10-Q 1 f10q1st03.txt QUARTERLY REPORT FOR QUARTER 9/28/02 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 28, 2002 COMMISSION FILE NUMBER: 1-5555 WELLCO ENTERPRISES, INC. ------------------------- (Exact name of registrant as specified in charter) NORTH CAROLINA 56-0769274 ------------------- ------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 150 Westwood Circle, P.O. Box 188, Waynesville, NC 28786 (Address of Principal Executive Office) Registrant's telephone number, including area code 828-456-3545 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- 1,185,746 shares of $1 par value common stock were outstanding on November 12, 2002. PART I. FINANCIAL INFORMATION Item 1. Financial Statements WELLCO ENTERPRISES, INC. CONSOLIDATED FINANCIAL STATEMENTS FILED WITH FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 28, 2002 The attached unaudited financial statements reflect all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the financial position, results of operations, and cash flows for the interim periods presented. All significant adjustments are of a normal recurring nature. -2- WELLCO ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 28, 2002 AND JUNE 29, 2002 (in thousands) ASSETS (unaudited) SEPTEMBER 28, JUNE 29, 2002 2002 ------------- -------- CURRENT ASSETS: Cash and cash equivalents .................... $ 720 $ 270 Receivables, net ............................. 1,311 1,374 Inventories- Finished goods ........................... 1,942 2,509 Work in process .......................... 819 1,268 Raw materials ............................ 2,729 2,463 -------- -------- Total .................................... 5,490 6,240 Deferred taxes and prepaid expenses .......... 558 381 Assets held for sale (Note 5) ................ 50 70 -------- -------- Total ........................................ 8,129 8,335 -------- -------- MACHINERY LEASED TO LICENSEES, net of accumulated depreciation .............. 27 28 PROPERTY, PLANT AND EQUIPMENT: Land ......................................... 107 107 Buildings .................................... 1,176 1,176 Machinery and equipment ...................... 6,851 6,727 Office equipment ............................. 753 747 Automobiles .................................. 220 220 Leasehold improvements ....................... 749 735 -------- -------- Total cost ................................... 9,856 9,712 Less accumulated depreciation and amortization .............................. (6,012) (5,786) -------- -------- Net Property Plant and Equipment ............. 3,844 3,926 -------- -------- INTANGIBLE ASSETS: Excess of cost over net assets of subsidiary at acquisition (Note 2) ........ 228 228 Intangible pension asset ..................... 21 21 -------- -------- Total ........................................ 249 249 DEFERRED TAXES ..................................... 391 391 -------- -------- TOTAL .............................................. $ 12,640 $ 12,929 ======== ======== (continued on next page) -3- WELLCO ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 28, 2002 AND JUNE 29, 2002 (in thousands except share data) LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) SEPTEMBER 28, JUNE 29, 2002 2002 --------------------------- CURRENT LIABILITIES: Accounts payable ............................. $ 716 $ 1,306 Accrued compensation ......................... 902 892 Accrued income taxes ......................... 840 769 Other liabilities ............................ 531 587 -------- -------- Total ........................................ 2,989 3,554 -------- -------- LONG-TERM LIABILITIES: Pension obligation ........................... 1,028 1,028 Notes payable ................................ 207 205 Deferred revenues ............................ 93 95 COMMITMENTS STOCKHOLDERS' EQUITY: Common stock, $1.00 par value ................ 1,183 1,183 Additional paid-in capital ................... 336 336 Retained earnings ............................ 7,523 7,247 Accumulated other comprehensive loss ......... (719) (719) -------- -------- Total ........................................ 8,323 8,047 -------- -------- TOTAL .............................................. $ 12,640 $ 12,929 ======== ======== See Notes to Consolidated Financial Statements. -4- WELLCO ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL THREE MONTHS ENDED SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001 (in thousands except per share and number of shares) (unaudited) SEPTEMBER 28, SEPTEMBER 29, 2002 2001 ----------------------------- REVENUES ....................................... $ 5,258 $ 3,570 ----------- ----------- COSTS AND EXPENSES: Cost of sales and services ............... 4,230 3,207 Unrecovered contract preparation costs (Note 5) ........................... 20 -- General and administrative expenses ...... 556 590 ----------- ----------- Total .................................... 4,806 3,797 ----------- ----------- GRANT INCOME ................................... 20 20 ----------- ----------- OPERATING INCOME (LOSS) ........................ 472 (207) INTEREST EXPENSE ............................... (4) (4) INTEREST INCOME ................................ 2 11 ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES ............. 470 (200) PROVISION FOR INCOME TAXES ..................... 76 5 ----------- ----------- NET INCOME (LOSS) .............................. $ 394 $ (205) =========== =========== BASIC EARNINGS (LOSS) PER SHARE (Note 4) based on weighted average number of shares outstanding ....................... $ 0.33 $ (0.18) =========== =========== Shares used in computing basic earnings per share ....................... 1,182,746 1,163,246 =========== =========== DILUTED EARNINGS (LOSS) PER SHARE (Note 4) based on weighted average number of shares outstanding and dilutive stock options ................................. $ 0.32 $ (0.18) =========== =========== Shares used in computing diluted earnings per share ....................... 1,228,744 1,163,246 =========== =========== See Notes to Consolidated Financial Statements. -5- WELLCO ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL THREE MONTHS ENDED SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001 (in thousands) (unaudited) SEPTEMBER 28, SEPTEMBER 29, 2002 2001 --------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ............................... $ 394 $(205) ----- ----- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization .............. 227 217 Non-cash asset impairment .................. 20 -- Non-cash grant income recognized ........... (20) (20) (Increase) decrease in- Receivables .......................... 63 427 Inventories .......................... 750 40 Other current assets ................. (152) (176) Increase (decrease) in- Accounts payable ..................... (590) 207 Accrued compensation ................. 10 (4) Accrued income taxes ................. 71 (33) Pension obligation ................... (45) (19) Other ................................ (16) (16) ----- ----- Total adjustments ............................... 318 623 ----- ----- NET CASH PROVIDED BY OPERATING ACTIVITIES ............................ 712 418 ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of plant and equipment ................ (144) (112) ----- ----- CASH USED IN INVESTING ACTIVITIES .................... (144) (112) ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid ............................. (118) -- ----- ----- NET CASH PROVIDED BY FINANCING ACTIVITIES ............................ (118) -- ----- ----- NET INCREASE IN CASH ................................. 450 306 CASH AT BEGINNING OF PERIOD .......................... 270 653 ----- ----- CASH AT END OF PERIOD ................................ $ 720 $ 959 ===== ===== (continued on next page) -6- WELLCO ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL THREE MONTHS ENDED SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001 (in thousands) (unaudited) SEPTEMBER 28, SEPTEMBER 29, 2002 2001 --------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for- Interest ................................. $ 4 $ 4 Income taxes ............................. $ 5 $40 === === See Notes to Consolidated Financial Statements. -7- WELLCO ENTERPRISES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE FISCAL THREE MONTHS ENDED SEPTEMBER 28, 2002 (in thousands except number of shares) (unaudited) Common Stock Additional Par Paid-In Retained Shares Value Capital Earnings --------------------------------------------- BALANCE AT JUNE 29, 2002 1,182,746 $ 1,183 $ 336 $ 7,247 Net income for the fiscal three months ended September 28, 2002 394 Cash dividend ($.10 per share) (118) --------------------------------------------- BALANCE AT SEPTEMBER 28, 2002 1,182,746 $ 1,183 $ 336 $ 7,523 --------------------------------------------- Accumulated Other Comprehensive Loss ------------- ADDITIONAL PENSION LIABILITY, NET OF TAX, BALANCE AT JUNE 29, 2002 $ (719) Change for the fiscal three months ended September 28, 2002 - ------ BALANCE AT SEPTEMBER 28, 2002 $ (719) ------- See Notes to Consolidated Financial Statements. -8- WELLCO ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL THREE MONTHS ENDED SEPTEMBER 28, 2002 1. BUSINESS AND ORGANIZATION: Substantially all of the Company's operating activity is from the sale of military and other rugged footwear, the sale of specialized machinery and materials for the manufacture of this type of footwear and the rendering of technical assistance and other services to licensees for the manufacture of this type of footwear. The majority of revenues were from sales to the U. S. government, primarily the Defense Supply Center Philadelphia (DSCP), under contracts for the supply of boots used by the U. S. Armed Forces. The loss of this customer would have a material adverse effect on the Company. Bidding on U. S. government boot solicitations is open to any qualified U. S. manufacturer. Bidding on contracts is very competitive. U. S. footwear manufacturers have been adversely affected by sales of footwear made in low labor cost countries. This has significantly affected the competition for contracts to supply boots to U. S. Armed Forces, which by law must be made in the U. S. Most boot contracts are for multi-year periods. Therefore, a bidder not receiving an award from a significant solicitation could be adversely affected for several years. In addition, current boot contracts contain options for additional pairs that are exercisable at the government's discretion. Company cannot predict with certainty its success in receiving a contract from any of the above solicitations. There are presently two outstanding U. S. government boot solicitations to which the Company responded. If a contract is awarded to Wellco from only one of these solicitations, or if Wellco does not receive a contract from either solicitation, future operating results will be adversely affected and certain assets may be impaired. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: New Accounting Pronouncements In October 2001, SFAS No. 144, "Accounting for Impairment or Disposal of Long-lived Assets" was issued specifying, among other things, the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No.144 supersedes SFAS No. 121 and the accounting and reporting provisions of APB 30 related to the disposal of a segment of a business. The Statement is effective for the Company's 2003 fiscal year which started June 30, 2002 and will be applied to long- lived assets whenever events or circumstances indicate that their carrying amount may not be recoverable. There was no effect on the Company's financial statements from the adoption of this standard. On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment approach, and is effective for the Company's 2003 fiscal year which started June 30, 2002. Under SFAS No. 142, if the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recorded equal to that excess. The Consolidated Balance Sheets includes $228,000 of goodwill ("Excess of cost over net assets of subsidiary at acquisition"). An initial review for impairment must be performed within six months of adopting the new standard. The Company will complete its initial impairment assessment by the end of the second quarter of fiscal 2003. -9- 3. LINE OF CREDIT: The Company maintains a $3,000,000 bank line of credit. The line, which expires December 31, 2002, is expected to be renewed. This line of credit is secured by a blanket lien on all machinery and equipment (carrying value of $2,656,000) and all non-governmental accounts receivable and inventory ($1,049,000). At September 28, 2002, there was no borrowing on the line of credit. The bank credit agreement contains, among other provisions, defined levels of net worth and current ratio requirements. The Company was in compliance with the loan covenants at September 28, 2002. 4. EARNINGS PER SHARE: The Company computes its basic and diluted earnings per share amounts in accordance with Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period plus the dilutive potential common shares that would have been outstanding upon the assumed exercise of dilutive stock options. The following is the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations: For the Three Months Ended 9/28/02 ---------------------------------- Net Income Shares Per-Share (Numerator) (Denominator) Amount ------------------------------------- Basic EPS Available to Shareholders $394,000 1,182,746 $ 0.33 Effect of Dilutive Stock-based Compensation Arrangements 45,998 ------------------------------------ Diluted EPS Available to Shareholders $394,000 1,228,744 $ 0.32 For the Three Months Ended 9/29/01 ----------------------------------- Net Loss Shares Per-Share (Numerator) (Denominator) Amount ------------------------------------- Basic EPS Available to Shareholders $205,000 1,163,246 $(0.18) Effect of Dilutive Stock-based Compensation Arrangements (Note: N/A - Anti-dilutive) ------------------------------------- Diluted EPS Available to Shareholders $205,000 1,163,246 $(0.18) -10- 5. UNRECOVERED CONTRACT PREPARATION COSTS: In October, 2001, Wellco submitted a solicitation response to a U. S. government procurement for berets to be used by U. S. Army personnel. Wellco did not have any prior experience in manufacturing berets or similar knitted products. Since submitting its response, certain costs were incurred in order to learn beret manufacturing operations and procedures, and to demonstrate to the government that Wellco has the capability to manufacture and deliver berets within the government's required delivery schedule. The government has announced contract awards and Wellco was not awarded a contract. In the 2002 fiscal year, beret manufacturing machinery was written down by $159,000 to an amount equal to the estimated amount for which this machinery can be sold. At September 28, 2002 based on revised estimates of the resale value, the beret manufacturing machinery was further written down by $20,000 and is shown as Unrecovered Contract Preparation Costs in the Consolidated Statements of Operations for the fiscal three months ended September 28, 2002. The revised estimated amount for which this machinery can be sold is included in the Consolidated Balance Sheet as Assets Held For Sale. -11- PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Critical Accounting Policies: The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements, and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company believes the following are the critical accounting policies which could have the most significant effect on the Company's reported results and require the most difficult, subjective or complex judgements by management. o Impairment of Long-Lived Assets: The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. The Company makes estimates of its future cash flows related to assets subject to impairment review. One of the most critical estimates is future demand, primarily through U. S. Department of Defense contracts, for the Company's products. Changes to this and other estimates could result in an impairment charge in future periods. o Inventory Valuation: Raw materials and supplies are valued at the lower of first-in, first-out cost or market. Finished goods and work in process are valued at the lower of actual cost, determined on a specific identification basis, or market. The Company estimates which materials may be obsolete and which products in work in process or finished goods may be sold at less than cost, and adjusts their inventory value accordingly. Future periods could include either income or expense items if estimates change and for differences between the estimated and actual amount realized from the sale of inventory. o Income Taxes: The Company records a liability for potential tax assessments based on its estimate of the potential exposure. Due to the subjectivity and complex nature of the underlying issues, actual payments or assessments may differ from estimates. Income tax expense in future periods could be adjusted for the difference between actual payments and the Company's recorded liability based in its assessments and estimates. The Company has recorded a valuation allowance equal to a significant part of its deferred tax assets. The valuation allowance is based on an evaluation of the uncertainty of future taxable income from certain jurisdictions. An adjustment could be required if circumstances and events cause the Company to change these estimates. Since June 29, 2002, the end of the 2002 fiscal year, there have been no changes in the nature of the estimates and assumptions related to theses critical accounting policies. -12- Comparing the Three Months Ended September 28, 2002 and September 29, 2001: For the three months ended September 28, 2002 (current quarter), Wellco had net income of $394,000 compared to a net loss of $205,000 in the prior year three month period ended September 29, 2001 (prior quarter). The major reasons for the increase in net income are: o Total revenues in the current quarter increased $1,688,000 as compared to the prior quarter. The primary reason for this increase in revenues and also the increase in net income was a 56% increase in pairs of Direct Molded Sole (DMS) combat boots shipped under contract with Defense Supply Center Philadelphia ("DSCP", the U. S. government agency which supplies U. S. Armed Forces with boots). In both the current and prior quarters, which correspond to the last quarter of the government's fiscal year, DSCP had limited funding, which resulted in boot orders to Wellco being less than normal. However, in the current quarter, Wellco's shipment of boots to DSCP was not materially affected because of a large order received in April 2002. o Cost of sales and services in the current quarter increased $1,023,000, which is a 32% increase compared to the 47% increase in revenues. Fixed costs such as depreciation and certain semi- variable costs such as fringe benefits and maintenance expenses do not increase proportionately to an increase in revenues. Because of DSCP's limited funding, boot production in both the current and prior quarter was less than normal. However, the effect of lower production on operating results in the current quarter was not as adverse as the prior quarter because shipments of boots in the current quarter were substantially more than the prior quarter. o The current quarter includes $20,000 of unrecovered contract preparation costs. In October, 2001, Wellco submitted a solicitation response to a U. S. government procurement for berets to be used by U. S. Army personnel. Wellco did not have any prior experience in manufacturing berets or similar knitted products. Since submitting its response, certain machinery was purchased and certain costs were incurred in order to learn beret manufacturing operations and procedures, and to demonstrate to the government that Wellco has the capability to manufacture and deliver berets within the government's required delivery schedule. The government has announced contract awards and Wellco was not awarded a contract. In the 2002 fiscal year, beret manufacturing machinery was written down by $159,000 to an amount equal to the estimated amount for which this machinery can be sold. At September 28, 2002 based on revised estimates of the resale value, the beret manufacturing machinery was further written down by $20,000 and is shown as Unrecovered Contract Preparation Costs in the Consolidated Statements of Operations for the fiscal three months ended September 28, 2002. The revised estimated amount for which this machinery can be sold is included in the Consolidated Balance Sheet as Assets Held For Sale. o Lower total administrative personnel salary cost and travel cost were the primary reasons general and administrative expenses decreased $34,000 in the current quarter. The income tax rate (the percent of Provision for Income Taxes to the Income Before Income Taxes) for the quarter ended September 28, 2002 was 16% compared to a 3% rate of tax on a net loss for the quarter ended September 29, 2001. The current quarter rate is higher because of an increase in the estimated portion of total consolidated pretax income for fiscal year 2003 that will be subject to U. S. income taxes. -13- Forward Looking Information: On April 19, 2002, the DSCP issued Wellco a contract modification extending its contract for Direct Molded Sole (DMS) combat and hot-weather boots, and has subsequently ordered 183,000 pairs (103,000 in April 2002 and 80,000 in October 2002) under this extension. This contract was originally scheduled to expire on April 15, 2002. On March 19, 2002, Wellco submitted a response to a new DSCP solicitation for DMS boots. The scheduled award date is presently not later than November 15, 2002. Contracts will be for a base period of one year, with two one-year options. This solicitation provides for up to four contracts with the quantities to be purchased from each contractor being 35%, 30%, 20% and 15% of DSCP total boot purchases. Under its current contract, Wellco is supplying 25% of total DSCP purchases. The total minimum and maximum pairs DSCP will buy under contracts issued from the new solicitation are lower than those under current contracts for the reasons stated below. The U. S. Army has approved replacing its all-leather combat boot, one of the three DMS boots supplied by Wellco under its current contract, with the Infantry Combat Boot (ICB), which is presently used only by the Marine Corps. In July 2002, DSCP received solicitation responses, including one from Wellco, for the ICB boot, and the scheduled award date is presently November 15, 2002. The solicitation provides for three contract awards, with first delivery approximately eight months after contract award, with a base period of one year and four one-year options thereafter. The ICB solicitation provides that within 90 days after contract award, each contractor is required to manufacture and submit for testing 2,000 pairs of boots. If testing of these 2,000 pairs of boots is not satisfactory, it is possible that the contractor will not receive any additional delivery orders under this contract. The DOD's evaluation of solicitation offers is a time consuming process, and many times they ask for an extension of offers. Therefore, contract awards from the DMS and ICB boot solicitations may be later than the dates stated above. Bidding on government solicitations is very competitive, and the Company cannot predict with certainty its success in receiving a contract from any of the above solicitations. Wellco believes that, if it is awarded a contract from both the DMS and ICB boot solicitations, any adverse effect on future operating results, related to the Army's replacement of the all-leather combat boot with the ICB boot, will not be substantial. If a contract is awarded Wellco from only one of these solicitations, or if Wellco does not receive a contract from either solicitation: future operating results and liquidity would be adversely affected; use of the bank line of credit would likely increase; and, the bank line of credit may be cancelled or may not be renewed (see further discussion in the Liquidity and Capital Resources section). In addition, if contracts are not awarded to Wellco, the carrying amount of certain long-lived assets may be impaired. If some or all of these negative events were to occur, Wellco believes that the effects would not occur until the Company's fiscal year 2004. The Company has received machinery orders from a new customer totaling $600,000. The Company estimates that delivery will be in the second and third quarters of fiscal year 2003. The Company is attempting to sell the previously mentioned beret manufacturing machinery, which has a carrying value in the Consolidated Balance Sheets at September 28, 2002 of $50,000. Future write down of this amount may be necessary if the estimated or actual resale value is less than this amount. In October 2001, SFAS No. 144, "Accounting for Impairment or Disposal of Long-lived Assets" was issued specifying, among other things, the financial accounting and reporting for the impairment or disposal of long- lived assets. SFAS No.144 supersedes SFAS No. 121 and the accounting and reporting provisions -14- of APB 30 related to the disposal of a segment of a business. The Statement is effective for the Company's 2003 fiscal year which started June 30, 2002 and will be applied to long-lived assets whenever events or circumstances indicate that their carrying amount may not be recoverable. There was no effect on the Company's financial statements from the adoption of this standard. On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment approach, and is effective for the Company's 2003 fiscal year which started June 30, 2002. Under SFAS No. 142, if the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recorded equal to that excess. The Consolidated Balance Sheets includes $228,000 of goodwill ("Excess of cost over net assets of subsidiary at acquisition"). An initial review for impairment must be performed within six months of adopting the new standard. The Company will complete its initial impairment assessment by the end of the second quarter of fiscal 2003. Except for historical information, this form 10-Q includes forward looking statements that involve risks and uncertainties, including, but not limited to, the receipt of contracts from the U. S. government and the performance thereunder, the ability to control costs under fixed price contracts, the cancellation of contracts, and other risks detailed from time to time in the Company's Securities and Exchange Commission filings, including Form 10-K for the year ended June 29, 2002. Those statements include, but may not be limited to, all statements regarding intent, beliefs, expectations, projections, forecasts, and plans of the Company and its management. Actual results may differ materially from management expectations. The Company assumes no obligation to update any forward-looking statements. LIQUIDITY AND CAPITAL RESOURCES Wellco uses cash from operations and a bank line of credit to supply most of its liquidity needs. The following table summarizes, at the end of the most recent fiscal quarter and the last fiscal year, the amounts of cash and unused line of credit: (in thousands) September 28, 2002 June 29, 2002 ------------------------------------------ Cash and Cash Equivalents $720 $270 Unused Line of Credit 3,000 3,000 ------------------------------------------- Total $3,720 $3,270 =========================================== The increase in cash at September 28, 2002 resulted primarily from cash provided by operations during the first quarter of fiscal year 2003. The following table summarizes the major sources (uses) of cash for the three months ended September 28, 2002: -15- (in thousands) September 28, 2002 ------------------ Income Before Depreciation and Other Non-cash Adjustments $621 Net Change in Accounts Receivable, Inventories, Accounts Payable, and Accrued Compensation 233 Net Change in Income Taxes, Pension Obligation, and Other (142) ------------------ Net Cash Provided by Operations 712 Cash Used to Purchase Plant and Equipment (144) Cash Dividends Paid (118) ----------------- Net Increase in Cash and Cash Equivalents $450 ================= In the quarter ended September 28, 2002, cash provided by operations was $712,000. Net income of $394,000 and depreciation and amortization of $227,000 provided a total of $621,000. Operating cash was also provided by a reduction in inventories ($750,000) and accounts receivable ($63,000). Cash was used to decrease accounts payable by $590,000. Because DSCP did not issue any boot orders in the current quarter, cash was provided by boot shipments from inventory that were not replaced with boots produced. Cash from operations was primarily used to purchase equipment, pay cash dividends, and to invest in short- term interest earning instruments with maturities of three months or less. The following table shows aggregated information about contractual obligations as of September 28, 2002: Payments Due by Period Total Less Than 1 1-3 Years 4-5 Years After 5 Years Year ------------------------------------------------------------- Notes Payable $300,000 $300,000 Building Lease 1,091,000 $135,000 $306,000 $330,000 320,000 -------------------------------------------------------------- Total $1,391,000 $135,000 $306,000 $330,000 $620,000 =============================================================== In addition to not receiving a contract from some of the solicitations mentioned above, delays in U. S. government's contract awards and their issuance of production orders under contracts could have an adverse effect on liquidity. Wellco does not know of any other demands, commitments, uncertainties, or trends that will result in or that are reasonablely likely to result in its liquidity increasing or decreasing in any material way. The bank line of credit, which provides for total borrowing of $3,000,000, will expire on December 31, 2002 and will then be subject to renewal at the discretion of the bank. Historically, the bank has always renewed the line of credit. Under conditions of substantial reduction in operations, with little basis for projecting a reversal of such reduction, it is possible that the bank -16- would cancel the line of credit. Events that would cause a substantial reduction in operations include: cancellation of existing government contracts; not receiving future government contracts currently being solicited; and, receiving government contracts that do not provide enough revenues to provide adequate liquidity. Based on information available to date, the Company believes that such events could not occur until its fiscal year 2004. There was no borrowing under the line of credit at September 28, 2002 and the Company was in compliance with the loan covenants at September 28, 2002. The Company expects to use this bank line of credit from time to time. Since the Company's first source of liquidity is cash from operations, a decrease in sales of the Company's products would reduce this source of liquidity and result in increased use of the bank line of credit. Based on information available to date, the Company believes that such events could not occur until its fiscal year 2004. The Promissory Note, Loan Agreement and Security Agreement documenting the bank line of credit provide that: o All amounts borrowed shall become due and immediately payable upon demand of the bank. o The bank's obligation to make advances under the note shall terminate: if the bank makes a demand for payment; if a default under any loan document occurs; or, in any event, on December 31, 2002, unless the Note is extended by the bank under terms satisfactory to the bank. o All amounts borrowed shall become immediately payable if Wellco commences or has commenced against it a bankruptcy or insolvency proceeding, or in the event of default. Events of default include: o Having a current ratio less than that prescribed by the bank. o Having tangible net worth less than that prescribed by the bank. o Any failure to meet requirements under the Note, Loan Agreement or Security Agreement. Other than the above, Wellco does not know of any other demands, commitments, uncertainties, or trends that will result in or that are reasonablely likely to result in its liquidity increasing or decreasing in any material way. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company does not have any derivative financial instruments, other financial instruments, or derivative commodity instruments that requires disclosures. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports filed pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules, regulations and related forms, and that such information is accumulated and communicated to the Company's Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. -17- Within the 90 days prior to the filing date of this quarterly report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on this evaluation, the Company's Chief Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls and procedures subsequent to the date the Company completed its evaluation. Therefore, no corrective actions were required to be taken. -18- PART II. OTHER INFORMATION Item 1. Legal Proceedings. N/A Item 2. Changes in Securities. N/A Item 3. Defaults Upon Senior Securities. N/A Item 4. Submission of Matters to a Vote of Security Holders. N/A Item 5. Other Information. N/A Item 6. Exhibits and Reports on Form 8-K. a). Exhibits: None b). Reports on Form 8-K: None -19- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Wellco Enterprises, Inc., Registrant \s\ \s\ David Lutz, Chief Executive Officer Tammy Francis, Controller and Principal and President Financial Officer (Principal Executive Officer) November 12, 2002 -20- WELLCO ENTERPRISES, INC. FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2002 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT PRINCIPAL EXECUTIVE OFFICER I, David Lutz, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Wellco Enterprises, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3 Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report are our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the -21- registrant's internal controls. 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ David Lutz By: David Lutz, Chief Executive Officer and President (Principal Executive Officer) -22- WELLCO ENTERPRISES, INC. FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, David Lutz, certify that: 1. I am the chief executive officer of Wellco Enterprises, Inc. 2. Attached to this certification is Form 10-Q for the three months ended September 28, 2002, a periodic report (the "periodic report") filed by the issuer with the Securities Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act:), which contains financial statements. 3 I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that o the periodic report contain the financial statements fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act, and o the information in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer for the periods presented. Date: November 12, 2002 /s/ David Lutz By: David Lutz, Chief Executive Officer and President -23- WELLCO ENTERPRISES, INC. FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2002 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT PRINCIPAL FINANCIAL OFFICER I, Tammy Francis, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Wellco Enterprises, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3 Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report are our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and -24- b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Tammy Francis By: Tammy Francis, Controller (Principal Financial Officer) -25- WELLCO ENTERPRISES, INC. FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Tammy Francis, certify that: 1. I am the principal financial officer of Wellco Enterprises, Inc. 2. Attached to this certification is Form 10-Q for the three months ended September 28, 2002, a periodic report (the "periodic report") filed by the issuer with the Securities Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act:), which contains financial statements. 3 I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that o the periodic report contain the financial statements fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act, and o the information in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer for the periods presented. Date: November 12, 2002 /s/ Tammy Francis By: Tammy Francis, Controller (Principal Financial Officer) -26-