FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 2, 2005
Commission file number 1-5555
WELLCO ENTERPRISES, INC.
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(Exact name of Registrant as specified in charter)
North Carolina 56-0769274
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(State of incorporation) (I.R.S. employer identification no.)
Waynesville, North Carolina 28786
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 828-456-3545
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Securities registered pursuant to Section 12(b) of the Act:
Common Capital Stock - $1 par value American Stock Exchange
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(Title of class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Capital Stock - $1 par value
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(Title of class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X ----- ----- .
As of August 31, 2005, 1,270,746 common shares were outstanding, and the
aggregate market value of the common shares (based upon the closing price of
these shares on the American Stock Exchange on August 31, 2005) of Wellco
Enterprises, Inc. held by nonaffiliates was approximately $3,600,000.
Documents incorporated by reference:
Definitive Proxy Statement, to be dated October 14, 2005, in PART IV.
Form 10-K for the Fiscal Year Ended July 3, 2004, in PART IV.
Form 8-K, dated March 4, 2004, in Item 4.
Definitive Proxy Statement, dated October 17, 2003, in PART IV.
Definitive Proxy Statement, dated October 18, 2002, in PART IV.
Definitive Proxy Statement, dated October 13, 2000, in PART IV.
Definitive Proxy Statement, dated October 17, 1997, in PART IV.
Definitive Proxy Statement, dated October 18, 1996, in PART IV.
Form 10-K for the Fiscal Year Ended July 1, 2000, in PART IV.
Form 10-K for the Fiscal Year Ended July 3, 1982, in PART IV.
PART I
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Item 1. Business.
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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.
Footnote 15 to the Consolidated Financial Statements contains information about
revenues by similar sources and by geographic areas. The majority of revenues
($44,249,000 in 2005 and $39,648,000 in 2004) 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.
For more than the last five years, the Company has manufactured and sold
military combat boots under firm fixed price contracts with DSCP. The primary
boot products supplied DSCP are the hot weather boot and the temperate weather
boot. The government awards fixed price boot contracts on the basis of bids from
several qualified U. S. manufacturers. The Company also sells similar
military-style boot products, as well as anti-personnel mine protective footwear
products, to other customers, including customers located in other countries.
The Company provides, primarily under long-term licensing agreements,
technology, assistance and related services for manufacturing military and
commercial footwear to customers in the United States and abroad. Under these
agreements licensees receive technology, services and assistance, and the
Company earns fees based primarily on the licensees' sales volume. In addition
to providing technical assistance, the Company also, from time to time, supplies
certain foreign military footwear manufacturers with some of their machinery and
material needs. The Company builds specialized footwear manufacturing equipment
for use in its own and its customers' manufacturing operations. This equipment
is usually sold, but in some cases it is leased.
Net income for the 2005 fiscal year was $1,907,000 ($1.47 diluted income per
share) compared to net income of $2,448,000 ($1.97 diluted income per share) for
the 2004 fiscal year. Compared to the prior year, total revenues in the current
year increased by $4,774,000. Although the Defense Department's surge need ended
in fiscal year 2005, revenues increased because of the mix of boots sold to the
Defense Department. Although revenues increased, gross profit decreased because
the boot whose sales increased has a lower margin. In addition, some boot sales
in fiscal year 2004 were under a now-expired contract that had a higher margin
than the current contract.
More information about these, and other events affecting Wellco's 2005 and 2004
operating results, are contained in the Management's Discussion and Analysis of
Results of Operations and Financial Condition section of the Company's 2005
Annual Report to Shareholders which is incorporated in Part II of this Form
10-K.
Bidding on U. S. government boot solicitations is open to any qualified U. S.
manufacturer. In addition to meeting very stringent manufacturing and quality
standards, contractors are required to comply with demanding delivery schedules
and quality standards.
-1-
The Company competes on U. S. government contracts with several other companies,
none of which dominates the industry. 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 additional one-year options to purchase boots and the options are
exercisable at the government's discretion.
Many factors affect the government's demand for boots, therefore the quantity
purchased can vary from year to year. Contractors cannot influence the
government's boot needs. Price, quality, quick delivery and manufacturing
efficiency are the areas emphasized by the Company that strengthen its
competitive position. While the government's demand for boots varies from month
to month, the Company's business cannot be deemed seasonal.
The U. S. government usually evaluates bids received on solicitations for boots
using their "best value" system, under which bidders offering the best value to
the government are awarded the contract, or in the case of multiple contract
awards, a greater portion of total boots contracted. Best value usually involves
an evaluation of performance considerations, such as quality and delivery, with
the prices bid being equally important. As bidders become more equal in the best
value evaluation, price becomes more important.
Government contracts are subject to partial or complete termination under the
following circumstances:
(1) Convenience of the Government. The government's contracting
officer has the authority to partially or completely terminate a
contract for the convenience of the government only when it is in
the government's interest to terminate. The contracting officer is
responsible for negotiating a settlement with the contractor.
(2) Default of the Contractor. The government's contracting officer
has the authority to partially or completely terminate a contract
because of the contractor's actual or anticipated failure to
perform his contractual obligations.
Under certain circumstances occasioned by the egregious conduct of a contractor,
contracts may be terminated and a contractor may be prohibited for a certain
period of time from receiving government contracts. The Company has never had a
contract either partially or completely terminated.
Because domestic commercial footwear manufacturers are adversely affected by
imports from low labor cost countries, the Company targets its marketing of
technology and assistance primarily to military footwear manufacturers. The
Company competes against several other footwear construction methods commonly
used for heavy-duty commercial footwear. These methods include the Goodyear Welt
construction, as well as boots bottomed by injection molding. These methods are
used in work shoes, safety shoes, and hiking boots manufactured both in the U.
S. and abroad for the commercial market. Quality, service and reasonable
manufacturing costs are the most important features used to market the Company's
technology, assistance and services.
The Company has a strong research and development program. While not all
research and development results in successful new products or significant
revenues, the continuing development of new products and processes has been and
will continue to be a significant factor in growth and development.
-2-
Of the total amount spent on research and development, a significant portion is
for personnel costs of mold engineers, rubber technicians, chemists, pattern
engineers and management, all of whom have many responsibilities in addition to
research and development. The Company estimates that the total cost of research
and development, the majority of which is company sponsored, for fiscal years
2005, 2004 and 2003 is $78,000, $101,000 and $110,000.
The Company's backlog of all sales, not including license fees and rentals, as
of August 31, 2005 was approximately $17,300,000 compared to $28,000,000 at
August 31, 2004. The Company estimates that substantially all of the current
year backlog will be shipped in the 2006 fiscal year. The current year's backlog
decreased because the Company was awarded an extingency contract in May 2004 to
supply the U.S. Army with the temperate weather boot in the tan color for a
seven month period.
Most of the raw materials used by the Company can be obtained from at least two
sources and are readily available. Because all materials in combat boots must
meet rigid government specifications and because quality is the first priority,
the Company purchases most of its raw materials from vendors who provide the
best materials at a reasonable cost. The loss of some vendors would cause some
difficulty for the entire industry, but the Company believes a suitable
replacement could be found in a reasonably short period of time. Major raw
materials include leathers, fabrics and rubber, and, by government regulation
all are from manufacturers in the United States.
Compliance with various existing governmental provisions relating to protection
of the environment has not had a material effect on the Company's capital
expenditures, earnings or competitive position.
The Company employed an average of 799 persons during the 2005 fiscal year.
Item 2. Properties.
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The Company has manufacturing, warehousing and office facilities in Waynesville,
North Carolina and Aguadilla, Puerto Rico. The building and land in North
Carolina are owned by the Company. The Puerto Rico building and land are leased.
Management believes all its plants, warehouses and offices are in good condition
and are reasonably suited for the purposes for which they are presently used.
Item 3. Legal Proceedings.
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There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the Company's business, to which the Company or any of
its subsidiaries are a party or of which any of their property is subject.
Management does not know of any director, officer, affiliate of the Company, nor
any stockholder of record or beneficial owner of more than 5% of the Company's
common stock, or any associate thereof who is a party to a legal proceeding that
is adverse to the Company or any of its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
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-3-
There were not any submissions of matters to a vote of security holders during
the fourth quarter of fiscal year 2005.
PART II
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Items 5, 6, 7, and 8.
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The information called for by the following items is in the Company's 2005
Annual Report to Shareholders which is incorporated starting on the following
page in this Form 10-K:
Annual Report
Page No.
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Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
41
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Item 6. Consolidated Selected Financial Data 1
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Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition 4-13
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Item 8. Consolidated Financial Statements and
Supplementary Data 14-39, 42
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
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We are exposed to interest rate changes primarily as a result of our line of
credit which we use to maintain liquidity and to fund capital expenditures and
expansion. Our market risk exposure with respect to this debt is to changes in
LIBOR. Our line of credit provides for interest on outstanding borrowings at
rates tied to LIBOR. A 1% increase in interest rates on our current borrowings
would have had approximately $ 45,000 impact on income before income taxes. We
do not enter into derivative or interest rate transactions for speculative
purposes.
In the normal course of business and consistent with established policies and
procedures we use the necessary financial instruments to manage the fluctuations
in interest rates. The Company does not have any foreign currency risk.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
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On March 5, 2004, the Registrant filed a Form 8-K reporting under Item 4,
Changes in Registrant's Certifying Accountants, that at a meeting held on March
4, 2004,the audit committee of the Board of Directors of the Company approved
the engagement of Dixon Hughes PLLC, the successor in the merger of its current
independent auditors, Crisp Hughes Evans LLP, and the firm of Dixon Odom PLLC as
its independent auditors effective with the successful merger of the two firms.
On March 1, 2004, the audit committee of the Board of Directors was notified
that the merger of the two firms was completed and that the firm of Crisp Hughes
Evans LLP would resign as independent auditors.
Disclosure was filed in Item 4 of Form 8-K dated March 5, 2004, and is
incorporated herein by reference.
Item 9A. Controls & Procedures
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(a) Evaluation of Disclosure Controls and Procedures
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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
Commission'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 July 2, 2005, 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 were no changes in the Company's internal control over financial reporting
that occurred during the fourth quarter ended July 2, 2005 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
-5-
WELLCO(R)
ENTERPRISES, INC.
ANNUAL REPORT
2005
WELLCO ENTERPRISES, INC.
CONSOLIDATED SELECTED FINANCIAL DATA
(In Thousands Except for Per Share Amounts)
Fiscal Year Ended
July 2, July 3, June 28, June 29, June 30,
2005 2004 2003 2002 2001
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Revenues $ 50,467 $ 45,693 $ 24,833 $ 19,981 $ 19,417
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Net Income 1,907 2,448 (A) 823 683 1,153
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Basic Earnings
per Share 1.51 2.04 0.70 0.58 0.99
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Diluted Earnings
per Share 1.47 1.97 0.68 0.56 0.97
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Cash Dividends
Declared per Share
of Common Stock 0.60 0.45 0.40 0.40 0.40
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Total Assets at Year End 20,804 22,919 15,310 12,929 12,787
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Long-Term Liabilities
at Year End $ 2,462 $ 2,112 $ 1,972 $ 1,328 $ 1,532
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(A) After a $228,000 cumulative effect of a change in accounting principle
(See Note 22 in Consolidated Financial Statements). The cumulative
effect reduced both basic earnings and diluted earnings per share by
$0.19.
See the Management's Discussion and Analysis of Results and Operations and
Financial Condition section.
Independent Auditors
Dixon Hughes PLLC
Asheville, N.C.
Annual Meeting
November 15, 2005
Corporate Offices
Waynesville, N.C.
10-K Availability
The Company's Form 10-K (annual report filed with the Securities and Exchange
Commission) is available without charge to those who wish to receive a copy.
Write to: Corporate Secretary, Wellco Enterprises, Inc., Box 188, Waynesville,
N.C. 28786
-1-
Shareholders:
For fiscal year 2005, your company had net income of $1,907,000, equivalent to
basic earnings per share of $1.51 (diluted $1.47), from revenues of $50,467,000.
This compares with net income of $2,448,000, equivalent to basic earnings per
share of $2.04 (diluted $1.97) in the 2004 fiscal year, from revenues of
$45,693,000. The Management's Discussion and Analysis section of this Annual
Report gives you more comparative information as to the reasons for changes
between results for fiscal years 2005 and 2004.
The fiscal year 2004 Annual Report discussed the significant increase in
revenues that resulted from the "surge" for desert boots (now know as the "Army
Combat Boot-Hot Weather) and the simultaneous incorporation into production of
the first contract for the Army's then-new ICB boot (now know as the "Army
Combat Boot-Temperate Weather"). The desert boot surge ceased in the first half
of fiscal year 2005. However, we had significant shipments of the Temperate
Weather boot, which, compared to the desert boot, is much more expensive to
manufacture and has a higher sales price.
Although revenues set a record, overall margins decreased. We operate in a very
competitive environment. Almost all remaining U. S. manufacturers of "heavy"
boots respond to Department of Defense (DOD) solicitations for boots. There can
be up to 10 companies that make an offer for the supply of boots and price is a
major factor in determining who receives a contract. For the two contracts that
make up the majority of fiscal year 2005 revenues, we had to offer prices that
were very competitive.
Our boot manufacturing is done by a wholly owned subsidiary located in Puerto
Rico. The last two years have been very challenging for the factory. After more
than doubling production in fiscal year 2004, significant efforts were made in
fiscal year 2005 to improve manufacturing efficiency and to control costs.
Certain numbers and ratios are used to monitor this factory's cost, and
progressively in 2005 they have shown significant improvement.
Because of a lot of extra effort by administrative personnel, and despite the
103% increase in revenues between fiscal year 2003 and 2005, general and
administrative expenses only increased 14%. Comparing fiscal year 2005 and 2004,
general and administrative expenses decreased 10%.
Our DOD contracts are multi-year, indefinite quantity contracts. Each contract
we have starts with a base year followed by option years. Options are exercised
at the unilateral discretion of the DOD. Assuming option exercise, contracts
have a total "life" of three to five years.
Each contract also provides for a minimum number of pairs that the DOD has to
buy each year and a maximum they may buy. While the multi-year feature gives
assurance of a certain number of years of production, the indefinite quantity
feature makes it very difficult to project what the level of boots sales for any
year will be. The Forward Looking section of Management's Discussion and
Analysis in this Annual Report contains information about options remaining on
our contracts and the minimum and maximum number of pairs.
In September 2005 the Company submitted a response to a solicitation for the
research and development of a Modular Boot System (MBS) for the U. S. military.
Presently, the DOD buys four different boot styles to meet the varied climatic
conditions encountered by military personnel. This solicitation calls for
bidders to submit concepts and models of a MBS that would result in a functional
boot system that would provide comfort in a temperature range of -60(0)F to
120(0)F. If successful, the MBS would replace many, if not all, of the current
boot styles.
After review of solicitations, the Defense Department will make up to two
contract awards, or the Defense Department may determine not to award any
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contracts. Of course, we cannot confidently predict if we will receive a
contract from this solicitation. If we did receive a contract award, the work
will be very challenging, and, if our MBS is successful, could affect our DOD
contracts in the future.
For several years we have sold our military boot products to the "commercial"
(non-DOD) market. In addition to offering "standard" military boots, we offer
boots with comfort and weight-saving features that are not presently available
in standard military boots. While not significant to total revenues, sales of
commercial military boots have slowly grown over the last few years. We recently
made certain changes in our structure that hopefully will increase the growth
rate of these sales.
Going into fiscal year 2006, we have what we judge to be a good level of orders
under our DOD contracts. Delivery under these orders is "heavy" in the December
2005 through February 2006 period. Hopefully, additional orders will follow.
In early August 2005, a sole-source supplier of a major component of our DOD
boots had a significant quality problem. Fortunately, the many quality checks we
perform found this problem before any bad components got into finished boots.
The supplier worked very diligently to identify and fix the problem.
Unfortunately, this problem required that we do additional and time-consuming
quality checks. While the supplier has agreed to reimburse our additional costs,
this problem will result in a delay in our shipments to the DOD in the fiscal
quarter ending October 1, 2005.
In June 2005, Mr. James T. Emerson, who owned 58% of outstanding Wellco shares,
died. In addition to being the majority shareholder, Mr. Emerson made many
contributions through his many years of service as a member of your Board of
Directors. Mr. Emerson's estate currently has sole voting and dispositive power
over the shares.
Fiscal year 2005 was a year of continuing challenges. Just as our employees did
in fiscal year 2004, they responded to these challenges in a strong and
constructive manner. They are developing new skills and refining existing ones.
Our employees are critical to our future operations and are much appreciated.
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David Lutz
Chief Executive Officer and President
September 29, 2005
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
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RESULTS OF OPERATIONS
Critical Accounting Policies:
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The Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of America 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.
(A) 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.
(B) 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.
(C) Recognition of Contract Adjustments:
From time to time, contract price adjustments will occur which
require the Company to compute and present to the Defense
Department for audit its calculation of such adjustments. If the
adjustment is one of a recurring nature, the Company will record
its calculation in the period the change occurred. For other
adjustments, adjustment is not recorded until the period in which
the Company and the government agree on the amount of adjustment.
(D) 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 for part of its
deferred tax assets. The valuation allowance is based on an
evaluation of the uncertainty of future taxable income from
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certain jurisdictions. An adjustment could be required if
circumstances and events cause the Company to change these
estimates.
Comparing the Fiscal Year ended July 2, 2005 to the Fiscal Year ended July 3,
2004:
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OVERVIEW
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Although the Defense Department's surge need ended in fiscal year 2005, revenues
increased because of the mix of boots sold to the Defense Department. Although
revenues increased, gross profit decreased because the boot whose sales
increased has a lower margin. In addition, some boot sales in fiscal year 2004
were under a now-expired contract that had a higher margin than the current
contract.
Comparative results for these two periods is as follows:
Fiscal Year Fiscal Year
Ended Ended % of
(Amounts in thousands) July 2, 2005 July 3, 2004 Change Change
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Revenues $50,467 $45,693 $4,774 10%
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Cost of Sales and
Services 45,232 39,438 5,794 15%
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Gross Profit 5,235 6,255 (1,020) -16%
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General and
Administrative Expenses 2,717 3,009 (292) -10%
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Grant Income 135 80 55 69%
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Operating Income 2,653 3,326 (673) -20%
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Net Interest Expense 253 196 (57) 29%
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Income Taxes 493 682 189 -28%
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Net Income $1,907 $2,448 $(541) -22%
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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. In late March 2003,
DSCP exercised its surge option clause under contracts to manufacture the Direct
Molded Sole (DMS) boot. Surge orders ended in early fiscal year 2005, and the
pairs of DMS boots shipped in 2005 was 256,000 compared to 514,000 pairs in
fiscal year 2004. The DMS boot is currently referred to as the Army Combat
Boot-Hot Weather (HW).
In March 2003, the Company was awarded a multi-year, indefinite quantity
contract to supply the U. S. Army's then-new general issue boot (the ICB boot).
The ICB boot is currently referred to as the Army Combat Boot-Temperate Weather
(TW). During fiscal year 2005, the Company made significant shipments under DSCP
orders for this boot. In addition, the Company was awarded and completed an
exigency contract for this boot. Comparing fiscal year 2005 and 2004, pairs
shipped of the ICB boot increased to 324,000 from 75,000.
Although revenues increased, gross profit decreased. Margins earned on the TW
boot are lower than those earned on the HW boot. In addition, some boot sales in
fiscal year 2004 were under a now-expired contract that had a higher margin than
the current HW boot contract.
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Revenues from technical assistance fees and equipment rentals from licensees,
which vary with licensee sales, decreased approximately 31% in the 2005 fiscal
year. Some of these licensees have boot contracts with DSCP and their sales
decreased with the end of surge. This revenue decrease also contributed to the
lower gross profit.
The Company's Puerto Rico subsidiary participates in a Puerto Rico government
program under which certain portions of wages paid to new employees in training
are reimbursed to that subsidiary. This reimbursement is recorded as revenues in
the period cash is received. Under this program, $1,385,000 was received and
recorded in fiscal year 2005. The amount received and recorded in fiscal year
2004 was $321,000.
Decreased salary, bonus and travel costs were the major expense categories that
reduced General and Administrative Expenses. In fiscal year 2005, two highly
compensated salaried persons retired. Salary expense in fiscal year 2004
includes both the salaries of these persons and their replacements. Officer
bonuses vary with net profit. In fiscal year 2005, fewer trips were made to the
Company's boot manufacturing factory in Puerto Rico.
Increased interest rates on the bank line of credit caused the increase in
interest expense.
From time to time, the Company receives grants from the government of Puerto
Rico, primarily related to the expansion of manufacturing operations. Grant
income represents the straight-line recognition of grants over the grant period.
The fiscal year 2004 amount represents the last recognition of a grant issued in
1999, and fiscal year 2005 reflects recognition of income from a new grant
covering the fiscal years 2004 through 2008. See Footnote 17 to Consolidated
Financial Statements.
The income tax rate (the percent of Provision for Income Taxes to the Income
Before Income Taxes) for the 2005 fiscal year was 21% compared to 22% for the
prior fiscal year. Income earned by the Company's Puerto Rico subsidiary, which
is exempt from Puerto Rico income tax is currently partially exempt from U. S.
income taxes. Fiscal year 2006 is the last year in which this subsidiary will
have an exemption from U. S. income taxes. See Footnote 11 to the Consolidated
Financial statements.
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Comparing the Fiscal Year ended July 3, 2004 to the Fiscal Year ended June 28,
2003:
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Comparative results for these two periods are as follows:
Fiscal Year Fiscal Year
Ended July 3, Ended June 28, % of
(Amounts in thousands) 2004 2003 Change Change
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Revenues $ 45,693 $ 24,833 $ 20,860 84%
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Cost of Sales and
Services 39,438 21,272 18,166 85%
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Unrecovered Contract
Preparation
Costs - 70 (70)
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Gross Profit 6,255 3,491 2,764 79%
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General and
Administrative Expenses 3,009 2,390 619 26%
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Grant Income 80 80 -
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Operating Income 3,326 1,181 2,145 181%
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Net Interest Expense 196 21 175 -833%
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Income Taxes 682 109 573 -525%
- --------------------------------------------------------------------------------
Income Before Accounting
Change 2,448 1,051 1,397 133%
- --------------------------------------------------------------------------------
Accounting Change - (228) 228
- --------------------------------------------------------------------------------
Net Income $ 2,448 $ 823 $ 1,625 197%
- --------------------------------------------------------------------------------
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 exercised its surge option clause under 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 required Wellco
to significantly increase its rate of boot production.
In the 2004 fiscal year, the Company's increased shipments of DMS boots which
were under surge increased revenues approximately $13,800,000. In the 2004
fiscal year, the Company shipments of the new Army ICB boot increased revenues
approximately $6,000,000.
In order to meet the surge requirement, work shifts were added, new employees
were hired, overtime premiums were paid, and premium air freight costs were
incurred for shipping some raw materials and production machinery.
In March 2003, the Company was awarded a contract to supply the U. S. Army's new
ICB boot. 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 2004 fiscal year, the Company incurred significant costs (new
-7-
employee training costs, materials for production trials, boot testing, plant
infrastructure costs, etc.) to integrate the production of this new boot into
the Company's factories.
Although revenues increased significantly because of surge and the new ICB
contract, the excess costs associated with this activity resulted in Cost of
Sales increasing at approximately the same rate as the increase in revenues.
Revenues from technical assistance fees and equipment rentals from licensees,
which vary with licensee sales, were greater in the fiscal year because of
increased sales of certain licensees, primarily licensees that were also under
surge.
Increased salaries and bonus expense caused the majority of the increase in
General and 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 costs have also
increased as management personnel traveled more frequently to the Company's
primary manufacturing facility in Puerto Rico.
The increase in interest expense was caused by increased use of the Company's
bank line of credit, which was the primary source of cash needed for surge and
the new ICB contract. 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 was completely recognized
in the fourth quarter of fiscal year 2004.
Prior fiscal year 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 2004 fiscal year was 22% compared to 9% for the
prior fiscal year. 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. As shown in Footnote 11 to the Consolidated Financial Statements,
income earned by the Company's Puerto Rico subsidiary, which is exempt from
Puerto Rico income tax, and which is partially exempt from U. S. income taxes,
was a smaller percent of total Income Before Income Taxes. The income tax rate
was reduced by 9% from the realization of previously recorded deferred tax
assets whose value had been reduced by a valuation allowance.
Forward Looking Information:
- ---------------------------
Below is a summary of the Company's current boot contracts with the Defense
Department. The Company's Defense Department boot contracts are indefinite
quantity contracts. This means that each contract specifies a minimum number of
pairs that must be ordered from a contractor and a maximum number of pairs that
may be ordered.
On September 23, 2005, the Defense Department exercised the second and
final option year under the Company's Hot Weather boot contract. For
the first option year, the minimum pairs were 41,000 and the maximum
-8-
was 323,000. A total of 163,000 pairs were actually ordered in the
first option year. For the second option year, the minimum pairs is
41,000 and the maximum is 256,000. Pairs ordered to date under the
second option year are 41,000. The second option year is for the period
October 2005 through September 2006. The Company expects the Defense
Department to issue a new solicitation for contracts to supply the Hot
Weather boot starting in October 2006. The Company cannot confidently
predict its success in receiving a contract award.
On July 8, 2005, the Defense Department exercised the second option
year under the Company's Temperate Weather boot contract. For the first
option year, the minimum pairs were 51,000 and the maximum was 227,000.
A total of 176,000 pairs were actually ordered in the first option
year. For the second option year, the minimum pairs are 13,000 and the
maximum are 227,000. Pairs ordered to date under the second option year
are 116,000. This contract has two more option years outstanding. The
exercise of any contract option is the unilateral decision of the
Defense Department.
The Hot Weather boot contract was awarded to four contractors. Each contractor
was awarded a percent allocation of all Hot Weather boots to be ordered. One
contractor got 35%, Wellco got 30%, one contractor got 20% and the fourth
contractor got 15%.
This Hot Weather boot contract also provides that, after the exercise of each
option, contractor allocation must be the same as that originally awarded for
the minimum number of pairs ordered in that option year. The contract further
provides that, during each option year and after the minimum pairs have been
ordered at the awarded allocation percent, the Defense Department can, based on
the contractor's option price and performance during the prior contract year,
change a contractor's allocation percentage.
In September 2005, Wellco was informed that its allocation percentage for the
first option year, which started in October 2004 and ends September 30, 2005,
had decreased from 30% to 15%. Wellco asked but was not told the specific
factor(s) that resulted in this decrease. Wellco believes that the reduction in
its allocation percentage was due to its not supplying all pairs under surge
delivery orders by the specified delivery date.
When Wellco submitted its solicitation response that resulted in this contract,
the price offered for the 15% allocation was higher than the 30% allocation.
Shipments during the first option have been invoiced and revenues recognized
using the lower 30% allocation price. Wellco believes that its invoice price for
pairs above the minimum should be adjusted to the higher 15% allocation price.
Wellco understands that the Defense Department's interpretation of the contract
is that pairs shipped at the lower percentage are to be invoiced at the lower
30% price. Wellco is consulting its legal counsel about this issue.
The majority of the Company's boots manufacturing operations occur at the
factory of a wholly owned subsidiary located in Puerto Rico. The Company is
participating in a Puerto Rican government program under which it is reimbursed
for part of the compensation paid to certain employees in training. As of July
2, 2005, $852,000 has been filed for, but has not been received or recorded as
revenues, reimbursement under this program. The government of Puerto Rico
recently suspended new contracts for this program. The Company understands that
this suspension will not affect its collection of the $852,000. In the past two
fiscal years, the Company has received and recorded as revenues a total of
$1,700,000 under this program.
In September 2005 the Company submitted a response to a solicitation for the
research and development of a Modular Boot System (MBS) for the U. S. military.
Presently, the Department of Defense buys four different boot styles to meet the
varied climatic conditions encountered by military personnel. This solicitation
-9-
calls for bidders to submit concepts and models of a MBS that would result in a
functional boot system that would provide comfort in a temperature range of
- -60(0)F to 120(0)F. If successful, the MBS would replace many, if not all, of
the current boot styles.
After review of solicitations, the Defense Department will make up to two
contract awards, or, the Defense Department may determine not to award any
contracts. The Company cannot confidently predict if it will receive a contract
from this solicitation.
The Company has submitted solicitation responses to supply machinery and
assistance for the upgrade of boot manufacturing machinery to factories in three
foreign countries. Two of the three solicitations are judged to be significant.
The Company cannot confidently predict if it will receive a contract from any of
these solicitations.
Income earned by the Company's Puerto Rico subsidiary has for many years been
fully exempt from U. S. income taxes and is currently partially exempt. Fiscal
year 2006 is the last year in which this subsidiary will have any exemption from
U. S. income taxes. See Footnote 11 to the Consolidated Financial statements.
In early August 2005, a sole-source supplier of a major component of our DOD
boots had a significant quality problem. Fortunately, the many quality checks we
perform found this problem before any bad components got into finished boots.
The supplier worked very diligently to identify and fix the problem.
Unfortunately, this problem required that we do additional and time-consuming
quality checks. While the supplier has agreed to reimburse our additional costs,
this problem will result in a delay in our shipments to the DOD in the fiscal
quarter ending October 1, 2005.
The requirements of Section 404 of the Sarbanes-Oxley Act of 2002 will first
apply to the Company's 2008 fiscal year. Section 404 requires the Company to
document, test, and issue an opinion as to the adequacy of their internal
controls over financial reporting. In addition, Section 404 requires the
Company's Independent Accountants to review the Company's internal control
documentation and testing results, and to issue its opinion as to the
correctness of the Company's opinion as to the adequacy of their internal
controls over financial reporting. The Company has received quotations from
outside firms specializing in the review, documentation and testing of internal
controls. Based on these quotations and on reported information about the costs
other companies are incurring, the Company estimates that the cost of the
internal control review and audit will be between $200,000 and $500,000. The
Company cannot reasonably predict whether material weaknesses will be found in
its internal controls over financial reporting.
The business of providing boots to the U. S. Defense Department is very
competitive. With more than 98% of U. S. footwear sales being of foreign
manufacture, the Company believes that many U. S. boot manufacturers are
attempting to utilize excess U. S. manufacturing capacity by supplying boots to
the U. S. military under contracts with the Defense Department.
A 1% increase in the assumed discount rate used to compute the Company's pension
benefit obligation would decrease the obligation at June 30, 2005 by
approximately $658,000. Conversely, a 1% decrease in the assumed discount rate
would increase the benefit obligation at June 30, 2005 by approximately
$805,000.
A 1% increase in the assumed discount rate used to compute the Company's retiree
health benefit obligation would decrease the benefit obligation at July 2, 2005
by approximately $31,000. Conversely, a 1% decrease in the assumed discount rate
would increase the benefit obligation at July 2, 2005 by approximately $36,000.
-10-
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 each fiscal year
shown the Company's cash and funds available from the bank line of credit:
(in thousands)
- --------------------------------------------------------------------
2005 2004 2003
- --------------------------------------------------------------------
Cash and Cash Equivalents $34 $58 $133
- --------------------------------------------------------------------
Unused Bank Line of Credit 5,780 3,220 910
- --------------------------------------------------------------------
Total $5,814 $3,278 $1,043
- --------------------------------------------------------------------
The following table summarizes the cash flow activities for the last three
years:
(in thousands)
Cash provided by (used in): 2005 2004 2003
- --------------------------------------------------------------------------------
Operating activities $3,976 $(1,384) $906
- --------------------------------------------------------------------------------
Investing activities (1,497) (2,066) (1,183)
- --------------------------------------------------------------------------------
Financing activities (2,503) 3,375 140
- --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents $(24) $(75) $(137)
- --------------------------------------------------------------------------------
Operating Activities: In the 2005 fiscal year, cash provided by operations was
$3,976,000. Net income of $1,907,000, depreciation of $1,277,000 and a
$2,865,000 decrease in accounts receivable were the main operating sources of
cash. The main uses of operating cash were a decrease of $747,000 in accounts
payable, a decrease of $676,000 in accrued income taxes, a decrease of $266,000
in accrued compensation and an increase of $594,000 in inventory.
Investing Activities: For the 2005 fiscal year, purchases of machinery and other
equipment was $1,497,000.
Financing Activities: For the 2005 fiscal year, the Company's net cash used in
financing activity totaled $2,503,000. Cash of $317,000 was provided from the
exercise of stock options. The use of financing activities were $760,000 to pay
quarterly dividend payments to stockholders and $2,060,000 was used to repay the
line of credit borrowings.
In 2004, cash used by operations was $1,384,000. Net income of $2,448,000 and
depreciation of $1,100,000 was far short of providing the cash needs for an
increase of $2,620,000 in accounts receivable and $4,062,000 in inventory. The
increase in accounts receivable and inventory was primarily caused by surge and
the new ICB contract. $75,000 of cash from the beginning of the fiscal year,
along with $3,190,000 of borrowings from the line of credit and $730,000 from
stock option exercises, provided the cash for purchases of equipment of
$2,066,000and the payment of cash dividends of $545,000.
-11-
In 2003, cash provided by operations was $906,000. Net income of $823,000 and
depreciation of $995,000 and a $1,832,000 increase in accounts payable were the
main sources. The main use of cash for operations was a $2,076,000 increase in
accounts receivable and a $761,000 increase in inventory. Cash from operations
and $137,000 of cash from the beginning of the fiscal year, along with $590,000
of borrowings from the line of credit, provided the cash for purchases of
equipment and the payment of cash dividends.
The following table shows aggregated information about contractual obligations
as of July 2, 2005:
Payments Due by Period
Less Than 1
Total Year 1-3 Years 4-5 Years After 5 Years
- -------------------------------------------------------------------------------
Long-Term
Debt $300,000 - - - $300,000
- -------------------------------------------------------------------------------
Building Lease 843,000 $200,000 $421,000 $222,000 -
- --------------------------------------------------------------------------------
Total $1,143,000 $200,000 $421,000 $222,000 $300,000
- --------------------------------------------------------------------------------
During fiscal year 2005, the Company had the following material cash payments
for interest of $247,000, pension plans contributions of $284,000 and income
taxes paid of $966,000. For fiscal year 2006, the Company expects future cash
requirements for these disclosed items to approximate the historical amounts
paid during the previous year.
The Company has a commitment to purchase certain equipment of $200,000 during
the first half of fiscal year 2006. Other than this, Wellco does not know of any
other demands, commitments, uncertainties, or trends that will result in or that
are reasonably likely to result in its liquidity increasing or decreasing in any
material way.
The bank line of credit of $7,500,000 will expire on December 31, 2005 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 would cancel or not renew the line of credit. Events
that would cause a substantial reduction in operations include, but are not
limited to, cancellation of existing government contracts or receiving
government contracts that do not provide enough revenues to provide adequate
liquidity.
At July 2, 2005, $5,780,000 of additional borrowings was available under the
bank line of credit and the Company was in compliance with the loan covenants on
that date.
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 operations will
continue to be a significant source of cash in fiscal year 2006.
The Promissory Note, Loan Agreement and Security Agreement documenting the bank
line of credit provide that:
-12-
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 makesva demand for payment; if a
default under any loan document occurs; or, in any event, on
December 31, 2005, 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.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Statements throughout this report that are not historical facts are
forward-looking statements. These statements are based on current expectations
and beliefs, and involve numerous risks and uncertainties. Many factors could
affect the Company's actual results, causing results to differ materially from
those expressed in any such forward-looking information.
These factors include, but are 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 July 2, 2005. 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.
-13-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE FISCAL YEARS ENDED
JULY 2, 2005, JULY 3, 2004 AND JUNE 28, 2003
(in thousands except per share amounts)
JULY 2, JULY 3, JUNE 28,
2005 2004 2003
------------------------------
REVENUES (Notes 5, 15 and 16) .............. $ 50,467 $ 45,693 $ 24,833
-------- -------- --------
COSTS AND EXPENSES
Cost of sales and services ................ 45,232 39,438 21,272
Unrecovered contract preparation
costs (Note 18) ........................... -- -- 70
General and administrative expenses ....... 2,717 3,009 2,390
-------- -------- --------
Total ..................................... 47,949 42,447 23,732
-------- -------- --------
GRANT INCOME (Note 17) ...................... 135 80 80
-------- -------- --------
OPERATING INCOME ............................ 2,653 3,326 1,181
NET INTEREST EXPENSE ........................ 253 196 21
-------- -------- --------
INCOME BEFORE INCOME TAXES .................. 2,400 3,130 1,160
PROVISION FOR INCOME TAXES (Note 11) ........ 493 682 109
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE ........ 1,907 2,448 1,051
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Notes 2 and 21) .... -- -- 228
-------- -------- --------
NET INCOME .................................. 1,907 2,448 823
OTHER COMPREHENSIVE INCOME (LOSS) (Note 9):
Decrease (increase) in additional minimum
pension liability ......................... (157) 324 (924)
-------- -------- --------
COMPREHENSIVE INCOME (LOSS) ................. $ 1,750 $ 2,772 $ (101)
======== ======== ========
EARNINGS PER SHARE (Note 14):
Basic, before cumulative effect ........... $ 1.51 $ 2.04 $ 0.89
Cumulative effect ......................... -- -- (0.19)
-------- -------- --------
Basic, after cumulative effect ............ $ 1.51 $ 2.04 $ 0.70
======== ======== ========
Diluted, before cumulative effect ......... $ 1.47 $ 1.97 $ 0.87
Cumulative effect ......................... -- -- (0.19)
-------- -------- --------
Diluted, after cumulative effect .......... $ 1.47 $ 1.97 $ 0.68
======== ======== ========
DIVIDENDS DECLARED PER SHARE ................ $ 0.60 $ 0.45 $ 0.40
======== ======== ========
See Notes to Consolidated Financial Statements.
-14-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JULY 2, 2005 AND JULY 3, 2004
(in thousands)
ASSETS
JULY 2, JULY 3,
2005 2004
-------------------
CURRENT ASSETS:
Cash and cash equivalents .................... $ 34 $ 58
Receivables, net (Notes 3 and 7) ............. 3,205 6,070
Inventories (Notes 4 and 7) .................. 11,657 11,063
Deferred taxes (Note 11) .................... 266 357
Prepaid expenses ............................. 304 244
------- -------
Total ........................................ 15,466 17,792
------- -------
MACHINERY LEASED TO LICENSEES, net
(Notes 2 and 5) .............................. 11 17
PROPERTY, PLANT AND EQUIPMENT, net
(Notes 6 and 7) .............................. 5,317 5,091
INTANGIBLE ASSETS:
Intangible pension asset (Note 9) ............ 10 19
------- -------
TOTAL .............................................. $20,804 $22,919
======= =======
(continued on next page)
-15-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JULY 2, 2005 AND JULY 3, 2004
(in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
JULY 2, JULY 3,
2005 2004
---------------------
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 7) ...... $ 1,720 $ 3,780
Accounts payable ............................. 2,912 3,659
Accrued compensation ......................... 1,016 1,282
Accrued liabilities (Notes 8, 9 and 17) ...... 285 309
Accrued income taxes (Note 11) ............... 649 1,325
-------- --------
Total .................................... 6,582 10,355
-------- --------
LONG-TERM LIABILITIES:
Pension obligation (Note 9) .................. 1,485 1,337
Notes payable (Note 12) ...................... 231 222
Other accrued liabilites (Note 10) ........... 425 387
Deferred grant income (Note 17) .............. 124 --
Deferred taxes (Note 11) .................... 128 88
Deferred revenues (Note 12) .................. 69 78
COMMITMENTS (Note 20)
STOCKHOLDERS' EQUITY (Notes 9, 12 and 13):
Common stock, $1.00 par value; shares
authorized - 2,000,000; shares
issued and outstanding - 1,270,746
and 1,245,046, respectively .............. 1,271 1,245
Additional paid-in capital ................... 1,319 1,027
Retained earnings ............................ 10,646 9,499
Accumulated other comprehensive loss ......... (1,476) (1,319)
-------- --------
Total .................................... 11,760 10,452
-------- --------
TOTAL .............................................. $ 20,804 $ 22,919
======== ========
See Notes to Consolidated Financial Statements.
-16-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JULY 2, 2005, JULY 3, 2004 AND JUNE 28, 2003
(in thousands)
JULY 2, JULY 3, JUNE 28,
2005 2004 2003
-----------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income .............................. $ 1,907 $ 2,448 $ 823
------- ------- -------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Cumulative effect of change
in accounting principle ............. -- -- 228
Depreciation and amortization ....... 1,277 1,100 995
Deferred income taxes ............... 131 (4) 44
Non-cash asset impairment ........... -- -- 70
Grant monies received
(Non-cash grant income) ............. 189 (80) (80)
Non-cash interest expense ........... 9 9 8
Non-cash reduction in deferred
revenues ............................ (9) (9) (8)
(Increase) decrease in-
Receivables ..................... 2,865 (2,620) (2,076)
Inventories ..................... (594) (4,062) (761)
Other current assets ............ (60) 25 57
Increase (decrease) in-
Accounts payable ................ (747) 521 1,832
Accrued compensation ............ (266) 564 (82)
Other accrued liabilities ....... (50) 102 95
Accrued income taxes ............ (676) 603 (47)
Pension obligation .............. -- 19 (192)
------- ------- -------
Total adjustments ....................... 2,069 (3,832) 83
------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES .................... 3,976 (1,384) 906
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment .................. (1,497) (2,066) (1,183)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES ......... (1,497) (2,066) (1,183)
------- ------- -------
(continued on next page)
-17-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JULY 2, 2005, JULY 3, 2004 AND JUNE 28, 2003
(in thousands)
JULY 2, JULY 3, JUNE 28,
2005 2004 2003
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances (repayments) of
line of credit borrowings ............... (2,060) 3,190 590
Cash dividends paid ..................... (760) (545) (474)
Stock option exercise and tax benefit ... 317 730 24
------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES .................... (2,503) 3,375 140
------- ------- -------
NET DECREASE IN CASH AND
CASH EQUIVALENTS ........................ (24) (75) (137)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ....................... 58 133 270
------- ------- -------
CASH AND CASH EQUIVALENTS AT
END OF YEAR ............................. $ 34 $ 58 $ 133
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid (received) for-
Interest ............................ $ 247 $ 191 $ 22
Income taxes paid (refunded) ........ 966 (22) 113
NONCASH INVESTING AND FINANCING
FLOW IACTIVITY:N:
Increase in leasehold improvements .. $ -- $ 38 $ --
======= ======= =======
See Notes to Consolidated Financial Statements.
-18-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED
JULY 2, 2005, JULY 3, 2004 AND JUNE 28, 2003
(in thousands except share data)
JULY 2, JULY 3, JUNE 28,
2005 2004 2003
--------------------------------
COMMON STOCK :
Balance at beginning of year ......... $ 1,245 $ 1,186 $ 1,183
Stock option exercise (Note 13) ...... 26 59 3
-------- -------- --------
Balance at end of year .............. 1,271 1,245 1,186
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year ......... 1,027 357 336
Stock option exercise (Note 13) ...... 233 566 21
Tax benefit from stock
option plans ......................... 59 104 --
-------- -------- --------
Balance at end of year .............. 1,319 1,027 357
-------- -------- --------
RETAINED EARNINGS:
Balance at beginning of year ......... 9,499 7,596 7,247
Net income ........................... 1,907 2,448 823
Cash dividends (per share:
2005 - $.60, 2004 - $.45,
2003 - $.40) ..................... (760) (545) (474)
-------- -------- --------
Balance at end of year ............... 10,646 9,499 7,596
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Additional minimum pension
liability, net of tax (Note 9):
Balance at beginning of year ......... (1,319) (1,643) (719)
Change for the year .................. (157) 324 (924)
-------- -------- --------
Balance at end of year ............... (1,476) (1,319) (1,643)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY ................. $ 11,760 $ 10,452 $ 7,496
======== ======== ========
See Notes to Consolidated Financial Statements.
-19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended July 2, 2005, July 3, 2004, and June 28, 2003
1. BUSINESS OPERATIONS:
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 ($44,249,000 in 2005, $39,648,000 in 2004, and $18,209,000 in
2003) 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. The Company cannot predict with certainty its success in
receiving a contract from any of the above solicitations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying financial statements include the consolidated
accounts of the Company and its wholly-owned subsidiaries.
Appropriate eliminations have been made of all material
intercompany transactions and balances.
Cash and Cash Equivalents
Cash in excess of daily requirements is invested in short-term
interest earning instruments. The Company considers
investments with original maturities of three months or less
to be cash equivalents.
Receivables
Accounts receivable from the sale of products or services are
recorded at net realizable value and the Company grants credit
to customers on an unsecured basis. The Company provides an
allowance for doubtful collections that is based upon a review
of outstanding receivables, historical collections
information, and existing economic conditions. Normal trade
receivables are due 30 days after the issuance of the invoice.
Receivables past due more than 120 days are considered
delinquent. Delinquent receivables are written off based on
individual credit evaluations and specific circumstances of
the customer.
-20-
Inventories
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.
Income Taxes
The provision for income taxes is based on taxes currently
payable adjusted for the net change in the deferred tax asset
or liability during the current year. A deferred tax asset or
liability arises from temporary differences between the
carrying value of assets and liabilities for financial
reporting and income tax purposes. A valuation allowance is
recorded to reduce the carrying amounts of deferred tax assets
unless it is more likely than not that such assets will be
realized.
Fair Value of Financial Instruments
The carrying values of cash, receivables and accounts payable
at July 2, 2005 and July 3, 2004 approximate fair value. The
carrying value of the notes payable (see Note 12 to the
Consolidated Financial Statements) is equal to the present
value of estimated future cash flows using a discount rate
commensurate with the uncertainties involved and thus
approximates fair value.
Depreciation and Amortization
The Company uses the straight-line method to compute
depreciation and amortization on machinery leased to licensees
and property, plant and equipment used by the Company.
Machinery Leased to Licensees
Certain shoe-making machinery is leased to licensees under
cancelable operating leases. Such activity is accounted for by
the operating method whereby leased assets are capitalized and
depreciated over their estimated useful lives (5 to 10 years)
and rentals, based primarily on the volume of shoes produced
or shipped by the lessees, are recorded during the period
earned.
Research and Development Costs
All research and development costs are expensed as incurred
unless subject to reimbursement. The amount charged against
income was approximately $78,000 in 2005, $101,000 in 2004 and
$110,000 in 2003.
Intangible Asset
The excess of the fair value (as determined by the Board of
Directors) of Wellco Enterprises, Inc. common stock issued
over the net assets of Ro-Search, Incorporated, a wholly owned
subsidiary of Wellco, at acquisition was not being amortized.
This asset arose prior to 1970 and, in the opinion of
management, there was not any diminution in its value under
the guidance of APB Opinion No. 17. Effective for the
Company's 2003 fiscal year, Statement of Financial Accounting
Standards No. 142 (SFAS 142), Goodwill and Other Intangible
Assets, supersedes APB Opinion No. 17.
Statement of Financial Accounting Standards No. 142 (SFAS 142,
"Goodwill and Other Intangible Assets) was effective with the
Company's 2003 fiscal year. Under SFAS 142, this goodwill was
deemed impaired and was written off as a cumulative effect of
change in accounting principle at June 28, 2003, as explained
in Footnote 22.
-21-
Revenue Recognition
Two of the Company's current boot contracts require a bill and
hold procedure. Under bill and hold, the government issues a
specific boot production order which, when completed and ready
for shipment, is inspected and accepted by the Quality
Assurance Representative (QAR), thereby transferring ownership
to the government. Under the bill and hold procedure, after
inspection and acceptance by the QAR, the boots become
"government-owned property". Also, after QAR inspection and
acceptance, Wellco invoices and receives payment from the
government, and warehouses and distributes the related boots
against government-issued requisition orders, which Wellco
receives five days per week. Government-owned boots stored in
Wellco's warehouse are complete, including packaging and
labeling. The bill and hold procedure requires physical
segregation and specific identification of government-owned
boots and, because they are owned by the government, Wellco
cannot use them to fill any other customers' orders. Wellco
has certain custodial responsibilities for these boots,
including loss or damage, which Wellco insures. The related
insurance policies specifically provide that loss payment on
finished stock and sold personal property completed and
awaiting delivery is based on Wellco's selling price. The bill
and hold procedure also provides that at the end of any
one-year term when an option is not exercised, the government
is to take final delivery of any and all of its remaining
inventory within six months. In accordance with guidance
issued under Securities and Exchange Commission Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, revenues from bill and hold transactions are
recognized at the time of acceptance by the QAR.
Certain shoe-making machinery is leased to licensees under
twenty-year cancelable operating leases. Lease payments are
variable based on the quantity of boots manufactured and sold
by the lessee to its customers and the contractual rental fee
per pair of boots. There are no base rental amounts or
contingent rentals contained in the agreements. Rental income
is recognized by the Company when the lessee manufactures and
sells boots to the customer and is based upon the quantity of
boots manufactured or shipped by the lessee times the fixed
rate per pair of boots contained in the lease agreements.
The Company earns service fees for providing customers with
technical assistance in the manufacture of boots. The related
agreements under which these services are provided are for a
fixed term and expire in calendar years 2005-2007. The Company
records service fee revenues at a fixed rate per pair of boots
times the quantity of boots manufactured and sold by the
customer.
Revenues from the sale of machinery and materials are recorded
at the time of shipment from our factory (FOB factory) or at
the time of receipt by the customer (FOB destination). Other
than a one-year warranty, the Company does not have any
continuing responsibility related to machines sold. Warranty
costs are diminimus.
Shipping and Handling Costs
Shipping and handling costs are charged to Cost of Sales and
Services in the period incurred. Any amounts paid by customers
for shipping and handling are included in Revenues.
-22-
Cost of Sales and Services
Cost of sales and services includes raw materials and
freight-in on raw materials, direct and indirect manufacturing
labor, employee fringe benefits on manufacturing labor,
manufacturing supplies, purchasing and receiving costs,
material inspection costs, warehousing costs, internal
transfer costs, product distribution costs including shipping
and handling, repairs and maintenance, supervisors salaries,
depreciation on manufacturing equipment, and other
manufacturing overhead costs.
General and Administrative Expenses
General and Administrative Expenses include administrative
personnel compensation costs, legal and audit costs,
depreciation on administrative equipment, stock expense and
director fees, travel costs, office supplies, and other such
costs not directly related to the manufacture of the Company's
products. Since the majority of its products are sold to the
U. S. government, the Company does not incur significant
selling costs, such as sales commissions and advertising.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including
intangible 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 Consolidated Statement of Operations and
Comprehensive Income for the fiscal years 2003 include a
write-down of $70,000 related to equipment purchased during
contract preparation for the manufacture of berets.
Self-Funded Group Health Insurance
The cost of employee group health insurance is recorded in the
period in which the health care costs are incurred including
an estimate of the incurred but not reported claims. Third
party administrator fees are recorded in the month to which
they apply. The cost of stop loss insurance is recorded in the
month to which it applies. The liability for incurred but not
reported insurance claims is accrued and included in the
Accounts Payable caption in the Consolidated Balance Sheets.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to June
30. Consequently, the 2005 and 2003 fiscal years contained 52
weeks each of operating results while the 2004 fiscal year
contained 53 weeks.
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities, as well as the
disclosure of contingent assets and liabilities, at the date
of the financial statements. They also affect the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in prior years'
financial statements to conform to classifications used in the
current year.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans
using the compensation recognition provisions of Accounting
-23-
Principles Board Opinion 25 (APB 25), "Accounting for Stock
Issued to Employees". The Company also provides the
disclosures required by Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based
Compensation- Transition and Disclosure." Compensation expense
under the APB 25 method is recognized when there is a
difference between the exercise price for stock options and
the stock's market price on the measurement date, which for
the Company, is normally the date of award.
3. RECEIVABLES:
The majority of receivables at July 2, 2005 and July 3, 2004 are from
the U. S. Government. The Company's policy is to require either a
confirmed irrevocable bank letter of credit or advance payment on
significant orders from foreign customers. Allowances for doubtful
accounts in 2005, 2004 and 2003 are not significant.
4. INVENTORIES:
The components of inventories are:
(in thousands)
2005 2004
- -------------------------------------------------------------------------
Finished Goods $ 4,853 $ 2,228
- -------------------------------------------------------------------------
Work in Process 2,880 2,771
- -------------------------------------------------------------------------
Raw Materials and Supplies 3,924 6,064
- -------------------------------------------------------------------------
Total $ 11,657 $ 11,063
- -------------------------------------------------------------------------
5. MACHINERY LEASED TO LICENSEES:
Accumulated depreciation netted against the cost of leased assets in
the Consolidated Balance Sheets at July 2, 2005 and July 3, 2004 is
$1,549,000 and $1,543,000, respectively. Rental revenues for the fiscal
years 2005, 2004, and 2003 were $291,000, $279,000 and $178,000,
respectively, and vary with lessees' production or shipments.
6. PROPERTY, PLANT AND EQUIPMENT:
The components of property, plant and equipment are summarized as
follows:
(in thousands)
2005 2004 Estimated Useful Life
- -------------------------------------------------------------------------------
Land $ 107 $ 107 N/A
- -------------------------------------------------------------------------------
Buildings 1,439 1,439 40-45 Years
- -------------------------------------------------------------------------------
Machinery & Equipment 10,846 9,553 2-20 Years
- -------------------------------------------------------------------------------
Furniture & Fixtures 1,059 985 2-10 years
- -------------------------------------------------------------------------------
-24-
2005 2004 Estimated Useful Life
- -------------------------------------------------------------------------------
Leasehold Improvements 809 809 *
- -------------------------------------------------------------------------------
Total Cost $ 14,260 $ 12,893
- -------------------------------------------------------------------------------
Total Accumulated
Depreciation and
Amortization $ 8,943 $ 7,802
- -------------------------------------------------------------------------------
*Leasehold improvements are amortized using the straight-line method over the
shorter of the estimated useful lives of the improvements or the period of the
respective leases.
7. LINES OF CREDIT:
On October 21, 2004, the Company increased its line of credit from
$5,000,000 to $7,500,000 . On December 9, 2004, the Company increased
its line of credit to $10,000,000 through February 28, 2005 and then
the line was reduced to $9,000,000 through April 30, 2005. The
Company's line of credit was renewed on May 2, 2005 and the line was
reduced back to $7,500,000. The Company's line of credit expires on
December 31, 2005 and can be renewed annually at the bank's discretion.
At July 3, 2005, borrowings on this line of credit were $1,720,000 with
$5,780,000 available in additional borrowings.
Interest is at the London Interbank Offered Rate (LIBOR) plus 2.25
points or 5.59% at July 2, 2005. 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
July 2, 2005. The covenants are subject to review at the end of each
fiscal quarter. This line of credit is secured by a blanket lien on all
machinery and equipment, receivables and inventory.
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 or not renew it when it expires.
Events that would cause a substantial reduction in operations include:
cancellation of existing government contracts that are being solicited;
not receiving future government contracts; and, receiving government
contracts that do not provide enough revenues to provide adequate
liquidity.
8. ACCRUED LIABILITIES:
The components of accrued liabilities are:
(in thousands)
2005 2004
- -----------------------------------------------------------
Interest Expense (Note 12) $ 2 $ 2
- -----------------------------------------------------------
Accrued Lease Payments (Note 20) 56 93
- -----------------------------------------------------------
Deferred Grant Revenues (Note 17) 65 -
- -----------------------------------------------------------
Other 162 214
- -----------------------------------------------------------
Total $ 285 $ 309
- -----------------------------------------------------------
-25-
9. PENSION PLANS:
The Company has two non-contributory, defined benefit pension plans.
The components of pension expense, included in Cost of Sales and
Services in the Consolidated Statements of Operations and Comprehensive
Income are as follows:
(In thousands)
2005 2004 2003
- --------------------------------------------------------------------------
Benefits Earned for Service in the
Current Year $ 146 $ 129 $ 132
- --------------------------------------------------------------------------
Interest on the Projected Benefit
Obligation 348 355 365
- --------------------------------------------------------------------------
Expected Return on Plan Assets (312) (297) (286)
- --------------------------------------------------------------------------
Amortization of: Unrecognized Net
Pension Obligation at July 1, 1987;
Cost of Benefit Changes Since That
Date; and Gains and Losses 61 116 80
- --------------------------------------------------------------------------
Against Actuarial Assumptions
Pension Expense $ 243 $ 303 $ 291
- --------------------------------------------------------------------------
Below are various analyses and other information relating to the
Company's pension liability, assets and expense as of July 2005
and July 2004, (all amounts are in thousands except for those
indicated as percent):
Change in Benefit Obligation: 2005 2004
- ----------------------------------------------------------------------
Benefit Obligation at Beginning of Year $ 5,817 $ 6,158
- ----------------------------------------------------------------------
Current Year Service Cost 146 129
- ----------------------------------------------------------------------
Interest Cost on Projected Liability 348 355
- ----------------------------------------------------------------------
Benefit Payments (529) (533)
- ----------------------------------------------------------------------
Actuarial (Gain)Loss 813 (292)
- ----------------------------------------------------------------------
Benefit Obligation at End of Year $ 6,595 $ 5,817
Change in Plan Assets: 2005 2004
- ----------------------------------------------------------------------
Fair Value of Plan Assets at Beginning
of Year $ 4,704 $ 4,374
- ----------------------------------------------------------------------
Company Contributions 284 283
- ----------------------------------------------------------------------
Actual Return on Plan Assets 383 580
- ----------------------------------------------------------------------
-26-
Change in Plan Assets: 2005 2004
- ----------------------------------------------------------------------
Benefit Payments (529) (533)
- ----------------------------------------------------------------------
Fair Value of Plan Assets at End of Year $ 4,842 $ 4,704
- ----------------------------------------------------------------------
Reconciliation of Funded Status: 2005 2004
- ----------------------------------------------------------------------
Funded Status $ (1,752) $ (1,113)
- ----------------------------------------------------------------------
Unrecognized Actuarial Loss 2,008 1,319
- ----------------------------------------------------------------------
Unrecognized Prior Service Cost 10 19
- ----------------------------------------------------------------------
Net Amount Recognized $ 266 $ 225
- ----------------------------------------------------------------------
Amounts Recognized in the Consolidated Balance
Sheets: 2005 2004
- ----------------------------------------------------------------------
Intangible Pension Asset $ 10 $ 19
- ----------------------------------------------------------------------
Accumulated Other Comprehensive Loss 1,476 1,319
- ----------------------------------------------------------------------
Accrued Pension Liability:
- ----------------------------------------------------------------------
Prepaid Benefit Cost 521 478
- ----------------------------------------------------------------------
Accrued Benefit Cost (256) (254)
- ----------------------------------------------------------------------
Additional Minimum Pension Liability (1,485) (1,337)
- ----------------------------------------------------------------------
Net Amount Recognized in Financial
Statements $ 266 $ 225
- ----------------------------------------------------------------------
Accumulated Benefit Obligation in Excess of Plan
Assets: 2005 2004
- ----------------------------------------------------------------------
Projected Benefit Obligation $ 6,595 $ 5,817
- ----------------------------------------------------------------------
Accumulated Benefit Obligation 6,062 5,460
- ----------------------------------------------------------------------
Fair Value of Plan Assets $ 4,842 $ 4,704
- ----------------------------------------------------------------------
2005 2004
- ----------------------------------------------------------------------
Increase (Decrease) in Minimum Liability
Included in Other Comprehensive Income $ 157 $ (324)
- ----------------------------------------------------------------------
-27-
Weighted-average assumptions used to determine
benefit obligations: 2005 2004
- ----------------------------------------------------------------------
Assumed Discount Rate 5.00% 6.25%
- ----------------------------------------------------------------------
Rate of Compensation Increase, For the
Pay Related Benefit Plan 5.50% 5.50%
- ----------------------------------------------------------------------
Weighted-average assumptions used to determine
net periodic benefit cost: 2005 2004
- ----------------------------------------------------------------------
Assumed Discount Rate 6.25% 6.00%
- ----------------------------------------------------------------------
Expected Long-Term Rate of Return on Plan Assets 6.75% 6.75%
- ----------------------------------------------------------------------
Rate of Compensation Increase, For the Pay
Related Benefit Plan 5.50% 5.50%
- ----------------------------------------------------------------------
PLAN ASSETS:
Pension plan's weighted-average asset
allocations by asset category: 2005 2004
- ----------------------------------------------------------------------
Equity Securities 45% 46%
- ----------------------------------------------------------------------
Debt Securities 5% 5%
- ----------------------------------------------------------------------
Real Estate 0% 0%
- ----------------------------------------------------------------------
Other 50% 49%
- ----------------------------------------------------------------------
Total 100% 100%
- ----------------------------------------------------------------------
This allocation and investment funds was selected as one that limits
risk while providing higher returns on plan assets then guaranteed rate
funds, while still providing adequate liquidity to meet payments to
retirees.
In developing the assumed weighted-average long-term rate of
return on plan assets, the Company used information from its third
party pension plan assets manager, including their review of asset
class return expectations and long-term inflation assumptions. Also
considered in setting this rate is the historical return on plan
assets.
CASH FLOWS:
Contributions
Contributions to the pension plan for fiscal year 2006 are expected to
be $367,000.
-28-
Estimated Future Benefit Payments (In thousands) Amount
- ----------------------------------------------------------------
2006 $ 463
- ----------------------------------------------------------------
2007 453
- ----------------------------------------------------------------
2008 449
- ----------------------------------------------------------------
2009 449
- ----------------------------------------------------------------
2010 438
- ----------------------------------------------------------------
2011-2015 2,296
- ----------------------------------------------------------------
At July 2005, one of the pension plans has a benefit obligation
($2,696,000) that is greater than its plan assets ($2,180,000)
resulting in the additional liability of $1,037,000 and at June 2004,
the plan had a benefit obligation ($2,520,000) that was greater than
its plan assets ($2,109,000) resulting in the additional liability of
$890,000. At July 2005, the other pension plan has a benefit obligation
($3,367,000) that is greater than its plan assets ($2,663,000)
resulting in the additional liability of $448,000 and at June 2004,
this plan had a benefit obligation ($3,297,000) that is greater than
its plan assets ($2,595,000) resulting in the additional liability of
$447,000.
A 1% increase in the assumed discount rate would decrease the benefit
obligation at July 2005 by $658,000. Conversely, a 1% decrease in the
assumed discount rate would increase the benefit obligation at July
2005 by $805,000.
The Consolidated Statements of Operations and Comprehensive Income
shows the amount included in Other Comprehensive Income (Loss) that
resulted from recording the additional minimum pension liability which
represents the portion of the pension liability that has not yet been
charged against operations. A valuation allowance is recorded for the
deferred tax asset ($502,000) that arises from the cumulative Other
Comprehensive Income (Loss).
In addition, the Company provides retirement benefits to certain
employees through deferred compensation contracts and the unfunded
liability associated with these contracts was $71,000 at July 2, 2005
and $92,000 at July 3, 2004. Benefit measurements for the pension plan
is June 30, 2005 and June 30, 2004.
10. RETIREE HEALTH BENEFITS:
The Company accounts for the costs and liability of health care
benefits for retired employees using Statement of Financial Accounting
Standards No. 106 (FAS 106), "Employers Accounting for Postretirement
Benefits Other Than Pensions". The liability at the date of adoption of
FAS 106 (July 4, 1993) is being recognized over employee future service
lives.
Employees of the North Carolina plant who meet certain criteria and
retire early (age 62-64) or become disabled, receive for themselves,
but not for their dependents, the same health insurance benefits
received by active employees. All benefits terminate when the employee
becomes eligible to receive Medicare (usually age 65 or 30 months after
disability date). This benefit is provided at no cost to the employee
and the Company does not fund the cost of this benefit prior to costs
actually being incurred.
-29-
The cost of retiree health benefits included in the accompanying
Statements of Operations and Comprehensive Income was:
(in thousands)
2005 2004 2003
---------------------------------------------------------------
Benefits Earned for Current Service $ 35 $ 36 $ 28
---------------------------------------------------------------
Interest Cost on Accumulated Liability 19 24 22
---------------------------------------------------------------
Amortization of the July 4, 1993
Liability 4 4 4
---------------------------------------------------------------
Total Cost $ 58 $ 64 $ 54
---------------------------------------------------------------
An analysis of the total liability for the last two fiscal years,
including a reconciliation of the liability in the Consolidated Balance
Sheets (see Note 8) at July 2, 2005 and July 3, 2004 is as follows:
(in thousands)
2005 2004
- ------------------------------------------------------------------------
Total Obligation at Beginning of Year $ 295 $ 414
- ------------------------------------------------------------------------
Liability for Current Service 35 36
- ------------------------------------------------------------------------
Interest on Liability 19 24
- ------------------------------------------------------------------------
Benefit Payments - -
- ------------------------------------------------------------------------
Actuarial (Gain) Loss 34 (82)
- ------------------------------------------------------------------------
Total Obligation at End of Year 383 392
- ------------------------------------------------------------------------
Less Unamortized Liability at July 4, 1993 (37) (42)
- ------------------------------------------------------------------------
Unrecognized Loss 8 (55)
- ------------------------------------------------------------------------
Liability Recognized in the Consolidated Balance Sheets $ 354 $ 295
- ------------------------------------------------------------------------
The assumed health care cost trend rate used to project expected future
cost was 12% in 2005 and 15% in 2004, gradually decreasing to 6% by
2010 and remaining at 6% thereafter. The assumed discount rate used to
determine the accumulated liability was 5.00% for 2005 and 6.25% for
2004.
A 1% increase in the assumed health care cost trend rate would
increase the benefit obligation at July 2, 2005 by $12,000. Conversely,
a 1% decrease in the assumed health care cost trend rate would decrease
the benefit obligation at July 2, 2005 by $11,000.
A 1% increase in the assumed discount rate would decrease the benefit
obligation at July 2, 2005 by $31,000. Conversely, a 1% decrease in the
assumed discount rate would increase the benefit obligation at July 2,
2005 by $36,000. Benefit measurements for the plan is June 30, 2005 and
June 30, 2004.
-30-
11. INCOME TAXES:
The Company accounts for the provision and liability for income taxes
using Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The provision for income taxes consists of the
following:
(In thousands)
2005 2004 2003
- -----------------------------------------------------------------------------
Federal Provision:
- -----------------------------------------------------------------------------
Currently Payable $ 354 $ 666 $ 50
- -----------------------------------------------------------------------------
Deferred 131 (4) 44
- -----------------------------------------------------------------------------
Total Federal 485 662 94
- -----------------------------------------------------------------------------
State Provision Currently Payable 8 20 15
- -----------------------------------------------------------------------------
Total Provision $ 493 $ 682 $ 109
- -----------------------------------------------------------------------------
A reconciliation of the effective income tax rate for the 2005, 2004
and 2003 fiscal years is as follows:
2005 2004 2003
- -----------------------------------------------------------------------------
Statutory Federal Income Tax Rate 34% 34% 34%
- -----------------------------------------------------------------------------
Current Period Income of Puerto Rico
Subsidiary Substantially Exempt From Puerto
Rican and Federal Income Taxes (13)% (5)% (28)%
- ------------------------------------------------------------------------------
Deferred Tax Valuation Allowance (Reversal of
Previously Recorded Valuation Allowance) (2)% (9)% -
- ------------------------------------------------------------------------------
State Taxes, Net of Federal Tax Benefit - 1% 1%
- ------------------------------------------------------------------------------
Other 1% 1% 2%
- ------------------------------------------------------------------------------
Effective Income Tax Rate 20% 22% 9%
- ------------------------------------------------------------------------------
Income earned in Puerto Rico by the Company's Puerto Rican wholly-owned
subsidiary was 90% exempt from Puerto Rican income tax through 2000.
Effective July 1, 2000, the Company received a new multi-year tax
exemption grant that provided for a flat income tax rate of 2% and
eliminated the withholding tax (5%) on dividends paid. Income earned in
Puerto Rico by this subsidiary has not been subject to United States
federal income tax. The Small Business Job Protection Act (Act)
terminated the federal tax credit on this income subject to a phase out
for existing companies, for tax years beginning after December 31,
1996. Under the phase out, the Company received a full credit through
fiscal year 2002. For fiscal years 2003 through 2006, the credit is
limited, and will be completely eliminated starting with the 2007
fiscal year.
The accumulated undistributed earnings ($2,848,000) through July 1,
2000 of this subsidiary are subject to the 5% Puerto Rican withholding
-31-
tax when remitted to the parent Company as dividends. Accrued tax
liabilities have been provided for the withholding tax reasonably
expected to be paid in the future.
Significant components of the Company's deferred tax assets and
liabilities as of the end of fiscal 2005 and 2004 are as follows:
(in thousands)
Deferred Tax Assets: 2005 2004
- -------------------------------------------------------------------------------
Tax Effect of Pension Liability Charged Against Equity $ 502 $ 448
- -------------------------------------------------------------------------------
Employee Compensation Charged Against Financial
Statement Income, Not Yet Deducted From Taxable
Income 286 383
- -------------------------------------------------------------------------------
Additional Costs Inventoried for Tax Purposes 98 91
- -------------------------------------------------------------------------------
State NOL Carryforward 49 165
- -------------------------------------------------------------------------------
Alternative Minimum Tax Credit 102 277
- -------------------------------------------------------------------------------
Other 391 229
- -------------------------------------------------------------------------------
Deferred Tax Assets Before Valuation Allowance 1,428 1,593
- -------------------------------------------------------------------------------
Valuation Allowance (1,162) (1,236)
- -------------------------------------------------------------------------------
Total Deferred Tax Assets 266 357
- -------------------------------------------------------------------------------
Deferred Tax Liabilities:
Depreciation and Prepaid Pension Costs Deducted From
Taxable Income Not Yet Charged Against Financial
Statement Income 128 88
- -------------------------------------------------------------------------------
Net Deferred Tax Assets (Liabilities) $ 138 $ 269
- -------------------------------------------------------------------------------
Deferred tax assets have been reduced by a valuation allowance because
it is more likely than not that certain of these assets will not be
used to reduce future tax payments.
The Company has state operating loss carryforwards of approximately
$708,000, which begin to expire in 2013, available to reduce future
state taxable income.
12. NOTES PAYABLE:
As part of an agreement with a customer for which the Company provides
certain technology and equipment, in April, 2001 that customer loaned
the Company $300,000. The loan agreement provides for quarterly
interest payments at an annual rate of 3% with the $300,000 principal
due in April 2011. Because this interest rate is less than the market
rate, the Company recorded the note payable discounted at a market rate
of 8% ($196,000), and is recording interest expense at this rate. The
difference between interest at the 8% and 3% rates ($104,000) was
recorded as deferred service income, which is being recognized over the
10-year life of the loan agreement. The Company attributed the
difference between the stated 3% rate and the market rate of 8% as part
of its compensation for technology and equipment provided to the
customer. The Consolidated Statements of Operations and Comprehensive
-32-
Income for the fiscal years 2005, 2004 and 2003 include service fee
income of $9,000, $9,000 and $8,000, respectively, and interest expense
of $18,000, $17,000 and $17,000, respectively. The Consolidated Balance
Sheets at July 2, 2005 and at July 3, 2004 includes $231,000 and
$222,000, respectively, for this note, and $69,000 and $78,000,
respectively, as deferred service income.
13. STOCK OPTIONS:
On July 12, 2000, the Company and its Chairman of the Board executed an
Agreement under which the Chairman was granted options to purchase up
to 50,000 shares of the Company's common stock at an exercise price of
$9.125 per share with such options vesting in 2005 or earlier if
certain performance targets are met. As of July 2, 2005, 50,000 shares
under the Agreement have vested. Expiration of such options shall be
the earlier of the fifth anniversary of the date on which such options
vest or one year after the Chairman's separation from employment under
the Agreement (see Note 19 to the Consolidated Financial Statements).
The 1999 Stock Option Plan for Key Employees (1999 Employee Plan) and
the 1999 Stock Option Plan for Non-Employee Directors (1999 Director
Plan) provide for granting options to purchase 90,000 shares and 21,000
shares, respectively. As of July 2, 2005 options have been granted for
65,000 shares under the 1999 Employee Plan and 11,000 shares under the
1999 Director Plan. The plans permit the issuance of either incentive
stock options or non-qualified stock options.
The 1997 Stock Option Plan for Key Employees (1997 Employee Plan) and
the 1997 Stock Option Plan for Non-Employee Directors (1997 Director
Plan) provide for granting options to purchase 99,000 shares and 16,000
shares, respectively. As of July 2, 2005 options have been granted for
84,000 shares under the 1999 Employee Plan and 10,000 shares under the
1999 Director Plan.
The 1996 Stock Option Plan for Key Employees provides for granting
options to purchase 60,000 shares. At July 2, 2005 options have been
granted for 52,500 shares.
Under all of the above Plans, option price is the market price on the
date granted, and options have a life of 10 years from the date
granted. As of July 2, 2005, all granted options are exercisable.
Transactions involving these Plans for the last three fiscal years are
summarized below:
Weighted-
No. of Average
Option Shares: Shares Exercise Price
- --------------------------------------------------------------------------
Outstanding at June 29, 2002 213,500 $9.79
- --------------------------------------------------------------------------
Exercised (3,000) 8.00
- --------------------------------------------------------------------------
Forfeited (12,000) 9.67
- --------------------------------------------------------------------------
Outstanding at June 28, 2003 198,500 9.78
- --------------------------------------------------------------------------
Exercised (59,300) 10.55
- --------------------------------------------------------------------------
Outstanding at July 3, 2004 139,200 9.46
- --------------------------------------------------------------------------
Exercised (25,700) 10.01
- --------------------------------------------------------------------------
-33-
Weighted-
No. of Average
Option Shares: Shares Exercise Price
- --------------------------------------------------------------------------
Forfeited (2,000) 12.00
- --------------------------------------------------------------------------
Outstanding at July 2, 2005 111,500 $9.29
- --------------------------------------------------------------------------
The following table summarizes information about fixed stock options
outstanding at July 2, 2005:
Weighted-Average
Remaining
Range of Exercise Weighted Average Contractual Life
Number Prices Exercise Price in Years
- -------------------------------------------------------------------------------
15,000 $5.00 $5.00 0.6
- -------------------------------------------------------------------------------
32,000 $12.00-$17.50 $12.34 2.0
- -------------------------------------------------------------------------------
20,500 $8.00 $8.00 4.0
- -------------------------------------------------------------------------------
44,000 $9.13 $9.13 5.0
- -------------------------------------------------------------------------------
The following table summarizes information concerning options issued,
options available for future issuance and approval of plans by security
holders at July 2, 2005:
(A) (B) (C)
- --------------------------------------------------------------------------------
Number of
Securities
Remaining Available
Number of for Future Issuance
Securities to be Weighted- Under Equity
Issued Upon Average Compensation Plans
Exercise of Exercise Price (Excluding
Outstanding of Outstanding Securities Reflected
Plan Category Options Options in Column (A))
- --------------------------------------------------------------------------------
Equity Compensation
Plans Approved by
Security Holders 111,500 $9.29 63,500
- --------------------------------------------------------------------------------
Equity Compensation
Plans Not Approved by
Security Holders - - -
- --------------------------------------------------------------------------------
Total 111,500 $9.29 63,500
- --------------------------------------------------------------------------------
-34-
The Company has applied the intrinsic value based method of accounting
prescribed by APB Opinion No. 25 and related interpretations in
accounting for stock-based compensation plans. Accordingly, 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.
The Company has adopted the disclosure provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure, an
amendment of FASB Statement No.123" and the following table illustrates
the pro forma effect on net income and income per share in 2005, 2004
and 2003 had the fair value recognition provisions of SFAS No.123
"Accounting for Stock-Based Compensation" been applied to stock-based
employee compensation.
2005 2004 2003
- ---------------------------------------------------------------------------
Net Income, As Reported (in thousands) $ 1,907 $ 2,448 $ 823
- ---------------------------------------------------------------------------
Net Income, Pro Forma (in thousands) $ 1,889 $ 2,430 $ 800
- ---------------------------------------------------------------------------
Basic Earnings Per Share, As Reported $ 1.51 $ 2.04 $ 0.70
- ---------------------------------------------------------------------------
Basic Earnings Per Share, Pro Forma $ 1.49 $ 2.02 $ 0.68
- ---------------------------------------------------------------------------
Diluted Earnings Per Share, As Reported $ 1.47 $ 1.97 $ 0.68
- ---------------------------------------------------------------------------
Diluted Earnings Per Share, Pro Forma $ 1.45 $ 1.95 $ 0.66
- ---------------------------------------------------------------------------
14. 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 Fiscal Year Ended 7/02/05
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Basic EPS Available to
Shareholders $ 1,907,000 1,263,938 $ 1.51
- --------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 34,362
- --------------------------------------------------------------------------------
Diluted EPS Available to
Shareholders $ 1,907,000 1,298,300 $ 1.47
- --------------------------------------------------------------------------------
-35-
For the Fiscal Year Ended 7/03/04
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Basic EPS Available to
Shareholders $ 2,448,000 1,200,937 $ 2.04
- --------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 43,017
- --------------------------------------------------------------------------------
Diluted EPS Available to
Shareholders $ 2,448,000 1,243,954 $ 1.97
- --------------------------------------------------------------------------------
For the Fiscal Year Ended 6/28/03
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Income Before Accounting Change $ 1,051,000 1,184,242 $ 0.89
Cumulative Effect of Accounting
Change (228,000)
- --------------------------------------------------------------------------------
Net Income Available to
Shareholders 823,000 1,184,242 $ 0.70
- --------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 26,687
- --------------------------------------------------------------------------------
Diluted EPS Available to
Shareholders $ 823,000 1,210,929 $ 0.68
- --------------------------------------------------------------------------------
15. SEGMENT AND REVENUE INFORMATION:
The Company operates in one reportable segment. SFAS 131 requires
disclosure of financial and descriptive information about reportable
operating segments, revenues by products or services, and revenues and
assets by geographic areas. 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 Company identifies segments based on the
Company's organization under one management group. The Company's
operations are managed as one unit and resources are allocated without
regard to separate functions.
Information about the Company's revenues is as follows:
(in thousands)
2005 2004 2003
- --------------------------------------------------------------------------------
Sales of Footwear and Related Items $ 49,530 $ 44,327 $ 24,012
- --------------------------------------------------------------------------------
Revenues from Licensees 937 1,366 821
- --------------------------------------------------------------------------------
Total Revenues by Major Product Group $ 50,467 $ 45,693 $ 24,833
- --------------------------------------------------------------------------------
-36-
2005 2004 2003
- -------------------------------------------------------------------------------
Revenues from U. S. Customers $ 49,108 $ 45,344 $ 24,631
- --------------------------------------------------------------------------------
Revenues from International Customers 1,359 349 202
- --------------------------------------------------------------------------------
Total Revenues by Geographic Region $ 50,467 $ 45,693 $ 24,833
- --------------------------------------------------------------------------------
Location of Major International Customers:
- --------------------------------------------------------------------------------
Latin America $ 116 $ 153 $ 127
- --------------------------------------------------------------------------------
Canada - 14 12
- --------------------------------------------------------------------------------
Asia/Pacific 40 171 47
- --------------------------------------------------------------------------------
Mexico 137 2 2
- --------------------------------------------------------------------------------
United Kingdom/Europe/South Africa 1,066 9 14
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Major Customer- U. S. Government $ 44,249 $ 39,648 $ 18,209
- --------------------------------------------------------------------------------
The Company does not have long-lived assets or operations in foreign
countries. The categorization of revenues as being from international
customers was based upon the final destination of products sold or
services rendered.
16. 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.
17. GRANT MONEY RECEIVED:
The Company received $400,000 ($100,000 in November, 2000 and a final
payment of $300,000 on July 2, 2001) from the government of Puerto Rico
under a Special Incentives Contract related to its 1999 consolidation
of boot manufacturing operations in Puerto Rico, which was completed in
fiscal year 2001. The grant required the Company to maintain operations
in Puerto Rico for five years (fiscal years 2000 through 2004). Grant
-37-
income was not recognized until the $100,000 was received in November,
2000, and the 2001 Consolidated Statement of Operations and
Comprehensive Income included, as a catch-up adjustment, $160,000 of
grant income. After the Contract was executed on May 23, 2001, and
subsequent to receiving the final $300,000 payment, grant income
recognized on a straight line basis over this five year period at the
rate of $20,000 per fiscal quarter. The Consolidated Statements of
Operations and Comprehensive Income for the fiscal years 2004 and 2003
include an income item from this grant of $80,000. As of July 3, 2004,
all of the deferred grant income from this first grant had been
recognized.
In December 2004, the Company received $280,000 from the government of
Puerto Rico and another $43,000 in April 2005 under a Special
Incentives Contract related to creating new job opportunities in its
boot manufacturing operations in Puerto Rico. The grant is for a five
year period (fiscal years 2004 through 2008) and requires the Company
to maintain a certain level of employment in Puerto Rico over the grant
period. If this requirement is not met, the Company may be required to
refund a pro-rata portion of the total grant. The grant is for a
maximum of $526,000 and monies are disbursed based upon certain
expenditures made by the Company. The Company's policy is to recognize
grant monies pro-rata over the five year grant period, with grant
income first recognized in the period in which it is received. The
Consolidated Statements of Operations and Comprehensive Income for the
fiscal year 2005 recognized $135,000 as grant income including $70,000
that related to grant periods prior to fiscal year 2005.
18. UNRECOVERED CONTRACT PREPARATION COSTS:
In October, 2001, Wellco submitted a solicitation response to a DSCP
procurement for berets to be used by U. S. Army personnel. Wellco did
not have any prior experience in manufacturing berets or similar
knitted products. Since submitting its response, certain costs were
incurred in order to learn beret manufacturing operations and
procedures, and to demonstrate to the government that Wellco had the
capability to manufacture and deliver berets within the government's
required delivery schedule.
In July, 2002, Wellco received notification that the contract awardee
was another company. At June 29, 2002, beret manufacturing machinery
was written down by $159,000 to an amount equal to the estimated amount
for which this machinery could be sold. Based on revised estimates of
the resale value, the beret manufacturing machinery was further written
down by $70,000 and shown as Unrecovered Contract Preparation Costs in
the Consolidated Statements of Operations and Comprehensive Income for
the fiscal year ended June 28, 2003.
19. RELATED PARTY TRANSACTIONS:
The Company has an Agreement with its former Chairman of the Board of
Directors under which certain payments are to be made to the former
Chairman for a five-year period commencing January 2000. These payments
are computed as certain fixed percentages of revenues earned by the
Company and related to certain products, as defined, that the former
Chairman has been instrumental in conceiving or developing. The amount
paid under this agreement since its inception and through July 2, 2005
was $7,000.
20. COMMITMENTS:
The Company has a non-cancelable operating lease with a Puerto Rican
governmental agency for its manufacturing facility. The term of the
lease is for ten years, beginning July 1, 1999 with monthly payments
that commenced on January 1, 2000. Total lease payments for the period
July 3, 2005 through June 30, 2009 are $843,000. Lease payments for
-38-
each of the Company's four fiscal years ending after July 2, 2005 are:
$200,000, $207,000, $214,000 and $222,000. Lease expense for the
Company's current Puerto Rican facility in the 2005 fiscal year was
$156,000. The Company leased more square footage during fiscal year
2005. Lease expense for 2004 and 2003 fiscal years was $142,500 each
year.
21. PUERTO RICAN GOVERNMENT REFUND:
The majority of the Company's boot manufacturing operations occur at
the factory of a wholly-owned subsidiary located in Puerto Rico. The
Company is participating in a Puerto Rican government program to assist
manufacturers in the training of new or expanded work force under which
the Company is reimbursed for part of the compensation paid to certain
employees. The Consolidated Statements of Operations for fiscal years
2005 and 2004 include $1,385,000 and $321,000 as Revenues from this
program.
The Company has filed a reimbursement claim for an additional $852,000
for compensation paid employees and expensed through July 2, 2005. The
Company's policy is to recognize reimbursement as a revenue in the
period that they are received.
22. GOODWILL:
Statement of Financial Accounting Standards No. 142 (SFAS 142,
"Goodwill and Other Intangible Assets") was effective with the
Company's 2003 fiscal year. The excess of cost over net assets of
subsidiary at acquisition (goodwill) was reviewed for impairment in
conjunction with the adoption of SFAS 142. SFAS No. 142 provides for a
specific method to determine if goodwill is impaired and the
application of this method resulted in the $228,000 of goodwill being
deemed as impaired. As required under SFAS 142, the Company charged
this goodwill against the Consolidated Statements of Operations and
Comprehensive Income as the cumulative effect of change in accounting
principle. In applying the SFAS 142 method, conservative assumptions
and estimates were used, which may not be indicative of future results.
The changes in the carrying amount of goodwill was as follows
( in thousands)
2003
- ----------------------------------------------------------------
Excess of cost over net assets of subsidiary
at acquisition, at beginning of year $ 228
- ----------------------------------------------------------------
Cumulative effect of change in accounting
principle (228)
- ----------------------------------------------------------------
Excess of cost over net assets of subsidiary $ 0
at acquisition, at end of year
- ----------------------------------------------------------------
-39-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders
of Wellco Enterprises, Inc.
Waynesville, North Carolina
We have audited the accompanying consolidated balance sheets of Wellco
Enterprises, Inc. and subsidiaries (the "Company") as of July 2, 2005 and July
3, 2004, and the related consolidated statements of operations and comprehensive
income, stockholders' equity, and cash flows for each of the three years in the
period then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
July 2, 2005 and July 3, 2004 and the results of their operations and their cash
flows for each of the three years in the period then ended in conformity with
accounting principles generally accepted in the United States of America.
DIXON HUGHES PLLC
Asheville, North Carolina
September 28, 2005
-40-
WELLCO ENTERPRISES, INC.
PRICE RANGE, DIVIDENDS AND MARKET OF COMMON STOCK
Fiscal Year 2005 Quarters
First Second Third Fourth
- ------------------------------------------------------------------------
Market Price Per Share-
- ------------------------------------------------------------------------
High $21.24 $21.00 $16.65 $13.81
- ------------------------------------------------------------------------
Low $16.60 $14.25 $13.71 $11.70
- ------------------------------------------------------------------------
Per Share Cash Dividend Declared $0.15 $0.15 $0.15 $0.15
- ------------------------------------------------------------------------
Fiscal Year 2004 Quarters
First Second Third Fourth
- ------------------------------------------------------------------------
Market Price Per Share-
- ------------------------------------------------------------------------
High $11.10 $11.75 $22.69 $23.80
- ------------------------------------------------------------------------
Low $8.55 $9.80 $11.40 $12.00
- ------------------------------------------------------------------------
Per Share Cash Dividend Declared $0.10 $0.10 $0.10 $0.15
- ------------------------------------------------------------------------
The Company's Common Stock is traded on the American Stock Exchange.
The number of holders of record of Wellco's Common Stock as of September 16,
2005 was 176.
Registrar and Transfer Agent
Mellon Shareholders Services
New York, N. Y.
-41-
WELLCO ENTERPRISES, INC.
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
(In Thousands Except for Per Share Amounts)
Fiscal Year 2005 Quarters
First Second Third Fourth
- ------------------------------------------------------------------------
Revenues $ 10,621 $ 13,974 $ 14,646 $ 11,226
- ------------------------------------------------------------------------
Cost of Sales and Services 9,387 12,505 13,731 9,609
- ------------------------------------------------------------------------
Net Income 397 521 209 780
- ------------------------------------------------------------------------
Basic Earnings Per Share 0.32 0.41 0.16 0.62
- ------------------------------------------------------------------------
Fully Diluted Earnings Per Share $ 0.31 $ 0.40 $ 0.16 $ 0.60
- ------------------------------------------------------------------------
Fiscal Year 2004 Quarters
First Second Third Fourth
- -------------------------------------------------------------------------
Revenues $ 8,617 $ 11,389 $ 11,513 (A)14,174
- -------------------------------------------------------------------------
Cost of Sales and Services 7,490 10,122 9,914 11,912
- -------------------------------------------------------------------------
Net Income 416 551 623 858
- -------------------------------------------------------------------------
Basic Earnings Per Share 0.35 0.46 0.52 0.70
- -------------------------------------------------------------------------
Fully Diluted Earnings Per Share $ 0.35 $ 0.46 $ 0.50 $ 0.66
- -------------------------------------------------------------------------
(A) Includes sales of 55,000 pairs of black ICB boots under new contract.
-42-
Officers and Directors
DAVID LUTZ
Chief Executive Officer, President, Chief Operating Officer and Chairman,
Board of Directors
HORACE AUBERRY
Chairman Emeritus, Board of Directors
ROLF KAUFMAN
Vice Chairman of the Board
FRED K. WEBB, Jr.
Vice President of Marketing
Officers
CHRIS CASTLEBERRY
Executive Vice President
RICHARD A. WOOD, Jr.
Secretary, Attorney, Member of the law firm of McGuire, Wood & Bissette, P. A.
TAMMY FRANCIS
Treasurer, Assistant Secretary and Controller
Directors
WILLIAM M. COUSINS, Jr.
President of William M. Cousins, Jr., Inc.
(Management Consultants)
SARAH E. LOVELACE
Executrix of the estate of James T. Emerson
CLAUDE S. ABERNETHY, Jr.
-43-
Senior Vice President of IJL Wachovia
KATHERINE J. EMERSON
Information Systems Controller and CPA
Master Gage and Tool Company
JOHN D. LOVELACE
Vice President of Credit and Collections
United Leasing Corporation
-44-
PART III
Responsive information called for by the following Items 10, 11, 12. 13 and 14,
except for certain information about executive officers provided and the
Registrant's Code of Ethics presented below, will be filed not later than 120
days after the close of the fiscal year with the Securities and Exchange
Commission in a Proxy Statement dated October 14, 2005, and is incorporated
herein by reference. After each item and shown in parenthesis is the proxy
heading for the section containing the responsive information.
Item 10. Directors and Executive Officers of the Registrant.
(Board of Directors)
- ------- ----------------------------------------------------
The Proxy Statement is not expected to contain information disclosing
delinquent Form 4 filers.
Identification of Executive Officers and Certain Significant Employees:
----------------------------------------------------------------------
Name Age Office
- --------------------------------------------------------------------------------
David Lutz, CPA 60 Chairman, Board of Directors,
Chief Executive Officer, President,
- --------------------------------------------------------------------------------
Horace Auberry 74 Chairman Emeritus, Board of Directors
- --------------------------------------------------------------------------------
Rolf Kaufman 75 Vice Chairman, Board of Directors
- --------------------------------------------------------------------------------
Chris Castleberry 32 Executive Vice President
- --------------------------------------------------------------------------------
Fred K. Webb, Jr. 45 Vice President of Marketing
- --------------------------------------------------------------------------------
Richard A. Wood, Jr. 68 Secretary
- --------------------------------------------------------------------------------
Tammy Francis, CPA 46 Controller, Treasurer and Assistant
Secretary
- --------------------------------------------------------------------------------
Effective January 1, 2002, Mr. Lutz was elected Chairman of the Board of
Directors and Chief Executive Officer and has been serving as President and
Director for more than five years.
Also, effective January 1, 2002, Mr. Auberry retired from Chief Executive Office
and is serving as Chairman Emeritus. Prior to serving as Chairman Emeritus, Mr.
Auberry served as Chairman of the Board of Directors for more than five years.
Mr. Castleberry has been an employee with the Company since April 2000 and was
elected Executive Vice President in 2004. He was Vice-President, Technical
Director from 2001 to 2004. From 1996 until 2000, he was a plant engineer for
Converse Corporation, Inc.
Mr. Webb has been a director since 1996 and an employee with the Company since
August 1998. In February 1999, Mr. Webb was elected Vice President of Marketing.
Mr. Webb was employed as an Accounting Team Leader with United Guaranty
Corporation from 1989 until 1998.
Ms. Francis has been Controller since October, 1996 and was elected Treasurer in
2003 and Assistant Secretary in 1998.
-6-
Executive officers are elected by the Board of Directors to serve a term of one
year. There are no arrangements or understandings pursuant to which any of the
officers are elected, and all are elected to serve for one year terms.
The Registrant has a Code of Conduct and Ethics that applies to, among others,
its principal executive officer, principal financial officer and principal
accounting officer or controller.
Item 11. Executive Compensation. (Executive Compensation)
- ------- ----------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(Security Ownership)
- ------- --------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions.
(Board of Directors/Security Ownership)
- ------- ----------------------------------------------
Since the beginning of the 2005 fiscal year, no executive officer of the
Registrant or member of his immediate family or record or beneficial owner of
more than 5% of the Company's stock has had any transaction or series of similar
transactions with the Registrant or any of its subsidiaries exceeding $60,000,
and there are no currently proposed transactions exceeding $60,000.
Since the beginning of the 2005 fiscal year, no -
(1) executive officer of the Registrant or member of his immediate
family,
(2) corporation or organization of which any such person is an
executive officer, partner, owner or 10% or more beneficial owner,
or
(3) trust or other estate in which any such person has a substantial
interest or as to which such person serves as trustee or in a
similar capacity, was indebted to the Registrant or its
subsidiaries in an amount exceeding $60,000.
Item 14. Principal Accountant Fees and Services.
(Independent Auditors Fees and Services)
- -------- --------------------------------------
-7-
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- ------- ---------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. All Financial Statements
Page
Number
- --------------------------------------------------------------------------------
The following consolidated financial statements of Wellco
Enterprises, Inc. are in the Registrant's 2005 Annual Report to
Shareholders which is integrated into
Part II of this Form 10-K immediately after page 4
- --------------------------------------------------------------------------------
Consolidated Balance Sheets - at July 2, 2005 and July 3, 2004 15-16*
- --------------------------------------------------------------------------------
Consolidated Statements of Operations and Comprehensive Income
- - for the years ended July 2, 2005, July 3, 2004 and June 28, 2003 14*
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows - for the years ended
July 2, 2005, July 3, 2004 and June 28, 2003 17-18*
- --------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity - for the years
ended July 2, 2005, July 3, 2004 and June 28, 2003 19*
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 40*
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 20-39*
- --------------------------------------------------------------------------------
* Page number in the 2005 Annual Report to Shareholders included in Part II of
this Form 10-K.
2. Financial Statement Schedules
Page
Number
- --------------------------------------------------------------------------------
Schedule II Valuation and Qualifying Accounts 21
- --------------------------------------------------------------------------------
All other schedules are omitted because they are not applicable or not required.
3. Exhibits
- -----------
Exhibit Page
Number Description Number
- --------------------------------------------------------------------------------
3 Articles of Incorporation and By-Laws (j)
- --------------------------------------------------------------------------------
10 Material Contracts:
- --------------------------------------------------------------------------------
A. Bonus Arrangement* (b)
- --------------------------------------------------------------------------------
-8-
Exhibit Page
Number Description Number
- --------------------------------------------------------------------------------
B. 1996 Stock Option Plan for Key Employees of Wellco
Enterprises, Inc.* (c)
- --------------------------------------------------------------------------------
C. 1997 Stock Option Plan for Key Employees of Wellco
Enterprises, Inc.* (d)
- --------------------------------------------------------------------------------
D. 1997 Stock Option Plan for Non-Employee Directors of Wellco
Enterprises, Inc.* (e)
- --------------------------------------------------------------------------------
E. 1999 Stock Option Plan for Key Employees of Wellco
Enterprises, Inc.* (f)
- --------------------------------------------------------------------------------
F. 1999 Stock Option Plan for Non-Employee Directors of Wellco
Enterprises, Inc.* (g)
- --------------------------------------------------------------------------------
G. Employment Agreement with Chairman of Wellco's Board of
Directors* (h)
- --------------------------------------------------------------------------------
H. Amended Employment Agreement with Chairman of Wellco's
Board of Directors* (i)
- --------------------------------------------------------------------------------
14 Code of Conduct and Ethics (k)
- --------------------------------------------------------------------------------
21 Subsidiaries of Registrant 13
- --------------------------------------------------------------------------------
23 Consent of Expert 14
- --------------------------------------------------------------------------------
31 Certifications of the Chief Executive Officer and
Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith. 15 - 18
- --------------------------------------------------------------------------------
32 Certifications of the Chief Executive Officer and
Chief Financial Officer under
Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith. 19 -20
- --------------------------------------------------------------------------------
* Management Compensation Arrangement/Plan.
Copies of the below listed exhibits may be obtained on written request to
Corporate Secretary, Wellco Enterprises, Inc., Box 188, Waynesville, N. C.
28786, accompanied by payment of the following amounts for each copy:
Exhibit 3 $40.00
Exhibit 10 A. 2.00
Exhibit 10 B. 3.00
Exhibit 10 C. 3.00
Exhibit 10 D. 3.00
Exhibit 10 E. 3.00
Exhibit 10 F. 3.00
Exhibit 10 G. 3.00
Exhibit 10 H. 3.00
Exhibit 14 This exhibit will be furnished without charge upon
receipt of a written request to the Corporate Secretary at
the address shown above.
-9-
(a) Exhibit was filed in Part IV of Form 10-K for the fiscal year
ended July 1, 1995, and is incorporated herein by reference.
(b) Exhibit was filed in PART IV of Form 10-K for the fiscal year
ended July 3, 1982, and is incorporated herein by reference.
(c) Exhibit was filed as Exhibit A to the Proxy Statement dated
October 18, 1996, and is incorporated herein by reference.
(d) Exhibit was filed as Exhibit A to the Proxy Statement dated
October 17, 1997, and is incorporated herein by reference.
(e) Exhibit was filed as Exhibit B to the Proxy Statement dated
October 17, 1997, and is incorporated herein by reference.
(f) Exhibit was filed as Exhibit A to the Proxy Statement dated
October 13, 2000, and is incorporated herein by reference.
(g) Exhibit was filed as Exhibit B to the Proxy Statement dated
October 13, 2000, and is incorporated herein by reference.
(h) Exhibit was filed in Part IV of Form 10-K for the fiscal year
ended July 1, 2000, and is incorporated herein by reference.
(i) Exhibit was filed in Part IV of Form 10-K for the fiscal year
ended June 29, 2002, and is incorporated herein by reference.
(j) Exhibit was filed in Part IV of Form 10-K for the fiscal year
ended July 3, 2004, and is incorporated herein by reference.
(k) Exhibit was filed in Part IV of Form 10-K for the fiscal year
ended July 3, 2004, and is incorporated herein by reference.
-10-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Wellco Enterprises, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WELLCO ENTERPRISES, INC.
/s/ David Lutz
- ----------------------------------------------------------------------------
By: David Lutz, Chief Executive Officer, President and Chairman of the
Board of Directors
(Chief Executive Officer)
- ----------------------------------------------------------------------------
/s/ Tammy Francis
- ----------------------------------------------------------------------------
By: Tammy Francis, Controller and Treasurer
(Chief Financial Officer)
- ----------------------------------------------------------------------------
Date: September 30, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Horace Auberry /s/ Rolf Kaufman
- --------------------------------------------------------------------------------
Horace Auberry, Director Rolf Kaufman, Director
- --------------------------------------------------------------------------------
/s/ David Lutz /s/ William M. Cousins, Jr.
- --------------------------------------------------------------------------------
David Lutz, Director William M. Cousins, Jr. Director
- --------------------------------------------------------------------------------
/s/ Fred K. Webb, Jr.
- ---------------------------------------------------------------
Fred K. Webb, Jr., Director
- ---------------------------------------------------------------
Date: September 30, 2005
-11-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders
of Wellco Enterprises, Inc.
Waynesville, North Carolina
We have audited the accompanying consolidated balance sheets of Wellco
Enterprises, Inc. and subsidiaries (the "Company") as of July 2, 2005 and July
3, 2004 and the related consolidated statements of operations and comprehensive
income, stockholders' equity, and cash flows for each of the three years in the
period then ended. Our audits also included the financial statement schedule
listed in the Index at Item 15(a)(2).These consolidated financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements and schedule are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
July 2, 2005 and July 3, 2004 and the results of their operations and their cash
flows for each of the three years in the period then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole presents fairly,
in all material respects, the information set forth therein.
DIXON HUGHES PLLC
Asheville, North Carolina
September 28, 2005
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Exhibit 21
WELLCO ENTERPRISES, INC.
SUBSIDIARIES OF THE REGISTRANT
Percentage of Voting
Jurisdiction of Securities Owned
Name of Company Incorporation by Immediate Parent
- --------------------------------------------------------------------------------
Wellco Enterprises, Inc. North Carolina Registrant
- --------------------------------------------------------------------------------
Wholly-Owned Subsidiaries:
- --------------------------------------------------------------------------------
Ro-Search, Incorporated North Carolina 100%
- --------------------------------------------------------------------------------
Mo-Ka Shoe Corporation Delaware 100%
- --------------------------------------------------------------------------------
All of the Registrant's wholly-owned subsidiaries are included in the
consolidated financial statements.
-13-
Exhibit 23
WELLCO ENTERPRISES, INC.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement No.
1-333-72824 of Wellco Enterprises, Inc. on Form S-8 of our report dated
September 28, 2005 appearing in this Annual Report on Form 10-K of Wellco
Enterprises, Inc. for the fiscal year ended July 2, 2005.
DIXON HUGHES PLLC
Asheville, North Carolina
September 28, 2005
-14-
Exhibit 31
WELLCO ENTERPRISES, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED JULY 2, 2005
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 annual report on Form 10-K of Wellco
Enterprises, Inc.(the registrant);
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 fourth 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):
-15-
(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: September 30, 2005
/s/ David Lutz
By: David Lutz, Chief Executive Officer and President
(Chief Executive Officer)
-16-
Exhibit 31
WELLCO ENTERPRISES, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED JULY 2, 2005
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 annual report on Form 10-K of Wellco
Enterprises, Inc.(the registrant);
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 fourth 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):
(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
-17-
(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: September 30, 2005
/s/ Tammy Francis
By: Tammy Francis, Controller and Treasurer
(Chief Financial Officer)
-18-
Exhibit 32
WELLCO ENTERPRISES, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED JULY 2, 2005
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-K for the fiscal year ended
July 2, 2005, 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: September 30, 2005
/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.
-19-
Exhibit 32
WELLCO ENTERPRISES, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED JULY 2, 2005
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-K for the fiscal year ended
July 2, 2005, 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: September 30, 2005
/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.
-20-
SCHEDULE II
WELLCO ENTERPRISES, INC. AND WHOLLY-OWNED SUBSIDIARIES
VALUATION ACCOUNTS FOR THE FISCAL YEARS ENDED JULY 2, 2005, JULY 3, 2004
AND JUNE 28, 2003
Balance at Additions
Beginning of Charged to Balance at End
Description of Year Income (A) Deductions(B) of Year
- --------------------------------------------------------------------------------
Allowance for
Doubtful Accounts-
- --------------------------------------------------------------------------------
2005 $37 - - $37
- --------------------------------------------------------------------------------
2004 $28 10 1 $37
- --------------------------------------------------------------------------------
2003 $28 3 3 $28
- --------------------------------------------------------------------------------
(A) Additions for allowance for doubtful accounts.
(B) Write-off of uncollectible accounts.
-21-
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