WELLCO ENTERPRISES INC
10-Q, 1999-05-18
FOOTWEAR, (NO RUBBER)
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                                    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: APRIL 3, 1999

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 May 18, 1999


                                                             

<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 APRIL 3, 1999










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
                         APRIL 3, 1999 AND JUNE 27, 1998
                                 (in thousands)

                                     ASSETS
<TABLE>
<CAPTION>

                                                      (unaudited)
                                                         APRIL 3,       JUNE 27,
                                                             1999           1998
                                                         --------       -------- 
<S>                                                     <C>           <C>   
                           
CURRENT ASSETS:
     Cash ........................................      $    147       $    196
     Receivables .................................         1,577          2,247
     Inventories-
          Finished goods .........................         4,146          4,747
          Work in process ........................         1,417          2,077
          Raw materials ..........................         2,202          2,684
                                                        --------       --------
          Total ..................................         7,765          9,508
     Deferred taxes and prepaid expenses .........           440            292
     Income tax refund receivable ................           357            292
                                                        --------       --------
     Total .......................................        10,286         12,535
                                                        --------       --------

MACHINERY LEASED TO LICENSEES
     (less accumulated depreciation of
     $1,511 and $1,503) ..........................             8             16

PROPERTY, PLANT AND EQUIPMENT:
     Land ........................................           107            107
     Buildings ...................................         1,159          1,155
     Machinery and equipment .....................         3,911          3,632
     Furniture and automobiles ...................           720            709
     Leasehold improvements ......................            89             63
                                                        --------       --------
     Total cost ..................................         5,986          5,666
     Less accumulated depreciation and
        amortization .............................        (3,696)        (3,333)
                                                        --------       --------
     Net .........................................         2,290          2,333
                                                        --------       --------

INTANGIBLE ASSETS:
     Excess of cost over net assets of
        subsidiary at acquisition ................           228            228
     Intangible pension asset ....................           220            440
                                                        --------       --------
     Total .......................................           448            668

DEFERRED TAXES ...................................           564            468
                                                        --------       --------

TOTAL ............................................      $ 13,596       $ 16,020
                                                        ========       ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       -3-
<PAGE>


                            WELLCO ENTERPRISES, INC.
                           CONSOLIDATED BALANCE SHEETS
                         APRIL 3, 1999 AND JUNE 27, 1998
                                 (in thousands)

                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>


                                                       (unaudited)
                                                          APRIL 3,      JUNE 27,
                                                              1999          1998
                                                          --------      --------                        
<S>                                                      <C>           <C>   

CURRENT LIABILITIES:
     Short-term borrowing from bank (Note 2) .......     $  1,295      $  2,885
     Accounts payable ..............................        1,985         1,696
     Accrued compensation ..........................          947           988
     Accrued pension ...............................          161           191
     Accrued income taxes ..........................         --             241
     Accrued restructuring costs ...................          350          --
     Other liabilities .............................          255           311
     Current maturity of note payable ..............          146           146
                                                         --------      --------
              Total ................................        5,139         6,458
                                                         --------      --------


LONG-TERM LIABILITIES:
     Pension obligation ............................        1,685         1,762
     Notes payable .................................          382           491

STOCKHOLDERS' EQUITY :
     Common stock, $1.00 par value .................        1,164         1,164
     Additional paid-in capital ....................          192           192
     Retained earnings .............................        5,769         6,688
     Accumulated other comprehensive income
     (Note 1) ......................................         (735)         (735)
                                                         --------      --------
              Total ................................        6,390         7,309
                                                         --------      --------

TOTAL ..............................................     $ 13,596      $ 16,020
                                                         ========      ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       -4-
<PAGE>

                            WELLCO ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                        FOR THE FISCAL NINE MONTHS ENDED
                        APRIL 3, 1999 AND MARCH 28, 1998
              (in thousands except per share and number of shares)

<TABLE>
<CAPTION>
                                                          (unaudited)
                                                        APRIL 3,       MARCH 28,
                                                            1999            1998
                                                        --------       --------- 
<S>                                                 <C>             <C>    
                           
REVENUES (Note 4) ..............................    $    13,169     $    18,764
                                                    -----------     -----------

COSTS AND EXPENSES:
     Cost of sales and services ................         11,992          17,798
     General and administrative expenses .......          1,662           1,508
                                                    -----------     -----------

     Total .....................................         13,654          19,306
                                                    -----------     -----------

RESTRUCTURING AND REALIGNMENT COSTS (Note 3) ...           (589)

CONTRACT CLAIM (Note 5) ........................           --               980
                                                    -----------     -----------

OPERATING INCOME (LOSS) ........................         (1,074)            438

NET INTEREST EXPENSE ...........................           (189)           (133)
                                                    -----------     -----------

INCOME (LOSS) BEFORE INCOME TAXES ..............         (1,263)            305

PROVISION (BENEFIT) FOR INCOME TAXES ...........           (460)             89
                                                    -----------     -----------

NET INCOME (LOSS) AND  COMPREHENSIVE
     INCOME (LOSS) (Note 1) ....................    $      (803)    $       216
                                                    ===========     ===========

BASIC EARNINGS (LOSS) PER SHARE
     based on weighted average number of
     shares outstanding ........................    $     (0.69)    $      0.19
                                                    ===========     ===========
     Shares used in computing basic
     earnings per share ........................      1,163,246       1,160,374
                                                    ===========     ===========

DILUTED EARNINGS  (LOSS) PER SHARE based on
     weighted  average  number of shares
     outstanding and dilutive stock
      options ..................................    $     (0.69)    $      0.18
                                                    ===========     ===========
     Shares used in computing diluted
     earnings per share ........................      1,163,246       1,190,311
                                                    ===========     ===========

</TABLE>


See Notes to Consolidated Financial Statements.


                                       -5-
<PAGE>

                            WELLCO ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                        FOR THE FISCAL THREE MONTHS ENDED
                      APRIL 3, 1999 AND MARCH 28, 1998 (in
                    thousands except per share and number of
                                     shares)
<TABLE>
<CAPTION>

                                                             (unaudited)
                                                        APRIL 3,       MARCH 28,
                                                            1999            1998
                                                        --------       ---------
<S>                                                 <C>             <C>    
                         
REVENUES (Note 3) ..............................    $     4,383     $     5,162
                                                    -----------     -----------

COSTS AND EXPENSES:
     Cost of sales and services ................          3,841           5,046
     General and administrative expenses .......            536             458
                                                    -----------     -----------
     Total .....................................          4,377           5,504
                                                    -----------     -----------

RESTRUCTURING AND REALIGNMENT COSTS (Note 3) ...           (589)           --

CONTRACT CLAIM (Note 5) ........................           --               980
                                                    -----------     -----------

OPERATING INCOME (LOSS) ........................           (583)            638

NET INTEREST EXPENSE ...........................            (40)            (46)
                                                    -----------     -----------

INCOME (LOSS) BEFORE INCOME TAXES ..............           (623)            592

PROVISION (BENEFIT) FOR INCOME TAXES ...........           (247)            158
                                                    -----------     -----------

NET INCOME (LOSS) AND  COMPREHENSIVE
     INCOME (LOSS) (Note 1) ....................    $      (376)    $       434
                                                    ===========     ===========

BASIC EARNINGS (LOSS) PER SHARE
     based on weighted average number of
     shares outstanding ........................    $     (0.32)    $      0.37
                                                    ===========     ===========
     Shares used in computing basic
     earnings per share ........................      1,163,246       1,163,193
                                                    ===========     ===========

DILUTED EARNINGS  (LOSS) PER SHARE based on
     weighted  average  number of shares
     outstanding and dilutive stock
      options ..................................    $     (0.32)    $      0.37
                                                    ===========     ===========
     Shares used in computing diluted
     earnings per share ........................      1,163,246       1,181,168
                                                    ===========     ===========
</TABLE>


See Notes to Consolidated Financial Statements.




                                       -6-
<PAGE>


                            WELLCO ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE FISCAL NINE MONTHS ENDED
                        APRIL 3, 1999 AND MARCH 28, 1998
                                 (in thousands)
<TABLE>
<CAPTION>

                                                          (unaudited)
                                                           APRIL 3,    MARCH 28,
                                                               1999         1998
                                                           --------    ---------
<S>                                                        <C>          <C>    
                           
CASH FLOWS FROM OPERATING
ACTIVITIES:
     Net income (loss) ...............................     $  (803)     $   216
                                                           -------      -------
     Adjustments  to reconcile  net income
     (loss) to net cash provided by (used
     in) operating activities:
          Depreciation and amortization ..............         371          303
          (Increase) decrease in-
               Accounts receivable ...................         670        1,262
               Inventories ...........................       1,743       (1,956)
               Other current assets ..................        (213)          57
          Increase (decrease) in-
               Accounts payable ......................         289          544
               Accrued liabilities ...................         (41)        (100)
               Accrued income taxes ..................        (241)        (242)
               Accrued restructuring costs ...........         350         --
               Pension obligation ....................         113          (58)
               Other .................................        (152)         (49)
                                                           -------      -------
     Total adjustments ...............................       2,889         (239)
                                                           -------      -------
NET CASH PROVIDED BY (USED IN)
     OPERATING ACTIVITIES ............................       2,086          (23)
                                                           -------      -------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of plant and equipment, net ...........        (320)      (1,298)
                                                           -------      -------
NET CASH USED IN INVESTING ACTIVITIES ................        (320)      (1,298)
                                                           -------      -------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Net borrowings (payments) under
     short-term agreements ...........................      (1,590)         813
     Proceeds from bank note payable .................        --            400
     Principal payments of bank note payable .........        (109)         (35)
     Cash dividends paid .............................        (116)        (116)
     Exercise of stock options .......................        --             85
                                                           -------      -------
NET CASH PROVIDED BY (USED IN)
     FINANCING ACTIVITIES ............................      (1,815)       1,147
                                                           -------      -------


NET DECREASE IN CASH .................................         (49)        (174)

CASH AT BEGINNING OF PERIOD ..........................         196          181
                                                           -------      -------

CASH AT END OF PERIOD ................................     $   147      $     7
                                                           =======      =======
</TABLE>

                                       -7-
<PAGE>

                            WELLCO ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE FISCAL NINE MONTHS ENDED
                        APRIL 3, 1999 AND MARCH 28, 1998
                                 (in thousands)
<TABLE>
<CAPTION>

                                                          (unaudited)
                                                           APRIL 3,    MARCH 28,
                                                               1999         1998
                                                           --------    ---------
<S>                                                        <C>          <C>    

SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
     Cash paid for-
          Interest ....................................     $   184     $    97
          Income taxes ................................          32       1,431
     Noncash increase (decrease) in note payable ......        --          (489)
                                                            =======     =======
</TABLE>


See Notes to Consolidated Financial Statements.


                                       -8-

<PAGE>

                            WELLCO ENTERPRISES, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        FOR THE FISCAL NINE MONTHS ENDED
                                  APRIL 3, 1999
                     (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 nine
     months ended April 3, 1999                                            (803)
Cash dividend declared
     ($.10 per share)                                                      (116)
                                  ----------------------------------------------

BALANCE AT APRIL 3, 1999          1,163,246   $ 1,164       $ 192       $ 5,769
                                  ==============================================                          



                                                                     Accumulated
                                                                           Other
                                                                   Comprehensive
                                                                          Income
                                                                ----------------
<S>                                                                      <C>   

BALANCE AT JUNE 27, 1998 (Note 1)                                        $ (735)

Change for the fiscal nine
     months ended April 3, 1999                                               -
                                                                ----------------

BALANCE AT APRIL 3, 1999                                                 $ (735)
                                                                ================
</TABLE>

See Notes to Consolidated Financial Statements.


                                       -9-

<PAGE>

                            WELLCO ENTERPRISES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE FISCAL NINE MONTHS ENDED APRIL 3, 1999


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.


2.    LINES OF CREDIT:

      During the second quarter of the 1999 fiscal year the Company  renewed its
      $4,000,000  secured  bank line of credit . The bank  line,  which  expires
      December 31, 1999, 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  $1,588,000)  and  all   non-governmental   accounts
      receivable and inventory  ($879,000).  At April 3,1999,  borrowings on the
      line of credit were  $1,295,000  with  $2,705,000  available in additional
      borrowings.

      The bank credit agreement contains, among other provisions, defined levels
      of net worth and current ratio requirements. The Company was in compliance
      with both covenants at April 3, 1999. The
                                      -10-

<PAGE>



      covenants are subject to review at the end of each fiscal quarter.

3.    RESTRUCTURING AND REALIGNMENT COSTS:

      In February, 1999, the Board of Directors approved a restructuring plan to
      consolidate and realign the Company's footwear  manufacturing  operations.
      Under this plan, the Company is consolidating  substantially  all footwear
      manufacturing operations at its facility in Aguadilla,  Puerto Rico, where
      the Company has had operations since 1956. The execution of this plan will
      result in the elimination of approximately 85 employment  positions at the
      Company's  Waynesville,  North Carolina facility, and in the transfer of a
      significant amount of Waynesville machinery to Aguadilla. In addition, the
      present  Aguadilla  operations  will be moved to a larger leased  facility
      into  which  will  be  incorporated   the  operations   transferred   from
      Waynesville.

      The  new  Aguadilla  facility  has  been  leased,  certain  materials  and
      machinery are currently being  transferred,  new employees are being hired
      and training has started.  In early July,  1999,  the balance of machinery
      and  materials  will be  transferred  and  Waynesville  employees  will be
      terminated on July 2.

      In addition to  manufacturing  small  quantities  of uppers into  finished
      boots when special  customer needs arise,  the  Waynesville  facility will
      continue  to  warehouse   and  ship  boots  and  serve  as  the  Company's
      headquarters,  as well as its sales and product  development  center. This
      action will not affect Ro-Search,  Inc., a wholly-owned  subsidiary of the
      Company which makes specialized  footwear  manufacturing  machinery at the
      Waynesville facility.

      The  consolidation  of footwear  manufacturing  operations in one location
      will have the effect of improving  manufacturing  efficiency  and reducing
      work in process inventory.  In addition,  certain  manufacturing costs are
      lower in Puerto Rico than they are in the United States.

      In the quarter ended April 3, 1999, a restructuring charge of $570,000 was
      recorded.  This  primarily  represents  anticipated  employment  severance
      expenses  ($545,000) and other exit costs ($25,000).  As of April 3, 1999,
      the Company has incurred  realignment  expenses of $19,000 for other costs
      related to the  restructuring  plan that do not qualify as "exit costs" as
      defined by Emerging Issues Task Force Issue No. 94-3.


4.    GOVERNMENT BOOT CONTRACT REVENUES:

      Revenues in the  three-month  period ended April 3, 1999  include  $67,000
      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 April 3, 1999.

5.    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 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.  After reduction for
      certain costs related to reaching this Agreement, $980,000 was

                                      -11-

<PAGE>



      recorded in the March 28, 1998 period.  In an early October,  1998 meeting
      with Wellco,  DSCP agreed to pay Wellco  $246,000 of the $1,000,000  claim
      and  $754,000  of the amount  originally  recorded  at March 28,  1998 was
      reversed in the quarter ended June 27, 1998.

      The Agreement provides that any disagreement between Wellco and DSCP on an
      item of cost will be  settled by binding  arbitration.  Wellco  attorney's
      were working with DSCP to select a mutually agreeable arbitrator when DSCP
      discovered  that  federal  regulations  significantly  restrict the use of
      binding arbitration.

      Wellco and DSCP have now agreed to attempt to settle this claim by the use
      of  alternative  dispute  resolution  procedures,  and have  agreed to use
      non-binding  mediation.  Any amount  Wellco  receives  beyond the $246,000
      recorded will be reflected in the period this claim is settled.


6.    LITIGATION:

      In March 1998 the Company was served with a civil  action  complaint.  The
      Plaintiff  alleged  that the  Company,  during  the period  October,  1995
      through  September,  1996 and acting as a subcontractor  to the Plaintiff,
      untimely  delivered  defective work shoes which resulted in certain losses
      for the  Plaintiff as well as  precluding  Plaintiff  from  competing on a
      subsequent contract.

      The Company  believed that it was not at fault and would have prevailed in
      this  case if it had gone to  court.  However,  in order to avoid  further
      litigation  costs,  a settlement  has been reached  resolving  all matters
      between  the  Plaintiff  and  the  Company.   The  Company's  general  and
      administrative  expenses  for the nine month  period  ended  April 3, 1999
      includes $20,000 for settlement of this action.



                                      -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 April 3, 1999  and March 28, 1998
- -----------------------------------------------------------------

For the nine  months  ended  April 3, 1999,  Wellco  had a net loss of  $803,000
compared  to net income of $216,000  in the prior year nine month  period  ended
March 28, 1998. Both periods contain unrelated and infrequently  occurring items
which affect their comparability .

The current year period includes a charge of $589,000 for the  restructuring and
realignment of certain footwear manufacturing operations.  The prior year period
includes  an  income  item  of  $980,000   representing  a  contract  claim  and
approximately  $800,000 of start up costs  related to the first  production of a
new boot product.  Excluding these infrequently occurring items, the loss before
income taxes in the current  period was $674,000  compared to income of $125,000
in the prior period.

The current period  loss was primarily caused by

      o      The  $589,000  restructuring and realignment charge.
      o      A significant reduction in revenues from the sale of  boots to  the
             U.S. Defense Supply Center Philadelphia (DSCP).
      o      A significant reduction in revenues from technical assistance fees.

In February,  1999,  the Board of  Directors  approved a  restructuring  plan to
consolidate and realign the Company's footwear manufacturing  operations.  Under
this plan, the Company is consolidating substantially all footwear manufacturing
operations at its facility in Aguadilla,  Puerto Rico, where the Company has had
operations since 1956. The execution of this plan will result in the elimination
by July 2,  1999 of  approximately  85  employment  positions  at the  Company's
Waynesville,  North  Carolina  facility,  and in the  transfer of a  significant
amount of Waynesville machinery to Aguadilla. In addition, the present Aguadilla
operations  will be  moved  to a  larger  facility  into  which  the  operations
transferred from Waynesville will be incorporated.

The new Aguadilla facility has been leased,  certain materials and machinery are
currently being transferred,
                                      -13-

<PAGE>



new employees are being hired and training has started. In early July, 1999, the
balance of  Waynesville  machinery and  materials  will be  transferred  and the
present Aguadilla operations will be moved into the new facility.

In addition to manufacturing small quantities of uppers into finished boots when
special  customer  needs  arise,  the  Waynesville  facility  will  continue  to
warehouse and ship boots and serve as the Company's headquarters, as well as its
sales and product  development  center.  This action will not affect  Ro-Search,
Inc., a wholly-owned  subsidiary of the Company which makes specialized footwear
manufacturing machinery at the Waynesville facility.

The consolidation of footwear manufacturing operations in one location will have
the effect of improving  manufacturing  efficiency  and reducing work in process
inventory.  In addition,  certain  manufacturing  costs are lower in Puerto Rico
than they are in the United States.

In the  quarter  ended April 3, 1999,  a  restructuring  charge of $570,000  was
recorded  and  $19,000 of  realignment  expenses  were  incurred..  This  charge
represents  anticipated  employment severance expenses ($545,000) and other exit
costs ($25,000).  Realignment  expenses of $19,000 represent other costs related
to the  restructuring  plan that do not  qualify  as "exit  costs" as defined by
Emerging Issues Task Force Issue No. 94-3.

Pairs of Direct  Molded Sole (DMS) combat boots sold to DSCP in the current nine
month period were  approximately  19% less than the pairs sold in the prior year
nine month  period.  On April 10, 1998 DSCP  exercised  its first  option on the
current DMS boot contract  covering the period April 15, 1998 to April 15, 1999.
Under this option,  Wellco  received  delivery orders for 25% of total DMS pairs
purchased during that option year. For several years, DSCP has been reducing its
depot inventory of DMS boots.  Prior to this 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 was a reduction
in the minimum pairs from 155,000 to 125,000  pairs.  The price per pair for the
125,000  pairs  shipped  during the first  option  was  increased  to  partially
compensate for the reduced pairs.

Pairs of the  Intermediate  Cold/Wet (ICW) boot sold to DSCP in the current nine
month period were  approximately  52% less than the pairs sold in the prior year
nine month period.  This is Wellco's  first  contract for the production of this
boot,  and the  contract  provides  for a base year with two option  years.  The
contract

                                      -14-

<PAGE>



provides  that total pairs  purchased by DSCP during the first and second option
years are  approximately  45% less than pairs  purchased  during the first year.
Sales of this boot  included  in the  current  nine month  period were under the
first option year of that  contract,  and sales  included in the prior year nine
month period were under the base contract year.

Pairs of the ICB boot  sold to DSCP were  approximately  91% less than the pairs
sold in the prior year nine month period.  This is Wellco's  first  contract for
the production of this boot, and the contract  provides for a base year with two
option years. Shipments under the base year were substantially  completed in the
fiscal  year ended  June 27,  1998,  and DSCP did not  exercise  Wellco's  first
option.

Revenues from technical assistance fees from licensees were lower in the current
nine  month  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. In addition, fees earned from other DMS
combat boot manufacturers, which are based on their sales, were lower because of
the DSCP inventory reduction program.

In  April  1998  Wellco   executed  an  Agreement  with  Defense  Supply  Center
Philadelphia  (DSCP) which  provides  that DSCP will  reimburse  the Company for
certain costs incurred related to contract  performance during the 1997 and 1998
fiscal years.  Wellco maintains that it is 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 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.  After reduction for certain costs related to
reaching this  Agreement,  $980,000 was recorded as income in the March 28, 1998
period.  Footnote 5 to the  Consolidated  Financial  Statements gives additional
information about this claim and its current status.

The prior  year  period  also  includes  approximately  $800,000  start up costs
related to first production of the ICB boot.  Because the ICB boot  incorporates
several technologies and manufacturing methods which are significantly different
from those used in boots made by Wellco and because this contract allowed a very
short time period between the date of award and first shipment,  Wellco incurred
significant  costs related to rearranging its production line,  working with new
materials and  patterns,  employee  training and  developing  new  manufacturing
methods and procedures.

The tax benefit  results from the loss being  carried back for a refund of taxes
paid in prior years.

                                      -15-

<PAGE>



Forward Looking Information:

The program to reduce the government's  depot inventory of DMS combat boots, and
particularly  the  recent  acceleration  of  that  program,  has  resulted  in a
reduction of those inventories from 1,400,000 pairs in February, 1998 to 742,000
pairs in April,  1999. The latest  information from DSCP is that their target is
to have a boot  inventory of 5 1/2 to 6 months usage,  which would be 400,000 to
450,000 pairs.

Wellco is presently  shipping boots under the second option year of its DMS boot
contract  which  covers  the  period of April 16,  1999 to April 15,  2000.  The
minimum  total pairs DSCP is required to buy from Wellco during this option year
is 155,000,  compared to 125,000 in the  contract's  first option year. The DSCP
inventory  reduction program has a target safety level of pairs for each size of
boot in inventory equal to approximately 6 months of consumption. As this safety
level is reached  for each size,  DSCP  orders  will equal  consumption  This is
already happening for several sizes,  although Wellco does not necessarily think
its option two  shipments  will  significantly  exceed the 155,00 pair  required
minimum. By the end of the second option year, Wellco believes DSCP ordering for
most sizes will be equal to  consumption.  For its  current  contract  Wellco is
receiving 25% of total DMS boot purchases.  Based on usage in the last year, the
purchase  from  Wellco  of 25% of total DMS boot  consumption  for the last year
would have been 227,500 pairs.

Option  two  orders  received  to  date  by  Wellco  are  less  than a pro  rata
distribution  of the minimum pairs over the option year.  This reflects DSCP not
placing orders until the safety level is reached.  Therefore,  it is likely that
sales of DMS combat boots to DSCP will be proportionately less in the early part
of the second option year and proportionately more in the latter part.

Initially,  DSCP did not intend to exercise  the second and final  option  under
Wellco's ICW boot contract. The second option has now been exercised and Wellco,
as a condition  of option  exercise,  agreed to a 50%  reduction  in the minimum
pairs to be purchased during that option year.

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.

As stated in Note 5 to the Consolidated  Financial Statements,  DSCP have agreed
to and paid Wellco for $246,000 of its claim. As to the $754,000 balance, Wellco
and DSCP have agreed to attempt to reach a settlement by the use of  non-binding
mediation.  Any amount Wellco  receives beyond the $246,000 will be reflected in
the period this claim is settled.

                                      -16-

<PAGE>




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 total pairs of boots bought by the U. S. government, 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.

Comparing The Three  Months Ended April 3, 1999  and March 28, 1998
- -------------------------------------------------------------------

For the fiscal  quarter  ended April 3, 1999,  Wellco had a net loss of $376,000
compared to a net profit of $434,000 in the prior year three month  period ended
March 28, 1998.

The full  amount of the  restructuring  and  realignment  charge  ($589,000)  is
included in the current  period loss,  and the full amount of the contract claim
($980,000)  is included in the prior year income.  The prior year period  income
also includes  approximately $100,000 of start up costs related to the ICB boot.
Excluding these infrequently  occurring items, the loss before income tax in the
current period is $34,000 compared to a loss of $288,000 in the prior period.

Pairs of DMS combat  boots sold in the April 3, 1999 period were higher  because
DSCP increased  Wellco's  orders to reach the required  125,000 minimum pairs in
the first contract option year.

 The April 3, 1999 quarter reflects the same boots sales trend as the nine month
period  discussed  above  for the ICW and ICB  boots.  Pairs of ICW  boots  sold
decreased by 70% and there were no sales of the ICB boots. Also, for the reasons
stated above, technical assistance fees decreased by 75% for the current quarter
compared to the March 28, 1998 quarter.

For the quarter ending April 3, 1999 Wellco sold 15,000 pairs of the inmate work
shoe to a state  prison.  There  were no sales of this  shoe in the  prior  year
quarter.




                         LIQUIDITY AND CAPITAL RESOURCES

Wellco uses cash from operations and a bank line of credit to supply most of its
liquidity needs.

                                      -17-

<PAGE>



The following table  summarizes at the end of the most recent fiscal nine months
and the last fiscal year the amount of cash and unused line of credit:
<TABLE>
<CAPTION>

                                                           (in thousands)
                                                  April 3, 1999    June 27, 1998
                                                  -------------     ------------
<S>                                                      <C>              <C>    

Cash .........................................           $  147           $  196
Unused Line of Credit ........................            2,705            1,115
                                                         ------           ------
Total ........................................           $2,852           $1,311
                                                         ======           ======
</TABLE>

The increase in unused line of credit was caused by payments made since June 27,
1998 which reduced the amount borrowed.


The following  table  summarizes  the major sources  (uses) of cash for the nine
months ended April 3, 1999:
<TABLE>
<CAPTION>


                                                                  (in thousands)
                                                                   April 3, 1999
                                                                   -------------
<S>                                                                     <C>    

Net Loss Excluding Depreciation .................................       $  (432)
Net Change in Accounts Receivable, Inventories,
Accounts Payable, Accrued Liabilities, and Accrued
Income Taxes ....................................................         2,264
Other ...........................................................           254
Net Cash Provided By Operations .................................         2,086
Cash From Bank Line of Credit ...................................           625
Cash Used to Repay Lines of Credit ..............................        (2,215)
Cash Used to Repay Bank Note Payable ............................          (109)
Cash Used to Purchase Plant and Equipment .......................          (320)
Cash Dividends Paid .............................................          (116)
Net Decrease  in Cash ...........................................       $   (49)
</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.  The reduction in inventory provided cash of
$ 1,700,000  which,  along with  $670,000 of cash from the reduction in accounts
receivable  provided the cash from operations.  Cash form operations was used to
repay the bank line of credit and note, purchase plant and equipment and pay the
cash dividend.

The bank line of credit, which provides for total borrowings of $4,000,000, will
expire and be subject to renewal on December  31, 1999.  The amount  outstanding
under the bank line of credit at April 3, 1999 was $1,295,000.


                                      -18-

<PAGE>



The plan of  restructure  and  realignment  will  result  in the use of cash for
employee severance payments, machinery purchases, leasehold improvements, moving
and other costs. The estimated cash requirement to accomplish this is $1,200,000
and the money will come from the available bank line of credit.

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.


                                      -19-

<PAGE>




                           PART II. OTHER INFORMATION

Item 1.        Legal Proceedings.
               See Note 6 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 Holder.  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







                                      -20-

<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 18, 1999









                                      -21-

<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 APRIL 3,
     1999 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>                              JUL-03-1999
<PERIOD-START>                                 JUN-28-1998
<PERIOD-END>                                   APR-03-1999
<EXCHANGE-RATE>                                1
<CASH>                                           147
<SECURITIES>                                       0
<RECEIVABLES>                                  1,603
<ALLOWANCES>                                      26
<INVENTORY>                                    7,765
<CURRENT-ASSETS>                              10,286
<PP&E>                                         7,505
<DEPRECIATION>                                 5,207
<TOTAL-ASSETS>                                13,596
<CURRENT-LIABILITIES>                          5,139
<BONDS>                                          382
                              0
                                        0
<COMMON>                                       1,164
<OTHER-SE>                                     5,226
<TOTAL-LIABILITY-AND-EQUITY>                  13,596
<SALES>                                       13,169
<TOTAL-REVENUES>                              13,169
<CGS>                                         11,992
<TOTAL-COSTS>                                 11,992
<OTHER-EXPENSES>                                 589
<LOSS-PROVISION>                                   0
<INTEREST-EXPENSE>                               189
<INCOME-PRETAX>                               (1,263)
<INCOME-TAX>                                    (460)
<INCOME-CONTINUING>                             (803)
<DISCONTINUED>                                     0
<EXTRAORDINARY>                                    0
<CHANGES>                                          0
<NET-INCOME>                                    (803)
<EPS-PRIMARY>                                   (.69)
<EPS-DILUTED>                                   (.69)
        



</TABLE>


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