22 105
==== ====
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL THREE MONTHS ENDED
OCTOBER 3, 1998
(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 27, 1998 1,163,246 $ 1,164 $ 192 $ 6,688
Net loss for the fiscal
three months ended
October 3, 1998 (149)
BALANCE AT OCTOBER 3, 1998 1,163,246 $ 1,164 $ 192 $ 6,539
=======================================================
Accumulated
Other
Comprehensive
Income
----------------
<S> <C>
BALANCE AT JUNE 27, 1998 (Note 1) $ (735)
Change for the fiscal three
months ended October 3, 1998 -
----------------
BALANCE AT OCTOBER 3, 1998 $ (735)
================
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL THREE MONTHS ENDED OCTOBER 3, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Recent Statements of the Financial Accounting Standards Board
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," which is effective for the Company's current fiscal
year ending July 3, 1999. This statement establishes standards for
reporting and display of comprehensive income and its components and
accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Under SFAS 130, the Company's pension liability
adjustment is now reported in the equity section of the balance sheet as
accumulated other comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
the Company's current fiscal year ending July 3, 1999. SAFS 131 provides
that any new disclosures in the fiscal year in which the statement becomes
effective need not be made until the end of that year. This Statement
supersedes Financial Accounting Standards Board Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise", which
presently determines the Company's segment and related reporting, and
under which the Company has one segment. SFAS 131 requires disclosure of
financial and descriptive information about reportable operating segments,
revenues by products or services, and revenues and assets by geographic
areas. The Company believes that the only significant effects on its
disclosures resulting from SFAS 131 would be the additional disclosures if
it has more than one reportable operating segment. The Company has not as
yet determined if it has more than one reportable operating segment under
SFAS 131.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 (SFAS 132),
"Employers' Disclosures About Pensions and Other Postretirement Benefits,"
which is effective for the Company's current fiscal year ending July 3,
1999. This Statement supersedes the disclosure requirements of Financial
Accounting Standards Board Statement No. 87, "Employer's Accounting for
Pensions", No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits", and No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". SFAS 132 standardizes the disclosure requirements for pensions
and other postretirement benefits and does not address measurement or
recognition of such items. Disclosures required by SFAS 132 will not
significantly change the Company's present pension disclosure.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to June 30.
Therefore, the 1999 fiscal year will contain 53 weeks and the fiscal
quarter ended October 3, 1998 contained 14 weeks. The prior year fiscal
quarter ending September 27, 1997 contained 13 weeks.
2. LINES OF CREDIT:
The Company maintains a $4,000,000 secured bank line of credit. The bank
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 (carrying value of $1,577,000) and all
non-governmental
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<PAGE>
accounts receivable and inventory ($1,662,000). At October 3, 1998,
borrowings on the line of credit were $2,550,000 with $1,450,000 available
in additional borrowings.
The bank credit agreement contains, among other provisions, defined levels
of net worth and current ratio requirements. The Company was not in
compliance with the current ratio loan covenant at October 3, 1998. The
Company has received from the bank a waiver for the period ended October
3, 1998 regarding this loan covenant violation. The covenants are subject
to review at the end of each fiscal quarter.
3. GOVERNMENT BOOT CONTRACT REVENUES:
Revenues in the three-month period ended October 3, 1998 include $169,000
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. There were no significant differences
for the fiscal quarter ended October 3, 1998.
4. CONTRACT CLAIM:
In April 1998 Wellco executed an Agreement with Defense Supply Center
Philadelphia (DSCP). The Agreement provides that DSCP will reimburse the
Company for certain costs incurred related to contract performance during
the fourth quarter of the 1997 fiscal year and the first two quarters of
the 1998 fiscal year. Wellco maintained that it was due reimbursement for
costs incurred in performing in accordance with a prior DSCP
interpretation of the contract. This interpretation was later changed to
the detriment of Wellco. The Agreement provides that any disagreement
between Wellco and DSCP on an item of cost will be subject to binding
arbitration. The cost reimbursement is limited to $1,000,000.
Wellco submitted its claim under the Agreement in late May, 1998
documenting more than $1,000,000 in costs incurred. In an early October,
1998 meeting with Wellco, DSCP agreed to pay Wellco $246,000 of the
$1,000,000 claim. Therefore, the 1998 Consolidated Statements of
Operations included $226,000 of income related to this claim, representing
the agreed to $246,000 less $20,000 of related costs.
Binding arbitration will be used to determine how much, if any, of the
remaining $754,000 will be paid by DSCP to Wellco, and the process of
picking an arbitrator has now started. It is expected that this
arbitration procedure will take a few months and Wellco, although
confident that a significant amount of the $754,000 will ultimately be
paid, cannot reasonably predict what the arbitrator will decide. Any
amount Wellco will receive beyond $246,000 will be recorded at the time of
the arbitration decision.
5. CONTINGENCY:
In March 1998 the Company was served with a civil action complaint. The
Plaintiff is alleging that the Company, during the period October, 1995
through September, 1996, untimely delivered defective work shoes which
resulted in certain losses for the Plaintiff as well as precluding
Plaintiff from competing on a subsequent contract. In addition, the
complaint alleges that Wellco submitted as its bid prototype one of the
Plaintiff's work shoes which resulted in the subsequent contract being
awarded to Wellco. It is the opinion of the Company's management, based
upon the information available at this time, that the expected outcome of
these matters will not have a material adverse effect on the results of
operations and financial condition of the Company.
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Comparing The Three Months Ended October 3, 1998 and September 27, 1997
- - ------------------------------------------------------------------------
For the three months ended October 3, 1998, Wellco had a net loss of $149,000
compared to a net loss of $233,000 in the prior year three month period ended
September 27, 1997. The current period loss was primarily caused by a reduction
in the sale of Direct Molded Sole (DMS) combat boots to the U.S. Defense Supply
Center Philadelphia (DSCP) and by a significant reduction in revenues from
technical assistance fees. The prior year loss was primarily caused by costs
incurred in the initial production of the new Infantry Combat Boot (ICB).
Pairs of DMS combat boots sold to DSCP in the current three month period was
approximately 43% less than pairs sold in the prior year three month period. On
April 10, 1998 DSCP exercised it's first option on the current DMS boot contract
covering the period April 15, 1998 to April 15, 1999. Under this option, Wellco
will receive delivery orders for 25% of total DMS pairs purchased during this
year. For several years, DSCP has been reducing its depot inventory of DMS
boots. Prior to option exercise, in late February, 1998, DSCP met with all DMS
boot contractors informing them that inventory reduction was behind schedule and
needed to be accelerated. Out of this meeting came a contract modification
reducing the total guaranteed minimum pairs to be purchased by DSCP during the
first option year. For Wellco, this is a reduction in the minimum pairs from
155,000 to 125,000 pairs. The price per pair for the first 155,000 pairs during
the first option was increased to partially compensate for the reduced pairs.
Combat boot shipments during the September 27, 1997 period reflected part of an
acceleration of shipments under the contract's base year.
Revenues from technical assistance fees from licensees were lower in the October
3, 1998 period. Prior year fees include an additional fee related to supplying
certain customers with additional services. Wellco completed providing these
additional services by June, 1998. Revenues from equipment sales to licensees
increased in the October 3, 1998 period because of the sale of boot making
materials to a foreign customer and an equipment sale to a new licensee.
Because of the fewer DMS boot sales, Wellco has been reducing its inventory of
DMS combat boots by producing fewer pairs than were shipped. Some direct labor
and salaried personnel have been laid off. The reduced production and personnel
have caused several categories of semi-fixed costs to decrease.
Sales of the Intermediate Cold/Wet boot to DSCP were approximately the same as
in the prior period. This is the first contract Wellco has had for the
production of this boot and, as is often the case when entering the manufacture
of new products, margins are less than those on DMS boots historically supplied
by Wellco to DSCP.
On June 25, 1997, Wellco was awarded a contract to supply the new Infantry
Combat Boot/Marine Corps (ICB), with shipments starting in October, 1997. Wellco
had not previously made this boot. Operating results for September 27, 1997
period were adversely affected by the incurrence of approximately $700,000 of
start-up costs related to the initial production of this boot. The ICB 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 day
period, the contract also required Wellco to have the capacity to quickly
deliver orders for this boot to Marine recruit training 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 incorporates 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
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<PAGE>
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.
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. Production quantities of materials
were purchased and processed. Some materials did not perform as expected,
resulting in boots which could not be shipped under the contract and whose
market value were less than cost.
The rate of income tax benefit to loss before income taxes is lower in the
current period because some of the loss was incurred in the Company's Puerto
Rican subsidiary which is substantially exempt from both federal and Puerto
Rican income tax.
Forward Looking Information:
The Management's Discussion and Analysis section of the Company's 1998 Annual
Report contains information about DSCP's inventory reduction program for the DMS
combat boot, including their acceleration of this program in the current
contract option one year. This means that the minimum pairs DSCP must buy from
Wellco in the year April 15, 1998 through April 15, 1999 was, reduced from
155,000 to 125,000. In addition, DSCP made a non-binding commitment to exceed
the minimum if boot usage exceeded a certain amount. Wellco believes that if any
purchases beyond the 125,000 pair minimum are made, the total additional pairs
will not exceed 10,000.
Orders received by Wellco to date under the current option are less than a
proportional allocation of the 125,000 pairs over the option year. Therefore, an
increase in the ordering rate will occur before the option year ends on April
15, 1999.
Wellco has received a DSCP letter stating their intent to exercise the second
option of the current DMS contract, which should occur in April, 1999. The
minimum pairs to be purchased from Wellco during this option year is 155,000.
DSCP has provided Wellco with data showing that substantial progress has been
made in reducing their DMS combat boot inventory. Using this data and historical
boot usage, Wellco has projected that during the later part of the second option
DSCP should reach its desired inventory level. At that time, boot purchases
should increase to the number of pairs that are used.
In October, 1998 Wellco was awarded a contract to provide an inmate work shoe to
a state prison system through September 30, 1999. Wellco had previously supplied
this shoe for the year ended September 30, 1997.
Note 3 to the Consolidated Financial Statements contains information about a
contract claim. Part of the claim has been settled and $754,000 remains to be
settled by binding arbitration. The amount, if any, that Wellco receives from
the $754,000 will be recorded as an item of income at the time of the
arbitration decision.
The Company recognizes the need to consider whether its operations will 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.
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<PAGE>
The Company primarily uses packaged software running on personal computers and
file servers, and does not use mainframes. Packaged software primarily consists
of accounting, payroll, bar coding and inventory control, employee time and
attendance, and Microsoft Windows applications. All of Wellco's packaged
software has been updated to Year 2000 compliant versions. The total cost of
this updating was minimal.
A lack of timely Year 2000 compliance by Wellco's major customers, vendors and
suppliers could have a materially adverse affect on Wellco's results of
operations and financial condition, although such adverse effect should not be
long term or permanent. For example, orders received from the DSCP for boot
shipments are received electronically. After shipment, Wellco electronically
invoices boot shipments as well as receiving payment by bank wire transfer. A
lack of timely Year 2000 compliance by DSCP may significantly delay Wellco's
boot shipments. A lack of timely Year 2000 compliance with related computerized
systems, for example the ability to electronically receive invoicing from
Wellco, may significantly delay Wellco's receipt of cash from invoices. There
may be suppliers of materials, machine replacement parts, and other critical
items who may not be Year 2000 compliant. This may mean a delay in getting the
necessary materials and other items to maintain a continuous flow of production.
The Company has sent written communication to all major vendors and customers
asking confirmation as to their Year 2000 compliance status. There has been a
good response to this process and responses received to date have not indicated
a significant problem.
Wellco will continue monitoring customer and vendor responses to its Year 2000
compliance questionnaire. If vendor responses indicate a problem, Wellco may be
able to find other Year 2000 compliant vendors, or order excess materials and
other items necessary to continue operations until the estimated time vendors
are compliant. If customer responses indicate a problem, Wellco will work with
those customers to the extent possible. If Wellco has to take some or all of
these actions to minimize any Year 2000 problems, it may have to have additional
financing. Early detection of problems will increase the probability of finding
such financing.
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 27, 1998. Actual results may differ materially from
management expectations.
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 three months
and the last fiscal year the amount of cash and unused line of credit:
<TABLE>
<CAPTION>
(in thousands)
October 3, 1998 June 27, 1998
--------------- -------------
<S> <C> <C>
Cash ......................................... $ 281 $ 196
Unused Line of Credit ........................ 1,450 1,115
------ ------
Total ........................................ $1,731 $1,311
====== ======
</TABLE>
The following table summarizes the major sources (uses) of cash for the three
months ended October 3, 1998:
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<TABLE>
<CAPTION>
(in thousands)
October 3,
1998
----------
<S> <C>
Net Loss Plus Depreciation ...................................... $ (25)
Net Change in Accounts Receivable, Inventories,
Accounts Payable, Accrued Liabilities, and Accrued
Income Taxes .................................................... 794
Other ........................................................... (264)
Net Cash Provided By Operations ................................. 505
Cash From Bank Line of Credit ................................... 915
Cash Used to Repay Lines of Credit .............................. (1,250)
Cash Used to Repay Bank Loan .................................... (36)
Cash Used to Purchase Equipment ................................. (49)
Net Increase in Cash ........................................... $ 85
</TABLE>
The Management's Discussion and Analysis section of the Company's 1998 Annual
Report contains information about the increase in combat boot inventories that
occurred during the 1998 fiscal year. Since then, Wellco has been reducing its
inventory by reducing the production level and by having short periods of
suspended manufacturing operations. This resulted in cash from a $1,214,000
reduction in inventories during the first quarter of fiscal year 1999 being used
to reduce accounts payable by $108,000, repay the bank line of credit by
$335,000 and fund an increase of $287,000 in accounts receivable.
The amount outstanding under the bank line of credit at October 3, 1998 was
$2,550,000. As of November 12, 1998, cash flow had been used to further reduce
the amount outstanding to $1,895,000, a $655,000 reduction.
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.
The bank line of credit, which provides for total borrowings of $4,000,000, will
expire and be subject to renewal on December 31, 1998.
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.
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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. N/A
Item 5. Other Information. N/A
Item 6. Exhibits and Reports on Form 8-K.
a). Exhibits: None
b). Reports on Form 8-K: None
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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
November 17, 1998
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE 1ST QUARTER 10-Q, PERIOD ENDED OCTOBER 3,
1998 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> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> OCT-03-1998
<EXCHANGE-RATE> 1
<CASH> 281
<SECURITIES> 0
<RECEIVABLES> 2,592
<ALLOWANCES> 58
<INVENTORY> 8,294
<CURRENT-ASSETS> 11,796
<PP&E> 7,234
<DEPRECIATION> 4,960
<TOTAL-ASSETS> 15,206
<CURRENT-LIABILITIES> 5,846
<BONDS> 455
0
0
<COMMON> 1,164
<OTHER-SE> 5,996
<TOTAL-LIABILITY-AND-EQUITY> 15,206
<SALES> 4,957
<TOTAL-REVENUES> 4,957
<CGS> 5,057
<TOTAL-COSTS> 5,057
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (178)
<INCOME-TAX> (29)
<INCOME-CONTINUING> (149)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (149)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
