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: JANUARY 1, 2000
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 February 15,
2000.
<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 JANUARY 1, 2000
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
JANUARY 1, 2000 AND JULY 3, 1999
(in thousands)
ASSETS
(unaudited)
JANUARY 1, JULY 3,
2000 1999
---------- -------
CURRENT ASSETS:
Cash ....................................... $ 8 $ 89
Receivables ................................ 1,350 4,683
Inventories-
Finished goods ......................... 2,063 1,948
Work in process ........................ 2,411 1,712
Raw materials .......................... 2,374 1,853
-------- --------
Total .................................. 6,848 5,513
Deferred taxes and prepaid expenses ........ 758 621
Income tax refund receivable ............... 226 226
-------- --------
Total ...................................... 9,190 11,132
-------- --------
MACHINERY LEASED TO LICENSEES
(less accumulated depreciation of
$1,516 and $1,513) ......................... 13 6
PROPERTY, PLANT AND EQUIPMENT:
Land ....................................... 107 107
Buildings .................................. 1,176 1,176
Machinery and equipment .................... 4,955 4,139
Furniture and automobiles .................. 824 792
Leasehold improvements ..................... 670 457
-------- --------
Total cost ................................. 7,732 6,671
Less accumulated depreciation and
amortization ............................ (4,049) (3,701)
-------- --------
Net ........................................ 3,683 2,970
-------- --------
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition ............... 228 228
Intangible pension asset (Note 5) ......... 116 88
-------- --------
Total ...................................... 344 316
DEFERRED TAXES ................................... 470 429
-------- --------
TOTAL ............................................ $ 13,700 $ 14,853
======== ========
(continued on next page)
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WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 1, 2000 AND JULY 3, 1999
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
JANUARY 1, JULY 3,
2000 1999
----------- -------
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 2) ...... $ 2,420 $ 3,480
Accounts payable ............................. 1,448 1,046
Accrued compensation ......................... 759 908
Accrued restructuring costs (Note 3) ......... 2 119
Accrued pension (Note 5) ..................... 148 161
Accrued income taxes ......................... 502 427
Cash dividend declared ....................... 116 --
Other liabilities ............................ 317 377
Current maturity of note payable ............. 109 146
-------- --------
Total ........................................ 5,821 6,664
-------- --------
LONG-TERM LIABILITIES:
Pension obligation (Note 5) ................. 1,291 1,375
Notes payable ................................ 309 346
STOCKHOLDERS' EQUITY :
Common stock, $1.00 par value ................ 1,164 1,164
Additional paid-in capital ................... 192 192
Retained earnings ............................ 5,509 5,618
Accumulated other comprehensive loss
(Note 5) ..................................... (586) (506)
-------- --------
Total ........................................ 6,279 6,468
-------- --------
TOTAL .............................................. $ 13,700 $ 14,853
======== ========
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 1, 2000 AND JANUARY 2, 1999
(in thousands except per share and number of
shares)
(unaudited)
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
REVENUES ....................................... $ 9,291 $ 8,786
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............... 8,125 8,151
Restructuring and realignment costs
(Note 3) ................................. 312 --
General and administrative expenses ...... 940 1,126
----------- -----------
Total .................................... 9,377 9,277
----------- -----------
CONTRACT CLAIM (Note 4) ........................ 215 --
----------- -----------
OPERATING INCOME (LOSS) ........................ 129 (491)
NET INTEREST EXPENSE ........................... (119) (149)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES .............. 10 (640)
PROVISION (BENEFIT) FOR INCOME TAXES ........... 3 (213)
----------- -----------
NET INCOME (LOSS) .............................. $ 7 $ (427)
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE
based on weighted average number of
shares outstanding ....................... $ 0.01 $ (0.37)
=========== ===========
Shares used in computing basic
earnings per share ....................... 1,163,246 1,163,246
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE based
on weighted average number of shares
outstanding and dilutive stock
options .................................. $ 0.01 $ (0.37)
=========== ===========
Shares used in computing diluted
earnings per share ....................... 1,168,391 1,163,246
=========== ===========
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
JANUARY 1, 2000 AND JANUARY 2, 1999
(in thousands except per share and number of
shares)
(unaudited)
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
REVENUES ..................................... $ 4,559 $ 3,829
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............. 4,032 3,667
Restructuring and realignment
costs (Note 3) ......................... (47)
General and administrative expenses .... 469 553
----------- -----------
Total .................................. 4,454 4,220
----------- -----------
CONTRACT CLAIM (Note 4) ...................... 215 --
----------- -----------
OPERATING INCOME (LOSS) ...................... 320 (391)
NET INTEREST EXPENSE ......................... (71) (71)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............ 249 (462)
PROVISION (BENEFIT) FOR INCOME TAXES ......... 51 (184)
----------- -----------
NET INCOME (LOSS) ............................ $ 198 $ (278)
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE
based on weighted average number of
shares outstanding ..................... $ 0.17 $ (0.24)
=========== ===========
Shares used in computing basic
earnings per share ..................... 1,163,246 1,163,246
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE
based on weighted average
number of shares
outstanding and dilutive stock
options ................................ $ 0.17 $ (0.24)
=========== ===========
Shares used in computing diluted
earnings per share ..................... 1,168,655 1,163,246
=========== ===========
See Notes to Consolidated Financial Statements.
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WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 1, 2000 AND JANUARY 2, 1999
(in thousands)
(unaudited)
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ............................... $ 7 $ (427)
------- -------
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization .............. 351 247
(Increase) decrease in-
Receivables .......................... 3,333 612
Inventories .......................... (1,335) 1,456
Other current assets ................. (137) 16
Increase (decrease) in-
Accounts payable ..................... 402 (129)
Accrued liabilities .................. (266) (263)
Accrued income taxes ................. 75 (241)
Pension obligation ................... (205) (90)
Other ................................ (138) (80)
------- -------
Total adjustments ............................... 2,080 1,528
------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............................ 2,087 1,101
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment, net ........... (1,071) (98)
------- -------
NET CASH USED IN INVESTING ACTIVITIES ................ (1,071) (98)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under short-term agreements ........ (1,060) (1,085)
Principal payments of bank note payable ......... (37) (73)
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............................ (1,097) (1,158)
------- -------
NET DECREASE IN CASH ................................. (81) (155)
CASH AT BEGINNING OF PERIOD .......................... 89 196
------- -------
CASH AT END OF PERIOD ................................ $ 8 $ 41
======= =======
(continued on next page)
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<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 1, 2000 AND JANUARY 2, 1999
(in thousands)
(unaudited)
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ................................. $118 $146
Income taxes ............................. 10 27
Noncash dividend accrual ...................... 116 116
==== ====
See Notes to Consolidated Financial Statements.
-8-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 1, 2000
(in thousands except number of shares)
(unaudited)
Common Stock Additional
Par Paid-In Retained
Shares Value Capital Earnings
------------------------------------------------
BALANCE AT JULY 3, 1999 1,163,246 $ 1,164 $ 192 $ 5,618
Net income for the fiscal six
months ended January 1, 2000 7
Cash dividend declared
($.10 per share) (116)
------------------------------------------------
BALANCE AT JANUARY 1, 2000 1,163,246 $ 1,164 $ 192 $ 5,509
================================================
Accumulated
Other
Comprehensive
Loss
--------------
BALANCE AT JULY 3, 1999 $ (506)
Change for the fiscal six
months ended January 1, 2000
(Note 5) (80)
--------------
BALANCE AT JANUARY 1, 2000 $ (586)
==============
See Notes to Consolidated Financial Statements.
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<PAGE>
WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL SIX MONTHS ENDED JANUARY 1, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Recent Statement of the Financial Accounting Standards Board
In June 1998, the Financial Accounting Standards Board issued the Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. SFAS No. 133 was amended by SFAS No. 137 to make the provisions of SFAS
No. 133 effective for the fiscal quarters of fiscal years beginning after June
15, 2000. The Company has not yet determined the impact of the implementation of
this standard on its financial statements.
2. LINES OF CREDIT:
During the second quarter, the Company renewed its $4,000,000 secured bank line
of credit. The bank line, which expires December 31, 2000 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 $2,016,000) and all
non-governmental accounts receivable and inventory ($1,124,000). At January 1,
2000, borrowings on the line of credit were $2,420,000 with $1,580,000 available
in additional borrowings.
The bank credit agreement contains, among other provisions, defined levels of
net worth and current ratio requirements. The Company was not in compliance with
the current ratio loan covenant at January 1, 2000. The Company has received
from the bank a waiver regarding this loan covenant violation. The 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 consolidated substantially all footwear manufacturing
operations in Aguadilla, Puerto Rico, where the Company has had operations since
1956.
The execution of this plan, which started in early May 1999, resulted in the
elimination of 77 employment positions at the Company's Waynesville, North
Carolina facility, and in the transfer of a significant amount of Waynesville
machinery and materials to Aguadilla. Approximately 80 new personnel were added
and trained in Aguadilla and the Aguadilla operations have been moved to a
larger facility which incorporates the operations transferred from Waynesville.
Reconciliations of the Restructuring and Realignment Costs and accrual activity
during fiscal year 1999 and fiscal six months and quarter ending January 1, 2000
are as follows:
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<PAGE>
Fiscal Year Ending July 3, 1999:
Activity
Charged
Period Total Against Accrued
Costs Accrual Expenses Accrual Balance
- ------------------------- --------- ---------- ---------- --------- ------------
Severance $764,000 $764,000 ($680,000) $84,000
- ------------------------- --------- ---------- ---------- ---------- -----------
Employee Training Costs 104,000 104,000
- ------------------------- --------- ---------- ---------- ---------- -----------
Equipment Relocation and
Installation 84,000 35,000 119,000 35,000
- ------------------------- --------- ---------- ---------- ---------- -----------
Legal and Other 90,000 90,000
- ------------------------- --------- ---------- ---------- ---------- -----------
Total $278,000 $799,000 $1,077,000 ($680,000) $119,000
- ------------------------- -------- ----------- ---------- ---------- -----------
Fiscal Six Months Ending January 1, 2000:
Activity
Charged
Period Total Against Accrued
Costs Accrual Expenses Accrual Balance
- ------------------------- --------- ---------- ---------- --------- ------------
Severance ($122,000) $32,000 ($90,000) ($116,000)
- ------------------------- --------- ---------- ---------- ---------- -----------
Employee Training Costs 186,000 186,000
- ------------------------- --------- ---------- ---------- ----------- ----------
Equipment Relocation and
Installation 102,000 5,000 107,000 (38,000) 2,000
- ------------------------- --------- ---------- ---------- ---------- -----------
Legal and Other 109,000 109,000
- ------------------------- --------- ---------- ---------- ---------- -----------
Total $275,000 $37,000 $312,000 ($154,000) $2,000
- ------------------------- --------- ---------- --------- ----------- -----------
Quarter Ending January 1, 2000:
Activity
Charged
Period Total Against Accrued
Costs Accrual Expenses Accrual Balance
- ------------------------- ---------- --------- ---------- --------- -----------
Severance ($122,000) ($122,000)
- ------------------------- ---------- --------- ---------- --------- -----------
Employee Training Costs 16,000 16,000
- ------------------------- ---------- --------- ---------- --------- -----------
Equipment Relocation and
Installation 20,000 20,000 (3,000) 2,000
- ------------------------- ---------- --------- ---------- --------- -----------
Legal and Other 39,000 39,000
- ------------------------- ---------- --------- ---------- --------- -----------
Total ($47,000) ($47,000) ($3,000) $2,000
- -------------------------- --------- --------- ---------- --------- -----------
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<PAGE>
After January 1, 2000, the Company expects certain additional realignment costs.
These costs will primarily be related to completion of employee training, and
when combined with other miscellaneous costs, are not expected to exceed
$25,000.
The Company has been informed by the government of Puerto Rico that it will
receive a government grant of up to $400,000 as reimbursement for certain costs,
as approved by the government, related to the increased operations in Puerto
Rico. These amounts will be recorded in the period received.
4. CONTRACT CLAIM:
In April 1998 Wellco executed an Agreement with Defense Supply Center
Philadelphia (DSCP). The Agreement provides that DSCP will reimburse the Company
for certain costs incurred related to contract performance during the fourth
quarter of the 1997 fiscal year and the first two quarters of the 1998 fiscal
year. Wellco maintained that it was due reimbursement for costs incurred in
performing in accordance with a prior DSCP interpretation of the contract. This
interpretation was later changed to the detriment of Wellco. The Agreement
provided that any disagreement between Wellco and DSCP on an item of cost will
be subject to binding arbitration.
In October, 1998, DSCP agreed to pay Wellco $246,000 under this Agreement. The
1998 fiscal year Consolidated Statements of Operations included $226,000 of
income related to this claim, representing the agreed to $246,000 less $20,000
of related costs. Wellco subsequently filed a contract claim for the additional
amount it felt was due under the Agreement.
In January, 2000 the federal government's Alternative Disputes Resolution (ADR)
procedure was used to reach a final and non-appealable settlement of the claim.
The Consolidated Statements of Operations for the six months and three months
ended January 1, 2000 include $215,000 for the settlement of this claim, which
is the amount awarded Wellco by the ADR Judge less related costs.
5. PENSION PLANS:
Footnote 9 to the Company's 1999 Annual Report provides information about the
Company's pension plans as of June 30, 1999 (the date of the most recent
actuarial valuation at the end of the fiscal year 1999). On July 2, 1999, 77
employees were terminated related to the consolidation of substantially all
footwear manufacturing operations in Aguadilla, Puerto Rico. The information in
Footnote 9 of the 1999 Annual Report included estimated pension costs recorded
for the employee terminations, and did not reflect the affect of pension
settlement payments made to these employees after June 30, 1999. The Company's
actuary has now completed the final calculations necessary for updating this
June 30, 1999 disclosure for these terminations.
Below is the June 30, 1999 pension information reflecting those employee
terminations (all amounts are in thousands):
ANALYSIS OF PROJECTED PENSION LIABILITY: 1999 1998
---------------------------------------- ---- ----
Total Projected Liability at Beginning of Year $ 5,815 $ 5,449
---------------------------------------------- ------- -------
Current Year Service Cost 159 139
------------------------- ------- -------
Interest Cost on Projected Liability 393 394
------------------------------------- ------- -------
Benefit Payments (531) (423)
---------------- ------- -------
Actuarial (Gain) Loss (123) 256
--------------------- ------- -------
Increased Liability from Plan Amendments 9
---------------------------------------- ------- -------
Reduction in Liability for Terminated Employees (450)
----------------------------------------------- ------- -------
Total Projected Liability at End of Year $ 5,272 $5,815
---------------------------------------- ------- -------
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<PAGE>
ANALYSIS OF FAIR VALUE OF PENSION PLAN ASSETS: 1999 1998
---------------------------------------------- ---- ----
Fair Value of Plan Assets at Beginning of Year $ 3,530 $ 3,261
---------------------------------------------- -------- --------
Company Contributions 621 480
--------------------- -------- --------
Actual Return on Plan Assets 262 212
---------------------------- -------- --------
Benefit Payments to Retired Employees (531) (423)
------------------------------------- -------- --------
Settlement Payments to Terminated Employees (478)
------------------------------------------- -------- --------
Fair Value of Plan Assets at End of Year $ 3,404 $ 3,530
---------------------------------------- -------- --------
FUNDED STATUS: 1999 1998
-------------- ---- -----
Excess of Projected Benefit Obligation Over Fair
Value of Plan Assets $ 1,868 $ 2,285
------------------------------------------------ -------- --------
Less Projected Future Salary Increases (306) (333)
-------------------------------------- -------- --------
Equal to Liability Recognized in the
Consolidated Financial Statements $ 1,562 $ 1,952
------------------------------------ -------- --------
COMPONENTS OF PENSION LIABILITY: 1999 1998
-------------------------------- ---- -----
Unamortized Costs Not Yet Charged Against Operations-
-----------------------------------------------------
Net Obligation at July 1, 1987 $ 122 $ 284
------------------------------ ------- --------
Net Obligation From Changes to Plan Benefits
Since July 1, 1987 198 276
-------------------------------------------- ------- --------
Net Loss from Actuarial Assumptions Being
Different From Actual 989 1,325
----------------------------------------- ------- ---------
Less Projected Salary Increases That are in
Total Liability (306) (331)
------------------------------------------- -------- ---------
Total Liability Not Yet Charged Against
Operations 1,003 1,554
--------------------------------------- -------- ---------
Amount of Total Liability Charged Against
Operations 559 400
----------------------------------------- -------- ---------
Total Pension Liability Recognized in
Consolidated Financial Statements
Including Amounts in Accrued Expenses $ 1,562 $ 1,954
------------------------------------- -------- ---------
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<PAGE>
COMPONENTS OF PENSION LIABILITY THAT HAVE
NOT YET BEEN CHARGED AGAINST OPERATIONS: 1999 1998
----------------------------------------- ---- ----
Intangible Pension Asset $ 115 $ 440
------------------------ -------- --------
Deferred Tax Asset 302 379
------------------ -------- --------
Accumulated Other Comprehensive Loss 586 735
------------------------------------ -------- --------
Total Liability Not Yet Charged Against
Operations $ 1,003 $ 1,554
--------------------------------------- -------- --------
The Consolidated Statements of Operations and Comprehensive Income (Loss) for
the 1999 fiscal year includes as a part of the Restructuring and Realignment
Costs an estimated cost of $431,000 relating to the curtailment and settlement
of pension liabilities related to these terminated employees ($220,000 of
previously unrecognized prior service cost and $211,000 of previously
unrecognized actuarial losses). The actuary has computed these actual amounts as
$309,000 ($193,000 for prior service cost and $116,000 for actuarial loss), and
the Restructuring and Realignment Costs shown in the Consolidated Statements of
Operations for both the six month and fiscal quarter periods ended January 1,
2000 include an income item of $122,000 adjusting the previously recorded
estimate to the actual amount.
6. COMPREHENSIVE INCOME:
Comprehensive income (loss) for the six months and three months ended January 1,
2000 was ($73,000) and $118,000, respectively. Net income differed from
comprehensive income as a result of an increase in the minimum pension
liability.
7. EARNINGS PER SHARE:
The Company computes its basic and diluted earnings per share amounts in
accordance with Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings per Share." Basic earnings per share is computed by dividing net
earnings by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the period plus the
dilutive potential common shares that would have been outstanding upon the
assumed exercise of dilutive stock options.
The following is the reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
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<PAGE>
For the Six Months Ended 1-1-2000
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $7,000 1,163,246 $0.01
-----------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 5,145
-----------------------------------------------------------------------
Diluted EPS Available to Shareholders $7,000 1,168,391 $0.01
-----------------------------------------------------------------------
For the Three Months Ended 1-1-2000
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to
Shareholders $198,000 1,163,246 $0.17
-----------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 5,409
-----------------------------------------------------------------------
Diluted EPS Available to
Shareholders $198,000 1,168,655 $0.17
-----------------------------------------------------------------------
For the six months and three months ended January 2, 1999, there were no
differences between the basic and diluted earnings per share. All outstanding
stock options were anti-dilutive.
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Comparing The Six Months Ended January 1, 2000 and January 2, 1999:
Income before income taxes was $10,000 in the fiscal six months ended January 1,
2000 (the "current period") compared to a loss before income taxes of $640,000
in the prior year six month period ended January 2, 1999 (the "prior period").
The current period includes restructuring and realignment costs totaling
$312,000. These costs relate to a February, 1999 restructuring plan under which
the Company has consolidated substantially all footwear manufacturing operations
at its facility in Aguadilla, Puerto Rico. The execution of this plan resulted
in the elimination of 77 employment positions at the Company's Waynesville,
North Carolina facility, and in the transfer of a significant amount of
Waynesville machinery and materials to Aguadilla.
As detailed in Note 3 to the Consolidated Financial Statements, the
Restructuring and Realignment Costs charged against current period operations
are made up of:
Restructuring credit of $ 90,000. In the current period, the Company's
actuary completed calculation of actual pension cost for terminated
employees. The estimated cost was originally recorded in the fourth
quarter of the 1999 fiscal year. The actual cost was $122,000 less than
estimated. In addition, the current period includes a restructuring
cost of $32,000 to increase the amount previously accrued for health
care costs on terminated employees. A part of the severance
compensation for terminated Waynesville employees was the continuation
of health insurance for two months past termination. The Company is
self funded for its group health insurance and actual health care costs
for terminated employees was greater than originally estimated.
Realignment costs of $402,000 consisting of: new employee training costs
($186,000); cost to move machinery, install machinery and refurbish and
prepare building ($107,000); and legal and other costs ($109,000).
Also included in the current period is a non-recurring income item of $215,000
representing the final settlement of a contract claim (see Note 4 to the
Consolidated Financial Statements). In January, 2000 the federal government's
Alternative Disputes Resolution procedure was used to reach a final and
non-appealable settlement of a contract claim Wellco filed against the U. S.
government. In the 1998 fiscal year, when this claim originated, Wellco
recognized an income item of $226,000, which represented the amount of the claim
acknowledged and paid by the government.
Revenues in the current period were $505,000 more than the prior period. The
primary reason for this increase was an increase in the number of pairs of
combat boots shipped under contract with the U. S. government. The Company's
multi-year combat boot contract with the U. S. government provides for a minimum
number of pairs to be shipped in each contract year. In order to accelerate the
reduction of its combat boot inventory, the government negotiated a one year
decrease in this minimum which reduced Wellco's prior year sales.
Cost of sales and services and general and administrative expenses in the
current period decreased from the prior period a total of $212,000. This
primarily resulted from:
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<PAGE>
The overall reduction of costs from the consolidation of substantially all
manufacturing operations in Puerto Rico.
Semi-variable costs not increasing in proportion to the increase in
revenues.
The income tax rate (the percent of Provision (Benefit) for Income Taxes to the
Income (Loss) Before Income Taxes) in the current period was 30% compared to 33%
in the prior period. The Company expects a lower income tax rate for fiscal year
2000 because more of its consolidated income will be from earnings in Puerto
Rico which are substantially exempt from both Puerto Rico and federal income
taxes.
Forward Looking Information:
For several years, the U. S. government has been reducing its depot inventories
of combat boots by purchasing from contractors fewer pairs than were consumed.
For the last two years, they have accelerated the reduction. At the end of this
reduction program, Wellco believes the government will purchase combat boots
equal to its consumption.
The government supplies Wellco with its monthly DMS combat boot depot
inventories. Based on their numbers for January, 2000, the government has a
depot inventory totaling 573,000 pairs. Wellco understands the government's
target inventory to be between 550,000 and 600,000 total pairs. Wellco recently
became aware that the government is also reducing combat boot inventories
located at recruit induction centers. Although depot inventories are apparently
at the government's target, Wellco believes that the reduction of recruit
induction center inventories is causing a short-term delay in the government's
need to purchase combat boots at a rate equal to consumption.
Based on boot consumption for the last year, the annual purchase of combat boots
from Wellco would be approximately 250,000 pairs when the government purchases
at a rate equal to boot consumption. Under the current multi-year combat boot
contract, the minimum number of pairs purchased from Wellco in each year is
155,000.
Wellco is presently shipping boots under the second option year of its DMS boot
contract which covers the period from April 16, 1999 to April 15, 2000. The
minimum total pairs the government is required to buy from Wellco during this
option year is 155,000 pairs. Through February 14, 2000 the government has
bought 146,000 pairs against this minimum. Wellco believes that orders received
in the last two months of this second option year will result in total orders in
the option year exceeding the 155,000 pairs.
The last option of the current contract to supply the Intermediate Cold Wet boot
to the government expires on February 25, 2000. Wellco recently received advance
notice of the final delivery order under this contract which will assure
production and shipment for a few months beyond February 25. The government is
preparing a new solicitation for the ICW boot which will be issued in about two
months. Therefore, there may be some interruption in production and shipments of
this boot before new contracts are awarded. As with any solicitation, Wellco
cannot predict with certainty its success in receiving a contract from a new
solicitation.
The Company did not experience any problems with the conversion to Year 2000 and
the cost to update and test equipment and software for Year 2000 compliance was
minimal. However, this does not mean that a problem will not arise in the
future.
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 effect of customers and vendors not being timely in Year 2000
compliance, 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 July 3, 1999. Actual results may differ materially from
management expectations.
-17-
<PAGE>
Comparing The Three Months Ended January 1, 2000 and January 2, 1999:
Income before income taxes was $249,000 in the fiscal three months ended January
1, 2000 (the "current period") compared to a loss before income taxes of
$462,000 in the prior year three month period ended January 2, 1999 (the "prior
period").
The current period includes a non-recurring income item from Restructuring and
Realignment of $47,000. As detailed in Note 3 to the Consolidated Financial
Statements, this represents:
Restructuring credit of $122,000. As stated in the above discussion on the
six month period, this represents the adjustment of estimated pension
costs on terminated employees to actual.
Realignment costs of $75,000 consisting of: new employee training costs
($16,000); cost to move machinery, install machinery and refurbish and
prepare building ($20,000); and legal and other costs ($39,000).
Also included in the current period is the previously discussed $215,000 income
item which represents the final settlement of a contract claim.
Revenues in the current period were $730,000 (19%) more that the prior period.
The primary reason for this increase is the same as that for the six month
period explained above. Cost of sales and services and general and
administrative expenses increased a total of $281,000 (7%). The primary reasons
the 7% increase in cost of sales and services and general and administrative
expenses was substantially less than the 19% increase in revenues are:
The overall reduction of costs from the consolidation of substantially all
manufacturing operations in Puerto Rico.
Semi-variable costs not increasing in proportion to the increase in
revenues.
The income tax rate (the percent of Provision (Benefit) for Income Taxes to the
Income (Loss) Before Income Taxes) for current period was 20% compared to 40% in
the prior period. This decrease was primarily caused by a greater portion of
earnings being in Puerto Rico which are substantially exempt from both Puerto
Rico and federal income taxes. In addition, the prior year rate reflects some of
the loss before income taxes being incurred in the Company's Puerto Rico
subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Wellco uses cash from operations and a bank line of credit to supply most of its
liquidity needs.
The following table summarizes at the end of the most recent fiscal quarter and
the last fiscal year the amount of cash and unused line of credit:
(in thousands)
January 1, 2000 July 3, 1999
-------------------------------------------------------------
Cash $8 $89
-------------------------------------------------------------
Unused Line of Credit 1,580 520
-------------------------------------------------------------
Total $1,588 $609
-------------------------------------------------------------
The increase in the unused line of credit was caused by an increase in cash from
operations during the six month period.
-18-
<PAGE>
The following table summarizes the major sources (uses) of cash for the six
months ended January 1,2000:
(in thousands)
January 1, 2000
-------------------------------------------------------------
Net Income Plus Depreciation $358
-------------------------------------------------------------
Net Change in Accounts Receivable, Inventories,
Accounts Payable,
Accrued Liabilities, and Accrued
Income Taxes 2,209
-------------------------------------------------------------
Other (480)
-------------------------------------------------------------
Net Cash Provided By Operations 2,087
-------------------------------------------------------------
Cash From Bank Line of Credit 395
-------------------------------------------------------------
Cash Used to Repay Lines of Credit (1,455)
-------------------------------------------------------------
Cash Used to Repay Bank Note Payable (37)
-------------------------------------------------------------
Cash Used to Purchase Plant and Equipment (1,071)
-------------------------------------------------------------
Net Decrease in Cash $(81)
-------------------------------------------------------------
In June, 1999 a contract modification was received which allowed the shipment of
a significant amount of finished boots from existing inventories. The receivable
from this sale was collected in the fiscal six month period ended January 1,
2000. In addition, cash from several other large boot shipments in the quarter
ended July 3, 1999 was received in these six months. A significant amount of
cash was used to pay down the bank line of credit, increase work in process and
raw materials inventory in Puerto Rico, pay for costs related to the
consolidation of boot manufacturing operations in Puerto Rico, and to purchase
plant and equipment.
Related to the consolidation of boot manufacturing operations in Puerto Rico,
cash was used to make severance payments to terminated employees, purchase
machinery, to make leasehold improvements, to move machinery and employee
training costs. In addition, cash was used to purchase machinery which will
enable the Company to expand its manufacturing methods. This consolidation of
boot manufacturing operations is now completed and will no longer be a user of
cash.
The bank line of credit, which provides for total borrowing of $4,000,000, was
again renewed for a one year period on December 31, 1999, and will expire and be
subject to renewal on December 31, 2000. The amount outstanding under this line
at January 1, 2000 was $2,420,000. The Company expects to continue to rely on
this bank line of credit. The Company was not in compliance with the current
ratio loan covenant at January 1, 2000. The Company has received from the bank a
waiver regarding this loan covenant violation. The covenants are subject to
review at the end of each fiscal quarter.
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. N/A
Item 2. Changes in Securities. N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders:
The 1999 Annual Stockholders Meeting of Wellco Enterprises, Inc. was
held on November 16, 1999. The only matter voted on at
that meeting was the election of directors. The results of voting were:
Shares Withheld
Nominee for Director Shares Voted For From
-----------------------------------------------------------------
John D. Lovelace 1,031,002 3,300
-----------------------------------------------------------------
James T. Emerson 1,031,002 3,300
-----------------------------------------------------------------
David Lutz 1,031,002 3,300
-----------------------------------------------------------------
Fred K. Webb, Jr. 1,031,002 3,300
-----------------------------------------------------------------
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
February 15, 2000
-21-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE 2ND QUARTER 10-Q, PERIOD ENDED JANUARY 1,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<NAME> WELLCO ENTERPRISES,INC.
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