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.
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<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.
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<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.
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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.
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<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.
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<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>
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<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.
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<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
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<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
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<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.
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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 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,
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<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
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<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.
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<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
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<TOTAL-COSTS> 11,992
<OTHER-EXPENSES> 589
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<INCOME-PRETAX> (1,263)
<INCOME-TAX> (460)
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<CHANGES> 0
<NET-INCOME> (803)
<EPS-PRIMARY> (.69)
<EPS-DILUTED> (.69)
</TABLE>