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: SEPTEMBER 28, 2002
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 .
--- ---
1,185,746 shares of $1 par value common stock were outstanding on November 12,
2002.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WELLCO ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 28, 2002
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-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 2002 AND JUNE 29, 2002
(in thousands)
ASSETS
(unaudited)
SEPTEMBER 28, JUNE 29,
2002 2002
------------- --------
CURRENT ASSETS:
Cash and cash equivalents .................... $ 720 $ 270
Receivables, net ............................. 1,311 1,374
Inventories-
Finished goods ........................... 1,942 2,509
Work in process .......................... 819 1,268
Raw materials ............................ 2,729 2,463
-------- --------
Total .................................... 5,490 6,240
Deferred taxes and prepaid expenses .......... 558 381
Assets held for sale (Note 5) ................ 50 70
-------- --------
Total ........................................ 8,129 8,335
-------- --------
MACHINERY LEASED TO LICENSEES,
net of accumulated depreciation .............. 27 28
PROPERTY, PLANT AND EQUIPMENT:
Land ......................................... 107 107
Buildings .................................... 1,176 1,176
Machinery and equipment ...................... 6,851 6,727
Office equipment ............................. 753 747
Automobiles .................................. 220 220
Leasehold improvements ....................... 749 735
-------- --------
Total cost ................................... 9,856 9,712
Less accumulated depreciation and
amortization .............................. (6,012) (5,786)
-------- --------
Net Property Plant and Equipment ............. 3,844 3,926
-------- --------
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition (Note 2) ........ 228 228
Intangible pension asset ..................... 21 21
-------- --------
Total ........................................ 249 249
DEFERRED TAXES ..................................... 391 391
-------- --------
TOTAL .............................................. $ 12,640 $ 12,929
======== ========
(continued on next page)
-3-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 2002 AND JUNE 29, 2002
(in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
SEPTEMBER 28, JUNE 29,
2002 2002
---------------------------
CURRENT LIABILITIES:
Accounts payable ............................. $ 716 $ 1,306
Accrued compensation ......................... 902 892
Accrued income taxes ......................... 840 769
Other liabilities ............................ 531 587
-------- --------
Total ........................................ 2,989 3,554
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ........................... 1,028 1,028
Notes payable ................................ 207 205
Deferred revenues ............................ 93 95
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value ................ 1,183 1,183
Additional paid-in capital ................... 336 336
Retained earnings ............................ 7,523 7,247
Accumulated other comprehensive loss ......... (719) (719)
-------- --------
Total ........................................ 8,323 8,047
-------- --------
TOTAL .............................................. $ 12,640 $ 12,929
======== ========
See Notes to Consolidated Financial Statements.
-4-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001
(in thousands except per share and number of shares)
(unaudited)
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
-----------------------------
REVENUES ....................................... $ 5,258 $ 3,570
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............... 4,230 3,207
Unrecovered contract preparation
costs (Note 5) ........................... 20 --
General and administrative expenses ...... 556 590
----------- -----------
Total .................................... 4,806 3,797
----------- -----------
GRANT INCOME ................................... 20 20
----------- -----------
OPERATING INCOME (LOSS) ........................ 472 (207)
INTEREST EXPENSE ............................... (4) (4)
INTEREST INCOME ................................ 2 11
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............. 470 (200)
PROVISION FOR INCOME TAXES ..................... 76 5
----------- -----------
NET INCOME (LOSS) .............................. $ 394 $ (205)
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE (Note 4)
based on weighted average number of
shares outstanding ....................... $ 0.33 $ (0.18)
=========== ===========
Shares used in computing basic
earnings per share ....................... 1,182,746 1,163,246
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE (Note 4)
based on weighted average number of
shares outstanding and dilutive stock
options ................................. $ 0.32 $ (0.18)
=========== ===========
Shares used in computing diluted
earnings per share ....................... 1,228,744 1,163,246
=========== ===========
See Notes to Consolidated Financial Statements.
-5-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001
(in thousands)
(unaudited)
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
---------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ............................... $ 394 $(205)
----- -----
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization .............. 227 217
Non-cash asset impairment .................. 20 --
Non-cash grant income recognized ........... (20) (20)
(Increase) decrease in-
Receivables .......................... 63 427
Inventories .......................... 750 40
Other current assets ................. (152) (176)
Increase (decrease) in-
Accounts payable ..................... (590) 207
Accrued compensation ................. 10 (4)
Accrued income taxes ................. 71 (33)
Pension obligation ................... (45) (19)
Other ................................ (16) (16)
----- -----
Total adjustments ............................... 318 623
----- -----
NET CASH PROVIDED BY
OPERATING ACTIVITIES ............................ 712 418
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment ................ (144) (112)
----- -----
CASH USED IN INVESTING ACTIVITIES .................... (144) (112)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid ............................. (118) --
----- -----
NET CASH PROVIDED BY
FINANCING ACTIVITIES ............................ (118) --
----- -----
NET INCREASE IN CASH ................................. 450 306
CASH AT BEGINNING OF PERIOD .......................... 270 653
----- -----
CASH AT END OF PERIOD ................................ $ 720 $ 959
===== =====
(continued on next page)
-6-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001
(in thousands)
(unaudited)
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
---------------------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ................................. $ 4 $ 4
Income taxes ............................. $ 5 $40
=== ===
See Notes to Consolidated Financial Statements.
-7-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL THREE MONTHS ENDED
SEPTEMBER 28, 2002
(in thousands except number of shares)
(unaudited)
Common Stock Additional
Par Paid-In Retained
Shares Value Capital Earnings
---------------------------------------------
BALANCE AT JUNE 29, 2002 1,182,746 $ 1,183 $ 336 $ 7,247
Net income for the fiscal three
months ended September 28, 2002 394
Cash dividend ($.10 per share) (118)
---------------------------------------------
BALANCE AT SEPTEMBER 28, 2002 1,182,746 $ 1,183 $ 336 $ 7,523
---------------------------------------------
Accumulated
Other
Comprehensive
Loss
-------------
ADDITIONAL PENSION LIABILITY,
NET OF TAX, BALANCE
AT JUNE 29, 2002 $ (719)
Change for the fiscal three
months ended September 28, 2002 -
------
BALANCE AT SEPTEMBER 28, 2002 $ (719)
-------
See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL THREE MONTHS ENDED SEPTEMBER 28, 2002
1. BUSINESS AND ORGANIZATION:
Substantially all of the Company's operating activity is from the sale of
military and other rugged footwear, the sale of specialized machinery and
materials for the manufacture of this type of footwear and the rendering
of technical assistance and other services to licensees for the
manufacture of this type of footwear. The majority of revenues were from
sales to the U. S. government, primarily the Defense Supply Center
Philadelphia (DSCP), under contracts for the supply of boots used by the
U. S. Armed Forces. The loss of this customer would have a material
adverse effect on the Company.
Bidding on U. S. government boot solicitations is open to any qualified U.
S. manufacturer. Bidding on contracts is very competitive. U. S. footwear
manufacturers have been adversely affected by sales of footwear made in
low labor cost countries. This has significantly affected the competition
for contracts to supply boots to U. S. Armed Forces, which by law must
be made in the U. S.
Most boot contracts are for multi-year periods. Therefore, a bidder not
receiving an award from a significant solicitation could be adversely
affected for several years. In addition, current boot contracts contain
options for additional pairs that are exercisable at the government's
discretion. Company cannot predict with certainty its success in receiving
a contract from any of the above solicitations.
There are presently two outstanding U. S. government boot solicitations to
which the Company responded. If a contract is awarded to Wellco from only
one of these solicitations, or if Wellco does not receive a contract from
either solicitation, future operating results will be adversely affected
and certain assets may be impaired.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
New Accounting Pronouncements
In October 2001, SFAS No. 144, "Accounting for Impairment or Disposal of
Long-lived Assets" was issued specifying, among other things, the
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No.144 supersedes SFAS No. 121 and the accounting
and reporting provisions of APB 30 related to the disposal of a segment of
a business. The Statement is effective for the Company's 2003 fiscal year
which started June 30, 2002 and will be applied to long- lived assets
whenever events or circumstances indicate that their carrying amount may
not be recoverable. There was no effect on the Company's financial
statements from the adoption of this standard.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill
from an amortization method to an impairment approach, and is effective
for the Company's 2003 fiscal year which started June 30, 2002. Under SFAS
No. 142, if the carrying amount of goodwill exceeds its implied fair
value, an impairment loss is recorded equal to that excess. The
Consolidated Balance Sheets includes $228,000 of goodwill ("Excess of cost
over net assets of subsidiary at acquisition"). An initial review for
impairment must be performed within six months of adopting the new
standard. The Company will complete its initial impairment assessment by
the end of the second quarter of fiscal 2003.
-9-
3. LINE OF CREDIT:
The Company maintains a $3,000,000 bank line of credit. The line, which
expires December 31, 2002, is expected to be renewed. This line of credit
is secured by a blanket lien on all machinery and equipment (carrying
value of $2,656,000) and all non-governmental accounts receivable and
inventory ($1,049,000). At September 28, 2002, there was no borrowing on
the line of credit.
The bank credit agreement contains, among other provisions, defined levels
of net worth and current ratio requirements. The Company was in compliance
with the loan covenants at September 28, 2002.
4. 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:
For the Three Months Ended 9/28/02
----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------------------------------
Basic EPS Available to Shareholders $394,000 1,182,746 $ 0.33
Effect of Dilutive Stock-based
Compensation Arrangements 45,998
------------------------------------
Diluted EPS Available to Shareholders $394,000 1,228,744 $ 0.32
For the Three Months Ended 9/29/01
-----------------------------------
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
-------------------------------------
Basic EPS Available to Shareholders $205,000 1,163,246 $(0.18)
Effect of Dilutive Stock-based
Compensation Arrangements
(Note: N/A - Anti-dilutive)
-------------------------------------
Diluted EPS Available to Shareholders $205,000 1,163,246 $(0.18)
-10-
5. UNRECOVERED CONTRACT PREPARATION COSTS:
In October, 2001, Wellco submitted a solicitation response to a U. S.
government procurement for berets to be used by U. S. Army personnel.
Wellco did not have any prior experience in manufacturing berets or
similar knitted products. Since submitting its response, certain costs
were incurred in order to learn beret manufacturing operations and
procedures, and to demonstrate to the government that Wellco has the
capability to manufacture and deliver berets within the government's
required delivery schedule. The government has announced contract awards
and Wellco was not awarded a contract. In the 2002 fiscal year, beret
manufacturing machinery was written down by $159,000 to an amount equal to
the estimated amount for which this machinery can be sold. At September
28, 2002 based on revised estimates of the resale value, the beret
manufacturing machinery was further written down by $20,000 and is shown
as Unrecovered Contract Preparation Costs in the Consolidated Statements
of Operations for the fiscal three months ended September 28, 2002. The
revised estimated amount for which this machinery can be sold is included
in the Consolidated Balance Sheet as Assets Held For Sale.
-11-
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Critical Accounting Policies:
The Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles which require the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the Consolidated Financial Statements, and revenues
and expenses during the periods reported. Actual results could differ from those
estimates. The Company believes the following are the critical accounting
policies which could have the most significant effect on the Company's reported
results and require the most difficult, subjective or complex judgements by
management.
o Impairment of Long-Lived Assets:
The Company reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an
asset may not be recoverable. If the sum of the expected cash
flows, undiscounted and without interest, is less than the
carrying amount of the asset, an impairment loss is recognized as
the amount by which the carrying amount of the asset exceeds its
fair value. The Company makes estimates of its future cash flows
related to assets subject to impairment review. One of the most
critical estimates is future demand, primarily through U. S.
Department of Defense contracts, for the Company's products.
Changes to this and other estimates could result in an impairment
charge in future periods.
o Inventory Valuation:
Raw materials and supplies are valued at the lower of first-in,
first-out cost or market. Finished goods and work in process are
valued at the lower of actual cost, determined on a specific
identification basis, or market. The Company estimates which
materials may be obsolete and which products in work in process
or finished goods may be sold at less than cost, and adjusts
their inventory value accordingly. Future periods could include
either income or expense items if estimates change and for
differences between the estimated and actual amount realized from
the sale of inventory.
o Income Taxes:
The Company records a liability for potential tax assessments
based on its estimate of the potential exposure. Due to the
subjectivity and complex nature of the underlying issues, actual
payments or assessments may differ from estimates. Income tax
expense in future periods could be adjusted for the difference
between actual payments and the Company's recorded liability
based in its assessments and estimates.
The Company has recorded a valuation allowance equal to a
significant part of its deferred tax assets. The valuation
allowance is based on an evaluation of the uncertainty of future
taxable income from certain jurisdictions. An adjustment could be
required if circumstances and events cause the Company to change
these estimates.
Since June 29, 2002, the end of the 2002 fiscal year, there have been no changes
in the nature of the estimates and assumptions related to theses critical
accounting policies.
-12-
Comparing the Three Months Ended September 28, 2002 and September 29, 2001:
For the three months ended September 28, 2002 (current quarter), Wellco had net
income of $394,000 compared to a net loss of $205,000 in the prior year three
month period ended September 29, 2001 (prior quarter). The major reasons for the
increase in net income are:
o Total revenues in the current quarter increased $1,688,000 as
compared to the prior quarter. The primary reason for this
increase in revenues and also the increase in net income was a
56% increase in pairs of Direct Molded Sole (DMS) combat boots
shipped under contract with Defense Supply Center Philadelphia
("DSCP", the U. S. government agency which supplies U. S. Armed
Forces with boots).
In both the current and prior quarters, which correspond to the
last quarter of the government's fiscal year, DSCP had limited
funding, which resulted in boot orders to Wellco being less than
normal. However, in the current quarter, Wellco's shipment of
boots to DSCP was not materially affected because of a large
order received in April 2002.
o Cost of sales and services in the current quarter increased
$1,023,000, which is a 32% increase compared to the 47% increase
in revenues. Fixed costs such as depreciation and certain semi-
variable costs such as fringe benefits and maintenance expenses
do not increase proportionately to an increase in revenues.
Because of DSCP's limited funding, boot production in both the
current and prior quarter was less than normal. However, the
effect of lower production on operating results in the current
quarter was not as adverse as the prior quarter because shipments
of boots in the current quarter were substantially more than the
prior quarter.
o The current quarter includes $20,000 of unrecovered contract
preparation costs. In October, 2001, Wellco submitted a
solicitation response to a U. S. government procurement for
berets to be used by U. S. Army personnel. Wellco did not have
any prior experience in manufacturing berets or similar knitted
products. Since submitting its response, certain machinery was
purchased and certain costs were incurred in order to learn beret
manufacturing operations and procedures, and to demonstrate to
the government that Wellco has the capability to manufacture and
deliver berets within the government's required delivery
schedule. The government has announced contract awards and Wellco
was not awarded a contract. In the 2002 fiscal year, beret
manufacturing machinery was written down by $159,000 to an amount
equal to the estimated amount for which this machinery can be
sold. At September 28, 2002 based on revised estimates of the
resale value, the beret manufacturing machinery was further
written down by $20,000 and is shown as Unrecovered Contract
Preparation Costs in the Consolidated Statements of Operations
for the fiscal three months ended September 28, 2002. The revised
estimated amount for which this machinery can be sold is included
in the Consolidated Balance Sheet as Assets Held For Sale.
o Lower total administrative personnel salary cost and travel cost
were the primary reasons general and administrative expenses
decreased $34,000 in the current quarter.
The income tax rate (the percent of Provision for Income Taxes to the Income
Before Income Taxes) for the quarter ended September 28, 2002 was 16% compared
to a 3% rate of tax on a net loss for the quarter ended September 29, 2001. The
current quarter rate is higher because of an increase in the estimated portion
of total consolidated pretax income for fiscal year 2003 that will be subject to
U. S. income taxes.
-13-
Forward Looking Information:
On April 19, 2002, the DSCP issued Wellco a contract modification extending its
contract for Direct Molded Sole (DMS) combat and hot-weather boots, and has
subsequently ordered 183,000 pairs (103,000 in April 2002 and 80,000 in October
2002) under this extension. This contract was originally scheduled to expire on
April 15, 2002.
On March 19, 2002, Wellco submitted a response to a new DSCP solicitation for
DMS boots. The scheduled award date is presently not later than November 15,
2002. Contracts will be for a base period of one year, with two one-year
options. This solicitation provides for up to four contracts with the quantities
to be purchased from each contractor being 35%, 30%, 20% and 15% of DSCP total
boot purchases. Under its current contract, Wellco is supplying 25% of total
DSCP purchases. The total minimum and maximum pairs DSCP will buy under
contracts issued from the new solicitation are lower than those under current
contracts for the reasons stated below.
The U. S. Army has approved replacing its all-leather combat boot, one of the
three DMS boots supplied by Wellco under its current contract, with the Infantry
Combat Boot (ICB), which is presently used only by the Marine Corps. In July
2002, DSCP received solicitation responses, including one from Wellco, for the
ICB boot, and the scheduled award date is presently November 15, 2002. The
solicitation provides for three contract awards, with first delivery
approximately eight months after contract award, with a base period of one year
and four one-year options thereafter.
The ICB solicitation provides that within 90 days after contract award, each
contractor is required to manufacture and submit for testing 2,000 pairs of
boots. If testing of these 2,000 pairs of boots is not satisfactory, it is
possible that the contractor will not receive any additional delivery orders
under this contract.
The DOD's evaluation of solicitation offers is a time consuming process, and
many times they ask for an extension of offers. Therefore, contract awards from
the DMS and ICB boot solicitations may be later than the dates stated above.
Bidding on government solicitations is very competitive, and the Company cannot
predict with certainty its success in receiving a contract from any of the above
solicitations.
Wellco believes that, if it is awarded a contract from both the DMS and ICB boot
solicitations, any adverse effect on future operating results, related to the
Army's replacement of the all-leather combat boot with the ICB boot, will not be
substantial. If a contract is awarded Wellco from only one of these
solicitations, or if Wellco does not receive a contract from either
solicitation: future operating results and liquidity would be adversely
affected; use of the bank line of credit would likely increase; and, the bank
line of credit may be cancelled or may not be renewed (see further discussion in
the Liquidity and Capital Resources section). In addition, if contracts are not
awarded to Wellco, the carrying amount of certain long-lived assets may be
impaired. If some or all of these negative events were to occur, Wellco believes
that the effects would not occur until the Company's fiscal year 2004.
The Company has received machinery orders from a new customer totaling $600,000.
The Company estimates that delivery will be in the second and third quarters of
fiscal year 2003.
The Company is attempting to sell the previously mentioned beret manufacturing
machinery, which has a carrying value in the Consolidated Balance Sheets at
September 28, 2002 of $50,000. Future write down of this amount may be necessary
if the estimated or actual resale value is less than this amount.
In October 2001, SFAS No. 144, "Accounting for Impairment or Disposal of
Long-lived Assets" was issued specifying, among other things, the financial
accounting and reporting for the impairment or disposal of long- lived assets.
SFAS No.144 supersedes SFAS No. 121 and the accounting and reporting provisions
-14-
of APB 30 related to the disposal of a segment of a business. The Statement is
effective for the Company's 2003 fiscal year which started June 30, 2002 and
will be applied to long-lived assets whenever events or circumstances indicate
that their carrying amount may not be recoverable. There was no effect on the
Company's financial statements from the adoption of this standard.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment approach, and is effective for the
Company's 2003 fiscal year which started June 30, 2002. Under SFAS No. 142, if
the carrying amount of goodwill exceeds its implied fair value, an impairment
loss is recorded equal to that excess. The Consolidated Balance Sheets includes
$228,000 of goodwill ("Excess of cost over net assets of subsidiary at
acquisition"). An initial review for impairment must be performed within six
months of adopting the new standard. The Company will complete its initial
impairment assessment by the end of the second quarter of fiscal 2003.
Except for historical information, this form 10-Q includes forward looking
statements that involve risks and uncertainties, including, but not limited to,
the receipt of contracts from the U. S. government and the performance
thereunder, the ability to control costs under fixed price contracts, the
cancellation of contracts, and other risks detailed from time to time in the
Company's Securities and Exchange Commission filings, including Form 10-K for
the year ended June 29, 2002. Those statements include, but may not be limited
to, all statements regarding intent, beliefs, expectations, projections,
forecasts, and plans of the Company and its management. Actual results may
differ materially from management expectations. The Company assumes no
obligation to update any forward-looking statements.
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 amounts of cash and unused line of credit:
(in thousands)
September 28, 2002 June 29, 2002
------------------------------------------
Cash and Cash Equivalents $720 $270
Unused Line of Credit 3,000 3,000
-------------------------------------------
Total $3,720 $3,270
===========================================
The increase in cash at September 28, 2002 resulted primarily from cash provided
by operations during the first quarter of fiscal year 2003.
The following table summarizes the major sources (uses) of cash for the three
months ended September 28, 2002:
-15-
(in thousands)
September 28, 2002
------------------
Income Before Depreciation and Other Non-cash
Adjustments $621
Net Change in Accounts Receivable, Inventories,
Accounts Payable, and Accrued Compensation 233
Net Change in Income Taxes, Pension Obligation,
and Other (142)
------------------
Net Cash Provided by Operations 712
Cash Used to Purchase Plant and Equipment (144)
Cash Dividends Paid (118)
-----------------
Net Increase in Cash and Cash Equivalents $450
=================
In the quarter ended September 28, 2002, cash provided by operations was
$712,000. Net income of $394,000 and depreciation and amortization of $227,000
provided a total of $621,000. Operating cash was also provided by a reduction in
inventories ($750,000) and accounts receivable ($63,000). Cash was used to
decrease accounts payable by $590,000. Because DSCP did not issue any boot
orders in the current quarter, cash was provided by boot shipments from
inventory that were not replaced with boots produced.
Cash from operations was primarily used to purchase equipment, pay cash
dividends, and to invest in short- term interest earning instruments with
maturities of three months or less.
The following table shows aggregated information about contractual obligations
as of September 28, 2002:
Payments Due by Period
Total Less Than 1 1-3 Years 4-5 Years After 5 Years
Year
-------------------------------------------------------------
Notes Payable $300,000 $300,000
Building Lease 1,091,000 $135,000 $306,000 $330,000 320,000
--------------------------------------------------------------
Total $1,391,000 $135,000 $306,000 $330,000 $620,000
===============================================================
In addition to not receiving a contract from some of the solicitations mentioned
above, delays in U. S. government's contract awards and their issuance of
production orders under contracts could have an adverse effect on liquidity.
Wellco does not know of any other demands, commitments, uncertainties, or trends
that will result in or that are reasonablely likely to result in its liquidity
increasing or decreasing in any material way.
The bank line of credit, which provides for total borrowing of $3,000,000, will
expire on December 31, 2002 and will then be subject to renewal at the
discretion of the bank. Historically, the bank has always renewed the line of
credit. Under conditions of substantial reduction in operations, with little
basis for projecting a reversal of such reduction, it is possible that the bank
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would cancel the line of credit. Events that would cause a substantial reduction
in operations include: cancellation of existing government contracts; not
receiving future government contracts currently being solicited; and, receiving
government contracts that do not provide enough revenues to provide adequate
liquidity. Based on information available to date, the Company believes that
such events could not occur until its fiscal year 2004.
There was no borrowing under the line of credit at September 28, 2002 and the
Company was in compliance with the loan covenants at September 28, 2002. The
Company expects to use this bank line of credit from time to time. Since the
Company's first source of liquidity is cash from operations, a decrease in sales
of the Company's products would reduce this source of liquidity and result in
increased use of the bank line of credit. Based on information available to
date, the Company believes that such events could not occur until its fiscal
year 2004.
The Promissory Note, Loan Agreement and Security Agreement documenting the bank
line of credit provide that:
o All amounts borrowed shall become due and immediately payable
upon demand of the bank. o The bank's obligation to make advances
under the note shall terminate: if the bank makes a demand for
payment; if a default under any loan document occurs; or, in any
event, on December 31, 2002, unless the Note is extended by the
bank under terms satisfactory to the bank.
o All amounts borrowed shall become immediately payable if Wellco
commences or has commenced against it a bankruptcy or insolvency
proceeding, or in the event of default.
Events of default include:
o Having a current ratio less than that prescribed by the bank.
o Having tangible net worth less than that prescribed by the bank.
o Any failure to meet requirements under the Note, Loan Agreement
or Security Agreement.
Other than the above, Wellco 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.
Item 4. Controls and Procedures.
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports filed
pursuant to the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules, regulations and related forms, and
that such information is accumulated and communicated to the Company's Chief
Executive Officer and Principal Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
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Within the 90 days prior to the filing date of this quarterly report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Principal Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based on this evaluation, the Company's Chief Executive Officer and Principal
Financial Officer concluded that the Company's disclosure controls and
procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls and procedures
subsequent to the date the Company completed its evaluation. Therefore, no
corrective actions were required to be taken.
-18-
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. 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
-19-
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, Chief Executive Officer Tammy Francis, Controller and Principal
and President Financial Officer
(Principal Executive Officer)
November 12, 2002
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WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2002
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
PRINCIPAL EXECUTIVE OFFICER
I, David Lutz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wellco Enterprises,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3 Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report are our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
-21-
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/s/ David Lutz
By: David Lutz, Chief Executive Officer and President
(Principal Executive Officer)
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WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2002
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, David Lutz, certify that:
1. I am the chief executive officer of Wellco Enterprises, Inc.
2. Attached to this certification is Form 10-Q for the three months ended
September 28, 2002, a periodic report (the "periodic report") filed by the
issuer with the Securities Exchange Commission pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act:),
which contains financial statements.
3 I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that
o the periodic report contain the financial statements
fully complies with the requirements of Section 13(a) or
15(d) of the Exchange Act, and
o the information in the periodic report fairly presents,
in all material respects, the financial condition and
results of operations of the issuer for the periods
presented.
Date: November 12, 2002
/s/ David Lutz
By: David Lutz, Chief Executive Officer and President
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WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2002
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
PRINCIPAL FINANCIAL OFFICER
I, Tammy Francis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wellco Enterprises,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3 Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared; b) evaluated the
effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and c)
presented in this quarterly report are our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
-24-
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/s/ Tammy Francis
By: Tammy Francis, Controller
(Principal Financial Officer)
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WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2002
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Tammy Francis, certify that:
1. I am the principal financial officer of Wellco Enterprises, Inc.
2. Attached to this certification is Form 10-Q for the three months ended
September 28, 2002, a periodic report (the "periodic report") filed by the
issuer with the Securities Exchange Commission pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act:),
which contains financial statements.
3 I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that
o the periodic report contain the financial statements
fully complies with the requirements of Section 13(a) or
15(d) of the Exchange Act, and
o the information in the periodic report fairly presents,
in all material respects, the financial condition and
results of operations of the issuer for the periods
presented.
Date: November 12, 2002
/s/ Tammy Francis
By: Tammy Francis, Controller
(Principal Financial Officer)
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