FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED: APRIL 1, 2006
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 a shell company (as defined in
Rule 12b-2 of the Act). Yes __No X .
------ -----
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule
12b-2 of the Act). ___Large accelerated filer __Accelerated filer
_X_Non-accelerated filer
1,270,746 common shares (all voting) were outstanding as of May 16, 2006.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WELLCO ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR THE FISCAL QUARTER ENDED APRIL 1, 2006
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
APRIL 1, 2006 AND JULY 2, 2005
(in thousands)
ASSETS
(unaudited) *
APRIL 1, JULY 2,
2006 2005
-------------------------
CURRENT ASSETS:
Cash and cash equivalents .................. $ 54 $ 34
Receivables, net ........................... 2,915 3,205
Inventories-
Finished goods ......................... 4,614 4,853
Work in process ........................ 2,274 2,880
Raw materials .......................... 5,356 3,924
-------- --------
Total .................................. 12,244 11,657
Deferred taxes ............................ 266 266
Prepaid expenses ........................... 612 304
-------- --------
Total ...................................... 16,091 15,466
-------- --------
MACHINERY LEASED TO LICENSEES,
Net of accumulated depreciation ............ 7 11
PROPERTY, PLANT AND EQUIPMENT:
Land ....................................... 107 107
Buildings .................................. 1,439 1,439
Machinery and equipment .................... 11,225 10,846
Office equipment ........................... 873 851
Automobiles ................................ 235 208
Leasehold improvements ..................... 817 809
-------- --------
Total cost ................................. 14,696 14,260
Less accumulated depreciation and
amortization ............................ (9,998) (8,943)
-------- --------
Net Property Plant and Equipment ........... 4,698 5,317
-------- --------
INTANGIBLE ASSETS:
Intangible pension asset ................... 10 10
-------- --------
TOTAL ............................................ $ 20,806 $ 20,804
======== ========
* Derived from audited financial statements
(continued on next page)
3
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
APRIL 1, 2006 AND JULY 2, 2005
(in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited) *
APRIL 1, JULY 2,
2006 2005
-------------------------
CURRENT LIABILITIES:
Short-term borrowing from bank ............... $ 3,650 $ 1,720
Accounts payable ............................. 1,951 2,912
Accrued compensation ......................... 790 1,016
Accrued income taxes ......................... 551 649
Other liabilities ............................ 499 285
-------- --------
Total ........................................ 7,441 6,582
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ........................... 1,485 1,485
Notes payable ................................ 238 231
Other accrued liabilities .................... 415 425
Deferred taxes .............................. 128 128
Deferred grant income ........................ 108 124
Deferred revenues ............................ 62 69
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value ................ 1,271 1,271
Additional paid-in capital ................... 1,319 1,319
Retained earnings ............................ 9,815 10,646
Accumulated other comprehensive loss ......... (1,476) (1,476)
-------- --------
Total ........................................ 10,929 11,760
-------- --------
TOTAL .............................................. $ 20,806 $ 20,804
======== ========
See Notes to Consolidated Financial Statements.
* Derived from audited financial statements
4
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL NINE MONTHS ENDED
APRIL 1, 2006 AND APRIL 2, 2005
(in thousands except per share and number of shares)
(unaudited)
APRIL 1, APRIL 2,
2006 2005
-----------------------------
REVENUES ..................................... $ 32,754 $ 40,406
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............. 30,918 36,788
General and administrative expenses .... 1,908 2,084
----------- -----------
Total .................................. 32,826 38,872
----------- -----------
GRANT INCOME ................................. 108 103
----------- -----------
OPERATING INCOME ............................. 36 1,637
NET INTEREST EXPENSE ......................... (207) (203)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ........... (171) 1,434
PROVISION FOR INCOME TAXES .................. 88 307
----------- -----------
NET INCOME (LOSS) ............................ $ (259) $ 1,127
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE
Based on weighted average number of
shares outstanding ..................... $ (0.20) $ 0.89
=========== ===========
Shares used in computing basic
earnings per share ..................... 1,270,746 1,261,660
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE
Based on weighted average number of
shares outstanding and dilutive
stock options .......................... $ (0.20) $ 0.87
=========== ===========
Shares used in computing diluted
earnings per share ..................... 1,270,746 1,297,748
=========== ===========
DIVIDENDS DECLARED PER SHARE ................. $ 0.45 $ 0.45
=========== ===========
See Notes to Consolidated Financial Statements.
5
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
APRIL 1, 2006 AND APRIL 2, 2005
(in thousands except per share and number of shares)
(unaudited)
APRIL 1, APRIL 2,
2006 2005
----------------------------
REVENUES ....................................... $ 13,395 $ 14,646
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............... 12,389 13,731
General and administrative expenses ...... 663 602
----------- -----------
Total .................................... 13,052 14,333
----------- -----------
GRANT INCOME ................................... 23 14
----------- -----------
OPERATING INCOME ............................... 366 327
NET INTEREST EXPENSE ........................... (98) (66)
----------- -----------
INCOME BEFORE INCOME TAXES .................... 268 261
PROVISION FOR INCOME TAXES .................... 106 52
----------- -----------
NET INCOME ..................................... $ 162 $ 209
=========== ===========
BASIC EARNINGS PER SHARE (Notes 4 and 5)
based on weighted average number of
shares outstanding ....................... $ 0.13 $ 0.16
=========== ===========
Shares used in computing basic
earnings per share ....................... 1,270,746 1,270,746
=========== ===========
DILUTED EARNINGS PER SHARE (Notes 4 and 5)
based on weighted average number of
shares outstanding and dilutive stock
options .................................. $ 0.13 $ 0.16
=========== ===========
Shares used in computing diluted
earnings per share ....................... 1,286,035 1,305,000
=========== ===========
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 NINE MONTHS ENDED
APRIL 1, 2006 AND APRIL 2, 2005
(in thousands)
(unaudited)
APRIL 1, APRIL 2,
2006 2005
---------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ................................. $ (259) $ 1,127
------- -------
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation and amortization ................ 1,059 913
Non-cash reduction in
deferred revenue ............................. (7) (6)
Non-cash interest expense .................... 7 6
(Increase) decrease in-
Receivables ............................ 290 1,275
Inventories ............................ (587) (111)
Prepaid expenses ....................... (308) (459)
Increase (decrease) in-
Accounts payable ....................... (961) (688)
Accrued compensation ................... (226) (236)
Accrued income taxes ................... (98) (402)
Other liabilities ..................... 188 174
------- -------
Total adjustments ................................. (644) 466
------- -------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES .............................. (902) 1,593
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment .................. (436) (1,109)
------- -------
CASH USED BY INVESTING ACTIVITIES ...................... (436) (1,109)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances (repayments) of
line of credit borrowings ......................... 1,930 (255)
Cash dividends paid ............................... (572) (569)
Stock options exercised ........................... -- 303
------- -------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES .............................. 1,358 (521)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ... 20 (37)
CASH AND CASH EQUIVALENTS
AT THE BEGINNING OF THE PERIOD .................... 34 58
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............. $ 54 $ 21
======= =======
(continued on next page)
7
(unaudited)
APRIL 1, APRIL 2,
2006 2005
---------------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest $ 201 $ 204
Income taxes $ 120 $ 770
===== =====
See Notes to Consolidated Financial Statements.
8
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL NINE MONTHS ENDED
APRIL 1, 2006
(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 nine
months ended April 1, 2006 (259)
Cash dividend ($.45 per share) (572)
-----------------------------------------------
BALANCE AT APRIL 1, 2006 1,270,746 $ 1,271 $ 1,319 $ 9,815
-----------------------------------------------
Accumulated
Other
Comprehensive
Loss
----------------
ADDITIONAL PENSION LIABILITY,
NET OF TAX, BALANCE
AT JULY 2, 2005 $ (1,476)
Change for the fiscal nine
months ended April 1, 2006 -
----------------
BALANCE AT APRIL 1, 2006 $ (1,476)
================
See Notes to Consolidated Financial Statements.
9
WELLCO ENTERPRISES, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
FOR THE FISCAL NINE MONTHS ENDED APRIL 1, 2006
----------------------------------------------
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 April 1, 2006, borrowings on this
line of credit were $3,650,000 with $3,850,000 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 April 1, 2006.
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 Nine Months Ended 4/1/06
--------------------------------
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------------------------------------
Basic EPS Available to
Shareholders $ (259,000) 1,270,746 $ (0.20)
------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements -
(Note: N/A - Anti-dilutive)
------------------------------------------------------------------------
Diluted EPS Available to
Shareholders $ (259,000) 1,270,746 $ (0.20)
------------------------------------------------------------------------
For the Nine Months Ended 4/2/05
--------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------------------------------------
Basic EPS Available to
Shareholders $1,127,000 1,261,660 $ 0.89
------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 36,088
------------------------------------------------------------------------
Diluted EPS Available to
Shareholders $1,127,000 1,297,748 $ 0.87
------------------------------------------------------------------------
For the Three Months Ended 4/1/06
---------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------------------------------------
Basic EPS Available to
Shareholders $ 162,000 1,270,746 $ 0.13
------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 21,411
------------------------------------------------------------------------
Diluted EPS Available to
Shareholders $ 162,000 1,292,157 $ 0.13
------------------------------------------------------------------------
For the Three Months Ended 4/2/05
---------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------------------------------------
Basic EPS Available to
Shareholders $ 209,000 1,270,746 $ 0.16
------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 34,254
------------------------------------------------------------------------
Diluted EPS Available to
Shareholders $ 209,000 1,305,000 $ 0.16
------------------------------------------------------------------------
4. STOCK-BASED COMPENSATION:
Effective July 3, 2005, the Company adopted Statement of Financial
Accounting Standards No. 123R (revised 2004), "Share-Based Payment,"
("SFAS No. 123R") which was issued by the FASB in December 2004. SFAS No.
123R revises SFAS No. 123 "Accounting for Stock Based Compensation,"
and supersedes APB No. 25, "Accounting for Stock Issued to
Employees," (APB No. 25) and its related interpretations. SFAS
No.123R requires recognition of the cost of employee services received
in exchange for an award of equity instruments in the financial
statements over the period the employee is required to perform the
services in exchange for the award (presumptively the vesting period).
SFAS No. 123R also requires measurement of the cost of employee services
received in exchange for an award based on the grant-date fair value of
the award. SFAS No. 123R also amends SFAS No. 95 "Statement of Cash
Flows," to require that excess tax benefits be reported as financing cash
inflows, rather than as a reduction of taxes paid, which is included
within operating cash flows.
The Company adopted SFAS No. 123R using the modified prospective
application as permitted under SFAS No. 123R. Accordingly, prior period
amounts have not been restated. Under this application, the Company is
required to record compensation expense for all awards granted after the
date of adoption and for the unvested portion of previously granted awards
that remain outstanding at the date of adoption. As of the date of
adoption, the Company had no unvested previously granted awards and has not
granted any awards after July 2, 2005. There have been no options exercised
during the interim periods ended April 1, 2006. Therefore, the new standard
has had no impact on the consolidated statements of operations and cash
flows, or earnings per share of the Company during the current reporting
periods.
During the three months ended April 1, 2006, 15,000 option shares with a
weighted average exercise price of $5.00 per share expired. As of April 1,
2006, the Company had 96,500 options outstanding and exercisable at a
weighted average exercise price of $ 9.95 per share.
Prior to the adoption of SFAS No. 123R, the Company used the intrinsic
value method as prescribed by APB No. 25 and thus recognized no
compensation expense for options granted with exercise prices equal to the
fair market value of the Company's common stock on the date of grant.
The Company currently has five share-based compensation plans in effect at
April 1, 2006 and information about them is contained in the notes to the
consolidated financial statements filed as part of the Company's 2005
annual report on Form 10-K. This quarterly report should be read in
conjunction with such annual report.
The Company anticipates providing for future exercises from authorized but
unissued shares and not through purchases of its own stock.
The following table summarizes the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to the interim periods in the 2005 fiscal year:
---------------------------------------------------------------------
For the Nine For The Three
Months Ended Months Ended
April 2, 2005 April 2, 2005
---------------------------------------------------------------------
Net income:
---------------------------------------------------------------------
As reported $ 1,127,000 $ 209,000
---------------------------------------------------------------------
Compensation expense, net of tax 18,000 6,000
---------------------------------------------------------------------
Pro forma $ 1,109,000 $ 203,000
---------------------------------------------------------------------
12
---------------------------------------------------------------------
For the Nine For The Three
Months Ended Months Ended
April 2, 2005 April 2, 2005
---------------------------------------------------------------------
Basic earnings per share:
---------------------------------------------------------------------
As reported $ 0.89 $ 0.16
---------------------------------------------------------------------
Compensation expense, net of tax 0.01 0.00
---------------------------------------------------------------------
Pro forma $ 0.88 $ 0.16
---------------------------------------------------------------------
---------------------------------------------------------------------
Diluted earnings per share:
---------------------------------------------------------------------
As reported $ 0.87 $ 0.16
---------------------------------------------------------------------
Compensation expense, net of tax 0.01 0.00
---------------------------------------------------------------------
Pro forma $ 0.86 $ 0.16
---------------------------------------------------------------------
6. 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 Nine Months Ended
--------------------------------------------------------------------
April 1, 2006 April 2, 2005
--------------------------------------------------------------------
Benefits Earned for Service in
the Current Period $139,500 $109,800
--------------------------------------------------------------------
Interest on the Projected
Benefit Obligation 237,000 261,000
--------------------------------------------------------------------
Expected Return on Plan Assets (243,300) (234,300)
--------------------------------------------------------------------
Amortization of: Unrecognized Net
Pension Obligation at July 1,
1987; Cost of Benefit Changes
Since That Date; and Gains and Losses
Against Actuarial Assumptions 70,800 45,600
--------------------------------------------------------------------
Pension Expense $204,000 $182,100
--------------------------------------------------------------------
13
For the Three Months Ended
--------------------------------------------------------------------
April 1, 2006 April 2, 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
--------------------------------------------------------------------
7. 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 nine months
and three months ended April 1, 2006 include $405,000 and $24,000,
respectively, as revenues. The Consolidated Statements of Operations for
the nine months and three months ended April 2, 2005 include $1,165,000
and $0, respectively, as revenues.
The Company has filed a reimbursement claim for $959,000 for compensation
paid employees and expensed through April 1, 2006. The Company's policy is
to recognize reimbursements as revenue in the period that they are
received.
8. 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 April 1, 2006 recognized $23,000 as grant
income. The Consolidated Statements of Operations for the nine-month
period ended April 1, 2006 recognized $108,000 as grant income including
14
$41,000 that related to grant periods prior to fiscal year 2006. The
Consolidated Statements of Operations for the three months ended April 2,
2005 recognized $14,000 as grant income. The Consolidated Statements of
Operations for the nine months ended April 2, 2005 included $103,000 as a
grant income including $61,000 that related to grant periods prior to
fiscal year 2005.
9. 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.
10. 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
16
be adjusted for the difference between actual payments and the
Company's recorded liability based on its assessments and estimates.
The Company has recorded a valuation allowance equal to a significant part of
its deferred tax assets. The valuation allowance is based on an evaluation of
the uncertainty of future taxable income from certain jurisdictions. An
adjustment could be required if circumstances and events cause the Company to
change these estimates.
Since 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 Nine Months Ended April 1, 2006 and April 2, 2005:
- ---------------------------------------------------------------
OVERVIEW
--------
The most significant events occurring in the nine months ended April 1, 2006
(current period) compared to the nine months ended April 2, 2005 (prior
period) are:
1. 21% 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 $405,000 under its program, which reimburses the
Company for part of the compensation paid to certain employees.
This is $760,000 less than the $1,165,000 received in the prior
year. These payments are recorded as revenues in the period
received.
Comparative results for these two periods is as follows:
------------------------------------------------------------------------------
Current Period Prior Period
Nine Months Nine Months
Ended Ended
(Amounts in thousands) April 1, 2006 April 2, 2005 Change % of Change
------------------------------------------------------------------------------
Revenues $32,754 $40,406 $(7,652) -19%
------------------------------------------------------------------------------
Cost of Sales 30,918 36,788 (5,870) -16%
------------------------------------------------------------------------------
Gross Profit 1,836 3,618 (1,782) -49%
------------------------------------------------------------------------------
Administrative Expenses 1,908 2,084 (176) -8%
------------------------------------------------------------------------------
Grant Income 108 103 5 5%
------------------------------------------------------------------------------
Operating Income 36 1,637 (1,601) -98%
------------------------------------------------------------------------------
Interest Expense, Net 207 203 4 2%
------------------------------------------------------------------------------
Income Taxes 88 307 (219) -71%
------------------------------------------------------------------------------
Net Income (Loss) $(259) $1,127 $(1,386) -123%
------------------------------------------------------------------------------
17
For the current period, Wellco had a net loss of $259,000 from revenues of
$32,754,000 compared to a net income of $1,127,000 from revenues of $40,406,000
in the prior period.
In the current period, the Company shipped 377,000 pairs of boots under contract
with the U.S. Department of Defense as compared to 480,000 pairs in the prior
period, a decrease of 103,000 or 21%. In the prior period, delivery orders
issued by the DOD for Hot Weather boots incorporated a "surge" requirement to
meet the need in Iraq. The "surge" requirement was substantially completed in
the prior period.
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 $405,000 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
revenue in the period in which it is received, and not when the related
compensation is paid.
Gross profit for the nine months ended April 1, 2006 was $1,836,000 or 5.6% of
revenues as compared to gross profit of $3,618,000 or 9.0% for the prior period.
This decrease in gross profit as a percentage of revenues is primarily due to
higher per unit manufacturing costs associated with lower production levels and
the decrease of $760,000 in reimbursement revenues from the Puerto Rican
government mentioned 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. After this supplier solved its 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 $606,000. However, some of the excess
costs could not be recouped from the supplier.
During the current period, the $176,000 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.
For the current period, the Company reflected income tax expense of $88,000 on a
pretax loss of $171,000. This is the result of the U.S. parent and one
subsidiary having consolidated income before taxes and the Puerto Rican
subsidiary having a pretax loss. The Puerto Rican subsidiary's losses are not
available to offset the taxable income for the U.S. jurisdiction companies who
file a consolidated federal income tax return. The composition of the pretax
income or loss between the parent and each of the subsidiaries impacts the
income tax expense or benefit for each interim period. The effective income tax
rate for the prior period was 21% of pretax income.
18
Comparing the Three Months Ended April 1, 2006 and April 2, 2005:
- ----------------------------------------------------------------
OVERVIEW
--------
Comparative results for these two periods is as follows:
-------------------------------------------------------------------------------
Current Period Prior Period
Three Months Three Months
Ended Ended
Amounts in thousands April 1, 2006 April 2, 2005 Change % of Change
-------------------------------------------------------------------------------
Revenues $13,395 $14,646 (1,251) -9%
-------------------------------------------------------------------------------
Cost of Sales 12,389 13,731 (1,342) -10%
-------------------------------------------------------------------------------
Gross Profit 1,006 915 91 10%
-------------------------------------------------------------------------------
Administrative Expenses 663 602 61 -10%
-------------------------------------------------------------------------------
Grant Income 23 14 9 64%
-------------------------------------------------------------------------------
Operating Income 366 327 39 12%
-------------------------------------------------------------------------------
Interest Expense, Net 98 66 32 48%
-------------------------------------------------------------------------------
Income Taxes 106 52 54 104%
-------------------------------------------------------------------------------
Net Income $162 $209 (47) -22%
-------------------------------------------------------------------------------
For the three months ended April 1, 2006 (current period), Wellco had a net
income of $162,000 from revenues of $13,395,00 compared to net income of
$209,000 from revenues of $14,646,000 in the prior year three month period ended
April 2, 2005 (prior period).
Compared to the prior period, total revenues in the current period decreased by
$1,251,000. DOD contract pairs sold during the current period and prior period
were comparatively similar. However, during the current period the Company
shipped more pairs of a lower contract priced boot. Also, during the prior
quarter the Company shipped more commercial pairs of boots due to some large
sales to foreign customers.
Reimbursement from the Puerto Rican government program reimbursing employers for
compensation paid to certain employees was $24,000 in the current period
compared no reimbursement in the prior period.
Gross profit for the three months ended April 1, 2006 was $1,006,000 or 7.5% of
revenues as compared to gross profit of $915,000 or 6.2% for the prior period.
During the current period, general and administrative expenses increased by
$61,000 primarily caused by certain consultant fees experienced during the
change in management.
The amount of grant income recognized in the current period under the Puerto
Rico Special Incentives Contract is $23,000 as compared to $14,000 during the
prior period. 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.
19
For the current period, the Company reflected income tax expense of $106,000 on
pretax income of $268,000. The effective income tax rate for the quarter ended
April 1, 2006 was 40% compared to 20% for the same quarter ended April 2, 2005.
This change in the effective tax rate is the result of the composition of
pre-tax earnings from the Puerto Rican subsidiary. The federal and Puerto Rican
income taxes for the separately taxed subsidiary are low do to current tax
exemptions and available credits. The composition of the pretax income or loss
between the parent and each of the subsidiaries impacts the income tax expense
or benefit for a given interim period.
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.
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 was only an extension of the
shipping date. No orders or contracts were cancelled as a result of these
extensions.
Subsequently, the DOD provided the Company with additional specific information
about the significant reduction in year-to-year comparative boot usage. In light
of this recent information, maintaining the current level of boot manufacturing
capacity was no longer justified, and the Company began reducing its
manufacturing employment and work shifts in the later part of the third fiscal
quarter of 2006.
On April 12, 2006, the Company was awarded a Department of Defense contract to
supply the U.S. Army with Extreme Cold Weather boots. This contract is for a one
year period, with four one year options which are exercisable at the
government's discretion, with revenues estimated to range from a minimum of
$177,930 to a maximum of $1,910,671 per year. The base year of the contract has
been exercised for a maximum amount of $1,697,452.
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
20
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. 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 April
1, 2006, $959,000 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 $959,000.
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 could replace some of the current boot styles.
The Department of Defense placed its first order under this contract for 580
pairs of the Modular Boot System and the Company shipped the boots during the
quarter ended April 1, 2006. This first order of boots is being 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.
Recent feedback from the Natick Contracting Division of the U.S. Army was very
positive on the technology submitted. As with any contract, there is no
assurance that Wellco will be successful in development of the Army's Modular
Boot System.
The Company is actively bidding on solicitations for footwear contracts with the
U.S. military for new products. At the same time, we are very focused on
building our commercial wholesale and retail business.
In December 2005, the Company received a contract for approximately $930,000 to
supply machinery and assistance for the upgrade of boot manufacturing machinery
21
to a factory in a foreign country. The deliveries began during the third quarter
of 2006 fiscal year and will continue 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.
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)
April 1, 2006 July 2, 2005
---------------------------------------------------------------------
Cash and Cash Equivalents $54 $34
---------------------------------------------------------------------
Unused Line of Credit 3,850 5,780
---------------------------------------------------------------------
Total $3,904 $5,814
---------------------------------------------------------------------
The following table summarizes the cash flow activities for the nine-month
period ended April 1, 2006:
Cash provided by (used in): (in thousands)
----------------------------------------------------------
Operating activities ($902)
----------------------------------------------------------
Investing activities (436)
----------------------------------------------------------
Financing activities 1,358
----------------------------------------------------------
Net change in cash and cash equivalents $20
----------------------------------------------------------
22
Operating Activities: In the nine months ended April 1, 2006, cash used by
operations was $902,000. Depreciation of $1,059,000, a decrease of $290,000 in
account receivables, and an $188,000 increase in other liabilities were the main
operating sources of cash. The main uses of operating cash were the net loss of
$259,000, decreases of $961,000 in accounts payable, $226,000 in accrued
compensation, $98,000 in accrued taxes, and an increase of $587,000 in
inventories and $308,000 in prepaid expenses.
Investing Activities: In the nine months ended April 1, 2006, purchases of
machinery and other equipment was $436,000.
Financing Activities: In the nine months ended April 1, 2006, the Company's net
cash from financing activities totaled $1,358,000. Cash was provided through
additional borrowings of $1,930,000 from the line of credit. $572,000 was used
to pay quarterly dividend payments to stockholders.
The following table shows aggregated information about contractual obligations
as of April 1, 2006:
Payments Due by Period
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
- --------------------------------------------------------------------------------
Notes Payable $300,000 $300,000
- --------------------------------------------------------------------------------
Building Lease 905,000 $268,000 $565,000 $72,000 -
- --------------------------------------------------------------------------------
Total $1,205,000 $268,000 $565,000 $72,000 $300,000
- --------------------------------------------------------------------------------
In addition, during the nine month period ended April 1, 2006, the Company paid
$201,000 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 April 1, 2006 were $3,650,000.
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 were 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 April 1,
2006.
The Promissory Note, Loan Agreement and Security Agreement documenting the bank
line of credit provide that:
23
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.
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.
24
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 April 1, 2006 and
based on its evaluation, our chief executive officer and chief financial officer
have concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
There have been no 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.
25
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings. N/A
Item 1(A). Risk Factors. 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. Submission of Matters to a Vote of Security Holders. N/A
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.
26
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\
- -------------------------------------- ----------------------------------
Lee Ferguson, Chief Executive Officer Tammy Francis, Controller and
and President (Principal Executive Officer) Chief Financial Officer
- --------------------------------------------------------------------------------
May 16, 2006
27
Exhibit 31
----------
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE NINE MONTHS ENDED APRIL 1, 2006
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, Lee Ferguson, 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
28
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: May 16, 2006
------------
/s/ Lee Ferguson
By: Lee Ferguson, Chief Executive Officer and President
(Chief Executive Officer)
29
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE NINE MONTHS ENDED APRIL 1, 2006
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
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: May 16, 2006
------------
/s/ Tammy Francis
By: Tammy Francis, Controller and Treasurer
(Chief Financial Officer)
31
Exhibit 32
----------
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE NINE MONTHS ENDED APRIL 1, 2006
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, Lee Ferguson, certify that:
1. I am the chief executive officer of Wellco Enterprises, Inc.
2. Attached to this certification is Form 10-Q for the nine months ended
April 1, 2006, 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: May 16, 2006
------------
/s/ Lee Ferguson
- -----------------------------------------------------
By: Lee Ferguson, 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.
32
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE NINE MONTHS ENDED APRIL 1, 2006
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Tammy Francis, certify that:
1. I am the chief financial officer of Wellco Enterprises, Inc.
2. Attached to this certification is Form 10-Q for the nine months ended
April 1, 2006, 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: May 16, 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.
33