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: MARCH 29, 2003
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
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(Address of Principal Executive Office)
Registrant's telephone number, including area code 828-456-3545
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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 May 13, 2003.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WELLCO ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR THE FISCAL QUARTER ENDED MARCH 29, 2003
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
MARCH 29, 2003 AND JUNE 29, 2002
(in thousands)
ASSETS
(unaudited)
MARCH 29, JUNE 29,
2003 2002
-------------------------
CURRENT ASSETS:
Cash and cash equivalents .................... $ 760 $ 270
Receivables, net ............................. 2,492 1,374
Inventories-
Finished goods ........................... 1,654 2,509
Work in process .......................... 1,087 1,268
Raw materials ............................ 2,349 2,463
-------- --------
Total .................................... 5,090 6,240
Deferred taxes and prepaid expenses .......... 543 381
Assets held for sale (Note 6) ................ 25 70
-------- --------
Total ........................................ 8,910 8,335
-------- --------
MACHINERY LEASED TO LICENSEES,
net of accumulated depreciation .............. 24 28
PROPERTY, PLANT AND EQUIPMENT:
Land ......................................... 107 107
Buildings .................................... 1,176 1,176
Machinery and equipment ...................... 7,151 6,727
Office equipment ............................. 773 747
Automobiles .................................. 185 220
Leasehold improvements ....................... 842 735
-------- --------
Total cost ................................... 10,234 9,712
Less accumulated depreciation and
amortization .............................. (6,481) (5,786)
-------- --------
Net Property Plant and Equipment ............. 3,753 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 .............................................. $ 13,327 $ 12,929
======== ========
(continued on next page)
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WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 29, 2003 AND JUNE 29, 2002
(in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
MARCH 29, JUNE 29,
2003 2002
------------------------
CURRENT LIABILITIES:
Accounts payable ............................. $ 1,838 $ 1,306
Accrued compensation ......................... 694 892
Accrued income taxes ......................... 776 769
Other liabilities ............................ 543 587
-------- --------
Total ........................................ 3,851 3,554
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ........................... 1,028 1,028
Notes payable ................................ 211 205
Deferred revenues ............................ 89 95
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value ................ 1,186 1,183
Additional paid-in capital ................... 357 336
Retained earnings ............................ 7,324 7,247
Accumulated other comprehensive loss ......... (719) (719)
-------- --------
Total ........................................ 8,148 8,047
-------- --------
TOTAL .............................................. $ 13,327 $ 12,929
======== ========
See Notes to Consolidated Financial Statements.
-4-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL NINE MONTHS ENDED
MARCH 29, 2003 AND MARCH 30, 2002
(in thousands except per share and number of shares)
(unaudited)
MARCH 29, MARCH 30,
2003 2002
-------------------------
REVENUES ....................................... $ 16,078 $ 15,134
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............... 13,851 12,632
Unrecovered contract preparation
costs (Note 6) ........................... 45 --
General and administrative expenses ...... 1,712 1,937
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Total .................................... 15,608 14,569
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GRANT INCOME ................................... 60 60
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OPERATING INCOME ............................... 530 625
INTEREST EXPENSE ............................... (22) (28)
INTEREST INCOME (Note 7) ....................... 6 257
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INCOME BEFORE INCOME TAXES ..................... 514 854
PROVISION FOR INCOME TAXES ..................... 82 46
----------- -----------
NET INCOME ..................................... $ 432 $ 808
=========== ===========
BASIC EARNINGS PER SHARE (Notes 4 and 5)
based on weighted average number of
shares outstanding ....................... $ 0.36 $ 0.69
=========== ===========
Shares used in computing basic
earnings per share ....................... 1,185,365 1,170,497
=========== ===========
DILUTED EARNINGS PER SHARE (Notes 4 and 5)
based on weighted average number of
shares outstanding and dilutive stock
options .................................. $ 0.36 $ 0.67
=========== ===========
Shares used in computing diluted
earnings per share ....................... 1,215,378 1,214,299
=========== ===========
See Notes to Consolidated Financial Statements.
-5-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
MARCH 29, 2003 AND MARCH 30, 2002
(in thousands except per share and number of shares)
(unaudited)
MARCH 29, MARCH 30,
2003 2002
------------------------
REVENUES ......................................... $ 5,572 $ 5,174
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ................. 5,042 4,176
General and administrative expenses ........ 576 634
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Total ...................................... 5,618 4,810
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GRANT INCOME ..................................... 20 20
----------- -----------
OPERATING INCOME (LOSS) .......................... (26) 384
INTEREST EXPENSE ................................. (6) (4)
INTEREST INCOME .................................. 1 3
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INCOME (LOSS) BEFORE INCOME TAXES ................ (31) 383
PROVISION (BENEFIT) FOR INCOME TAXES ............. (5) 15
----------- -----------
NET INCOME (LOSS) ................................ $ (26) $ 368
-----------
BASIC EARNINGS (LOSS) PER SHARE (Notes 4 and 5)
based on weighted average number of
shares outstanding ......................... $ (0.02) $ 0.31
=========== ===========
Shares used in computing basic
earnings per share ......................... 1,185,746 1,180,697
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE (Notes 4 and 5)
based on weighted average
number of shares outstanding and dilutive
stock options .............................. $ (0.02) $ 0.30
=========== ===========
Shares used in computing diluted
earnings per share ......................... 1,185,746 1,237,577
=========== ===========
See Notes to Consolidated Financial Statements.
-6-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL NINE MONTHS ENDED
MARCH 29, 2003 AND MARCH 30, 2002
(in thousands)
(unaudited)
MARCH 29, MARCH 30,
2003 2002
---------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ...................................... $ 432 $ 808
------- -------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization ............. 734 649
Non-cash asset impairment ................. 45 --
Non-cash grant income recognized .......... (60) (60)
Non-cash reduction in accrued interest .... -- (234)
(Increase) decrease in-
Receivables .......................... (1,118) 448
Inventories .......................... 1,150 (327)
Other current assets ................. (50) (150)
Increase (decrease) in-
Accounts payable ..................... 532 (86)
Accrued compensation ................. (198) (5)
Accrued income taxes ................. 7 (2)
Pension obligation ................... (132) (96)
Other ................................ 36 23
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Total adjustments ............................... 946 160
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NET CASH PROVIDED BY
OPERATING ACTIVITIES ............................ 1,378 968
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment ................ (557) (391)
------- -------
CASH USED IN INVESTING ACTIVITIES .................... (557) (391)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid ............................. (355) (354)
Stock option exercised .......................... 24 164
------- -------
NET CASH USED IN FINANCING ACTIVITIES ................ (331) (190)
------- -------
NET INCREASE IN CASH ................................. 490 387
CASH AT BEGINNING OF PERIOD .......................... 270 653
------- -------
CASH AT END OF PERIOD ................................ $ 760 $ 1,040
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(continued on next page)
-7-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL NINE MONTHS ENDED
MARCH 29, 2003 AND MARCH 30, 2002
(in thousands)
(unaudited)
MARCH 29, MARCH 30,
2003 2002
---------------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest .................................... $ 22 $ 28
Income taxes ................................ 75 50
NONCASH DECREASE IN NOTE PAYABLE (Note 7) .............. $-- $347
==== ====
See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL NINE MONTHS ENDED
MARCH 29, 2003
(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 nine
months ended March 29, 2003 432
Exercise of stock options 3,000 3 21
Cash dividend ($.30 per share) (355)
-----------------------------------------------
BALANCE AT MARCH 29, 2003 1,185,746 $ 1,186 $ 357 $ 7,324
===============================================
Accumulated
Other
Comprehensive
Loss
-------------
ADDITIONAL PENSION LIABILITY,
NET OF TAX, BALANCE
AT JUNE 29, 2002 $ (719)
Change for the fiscal nine
months ended March 29, 2003 -
--------------
BALANCE AT MARCH 29, 2003 $ (719)
==============
See Notes to Consolidated Financial Statements.
-9-
WELLCO ENTERPRISES, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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FOR THE FISCAL NINE MONTHS ENDED MARCH 29, 2003
-----------------------------------------------
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
United States Armed Forces. The loss of this customer would have a
material adverse effect on the Company.
Bidding on DSCP 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 United States.
There is presently one outstanding DSCP boot solicitation to which the
Company responded. If Wellco does not receive a contract from this
solicitation, future operating results will be adversely affected and
certain assets may be impaired.
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. The Company cannot predict with certainty its success in
receiving a contract from any solicitation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
New Accounting Pronouncements
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. 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 include $228,000 of goodwill ("Excess of cost over net assets of
subsidiary at acquisition") related to the Company's Ro-Search, Inc.
reporting unit. As this goodwill arose prior to 1970, it was not amortized
prior to the adoption of SFAS No. 142.
The Company adopted the provisions of SFAS No. 142 on June 30, 2002, the
beginning of the Company's 2003 fiscal year. The Company has completed
step one of the transitional impairment test and has determined that the
carrying amount of the reporting unit's net assets, including goodwill,
exceeds the fair value of the reporting unit. Management will proceed with
step two of the transitional impairment test to determine if an impairment
should be recorded. The Company expects to complete this analysis by no
later than the end of the Company's 2003 fiscal year.
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
-10-
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.
In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" was issued to amend disclosure requirements of
FASB No. 123, "Accounting for Stock- Based Compensation" to require
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The disclosure provisions for
interim financial information is effective for all periods presented in
the financial reports for the Company's fiscal quarter ended March 29,
2003.
In January 2003, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" was issued to clarify the requirements for a
guarantor's accounting for and disclosures of certain guarantees issued
and outstanding. The initial recognition and measurement provisions are
effective for guarantees issued or modified after December 31, 2002. The
Company has not yet determined the impact, if any, that the recognition
and measurement provisions will have on its consolidated financial
position or results of operations.
3. LINE OF CREDIT:
The Company recently renewed its bank line of credit. Due to the Company's
increased cash from operations and its lack of need for a $3,000,000 line
of credit, on February 5, 2003 the line was reduced from $3,000,000 to
$1,500,000. The line, which expires December 31, 2003, 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 $2,528,000)
and all non-governmental accounts receivable and inventory ($846,000). At
March 29, 2003, 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 March 29, 2003.
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:
-11-
For the Nine Months Ended 3/29/03
----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $432,000 1,185,365 $0.36
Effect of Dilutive Stock-based
Compensation Arrangements 30,013
-----------------------------------
Diluted EPS Available to Shareholders $432,000 1,215,378 $0.36
For the Nine Months Ended 3/30/02
----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $808,000 1,170,497 $0.69
Effect of Dilutive Stock-based
Compensation Arrangements 43,802
-----------------------------------
Diluted EPS Available to Shareholders $808,000 1,214,299 $0.67
For the Three Months Ended 3/29/03
-----------------------------------
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $(26,000) 1,185,746 $(0.02)
Effect of Dilutive Stock-based Compensation
Arrangements (Note N/A - Anti-dilutive)
-----------------------------------
Diluted EPS Available to Shareholders $(26,000) 1,185,746 $(0.02)
For the Three Months Ended 3/30/02
-----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $368,000 1,180,697 $0.31
Effect of Dilutive Stock-based
Compensation Arrangements 56,880
-----------------------------------
Diluted EPS Available to Shareholders $368,000 1,237,577 $0.30
5. STOCK-BASED COMPENSATION:
On December 31, 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for
Stock-Based Compensation- Transition and Disclosure. This statement amends
SFAS No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement
-12-
to require prominent disclosure about the effects on reported net income
of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends APB Opinion No. 28,
Interim Financial Reporting, to require disclosure about those effects in
interim financial statements. We intend to continue to account for
stock-based compensation based on the provisions of APB Opinion No. 25.
The following table summarizes our results as if we had recorded
stock-based compensation expenses for the nine months and three months
ended March 29, 2003 and March 30, 2002, based on the provisions of SFAS
123, as amended by SFAS 148:
For the Nine Months Ended
March 29, 2003 March 30, 2002
--------------------------------------
Net income:
As reported $432,000 $808,000
Compensation expense, net of tax 18,000 18,000
--------------------------------
Pro forma $414,000 $790,000
Basic earnings per share:
As reported $0.36 $0.69
Compensation expense, net of tax 0.01 0.01
-----------------------------
Pro forma $0.35 $0.68
Diluted earnings per share:
As reported $0.36 $0.67
Compensation expense, net of tax 0.02 0.02
-----------------------------
Pro forma $0.34 $0.65
For the Three Months Ended
March 29, 2003 March 30, 2002
Net income (loss):
As reported ($26,000) $368,000
Compensation expense, net of tax 6,000 6,000
---------------------------------
Pro forma ($32,000) $362,000
-13-
March 29, 2003 March 30, 2002
Basic earnings (loss) per share:
As reported ($0.02) $0.31
Compensation expense, net of tax 0.01 -
-------------------------------
Pro forma ($0.03) $0.31
Diluted earnings (loss) per share:
As reported ($0.02) $0.30
Compensation expense, net of tax 0.01 0.01
-------------------------------
Pro forma ($0.03) $0.29
6. UNRECOVERED CONTRACT PREPARATION COSTS:
In October, 2001, Wellco submitted a solicitation response to a DSCP
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 had the capability to
manufacture and deliver berets within the government's required delivery
schedule. In July 2002, the government 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 could be sold. Based on
revised estimates of the resale value, the beret manufacturing machinery
was further written down by $45,000 and is shown as Unrecovered Contract
Preparation Costs in the Consolidated Statements of Operations for the
fiscal nine months ended March 29, 2003. The revised estimated amount for
which this machinery can be sold is included in the Consolidated Balance
Sheets as Assets Held For Sale.
7. NOTE PAYABLE:
On December 29, 1995 Wellco repurchased from Coronet Insurance Company and
some of its affiliates (Coronet and Affiliates) 1,531,272 shares of Wellco
common stock, which represented 57.69% of total shares outstanding at that
time. This repurchase provided for certain additional payments, without
interest, to be made if cumulative net income for the six fiscal years
1997 through 2002 exceeded a defined amount. Generally accepted accounting
principles required that an obligation be reflected in the Consolidated
Balance Sheets for the estimated additional payments that would be made.
Actual cumulative net income through fiscal year 2002 was less than the
defined amount that cumulative net income had to exceed and therefore the
Company has no obligation under this arrangement.
Since its stock repurchase, Wellco, had accrued imputed interest expense
on the estimated additional contingent payment. At December 29, 2001, the
previously accrued $234,000 interest liability was reversed in connection
with the elimination of the Note Payable and accordingly, interest income
for this amount was recognized in the Consolidated Statements of
-14-
Operations for the fiscal nine months ended March 30, 2002.
8. GOVERNMENT BOOT CONTRACT REVENUES:
From time to time, the Company records estimates of revenues or costs
associated with certain contract actions before the amount of such actions
are settled with the DSCP. Any differences between these estimates and the
actual amounts agreed to are included in the period of settlement.
The Company has incurred certain contract material costs which are
reimbursable under a contract price adjustment clause. Under this contract
clause, the Company cannot, unless the amount exceeds a specified amount,
submit a claim to the government for these costs until the contract's end.
After a claim is filed, it is reviewed and audited by the government. It
has been several years since the Company has had a claim of this type, and
therefore the Company lacks any recent experience of government audits of
this type of claim. The Company has determined that under the Securities
and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements", the claim amount is not fixed or
determinable, therefore the estimated amount should not be recorded at
this time. The amount of this claim will be recorded in revenues in the
period in which it becomes fixed or determinable.
-15-
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 its
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 on 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 these critical
accounting policies.
-16-
Comparing the Nine Months Ended March 29, 2003 and March 30, 2002:
- -----------------------------------------------------------------
For the nine months ended March 29, 2003 (current period), Wellco had net income
of $432,000 compared to a net income of $808,000 in the prior year nine month
period ended March 30, 2002 (prior period). The major reasons for the decrease
in net income are:
o During the current period, there was a 3% decrease in Direct
Molded Sole (DMS) combat boots shipped to the U.S. government.
However, total revenues in the current period increased by
$944,000 as compared to the prior period. Sales of certain boot
manufacturing equipment and materials to licensees increased by
$649,000 due to an installation of boot manufacture equipment at
a state prison. Also, the Company began shipping under a small
contract with DSCP to supply the Extreme Cold Weather (Mukluk)
boots and the sales from this contract for the current period
were $835,000.
o Cost of Sales and Services in the current period increased by
$1,219,000, resulting in a $275,000 decrease in gross profit.
Substantially all of combat boots sold to DSCP in the current
period were under three extensions of a contract which expired in
April, 2002. Prior to issuing these contract extensions and in
the process of DSCP negotiating extension prices, DSCP insisted
that certain extension prices be those offered by Wellco on an
outstanding boot solicitation. Prices offered by Wellco on the
outstanding solicitation are lower than those under the expired
contract. These lower prices reduced gross profit by $120,000 in
the current period. The gross profit margin on boot sales was
also adversely affected by an increase in leather prices. In
addition, employee group health insurance, workers compensation
insurance and general property insurance costs increased $162,000
during the current period. Since Wellco's group health insurance
is self-funded, there was additional expense as a result of two
employees' major medical procedures.
o The current period includes $45,000 of unrecovered contract
preparation costs. In October, 2001, Wellco submitted a
solicitation response to a DSCP 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 had the capability to manufacture and deliver berets
within the government's required delivery schedule. In July 2002,
the government 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 could be sold. Based on
revised estimates of the resale value, the beret manufacturing
machinery was further written down by $45,000 and is shown as
Unrecovered Contract Preparation Costs in the Consolidated
Statements of Operations for the nine months ended March 29,
2003. The revised estimated amount for which this machinery
could be sold is included in the Consolidated Balance Sheets as
Assets Held For Sale.
o Lower total administrative personnel salary cost and lower legal
cost were the primary reasons general and administrative expenses
decreased $225,000 in the current period.
o The Consolidated Statements of Operations for the current period
and the prior period include grant income of $60,000. This grant
requires the Company to maintain operations in Puerto Rico for
its five fiscal years 2000 through 2004, and the grant income is
being recognized on a straight line basis over this five year
period.
-17-
o Net income in the prior period includes interest income of
$234,000 which represents the reversal of previously accrued
imputed interest related to a December 29, 1995 repurchase by
Wellco of 1,531,272 shares of its common stock (see Note 7). This
repurchase provided for certain additional payments, without
interest, to be made if cumulative net income for the six
fiscal years 1997 through 2002 exceeded certain defined amounts.
Since its stock repurchase, Wellco, using generally accepted
accounting principles, accrued imputed interest for estimated
additional payments. At December 29, 2001, Wellco projected that
no additional payments were due and the previously accrued
interest expense, as well as the previously accrued liability for
these payments, were reversed.
The income tax rate (the percent of Provision for Income Taxes to the Income
Before Income Taxes) for the current period was 16% compared to 5% for the prior
period. The Small Business Job Protection Act (Act) terminated the federal tax
credit on income earned from operations in Puerto Rico. Under the Act, the
amount of the Company's fiscal year 2003 through 2006 income subject to this
credit is limited, and the credit is entirely eliminated starting with fiscal
year 2007. The current period income tax rate is higher because fiscal year 2003
income from Puerto Rico operations is estimated to exceed the amount subject to
the credit, thereby resulting in the excess not being subject to the federal tax
credit.
Comparing the Three Months Ended March 29, 2003 and March 30, 2002:
- ------------------------------------------------------------------
For the three months ended March 29, 2003 (current period), Wellco had a net
loss of $26,000 compared to a net income of $368,000 in the prior year three
month period ended March 30, 2002 (prior period). The major reasons for the
decrease in net income are:
o Despite a 16% decrease in sales of pairs of DMS combat boots,
total revenues in the current period increased by $398,000 as
compared to the prior period. At the start of the current period,
Wellco had a reasonably small backlog to ship under its DMS
contract extension. The most recent extension was delayed until
the middle of March 2003, and this caused the decrease in DMS
boot sales.
During the current period, the Company had sales of $632,000 from
the Mukluk contract of which shipments only began during the 2003
fiscal year. In addition, sales of certain boot manufacturing
equipment and materials to licensees increased by $527,000 due to
an installation of boot manufacture equipment at a state prison.
o Although Revenues during the current period increased by $398,000
(8%), Cost of Sales and Services in the current period increased
by $866,000 (21%).
The effect of lower prices on DMS contract extensions, as
mentioned above in the nine month comparison, reduced gross
profit by $42,000 in the current period. The gross profit margin
on boot sales was also adversely affected by an increase in
leather prices. In addition, employee group health insurance,
workers compensation insurance and general property insurance
costs increased $98,000 during the current period.
o Lower total administrative personnel salary cost was the primary
reason that general and administrative expenses decreased $58,000
in the current period.
o As stated above in the nine month comparison, grant income is
being recognized on a straight line basis over the fiscal years
2000 through 2004.
-18-
The rate of income tax benefit for the current period loss was 16% compared to a
4% income tax for the prior period taxable income. The current period benefit
results from the taxable loss being used to offset taxable income in the first
and second fiscal quarters of 2003. The current period income tax benefit rate
is higher because, as discussed in the nine month comparison, fiscal year 2003
income from Puerto Rico operations is estimated to exceed the amount subject to
the credit.
Forward Looking Information:
- ---------------------------
Wellco is presently shipping boots under the third extension of a DSCP contract
which was initially scheduled to expire in April, 2002. In late March, 2003,
DSCP invoked its surge option under this contract. Under surge, a contractor is
to make as many boots as fast as reasonably possible, and DSCP is to reimburse
the contractor for excess costs caused by the surge effort. Based on information
supplied by DSCP, surge is expected to last throughout the fourth quarter of
fiscal year 2003, which will end June 28, 2003. Wellco estimates that it will
ship between 90,000 and 120,000 pairs during this quarter, compared to 56,000
pairs in the prior year fourth quarter. Surge is expected to extend into at
least part of the first quarter of fiscal year 2004. However, it is the option
of DSCP to unilaterally terminate its surge option at any time.
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 May 16, 2003.
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 pairs DSCP will buy under contracts issued from the new
solicitation will be lower than in the past because of the Army's replacement of
its all- leather combat boot with the ICB boot, as discussed below.
The DSCP'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 solicitation may be later than the date stated above. The Company cannot
predict with certainty its success in receiving a contract from any
solicitation.
In 2002, the U. S. Army announced that it would replace its all-leather combat
boot, one of the three DMS boots supplied by Wellco under its current contract,
with the Infantry Combat Boot (ICB). On March 11, 2003, Wellco, along with two
other manufacturers, was awarded a contract to supply the U.S. Army with this
boot. This contract is for a one year period, with four one year options which
are exercisable at the government's discretion, with revenues estimated to range
from a minimum of $9.2 million to a maximum of $22.4 million per year. The ICB
contract requires Wellco to manufacture and submit for DSCP testing 2,000 pairs
of boots, and testing is scheduled for the last week of May, 2003. If testing is
satisfactory, Wellco will receive an order for future deliveries, with the first
delivery due in 120 days after approval of the 2,000 pairs. If testing of these
initial boots is not satisfactory, it is possible that Wellco will not receive
any additional delivery orders under this contract.
Wellco believes that, if it is awarded a contract from the DMS solicitation and
if testing of the ICB boot is satisfactory, 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 Wellco is not awarded a
contract from the DMS solicitation or its 2,000 pairs of ICB boots do not test
successfully, 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 these negative
events do occur, the carrying amount of certain long-lived assets may become
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.
-19-
The Company is attempting to sell the previously mentioned beret manufacturing
machinery, which has a carrying value in the Consolidated Balance Sheets at
March 29, 2003 of $25,000. 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
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. 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 include
$228,000 of goodwill ("Excess of cost over net assets of subsidiary at
acquisition") related to the Company's Ro-Search, Inc. reporting unit. As this
goodwill arose prior to 1970, it was not amortized prior to the adoption of SFAS
No. 142.
The Company adopted the provisions of SFAS No. 142 on June 30, 2002, the
beginning of the Company's 2003 fiscal year. The Company has completed step one
of the transitional impairment test and has determined that the carrying amount
of the reporting unit's net assets, including goodwill, exceeds the fair value
of the reporting unit. Management will proceed with step two of the transitional
impairment test to determine if an impairment should be recorded. The Company
expects to complete this analysis by no later than the end of the Company's 2003
fiscal year.
In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" was issued to amend disclosure requirements of FASB
No. 123, "Accounting for Stock-Based Compensation" to require disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The disclosure provisions for interim financial information is
effective for all periods presented in the financial reports for the Company's
fiscal quarter ended March 29, 2003.
In January 2003, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" was issued to clarify the requirements for a guarantor's
accounting for and disclosures of certain guarantees issued and outstanding. The
initial recognition and measurement provisions are effective for guarantees
issued or modified after December 31, 2002. The disclosure requirements are
effective for the Company's fiscal quarter ended December 28, 2002. The Company
has not yet determined the impact, if any, that the recognition and measurement
provisions will have on its consolidated financial position or results of
operations.
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 DSCP 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.
-20-
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)
March 29, 2003 June 29, 2002
--------------------------------------
Cash and Cash Equivalents $760 $270
Unused Line of Credit 1,500* 3,000
--------------------------------------
Total $2,260 $3,270
* after reduction on February 5, 2003 from the previous amount of $3,000,000.
The increase in cash at March 29, 2003 resulted primarily from cash provided by
operations during the first nine months of fiscal year 2003.
The following table summarizes the major sources (uses) of cash for the nine
months ended March 29, 2003:
(in thousands)
March 29, 2003
--------------
Income Before Depreciation and Other Non-cash
Adjustments $1,151
Net Change in Accounts Receivable, Inventories,
Accounts Payable, and Accrued Compensation 366
Net Change in Income Taxes, Pension Obligation,
and Other (139)
------
Net Cash Provided by Operations 1,378
Cash Used to Purchase Plant and Equipment (557)
Cash Provided by Exercise of Stock Options 24
Cash Dividends Paid (355)
------
Net Increase in Cash and Cash Equivalents $490
In the nine months ended March 29, 2003, cash provided by operations was
$1,378,000. Net income of $432,000, depreciation and amortization of $734,000, a
reduction in inventories of $1,150,000 and an increase in accounts payable of
$532,000 provided the main sources of operating cash. The main uses of operating
cash were to decrease accrued compensation by $198,000, and also to fund an
increase in accounts receivable of $1,118,000.
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 March 29, 2003:
-21-
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 1,024,000 $146,000 $315,000 $339,000 $224,000
Unconditional
Equipment
Purchase
Obligations 750,000 $750,000
---------------------------------------------------------------
Total $2,074,000 $896,000 $315,000 $339,000 $524,000
In addition to not receiving a contract from some of the solicitations mentioned
above, delays in DSCP contract awards and their issuance of production orders
under contracts could have an adverse effect on liquidity.
Manufacture of the ICB boot will require an investment in molds and other
machinery, both to manufacture this new product as well as to expand capacity.
The investment is estimated to be $750,000 and should be completed by August,
2003. Other than this, 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.
Prior to February 5, 2003, the bank line of credit provided for borrowings of up
to $3,000,000. Because of infrequent and limited line use, and in order to
reduce the bank's line maintenance charge, on February 5, 2003 the line was
reduced from $3,000,000 to $1,500,000. The line, which expires December 31,
2003, can be renewed annually at the bank's discretion. 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 could 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 March 29, 2003 and the
Company was in compliance with the loan covenants at March 29, 2003. 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,
2003, unless the Note is extended by the bank under terms
satisfactory to the bank.
-22-
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 require 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.
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.
-23-
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:
(99) Section 906 Certifications of Principal Executive
Officer and Principal Financial Officer
b). Reports on Form 8-K:
On March 17, 2003, the Company filed a current report on
Form 8-K regarding a change in the Company's certifying
accountant.
-24-
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)
May 13, 2003
-25-
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE NINE MONTHS ENDED MARCH 29, 2003
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
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 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 functions):
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
-26-
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether 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: May 13, 2003
/s/ David Lutz
By: David Lutz, Chief Executive Officer and President
(Principal Executive Officer)
-27-
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE NINE MONTHS ENDED MARCH 29, 2003
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
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 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 functions):
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 registrant's internal controls.
-28-
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether 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: May 13, 2003
/s/ Tammy Francis
By: Tammy Francis, Controller
(Principal Financial Officer)
-29-
EXHIBIT 99
WELLCO ENTERPRISES, INC. EXHIBIT 99
FORM 10-Q FOR THE NINE MONTHS ENDED MARCH 29, 2003 EXHIBIT 99
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
EXHIBIT 99 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 99
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 nine months ended
March 29, 2003, 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 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: May 13, 2003
/s/ David Lutz
By: David Lutz, Chief Executive Officer and President
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by Wellco Enterprises Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
-30-
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE NINE MONTHS ENDED MARCH 29, 2003
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 nine months ended
March 29, 2003, 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 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: May 13, 2003
/s/ Tammy Francis
By: Tammy Francis, Controller
(Principal Financial Officer)
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by Wellco Enterprises Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
-31-