FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 2005
COMMISSION FILE NUMBER: 1-5555
WELLCO ENTERPRISES, INC.
--------------------------------------
(Exact name of registrant as specified in charter)
NORTH CAROLINA 56-0769274
- --------------------------- ----------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
150 Westwood Circle, P.O. Box 188, Waynesville, NC 28786
(Address of Principal Executive Office)
Registrant's telephone number, including area code 828-456-3545
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X .
----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes No X .
----- -----
1,270,746 common shares (all voting) were outstanding as of February 14, 2006.
- -3-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WELLCO ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 2005
The attached unaudited financial statements reflect all adjustments which are,
in the opinion of management, necessary to reflect a fair statement of the
financial position, results of operations, and cash flows for the interim
periods presented. All significant adjustments are of a normal recurring nature.
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND JULY 2, 2005
(in thousands)
ASSETS
(unaudited) *
DECEMBER 31, JULY 2,
2005 2005
--------------------------
CURRENT ASSETS:
Cash and cash equivalents .................. $ 102 $ 34
Receivables, net ........................... 5,075 3,205
Inventories-
Finished goods ......................... 3,572 4,853
Work in process ........................ 4,313 2,880
Raw materials .......................... 5,530 3,924
-------- --------
Total .................................. 13,415 11,657
Deferred taxes ............................ 266 266
Prepaid expenses ........................... 698 304
-------- --------
Total ...................................... 19,556 15,466
-------- --------
MACHINERY LEASED TO LICENSEES,
Net of accumulated depreciation ............ 8 11
PROPERTY, PLANT AND EQUIPMENT:
Land ....................................... 107 107
Buildings .................................. 1,439 1,439
Machinery and equipment .................... 11,105 10,846
Office equipment ........................... 872 851
Automobiles ................................ 235 208
Leasehold improvements ..................... 817 809
-------- --------
Total cost ................................. 14,575 14,260
Less accumulated depreciation and
amortization ............................ (9,646) (8,943)
-------- --------
Net Property Plant and Equipment ........... 4,929 5,317
-------- --------
INTANGIBLE ASSETS:
Intangible pension asset ................... 10 10
-------- --------
TOTAL ............................................ $ 24,503 $ 20,804
======== ========
* Derived from audited financial statements
(continued on next page)
-3-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND JULY 2, 2005
(in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited) *
DECEMBER 31, JULY 2,
2005 2005
--------------------------
CURRENT LIABILITIES:
Short-term borrowing from bank ............... $ 5,400 $ 1,720
Accounts payable ............................. 4,028 2,912
Accrued compensation ......................... 705 1,016
Dividend payable ............................. 191 --
Accrued income taxes ......................... 511 649
Other liabilities ............................ 241 285
-------- --------
Total ........................................ 11,076 6,582
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ........................... 1,485 1,485
Notes payable ................................ 236 231
Other accrued liabilities .................... 425 425
Deferred taxes .............................. 128 128
Deferred grant income ........................ 131 124
Deferred revenues ............................ 64 69
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value ................ 1,271 1,271
Additional paid-in capital ................... 1,319 1,319
Retained earnings ............................ 9,844 10,646
Accumulated other comprehensive loss ......... (1,476) (1,476)
-------- --------
Total ........................................ 10,958 11,760
-------- --------
TOTAL .............................................. $ 24,503 $ 20,804
======== ========
See Notes to Consolidated Financial Statements.
* Derived from audited financial statements
-4-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 31, 2005 AND JANUARY 1, 2005
(in thousands except per share and number of shares)
(unaudited)
DECEMBER 31, JANUARY 1,
2005 2005
------------------------------
REVENUES ...................................... $ 19,359 $ 25,760
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services .............. 18,529 23,057
General and administrative
expenses ................................ 1,245 1,482
----------- -----------
Total ................................... 19,774 24,539
----------- -----------
GRANT INCOME .................................. 85 89
----------- -----------
OPERATING INCOME (LOSS) ....................... (330) 1,310
INTEREST EXPENSE .............................. (109) (137)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............ (439) 1,173
PROVISION (BENEFIT) FOR INCOME TAXES .......... (18) 255
----------- -----------
NET INCOME (LOSS) ............................. $ (421) $ 918
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE
Based on weighted average
number of shares outstanding ............ $ (0.33) $ 0.73
=========== ===========
Shares used in computing
basic earnings per share ................ 1,270,746 1,257,092
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE
Based on weighted average
number of shares outstanding
and dilutive stock options .............. $ (0.33) $ 0.70
=========== ===========
Shares used in computing
diluted earnings per share .............. 1,270,746 1,312,888
=========== ===========
DIVIDENDS DECLARED PER SHARE .................. $ 0.30 $ 0.30
=========== ===========
See Notes to Consolidated Financial Statements
-5-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
DECEMBER 31, 2005 AND JANUARY 1, 2005
(in thousands except per share and number of shares)
(unaudited)
DECEMBER 31, JANUARY 1,
2005 2005
---------------------------
REVENUES .................................. $ 11,041 $ 14,358
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services .......... 10,127 12,889
General and administrative
expenses ............................ 636 794
----------- -----------
Total ............................... 10,763 13,683
----------- -----------
GRANT INCOME .............................. 23 89
----------- -----------
OPERATING INCOME .......................... 301 764
INTEREST EXPENSE .......................... (66) (89)
----------- -----------
INCOME BEFORE INCOME TAXES ............... 235 675
PROVISION FOR INCOME TAXES ............... 10 154
----------- -----------
NET INCOME ................................ $ 225 $ 521
=========== ===========
BASIC EARNINGS PER SHARE (Notes 4 and 5)
based on weighted average number of
shares outstanding .................. $ 0.18 $ 0.41
=========== ===========
Shares used in computing basic
earnings per share .................. 1,270,746 1,266,402
=========== ===========
DILUTED EARNINGS PER SHARE (Notes 4 and 5)
based on weighted average number of
shares outstanding and dilutive stock
options ............................. $ 0.17 $ 0.40
=========== ===========
Shares used in computing diluted
earnings per share .................. 1,292,157 1,303,970
=========== ===========
DIVIDENDS DECLARED PER SHARE .............. $ 0.15 $ 0.15
=========== ===========
See Notes to Consolidated Financial Statements.
-6-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 31, 2005 AND JANUARY 1, 2005
(in thousands)
(unaudited)
DECEMBER 31, JANUARY 1,
2005 2005
-------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ................... $ (421) $ 918
------- -------
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization .. 705 607
Non-cash reduction in deferred
revenue ........................ (5) (4)
Non-cash interest expense ...... 5 4
(Increase) decrease in-
Receivables .............. (1,870) (2,618)
Inventories .............. (1,758) (1,800)
Prepaid expenses ......... (394) (389)
Increase (decrease) in-
Accounts payable ......... 1,117 546
Accrued compensation ..... (311) (416)
Accrued income taxes ..... (138) (54)
Other liabilities ....... (36) 74
------- ------
Total adjustments ................... (2,685) (4,050)
-------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES ................ (3,106) (3,132)
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment .... (315) (939)
------- ------
CASH USED BY INVESTING ACTIVITIES ........ (315) (939)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings . 3,680 3,955
Cash dividends paid ................. (191) (188)
Stock options exercised ............. -- 303
------- -------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES ................ 3,489 4,070
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ......................... 68 (1)
CASH AND CASH EQUIVALENTS
AT THE BEGINNING OF THE PERIOD ...... 34 58
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 102 $ 57
======= =======
(continued on next page)
-7-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 31, 2005 AND JANUARY 1, 2005
(in thousands)
(unaudited)
DECEMBER 31, JANUARY 1,
2005 2005
-------------------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest $ 104 $ 137
Income taxes $ 120 $ 265
===== =====
See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL SIX MONTHS ENDED
DECEMBER 31, 2005
(in thousands except number of shares and per share)
(unaudited)
Common Stock Additional
Par Paid-In Retained
Shares Value Capital Earnings
--------------------------------------------
BALANCE AT JULY 2, 2005 1,270,746 $ 1,271 $ 1,319 $ 10,646
Net loss for the fiscal six
months ended December 31, 2005 (421)
Cash dividend ($.30 per share) (381)
--------------------------------------------
BALANCE AT DECEMBER 31, 2005 1,270,746 $ 1,271 $ 1,319 $ 9,844
============================================
Accumulated
Other
Comprehensive
Loss
-------------
ADDITIONAL PENSION LIABILITY,
NET OF TAX, BALANCE
AT JULY 2, 2005 $ (1,476)
Change for the fiscal six
months ended December 31, 2005 -
--------
BALANCE AT DECEMBER 31, 2005 $ (1,476)
========
See Notes to Consolidated Financial Statements.
-9-
- -10-
WELLCO ENTERPRISES, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
FOR THE FISCAL SIX MONTHS ENDED DECEMBER 31, 2005
-------------------------------------------------
1. BUSINESS:
Substantially all of the Company's operating activity is from the sale of
military and other rugged footwear, the sale of specialized machinery and
materials for the manufacture of this type of footwear and the rendering
of technical assistance and other services to licensees for the
manufacture of this type of footwear. The majority of revenues were from
sales to the U.S. government, primarily the Defense Supply Center
Philadelphia (DSCP), under contracts for the supply of boots used by the
United States Armed Forces. The loss of this customer would have a
material adverse effect on the Company.
Bidding on DSCP boot solicitations is open to any qualified U. S.
manufacturer. Bidding on contracts is very competitive. U. S. footwear
manufacturers have been adversely affected by sales of footwear
made in low labor cost countries. This has significantly affected the
competition for contracts to supply boots to U. S. Armed Forces, which
by law must be made in the United States.
Most boot contracts are for multi-year periods. Therefore, a bidder not
receiving an award from a significant solicitation could be adversely
affected for several years. In addition, current boot contracts contain
options for additional pairs that are exercisable at the government's
discretion. The Company cannot predict with certainty its success in
receiving a contract from any solicitation.
2. LINE OF CREDIT:
The Company maintains a $7,500,000 bank line of credit, which was renewed
on December 31, 2005. The Company's line of credit will expire on December
31, 2006 and can be renewed annually at the bank's discretion. This line
of credit is secured by a blanket lien on all machinery and equipment and
all accounts receivable and inventory. At December 31, 2005, borrowings on
this line of credit were $5,400,000 with $2,100,000 available in
additional borrowings. The bank credit agreement contains, among other
provisions, defined levels of net worth and current ratio requirements.
The Company was in compliance with the loan covenants as of December 31,
2005.
3. EARNINGS (LOSS) PER SHARE:
The Company computes its basic and diluted earnings (loss) per share
amounts in accordance with Statement of Financial Accounting Standards No.
128 (SFAS 128), "Earnings per Share." Basic earnings (loss) per
share is computed by dividing net earnings (loss) by the weighted average
number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net earnings (loss) 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.
-10-
For the Six Months Ended 12/31/05
---------------------------------
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------------------------------------
Basic EPS Available to
Shareholders $ (421,000) 1,270,746 $ (0.33)
-----------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements
(Note: N/A - Anti-dilutive) -
-----------------------------------------------------------------------
Diluted EPS Available to
Shareholders $ (421,000) 1,270,746 $ (0.33)
-----------------------------------------------------------------------
For the Six Months Ended 1/01/05
--------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------
Basic EPS Available to
Shareholders $ 918,000 1,257,092 $ 0.73
-----------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 55,796
-----------------------------------------------------------------------
Diluted EPS Available to
Shareholders $ 918,000 1,312,888 $ 0.70
-----------------------------------------------------------------------
For the Three Months Ended 12/31/05
-----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to
Shareholders $ 225,000 1,270,746 $ 0.18
-----------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 21,411
-----------------------------------------------------------------------
Diluted EPS Available to
Shareholders $ 225,000 1,292,157 $ 0.17
-----------------------------------------------------------------------
For the Three Months Ended 1/01/05
----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------
Basic EPS Available to
Shareholders $ 521,000 1,266,402 $ 0.41
-----------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 37,568
-----------------------------------------------------------------------
Diluted EPS Available to
Shareholders $ 521,000 1,303,970 $ 0.40
-----------------------------------------------------------------------
-11-
4. STOCK-BASED COMPENSATION:
The Company uses Accounting Principles Board Opinion No. 25 (APB 25) to
account for stock options granted to employees. Under APB 25, no
compensation cost is reflected in net income for stock option awards as
all options granted had an exercise price equal to or in excess of the
market value of the underlying common stock on the date of grant. Under
SFAS No. 123 and No. 148, a company that uses APB 25 to account for stock
options must disclose the effect on reported net income of using a fair
value based method of accounting for stock-based employee compensation.
The Company's stock options were all vested by July 2, 2005, the end of
the 2005 fiscal year. Thus, there is no compensation expense for stock
options for fiscal year 2006. The following table summarizes the effect on
net income and earnings per share for the interim periods in the 2005
fiscal year had the accounting for employee stock options been based on
the fair value method.
For the Six Months Ended
January 1,
2005
--------------------------------------------------------
Net income:
--------------------------------------------------------
As reported $918,000
--------------------------------------------------------
Compensation expense, net of tax 12,000
--------------------------------------------------------
Pro forma $906,000
--------------------------------------------------------
--------------------------------------------------------
Basic earnings per share:
--------------------------------------------------------
As reported $0.73
--------------------------------------------------------
Compensation expense, net of tax 0.01
--------------------------------------------------------
Pro forma $0.72
--------------------------------------------------------
--------------------------------------------------------
Diluted earnings per share:
--------------------------------------------------------
As reported $0.70
--------------------------------------------------------
Compensation expense, net of tax 0.01
--------------------------------------------------------
Pro forma $0.69
--------------------------------------------------------
-12-
For the Three Months Ended
January 1,
2005
--------------------------------------------------------
Net income:
--------------------------------------------------------
As reported $ 521,000
--------------------------------------------------------
Compensation expense, net of tax 6,000
--------------------------------------------------------
Pro forma $ 515,000
--------------------------------------------------------
--------------------------------------------------------
Basic earnings per share:
--------------------------------------------------------
As reported $0.41
--------------------------------------------------------
Compensation expense, net of tax 0.00
--------------------------------------------------------
Pro forma $0.41
--------------------------------------------------------
--------------------------------------------------------
Diluted earnings per share:
--------------------------------------------------------
As reported $0.40
--------------------------------------------------------
Compensation expense, net of tax 0.00
--------------------------------------------------------
Pro forma $0.40
--------------------------------------------------------
5. PENSION PLANS:
The Company has two non-contributory, defined benefit plans. The
components of pension expense, included in Cost of Sales and Services in
the Consolidated Statements of Operations are as follows:
For the Six Months Ended
December 31, January 1,
2005 2005
-----------------------------------------------------------------
Benefits Earned for Service in the
Current Period $93,000 $73,200
-----------------------------------------------------------------
Interest on the Projected Benefit
Obligation 158,000 174,000
-----------------------------------------------------------------
Expected Return on Plan Assets (162,200) (156,200)
-----------------------------------------------------------------
-13-
December 31, January 1,
2005 2005
Amortization of: Unrecognized Net
Pension Obligation at July 1, 1987;
Cost of Benefit Changes Since That
Date; and Gains and Losses Against
Actuarial Assumptions 47,200 30,400
-----------------------------------------------------------------
Pension Expense $136,000 $121,400
-----------------------------------------------------------------
For the Three Months Ended
December 31, January 1,
2005 2005
-----------------------------------------------------------------
Benefits Earned for Service in
the Current Period $46,500 $36,600
-----------------------------------------------------------------
Interest on the Projected Benefit
Obligation 79,000 87,000
-----------------------------------------------------------------
Expected Return on Plan Assets (81,100) (78,100)
-----------------------------------------------------------------
Amortization of: Unrecognized Net
Pension Obligation at July 1, 1987;
Cost of Benefit Changes
Since That Date; and Gains and
Losses Against Actuarial Assumptions 23,600 15,200
-----------------------------------------------------------------
Pension Expense $68,000 $60,700
-----------------------------------------------------------------
6. 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 the six months
and three months ended December 31, 2005 include $381,000 as revenue. The
Consolidated Statements of Operations for the six months and three months
ended January 1, 2005 include $1,165,000 and $385,000, respectively, as
revenue.
The Company has filed a reimbursement claim for $840,000 for compensation
paid employees and expensed through December 31, 2005. The Company's
policy is to recognize reimbursements as revenue in the period that they
are received.
-14-
7. GRANT MONEY RECEIVED:
The Company received approximately $442,000 ($280,000 in December 2004,
$43,000 in April 2005, $99,000 in September 2005, and $20,000 in December
2005) from the government of Puerto Rico 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
for the three-month period ended December 31, 2005 recognized $23,000 as
grant income. The Consolidated Statements of Operations for the six-month
period ended December 31, 2005 recognized $85,000 as grant income
including $41,000 that related to grant periods prior to fiscal year 2006.
The Consolidated Statements of Operations for the six months and three
months ended January 1, 2005 included $89,000 as a grant income including
$61,000 that related to grant periods prior to fiscal year 2005.
8. GOVERNMENT BOOT CONTRACT REVENUES:
From time to time, the Company records estimates of revenues or costs
associated with certain contract actions before the amount of such actions
are settled with the DSCP. Any differences between these estimates and the
actual amounts agreed to are included in the period of settlement.
9. RECLASSIFICATIONS:
Certain reclassifications have been made in the prior year's financial
statements to conform to classifications used in the current year.
-15-
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
=====================
Critical Accounting Policies:
- ----------------------------
The Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles which require the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the Consolidated Financial Statements, and revenues
and expenses during the periods reported. Actual results could differ from those
estimates. The Company believes the following are the critical accounting
policies which could have the most significant effect on the Company's reported
results and require the most difficult, subjective or complex judgments by
management.
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.
Inventory Valuation:
-------------------
Raw materials and supplies are valued at the lower of first-in,
first-out cost or market. Finished goods and work in process are valued
at the lower of actual cost, determined on a specific identification
basis, or market. The Company estimates which materials may be obsolete
and which products in work in process or finished goods may be sold at
less than cost, and adjusts its inventory value accordingly. Future
periods could include either income or expense items if estimates
change and for differences between the estimated and actual amount
realized from the sale of inventory.
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, the adjustment is not
recorded until the period in which the Company and the government agree
on the amount of adjustment.
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.
-16-
The Company has recorded a valuation allowance equal to a significant part of
its deferred tax assets. The valuation allowance is based on an evaluation of
the uncertainty of future taxable income from certain jurisdictions. An
adjustment could be required if circumstances and events cause the Company to
change these estimates.
Since July 2, 2005, the end of the 2005 fiscal year, there have been no changes
in the nature of the estimates and assumptions related to these critical
accounting policies.
Comparing the Six Months Ended December 31, 2005 and January 1, 2005:
- --------------------------------------------------------------------
OVERVIEW
--------
The most significant events occurring in the six months ended December 31,
2005 (current period) compared to the six months ended January 1, 2005 (prior
period) are:
1. 33% decrease in total pairs of boots sold under contracts with
the U.S. Department of Defense (DOD).
2. In the current period, the Company received from the Government
of Puerto Rico $381,000 under its program which reimburses the
Company for part of the compensation paid to certain employees.
This is $784,000 less than the $1,165,000 received in the prior
period. These payments are recorded as revenues in the period
received.
Comparative results for these two periods is as follows:
------------------------------------------------------------------------------
Current Period
Six Months Ended Prior Period
(Amounts in December 31, Six Months Ended
thousands) 2005 January 1, 2005 Change % of Change
------------------------------------------------------------------------------
Revenues $ 19,359 $ 25,760 $ (6,401) -25%
------------------------------------------------------------------------------
Cost of Sales 18,529 23,057 (4,528) -20%
------------------------------------------------------------------------------
Gross Profit 830 2,703 (1,873) -69%
------------------------------------------------------------------------------
Administrative
Expenses 1,245 1,482 (237) -16%
------------------------------------------------------------------------------
Grant Income 85 89 (4)
------------------------------------------------------------------------------
Operating Income
(Loss) (330) 1,310 (1,640) -125%
------------------------------------------------------------------------------
Interest Expense, Net 109 137 28
------------------------------------------------------------------------------
Income Taxes
(Benefit) (18) 255 (273)
------------------------------------------------------------------------------
Net Income (Loss) $ (421) $ 918 $ (1,339) -146%
------------------------------------------------------------------------------
-17-
For the current period, Wellco had a net loss of $421,000 compared to a net
income of $918,000 in the prior period.
In the current period the Company shipped 211,000 pairs of boots under contract
with the U.S. Department of Defense as compared to 317,000 pairs in the prior
period, a decrease of 106,000 or 33%.
Hot Weather boots represented 96,000 pairs of the total decrease in pairs
shipped. In the prior period, delivery orders issued by the DOD under which the
Company was shipping Hot Weather boots incorporated a "surge" requirement to
meet the need in Iraq. The "surge" requirement was substantially completed in
the prior period.
In addition, a supplier's quality problem reduced the rate of production and
shipments. In early August 2005, the only U.S. supplier of a DOD required
component had a quality problem that was substantially not resolved until late
September. This supplier's quality problem severely limited the supply of this
component material and contributed to the reduction in sales to DOD. In the July
through September, 2005 period, the Company received new DOD orders totaling
187,000 pairs of boots. However, the component quality problem prevented the
Company from producing and selling a significant quantity of boots under these
new orders in the current period. More information about this is in the below
discussion of Cost of Sales and Services.
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 and expanded work force under which the Company is
reimbursed for part of the compensation paid to certain employees. During the
current period, the Company received $381,000 of reimbursement under this
program, which is included in revenues. In the prior period, the Company
received $1,165,000. The Company's policy is to recognize the reimbursements as
a revenue in the period that it is received, and not when the related
compensation is paid.
Cost of Sales and Services in the current year decreased by only $4,528,000,
which resulted in a decrease in gross profit of $1,873,000. After a long period
of stable raw material prices, many of the prices of raw materials used in our
boots have been increasing during the current period and this has lowered profit
margins on the DOD contracts.
As stated above, in early August 2005, the only U.S. supplier of a DOD required
component had a significant quality problem. Fortunately, the Company's quality
system found this problem when it first occurred. In order to assure that
defective product did not get into boots, the Company had to perform additional
quality checks and time consuming repairs. The rate of boot production was
reduced due to the limited supply of this component. In the July through
September, 2005 period, the Company received new DOD orders totaling 187,000
pairs of boots. However, the component quality problem prevented the Company
from producing a significant quantity of boots under these new orders in the
current period. After this supplier solved his quality problem, the rate of
production continued to be impaired as it took that supplier several weeks to
reestablish full production.
The supplier agreed to reimburse certain excess manufacturing costs and the
current period costs have been reduced by the amount invoiced for these excess
costs. However, some of the excess costs could not be recouped from the
supplier.
-18-
Over the past two years, because of surge and a new DOD contract, the Company
has more than doubled its production capacity. Although surge ended, the Company
had information indicating that consumption of military boots was more than what
DOD was ordering. Therefore, the Company decided to maintain, at least
temporarily, this increased production capacity. If production capacity was
sharply reduced and DOD orders increased significantly, increasing production
capacity would be time consuming and expensive, and would increase the risk that
DOD orders would not be shipped by the required due dates.
The expectation of increased orders materialized. From August through October
2005, the Company received DOD delivery orders totaling 280,000 pairs of boots,
with delivery due from November 2005 through June 2006. Of this total, 155,000
pairs were due in December 2005 through February 2006. In addition, DOD's
October 2005 projection of future orders under Wellco contracts showed that
significant Temperate Weather boot orders was expected to be issued in January
and February (141,000 pairs) with delivery starting in May 2006. Therefore,
during the current period the Company maintained its production capacity by
working fewer days per week and by short-term employee layoff.
Consequently, the reduced production and shipping rate while the supplier
corrected his quality problem and the increase in DOD boot orders justified
maintaining capacity, although fixed and semi-variable manufacturing and
administrative costs were not fully recovered.
Recently, the Company learned that the DOD projection of future orders was
significantly wrong. See the Forward Looking section.
Many of the fabrics, rubber and polyurethane materials used in the manufacture
of boots contain petrochemicals. The Katrina and Rita hurricanes damaged
petrochemical processing facilities, and prices of many raw materials have
recently increased. The Company's DOD contracts are fixed price.
During the current period, the $237,000 decrease in general and administrative
expenses was primarily caused by a reduction in the number of administrative
employees and a reduction in profit-based bonuses.
The amount of grant income recognized in the current period under the Puerto
Rico Special Incentives Contract for the six-month period ended December 31,
2005 includes $85,000 as grant income including $41,000 that related to grant
periods prior to fiscal year 2006. The Consolidated Statements of Operations for
the six months ended January 1, 2005 included $89,000 of which $61,000 related
to grant periods prior to fiscal year 2005.
Interest expense decreased $28,000 because of decreased borrowings under a bank
line of credit.
The rate of tax benefit for income taxes for the current period was 4% compared
to a 22% rate of tax for the prior period. This benefit rate is less than the U.
S. federal tax rate of 34% because the majority of the loss is from operations
in Puerto Rico, which is substantially exempt from U. S. income tax.
-19-
Comparing the Three Months Ended December 31, 2005 and January 1, 2005:
- ----------------------------------------------------------------------
OVERVIEW
--------
The most significant event occurring in the three months ended December 31, 2005
(current period) compared to the three months ended January 1, 2005 (prior
period) was 29% decrease in total pairs of boots sold under contracts with the
U.S. Department of Defense (DOD).
Comparative results for these two periods is as follows:
- ------------------------------------------------------------------------------
Current Period
Three Months Ended Prior Period
(Amounts in December 31, Three Months Ended
thousands) 2005 January 1, 2005 Change % of Change
- --------------------------------------------------------------------------------
Revenues $11,041 $14,358 (3317) -23%
- --------------------------------------------------------------------------------
Cost of Sales 10,127 12,889 (2762) -21%
- --------------------------------------------------------------------------------
Gross Income 914 1469 (555) -38%
- --------------------------------------------------------------------------------
Administrative
Expenses 636 794 (158) -20%
- --------------------------------------------------------------------------------
Grant Income 23 89 (66)
- --------------------------------------------------------------------------------
Operating Income 301 764 (463) -61%
- --------------------------------------------------------------------------------
Interest Expense,
Net 66 89 (23)
- --------------------------------------------------------------------------------
Income Taxes 10 154 (144)
- --------------------------------------------------------------------------------
Net Income $225 521 (296) -57%
- --------------------------------------------------------------------------------
For the three months ended December 31, 2005 (current period), Wellco had a net
income of $225,000 compared to net income of $521,000 in the prior year three
month period ended January 1, 2005(prior period).
Compared to the prior period, total revenues in the current period decreased by
$3,317,000. During the current quarter, the Company shipped 29% fewer pairs
(49,000) of boots under its DOD contracts.
Hot Weather boots, previously under DOD surge, represented 23,000 pairs of the
total decrease in pairs shipped. Temperate Weather boots were 36,000 pairs of
the total decrease. On August 17, 2005 and on October 17, 2005, the Company
received DOD orders for the Temperate Weather boot totaling 103,000 pairs with
required delivery dates in December, 2005 through March 2006. However, the
supplier component quality problem mentioned above continued to limit the
Company's rate of production and shipment under these new orders during the
current period. After finding and correcting the problem, it took this supplier
many weeks to reestablish full production.
-20-
Reimbursement from the Puerto Rican government program reimbursing employers for
compensation paid to certain employees was $381,000 in the current period
compared to $385,000 in the prior period.
Cost of Sales and Services in the current period decreased by only $2,762,000.
Fixed and semi-variable costs did not decrease proportionately to this decrease
in production and revenues, which was caused by a supplier quality problem and
the end of surge on Hot Weather boots.
The supplier with the quality problem has issued the Company a credit for
reimbursement of certain excess manufacturing costs incurred in the current
period, and current period costs have been reduced by the amount of this credit
memo. However, some of the excess costs could not be recouped from the supplier.
The Company's DOD delivery orders for the two months of January and February
2006 required the shipment of a total of 123,000 pairs of boots. The reduction
in production and shipments caused by the supplier quality problem meant that
the Company was delayed in the manufacture of these boots. In order to assure
that it met these deliveries, and in order to assure that it had the capacity to
meet delivery on the above mentioned DOD October 2005 projection of future
orders, the Company continued to maintain its production capacity. By
maintaining production capacity, the Company was able to meet all the January
and February 2006 deliveries.
During the current period, general and administrative expenses decreased by
$158,000, caused primarily by a reduction in the number of administrative
employees and a reduction in profit-based bonuses.
The amount of grant income recognized in the current period under the Puerto
Rico Special Incentives Contract is $23,000. The prior year contained $89,000 in
grant income, of which $75,000 related to prior grant periods. 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 income tax rate (the percent of Provision for Income Taxes to the Income
Before Income Taxes) for the quarter ended December 31, 2005 was 4% compared to
a 23% rate of tax for the quarter ended January 1, 2005.
Forward Looking Information:
- ---------------------------
Last year, the DOD started the practice of providing contractors with
projections of future orders under contracts. These projections allow
contractors to plan production, raw materials ordering and employee staffing.
The October 2005 DOD projection indicated a strong rate of orders throughout the
balance of the Company's 2006 fiscal year. As recently as December 2005 DOD
personnel informed the Company that a large order with a projected issuance date
of January 2006 was on schedule.
However, in early February 2006, DOD extended the delivery dates for two boot
orders under its contracts. The original delivery dates for boot shipments in
April through June 2006 have been extended to May through August 2006. The
Company was informed the Army's current usage of boots is lower than the rate
projected when the orders were issued. This is only an extension of the shipping
date. No orders or contracts have been cancelled.
-21-
Subsequently, the DOD provided the Company with additional specific information
about the significant reduction in year-to-year comparative boot usage.
The DOD has not provided the Company with a new projection of future orders. DOD
personnel have stated that they do not know why boot usage is less than
projected. In light of this recent information, maintaining the current level of
boot manufacturing capacity is no longer justified, and the Company is currently
reducing its manufacturing employment and work shifts.
Below is a summary of the Company's two current major boot contracts with the
DOD. The Company's DOD 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 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 are 41,000 and the maximum is 256,000. Pairs
ordered to date under the second option year are 105,000. The second option year
is for the period October 2005 through September 2006.
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 221,000. This contract has two more option
years outstanding. The exercise of any contract option is the unilateral
decision of the Defense Department.
The DOD recently issued a synopsis of a new solicitation for the Hot Weather
boot. The Company's current Hot Weather boot contract expires at the end of
September 2006. The synopsis states that of the five contracts expected to be
awarded from the solicitation, three will be restricted to contractors who meet
the criteria for being a small business, and two contracts will be awarded
without the small business restriction. The Company is not a small business. The
Company estimates that there could be as many as five companies, beside itself,
which will be competing on the two non-small business contracts. The Hot Weather
boot contract is one of the two major DOD boot contracts the Company currently
has, and the effect of not being awarded a contract from the new solicitation on
the Company's results of operations would be adverse. As with any DOD boot
solicitation, the Company cannot predict its being awarded or not being awarded
a contract.
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
December 31, 2005, $840,000 has been filed for, but has not been received or
recorded as revenues, 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 remaining balance due of
$840,000. In the past two fiscal years, the Company has received and recorded as
revenues a total of $2,088,000 under this program.
-22-
In December 2005, the Company was one of two contract awardees for the
development of the US Army Modular Boot System. This award was the result of the
Company's response to the Modular Boot System solicitation that required
submission of data and product demonstration models illustrating the Company's
concept of the modular boot system.
This contract provides the development of a Modular Boot System 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. The
contract's goal is to develop a functional boot system to provide comfort in a
temperature range of -60(0)F to 120(0)F. If successful, the new Modular Boot
System would replace many, if not all, of the current boot styles.
The Department of Defense has placed its first order under this contract for 580
pairs of the Modular Boot System. The estimated contract price for this first
order is $ 93,960 with a delivery date in March 2006. This first order of boots
will be evaluated, and if successful, additional production of the Modular Boot
System will be ordered for expanded testing. If the Wellco Modular Boot System
is successful through all phases of development and testing, the contract
provides for Wellco to manufacture 160,000 pairs of this boot for issuance to
military personnel.
As with any contract, there is no assurance that Wellco will be successful in
development of the Army's Modular Boot System.
In December 2005, the Company received a contract for approximately $930,000 to
supply machinery and assistance for the upgrade of boot manufacturing machinery
to a factory in a foreign country. The deliveries will be during the remaining
six months of the 2006 fiscal year and until the end of calendar year 2007.
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.
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 Securities and Exchange Commission is
presently evaluating the effect of Section 404 on smaller public companies, and
changes have been proposed that will reduce the cost of meeting all the
requirements of Section 404. Unless this evaluation results in a significant
reduction in requirements for small public companies, the Company will incur
significant costs in complying with Section 404.
The Company relies heavily on boot contracts from the DOD for most of its
operations. The business of providing boots to the U. S. Defense Department is
very competitive. With more than 98% of U. S. commercial footwear sales being of
foreign manufacture, the manufacture of boots for DOD, which must all be done in
the U. S., is one way of using domestic capacity.
-23-
LIQUIDITY AND CAPITAL RESOURCES
===============================
Wellco uses cash from operations and a bank line of credit to supply most of its
liquidity needs.
The following table summarizes, at the end of the most recent fiscal quarter and
the last fiscal year, the amounts of cash and unused line of credit:
(in thousands)
December 31, 2005 July 2, 2005
---------------------------------------------------------------------
Cash and Cash Equivalents $102 $34
---------------------------------------------------------------------
Unused Line of Credit 2,100 5,780
---------------------------------------------------------------------
Total $2,202 $5,814
---------------------------------------------------------------------
The following table summarizes the cash flow activities for the six-month period
ended December 31, 2005:
Cash provided by (used in): (in thousands)
------------------------------------------------------
Operating activities ($3,106)
------------------------------------------------------
Investing activities (315)
------------------------------------------------------
Financing activities 3,489
------------------------------------------------------
Net change in cash and cash equivalents $68
------------------------------------------------------
Operating Activities: In the six months ended December 31, 2005, cash used by
operations was $3,106,000. Depreciation of $705,000 and a $1,117,000 increase in
accounts payable were the main operating sources of cash. The main uses of
operating cash were the net loss of $421,000, decreases of $311,000 in accrued
compensation, $138,000 in accrued taxes and an increase of $1,870,000 in
accounts receivable, $1,748,000 in inventories, and $394,000 in prepaid
expenses.
Investing Activities: In the six months ended December 31, 2005, purchases of
machinery and other equipment was $315,000.
Financing Activities: In the six months ended December 31, 2005, the Company's
net cash from financing activities totaled $3,489,000. Cash was provided through
additional borrowings of $3,680,000 from the line of credit. $191,000 was used
to pay quarterly dividend payments to stockholders.
The following table shows aggregated information about contractual obligations
as of December 31, 2005:
-24-
Payments Due by Period
Less Than 1
Total Year 1-3 Years 4-5 Years After 5 Years
- --------------------------------------------------------------------------------
Notes Payable $300,000 $300,000
- --------------------------------------------------------------------------------
Building Lease 971,000 $266,000 $560,000 $145,000 -
- --------------------------------------------------------------------------------
Total $1,271,000 $266,000 $560,000 $145,000 $300,000
- --------------------------------------------------------------------------------
In addition, during the six month period ended December 31, 2005, the Company
paid $104,000 in interest expense, $120,000 in income tax payments and $183,000
in contributions to its pension plans.
The Company maintains a $7,500,000 bank line of credit. Borrowings under the
line of credit at December 31, 2005 were $5,400,000.
The bank line of credit will expire and be subject to renewal on December 31,
2006. Historically, the bank has always renewed the line of credit. Under
conditions of substantial reduction in operations, with little basis for
projecting a reversal of such reduction, it is possible that the bank would
cancel the line of credit. Events that would cause a substantial reduction in
operations include cancellation of existing government contracts, not receiving
future contracts and receiving government contracts that do not provide enough
revenues to provide adequate liquidity. The Company expects continued need of
this line of credit after December 31, 2006, and would be adversely affected if
the line is not renewed.
Loan agreements related to the line of credit contain covenants requiring the
Company to maintain at the end of each fiscal quarter a certain level of working
capital and tangible net worth. The Company met these requirements at December
31, 2005.
The Promissory Note, Loan Agreement and Security Agreement documenting the bank
line of credit provide that:
o All amounts borrowed shall become due and immediately payable upon
demand of the bank.
o The bank's obligation to make advances under the note shall terminate:
if the bank makes a demand for payment; if a default under any loan
document occurs; or, in any event, on December 31, 2006, unless the
Note is extended by the bank under terms satisfactory to the bank.
o All amounts borrowed shall become immediately payable if Wellco
commences or has commenced against it a bankruptcy or insolvency
proceeding, or in the event of default.
Events of default include:
o Having a current ratio less than that prescribed by the bank.
o Having tangible net worth less than that prescribed by the bank.
o Any failure to meet requirements under the Note, Loan Agreement or
Security Agreement.
Other than the above, Wellco does not know of any other demands, commitments,
uncertainties, or trends that will result in or that are reasonablely likely to
result in its liquidity increasing or decreasing in any material way.
-25-
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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. 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 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
are filed or submitted under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
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 December 31, 2000 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
-26-
There have been no changes in internal controls during the last fiscal quarter
that materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
-27-
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings. N/A
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. The 2005 Annual Stockholders Meeting of Wellco Enterprises,
Inc. was on November 15, 2005. The only matter voted
on at that meeting was the election of directors. The results
of voting were:
Directors were elected as follows:
Nominee for Director Shares Voted For
Claude Abernethy, Jr. 1,228,024
William M. Cousins, Jr. 1,222,224
Katherine J. Emerson 1,228,924
George Henson 1,228,924
Rolf Kaufman 1,223,928
John D. Lovelace 1,220,128
Sarah E. Lovelace 1,223,928
David Lutz 1,224,828
Fred K. Webb, Jr. 1,224,828
Item 5. Other Information.
A) N/A
B) N/A
Item 6. Exhibits.
(31) Certifications of the Chief Executive Officer and Chief
Financial Officer under Section 302 of the Sarbanes-
Oxley Act of 2002, filed herewith.
(32) Certifications of the Chief Executive Officer and
Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
-28-
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Wellco Enterprises, Inc., Registrant
\s\ \s\
- --------------------------------------------------------------------------------
David Lutz, Chief Executive Officer Tammy Francis, Controller and Chief
and President (Principal Executive Financial Officer
Officer)
- --------------------------------------------------------------------------------
February 14, 2006
-29-
Exhibit 31
----------
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE SIX MONTHS ENDED DECEMBER 31, 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 report on Form 10-Q of Wellco Enterprises, Inc.
(the registrant);
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the registrant's
current 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
-30-
(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: February 14, 2006
/s/ David Lutz
By: David Lutz, Chief Executive Officer and President
(Chief Executive Officer)
-31-
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE SIX MONTHS ENDED DECEMBER 31, 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 report on Form 10-Q of Wellco Enterprises,
Inc.(the registrant);
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15
(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal controls over financial reporting that occurred
during the registrant's current 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
-32-
(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: February 14, 2006
/s/ Tammy Francis
By: Tammy Francis, Controller and Treasurer
(Chief Financial Officer)
-33-
Exhibit 32
----------
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE SIX MONTHS ENDED DECEMBER 31, 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-Q for the six months ended
December 31, 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 the
periodic report containing the financial statements fully complies with
the requirements of Section 13(a) or 15(d) of the Exchange Act, and 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: February 14, 2006
/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.
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WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE SIX MONTHS ENDED DECEMBER 31, 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-Q for the six months ended
December 31, 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 the
periodic report containing the financial statements fully complies with
the requirements of Section 13(a) or 15(d) of the Exchange Act, and 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: February 14, 2006
/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.
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