FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended July 1, 1995
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.)
Waynesville, North Carolina 28786
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 704-456-3545
Securities registered pursuant to Section 12(b) of the Act:
Common Capital Stock - $1 par value American Stock Exchange
(Title of class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Capital Stock - $1 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
As of September 1, 1995, 884,806 common shares were outstanding, and the
aggregate market value of the common shares (based upon the closing price of
these shares on the American Stock Exchange on August 25, 1995) of Wellco
Enterprises, Inc. held by nonaffiliates was approximately $5,300,000.
Documents incorporated by reference:
Definitive Proxy Statement, to be dated October 17, 1995, in PART III.
Definitive Proxy Statement dated October 22, 1985, in PART IV.
Definitive Proxy Statement dated July 3, 1982, in PART IV.
PART I
Item 1. Business.
The Company operates in one industry segment. Substantially all the Company's
revenues are derived from the sale of military footwear and related items,
whether sold by the Company or its licensees. The majority of revenues (66% in
1995, 74% in 1994) were from sales to the U. S. government, primarily the
Defense Logistics Agency.
For more than the last five years, the Company has manufactured and sold
military combat boots under firm fixed price contracts with the United States
government. Boot products are the general issue all-leather boot, the hot
weather boot and the desert boot, all manufactured using the government
specified Direct Molded Sole process. The government awards fixed price boot
contracts on the basis of bids from several qualified manufacturers.
The Company also provides, primarily under long-term licensing agreements,
technology, assistance and related services for manufacturing military and
commercial footwear to customers in the United States and abroad. Under these
agreements licensees receive technology, services and assistance, and the
Company earns fees based primarily on the licensees' sales volume. In addition
to providing technical assistance, the Company also helps supply certain foreign
military footwear manufacturers with some of their machinery and material needs.
The Company builds specialized footwear manufacturing equipment for use in its
own and its customers' manufacturing operations. This equipment is either sold
or leased.
During the 1995 fiscal year, pairs of combat boots sold were approximately 20%
less than the 1994 fiscal year. Except for Operation Desert Storm, which caused
pairs of combat boots sold to the U. S. government in fiscal year 1991 to
increase significantly, the government has for the last few years been reducing
its inventory of combat boots by purchasing fewer pairs than were consumed.
During 1995, the government accomplished this by extending the delivery schedule
for the second year of a multi-year contract from twelve to sixteen months.
On August 6, 1993, Wellco was awarded an indefinite quantity multi-year contract
from the U. S. government for between 277,000 and 416,000 pairs of combat boots
to be shipped during a one year period starting October, 1993. Against this
first year quantity, the government placed orders for its minimum required
quantity of 277,000 pairs. This contract contains two options under which the
government can exercise its right to buy between 277,000 and 416,000 pairs for
each option.
The government had initially planned to require delivery on each option over a
one year period, as was the case with the base year 277,000 pairs. In August,
1994 the government exercised its first option for the 277,000 minimum pairs.
However, actual consumption of combat boots during the first year of this
contract has been less than anticipated, resulting in the government extending
deliveries of this option's 277,000 pairs over sixteen months, or one-third
longer than the first year's delivery.
On August 2, 1995, the government exercised its second and last option under
this contract, again for the minimum 277,000 pairs. On September 26, 1995, the
Company agreed to a government request for a contract modification which reduced
the minimum second option pairs to 30,000. The Company understands that this
request was caused by the government's over-obligation of funds for its fiscal
year ending September 30, 1995, and they were correcting this by reducing their
obligation on items for which delivery orders had not yet been placed. The
Company agreed to this modification because the government could have otherwise
exercised its right to unilaterally cancel the contract for the convenience of
the government. This contract modification allows the Company to make a claim
against the government for the lost contribution to overhead, general and
administrative costs and profit caused by any reduction in the original 277,000
pairs and/or any delay in production.
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The government has indicated that their intent is to purchase all of the
original 277,000 pairs, but they will have to wait for their fiscal year 1996
funding appropriation before increasing the 30,000 pair committment. The Company
presently believes that this will result in a reduced production schedule of no
more than a few weeks, but if there is a significant delay in ordering boots
and/or if the government orders significantly less than their original 277,000
pair commitment, the operating results of the Company could be adversely
affected. The Company intends to file a claim for any lost overhead, general and
administrative costs and profit, but any such claim would be subject to final
verification and audit by the government. The Company believes that any adverse
effect would only be significant starting it its third fiscal quarter beginning
December 31, 1995.
Somewhat offsetting the effect of reduced combat boot shipments in 1995 was an
increase in machinery and material sales to licensees, including a military
combat boot factory in El Salvador, one new licensee and one long-term licensee.
These sales can vary significantly from year to year with the needs of these
customers.
During 1994, the Company was awarded an option under an existing U. S.
government research and development contract for further work on improvement to
the hot weather combat boot. This work was completed in 1995 and improvements
developed under this contract have now been incorporated into the hot weather
combat boot. In August, 1995, the Company was awarded a U. S. Government
research and development "cost plus fixed fee" contract with a total estimated
value of $1,184,000. The objective of this contract is to develop changes to the
combat boot that will result in fewer lower extremity disorders. Work has
started on this contract and could extend over three years.
This type of research and development work is vital to assuring that the U. S.
armed forces have the most serviceable combat boots available. Development work
of this type, done by the Company in a very short period of time in 1991, led to
the desert boot which was first used in Operation Desert Storm.
In 1995, Wellco, along with two other manufacturers of military clothing,
jointly bid on a trial contract to procure, warehouse and distribute all of the
standard clothing items to Air Force recruits at Lackland Air Force Base in
Texas for one year, with two options for one year each. The government has been
evaluating bids for many months, with the projected contract award date being no
later than October 24, 1995.
Bidding on contracts is open to any qualified U. S. manufacturer. In addition to
meeting very stringent manufacturing and quality specifications, contractors are
required to comply with precise delivery schedules and a significant investment
in specialized equipment is required.
The August, 1993 combat boot contract was the first one awarded the Company
under the U. S. government's "best value" system, under which contractors
offering the best value to the government receive the largest awards. Wellco
anticipates that during the latter half of the 1996 fiscal year the U. S.
Government will start the solicitation process on its next multi-year contract.
Until then, Wellco is continuing to improve its quality and on-time delivery,
two very important factors in the best value system.
The Company usually competes on U. S. government contracts with three other
companies, no one of which dominates the industry. Many factors affect the
government's demand for combat boots and the quantity purchased can vary from
year to year. Wellco anticipates that the government will continue buying fewer
pairs of combat boots than consumption for the next few years. Contractors
cannot influence the government's combat boot needs. Price, quality and
manufacturing efficiency are the areas emphasized by the Company that strengthen
its competitive position.
Government contracts are subject to partial or complete termination under the
following circumstances:
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(1) Convenience of the Government. The government's contracting
officer has the authority to partially or completely terminate
a contract for the convenience of the government only when it
is in the government's interest to terminate. The contracting
officer is responsible for negotiating a settlement with the
contractor.
(2) Default of the Contractor. The government's contracting
officer has the authority to partially or completely terminate
a contract because of the contractor's actual or anticipated
failure to perform his contractual obligations.
Under certain circumstances occasioned by the egregious conduct of a contractor,
contracts may be terminated and a contractor may be prohibited for a certain
period of time from receiving government contracts. The Company has never had a
contract either partially or completely terminated.
Because domestic commercial footwear manufacturers are adversely affected by
imports from low labor cost countries, the Company targets its marketing of
technology and assistance primarily to military footwear manufacturers. The
Company competes against several other footwear construction methods commonly
used for heavy-duty footwear with leather uppers. These methods include the
Goodyear Welt construction, as well as boots bottomed by injection molding.
These methods are used in work shoes, safety shoes, and hiking boots
manufactured both in the U. S. and abroad for the commercial market. The
Goodyear Welt method is also used for certain types of military boots, although
not for the models manufactured by the Company which are made only in the
government specified Direct Molded Sole construction. Quality, service and
reasonable manufacturing costs are the most important features used to market
the Company's technology, assistance and services.
The Company has a strong research and development program. While not all
research and development results in successful new products or significant
revenues, the continuing development of new products and processes has been and
will continue to be a significant factor in growth and development. The Company
developed the desert combat boot, first used in Operation Desert Storm. In 1993,
the Company completed initial development of improvements to the black hot
weather boot incorporating many of the features it developed for the desert
boot. In 1994 it was awarded an option under that contract for further
development. In August, 1995 it was awarded a contract to develop changes to
combat boots that will result in fewer lower extremity disorders.
Although not precisely quantified, the Company spends a significant amount of
time and effort on both Company and customer-sponsored research activities
related to the development of new products and processes and to the improvement
of existing ones. A significant amount of this cost is for the personnel costs
of mold engineers, rubber technicians, chemists, pattern engineers and
management, all of whom have many responsibilities in addition to research and
development. The Company estimates that the cost of research and development can
vary from $50,000 to $300,000 per year, depending on the number of research
projects and the specific needs of its customers.
See Note 14 to the consolidated financial statements in Item 8 for revenues by
class and information about export revenues. The Company does not have foreign
operations.
The Company's backlog of all sales, not including license fees and rentals, as
of September, 1995 was approximately $18,100,000 compared to $17,200,000 last
year. Of the current year backlog, the Company estimates that approximately
$10,400,000 will be shipped in the 1996 fiscal year.
Most of the raw materials used by the Company can be obtained from at least two
sources and are readily available. Because all materials in combat boots must
meet rigid government specifications and because quality is the first priority,
the Company purchases most of its raw materials from vendors who provide the
best materials at a reasonable cost. The loss of some vendors would cause some
difficulty for the entire industry, but the Company believes a suitable
replacement could be found in a reasonably short period of time. Major raw
materials include leathers, fabrics and rubber, and by government regulation all
are from manufacturers in the United States.
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Compliance with various existing governmental provisions relating to protection
of the environment has not had a material effect on the Company's capital
expenditures, earnings or competitive position.
The Company employed an average of 267 persons during the 1995 year.
Item 2. Properties.
The Company has manufacturing, warehousing and office facilities in Waynesville,
North Carolina and Aguadilla, Puerto Rico. The building and land in North
Carolina is owned by the Company. The Puerto Rico building and land are leased.
Management believes all its plants, warehouses and offices are in good condition
and are reasonably suited for the purposes for which they are presently used.
The volume of operations in 1995 caused both the Waynesville and Aguadilla
facilities to be used at less than normal capacity.
Item 3. Legal Proceedings.
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the Company's business, to which the Company or any of
its subsidiaries is a party or of which any of their property is subject.
Management does not know of any director, officer, affiliate of the Company, nor
any stockholder of record or beneficial owner of more than 5% of the Company's
common stock, or any associate thereof who is a party to a legal proceeding that
is adverse to the Company or any of its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
There were not any submissions of matters to a vote of security holders during
the fourth quarter of fiscal year 1995.
PART II
Items 5, 6, 7 and 8.
The information called for by the following items is in the Company's 1995
Annual Report to Shareholders which is incorporated starting on the following
page in this Form 10-K:
Annual Report
Page Number
Item 5. Market for the Registrant's Common
Equity and Related
Stockholder Matters 30
Item 6. Selected Financial Data 1
Item 7. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 6-10
Item 8. Financial Statements and Supplementary Data 11-29, 31
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WELLCO(R)
ENTERPRISES, INC.
ANNUAL REPORT
1995
WELLCO ENTERPRISES, INC.
CONSOLIDATED SELECTED FINANCIAL DATA
(In Thousands Except for Per Share Amounts)
Year Ended
July 1, July 2, July 3, June 27, June 29,
1995 1994 (A) 1993 1992 1991
------- ------- -------- -------- --------
Revenues ................................ $18,003 $18,255 $18,977 $16,928 $24,261
Net Income .............................. 969 1,542 (B) 1,980 2,349 2,027
Net Income Per Share
1.10 1.75 (B) 2.28 2.70 2.33
Cash Dividends Declared
Per Share of Common
Stock ................................... .25 (C) 6.25 .25 .25 .25
Total Assets at Year End ................ 22,738 20,995 25,013 22,953 21,358
Long-Term Liabilities at
Year End ................................ $ 1,897 $ 1,647 $ 1,770 $ 1,498 $ 1,493
(A) Contains 53 weeks. All other years are 52 weeks.
(B) Increased by $260,000 ($.30 per share) representing the cumulative
effect at the beginning of the 1993 fiscal year of a change in
accounting for income taxes.
(C) Includes a special cash dividend of $6.00 per share.
See The Management's Discussion and Analysis section.
Independent Auditors
Deloitte & Touche LLP Charlotte, N.C.
Annual Meeting
November 21, 1995
Corporate Offices
Waynesville, N.C.
10-K Availability
The Company's Form 10-K (annual report filed with the Securities and Exchange
Commission) is available without charge to those who wish to receive a copy.
Write to: Corporate Secretary, Wellco Enterprises, Inc., Box 188, Waynesville,
N.C. 28786
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Dear Fellow Shareholder:
As it has been for a number of years, your company's most important activity
continues to be the development, manufacture and sale of military footwear.
Although heavily influenced by the size of our country's military establishment
and by Government purchasing patterns, we feel this business continues to
represent a very promising long-term future for a small number of dedicated and
specialized producers, such as Wellco, and we intend to maintain our
concentration on this business, while continuing also to seek opportunities in
related and compatible fields for military and commercial consumption at home
and abroad.
The decline in net income in Fiscal Year 1995 resulted primarily from reduced
shipments of military boots to the U.S. Government, as well as a $420,000
reduction in net investment and dividend and interest income.
Several developments that have taken place in recent months could have a
significant favorable impact on the company's earnings, beginning with the
second half of its 1996 Fiscal Year:
1. Wellco's sales to the U.S. Government for the past two years have largely
been against a contract awarded in August 1993, which called for a minimum
basic quantity of 277,000 pr of military combat boots, with two options for
additional like quantities to be exercised at one-year intervals. The basic
award called for shipments over a one-year period. When the first option
was exercised in August 1994, the Government specified a sixteen month
delivery schedule for the purpose of reducing its inventories. This
stretched-out delivery schedule is the cause of reduced current sales to
the Government. The sixteen month delivery cycle will end in December 1995.
On August 2, 1995, the government exercised its second and last option
under this contract, again for the minimum 277,000 pairs. On September 26,
1995, the Company agreed to a government request for a contract
modification which reduced the minimum second option pairs to 30,000.
The Company understands that this request was caused by the
government's over-obligation of funds for its fiscal year ending September
30, 1995, and they were correcting this by reducing their obligation on
items for which delivery orders had not yet been placed. The Company
agreed to this modification because the government could have otherwise
exercised its right to unilaterally cancel the contract for the
convenience of the government. This contract modification allows the
Company to make a claim against the government for the lost contribution
to overhead, general and administrative costs and profit caused by any
reduction in the original 277,000 pairs and/or any delay in production.
The government has indicated that their intent is to purchase all of the
original 277,000 pairs, but they will have to wait for their fiscal year
1996 funding appropriation before increasing the 30,000 pair commitment.
The Company presently believes that this will result in a reduced
production schedule of no more than a few weeks, but if there is a
significant delay in ordering boots and/or if the government orders
significantly less than their original 277,000 pair commitment, the
operating results of the Company could be adversely affected. The Company
intends to file a claim for any lost overhead, general and administrative
costs and profit, but any such claim would be subject to final verification
and audit by the government. The Company believes that any adverse effect
would only be significant starting in its third fiscal quarter beginning
December 31, 1995.
2. On August 31, 1995 Wellco's subsidiary, Ro-Search Inc., was awarded a
$1,184,000 Development Contract by U.S. Army Natick Research, Development
and Engineering Center, with the object of developing improvements in
military combat footwear for the purpose of reducing the incidence of lower
extremity disorders. Work on this contract could extend over a three year
period and, if successful, could contribute significantly to maintaining
and enhancing the Company's leadership position in the development and
production of military boots.
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3. In recent months the Company has received several orders for the production
of military footwear for Latin American and Middle East countries. We feel
that foreign countries are beginning to recognize the superior quality of
U.S.-made boots, in comparison with lower-cost products made in the Far
East and elsewhere.
4. The blast protective boots and overboots developed by Ro-Search, Inc.,
designed to eliminate or reduce foot and leg injuries among military
personnel operating in mine-infested areas and engaged in mine clearance
operations, are attracting widening attention for use in parts of the world
where guerilla warfare and other conflicts have taken place. Such boots are
presently being produced for use in Turkey and in Peru.
5. The Company's largest commercial licensee, Georgia Boot Inc., is presently
relying on Wellco to bottom several hundred pairs daily of work and safety
shoes, using Ro-Search's proprietary Process 82. Similar production of
commercial footwear for other clients is under consideration.
6. Wellco, together with two other manufacturers of military apparel, is
participating in a joint venture which has bid to manufacture and/or
procure and to distribute all standard items of clothing to all U. S. Air
Force recruits. This is a test contract whose purpose we understand to be
an evaluation of the use of contractors to replace some of the Government's
purchasing and distribution system. The Government is presently evaluating
bids and has projected a contract award during this Fall. If awarded to
Wellco and its partners, such a contract could have a favorable effect on
future revenues and earnings.
The dedication, experience and talents of our co-workers in Waynesville, North
Carolina and Aguadilla, Puerto Rico have always been and will continue to be a
key component of whatever we may accomplish.
Our heartfelt gratitude is extended to all of them.
Respectfully,
Horace Auberry Rolf Kaufman
Chairman President
September 28, 1995
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WELLCO'S INVOLVEMENT IN BOOT DEVELOPMENT
Wellco was founded fifty-five years ago. One of the activities of the Company
and its employees that has brought us this far is our work in footwear
development, especially in the development of combat boots that meet the needs
of the U. S. armed forces. The individual soldier is our customer and the
purpose of our development efforts is to provide them with the best, most
serviceable boots available.
Our financial releases frequently mention various development work. This year we
are providing you with a history of Wellco's involvement in footwear
development, which, in light of the importance of combat boots to current
operations, is primarily about combat boot development.
The first development work goes back to the early 1930's, even prior to Wellco's
founding in 1941. At that time, the Company's founders, then operating in
Germany, developed and patented the initial technology for simultaneously
forming, vulcanizing and attaching a one-piece rubber sole and heel to a shoe
upper.
Wellco's founders, the Rollman and Kaufman families, had to flee Nazi Germany.
Although they brought few physical possessions, they were able to bring their
knowledge and desire to develop and improve footwear. Upon coming to the U.S.
and founding Wellco in Waynesville, North Carolina, they first applied this
knowhow to the production of a broad line of slippers and casual footwear, while
continuing to perfect the process for use in heavy duty rugged footwear,
including military boots. This continuing development activity led to the
patenting in 1957 of "Process 82(R)," a version of the technology that has been
widely licensed and used and continuously improved for the production of work
and safety footwear and other products worldwide. In 1963, the Company was
successful in demonstrating to the U.S. Military the superiority of another
version of the original technology for use in military footwear, which became
known as the DMS (Direct Molded Sole) construction.
The first military application of the DMS construction was in the production of
the Tropical Combat Boot, initially known as the "Vietnam Boot." The U. S. armed
forces did not have a combat boot that protected their feet in the hot, wet
climate of Viet Nam. They also needed protection against certain unique hazards
which they encountered. This boot has been in continuous use for more than
thirty years, with a succession of improvements developed by Ro-Search in
conjunction with U.S. Army Natick Research, Development and Engineering Center
(Natick), leading to the adoption of the most recent improvements in 1994.
In 1968 the U.S. military's general purpose all-leather combat boot was changed
to the DMS construction. This boot replaced one made with the Goodyear Welt
construction and gave the U. S. armed forces a much more comfortable and
serviceable boot. The current version of this boot was designed and adopted in
1985, although it too has been variously refined since that time, always as a
result of cooperative efforts between Wellco/Ro-Search and Natick.
In 1991 a Wellco/Ro-Search developed prototype was selected as the U.S.
Military's desert boot, presently known as Hot Weather Boot - Type II. This boot
was designed under emergency conditions for Operations Desert Shield and Desert
Storm, in response to the requirements personally set forth by General Norman H.
Schwarzkopf. U. S. armed forces needed a boot that provided protection and
performance in a hot, dry and sandy climate. In record time, the Company
developed a boot meeting the soldiers' needs, wrote the boot specification and
started contract production of this boot. This boot today has become the
standard for use by military forces operating in arid climates.
On August 31, 1995, Ro-Search was awarded a $1,184,000 development contract by
Natick. While military combat boots used by our country's armed forces are the
finest in the world, there is always room for improvement. The contract just
awarded seeks to improve the wearer's foot health and comfort by increasing
flexibility and enhancing impact characteristics of such footwear, while
retaining the excellent support, wearability and resistance to the elements that
are characteristic of the present product. To carry
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out this assignment and consider all options, the Company has enlisted the aid
of several sub-contractors specialized in various footwear constructions other
than the DMS (Direct Molded Sole) construction of the present combat boots,
and/or specialized in testing and evaluation of factors that influence the
incidence of foot and leg disorders and injury. The contract just awarded
includes three phases that could extend over a three-year period and is expected
to result in the adoption of a new or improved design for soldier use by
approximately 1998. The importance of this contract to the Company rests not as
much in the revenue and net income which may be associated with it as it does in
the opportunity to develop military footwear. We again have the opportunity to
be of service to our primary customer, the U. S. armed forces, and we look
forward to again improving the combat boots he relies upon in protecting all of
us.
There is one more area where our boot development makes a significant
contribution to soldiers. For several years, Ro-Search has been perfecting boots
which reduce injuries among troops operating in mine- infested areas and/or
engaged in mine clearance operations. To this end, a blast protective boot has
been developed, incorporating a metal honeycomb in the sole deigned to absorb
and deflect the blast produced by land mines. A blast protective overboot,
incorporating the same honeycomb in its sole, supplemented by Kevlar(R)
impact-resistant material, has been developed for use in combination with the
blast protective boot in areas of greatest danger. These boots have been tested
by the U.S. Military at Natick and at Aberdeen Proving Grounds and have been
worn under guerilla warfare conditions in El Salvador and by Canadian forces
engaged in mine clearance in U.N. operations in Kuwait and Bosnia. Such boots
are presently being produced for use in Peru and Turkey and are attracting a
high level of interest from the military forces of a number of other countries,
besides the U.S.A.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Comparing The Year Ended July 1, 1995 and July 2, 1994:
Income before income taxes in the current year was $1,212,000 compared to
$2,034,000 in the prior one. Several factors resulted in the $822,000 decrease,
the more significant ones being:
1. Pairs of combat boots sold decreased almost 20%. Most of this decrease
was in shipments to the U. S. government. In November, 1994, Wellco
made its first shipments against an option awarded under its current
military boot contract. This option has a delivery schedule of sixteen
months, compared to a twelve month schedule for boots shipped in
fiscal year 1994.
2. 1994 includes $255,000 in favorable adjustments to previous estimates
of contracting actions which were finalized in the fourth quarter.
From time to time contract changes will occur whose financial effect
on the Company are included in the financial statements at estimated
amounts until final amounts are negotiated and settled with the
government. Most of this $255,000 adjustment relates to estimates
recorded in the years 1991-1993.
3. Somewhat offsetting the effect of lower combat boots sales was an
increase in machinery and materials sales. A significant shipment of
machinery and boot materials was made to a combat boot manufacturing
factory in El Salvador, which did not occur in 1994. 1995 also
includes substantial machinery sales to one new boot manufacturing
customer and to one long-time customer. These sales can vary
significantly from year to year with the needs of these customers.
4. Revenues from technical assistance fees and equipment rentals from
licensees, which vary with their shipments, decreased because the
Company's U. S. combat boot manufacturing licensees were also affected
by the government's longer delivery schedule .
5. While revenues decreased $252,000, certain manufacturing expenses
increased, and this reduced margins. Group health insurance costs, for
which the Company is self funded, increased $131,000. This cost varies
from period to period with the actual amount of health costs incurred
by employees. Workers' compensation insurance premiums also increased,
but this was more than offset by decreases in the cost of utilities
and maintenance.
6. General and administrative expense decreased $6,000 in 1995. Employee
bonus compensation decreased $69,000 with the lower net income.
7. Dividend and interest income decreased $52,000. Investment income
decreased $368,000 in the current year, primarily because two equity
securities were sold for prices less than their carrying value.
The percentage of income tax provision to pretax income decreased in 1995. The
untaxed portion of dividend income from corporate equity securities did not
decrease in proportion to the decrease in pretax income.
In 1995, Wellco adopted Statement of Financial Accounting Standards No. 115,
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"Accounting for Certain Investments in Debt and Equity Securities". This
resulted in the carrying value of Marketable Securities, as shown in the
Consolidated Balance Sheets, being increased by the $730,000 excess of fair
value over their adjusted cost, and a corresponding increase, net of the effect
of income taxes, in Stockholders' Equity of $482,000.
On December 30, 1994, Wellco purchased 400,000 shares of the common stock of
Alba Waldensian, Inc. (21.5% of total shares outstanding). This investment is
being accounted for on the equity method. Included in the 1995 pretax income is
$69,000 representing Wellco's share of Alba's net income from the date of
purchase through July 1, 1995, and the amortization of the excess of Wellco's
proportionate share of Alba's net assets over Wellco's basis in the stock.
Forward Looking Information:
In August, 1993 Wellco was awarded a U. S. government combat boot contract for
277,000 pairs to be shipped over a twelve month period. The contract also
contains two options for the same quantity. During the first year and each
option period, the government can increase its total purchases by up to 50%,
with the specific additional quantity awarded to each contractor being based on
an evaluation of the contractors' performance during the prior year. To date,
the government has not increased its purchases, and the Company understands that
it will not during the remaining option periods of this contract.
In August, 1994 the government exercised the first option for a total of 277,000
pairs. The delivery period for shipments under this option is sixteen months, or
a one-third longer period than the first year's award. This delivery extension
was caused by a government program to reduce its combat boot inventories by
buying fewer boots than are consumed. Deliveries under this option will be
substantially completed by December, 1995.
On August 2, 1995, the government exercised its second and last option under
this contract, again for the minimum 277,000 pairs. On September 26, 1995, the
Company agreed to a government request for a contract modification which reduced
the minimum second option pairs to 30,000. The Company understands that this
request was caused by the government's over-obligation of funds for its fiscal
year ending September 30, 1995, and they were correcting this by reducing their
obligation on items for which delivery orders had not yet been placed. The
Company agreed to this modification because the government could have otherwise
exercised its right to unilaterally cancel the contract for the convenience of
the government. This contract modification allows the Company to make a claim
agains the government for the lost contribution to overhead, general and
administrative costs and profit caused by any reduction in the original 277,000
pairs and/or any delay in production.
The government has indicated that their intent is to purchase all of the
original 277,000 pairs, but they will have to wait for their fiscal year 1996
funding appropriation before increasing the 30,000 pair commitment. The Company
presently believes that this will result in a reduced production schedule of no
more than a few weeks, but if there is a significant delay in ordering boots
and/or if the government orders significantly less than their original 277,000
pair commitment, the operating results of the Company could be adversely
affected. The Company intends to file a claim for any lost overhead, general and
administrative costs and profit, but any such claim would be subject to final
verification and audit by the government. The Company believes that any adverse
effect would only be significant starting in its third fiscal quarter beginning
December 31, 1995.
The Company also understands that the government's combat boot inventory is
significantly greater than what they want it to be. They are presently buying
fewer pairs than consumption and will probably continue to do so for the next
few years.
-7-
In late August, 1995, the Company was awarded a $1,184,000 development boot
contract from the U. S. government. The objective of this contract is to develop
changes to the combat boot that will result in fewer lower extremity disorders.
Work has started on this contract and could extend over three years.
Wellco, along with two other manufacturers of military clothing, have jointly
bid on a trial contract to procure, warehouse and distribute all of the standard
clothing items to Air Force recruits at Lackland Air Force Base in Texas for one
year, with two options for one year each. The government has been evaluating
bids for many months, with the projected contract award date being no later than
October 24, 1995.
Subsequent to July 1, 1995, Wellco received several orders from foreign
customers for its anti-personnel mine protective boot. Interest in this product
has increased significantly, but at this point it is too early to project if it
will become a significant contributor to future operations.
Comparing The Year Ended July 2, 1994 and July 3, 1993:
Income before income taxes in the current year was $2,034,000 compared to
$2,423,000 in the prior one.
Several factors resulted in the $389,000 decrease, the more significant ones
being:
1. Operations in the prior year included significant equipment sales
under contract to a military boot factory in Colombia, South America.
This contract represented a complete retooling of an existing factory,
and a contract of this type and significance did not exist in 1994.
Somewhat offsetting this were $255,000 in favorable adjustments to
previous estimates of contracting actions which were finalized in the
fourth quarter of the 1994 year. From time to time contract changes
will occur whose financial effect on the Company are included in the
financial statements at estimated amounts until final amounts are
negotiated and settled with the government. Most of this $255,000
adjustment relates to estimates recorded in the years 1991-1993. If
prior year estimates were adjusted for the actual settlement amounts,
pretax income for 1993, 1992 and 1991 would be increased by
approximately $101,000, $93,000 and $41,000.
2. Revenues from technical assistance fees and equipment rentals from
licensees decreased because the prior period included certain fee
surcharges which did not occur in the current period. Somewhat
offsetting this was the effect of certain licensees having higher
sales, on which these variable fees are earned.
3. Despite the decrease in total revenues, certain manufacturing expenses
increased, and this reduced margins. Group health insurance costs, for
which the Company is self funded, increased $82,000. The cost of
workers' compensation insurance also increased.
4. General and administrative expense decreased in 1994 because the prior
year includes $137,000 incurred by a special committee of Wellco's
Board of Directors in the investigation of a potential acquisition.
Also, employee bonus compensation decreased with the lower net income.
5. Dividend and interest income decreased because the payment of a
special cash dividend in September, 1993 totaling $5,300,000 reduced
invested funds.
The percentage of income tax provision to pretax income decreased in 1994. The
primary reason for this was a reduction in the previously accrued liability for
Puerto Rico taxes on undistributed earnings of the Company's subsidiary which
operates in Puerto Rico. The subsidiary was able, under a new law of Puerto
Rico, to prepay, at a 20% lower rate, certain of these taxes normally paid when
that subsidiary pays a dividend to the Company.
-8-
In fiscal year 1993, Wellco elected to adopt early Financial Accounting
Standards Board Opinion No. 109, "Accounting for Income Taxes". The cumulative
prior year effect of adopting SFAS No. 109 was recorded in 1993 and increased
net income by $260,000.
LIQUIDITY AND CAPITAL RESOURCES
Wellco uses cash from operations to supply most of its liquidity needs. A bank
line of credit is maintained for supplying any unforeseen cash needs.
The following table summarizes at the end of each year the availability of cash
from the Company's most liquid assets and from its existing borrowing sources:
(in thousands)
1995 1994 1993
---- ---- ----
Cash .................................... $ 2,423 $ 2,528 $ 3,188
Marketable Securities, Current .......... 996 2,894 6,469
Unused Line of Credit ................... 1,480 1,480 1,480
------- ------- -------
Total ................................... $ 4,899 $ 6,902 $11,137
The decrease at the end of 1995 was primarily caused by the investment in Alba
Waldensian, Inc. The decrease at the end of 1994 was caused by the payment of a
special cash dividend totaling $5,300,000 in September, 1993. This dividend was
paid out of monies determined by the Board of Directors to not be otherwise
needed in the foreseeable future.
The following table summarizes the major sources (uses) of cash for the last
three years:
(in thousands)
1995 1994 1993
---- ---- ----
Net Income Plus Depreciation and Equity in
Earnings of Affiliate, Less Net Investment Income ...................... $ 1,214 $ 1,490 $ 1,853
Net Change in Accounts Receivable, Inventory,
Accounts Payable and Accrued Liabilities ............................... 192 (1,970) 978
Other .................................................................. (173) (119) (281)
Net Cash Provided (Used) By Operations ................................. 1,233 (599) 2,550
Net Cash From Sale of (Purchases of) Marketable
Securities ............................................................. 3,653 5,563 (1,490)
Cash Used to Purchase Affiliate ........................................ (4,475)
Cash Used to Purchase Equipment ........................................ (295) (322) (299)
Cash Dividends Paid .................................................... (221) (5,530) (217)
Other .................................................................. 228 (11)
Net Increase (Decrease in Cash) ........................................ $ (105) $ (660) $ 533
-9-
In 1995, cash from the sale of marketable securities was used to pay for part of
the purchase of Alba Waldensian, Inc. (the affiliate) common stock. Cash from
1995 operations was also used to purchase Alba's stock, purchase equipment and
pay the cash dividend. Cash from 1994 operations was used to increase inventory
and to provide monies for the increase in accounts receivable. Cash from the
sale of marketable securities and some of the cash from July 3, 1993 was used to
pay 1994 cash dividends, including the $5,300,000 special dividend.
Cash resources are adequate to meet presently known operating activity needs.
The Company has no material commitments for capital equipment. The Company does
not know of any demands, commitments, uncertainties, or trends that will result
in or that are reasonably likely to result in its liquidity increasing or
decreasing in any material way.
The bank line of credit, which provides for total borrowings of $1,500,000, will
expire and be subject to renewal on December 30, 1995.
-10-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED
JULY 1, 1995, JULY 2, 1994 AND JULY 3, 1993
(in thousands except per share and number of shares)
JULY 1, JULY 2, JULY 3,
1995 1994 1993
------- ------- -------
REVENUES (Notes 1, 6, 14 and 15) .............. $ 18,003 $ 18,255 $ 18,977
COSTS AND EXPENSES:
Cost of sales and services ............... 15,128 14,903 15,254
General and administrative ............... 2,196 2,202 2,398
expenses ................................. -- -- --
Total .................................... 17,324 17,105 17,652
-------- -------- --------
DIVIDEND AND INTEREST INCOME .................. 446 498 629
NET INVESTMENT INCOME (Note 4) ................ 18 386 469
-------- -------- --------
INCOME BEFORE EQUITY IN EARNINGS
OF AFFILIATE ............................. 1,143 2,034 2,423
EQUITY IN EARNINGS OF AFFILIATE
(Notes 1 and 5) .......................... 69
-------- -------- --------
INCOME BEFORE INCOME TAXES .................... 1,212 2,034 2,423
PROVISION FOR INCOME TAXES
(Notes 1 and 12) ......................... 243 492 703
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR
INCOME TAXES ............................. 969 1,542 1,720
======== ======== ========
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME
TAXES (Note 12) .......................... 260
-------- -------- --------
NET INCOME .................................... $ 969 $ 1,542 $ 1,980
======== ======== ========
PER SHARE OF COMMON STOCK (based on
weighted average number of shares
outstanding)-
Before cumulative effect of change
in accounting for income ............. $ 1.10 $ 1.75 $ 1.98
taxes
Cumulative effect of change in
accounting for income taxes .......... 0.30
-------- -------- --------
Net income ............................... $ 1.10 $ 1.75 $ 2.28
======== ======== ========
Weighted average number of
shares
outstanding .............................. 884,806 881,267 869,357
======== ======== ========
See Notes to Consolidated Financial Statements.
-11-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JULY 1, 1995 AND JULY 2, 1994
(in thousands)
ASSETS
JULY 1, JULY 2,
1995 1994
------- -------
CURRENT ASSETS:
Cash ........................................... $ 2,423 $ 2,528
Marketable securities,current
(Notes 1 and 4) ............................. 996 2,894
Receivables (Note 2) ........................... 3,267 4,400
Inventories (Notes 1 and 3) .................... 4,295 3,522
Deferred taxes and prepaid
expenses
(Note 12) ................................... 429 354
------- -------
Total .......................................... 11,410 13,698
------- -------
MARKETABLE SECURITIES,non-current
(Notes 1 and 4) ................................ 3,787 4,794
INVESTMENT IN AFFILIATE (Notes 1 and 5) ............ 5,529
MACHINERY LEASED TO LICENSEES
(Notes 1 and 6) ................................ 111 182
PROPERTY, PLANT AND EQUIPMENT:
(Notes 1 and 7) ................................ 1,031 997
INTANGIBLE ASSETS:
Excess of cost over net
assets of
subsidiary at acquisition ................... 228 228
(Note 1)
Intangible pension asset ....................... 642 575
(Note 10)
------- -------
Total .......................................... 870 803
------- -------
DEFERRED TAXES (Note 12) ........................... 521
------- -------
TOTAL .............................................. $22,738 $20,995
======= =======
See Notes to Consolidated Financial Statements.
-12-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JULY 1, 1995 AND JULY 2, 1994
(in thousands)
LIABILITIES AND EQUITY
JULY 1, JULY 2,
1995 1994
------- -------
CURRENT LIABILITIES:
Short-term borrowing from bank ............ $ 20 $ 20
(Note 8)
Accounts payable .......................... 1,533 1,825
Accrued liabilities (Note 9) .............. 1,418 1,148
Accrued income taxes (Note 12) ............ 207 353
----------- -----------
Total ................................. 3,178 3,346
=========== ===========
LONG-TERM LIABILITIES:
Pension obligation (Note 10) .............. 1,887 1,647
Deferred taxes (Note 12) .................. 10
COMMITMENT (Note 16)
STOCKHOLDERS' EQUITY (Notes 13 and 16):
Preferred 5% cumulative redeemable,
convertible stock; $100 par value:
3,000 shares authorized, none
outstanding
Common stock, $1.00 par value;
2,000,000 shares authorized;
884,806 shares
issued and outstanding ................ 885 885
Additional paid-in capital ................ 1,409 759
(Note 5)
Retained earnings ......................... 15,412 14,664
Pension liability adjustment .............. (525) (306)
(Note 10)
Unrealized gain on marketable
securities (Notes 1 and 4 ) .......... 482
----------- -----------
Total ................................. 17,663 16,002
----------- -----------
TOTAL .......................................... $ 22,738 $ 20,995
=========== ===========
See Notes to Consolidated Financial Statements.
-13-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JULY 1, 1995, JULY 2, 1994 AND JULY 3, 1993
(in thousands)
JULY 1, JULY 2, JULY 3,
1995 1994 1993
------- ------- -------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ................................ $ 969 $ 1,542 $ 1,980
------- ------- -------
Adjustments to reconcile net income
to net cash provided (used) by operating
activities:
Depreciation and amortization ........... 332 334 342
Net investment income ................... (18) (386) (469)
Equity in earnings of ................... (69)
affiliate
(Increase) decrease in-
Accounts receivable .................. 1,133 (767) 1,055
Inventories .......................... (773) (1,047) (440)
Other current assets ................. (75) (97) (120)
Increase (decrease)in-
Accounts payable ..................... (292) (31) 472
Accrued liabilities .................. 270 (7) (71)
Accrued income taxes ................. (146) (118) (38)
Pension obligation ................... (46) 22 219
Other ................................ (52) (44) (380)
------- ------- -------
Total adjustments ......................... 264 (2,141) 570
------- ------- -------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES ...................... 1,233 (599) 2,550
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in affiliate ................... (4,475)
Net sales (purchases) of current
marketable securities ................... 1,898 3,766 (3,997)
Purchases of noncurrent
marketable securities ................... (2,343) (588) (2,809)
Sales of noncurrent
marketable securities ................... 4,098 2,385 5,316
Purchases of equipment .................... (295) (322) (299)
------- ------- -------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES ..................... (1,117) 5,241 (1,789)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan from bank ............................ 2,050
Repayment of bank loan .................... (2,050)
Cash dividends paid ....................... (221) (5,530) (217)
Purchase of common stock .................. (24)
Stock option exercise ..................... 228 13
------- ------- -------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES ...................... (221) (5,302) (228)
------- ------- -------
NET INCREASE (DECREASE) IN CASH ............... (105) (660) 533
CASH AT BEGINNING OF PERIOD ................... 2,528 3,188 2,655
------- ------- -------
CASH AT END OF PERIOD ............. $ 2,423 $ 2,528 $ 3,188
======= ======= =======
(continued on next page)
-14-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JULY 1, 1995, JULY 2, 1994, AND JULY 3, 1993
JULY 1, JULY 2, JULY 3,
1995 1994 1993
------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ................................ $ 44 $ 20 $ 24
Income taxes ............................ 779 745 907
Noncash increase in marketable
securities to fair value ................ 730
Noncash increase in Investment
in Affiliate ............................ 986
==== ==== ====
See Notes to Consolidated Financial Statements.
-15-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE FISCAL YEARS ENDED
JULY 1, 1995, JULY 2, 1994 AND JULY 3, 1993
(in thousands except number of shares)
JULY 1, JULY 2, JULY 3,
1995 1994 1993
------- ------- -------
COMMON STOCK (Notes 13 and 16):
Balance at beginning of year ........... $ 885 $ 869 $ 869
Purchase of common stock ............... (1)
Stock option exercise .................. 16 1
-------- -------- --------
Balance at end of year ................. 885 885 869
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL:
(Notes 5, 13 and 16):
Balance at beginning of year ........... 759 547 536
Excess of basis over cost
of investment in affiliate ............. 650
Purchase of common stock ............... (1)
Stock option exercise .................. 212 12
-------- -------- --------
Balance at end of year ................. 1,409 759 547
-------- -------- --------
RETAINED EARNINGS:
Balance at beginning of year ........... 14,664 18,652 16,911
Purchase of common stock ............... (22)
Net income ............................. 969 1,542 1,980
Cash dividends (per share: 1995
and 1993, $.25; 1994 $6.25)........ (221) (5,530) (217)
-------- -------- --------
Balance at end of year ................. 15,412 14,664 18,652
-------- -------- --------
PENSION LIABILITY ADJUSTMENT
(Note 10):
Balance at beginning of year ........... (306) (327)
Change for the year .................... (219) 21 (327)
-------- -------- --------
Balance at end of year ................. (525) (306) (327)
-------- -------- --------
UNREALIZED GAIN ON
MARKETABLE SECURITIES (Notes 1 and 4) .. 482
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY ................. $ 17,663 $ 16,002 $ 19,741
======== ======== ========
See Notes to Consolidated Financial Statements.
-16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended July 1, 1995, July 2, 1994 and July 3, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying financial statements include the consolidated
accounts of the Company and its wholly-owned subsidiaries.
Appropriate eliminations have been made of intercompany
transactions and balances.
Inventories
Raw materials and supplies are valued at the lower of
first-in, first-out cost or market. Finished goods and work in
process are valued at the lower of actual cost, determined on
a specific basis, or market.
Income Taxes
The provision for income taxes is based on taxes currently
payable adjusted for the net change in the deferred tax asset
or liability during the current year. A deferred tax asset or
liability arises from temporary differences between the
carrying value of assets and liabilities for financial
reporting and income tax purposes.
Marketable Securities
Marketable securities consist of corporate equity and debt
securities and the notes of various U. S. government agencies.
Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity
Securities", was effective as of the beginning of the 1995
fiscal year. Under SFAS 115, corporate equity and debt
securities are classified as available-for-sale and are valued
in the Consolidated Balance Sheets at their fair value
(usually market value). The difference between fair value and
the securities' adjusted cost, net of the effect of income
taxes, is reflected in Stockholders' Equity.
U. S. government agency notes, purchased at a discount to
their face value and held for a very short period prior to
their maturity, are classified as held-to-maturity. These
securities are valued in the Consolidated Balance Sheets at
their cost, which is not significantly less than amortized
cost, and the difference between cost and the amount realized
at maturity is included with Interest Income in the
Consolidated Statements of Operations.
Retroactive application of SFAS 115 is not permitted. Prior to
the 1995 fiscal year, the Company's method of accounting for
marketable securities was to reflect their value at cost.
Under both SFAS 115 and the prior accounting method, an
unrealized loss is recognized for any decline in an individual
investment's fair value below cost that is judged to be other
than temporary. Realized gains and losses on the sales of
investments are determined on the specific identification
basis.
Depreciation
-17-
The Company uses the straight-line method to compute
depreciation on machinery leased to licensees and property,
plant and equipment.
Investment in Affiliate
Investment in affiliate, defined as owned more than 20% but
not more than 50%, is accounted for on the equity method.
Because this affiliate was purchased from a more-than- 50%
owner of Wellco, the investment was initially recorded at that
entity's basis at the date of Wellco's acquisition. The excess
of that basis over Wellco's cost of acquisition ($650,000, net
of the effect of income taxes) was recorded as an increase in
Additional Paid-In Capital.
Machinery Leased to Licensees
Certain shoe-making machinery is leased to licensees under
cancelable operating leases. Such activity is accounted for by
the operating method whereby leased assets are capitalized and
depreciated over their estimated useful lives (5 to 10 years)
and rentals, based primarily on the volume of shoes produced
or shipped by the lessees, are recorded during the period
earned.
Intangible Asset
The excess of the fair value (as determined by the Board of
Directors) of Wellco Enterprises, Inc. common stock issued
over the net assets of Ro-Search, Incorporated at acquisition
is not being amortized. This asset arose prior to 1970 and, in
the opinion of management, there has not been any diminution
in its value.
Pensions
The Company has two non-contributory, defined benefit pension
plans covering substantially all employees at its North
Carolina plant. The Company's policy is to fund the minimum
amount required by the Employee Retirement Income Security
Act.
Revenue Recognition
All government combat boot production contracts are fixed
price and usually have a delivery schedule of twelve to
sixteen months. Revenue is recognized for each boot shipment
after it has been inspected and accepted by the government's
Quality Assurance Representative.
Government research and development contracts are typically no
more than one year in duration. Revenue is recognized as
services are performed and invoiced. Revenues from licensees
are recognized in the period services are rendered or products
are shipped.
Statements of Cash Flows
For the purpose of these statements, current marketable
securities are not considered to be cash equivalents since
they are purchased for yield and represent a part of the
Company's investing activities.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to June
30. Because of this, the 1993 fiscal contains 53 weeks, and
all other years presented contain 52 weeks.
-18-
Postemployment Benefits
Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits", is
effective for the Company's 1995 fiscal year. As it applies to
the Company, SFAS No. 112 requires the recording of an expense
and liability for the cost of insurance benefits to employees
who are not actively at work due to illness or layoff. The
amount of this liability at July 1, 1995 was not significant.
2. RECEIVABLES:
The majority of receivables at July 1, 1995 are from the U. S. government.
The Company's policy is to require either a confirmed irrevocable bank
letter of credit or advance payment on significant order from foreign
customers. Allowances for doubtful accounts in 1995 and 1994 are not
significant.
3. INVENTORIES:
The components of inventories are:
(in thousands)
1995 1994
------ ------
Finished Goods ............................... $1,723 $ 734
Work in Process .............................. 1,415 1,183
Raw Materials and Supplies ................... 1,157 1,605
------ ------
Total ........................................ $4,295 $3,522
====== ======
4. MARKETABLE SECURITIES:
Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting
for Certain Investments in Debt and Equity Securities", was effective as of
the beginning of the 1995 fiscal year. Under SFAS 115, corporate equity and
debt securities are classified as available-for-sale and are valued in the
Consolidated Balance Sheets at their fair value (usually market value). The
difference between fair value and the securities adjusted cost, net of the
effect of income taxes, is reflected in Stockholders' Equity. U. S.
government agency notes are classified as held-to-maturity and are valued at
their cost which approximates amortized cost. Restatement of previously
issued financial statements is not permitted under SFAS 115. The Company's
previous method of accounting for investments was to reflect their value at
cost and only adjust cost by any declines in fair value below cost that were
judged to be other than temporary. Under both SFAS 115 and the previous
method of accounting, any decline in fair value below cost that is judged to
be other than temporary is recognized as an unrealized loss.
Applying FAS 115 to the July 1, 1995 Consolidated Financial Statements
resulted in corporate equity and debt securities being stated at their fair
value (an increase of $730,000 over adjusted cost) with an increase in
Stockholders' Equity, after the effect of income taxes, of $482,000. Fair
value is usually current market value at the financial statement date.
Adjusted cost, gross unrealized gains and losses and the fair value of all
Marketable Securities at July 1, 1995 is :
-19-
(in thousands)
Gross Gross
Unrealized Unrealized Fair
Adjusted Cost Gain Loss Value
------------- ---------- ---------- -----
Corporate Equity Securities ............................ $3,057 $ 778 $ 48 $3,787
Corporate Debt Securities .............................. 0 0 0 0
U. S. Government Agency Note ........................... 996 0 0 996
------ ------ ------ ------
Total .................................................. $4,053 $ 778 $ 48 $4,783
====== ====== ====== ======
Proceeds from the sale of Marketable Securities classified under FAS 115 as
available-for-sale in the fiscal year ended July 1, 1995 were $4,098,000,
resulting in gross realized gains of $354,000 and gross realized losses of
$142,000. An unrealized loss ($194,000) was recognized on one corporate
equity security whose fair value's decline below cost was judged to be
other than temporary. Realized gains and losses are determined on a
specific identification basis. The U. S. Government agency note matured in
July, 1995.
The adjusted cost and fair value of marketable securities at July 2, 1994
were:
(in thousands)
Adjusted Cost:
Corporate Equity Securities ................................. $3,334
Corporate Debt Securities ................................... 1,460
U. S. Government Agency Note ................................ 2,894
------
Total ....................................................... $7,688
------
Aggregate Fair Value ........................................ $7,900
Recognized and unrecognized investment gains and losses for the 1994 and 1993
fiscal years were:
(in thousands)
1994 1993
---- ----
Recognized During the Year-
Realized Gains ............................... $ 663 $ 1,146
Unrealized Losses ............................ (277) (677)
------- -------
Net Gain ..................................... 386 469
Unrecognized at End of Year-
Gains ........................................ 515 78
Losses ....................................... (303) (649)
------- -------
Net Unrealized Gain .......................... $ 212 $ 132
-20-
5. INVESTMENT IN AFFILIATE:
On December 30, 1994 Wellco purchased from Coronet Insurance Company for
cash 400,000 shares of the common stock of Alba Waldensian, Inc. (Alba)
$4,250,000 was paid to Coronet and $225,000 was paid for investment bankers
fees, legal fees and other investigation costs. This represents 21.5% of
total Alba common shares. At December 30, Coronet owned 58.79% of the total
outstanding common stock of Wellco. Because Coronet owned more than 50% of
Wellco, the investment was recorded at the basis of Coronet in these Alba
shares ($5,461,000), and the excess of that basis over Wellco's cost
increased Additional Paid-In Capital by $650,000, net of the effect of
income taxes. The total market value of these shares, based on the closing
price of Alba common stock on the American Stock Exchange on June 29,1995
was $3,650,000. Management has evaluated the reasons for the decline in
Alba's market price since its acquisition and has concluded that the
decline is temporary.
Wellco has an option to purchase up to 538,000 additional Alba shares from
Coronet. If all of this option was exercised, Wellco would own 50.4% of
total Alba common shares.
The investment in Alba is accounted for using the equity method. The excess
of Wellco's equity in the underlying net assets of Alba ($747,000) over its
basis is being amortized to income over a remaining period of approximately
7 years. Amortization included in Equity in Earnings of Affiliate in the
Consolidated Statements of Operations is $50,000 in the year ended July 1,
1995.
Alba is a manufacturer of both men's and women's apparel products as well
as medical specialty products. Other than this investment, there are no
business relationships or transactions between Wellco and Alba.
Summarized financial information (unaudited) for Alba is as follows:
(in thousands)
Financial Position at July 2, 1995:
Current Assets ................................................ $29,291
Noncurrent Assets ............................................. 23,673
-------
Total Assets .................................................. 52,964
Current Liabilities ........................................... 8,270
Noncurrent Liabilities ........................................ 15,500
Stockholders' Equity .......................................... 29,194
-------
Total Liabilities and Stockholders' Equity .................... $52,964
Operating Results for the Six Months Ended
July 2, 1995:
Net Revenues .................................................. $30,630
Income Before Income Taxes .................................... 144
Net Income .................................................... $ 90
-21-
6. MACHINERY LEASED TO LICENSEES:
Accumulated depreciation netted against the cost of leased assets in the
1995 and 1994 consolidated balance sheets is $1,408,000 and $1,337,000.
Rental revenues for the fiscal years 1995, 1994, and 1993 were $122,000,
$146,000 and $114,000, substantially all of which vary with lessee's
production or shipments.
7. PROPERTY, PLANT AND EQUIPMENT:
The cost and accumulated depreciation of property, plant and equipment is
summarized as follows:
(in thousands)
1995 1994 Estimated Useful
Life
---- ---- ----------------
Land ................................ $ 107 $ 107
Buildings ........................... 774 774 45 Years
Machinery &
Equipment ........................... 2,226 2,190 2-20 Years
Furniture & Fixtures ................ 411 337 2-10 years
Leasehold Improvements .............. 63 63 *
------ ------ ----------
Total Cost .......................... $3,581 $3,471
Total Accumulated
Depreciation ........................ $2,550 $2,474
*Leasehold improvements are amortized using the straight-line method over the
shorter of the estimated useful lives of the improvements or the period of
the respective leases.
8. LINE OF CREDIT:
The Company has a $1,500,000 unsecured bank line of credit. Interest is at
the bank's prime rate. The line, which expires December 30, 1995, can be
renewed annually at the bank's discretion. At July 1, 1995, $1,480,000 was
available for borrowing under this line.
9. ACCRUED LIABILITIES:
The components of accrued liabilities are:
(in thousands)
1995 1994
---- ----
Compensation ............................. $ 744 $ 810
Pension .................................. 286 120
Other .................................... 388 218
------ ------
Total .................................... $1,418 $1,148
-22-
10. PENSION PLANS:
The Company's pension plans provide retirement benefits based on either
years of service or final average annual earnings.
The components of pension expense computed in accordance with Statement of
Financial Accounting Standards No. 87 (Employers' Accounting For Pensions)
are:
(in thousands)
1995 1994 1993
---- ---- ----
Benefits Earned for Service in the
Current Year ............................... $ 134 $ 97 $ 90
Interest on the Projected Benefit
Obligation ................................. 357 373 374
Return on Plan Assets ...................... (207) (196) (201)
Amortization of: Unrecognized Net
Pension Obligation at July 1, 1987;
Cost of Benefit Changes Since That
Date; and Gains and Losses Against
Actuarial Assumptions ..................... 129 131 119
----- ----- -----
Pension Expense ............................ $ 413 $ 405 $ 382
The liability of the plans at July 1, 1995 and July 2, 1994, and the
components of the pension liability accrued in the balance sheets are:
(in thousands)
Pension Liability: 1995 1994
---- ----
Accumulated Benefit Obligation,
Substantially All Vested ....................... $ 4,742 $ 4,301
Obligation for Actuarially Projected
Future Salary Increases ........................ 322 352
Projected Benefit Obligation ..................... 5,064 4,653
Plan Assets at Fair Value ........................ (2,568) (2,534)
Projected Obligation Greater than Assets ......... 2,496 2,119
Less Projected Future Salary Increases ........... (322) (352)
Pension Liability Recognized in the
Consolidated Financial Statements ................ $ 2,174 $ 1,767
-23-
(in thousands)
1995 1994
---- ----
Components of Pension Liability:
Unamortized Costs Not Yet Charged
Against Operations-
Net Obligation at July 1, 1987 ..................... $ 497 $ 568
Net Obligation From Changes to the
Plans Since July 1, 1987 ......................... 369 412
Net Loss From Actuarial Assumptions
Being Different Than
Actual ........................................... 893 411
Less Projected Future Salary Increases ............. (322) (352)
Total Liability Not Yet Charged Against
Operations ....................................... 1,437 1,039
Amount of Liability That Has Been Charged
Against Operations ............................... 737 728
------- -------
Total Pension Liability ............................ $ 2,174 $ 1,767
The pension liability not yet charged against operations is a part of the
long-term pension obligation liability. This liability at July 1, 1995 is
offset by an intangible pension asset of $642,000 ($575,000 at July 2,
1994) and an equity reduction, net of income taxes, of $525,000 ($306,000
at July 2, 1994).
Plan assets are invested in the General Investment Account of the Company's
actuary. This account invests primarily in high-quality, fixed income
mortgage obligations and corporate bonds. The assumed average discount rate
and the expected long-term rate of return on plan assets is 7.5% ( 8% for
1994). To the extent projected benefits are based on final average annual
earnings, the assumed rate of annual increase in future salary levels is
5.5% (6.5% for 1994).
11. RETIREE HEALTH BENEFITS:
The Company provides health insurance benefits for qualified retired
employees of its North Carolina plant. Statement of Financial Accounting
Standards No. 106, "Employers Accounting for Postretirement Benefits Other
Than Pensions" (FAS 106) was effective for the 1994 fiscal year. This
Statement requires the recognition of the cost of postretirement benefits
over the service lives of employees and the recognition, either immediately
upon adoption of the Statement or over average remaining future service
lives, of the liability at the date of adoption (July 4, 1993). The 1995
and 1994 Consolidated Financial Statements reflect the Statement's adoption
and the Company elected to recognize the liability over remaining future
service lives. Restatement of previously issued financial statements is not
permitted. The Company's previous accounting method for postretirement
health benefits was to expense costs in the period paid.
Employees of the North Carolina plant who meet certain criteria and retire
early (age 62-64) or disabled receive for themselves, but not for their
dependents, the same health insurance benefits received by active
employees. All benefits terminate when the employee becomes eligible to
receive Medicare (usually age 65 or 30 months after disability date). This
benefit is provided at no cost to the employee and the Company does not
fund the cost of this benefit prior to costs actually being incurred.
-24-
The cost of retiree health benefits for the 1995 and 1994 fiscal year as
computed under FAS 106 was:
(in thousands)
1995 1994
---- ----
Benefits Earned for Current Service ...................... $20 $19
Interest Cost on Accumulated Liability ................... 20 21
Amortization of the July 4, 1993 Liability ............... 13 15
--- ---
Total Cost ............................................... $53 $55
Retirement health benefit costs expensed in the fiscal year 1993, under the
Company's previous accounting method, was $26,000.
The reconciliation of the total liability to the amount included as a
liability in the Consolidated Balance Sheet at July 1, 1995 and July 2,
1994 is:
(in thousands)
1995 1994
---- ----
Accumulated Liability For-
Retired Employees .................................... $ 12 $ 46
Fully Qualified Employees ............................ 0 9
Other Employees ...................................... 267 215
----- -----
Total ................................................ 279 270
Less Balance of Unrecognized
Liability at July 4, 1993 .......................... (254) (268)
Unrecognized Net Gain Since July 4, 1993 ............. 32 29
Liability Recognized in the Consolidated
Balance Sheet ..................................... $ 57 $ 31
The assumed health care cost trend rate used to project expected future
cost was 13.2% in 1995 (14% in 1994), gradually decreasing to 6% by 2004
and remaining at 6% thereafter. The assumed discount rate used to determine
the accumulated liability was 8% at July 1, 1995 ( 7.5% at July 2, 1994).
The effect of a 1% increase in the assumed health care cost trend rate for
each future year would not have a significant effect on the service and
interest cost components of the current period cost or on the accumulated
liability.
12. INCOME TAXES:
In fiscal year 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". The Standard requires
that an asset and liability approach be used in accounting for income taxes
and provides revised criteria for the recognition of deferred tax assets.
As permitted by the Standard, prior year financial statements have not been
restated. The cumulative prior year effect of adopting SFAS No. 109 was
recorded in 1993 and increased net income by $260,000.
-25-
This primarily represents the benefit of being able to reduce future years'
taxable income by certain expenses previously recognized for financial
statement purposes.
The provision for income taxes consist of the following:
(in thousands)
1995 1994 1993
---- ---- ----
Federal-
Currently Payable .................. $ 143 $ 458 $ 556
Deferred ........................... 45 (84) (10)
----- ----- -----
Total Federal ...................... 188 374 546
State .............................. 55 118 157
----- ----- -----
Total Provision .................... $ 243 $ 492 $ 703
A reconciliation of the effective income tax rate for the 1995, 1994 and
1993 fiscal years is as follows:
1995 1994 1993
---- ---- ----
Statutory Federal Income Tax Rate ............. 34% 34% 34%
Current Period Income of Puerto Rico
Subsidiary
Substantially Exempt From Puerto Rican
and Federal Income Taxes .................... (11%) (11%) (10%)
State Taxes, Net of Federal Tax Benefit ....... 4% 4% 5%
Untaxed Portion of Dividend Income ............ (5%) * *
Other ......................................... (2%) (3%)
Effective Income Tax Rate ..................... 20% 24% 29
* less than 1%
Income earned in Puerto Rico by the Company's Puerto Rican subsidiary is
not subject to United States federal income tax and is 90% exempt from
Puerto Rican income tax through 2000.
The accumulated undistributed earnings ($4,335,000 at July 1, 1995) of this
subsidiary are subject to a Puerto Rican tollgate tax (5%) when remitted to
the parent company. Accrued tax liabilities have been provided for the
tollgate tax reasonably expected to be paid in the future. In 1994 under a
new Puerto Rican law, the Company elected to prepay at a 8% rate certain
tollgate taxes previously accrued at 10%. This is the primary reason for
the decrease in the 1994 effective tax rate.
-26-
Significant components of the Company's deferred tax assets (no valuation
allowance considered necessary) and liabilities as of the end of fiscal
1995 and 1994 are as follows:
(in thousands)
1995 1994
---- ----
Deferred Tax Assets:
Investment Write Downs Recognized
in Financial Statements,
Not Yet Deducted From Taxable Income ..................... $209 $215
Pension Cost Charged Against Financial
Statement Income, Not Yet Deducted
From Taxable Income .................................... 153 207
Tax Effect of Pension Liability Charged
Against Equity ......................................... 270 158
Employee Compensation Charged Against
Financial Statement Income, Not Yet
Deducted From Taxable Income ........................... 132 137
Other .................................................... 97 71
---- ----
Total Deferred Tax Asset ................................. 861 788
Deferred Tax Liabilities:
Depreciation Deducted From Taxable Income
Not Yet Charged Against Financial Statement
Income ................................................. 51 63
Deferred Tax Liability on the Adjustment of
Marketable Securities to Fair Value .................... 248
Deferred Tax Liability on Increase in Basis
of Investment in Affiliate ............................. 335
Other .................................................... 23 5
---- ----
Total Deferred Tax Liability ............................. 657 68
---- ----
Net Deferred Tax Asset ................................... $204 $720
13. STOCK OPTIONS:
All options under the Company's 1985 Stock Option Plan have been granted.
Options have a term of 10 years from the date granted and have an exercise
price equal to the fair market value on the date granted. Shares under
option and fully exercisable at the end of the last three fiscal years are:
1995 1994 1993
---- ---- ----
Options Granted February 10, 1986 for the
Purchase of 6,000 Shares at $10.125 Each ...... 6,000
Options Granted June 14, 1989 for the
Purchase of 10,880 Shares at $16.50 Each ...... 700 700 10,800
In September, 1993, 16,100 shares of the Company's Common stock was issued
upon employees' exercise of stock options. The excess of the amount
received over the par value of shares issued
-27-
increased Additional Paid-in Capital.
14. SEGMENT AND REVENUE INFORMATION:
The Company operates in one industry segment. Substantially all the
Company's operating activity is from the sale of military footwear and
related items, whether sold directly by the Company or its licensees.
Revenues by class of product, major customer and export revenues for 1995,
1994 and 1993 were:
Percent of Total Revenues
1995 1994 1993
---- ---- ----
Revenues By Class of Product:
Sales of Footwear and Related Items ........... 96% 96% 95%
Revenues From Licensees ....................... 4% 4% 5%
--- --- ---
Total ......................................... 100% 100% 100%
Major Customer-U. S. Government ............... 66% 74% 62%
Export Revenues ............................... 12% 6% 14%
The majority of export revenues are to Central and South American
countries.
15. GOVERNMENT BOOT CONTRACT REVENUES:
In 1994 two contract actions were settled with the U. S. government, and
this resulted in an increase in income before income taxes of $255,000.
This amount is the excess of the actual settlement amounts over previously
recorded estimates. At July 1, 1995, all significant contract items had
been settled.
16. COMMITMENT:
Under a Resolution of its Board of Directors, Wellco is committed to
purchase its Common Stock, which, as of September 6, 1990, was owned by or
under option with an active or retired employee at that date. This purchase
is at the employee or retiree option and is activated only by the
termination of employment or death of the retiree. The purchase price is to
be based on Wellco's tangible book value at the time of purchase. The
maximum shares that could be purchased at July 1, 1995 is approximately
34,000.
-28-
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Wellco Enterprises, Inc.
Waynesville, North Carolina
We have audited the accompanying consolidated balance sheets of Wellco
Enterprises, Inc. and subsidiaries as of July 1, 1995 and July 2, 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended July 1, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Wellco Enterprises, Inc. and
subsidiaries as of July 1, 1995 and July 2, 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
July 1, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of accounting for marketable securities during fiscal year
1995 to conform with Statement of Financial Accounting Standards No. 115. As
discussed in Note 12 to the consolidated financial statements, the Company
changed its method of accounting for income taxes during fiscal year 1993 to
conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
September 11, 1995
-29-
WELLCO ENTERPRISES, INC.
PRICE RANGE, DIVIDENDS AND MARKET OF COMMON STOCK
Fiscal Year 1995 Quarter
First Second Third Fourth
Market Price-
High ....................................................... 17 3/8 18 17 1/2 17 1/8
Low ........................................................ 14 3/4 15 5/8 14 7/8 15
Per Share Cash Dividend Declared ........................... $.12 1/2 $.12 1/2
Fiscal Year 1994 Quarter
First Second Third Fourth
Market Price-
High ..................................................... 34 7/8 21 7/8 15 1/4 14 3/4
Low ...................................................... 15 3/4 13 7/8 14 1/4 14
Per Share Cash Dividend Declared ......................... $ 6.00 $.12 1/2 $.12 1/2
The Company's Common Stock is traded on the American Stock Exchange.
The number of holders of record of Wellco's Common Stock as of August 29, 1995
was 321.
Registrar and Transfer Agent
Chemical Bank
New York, N. Y.
-30-
WELLCO ENTERPRISES, INC.
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
(In Thousands Except for Per Share Amounts)
Fiscal Year 1995 Quarter
First Second Third Fourth
Revenues ...................................... $4,908 $5,045 $4,255 $3,795
Cost of Sales and Services .................... 4,174 4,047 3,775 3,132
Net Income .................................... 220 380 139 (A) 230
Net Income Per Share .......................... $ .25 $ .43 $ .16 $ .26
Fiscal Year 1994 Quarter
First Second Third Fourth
Revenues ................................... $3,398 $4,524 $4,396 $5,937
Cost of Sales and Services ................. 3,044 3,829 3,523 4,507
Net Income ................................. 81 (B) 393 376 (C) 692
Net Income Per Share ....................... $ .09 $ .44 $.42 $ .78
(A) Increased by $116,000 representing the adjustment of tax provisions for the
first three quarters, made at estimated annual effective tax rates, to the
actual rate for the year.
Reflects $89,000 charitable contribution to the Wellco Foundation.
(B) Includes $212,000 gain on sale of investments.
(C) Increased, by $143,000 in the fourth quarter and $61,000 in the third
quarter, by the settlement of certain U. S. government contract actions at
amounts different than the previously recorded estimates.
The fourth quarter also reflects -
$138,000 charitable contribution to the Wellco Foundation.
$50,000 reduction in tax provision from the prepayment of certain taxes at
a rate lower than that previously provided.
-31-
Officers and Directors
HORACE AUBERRY
Chairman of the Board
ROLF KAUFMAN
President
Officers
DAVID LUTZ
Secretary-Treasurer
SVEN E. OBERG
V. P. - Technical Director
RICHARD A. WOOD, Jr.
Assistant Secretary; Attorney, Member of the law firm of McGuire, Wood &
Bissette, P. A.
Directors
WILLIAM M. COUSINS, Jr.
President of William M. Cousins, Jr., Inc.
(Management Consultants)
CLYDE Wm. ENGLE
Chairman of the Board and Chief Executive Officer of Telco Capital Corporation
JAMES M. FAWCETT, Jr.
Registered Representative and Agent for The Equitable Companies, Inc.
JOSEPH MINIO
President and Chief Executive Officer of Belle Haven Management, Ltd.
LEE M. MORTENSON
President and Chief Operating Officer of Sunstates Corporation
J. AARON PREVOST
Retired Banker
WILLIAM D. SCHUBERT
Principal of Advanced Management Concepts
(Management Consultants)
-32-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no resignations by or dismissals of any independent accountant
engaged by the Company during the 1994 or 1995 fiscal years or during the period
from the end of the 1995 fiscal year through the date of filing this Form 10-K.
PART III
Responsive information called for by the following Items 10, 11, 12 and 13,
except for certain information about executive officers provided below, will be
filed not later than 120 days after the close of the fiscal year with the
Securities and Exchange Commission in a Proxy Statement dated October 17, 1995,
and is incorporated herein by reference. After each item and shown in
parenthesis is the proxy heading for the section containing the responsive
information.
Item 10. Directors and Executive Officers of the Registrant.
(Board of Directors)
The Proxy Statement is not expected to contain information
disclosing delinquent Form 4 filers.
Identification of Executive Officers:
Name Age Office
Horace Auberry 64 Chairman of the Board of Directors
Rolf Kaufman 64 President and Director
Sven Oberg 56 Vice President-Technical Director
David Lutz, CPA 50 Secretary-Treasurer
Richard A. Wood, Jr. 58 Assistant Secretary
There are no arrangements or understandings pursuant to which any of the
officers are elected, and all are elected to serve for one year terms. All
officers have served in their indicated capacities for more than 5 years.
Item 11. Executive Compensation.
(Executive Compensation)
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(Security Ownership)
Item 13. Certain Relationships and Related Transactions.
(Board of Directors/Security Ownership)
Since the beginning of the 1995 fiscal year, no executive officer of the
Registrant or member of his immediate family has had any transaction or series
of similar transactions with the Registrant or any of its subsidiaries exceeding
$60,000, and there are no currently proposed transactions exceeding $60,000.
-5-
Since the beginning of the 1995 fiscal year, no -
(1) executive officer of the Registrant or member of his immediate family,
(2) corporation or organization of which any such person is an executive
officer, partner, owner or 10% or more beneficial owner, or
(3) trust or other estate in which any such person has a substantial interest
or as to which such person serves as trustee or in a similar capacity,
was indebted to the Registrant or its subsidiaries in an amount exceeding
$60,000.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
1. All Financial Statements
Page
Number
Independent Auditors' Report 9
The following consolidated financial statements
of Wellco Enterprises, Inc. are in the
Registrant's 1995 Annual Report which is integrated
into Part II of this Form 10-K
immediately after page 4
Balance Sheets-at July 1, 1995 and July 2, 1994 12-13*
Statements of Operations-years ended July 1, 1995,
July 2, 1994 and July 3, 1993 11*
Statements of Cash Flows-years ended July 1, 1995,
July 2, 1994 and July 3, 1993 14-15*
Statements of Stockholders' Equity-years ended July 1, 1995,
July 2, 1994 and July 3, 1993 16*
Notes to Consolidated Financial Statements 17-28*
* Page number in the 1995 Annual Report to Shareholders integrated in Part II of
this Form 10-K.
2. Financial Statement Schedules
Page
Number
Schedule II Valuation and Qualifying Accounts 11
The audited financial statements of Alba-Waldensian, Inc., a less than 50% owned
significant subsidiary, for their fiscal year ended December 31, 1995 will be
filed as an amendment to this Form 10-K within 90 days after December 31, 1995.
All other schedules are omitted because they are not applicable or not required.
-6-
3. Exhibits
Exhibit Page
Number Description Number
3 Articles of Incorporation and By-Laws 13
10 Material Contracts:
A. Bonus Arrangement* (a)
B. 1985 Stock Option Plan for Key Employees of Wellco
Enterprises, Inc.* (b)
21 Subsidiaries of Registrant 14
23 Consent of Experts (c)
27 Financial Data Schedule 15
* Management Compensation Arrangement/Plan.
Copies of the below listed exhibits may be obtained on written request to
Corporate Secretary, Wellco Enterprises, Inc., Box 188, Waynesville, N. C.
28786, accompanied by payment of the following amounts for each copy;
Exhibit 3 $40.00
Exhibit 10 A. 2.00
Exhibit 10 B. 3.00
(a) Exhibit was filed in PART IV of Form 10-K for the fiscal year ended July 3,
1982, and is incorporated herein by reference.
(b) Exhibit was filed as Exhibit A to the Proxy Statement dated October 22,
1985, and is incorporated herein by reference.
(c) Consent is contained in opinion of independent certified public accountants
on page 9.
Item 14 (b) - Reports on Form 8-K
There were no reports on Form 8-K for the three months ended July 1, 1995.
-7-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Wellco Enterprises, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WELLCO ENTERPRISES, INC.
/s/ Horace Auberry /s/David Lutz
By: Horace Auberry, Chairman By: David Lutz, Secretary-Treasurer
(Co-Principal Executive Officer) (Principal Financial and Accounting Officer)
/s/ Rolf Kaufman
By: Rolf Kaufman, President
(Co-Principal Executive Officer)
Date: September 27, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Horace Auberry /s/ J. Aaron Prevost
Horace Auberry J. Aaron Prevost
(Chairman) (Director)
/s/ Rolf Kaufman /s/ James M. Fawcett, Jr.
Rolf Kaufman James M. Fawcett, Jr.
(Director) (Director)
/s/ William M. Cousins, Jr.
William M. Cousins, Jr.
(Director)
Date: September 27, 1995
-8-
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Wellco Enterprises, Inc.
Waynesville, North Carolina
We have audited the accompanying consolidated balance sheets of Wellco
Enterprises, Inc. and subsidiaries as of July 1, 1995 and July 2, 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended July 1, 1995. Our audits
also included the financial statement schedule filed under Part IV of Item
14(a)2. These financial statements and financial statement schedule are the
responsiblility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Wellco Enterprises, Inc. and
subsidiaries as of July 1, 1995 and July 2, 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
July 1, 1995 in conformity with generally accepted accounting principles. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of accounting for marketable securities during fiscal year
1995 to conform with Statement of Financial Accounting Standards No. 115. As
discussed in Note 12 to the consolidated financial statements, the Company
changed its method of accounting for income taxes during fiscal year 1993 to
conform with Statement of Financial Accounting Standards No. 109.
We consent to the incorporation by reference of the above report in the
Prospectus constituting part of the Registration Statement 33-8246 of Wellco
Enterprises, Inc. on Form S-8.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
September 11, 1995
-9-
WELLCO ENTERPRISES, INC.
FORM 10-K
FISCAL YEAR ENDED JULY 1, 1995
INDEX TO FINANCIAL STATEMENT SCHEDULE AND EXHIBITS
Page
Financial Statement Schedule: Number
Schedule II-Valuation and Qualifying Accounts 11
Audited Financial Statements of Less Than 50%
Owned Significant Subsidiary 12
Exhibits:
Exhibit 3-Articles of Incorporation and By-Laws 13
Exhibit 10 A.-Bonus Arrangement (a)
Exhibit 10 B.-1985 Stock Option Plan for Key
Employees of Wellco Enterprises, Inc. (b)
Exhibit 21-Subsidiaries of Registrant 14
Exhibit 23-Consent of Experts (c)
Exhibit 27-Financial Data Schedule 15
(a) Exhibit was filed in PART IV of Form 10-K for the fiscal year ended July 3,
1982, and is incorporated herein by reference.
(b) Exhibit was filed as Exhibit A to the Proxy Statement dated October 22,
1995, and is incorporated herein by reference.
(c) Consent is contained in opinion of Independent Certified Public Accountants
on page 9.
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SCHEDULE II
WELLCO ENTERPRISES, INC. AND WHOLLY-OWNED SUBSUDIARIES
VALUATION ACCOUNTS
FOR THE FISCAL YEARS ENDED JULY 1, 1995, JULY 2, 1994 AND JULY 3, 1995
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO BALANCE AT
DESCRIPTION YEAR INCOME DEDUCTIONS END OF YEAR
Allowance for
doubtful
accounts-
1995 $43 $ 6(A) $37
1994 61 18(A) 43
1993 67 6(A) 61
(A) Write off of uncollectable accounts.
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WELLCO ENTERPRISES, INC.
AUDITED FINANCIAL STATEMENTS OF LESS THAN 50% OWNED SIGNIFICANT SUBSIDIARY
The audited financial statements of Alba-Waldensian, Inc., a less than 50% owned
significant subsidiary, for their fiscal year ended December 31, 1995 will be
filed as an amendment to this Form 10-K within 90 days after December 31, 1995.
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