FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED: APRIL 3, 2004
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 .
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X .
--- ---
1,224,046 shares of $1 par value common stock were outstanding on May 13, 2004.
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
----------------------------
WELLCO ENTERPRISES, INC.
------------------------
CONSOLIDATED FINANCIAL STATEMENTS FILED WITH FORM 10-Q
------------------------------------------------------
FOR THE FISCAL QUARTER ENDED APRIL 3, 2004
------------------------------------------
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
APRIL 3, 2004 AND JUNE 28, 2003
(in thousands)
ASSETS
(unaudited)
APRIL 3, JUNE 28,
2004 2003
----------------------
CURRENT ASSETS:
Cash and cash equivalents .................... $ 77 $ 133
Receivables, net ............................. 6,859 3,450
Inventories-
Finished goods ........................... 3,359 1,247
Work in process .......................... 2,740 1,753
Raw materials ............................ 6,531 4,001
-------- --------
Total .................................... 12,630 7,001
Deferred taxes and prepaid expenses .......... 592 475
-------- --------
Total ........................................ 20,158 11,059
-------- --------
MACHINERY LEASED TO LICENSEES,
net of accumulated depreciation .............. 18 23
PROPERTY, PLANT AND EQUIPMENT:
Land ......................................... 107 107
Buildings .................................... 1,439 1,439
Machinery and equipment ...................... 9,027 7,559
Office equipment ............................. 792 763
Automobiles .................................. 188 188
Leasehold improvements ....................... 772 771
-------- --------
Total cost ................................... 12,325 10,827
Less accumulated depreciation and
amortization .............................. (7,484) (6,708)
-------- --------
Net Property Plant and Equipment ............. 4,841 4,119
-------- --------
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition (Note 2) ........ -- --
Intangible pension asset ..................... 29 29
-------- --------
Total ........................................ 29 29
DEFERRED TAXES ..................................... 80 80
-------- --------
TOTAL .............................................. $ 25,126 $ 15,310
======== ========
(continued on next page)
-3-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
APRIL 3, 2004 AND JUNE 28, 2003
(in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
APRIL 3, JUNE 28,
2004 2003
-------------------------
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 3) ...... $ 7,520 $ 590
Accounts payable ............................. 3,389 3,138
Accrued compensation ......................... 1,448 810
Accrued income taxes ......................... 1,073 722
Other liabilities ............................ 616 582
-------- --------
Total ........................................ 14,046 5,842
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ........................... 1,672 1,672
Notes payable ................................ 219 213
Deferred revenues ............................ 81 87
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value ................ 1,224 1,186
Additional paid-in capital ................... 700 357
Retained earnings ............................ 8,827 7,596
Accumulated other comprehensive loss ......... (1,643) (1,643)
-------- --------
Total ........................................ 9,108 7,496
-------- --------
TOTAL .............................................. $ 25,126 $ 15,310
======== ========
See Notes to Consolidated Financial Statements.
-4-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL NINE MONTHS ENDED
APRIL 3, 2004 AND MARCH 29, 2003
(in thousands except per share and number of shares)
(unaudited)
APRIL 3, MARCH 29,
2004 2003
------------------------
REVENUES ......................................... $ 31,519 $ 16,078
-------- --------
COSTS AND EXPENSES:
Cost of sales and services ................. 27,526 13,896
General and administrative expenses ........ 1,979 1,712
-------- --------
Total ...................................... 29,505 15,608
-------- --------
GRANT INCOME ..................................... 60 60
-------- --------
OPERATING INCOME ................................. 2,074 530
INTEREST EXPENSE ................................. (136) (22)
INTEREST INCOME .................................. 1 6
-------- --------
INCOME BEFORE INCOME TAXES ....................... 1,939 514
PROVISION FOR INCOME TAXES ....................... 349 82
-------- --------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE .......... 1,590 432
======== ========
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Note 2) .............. -- (228)
-------- --------
NET INCOME ....................................... $ 1,590 $ 204
======== ========
EARNINGS PER SHARE (Note 4):
Basic, before cumulative effect ............ $ 1.34 $ 0.36
Cumulative effect .......................... -- (0.19)
-------- --------
Basic, after cumulative effect ............. $ 1.34 $ 0.17
======== ========
Diluted, before cumulative effect .......... $ 1.31 $ 0.36
Cumulative effect .......................... -- (0.19)
-------- --------
Diluted, after cumulative effect ........... $ 1.31 $ 0.17
======== ========
See Notes to Consolidated Financial Statements.
-5-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
APRIL 3, 2004 AND MARCH 29, 2003
(in thousands except per share and number of shares)
(unaudited)
APRIL 3, MARCH 29,
2004 2003
------------------------
REVENUES ......................................... $ 11,513 $ 5,572
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ................. 9,914 5,042
General and administrative expenses ........ 811 576
----------- -----------
Total ...................................... 10,725 5,618
----------- -----------
GRANT INCOME ..................................... 20 20
----------- -----------
OPERATING INCOME (LOSS) .......................... 808 (26)
INTEREST EXPENSE ................................. (74) (6)
INTEREST INCOME .................................. -- 1
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ................ 734 (31)
PROVISION (BENEFIT) FOR INCOME TAXES ............. 111 (5)
----------- -----------
NET INCOME (LOSS) ................................ $ 623 $ (26)
========== ===========
BASIC EARNINGS (LOSS) PER SHARE (Notes 4 and 5)
based on weighted average number
of shares outstanding .......................... $ 0.52 $ (0.02)
========== ===========
Shares used in computing basic
earnings per share ............................. 1,199,977 1,185,746
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE (Notes 4 and 5)
based on weighted average
number of shares outstanding and
dilutive stock options ......................... $ 0.50 $ (0.02)
=========== ===========
Shares used in computing diluted
earnings per share ......................... 1,249,379 1,185,746
=========== ===========
See Notes to Consolidated Financial Statements.
-6-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL NINE MONTHS ENDED
APRIL 3, 2004 AND MARCH 29, 2003
(in thousands)
(unaudited)
APRIL 3, MARCH 29,
2004 2003
---------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ...................................... $ 1,590 $ 432
------- -------
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization ............. 781 734
Non-cash asset impairment ................. -- 45
Non-cash grant income recognized .......... (60) (60)
Non-cash reduction in deferred revenue .... (6) (6)
Non-cash interest expense ................. 6 6
(Increase) decrease in-
Receivables .......................... (3,409) (1,118)
Inventories .......................... (5,629) 1,150
Other current assets ................. (75) (50)
Increase (decrease) in-
Accounts payable ..................... 251 532
Accrued compensation ................. 638 (198)
Accrued income taxes ................. 351 7
Pension obligation ................... (42) (132)
Other ................................ 94 36
------- -------
Total adjustments ............................... (7,100) 946
------- -------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES ............................ (5,510) 1,378
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment ................ (1,498) (557)
-------
CASH USED BY INVESTING ACTIVITIES .................... (1,498) (557)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings ............. 6,930 --
Cash dividends paid ............................. (359) (355)
Stock options exercised ......................... 381 24
------- -------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES ............................ 6,952 (331)
------- -------
NET INCREASE (DECREASE) IN CASH ...................... (56) 490
CASH AT BEGINNING OF PERIOD .......................... 133 270
------- -------
CASH AT END OF PERIOD ................................ $ 77 $ 760
======= =======
(continued on next page)
-7-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL NINE MONTHS ENDED
APRIL 3, 2004 AND MARCH 29, 2003
(in thousands)
(unaudited)
APRIL 3, MARCH 29,
2004 2003
---------------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ................................ $136 $ 22
Income taxes ............................ $-- $ 75
==== ====
See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL NINE MONTHS ENDED
APRIL 3, 2004
(in thousands except number of shares)
(unaudited)
Common Stock Additional
Par Paid-In Retained
Shares Value Capital Earnings
---------------------------------------------
BALANCE AT JUNE 28, 2003 1,185,746 $ 1,186 $ 357 $ 7,596
Net income for the fiscal nine
months ended April 3, 2004 1,590
Exercise of stock options 38,300 38 343
Cash dividend ($.30 per share) (359)
---------------------------------------------
BALANCE AT APRIL 3, 2004 1,224,046 $ 1,224 $ 700 $ 8,827
---------------------------------------------
Accumulated
Other
Comprehensive
Loss
----------------
ADDITIONAL PENSION LIABILITY,
NET OF TAX, BALANCE
AT JUNE 28, 2003 $ (1,643)
Change for the fiscal nine
months ended April 3, 2004 -
----------------
BALANCE AT APRIL 3, 2004 $ (1,643)
----------------
See Notes to Consolidated Financial Statements.
-9-
WELLCO ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE FISCAL NINE MONTHS ENDED APRIL 3, 2004
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.
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.
In late March 2003, DSCP ordered the Company to accelerate its rate of
direct molded sole (DMS) boot production under a contract by exercising
the contract's surge option clause and surge on this production is
expected to last through the fiscal year 2004 and first fiscal quarter of
2005.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting Changes
Statement of Financial Accounting Standards No. 142 (SFAS 142, "Goodwill
and Other Intangible Assets") was effective for the first quarter of
Company's 2003 fiscal year. SFAS 142 provides for a specific method to
determine if goodwill is impaired, and the application of this method
resulted in the determination that $228,000 of previously recorded
goodwill was impaired. Under SFAS 142, this $228,000 was measured as of
the beginning of the 2003 fiscal year and was charged against income in
fourth quarter of fiscal year 2003 as the cumulative effect of a change in
accounting principle.
SFAS 142 provides that when presenting prior period information for
interim periods of the fiscal year in which the impairment loss was
recorded, and when that impairment loss was not recorded in the first
quarter of that fiscal year, prior period information shall be restated to
reflect the impairment loss in the first quarter of the fiscal year of
adoption. Accordingly, the Consolidated Statements of Operations for the
fiscal nine months ended March 29, 2003 have been restated to reflect as a
cumulative effect of change in accounting principle the goodwill
impairment.
The following table summarizes the impact of adopting SFAS 142 on the
Consolidated Statements of Operations for the nine months ended March 29,
2003:
-10-
March 29,
2003
- ---------------------------------------------------------------------------
Net income as previously reported $ 432,000
- ---------------------------------------------------------------------------
Cumulative effect of change in accounting principle (228,000)
- ---------------------------------------------------------------------------
Net income as restated $ 204,000
- ---------------------------------------------------------------------------
Per share:
- ---------------------------------------------------------------------------
Basic earnings per share as reported $ 0.36
- ---------------------------------------------------------------------------
Cumulative effect of change in accounting principle (0.19)
- ---------------------------------------------------------------------------
Basic earnings per share as restated 0.17
- ---------------------------------------------------------------------------
Diluted earnings per share as reported 0.36
- ---------------------------------------------------------------------------
Cumulative effect of change in accounting principle (0.19)
- ---------------------------------------------------------------------------
Diluted earnings per share as restated $ 0.17
- ---------------------------------------------------------------------------
New Accounting Pronouncements
In December 2003, the FASB issued SFAS No. 132(R), a revision to SFAS No.
132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits". SFAS No. 132(R) does not change the measurement or recognition
related to pension and other postretirement plans required by SFAS No.
87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits", and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and retains
the disclosure requirements contained in SFAS No. 132. SFAS No. 132(R)
requires additional disclosures about the assets, obligations, cash flows
and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. SFAS No. 132(R) is effective for
financial statements with fiscal years ending after December 15, 2003. The
Company included the required annual disclosures in its consolidated
financial statements as of and for the year ended June 28,2003 and has
included the required interim disclosures in Note 7 to its consolidated
financial statements. The adoption of SFAS No. 132(R) did not impact the
Company's consolidated balance sheet or results of operations.
The Financial Accounting Standards Board is currently working on a new
standard related to employer accounting for stock options issued to
employees. The Company believes that the new standard may require
recording compensation expense for the granting, modifying or settling of
employee stock options. Although the final provisions of the new standard
are not known, the Company may be required to record compensation expense
for certain previously granted stock options. The Company expects that the
new standard will be effective for its 2006 fiscal year.
Other accounting standards that have been issued or proposed by the FASB
or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on our consolidated
financial statements upon adoption.
-11-
3. LINE OF CREDIT:
The Company recently renegotiated its bank line of credit. Due to the
Company's increased accounts receivable from shipping DMS boots under
surge, and to increased inventories, caused by both surge and the initial
production of the ICB boot, the Company increased its line of credit on
December 29, 2003 from $4,500,000 to $5,000,000. Subsequently, on February
20, 2004 the line has been increased to $10,000,000. Availability under
this line shall be reduced to $9,000,000 on May 1, 2004; to $8,000,000 on
June 1, 2004; to $7,000,000 on July 1, 2004; to $6,000,000 on August 1,
2004; and to $5,000,000 on September 1, 2004. The line, which expires
December 31, 2004, can be renewed annually at the bank's discretion. This
line of credit is secured by a blanket lien on all machinery and equipment
and all accounts receivable and inventory. At April 3, 2004, borrowings on
this line of credit were $7,520,000 with $2,480,000 available in
additional borrowings.
The bank credit agreement contains, among other provisions, defined levels
of net worth and current ratio requirements. The Company was not in
compliance with the current ratio loan covenant at April 3, 2004. The
Company has received from the bank a waiver for the period ended April 3,
2004 regarding this loan covenant violation. The covenants are subject to
review at the end of each fiscal quarter.
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 Nine Months Ended 4/03/04
----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------------------------
Basic EPS Available to Shareholders $ 1,590,000 1,190,388 $ 1.34
- -------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 24,870
- -------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $ 1,590,000 1,215,258 $ 1.31
- -------------------------------------------------------------------------------
-12-
For the Nine Months Ended 3/29/03
----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------------------------
Income Before Accounting Change $ 432,000 1,185,365 $ 0.36
- -------------------------------------------------------------------------------
Cumulative Effect of Accounting Change (228,000) (0.19)
- -------------------------------------------------------------------------------
Net Income Available to Shareholders 204,000 0.17
- -------------------------------------------------------------------------------
Effect of Dilutive Stock-based Compensation
Arrangements 30,013
- -------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $ 204,000 1,215,378 $ 0.17
- -------------------------------------------------------------------------------
For the Three Months Ended 4/03/04
-----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------
Basic EPS Available to Shareholders $ 623,000 1,199,977 $ 0.52
- -------------------------------------------------------------------------------
Effect of Dilutive Stock-based Compensation
Arrangements 49,402
- -------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $ 623,000 1,249,379 $ 0.50
- -------------------------------------------------------------------------------
For the Three Months Ended 3/29/03
-----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------
Income (Loss) Before Accounting Change $ (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)
- -------------------------------------------------------------------------------
5. STOCK-BASED COMPENSATION:
The Company uses Accounting Principles Board Opinion No. 25 (APB 25) to
account for stock options granted to employees. Under APB 25, no
compensation cost is reflected in net income for stock option awards as
all options granted had an exercise price equal to or in excess of the
market value of the underlying common stock on the date of grant.
Under SFAS No. 123 and No. 148, a company that uses APB 25 to account for
stock options must disclose the effect on reported net income of using a
fair value based method of accounting for stock- based employee
compensation.
The following table summarizes the effect on net income and earnings per
share had the accounting for employee stock options been based on the fair
value method.
-13-
For the Nine Months Ended
April 3, 2004 March 29, 2003
- -------------------------------------------------------------------------------
Net income:
- -------------------------------------------------------------------------------
As reported $ 1,590,000 $ 204,000
- -------------------------------------------------------------------------------
Compensation expense, net of tax 18,000 18,000
- -------------------------------------------------------------------------------
Pro forma $ 1,572,000 $ 186,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Basic earnings per share:
- -------------------------------------------------------------------------------
As reported $ 1.34 $ 0.17
- -------------------------------------------------------------------------------
Compensation expense, net of tax 0.02 0.01
- -------------------------------------------------------------------------------
Pro forma $ 1.32 $ 0.16
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Diluted earnings per share:
- -------------------------------------------------------------------------------
As reported $ 1.31 $ 0.17
- -------------------------------------------------------------------------------
Compensation expense, net of tax 0.02 0.01
- -------------------------------------------------------------------------------
Pro forma $ 1.29 $ 0.16
- -------------------------------------------------------------------------------
For the Three Months Ended
April 3, 2004 March 29, 2003
- -------------------------------------------------------------------------------
Net income (loss):
- -------------------------------------------------------------------------------
As reported $ 623,000 $ (26,000)
- -------------------------------------------------------------------------------
Compensation expense, net of tax 6,000 6,000
- -------------------------------------------------------------------------------
Pro forma $ 617,000 $ (32,000)
- -------------------------------------------------------------------------------
Basic earnings per share:
- -------------------------------------------------------------------------------
As reported $ 0.52 $ (0.02)
- -------------------------------------------------------------------------------
Compensation expense, net of tax 0.01 0.01
- -------------------------------------------------------------------------------
Pro forma $ 0.51 $ (0.03)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Diluted earnings per share:
- -------------------------------------------------------------------------------
As reported $ 0.50 $ (0.02)
- -------------------------------------------------------------------------------
Compensation expense, net of tax 0.01 0.01
- -------------------------------------------------------------------------------
Pro forma $ 0.49 $ (0.03)
- -------------------------------------------------------------------------------
-14-
6. 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.
In late March 2003, DSCP ordered the Company to accelerate its rate of
boot production by exercising a contract's surge option clause. The
Consolidated Statements of Operations for the nine months ended April 3,
2004 include surge related costs (overtime, new employee training, etc.),
totaling $925,000. In addition, the Consolidated Statements of Operations
and Comprehensive Income for the year ended June 28, 2003 include surge
related costs of $279,000. Wellco interprets the related surge option
contract clause to require its submitting and subsequently negotiating
with DSCP a proposal for reimbursement of these costs. DSCP has a
different understanding of this clause under which the Company would not
be reimbursed these costs. The Company's legal counsel has discussed with
DSCP's legal counsel this difference in contract clause interpretation,
without any resolution. The probability of successfully resolving this
issue, or the outcome of any legal action, cannot be reasonably predicted.
The reimbursement of surge costs will be recognized in revenues in the
period when and if DSCP acknowledges Wellco's right to reimbursement, or
when any ensuing legal action awards reimbursement.
7. PENSION PLANS:
The Company has two non-contributory, defined benefit plans. The
components of pension expense, included in Cost of Sales and Services in
the Consolidated Statements of Operations are as follows:
-15-
For the Nine Months Ended
April 3, 2004 March 29, 2003
- -------------------------------------------------------------------------------
Benefits Earned for Service in
the Current Year $ 96,800 $ 99,000
- -------------------------------------------------------------------------------
Interest on the Projected Benefit
Obligation 266,000 273,750
- -------------------------------------------------------------------------------
Expected Return on Plan Assets (223,000) (214,500)
- -------------------------------------------------------------------------------
Amortization of: Unrecognized Net
Pension Obligation at July 1,
1987; Cost of Benefit Changes
Since That Date; and Gains
and Losses Against
Actuarial Assumptions 87,000 60,000
- -------------------------------------------------------------------------------
Pension Expense $ 226,800 $ 218,250
- -------------------------------------------------------------------------------
For the Three Months Ended
April 3, 2004 March 29, 2003
- -------------------------------------------------------------------------------
Benefits Earned for Service in the
Current Year $ 32,270 $ 33,000
- -------------------------------------------------------------------------------
Interest on the Projected Benefit
Obligation 88,670 91,250
- -------------------------------------------------------------------------------
Expected Return on Plan Assets (74,340) (71,500)
Amortization of: Unrecognized Net
Pension Obligation at July 1, 1987;
Cost of Benefit Changes Since That
Date; and Gains and Losses Against
Actuarial Assumptions 29,000 20,000
- -------------------------------------------------------------------------------
Pension Expense $ 75,600 $ 72,750
- -------------------------------------------------------------------------------
-16-
PART I. FINANCIAL INFORMATION
Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
=====================
Critical Accounting Estimates:
- -----------------------------
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. Many times, there is significant
uncertainty about future events which makes estimates difficult. 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 28, 2003, the end of the 2003 fiscal year, there have been no changes
in the nature of the estimates and assumptions related to these critical
accounting policies.
-17-
Comparing the Nine Months Ended April 3, 2004 and March 29, 2003:
- ------------------------------------------------------------------
OVERVIEW
--------
The most significant event affecting the Company's operations in the current
fiscal year is the increased demand for desert boots used by U. S. Armed Forces
personnel serving in Iraq. To meet the need, boot production has more than
doubled, new employees have been hired and trained, overtime has been incurred
and new equipment has been purchased. While this level of activity has increased
income, significant excess costs have been incurred.
The second most significant event occurring in this fiscal year is the
integration into manufacturing of a new boot for the U. S. Department of
Defense. Excess costs were incurred in training employees and establishing
manufacturing procedures and methods. Sales of this boot to date have not been
significant because of uncertainty about this boot passing a certain required
test, which is now successfully resolved.
Comparative results for these two periods is as follows:
Current Period Prior Period
Nine Months Nine Months
Ended April 3, Ended March 29, % of
(Amounts in thousands) 2004 2003 Change Change
- -------------------------------------------------------------------------------
Revenues $ 31,519 $ 16,078 $ 15,441 96%
- -------------------------------------------------------------------------------
Cost of Sales 27,526 13,896 13,630 98%
- -------------------------------------------------------------------------------
Gross Profit 3,993 2,182 1,811 83%
- -------------------------------------------------------------------------------
Administrative Expenses 1,979 1,712 267 16%
- -------------------------------------------------------------------------------
Grant Income 60 60 -
- -------------------------------------------------------------------------------
Operating Income 2,074 530 1,544 291%
- -------------------------------------------------------------------------------
Interest Expense 135 16 119
- -------------------------------------------------------------------------------
Income Taxes 349 82 267
- -------------------------------------------------------------------------------
Income Before Accounting
Change 1,590 432 1,158
- -------------------------------------------------------------------------------
Accounting Change - (228) (228)
- -------------------------------------------------------------------------------
Net Income $ 1,590 $ 2 $ 1,386
- -------------------------------------------------------------------------------
The Company's primary customer is the Defense Supply Center Philadelphia (DSCP),
the Department of Defense agency with which the Company contracts for the
manufacture of boots used by U. S. Armed Forces personnel. Since late March,
2003, DSCP has exercised its surge option clause under certain contracts to
manufacture the Direct Molded Sole (DMS) boot. Invoked in response to the need
for desert boots used by U. S. Armed Forces personnel in Iraq, the surge option
requires Wellco to significantly increase its rate of boot production.
In the current period, the Company shipped 383,000 pairs of DMS boots, compared
to 178,000 pairs of shipped in the prior year. The increase in pairs of boots
shipped is the primary reason for the increases shown above.
-18-
This increase was only possible by adding work shifts, hiring new employees,
working overtime and paying premium freight cost for air shipments of raw
materials. For the current period, the Company has identified $925,000, included
in Cost of Sales and Services, of additional cost incurred because of the DSCP
surge.
Wellco interprets the related surge option contract clause to require its
submitting and subsequently negotiating with DSCP a proposal for reimbursement
of these costs. DSCP has a different interpretation of this clause. Based on the
advice of its legal counsel, Wellco has notified DSCP that when total additional
costs incurred because of surge are known, it intends to submit a request for
reimbursement of these costs. The Company plans to submit request for
reimbursement of these costs with DSCP in the next few months. The Company
cannot predict whether it will be reimbursed for some or all of these costs. As
of April 3, 2004, the Company has not recognized any revenues from any of these
identified costs.
In March, 2003, the Company was awarded a contract to supply the U. S. Army's
new Infantry Combat Boot (ICB). About two years ago, the Army decided to replace
its all-leather combat boot, one of the three DMS boots manufactured by Wellco
which represents about half of Wellco's historical sales to DSCP, with the ICB
boot. Wellco, along with two other manufacturers, was awarded a contract to
supply this boot. During the current period, the Company incurred significant
costs (new employee training costs, materials for production trials, boot
testing, plant infrastructure costs, etc.) to integrate the productions of this
new boot into the Company's factories.
20,000 pairs of ICB boots sold to DSCP are included in current period revenues.
Because of testing issues, significant additional sales from the ICB boot will
not be included in revenues until the fiscal quarter ending July 3, 2004. See
the "Forward Looking" section below.
Revenues from technical assistance fees and equipment rentals from licensees,
which vary with licensee sales, were greater in the current period because of
increased sales of certain licensees.
Increased salaries and bonus expense caused the majority of the increase in
administrative expenses. Two persons have been hired to replace two near-term
retirements. Several administrative clerks have been added to do the work caused
by the increased activity level. One in-house sales person has been added
because of increases in commercial sales of military boots. Employee bonuses
substantially vary directly with net income. Travel cost have also increased as
management personnel traveled more frequently to oversee operations at the
Company's Puerto Rico factory.
The increase in interest expense was caused by increased use of the Company's
bank line of credit. See the "Liquidity and Capital Resources" section below.
Grant income represents the straight line recognition of a grant issued by the
government of Puerto Rico related to the Company's 1999 consolidation of
manufacturing operations in Puerto Rico. This income will all be recognized by
the end of fiscal year 2004.
Prior period net income was reduced by the write-off of $228,000 of previously
recorded goodwill that was determined to be impaired under Statement of
Financial Accounting Standards No. 142 which became effective in the fiscal year
2003.
The income tax rate (the percent of Provision for Income Taxes to the Income
Before Income Taxes) for the current period was 18% compared to 16% for the
prior period. The income tax rate increase is primarily due to an increase in
the proportion of total Income Before Income Taxes which is subject to full
federal tax.
-19-
Comparing the Three Months Ended April 3, 2004 and March 29, 2003:
- ------------------------------------------------------------------
Current Period Prior Year
Three Months Three Months
Ended Ended % of
(Amounts in thousands) April 3, 2004 March 29, 2003 Change Change
- -------------------------------------------------------------------------------
Revenues $ 11,513 $ 5,572 $ 5,941 107%
- -------------------------------------------------------------------------------
Cost of Sales 9,914 5,042 4,872 97%
- -------------------------------------------------------------------------------
Gross Profit 1,599 530 1,069 202%
- -------------------------------------------------------------------------------
Administrative Expenses 811 576 235 41%
- -------------------------------------------------------------------------------
Grant Income 20 20 -
- -------------------------------------------------------------------------------
Operating Income (Loss) 808 (26) 834
- -------------------------------------------------------------------------------
Interest (Expense) 74 5 69
- -------------------------------------------------------------------------------
Income Taxes (Benefit) 111 (5) 116
- -------------------------------------------------------------------------------
Net Income (Loss) $ 623 $ (26) $ 649
- -------------------------------------------------------------------------------
The current period reflects the increased boot activity caused by surge.
In the current period, the Company shipped 131,000 pairs of boots under surge,
compared to 52,000 pairs shipped in the prior year. The increase in pairs of
boots shipped is the primary reason for the increases shown above.
19,000 pairs of ICB boots sold to DSCP are included in current period revenues.
For the current period, the Company has identified $405,000 of additional cost
incurred because of the DSCP surge.
The income tax rate (the percent of Provision for Income Taxes to the Income
Before Income Taxes) for the current period was 15% compared to benefit rate of
16% for the prior period. The income tax rate change is primarily due to an
increase in the proportion of total Income Before Income Taxes which is subject
to full federal tax.
Forward-looking Information:
- ---------------------------
Based on information supplied by DSCP, surge is expected to last at least
through the Company's fiscal year 2004, which will end July 3, 2004 and into the
first quarter of fiscal year 2005. The Company understands that the demand for
desert boots remains high. However, the Company cannot predict when DSCP will
revoke its surge option. Historically, as the U. S. government approaches the
end of its fiscal year on September 30, DSCP funding limitations have resulted
in reduced orders for boots in the July through September period.
On September 30, 2003, DSCP awarded Wellco a new contract for DMS combat boots.
Wellco's award was for 30% of DSCP total DMS boot purchases. The contract is for
a base period of one year, with two one-year options. Four contracts were
awarded and the quantities to be purchased from each contractor are 35%, 30%,
20% and 15% of DSCP total boot purchases. Under the old DMS contract mentioned
above, Wellco supplied 25% of total DSCP purchases. After surge, the total
-20-
DSCP will buy under these new contracts will be lower than in the past because
of the Army's replacement of its all-leather DMS combat boot with the Infantry
Combat Boot (ICB). In addition, the new contract, as compared to the old
contract, has lower prices which will result in a lower profit margin per pair
of boots.
In March 2003, DSCP awarded the Company a contract to supply the ICB boot. This
contract is for a one year period, with four one-year options which are
exercisable at the government's discretion.
The ICB boot is subject to extensive inspection and testing prior to its sale to
DSCP. Initially, DSCP was the only approved testing laboratory for one of the
tests and testing took several days. DSCP first tested the Company's ICB boots
in January, 2004. Several boots representing sizeable production lots did not
pass the test, and DSCP issued a Cure Notice stating that the related contract
may be cancelled if the Company did not supply boots that pass the test.
Subsequently, an independent laboratory was certified by DSCP to do this test.
Upon re-test and subsequent testing of other boots at this laboratory, all of
the Company's ICB boots passed the test. DSCP is now accepting ICB boots based
on Wellco's certification of its boots passing all tests.
This testing situation has delayed Wellco's revenue recognition from the ICB
contract. Since it was not completely resolved until after the end of Wellco's
fiscal quarter ended April 3, 2004, significant sales of the ICB boot will not
be included in revenues until the fiscal quarter ending July 3, 2004, the fourth
quarter of Wellco's 2004 fiscal year.
Just as the current DMS contract, the margins on the ICB boot are less than
those historically earned under prior contracts. The business of providing boots
to DSCP is very competitive, as U. S. boot manufacturers attempt to replace
volume lost to low-cost foreign-made boots by manufacturing for the U. S.
Defense Department.
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 28, 2003. 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:
-21-
(in thousands)
April 3, 2004 June 28, 2003
- -------------------------------------------------------------------------
Cash and Cash Equivalents $77 $133
- -------------------------------------------------------------------------
Unused Line of Credit * 2,480 910
- -------------------------------------------------------------------------
Total Available $2,557 $1,043
- -------------------------------------------------------------------------
* As discussed below, the line of credit has been increased since June 28, 2003
The increase in cash available at April 3, 2004 resulted from an increase in the
maximum borrowings available under the bank line of credit.
The following table summarizes the major sources (uses) of cash for the nine
months ended April 3, 2004:
(in thousands)
April 3, 2004
- -------------------------------------------------------------------------
Income Before Depreciation and Other Non-cash
Adjustments $2,311
- -------------------------------------------------------------------------
Net Change in Accounts Receivable, Inventories,
Accounts Payable, and Accrued Compensation (8,149)
- -------------------------------------------------------------------------
Net Change in Income Taxes, Pension Obligation,
and Other 328
- -------------------------------------------------------------------------
Net Cash Used by Operations (5,510)
- -------------------------------------------------------------------------
Cash Used to Purchase Plant and Equipment (1,498)
- -------------------------------------------------------------------------
Cash Provided by Line of Credit 6,930
- -------------------------------------------------------------------------
Cash Dividends Paid (359)
- -------------------------------------------------------------------------
Stock Options Exercised 381
- -------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents ($56)
- -------------------------------------------------------------------------
In the nine months ended April 3, 2004, cash used by operations was $5,510,000.
Net income of $1,590,000 and depreciation of $781,000 was far short of providing
the cash needs for an increase of $3,409,000 in accounts receivable and
$5,629,000 in inventory.
In addition to the operating cash needed for the investment in surge inventory
and accounts receivable, the delay in resolving the ICB testing issue created
significant cash needs. Resolving this issue took several months. The Company,
in order to ultimately meet the need of DSCP for this boot, continued to invest
in ICB boot inventories that could not be shipped until the testing issue was
resolved. In addition, a significant amount was invested in equipment for
manufacture of the ICB boot and to meet the surge need.
-22-
In January, 2004, the bank line of credit was increased to $5,000,000 and
subsequently in February to $7,000,000. After a major renegotiation with the
bank, the line was increased to a maximum of $10,000,000 in February. The actual
use of this line is limited to a monthly total of approximately the amount
invested in accounts receivable and inventory. The maximum line reduces to
$9,000,000 for May and reduces by $1,000,000 per month until September, when it
remains at $5,000,000 until review by the bank at December 31, 2004.
At the beginning of the fourth quarter of 2004, the Company had a very
significant number of ICB boots waiting to be tested. They have all now passed
the testing and they have been sold to DSCP. Cash from these sales will reduce
the line usage, and it is expected that the $5,000,000 limit will be adequate to
meet future operating and other needs.
The Company does not presently have commitments for significant equipment
additions and replacements. However, the Company is currently reviewing capital
additions which, if they meet certain criteria, could result in cash needs of
$200,000 to $500,000. In recent years, cash from operations and the line of
credit have been used to purchase equipment. For future purchases, the Company
may use a term loan.
The bank line of credit is subject to renewal on December 31, 2004.
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 would cancel the line
of credit. Events that would cause a substantial reduction in operations
include: cancellation of existing government contracts; and, receiving
government contracts that do not provide enough revenues to provide adequate
liquidity. In addition, a substantial decrease in sales of the Company's
products would reduce cash generated by operations and result in an increased
need to use the bank line of credit.
At April 3, 2004, the Company was not in compliance with the current ratio
requirement of its bank line of credit agreement. The Company has received from
the bank a waiver of the non-compliance at April 3, 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, 2004, 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.
The following table shows aggregated information about contractual obligations
as of April 3, 2004:
-23-
Payments Due by Period
Total Less Than 1 2-3 Years 4-5 Years After 5 Years
Year
- -------------------------------------------------------------------------------
Notes Payable $300,000 $300,000
- -------------------------------------------------------------------------------
Building Lease 878,000 $155,000 $327,000 $351,000 45,000
- -------------------------------------------------------------------------------
Total $1,178,000 $155,000 $327,000 $351,000 $345,000
- -------------------------------------------------------------------------------
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.
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
are filed or submitted under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commissions's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the reports that are filed under the Exchange Act is
accumulated and communicated to management, including the chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure. Under the supervision of and with the
participation of management, including the chief executive officer and chief
financial officer, the Company has evaluated the effectiveness of the design and
operation of its disclosure controls and procedures as of April 3, 2004, and
based on its evaluation, our chief executive officer and chief financial officer
have concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation described above, including any corrective actions with regard to
significant deficiencies and material weaknesses.
-24-
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.
a) N/A
b) N/A
Item 6. Exhibits and Reports on Form 8-K.
a). Exhibits:
(31) Certifications of the Chief Executive Officer and
Chief Financial Officer under Section 302 of
the Sarbanes-Oxley Act of 2002, filed herewith.
(32) Certifications of the Chief Executive Officer and
Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
b). Reports on Form 8-K:
On February 19, 2004, the Company filed a current report on
Form 8-K reporting under Item 12.
On March 5, 2004, the Company filed a current report on Form 8-K
reporting under Item 4.
-25-
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 Chief
and President Financial Officer
(Principal Executive Officer)
May 13, 2004
-26-
Exhibit 31
----------
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE NINE MONTHS ENDED APRIL 3, 2004
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David Lutz, certify that:
1. I have reviewed this report on Form 10-Q of Wellco Enterprises, Inc.(the
registrant);
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d- 15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal controls over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
-27-
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: May 13, 2004
/s/ David Lutz
By: David Lutz, Chief Executive Officer and President
(Chief Executive Officer)
-28-
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE NINE MONTHS ENDED APRIL 3, 2004
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Tammy Francis, certify that:
1. I have reviewed this report on Form 10-Q of Wellco Enterprises, Inc.(the
registrant);
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d- 15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal controls over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
-29-
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: May 13, 2004
/s/ Tammy Francis
By: Tammy Francis, Controller and Treasurer
(Chief Financial Officer)
-30-
Exhibit 32
----------
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE NINE MONTHS ENDED APRIL 3, 2004
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 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 nine months ended
April 3, 2004, 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 containing 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: May 13, 2004
/s/ David Lutz
By: David Lutz, Chief Executive Officer and President
(Chief Executive 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.
This certification will not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934 even if the document with which it is submitted to the Securities and
Exchange Commission is so incorporated by reference.
-31-
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE NINE MONTHS ENDED APRIL 3, 2004
CERTIFICATION OF CHIEF FINANCIAL OFFICER 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 chief financial officer of Wellco Enterprises, Inc.
2. Attached to this certification is Form 10-Q for the nine months ended
April 3, 2004, 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 containing 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: May 13, 2004
/s/ Tammy Francis
By: Tammy Francis, Controller and Treasurer
(Chief 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.
This certification will not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934 even if the document with which it is submitted to the Securities and
Exchange Commission is so incorporated by reference.
-32-