FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 28, 1997
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 5, 1997, 1,160,646 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 September 4, 1997) of Wellco
Enterprises, Inc. held by nonaffiliates was approximately $9,300,000.
Documents incorporated by reference:
Definitive Proxy Statement, to be dated October 17, 1997, in PART III.
Definitive Proxy Statement, to be dated October 18, 1996, in PART IV.
Definitive Proxy Statement, dated October 17, 1995, in PART IV.
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 (69% in
1997, 70% in 1996) were from sales to the U. S. government, primarily the U. S.
Defense Personnel Support Center (DPSC), under contracts for the supply of boots
used by the U. S. armed forces.
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. In 1997, the Company was also awarded
contracts for the supply of the intermediate cold/wet boot and the new infantry
combat boot. 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 usually sold,
but in some cases it is leased.
During the 1997 fiscal year, total revenues increased approximately 6%,
primarily because of an increase in the pairs of combat boots sold to the U. S.
government.
On April 15, 1997, Wellco was awarded a new contract from DPSC for the supply of
combat boots. This contract is for a one year period with four one year options.
This contract requires delivery in the first year of between 227,000 and 315,000
pairs, which equates to a total contract value in the first year of between
approximately $13,151,000 and $18,322,000. A total of four contracts were
awarded, with Wellco receiving 25% of total boots to be bought in the first
year, and the other three awardees receiving 35%, 20% and 20%.
DPSC had estimated that the award of this contract would be in December, 1996,
and Wellco substantially completed shipments under its prior contract in that
month. Instead of ceasing combat boot manufacturing operations from January,
1997 to contract award, Wellco continued to manufacture and inventory boots in
anticipation of a contract award. This resulted in a significant increase in
inventory by the date of a contract award and a significant reduction in
revenues for the third quarter of 1997. After a contract award, Wellco was
allowed to accelerate shipments under the contract until the end of June, 1997.
This reduced inventory and resulted in increased combat boot sales for all of
1997. However, this acceleration of shipments will result in combat boots
shipped under this contract through the end of its first year ( April 15, 1998)
being less than they would have otherwise been.
In February, 1997 Wellco was awarded a contract by DPSC to supply the
intermediate cold/wet boot. This is the first award to Wellco for this type of
boot. A total of two contracts were awarded and Wellco's contract is for 40% of
total pairs to be bought in the first year. The contract requires delivery in
the first year of between 80,000 and 122,000 pairs of this boot, which equates
to a total contract value in the first year of between approximately $6,400,000
and $9,600,000. This contract also gives DPSC two options, each providing for
total purchases of between 110,000 and 165,000 pairs of this boot, with one
contractor receiving 60% and the other 40% of total pairs purchased during each
option. The first shipments under this
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contract occurred in the fourth quarter of fiscal year 1997.
On June 25, 1997, DPSC awarded Wellco a contract to supply a new boot, called
the infantry combat boot, which will be used by the Marine Corps. A total of two
contracts were awarded and Wellco's contract is for 60% of total pairs to be
bought in the first year. The contract requires delivery in the first year of
between 42,000 and 69,000 pairs of this boot, which equates to a total contract
value in the first year of between approximately $2,900,000 and $4,800,000. This
contract also gives DPSC two options, each providing for total purchases of
between 53,000 and 115,000 pairs of this boot, with one contractor receiving 60%
and the other 40% of total pairs purchased during each option. Shipments under
this contract will start in October, 1997.
Prior to any option award under these three boot contracts, DPSC will evaluate
each contractor's performance during the prior contract period. Each option
award will be allocated between the contractors by the percentages stated above
for each contract, with the contractor evaluated as having the best performance
in the prior period receiving the larger percentage. In prior contracts, each
contractor was awarded option pairs at the same percentage as the first contract
year. The exercise of any option is at the unilateral discretion of the
government.
Under the Company's prior contracts, combat boots were shipped to government
warehouses on a prescribed delivery schedule. Both the new combat boot and
infantry combat boot contracts require Wellco to ship direct to the customer and
Wellco is evaluated on how quickly it ships boots after order receipt. In order
to have the boots in inventory in sizes ordered for quick shipment, Wellco has
significantly increased its working capital allocated to inventory.
Note 13 to the Company's 1997 Annual Report gives information about Wellco's
repurchase in the 1996 year of 1,531,272 of its common shares, representing
57.69% of total shares outstanding at that time. For several years prior to this
stock repurchase, Wellco invested funds not currently needed for operations in
certain marketable securities. Wellco's Consolidated Statements of Operations
included varying amounts of investment, dividend and interest income. From 1995
and until the date of stock repurchase in 1996, Wellco also owned 400,000 shares
(approximately 21.5% of total shares) of the common stock of Alba Waldensian,
Inc. Wellco's Consolidated Statements of Operations included during this period
21.5% of the earnings or losses of Alba.
In 1996, Wellco sold all marketable securities. The cash from these sales,
combined with a certain amount of cash invested in an interest-bearing overnight
account and the 400,000 shares of Alba, was used to pay for the stock
repurchase. Therefore, the 1997 Consolidated Statements of Operations does not
include investment income and equity in the income or loss of Alba.
In April 1997, the Company was served with a subpoena issued by a grand jury
empaneled in the United States District Court for the Eastern District of
Pennsylvania which requires the production of certain documents for the period
January 1, 1990 until April 29, 1997. The Company has been informed through its
legal counsel that the grand jury is investigating possible violations of
antitrust laws primarily involving alleged collusive activities among
manufacturers of combat boots for the U.S. government. The Company is
cooperating in this investigation, does not believe it has engaged in any
illegal conduct and does not believe that this matter will have a material
adverse effect on the Company's financial position or results of future
operations. However, the Company cannot predict what the final outcome of this
matter will be.
In 1988, the Company and other military combat boot manufacturers responded to
subpoenas which investigated possible violation of antitrust laws involving bids
submitted on military combat boot procurements for January 1, 1979 through May
6, 1988. This investigation was closed in 1992 and no legal action resulted from
it.
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The Management's Discussion and Analysis of the Company's 1997 Annual Report,
included in Item 8 of Section II of this Form 10-K, contains more information
about 1997 operating results.
Bidding on U. S. government boot solicitations is open to any qualified U. S.
manufacturer. In addition to meeting very stringent manufacturing and quality
specifications, contractors are required to comply with demanding delivery
schedules and a significant investment in specialized equipment is required.
The U. S. government usually evaluates bids received on solicitations for boots
using their "best value" system, under which bidders offering the best value to
the government are awarded a greater portion of total boots purchased. Best
value usually involves an evaluation of performance considerations, such as
quality and delivery, with the prices bid being less important. As bidders
become more equal in the best value evaluation, price becomes more important.
For the combat boot contract awarded April 15, 1997, Wellco and one other bidder
were given the highest possible evaluation. However, since Wellco's bid prices
were higher, Wellco was awarded the 25% allocation of total boots, and the other
competitor received 35%.
Since 1992, the government has been reducing its inventory of combat boots by
buying fewer pairs than were consumed. The current combat boot contract
establishes total minimum and maximum pairs to be ordered from all contractors
for each year of the contract of 703,220 and 1,055,828, which is less than
estimated consumption, and is also less than the total annual pairs ordered
under the prior contract. The Company estimates that the government will reach
its desired inventory level between the fourth and fifth years of the contract,
when it expects orders to increase to the level of consumption.
The Company usually competes on U. S. government contracts with several other
companies, none of which dominates the industry. Bidding on contracts is very
competitive, and since most contracts are for multi-year periods, a bidder not
receiving an award from a significant solicitation can be adversely affected.
Many factors affect the government's demand for combat boots and the quantity
purchased can vary from year to year. Contractors cannot influence the
government's combat boot needs. Price, quality, quick delivery 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:
(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,
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as well as boots bottomed by injection molding. These methods are used in work
shoes, safety shoes, and hiking boots manufactured both in the U. S. and abroad
for the commercial market. Quality, service and reasonable manufacturing costs
are the most important features used to market the Company's technology,
assistance and services.
The Company has a strong research and development program. While not all
research and development results in successful new products or significant
revenues, the continuing development of new products and processes has been and
will continue to be a significant factor in growth and development. 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, and the results of this work were subsequently incorporated into
the black hot weather boot. In August, 1995 it was awarded a contract to develop
changes to combat boots that will result in fewer lower extremity disorders, and
completed the first phase of this work in 1996. This contract can have up to
three phases, and after the end of the 1997 fiscal year, the government
authorized the second phase's start.
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 17 to the Consolidated Financial Statements 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, 1997 was approximately $18,700,000 compared to $5,700,000 last
year. The Company estimates that substantially all of the current year backlog
will be shipped in the 1998 fiscal year. The current backlog is more than the
prior year because it includes the three boot contract awards mentioned above.
Most of the raw materials used by the Company can be obtained from at least two
sources and are readily available. Because all materials in combat boots must
meet rigid government specifications and because quality is the first priority,
the Company purchases most of its raw materials from vendors who provide the
best materials at a reasonable cost. The loss of some vendors would cause some
difficulty for the entire industry, but the Company believes a suitable
replacement could be found in a reasonably short period of time. Major raw
materials include leathers, fabrics and rubber, and by government regulation all
are from manufacturers in the United States.
Compliance with various existing governmental provisions relating to protection
of the environment has not had a material effect on the Company's capital
expenditures, earnings or competitive position. The Company employed an average
of 279 persons during the 1997 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 are owned by the Company. The Puerto Rico building and land are leased.
Management believes all its plants, warehouses and offices are in good condition
and are reasonably suited
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for the purposes for which they are presently used. The volume of operations in
1997 caused both the Waynesville and Aguadilla facilities to be used at less
than normal capacity.
Item 3. Legal Proceedings.
In April 1997, the Company was served with a subpoena issued by a grand jury
empaneled in the United States District Court for the Eastern District of
Pennsylvania which requires the production of certain documents for the period
January 1, 1990 until April 29, 1997. The Company has been informed through its
legal counsel that the grand jury is investigating possible violations of
antitrust laws primarily involving alleged collusive activities among
manufacturers of combat boots for the U.S. government. The Company is
cooperating in this investigation, does not believe it has engaged in any
illegal conduct and does not believe that this matter will have a material
adverse effect on the Company's financial position or results of future
operations. However, the Company cannot predict what the final outcome of this
matter will be.
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the Company's business, to which the Company or any of
its subsidiaries are a party or of which any of their property is subject.
Management does not know of any director, officer, affiliate of the Company, nor
any stockholder of record or beneficial owner of more than 5% of the Company's
common stock, or any associate thereof who is a party to a legal proceeding that
is adverse to the Company or any of its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
There were not any submissions of matters to a vote of security holders during
the fourth quarter of fiscal year 1997.
PART II
Items 5, 6, 7, 7A and 8.
The information called for by the following items is in the Company's 1997
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 33
Item 6. Selected Financial Data 1
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 5-11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk *
Item 8. Financial Statements and Supplementary Data 12-31, 34
* This information is not required because the registrant is a small business
issuer.
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 1996 or 1997 fiscal years or during the period
from the end of the 1997 fiscal year through the date of filing this Form 10-K.
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WELLCO(R)
ENTERPRISES, INC.
ANNUAL REPORT
1997
WELLCO ENTERPRISES, INC.
CONSOLIDATED SELECTED FINANCIAL DATA
(In Thousands Except for Per Share Amounts)
Year Ended
June 28, June 29, July 1, July 2, July 3,
1997 1996 1995 1994 (A) 1993
-------- -------- ------- ------- --------
Revenues ..................... $21,199 $19,968 $18,003 $18,255 $18,977
Net Income ................... 758 991 969 1,542 (B)1,980
Net Income Per Share (D) ..... 0.67 0.53 0.37 0.58 (B) 0.76
Cash Dividends Declared
Per Share of Common
Stock (D) .................... .20 .125 .083 (C)2.083 .083
Total Assets at Year End ..... 15,652 12,697 22,738 20,995 25,013
Long-Term Liabilities at
Year End ..................... $ 2,789 $ 2,431 $ 1,897 $ 1,647 $ 1,770
(A) Contains 53 weeks. All other years are 52 weeks.
(B) Increased by $260,000 ($.10 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 $2.00 per share.
(D) All per share amounts have been adjusted to give retroactive effect to
a three-for-one stock split in the form of a stock dividend paid on
January 3, 1997.
See The Management's Discussion and Analysis section.
Independent Auditors
Deloitte & Touche LLP
Charlotte, N.C.
Annual Meeting
November 18, 1997
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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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, as
well as rendering services and selling products related to military footwear.
Net income for the 1997 fiscal year was $758,000 ($.67 per share) compared to
$991,000 ($.53 per share) for the 1996 fiscal year. The increase in earnings per
share was due to 1996 average shares outstanding being weighted by the effect of
Wellco's repurchase of 57.69% of its common shares half-way through the 1996
year. Earnings per share for 1997 reflect a full year of the reduced number of
shares.
Net income for 1996 includes several significant amounts related to Wellco's
repurchase on December 29, 1995 of 1,531,272 of its common shares from its
former major shareholder. All of Wellco's marketable securities were sold in
fiscal year 1996 to pay for part of the stock repurchase, resulting in
investment income of $1,204,000. Proceeds from the sale of these securities and
Wellco's investment in the common stock of Alba-Waldensian, Inc. (described as
Investment In Affiliate in the Consolidated Balance Sheets) were used as payment
for the 1,531,272 shares of Wellco. Total investment, interest and dividend
income in 1996 was $1,419,000 compared to $53,000 of interest income in 1997.
Net income for 1996 includes a charge of $601,000 representing Wellco's equity
in the losses of Alba prior to the stock repurchase and the excess of the
carrying value of the investment in Alba above its fair value at December 29,
1995. Net income for 1996 also includes a charge of $110,000 representing the
value assigned to the agreement of that former shareholder to limit his
ownership of Wellco shares to not more than 20% of total shares for the next 10
years. These charges, which total $711,000, did not occur in 1997.
Operating income increased in 1997 to $1,226,000 from $688,000 in 1996 on an
increase in revenues of approximately 6%. This was accomplished despite an
increase in certain costs, most of which were related to two new U. S.
government contracts.
The Management's Discussion and Analysis section of this Annual Report gives you
more detailed information about operations in 1997. The section below will give
you information about what we are currently working on.
NEW BOOT CONTRACTS FROM THE U. S. GOVERNMENT:
In 1997, Wellco was awarded three contracts from the U. S. government:
1. On April 15, 1997, Wellco was awarded a contract to supply
combat boots, for a one year period starting on April 15 with
four one-year options. These are the types of boots we have
manufactured since 1980 and include the all leather boot, the
hot-wet weather boot ( jungle boot) and the hot-dry boot
(desert boot). Wellco made significant shipments under this
contract in the fourth quarter of 1997. The government made
four contract awards, with Wellco being awarded 25% of first
year total boot purchases and three other competitors
receiving 35%, 20% and 20%.
2. In February, 1997 Wellco was awarded a contract to supply the
intermediate cold/wet boot. This contract has a base year and
two options. This boot is used by U. S. Armed Forces Personnel
in cold climates such as Bosnia and Korea, and is Wellco's
first contract for this boot. For this contract, Wellco
subcontracted certain work to Rocky Shoes and Boots, a major
manufacturer of rugged commercial boots and shoes. The first
shipment under this contract was made in late June, 1997. The
government made two contract awards, with Wellco being awarded
40% of first year total boot purchases and the other
contractor
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receiving 60%.
3. On June 28, 1997 Wellco was awarded a contract for the
infantry combat boot. This contract has a base year and two
options. This is a new military boot which is made waterproof
by a Gore-Tex(TM) bootie and will be used by the Marine Corps.
The first shipments under this contract will be made in
October, 1997. The government made two contract awards, with
Wellco being awarded 60% of first year total boot purchases
and the other contractor receiving 40%.
Although we received three new contract awards in 1997, there were some
disappointments. We and our employees go to a lot of effort to maintain
our record as a top-performing contractor. Wellco and one other
competitor for the combat boot contract were both judged by the
government as having the highest possible technical rating. However,
Wellco's contract is for 25% of total combat boots to be purchased in
the first year while this competitor was awarded 35%, with two other
competitors receiving contracts for 20% each. Wellco received the lower
percent because our prices were higher.
The first contract for the new infantry combat boot was awarded in
March, 1997. We understand that boots from this contract are to be
issued as a special one-time issue to Marines. This contract was
awarded to one contractor which was not Wellco.
DEVELOPMENT CONTRACT FOR THE NEXT GENERATION OF COMBAT BOOTS:
In 1996, we completed the first phase of a development boot contract
with the U.S. Army Natick Research, Development and Engineering Center.
The objective of this contract is to develop improvements to the combat
boot that will increase its flexibility and impact resistance, while
maintaining its stability. By making these improvements, soldiers will
have fewer lower extremity injuries. Prototype boots delivered in the
first phase have been tested and evaluated, and in August, 1997 Natick
authorized work to start on second phase. This will involve making
changes to certain of the prototypes submitted in the first phase.
MACHINERY AND TECHNICAL ASSISTANCE:
Ro-Search, Wellco's wholly-owned subsidiary which manufactures certain
shoe-making machinery and renders technical assistance and other
services to footwear manufacturers, was very busy in 1997. Because of
changes in the government's delivery requirements on combat boots, many
new combat boot molds were made. In June, 1997 Ro-Search shipped about
half of the footwear-making equipment to a new prison being built in
New Jersey. In 1997, Ro-Search received and started working on an order
from its oldest customer for the largest single mold order in our
history ($900,000). This mold order will be shipped in 1998, as will be
the balance of the New Jersey equipment.
Ro-Search's sales of boot lacing system hardware and machinery
continued to make a significant contribution.
ANTI-PERSONNEL MINE PROTECTIVE FOOTWEAR:
For many years, we have sold small quantities of anti-personnel mine
protective boots and overboots, while continuing to make improvements
not only in the level of protection given by these products but also in
their comfort. Our mine protective boots and overboots are being used
by soldiers involved in mine clearance in Bosnia.
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Starting in 1996, interest in these products increased significantly
and continued to do so in 1997. To date, there have been many inquiries
and small orders. We actually make two products. One is an
anti-personnel mine protective boot and the other is an anti-personnel
mine protective overboot. They can be worn together for maximum
protection, or can be worn separately. Most of the small orders to date
have been for the overboot whose main use is in mine detection and
clearance. We are trying to emphasize that the boot itself provides
significant protection and, since it is as comfortable, if not more so,
than other military boots, it can be worn all day in mine infested
areas.
These products have very expensive components, are very complex to
manufacture, and this is reflected in their price. Perhaps it takes a
lot of cost-benefit analysis by countries where mines are prevalent in
order to determine how much a human foot is worth.
In the Spring of 1997 we had both the boot and overboot tested at the
U.S. Army's Aberdeen Proving Grounds. The results were very impressive,
and we are using Aberdeen's test reports and pictures in marketing. We
will continue to pursue the market for these products.
Competition for boot contract awards from the U. S. government was very intense
in 1997. The government will make any option awards under these contracts based
on the contractor's performance in the contract's first year and on the option
prices bid. As we move into the 1998 fiscal year, we face the challenge of
improving on our performance record.
The dedication, experience and talents of all 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. This was especially true in
1997. You will read later in this Annual Report about the delay in awarding the
combat boot contract. This significantly reduced combat boot shipments in the
third quarter of 1997. After contract award in the fourth quarter, our employees
worked countless hours and more than made up for the lack of shipments in the
third quarter. Our heartfelt gratitude is extended to all of them.
Horace Auberry David Lutz
Chairman of the Board of Directors President, Treasurer
Chief Executive Officer Chief Operating Officer
September 25, 1997
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Comparing the Fiscal Year ended June 28, 1997 to June 29, 1996:
Income before income taxes was $1,088,000 in the 1997 fiscal year compared with
$1,357,000 in the 1996 fiscal year. The 1996 year included several non-recurring
items which were:
1. A $601,000 charge for Loss in Affiliate, representing Wellco's $305,000
equity in the six- month (July-December, 1995) loss of Alba-Waldensian,
Inc. (Alba), and the $296,000 write down to fair value of that investment.
Wellco had owned 400,000 common shares of Alba (21.5% of total shares)
since December 30, 1994. Wellco's investment in Alba was exchanged on
December 29, 1995, as part of the price for Wellco's repurchase of
1,531,272 shares of its common stock. Income was also reduced by a Stock
Repurchase Charge of $110,000, which is the portion of the stock repurchase
price allocated to an agreement limiting the selling shareholders'
ownership of total Wellco shares for a period of ten years (see Note 13 to
the Consolidated Financial Statements).
2. The total of interest, dividend and investment income was $1,419,000 in the
1996 year compared to $53,000 of interest income in 1997. The prior period
included gains resulting from the sale of all marketable securities at
amounts significantly greater than their carrying value. All marketable
securities were sold to pay for the stock repurchase. The current period
only includes interest income earned on excess operating funds.
Comparative 1997 operating income, before the above items and interest expense,
was $1,226,000 as compared with $688,000 in the prior year. Several factors
resulted in the $538,000 increase, the more significant ones being:
1. Total revenues increased $1,231,000. Pairs of combat boots
sold to the U. S. government increased approximately 6%. Pairs
of combat boots sold to other customers also increased in the
current year.
2. Greater revenues from the sale of combat boots more than
offset a decrease in sales of boot making machinery and
materials. The 1997 year does include a significant machinery
sale to a new customer. However, the 1996 year included
significant boot making materials sales to a foreign customer
which were not as large as in 1997. These sales can vary
significantly from period to period with the needs of this
group of customers.
3. Revenues from technical assistance fees and equipment rentals
from licensees, which vary with their shipments, increased
approximately 42% in the current year. In addition to the
licensees having increased shipments in 1997, an additional
fee is being earned until April, 1998 related to supplying
certain of these customers with additional services.
4. Revenues from U. S. government research and development
contracts decreased $288,000 in 1997. The prior year includes
Phase I billings under a multi-phase contract whose purpose is
to develop a combat boot that is more impact resistant and
flexible. The government did not commit funding to Phase II of
this contract until after the end of the 1997 year.
-5-
Operating income for 1997 was significantly affected by increases in certain
costs:
1. Interest cost increased $152,000. On April 15, 1997, Wellco
was awarded a new contract from the U. S. Defense Personnel
Support Center (DPSC) for their purchases of combat boots.
DPSC had estimated award to be in December, 1996, and Wellco
substantially completed shipments under its prior contract
in that month. Instead of ceasing combat boot manufacturing
operations from January, 1997 to contract award, Wellco
continued to manufacture and inventory boots in anticipation
of a contract award. This resulted in significant borrowings
from a bank line of credit on which $79,000 of interest cost
was incurred.
Although the Note Payable (see Note 14) does not provide for
the payment of interest, generally accepted accounting
principles require the imputation of interest. This interest
cost for 1997, which did not occur in 1996, was $97,000.
2. The new DPSC contract requires Wellco to ship combat boots
direct to customers (more than 1,000 locations) instead of to
four government warehouses, as was the case with prior
contracts. Direct customer shipments can be from one to
several hundred pairs per order, compared to warehouse
shipments which averaged several thousand pairs per shipment.
In addition, the contract provides for maximum contractor
evaluation points for shipping within 4 days of order receipt.
Prior contracts provided for monthly shipments against
delivery orders covering several months. After the April 15
contract award, DPSC agreed to let Wellco accelerate
shipments, which had the effect of reducing some of the
significant inventory build-up. Combat boot sales in the
fourth quarter were 120,000 pairs, almost double the average
amount for preceding quarters.
All of this caused excess labor costs, freight costs to air
ship materials, and other inefficiencies in developing new
procedures required by this significant change in boot
shipment methods.
3. In February, 1997 Wellco was awarded a contract from DPSC for
the supply of the intermediate cold/wet boot, which is the
first award to Wellco of this type of boot. The introduction
of this new boot caused start up costs related to labor,
maintenance and supplies.
4. 1997 includes a $73,000 reduction in revenues from the
adjustment of certain estimated contract price adjustments,
which were recorded in 1996, to the actual amounts settled
with the government.
5. Group health insurance, for which the Company is self insured,
increased $69,000 in 1997. This cost varies from period to
period with the actual amount of health costs incurred by
employees.
The percent of income tax provision to pretax income for 1997 was 30% compared
to 27% in 1996. The lower 1996 rate reflects the difference between the book and
tax basis of Wellco's investment in Alba, which was disposed of in 1996.
Forward Looking Information:
On April 15, 1997, Wellco was awarded a contract from the U.S. Defense Personnel
Support Center
-6-
(DPSC) for 25% of their purchases of combat boots for the one year period
starting April 15, with options for each of the ensuing four years. This
contract requires delivery in the first year of between 227,000 and 315,000,
which equates to a total contract value in the first year of between
approximately $13,151,000 and $18,322,000. Also on that date, three other
contract awards were made, with one competitor receiving an award for 35% of the
government's combat boot purchases, and two competitors receiving 20% each. This
contract was awarded using the government's best value method of bid evaluation
under which technical merit is generally more important than price. Both Wellco
and the 35% awardee were rated with the highest possible technical rating.
However, since Wellco bid higher prices than this competitor, Wellco was awarded
the 25% at its higher prices. For the prior contract which was completed in
December, 1996, Wellco was also the 25% supplier.
Before each option exercise, the government will evaluate each contractor's
performance during the prior period. Using this evaluation and factoring in the
contractor's option prices, the government will allocate the option award in the
35%/25%/20%/20% portions. The exercise of any option is at the unilateral
discretion of the government.
During the fourth quarter of the 1997 year, Wellco was allowed to accelerate its
first year shipments under the contract awarded April 15. This will result in
combat boot shipments under this contract through the end of its first year,
which is April 15, 1998, being less than they would have otherwise been.
Since 1992, the government has been reducing its inventory of combat boots by
buying fewer pairs than were consumed. The current contract establishes total
minimum and maximum pairs to be ordered from all contractors for each year of
the contract of 703,220 and 1,055,828, which is less than estimated consumption,
and is also less than the total annual pairs ordered under the prior contract .
The Company estimates that the government will reach its desired inventory level
between the fourth and fifth years of the contract, when it expects orders to
increase to the level of consumption.
In February, 1997 Wellco was awarded a contract by DPSC to supply the
intermediate cold/wet boot. This is the first award to Wellco for this type of
boot. A total of two contracts were awarded and Wellco's contract is for 40% of
total pairs to be bought in the first year. The contract requires delivery in
the first year of between 80,000 and 122,000 pairs of this boot, which equates
to a total contract value in the first year of between approximately $6,400,000
and $9,600,000. This contract also gives DPSC two options, each providing for
total purchases of between 110,000 and 165,000 pairs of this boot. Each option
award will be allocated 60%/40% between the two contractors, with the contractor
evaluated as having the best performance in the prior period receiving the 60%
amount. The first shipments under this contract occurred in the fourth quarter
of fiscal year 1997.
On June 25, 1997 DPSC awarded Wellco a contract to supply a new boot, called the
infantry combat boot, which will be used by the Marine Corps. A total of two
contracts were awarded and Wellco's contract is for 60% of total pairs to be
bought in the first year. The contract requires delivery in the first year of
between 42,000 and 69,000 pairs of this boot, which equates to a total contract
value in the first year of between approximately $2,900,000 and $4,800,000. This
contract also gives DPSC two options, each providing for total purchases of
between 53,000 and 115,000 pairs of this boot. Each option award will be
allocated 60%/40% between the two contractors, with the contractor evaluated as
having the best performance in the prior period receiving the 60% amount.
Shipments under this contract will start in October, 1997.
The infantry combat boot requires construction methods and manufacturing
procedures that are significantly different than those presently used, as well
as incorporating certain new materials. This will cause some training costs and
other manufacturing inefficiencies during initial production.
Ro-Search, Inc., Wellco's machinery and licensing subsidiary, has received from
its oldest customer an
-7-
order ($900,000) for footwear molds which is the largest single order ever
placed with Ro-Search. Shipments under this order will be primarily in the 1998
fiscal year.
See Note 22 to the Consolidated Financial Statements for information about a
subpoena served on the Company in April 1997.
Except for historical information, this annual report includes forward looking
statements that involve risks and uncertainties, including, but not limited to,
the receipt of contracts from the U. S. government and the performance
thereunder, the ability to control costs under fixed price contracts, the
cancellation of contracts, and other risks detailed from time to time in the
Company's Securities and Exchange Commission filings, including Form 10-K for
the year ended June 28, 1997. Actual results may differ materially from
management expectations.
Comparing the Year Ended June 29, 1996 and July 1, 1995:
Income before income taxes for the 1996 fiscal year was $1,357,000 compared to
$1,212,000 in the 1995 year. Current period income was reduced by a $601,000
charge for Loss in Affiliate, representing Wellco's $305,000 equity in the
six-month (July through December, 1995) loss of Alba-Waldensian, Inc. (Alba),
and the $296,000 write down to fair value of that investment. Wellco owned
400,000 common shares of Alba (21.5% of total shares) from December 30, 1994
until December 29, 1995, when these shares were exchanged as part of the
purchase price for Wellco's repurchase of 1,531,272 shares of its common stock.
Income was also reduced by a Stock Repurchase Charge of $110,000, which is the
portion of the stock repurchase price allocated to an agreement limiting the
selling shareholders' ownership of total Wellco shares for a period of ten years
(see Note 13 to the Consolidated Financial Statements).
Income before income taxes, Loss in Affiliate and Stock Repurchase Charge was
$2,068,000, which compares to income of $1,143,000 in 1995. The total of
interest, dividend and investment income increased to $1,419,000 in 1996 from
$464,000 in 1995, primarily because the 1996 includes gains from the sale of all
marketable securities previously owned by Wellco. The net sales proceeds from
the marketable securities' sale were used for the stock repurchase. Before Loss
in Affiliate, Stock Repurchase Charge and interest, dividend and investment
income, the Company had a pretax income of $649,000 in 1997 compared to income
of $679,000 in 1996. The major reasons for this change are:
1. Revenues increased $1,965,000. Pairs of combat boots sold to
the U. S. government increased approximately 9%. From January
through June, 1996, Wellco was shipping combat boots under the
second option of its current contract. From November, 1994
through December, 1995, shipments were under the first option.
Both options were for the same total pairs, but the delivery
period for the second option is for a shorter twelve month
period. Pairs of combat boots sold to other customers also
increased in 1996.
2. Greater revenues from the sale of combat boots more than
offset a decrease in machinery sales. 1995 revenues include
significant machinery sales to one new customer and to one
long-time customer. These sales can vary significantly from
period to period with the needs of this group of customers.
3. Margins on the increased combat boot sales did not fully
offset the loss of margins on lower machinery sales. Revenues
from technical assistance fees and equipment rentals from
licensees, which vary with their shipments, were also lower in
1996.
4. In 1995, the U. S. government issued certain contract price
increase adjustments, primarily for the increased cost of
leather used in manufacturing combat boots, whose actual
amounts
-8-
were greater than previously recorded estimates. This increased 1995 pretax
profits $54,000.
The major categories of fixed and semi-variable manufacturing costs increased by
$50,000. The cold winter resulted in utility costs increasing $20,000, and
insurance costs, many of which vary with revenues and labor costs, increased
$25,000.
The percentage of income tax provision to pretax income increased to 27% in 1996
from 20% in the 1995, primarily because the Equity in Loss of Affiliate and
Stock Repurchase Charge in 1996 are not deductible for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Wellco uses cash from operations to supply most of its normal 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)
1997 1996 1995
---- ---- ----
Cash ....................................... $ 181 $ 673 $2,423
Marketable Securities, Current ............. 996
Unused Line of Credit ...................... 2,813 1,500 1,480
------ ------ ------
Total ...................................... $2,994 $2,173 $4,899
====== ====== ======
The decrease in cash at the end of 1997 was primarily due to increased combat
boot inventories and the investment in inventory for the new intermediate
cold/wet boot. For the current combat boot contract, Wellco will be maintaining
a larger inventory to meet the four day shipping requirement for maximum
evaluation points.
The decrease in cash at the end of 1996 was mainly caused by an increase in
accounts receivable, which resulted from both an increase in sales of combat
boots to the U. S. government and technical difficulties in their processing of
invoice payments. Also in 1996, marketable securities were sold to pay for the
repurchase of 1,531,272 Wellco common shares.
The following table summarizes the other major sources and (uses) of cash for
the last three years:
(in thousands)
1997 1996 1995
---- ---- ----
Net Income Before Depreciation, Net Investment
Income, Equity in (Loss)Income of Affiliate and
Stock Repurchase Charge ....................... $ 1,083 $ 810 $ 1,214
Net Change in Accounts Receivable, Inventory,
Accounts Payable and Accrued Liabilities ...... (2,718) (1,542) 192
Other ......................................... 10 (165) (173)
-9-
(in thousands)
1997 1996 1995
---- ---- ----
Net Cash Provided By (Used In) Operations ..... (1,625) (897) 1,233
Net Cash From Sale of (Purchases of)
Marketable Securities ......................... 5,257 3,653
Cash Used to Repurchase Company's Stock and
Related Expenses .............................. (5,579)
Cash From Bank Line of Credit ................ 4,350 4,500
Cash Used to Repay Bank Line of Credit ........ (2,663) (4,520)
Cash Used to Purchase Affiliate ............... (4,475)
Cash Used to Purchase Equipment ............... (474) (371) (295)
Cash Dividends Paid ........................... (227) (140) (221)
Cash From Stock Options Exercised ............. 147
Net Decrease in Cash .......................... $ (492) $(1,750) $ (105)
The increase in inventory, caused by the increase in combat boot inventories and
the investment in inventory for the new intermediate cold/wet boot, was the
primary reason operations had a net use of $1,625,000.
To its operating cash needs, Wellco made full use of its $1,500,000 bank line of
credit and established a second bank line of credit for $3,000,000. The bank's
commitment for the $3,000,000 line of credit expires on September 24, 1997, and
the $1,500,000 line is subject to renewal on December 31, 1997. Subsequent to
June 28, 1997 cash from combat boot sales was used to pay off all borrowings
under the lines.
The primary reason for the 1996 decrease in cash was the increase in accounts
receivable, as explained above, and the use of cash for the Company's stock
repurchase. On December 29, 1995, the Company repurchased 1,531,272 of its
common shares for a price consisting partially of a $5,460,000 cash payment and
$119,000 in related expenses. The initial payment was partially financed by a
short term bank loan. All marketable securities were subsequently sold to repay
the bank loan.
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.
In fiscal year 1998 the Company plans to construct a warehouse addition
adjoining its existing facilities in Waynesville, North Carolina, at a cost of
approximately of $350,000. A bank has provided a three-year term loan commitment
if needed to finance this addition. Production of the new infantry combat boot
will require the purchase of an estimated $200,000 to $250,000 of new machinery,
and may result in total machinery purchases in 1998 being more than usual. The
Company believes that cash from operations, the bank line of credit and the bank
term loan commitment will be adequate to meet its cash needs during 1998.
Other than the items mentioned above, the Company has no other material
commitments for capital equipment. Note 14 to the Consolidated Financial
Statements provides information about a commitment
-10-
to make additional cash payments from a stock repurchase, with the amount of
payments contingent upon net income for the six fiscal years 1997 through 2002.
The Company does not know of any other demands, commitments, uncertainties, or
trends that will result in or that are reasonably likely to result in its
liquidity increasing or decreasing in any material way.
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED
JUNE 28, 1997, JUNE 29, 1996, AND JULY 1, 1995
(in thousands except per share and number of shares)
JUNE 28, JUNE 29, JULY 1,
1997 1996 1995
-------- -------- -------
REVENUES (Notes 6, 17 and 18) ...... $ 21,199 $ 19,968 $ 18,003
----------- ----------- -----------
COSTS AND EXPENSES (Notes 10,
11 and 19):
Cost of sales and services ......... 17,611 17,168 15,128
General and administrative
expenses .......................... 2,362 2,112 2,152
----------- ----------- -----------
Total .............................. 19,973 19,280 17,280
----------- ----------- -----------
OPERATING INCOME .................... 1,226 688 723
----------- ----------- -----------
INTEREST EXPENSE (Note 19) .......... 191 39 44
DIVIDEND AND INTEREST INCOME ........ 53 215 446
NET INVESTMENT INCOME (Note 4) ...... 1,204 18
----------- ----------- -----------
INCOME BEFORE EQUITY IN (LOSS)
INCOME OF AFFILIATE AND
STOCK REPURCHASE CHARGE ........ 1,088 2,068 1,143
EQUITY IN (LOSS) INCOME OF
AFFILIATE
(Note 5) ....................... (601) 69
STOCK REPURCHASE CHARGE (Note 13) ... (110)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES .......... 1,088 1,357 1,212
PROVISION FOR INCOME TAXES (Note 12) 330 366 243
----------- ----------- -----------
NET INCOME .......................... $ 758 $ 991 $ 969
=========== =========== ===========
PER SHARE OF COMMON STOCK
(based on weighted average
number of shares
outstanding) (Note 16):
Net income ........................ $ 0.67 $ 0.53 $ 0.37
=========== =========== ===========
Weighted average number
of shares outstanding ............. 1,126,113 1,884,648 2,654,418
=========== =========== ===========
See Notes to Consolidated Financial Statements.
-12-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 28, 1997 AND JUNE 29, 1996
(in thousands)
ASSETS
JUNE 28, JUNE 29,
1997 1996
-------- --------
CURRENT ASSETS:
Cash .......................................... $ 181 $ 673
Receivables (Notes 2 and 8) ................... 4,926 5,242
Inventories (Notes 3 and 8) ................... 7,677 3,924
Deferred taxes (Note 12) ..................... 341 258
Prepaid expenses .............................. 6 119
------- -------
Total ......................................... 13,131 10,216
------- -------
MACHINERY LEASED TO LICENSEES
(Note 6) ...................................... 36 63
PROPERTY, PLANT AND EQUIPMENT
(Note 7) ...................................... 1,313 1,138
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition (Note 1) ......... 228 228
Intangible pension asset (Note 10) ............ 511 623
------- -------
Total ......................................... 739 851
------- -------
DEFERRED TAXES (Note 12) ........................... 433 429
------- -------
TOTAL .............................................. $15,652 $12,697
======= =======
See Notes to Consolidated Financial Statements.
-13-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 28, 1997 AND JUNE 29, 1996
(in thousands)
LIABILITIES AND EQUITY
JUNE 28, JUNE 29,
1997 1996
-------- --------
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 8) ......... $ 1,687 $ --
Accounts payable ................................ 2,064 1,779
Accrued liabilities (Notes 9 and 11) ............ 1,570 1,302
Accrued income taxes (Note 12) .................. 357 139
Current maturity of note payable (Note 14) ...... 107
-------- --------
Total ....................................... 5,785 3,220
-------- --------
LONG-TERM LIABILITIES:
Pension obligation (Note 10) .................... 1,759 1,939
Note payable (Note 14) .......................... 1,030 492
COMMITMENT AND CONTINGENCY (Notes 20 and 21)
STOCKHOLDERS' EQUITY (Notes 5, 13, 15, and 16):
Common stock, $1.00 par value; 2,000,000
shares authorized; shares issued and
outstanding- 1,150,646 at 1997,
1,123,146 at 1996 ........................... 1,151 374
Additional paid-in capital ...................... 119 598
Retained earnings ............................... 6,430 6,696
Pension liability adjustment (Note 10) .......... (622) (622)
-------- --------
Total ....................................... 7,078 7,046
-------- --------
TOTAL ................................................ $ 15,652 $ 12,697
======== ========
See Notes to Consolidated Financial Statements.
-14-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JUNE 28, 1997, JUNE 29, 1996, AND JULY 1, 1995
(in thousands)
JUNE 28, JUNE 29, JULY 1,
1997 1996 1995
-------- -------- -------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ............................ $ 758 $ 991 $ 969
------- ------- -------
Adjustments to reconcile
net income to net cash
provided (used) by
operating activities:
Depreciation and amortization ..... 325 312 332
Net investment income ............. (1,204) (18)
Equity in loss (income) of
affiliate ......................... 601 (69)
Stock repurchase charge ........... 110
(Increase) decrease in-
Accounts receivable ........... 316 (1,975) 1,133
Inventories ................... (3,753) 371 (773)
Other current assets .......... 30 52 (75)
Increase (decrease)in-
Accounts payable .............. 285 246 (292)
Accrued liabilities ........... 215 (116) 270
Accrued income taxes .......... 218 (68) (146)
Pension obligation ............ (68) (26) (46)
Other ......................... 49 (191) (52)
------- ------- -------
Total adjustments ..................... (2,383) (1,888) 264
------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES .................. (1,625) (897) 1,233
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in affiliate ............... (4,475)
Net sales of current
marketable securities ............. 996 1,898
Purchases of noncurrent
marketable securities ............. (2,343)
Sales of noncurrent
marketable securities ............. 4,261 4,098
Purchases of equipment ................ (474) (371) (295)
------- ------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ................. (474) 4,886 (1,117)
------- ------- -------
(continued on next page)
-15-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JUNE 28, 1997, JUNE 29, 1996, AND JULY 1, 1995
(in thousands)
JUNE 28, JUNE 29, JULY 1,
1997 1996 1995
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan from bank ........................... 4,350 4,500 2,050
Repayment of bank loan ................... (2,663) (4,520) (2,050)
Cash dividends paid ...................... (227) (140) (221)
Purchase of common stock ................. (5,579)
Stock option exercise .................... 147
------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ..................... 1,607 (5,739) (221)
------- ------- -------
NET INCREASE (DECREASE) IN CASH ............... (492) (1,750) (105)
CASH AT BEGINNING OF PERIOD ................... 673 2,423 2,528
------- ------- -------
CASH AT END OF PERIOD ......................... $ 181 $ 673 $ 2,423
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ............................. $ 94 $ 39 $ 44
Income taxes ......................... 192 561 779
Noncash investing and financing
activity-
Adjustment of stock repurchase
note ............................... 646
Noncash decrease in Investment in
Affiliate from stock repurchase ... 4,928
Note issued as part of stock
repurchase ........................ 492
Noncash increase in Investment
in Affiliate ...................... 986
Noncash increase (decrease ) in
marketable securities to fair value (730) 730
======= ======= =======
See Notes to Consolidated Financial Statements.
-16-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED
JUNE 28, 1997, JUNE 29, 1996, AND JULY 1, 1995
(in thousands except share data)
JUNE 28, JUNE 29, JULY 1,
1997 1996 1995
-------- -------- -------
COMMON STOCK (Notes 13, 15 and 16):
Balance at beginning of year .......... $ 374 $ 885 $ 885
Repurchase of common stock ............ (511)
Common stock issued in stock split .... 749
Stock option exercise ................. 28
-------- -------- --------
Balance at end of year ................ 1,151 374 885
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL:
(Notes 5, 13, 15 and 16):
Balance at beginning of year .......... 598 1,409 759
Repurchase of common stock ............ (811)
Excess of basis over cost of
investment in affiliate ........... 650
Transfer to Common Stock the par value
of stock issued in stock split .... (598)
Stock option exercise ................. 119
-------- -------- --------
Balance at end of year ................ 119 598 1,409
-------- -------- --------
RETAINED EARNINGS (Notes 13, 14 and 16):
Balance at beginning of year .......... 6,696 15,412 14,664
Repurchase of common stock ............ (9,567)
Adjustment of note payable from stock
repurchase ........................ (646)
Transfer to Common Stock the par value
of stock issued in stock split .... (151)
Net income ............................ 758 991 969
Cash dividends (per share: 1997-$.20;
1996-$.125; 1995-$.083) ........... (227) (140) (221)
-------- -------- --------
Balance at end of year ................ 6,430 6,696 15,412
-------- -------- --------
PENSION LIABILITY ADJUSTMENT (Note 10)
Balance at beginning of year .......... (622) (525) (306)
Change for the year ................... (97) (219)
-------- -------- --------
Balance at end of year ................ (622) (622) (525)
-------- -------- --------
UNREALIZED GAIN ON
MARKETABLE SECURITIES (Note 4) ........ 482
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY ................. $ 7,078 $ 7,046 $ 17,663
======== ======== ========
See Notes to Consolidated Financial Statements.
-17-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended June 28, 1997, June 29, 1996, and July 1, 1995
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.
Fair Value of Financial Instruments
The carrying value of financial instruments at June 28, 1997
(cash, receivables, accounts payable and note payable)
approximates fair value. The carrying value of the note
payable is equal to the present value of estimated future cash
flows using a discount rate commensurate with the
uncertainties involved.
Depreciation
The Company uses the straight-line method to compute
depreciation on machinery leased to licensees and property,
plant and equipment.
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, a wholly owned
subsidiary of Wellco, 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.
-18-
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 months.
If the purchase order requires shipment to a depot warehouse,
revenue is recognized for each boot shipment after it has been
accepted by the government's Quality Assurance Representative.
If the purchase order requires shipment directly to the
consumer, revenues are recognized upon shipment.
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.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to June
30. All years presented contain 52 weeks.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Stock-Based Compensation Plans
Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock- Based Compensation," was
effective as of the beginning of the 1997 fiscal year. SFAS
123 provides for a choice of using a fair value method to
record compensation expense related to stock-based
compensation, or to continue using the compensation
recognition provisions of Accounting Principles Board Opinion
25 (APB 25). The Company chose to continue using APB 25 under
which compensation expense is generally recognized if there is
a difference between the award price for stock options and the
stock's market price at the date of award.
Recent Statements of the Financial Accounting Standards Board
In February, 1997 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings per Share." This Statement changes the
computation, presentation and disclosure of earnings per
share, and is effective for the Company's fiscal quarter
ending December 27, 1997. Under SFAS 128, the Company's
outstanding stock options will affect the computation of
diluted earnings per share, and this effect is not expected to
be significant.
-19-
In June, 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income," which is effective for
fiscal years beginning after December 15, 1997. This statement
establishes standards for reporting and display of
comprehensive income and its components. Under SFAS 130, the
Company's pension liability adjustment would be reported as an
item of comprehensive income.
In June, 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 (SFAS
131), "Disclosures About Segments of an Enterprise and Related
Information," which is effective for the Company's fiscal year
ending July 3, 1999. This Statement supersedes Financial
Accounting Standards Board Statement No. 14, which presently
determines the Company's segment and related reporting, and
under which the Company has one segment. SFAS 131 requires
disclosure of financial and descriptive information about
reportable operating segments, revenues by products or
services, and revenues and assets by geographic areas. The
Company believes that the only significant effects on its
disclosures resulting from SFAS 131 would be the additional
disclosures if it has more than one reportable operating
segment. The Company has not as yet determined if it has more
than one reportable operating segment under SFAS 131.
2. RECEIVABLES:
The majority of receivables at June 28, 1997 are from the U. S.
government. The Company's policy is to require either a confirmed
irrevocable bank letter of credit or advance payment on significant
orders from foreign customers. Allowances for doubtful accounts in
1997 and 1996 are not significant.
3. INVENTORIES:
The components of inventories are:
(in thousands)
1997 1996
---- ----
Finished Goods ............................... $2,551 $1,296
Work in Process .............................. 2,647 1,267
Raw Materials and Supplies ................... 2,479 1,361
------ ------
Total ........................................ $7,677 $3,924
====== ======
4. MARKETABLE SECURITIES:
In the 1996 fiscal year, all marketable securities were sold to provide the
majority of the cash portion of the consideration paid by Wellco to
repurchase 1,531,272 shares of its outstanding common stock (see Note 13).
Proceeds from the sale of Marketable Securities classified under SFAS 115
for 1996 and 1995 were $4,261,000 and $4,098,000. Gross realized gains and
losses, and unrealized losses for 1996 and 1995 were as follows:
-20-
(in thousands)
1996 1995
---- ----
Gross Realized Gains ..................... $ 1,326 $ 354
Gross Realized Losses .................... (122) (142)
Unrealized Loss .......................... (194)
------- -------
Net Investment Income .................... $ 1,204 $ 18
======= =======
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.
5. INVESTMENT IN AFFILIATE:
On December 30, 1994 Wellco purchased from Coronet Insurance Company
(Coronet) for cash 400,000 shares of the common stock of Alba Waldensian,
Inc. (Alba) which represented 21.5% of total Alba common shares. Because
Coronet owned more than 50% of Wellco's total outstanding common stock,
Wellco recorded as its carrying value of this investment Coronet's basis in
these Alba shares. The excess of that basis over Wellco's cost ($986,000)
increased Additional Paid-In Capital by $650,000, net of the effect of
income taxes ($336,000). Through December 29, 1995, this investment was
accounted for using the equity method.
Operating results for the fiscal year ended June 29, 1996 includes as
Equity in Loss of Affiliate a charge of $601,000, representing Wellco's
$305,000 equity in Alba's loss for the six-month period from July through
December, 1995 and a $296,000 reduction of this investment's carrying value
to fair value. On December 29, 1995, these shares were used as part of the
consideration paid for the repurchase of 1,531,272 shares of Wellco's
common stock (See Note 13). Operating results for the fiscal year ended
July 1, 1995 includes $69,000 as Equity in Income of Affiliate representing
Wellco's equity in Alba's net income for the six-month period from January
through June, 1995.
Other than this investment, there were no business relationships or
transactions between Wellco and Alba.
6. MACHINERY LEASED TO LICENSEES:
Accumulated depreciation netted against the cost of leased assets in the
1997 and 1996 consolidated balance sheets is $1,483,000 and $1,456,000.
Rental revenues for the fiscal years 1997, 1996, and 1995 were $178,000,
$128,000 and $122,000, substantially all of which vary with lessees'
production or shipments.
7. PROPERTY, PLANT AND EQUIPMENT:
The cost and accumulated depreciation of property, plant and equipment are
summarized as follows:
-21-
(in thousands)
Estimated
1997 1996 Useful Life
---- ---- -----------
Land $107 $107
Buildings 774 774 45 Years
Machinery &
Equipment 2,797 2,430 2-20 Years
Furniture & Fixtures 610 532 2-10 years
Leasehold
Improvements 63 63 *
Total Cost $4,351 $3,906
Total Accumulated
Depreciation $3,038 $2,768
*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. LINES OF CREDIT:
The Company maintains a $1,500,000 unsecured bank line of credit. The
unsecured line, which expires December 31, 1997, can be renewed annually at
the bank's discretion. At June 28, 1997, the unsecured line was fully used
with no additional borrowings available under this line.
During the third quarter of 1997, the Company entered into a second bank
line of credit for $3,000,000. Both of these lines were used to provide
cash for a significant increase in combat boot inventory, in preparation
for a quick response requirement under a new U.S. government combat boot
contract, and the inventory of the new intermediate cold/wet boot. The
bank's commitment for the $3,000,000 line of credit expires on September
24, 1997. The second line is secured by a blanket lien on all machinery and
equipment and all non-governmental accounts receivable ($1,161,000) and
inventory ($1,003,000). At June 28, 1997, borrowings on the secured line of
credit were $187,000 with $2,813,000 available in additional borrowings.
Interest for both lines is at the prime rate of 8.5%. The bank credit
agreement contains, among other provisions, defined levels of net worth and
current ratio requirements and the Company was in compliance with these
requirements at June 28, 1997.
In the fiscal year 1998 the Company plans to construct a warehouse addition
adjoining its existing facilities in Waynesville, North Carolina, at a cost
of approximately of $350,000. A bank has provided a $400,000 three-year
term loan commitment to finance the construction if needed. The commitment
expires on October 24, 1997.
9. ACCRUED LIABILITIES:
The components of accrued liabilities are:
-22-
(in thousands)
1997 1996
---- ----
Compensation ................................. $ 892 $ 793
Pension ...................................... 133 166
Retiree Health Benefits ...................... 170 110
Contribution ................................. 115 70
Other ........................................ 260 163
------ ------
Total ........................................ $1,570 $1,302
====== ======
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)
1997 1996 1995
---- ---- ----
Benefits Earned for Service in the
Current Year ............................... $ 147 $ 148 $ 134
Interest on the Projected Benefit
Obligation ................................. 388 368 357
Return on Plan Assets ...................... (234) (206) (207)
Amortization of: Unrecognized Net
Pension Obligation at July 1, 1987;
Cost of Benefit Changes Since That
Date; and Gains and Losses
Against Actuarial Assumptions ............. 163 156 129
----- ----- -----
Pension Expense ............................ $ 464 $ 466 $ 413
===== ===== =====
The liability of the plans at June 28, 1997 and June 29, 1996, and the
components of the pension liability accrued in the balance sheets are:
(in thousands)
Pension Liability: 1997 1996
---- ----
Accumulated Benefit Obligation, Substantially
All Vested ........................................... $5,152 $5,054
Obligation for Actuarially Projected Future
Salary Increases ..................................... 297 291
-23-
Pension Liability: 1997 1996
---- ----
Projected Benefit Obligation ............................. 5,449 5,345
Plan Assets at Fair Value ................................ (3,261) (2,949)
Projected Obligation Greater than Assets ................. 2,188 2,396
Less Projected Future Salary Increases ................... (296) (291)
Pension Liability Recognized in the Consolidated
Financial Statements ..................................... $ 1,892 $ 2,105
Components of Pension Liability:
Unamortized Costs Not Yet Charged Against Operations-
Net Obligation at July 1, 1987 ........................... 355 426
Net Obligation From Changes to the Plans Since
July 1, 1987 ............................................. 323 369
Net Loss From Actuarial Assumptions Being Different
Than Actual .............................................. 1,072 1,061
Less Projected Future Salary Increases ................... (296) (291)
Total Liability Not Yet Charged Against Operations ....... 1,454 1,565
Amount of Liability That Has Been Charged Against
Operations ............................................... 438 540
Total Pension Liability .................................. $ 1,892 $ 2,105
The pension liability not yet charged against operations is a part of the
long-term pension obligation liability. This liability at June 28,1997 is
offset by an intangible pension asset of $511,000 ($623,000 at June 29,
1996) and an equity reduction, net of income taxes, of $622,000 for 1997
and 1996. 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% for 1997 and 1996. 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%.
11. RETIREE HEALTH BENEFITS:
The Company accounts for the costs and liability of health care benefits
for retired employees using Statement of Financial Accounting Standards No.
106, "Employers Accounting for Postretirement Benefits Other Than Pensions"
(FAS 106). The liability at the date of adoption of FAS 106 ( July 4, 1993)
is being recognized over employee future service lives.
Employees of the North Carolina plant who meet certain criteria and retire
early (age 62-64) or 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 included in 1997, 1996 and 1995
Statements of Operations as computed under FAS 106 was:
(in thousands)
1997 1996 1995
---- ---- ----
Benefits Earned for Current Service ................. $25 $26 $20
Interest Cost on Accumulated Liability .............. 24 22 20
Amortization of the July 4, 1993 Liability .......... 14 13 13
--- --- ---
Total Cost .......................................... $63 $61 $53
=== === ===
The reconciliation of the total liability to the amount included as a
liability in the Consolidated Balance Sheet (see Note 9) at June 28, 1997
and June 29, 1996 is:
(in thousands)
Accumulated Liability For: 1997 1996
---- ----
Retired Employees .......................................... $ 16 $ 4
Fully Qualified Employees .................................. 0 7
Other Employees ............................................ 268 293
Total ...................................................... 284 304
Less Balance of Unrecognized Liability at July 4, 1993 ..... (227) (240)
Unrecognized Net Gain Since July 4, 1993 ................... 113 46
Liability Recognized in the Consolidated Balance Sheet ..... $ 170 $ 110
The assumed health care cost trend rate used to project expected future
cost was 11.0% in 1997 (12.4% in 1996), gradually decreasing to 6% by 2004
and remaining at 6% thereafter. The assumed discount rate used to determine
the accumulated liability was 8% for 1997 and 7.75% for 1996. 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:
The Company accounts for the provision and liability for income taxes using
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The provision for income taxes consist of the following:
(in thousands)
Federal: 1997 1996 1995
---- ---- ----
Currently Payable .................. $ 355 $ 457 $ 143
Deferred ........................... (87) (185) 45
-25-
Federal: 1997 1996 1995
---- ---- ----
Total Federal ..................... 268 272 188
State ............................. 62 94 55
Total Provision ................... $330 $366 $243
A reconciliation of the effective income tax rate for the 1997, 1996 and 1995
fiscal years is as follows:
1997 1996 1995
---- ---- ----
Statutory Federal Income Tax Rate ................... 34% 34% 34%
Current Period Income of Puerto Rico Subsidiary
Substantially Exempt From Puerto Rican and
Federal Income Taxes ................................ (7%) (7%) (11%)
State Taxes, Net of Federal Tax Benefit ............. 5% 5% 4%
Difference in Book and Tax Basis of Investment
in Affiliate ........................................ (6%)
Standstill Agreement ................................ 3%
Untaxed Portion of Dividend Income .................. * (5%)
Other ............................................... (2%) (2%) (2%)
Effective Income Tax Rate ........................... 30% 27% 20%
* less than 1%
Income earned in Puerto Rico by the Company's Puerto Rican subsidiary is
90% exempt from Puerto Rican income tax through 2000. Income earned in
Puerto Rico by this subsidiary has not been subject to United States
federal income tax. The Small Business Job Protection Act (Act), passed by
Congress on August 2, 1996 and subsequently signed by the President,
terminated, subject to a phase out for existing companies, the federal tax
credit on this income for tax years beginning after December 31, 1996.
Under the phase out, the Company should receive a full credit through
fiscal year 2002. For fiscal years 2003 through 2006, the credit will be
limited, and will be completely eliminated starting with the 2007 fiscal
year.
The accumulated undistributed earnings ($4,324,000 at June 28, 1997) 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.
Significant components of the Company's deferred tax assets (no valuation
allowance considered necessary) and liabilities as of the end of fiscal
1997 and 1996 are as follows:
-26-
(in thousands)
Deferred Tax Assets: 1997 1996
---- ----
Pension Cost Charged Against Financial Statement Income,
Not Yet Deducted From Taxable Income ......................... $104 $126
Tax Effect of Pension Liability Charged Against Equity ....... 320 320
Employee Compensation Charged Against Financial
Statement Income, Not Yet Deducted From Taxable Income ....... 158 146
Additional Costs Inventoried for Tax Purposes ................ 142 85
Other ........................................................ 99 61
Total Deferred Tax Asset ..................................... 823 738
Deferred Tax Liabilities:
Depreciation Deducted From Taxable Income Not Yet
Charged Against Financial Statement Income ................... 49 51
Net Deferred Tax Asset ....................................... $774 $687
13. REPURCHASE OF STOCK:
On December 29, 1995 Wellco repurchased from Coronet Insurance Company and
some of its affiliates (Coronet and Affiliates) 1,531,272 shares of Wellco
common stock, which represented 57.69% of total shares outstanding at that
time. Cash of $5,460,000 and 400,000 shares of Alba-Waldensian, Inc. (Alba)
common stock was paid to Coronet and Affiliates for these Wellco shares. In
addition, the Stock Repurchase Agreement provides that certain additional
payments may be made through Wellco's fiscal year 2003 (see Note 14). Under
North Carolina law the shares repurchased constitute authorized but
unissued shares.
The Stock Repurchase Agreement provides that for a period of ten years
after December 29, 1995 Coronet and Affiliates will limit their ownership
of Wellco common stock to not more than 20% of total shares outstanding.
The Consolidated Statement of Operations for the fiscal year ended June 29,
1996 included a Stock Repurchase Charge of $110,000 representing the value
assigned to this limitation.
This repurchase was recorded at the cash paid, the fair value of the Alba
shares, the present value of the additional amount projected to be paid
through fiscal year 2002, and the amount of investment banker, legal,
accounting and other costs incurred related to this share repurchase, a
total of $10,884,000. The par value of the common stock repurchased
($511,000) was charged against Common Stock. The excess of total amount
paid over the par value of Wellco's common stock repurchased was charged to
Additional Paid-In Capital ($811,000) and Retained Earnings ($9,567,000).
Although the stock repurchase occurred, the related Stock Repurchase
Agreement was not executed by Coronet and Affiliates, nor have they
performed certain other actions required by the Agreement. In addition, the
Circuit Court of Cook County in Illinois has since issued an Order of
Liquidation (Order) against Coronet Insurance Company. This Order requires
all persons having assets which are, or may be, the property of Coronet
Insurance Company to turn over these assets to the Director of Insurance
-27-
of the State of Illinois.
Wellco's counsel has advised that, because the Stock Repurchase Agreement
was not executed by Coronet and Affiliates and other actions required of
them by the Agreement were not performed, and because Coronet Insurance
Company is being liquidated by the Director of Insurance of the State of
Illinois, some uncertainty exists as to: (i) the enforceability of
provisions of the Stock Repurchase Agreement, and (ii) if enforceable, to
whom any additional obligation under the Agreement is owed. However, as of
June 28, 1997, the opinion of Company's management anticipates no
significant adverse impact to the financial statements as a result of the
resolution of any uncertainty raised by this matter.
14. NOTE PAYABLE:
Note 13 gives information about certain additional payments that may be
made under the Stock Repurchase Agreement, as well as information about the
uncertainty as to the Agreement's enforceability. Notwithstanding this,
generally accepted accounting principles require that an obligation be
reflected as a Note Payable in the Consolidated Balance Sheets for the
estimated additional payments that would be made if the Agreement is
enforceable. Since the date of stock repurchase, Wellco's Consolidated
Balance Sheets have included a Note Payable representing the present value
of the estimated amounts that would be paid if the Agreement is
enforceable. The amount of each estimated payment, discounted at a rate of
8.5%, is shown in the following table:
Paid in
Fiscal Year Amount
1998 $107,325
1999 152,418
2000 165,374
2001 179,430
2002 194,682
2003 338,472
Total $1,137,701
During the 1997 fiscal year, the Company revised its initial estimate of
the amount that might be paid. This increased the Note Payable as shown in
the Consolidated Balance Sheet and reduced Retained Earnings by $646,000.
The Stock Repurchase Agreement, as drafted, provides that actual payments,
if any, would only be made in the amount by which 60% of each fiscal year's
net income exceeds a certain defined amount, calculated on a cumulative
basis, and applying to fiscal years 1997 through 2002. The Note Payable has
been calculated on this basis. The Stock Repurchase Agreement does not
provide for the payment of interest. However, generally accepted accounting
principles require that interest be imputed, and $97,000 of interest
expense was recorded in 1997. Total payments under the note cannot exceed
$1,531,000 and all obligations under the note terminate after the 2003
fiscal year payment.
-28-
15. STOCK OPTIONS:
On February 6, 1996, the Board of Directors approved the 1996 Stock Option
Plan (1996 Plan) providing for the granting of stock options to key
employees. The 1996 Plan was subsequently approved by shareholders at their
1996 Annual Meeting. The Company also has a small number of granted and
unexercised, fully exercisable stock options under the 1985 Stock Option
Plan. All options available under the 1985 Plan have been granted.
Under the 1996 Plan, the Compensation Committee of the Board of Directors
is authorized to grant stock options for the purchase of up to 60,000
shares of the Company's common stock. This Plan provides that option
exercise prices will be market price on the date granted, that options have
a life of 10 years from the date of grant and are immediately exercisable
on the date granted. Options for 52,500 shares have been granted under the
1996 Plan.
Transactions involving these Plans for the last three fiscal years are
summarized below:
No. of Weighted Average
Option Shares: Shares Exercise Price
Outstanding at July 3, 1994 and July 1, 1995 2,100 $5.50
Granted 52,500 5.32
Outstanding at June 29, 1996 54,600 5.33
Exercised (27,500) 5.34
Outstanding at June 28, 1997 27,100 $5.32
The following table summarizes information about fixed stock options
outstanding at June 28, 1997, all of which are fully exercisable:
Weighted Average
Remaining
Range of Exercise Weighted Average Contractual Life
Number Prices Exercise Price in Years
27,100 $5.00-$5.75 $5.32 9.2
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation," is effective for the Company's 1997 fiscal
year. As allowed by SFAS 123, the Company elected to continue applying the
compensation expense recognition provisions of Accounting Principles Board
Opinion 25 and related interpretations, and has not recognized compensation
expense for its Plans. If compensation expense had been recognized, using
the fair value of options on the date granted computed under the method
prescribed by SFAS 123, net income and net income per share would have been
the pro forma amounts shown below (in thousands, except per share amounts):
1996
----
Net Income, As Reported $991
-29-
1996
----
Net Income, Pro Forma $957
Net Income Per Share, As Reported $.53
Net Income Per Share, Pro Forma $.51
The fair value on the date options were granted (the amount deducted from
net income as reported in arriving at pro forma net income amounts above)
was estimated using the Black-Scholes option pricing model using the
following assumptions:
Expected Dividend Yield 3.78%
Expected Stock Price Volatility 19.24%
Risk-Free Interest Rate 5.48%
Expected Life of Options in Years 2.29
The weighted average fair value of options granted during 1996 was $.65 per
share.
On July 2, 1997, the Board of Directors approved the 1997 Stock Option Plan
(1997 Plan) providing for the granting of options for the purchase of up to
115,000 shares of the Company's common stock. The Compensation Committee of
the Board of Directors has granted to certain key employees and
non-employee directors options for the purchase of 105,000 shares at the
market price on the date granted ($12.00 per share). The 1997 Stock Option
Plan is subject to, and the grants thereunder are contingent upon,
shareholder approval at the November 18, 1997 Annual Meeting of Wellco
shareholders.
16. STOCK SPLIT:
All common shares and per share amounts have been adjusted to give
retroactive effect to a three-for- one stock split affected in the form of
a stock dividend distributed on January 3, 1997 to stockholders of record
on December 6, 1996. The par value of the new shares issued, $749,000, was
transferred to Common Stock from Additional Paid-In Capital ($598,000) and
Retained Earnings ($151,000).
17. 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 1997,
1996 and 1995 were:
Percent of Total Revenues
1997 1996 1995
---- ---- ----
Revenues By Class of Product:
Sales of Footwear and Related Items 96% 97% 96%
-30-
1997 1996 1995
---- ---- ----
Revenues From Licensees 4% 3% 4%
Total 100% 100% 100%
Major Customer-U. S. Government 69% 70% 66%
Export Revenues 8% 12% 12%
The majority of export revenues are to Central and South American
countries.
18. GOVERNMENT BOOT CONTRACT REVENUES:
Revenues in 1997 include $49,000 representing the estimated amount of
certain contract actions not yet settled with the U. S. government.
Any difference between these estimates and the actual amounts agreed to
will be included in the period of settlement. Income before income
taxes in 1997 was decreased by $73,000, and was increased by $54,000 in
1995, from contract actions settled with the U. S. government in those
years at amounts different than of previously recorded estimates.
19. RECLASSIFICATIONS:
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
20. 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 June 28, 1997 is approximately
83,000.
21. CONTINGENCY:
In April 1997, the Company was served with a subpoena issued by a grand
jury empaneled in the United States District Court for the Eastern District
of Pennsylvania which requires the production of certain documents for the
period January 1, 1990 until April 29, 1997. The Company has been informed
through its legal counsel that the grand jury is investigating possible
violations of antitrust laws primarily involving alleged collusive
activities among manufacturers of combat boots for the U.S. government. The
Company is cooperating in this investigation, does not believe it has
engaged in any illegal conduct and does not believe that this matter will
have a material adverse effect on the Company's financial position or
results of future operations. However, the Company cannot predict what the
final outcome of this matter will be.
In 1988, the Company and other military combat boot manufacturers responded
to subpoenas which investigated possible violation of antitrust laws
involving bids submitted on military combat boot procurements for January
1, 1979 through May 6, 1988. This investigation was closed in 1992 and no
legal action resulted from it.
-31-
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 June 28, 1997 and June 29, 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended June 28, 1997. 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 June 28, 1997 and June 29, 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 28, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
September 12, 1997
-32-
WELLCO ENTERPRISES, INC.
PRICE RANGE, DIVIDENDS AND MARKET OF COMMON STOCK
Fiscal Year 1997 Quarter
First Second Third Fourth
Market Price Per Share-
High 10 1/3 15 14 5/8 14 3/4
Low 6 1/2 8 9 11 1/2
Per Share Cash Dividend Declared $.10 $.10
Fiscal Year 1996 Quarter
First Second Third Fourth
Market Price Per Share-
High 5 1/2 5 1/2 6 10 5/6
Low 5 1/6 5 5 5 3/4
Per Share Cash Dividend Declared $.04 1/6 $.08 1/3
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 26, 1997
was 287.
All per share amounts have been adjusted to give retroactive effect to a
three-for-one split in the form of a stock dividend paid on January 3, 1997.
Registrar and Transfer Agent
ChaseMellon Shareholders Services
New York, N. Y.
-33-
WELLCO ENTERPRISES, INC.
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
(In Thousands Except for Per Share Amounts)
Fiscal Year 1997 Quarter
First Second Third Fourth
Revenues $4,990 $4,738 $2,501 $8,970
Cost of Sales and Services 4,086 3,917 2,008 7,600
Net Income 298 208 (A) (91) (B) 343
Net Income (Loss) Per Share $.27 $.18 $(.08) $.30
Fiscal Year 1996 Quarter
First Second Third Fourth
Revenues $4,378 $4,656 $5,484 $5,450
Cost of Sales and Services 3,959 4,154 4,648 4,407
Net Income (C) (71) (D) 118 (E) 584 (F) 360
Net Income (Loss) Per Share (G) $(.027) $.043 $.52 $.32
(A) In December 1996, Wellco substantially completed combat boot shipments
under the prior combat boot contract, and since it was not awarded a
new contract until April 15, 1997, pairs of combat boots shipped in the
quarter ended March 29, 1997 were significantly less that normal.
(B) Reduced by $76,000 contribution to the Wellco Foundation. Reduced by
$28,000 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. Reduced by $54,000 of interest cost. Also
reduced by excess labor costs, freight costs and other inefficiencies
caused by a significant change in combat boot shipment methods.
(C) Reduced by $102,000 equity in loss of affiliate.
(D) Increased by $585,000 of investment income. Reduced by $410,000 of
equity in loss of affiliate and $94,000 stock repurchase charge.
(E) Increased by $347,000 of investment income.
(F) Reduced by $46,000 contribution to the Wellco Foundation. Increased by
$42,000 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.
(G) Net income per share for the third and fourth quarters is based on
1,123,146 shares, reduced from 2,654,418 shares in the prior quarters
after the December 29, 1995 repurchase of Wellco shares.
-34-
Officers and Directors
HORACE AUBERRY
Chairman of the Board and Chief Executive Officer
ROLF KAUFMAN
Vice Chairman of the Board
DAVID LUTZ
President and Chief Operating Officer and Treasurer
Officers
SVEN E. OBERG
V. P. - Technical Director
RICHARD A. WOOD, Jr.
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)
JAMES T. EMERSON
Retired Engineer
JOSEPH MINIO
President and Chief Executive Officer of Belle Haven Management, Ltd.
J. AARON PREVOST
Retired Banker
WILLIAM D. SCHUBERT
Principal of Advanced Management Concepts
(Management Consultants)
FRED K. WEBB, JR.
Accounting Team Leader for United Guaranty Corporation
-35-
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, 1997,
and is incorporated herein by reference. After each item and shown in
parenthesis is the proxy heading for the section containing the responsive
information.
Item 10. Directors and Executive Officers of the Registrant.(Board of Directors)
The Proxy Statement is not expected to contain information disclosing
delinquent Form 4 filers.
Identification of Executive Officers and Certain Significant Employees:
Name Age Office
Horace Auberry 66 Chairman of the Board of Directors,
Chief Executive Officer
Rolf Kaufman 66 Vice Chairman, Board of Directors
Sven Oberg 58 Vice President-Technical Director
David Lutz, CPA 52 President, Treasurer and Director
Richard A. Wood, Jr. 60 Secretary
Tammy Francis, CPA 38 Controller
In 1996, Mr. Kaufman retired from the office of President and remains active as
a consultant to the Company serving in the position as Vice Chairman, Board of
Directors. Mr. Lutz was elected to the office of President in 1996, previously
serving as Secretary/ Treasurer. Ms. Francis has been Controller since October,
1996. She was Controller of Atlas Precision, Inc., an injection molding
manufacturer, from 1995 until October, 1996. From 1990 until 1995, she was
Manager of Finance and Accounting at Haywood Electric Membership Corporation, a
rural utility company. Prior to becoming Secretary of the Company in 1996, Mr.
Wood served for more than the past five years as Assistant Secretary. Mr. Wood
is a partner in the law firm of McGuire, Wood & Bissett, general counsel to the
Company.
Executive officers are elected by the Board of Directors to serve a term of one
year. There are no arrangements or understandings pursuant to which any of the
officers are elected, and all are elected to serve for one year terms.
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 1997 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.
-6-
Since the beginning of the 1997 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 10
The following consolidated financial statements of
Wellco Enterprises, Inc. are in the Registrant's
1997 Annual Report which is integrated into Part II
of this Form 10-K immediately after page 5
Balance Sheets-at June 28, 1997 and June 29, 1996 13-14*
Statements of Operations-years ended June 28,1997,
June 29, 1996 and July 1, 1995 12*
Statements of Cash Flows-years ended June 28, 1997,
June 29, 1996 and July 1, 1995 15-16*
Statements of Stockholders' Equity-years ended
June 28, 1997, June 29, 1996 and July 1, 1995 17*
Notes to Consolidated Financial Statements 18-31*
* Page number in the 1997 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 12
All other schedules are omitted because they are not applicable or not required.
Exhibits
Exhibit Page
Number Description Number
3 Articles of Incorporation and By-Laws (a)
10 Material Contracts:
-7-
Exhibit Page
Number Description Number
A. Bonus Arrangement* (b)
B. 1985 Stock Option Plan for Key Employees of Wellco Enterprises
, Inc.* (c)
C. 1996 Stock Option Plan for Key Employees of Wellco Enterprises
, Inc.* (d)
21 Subsidiaries of Registrant 13
23 Consent of Experts (e)
* Management Compensation Arrangement/Plan.
Copies of the below listed exhibits may be obtained on written request to
Corporate Secretary, Wellco Enterprises, Inc., Box 188, Waynesville, N. C.
28786, accompanied by payment of the following amounts for each copy:
Exhibit 3 $40.00
Exhibit 10 A. 2.00
Exhibit 10 B. 3.00
Exhibit 10 C. 3.00
(a) Exhibit was filed in Part IV of Form 10-K for the fiscal year
ended July 1, 1995, and is incorporated herein by reference.
(b) Exhibit was filed in PART IV of Form 10-K for the fiscal year
ended July 3, 1982, and is incorporated herein by reference.
(c) Exhibit was filed as Exhibit A to the Proxy Statement dated
October 22, 1985, and is incorporated herein by reference.
(d) Exhibit was filed as Exhibit A to the Proxy Statement dated
October 18, 1996, and is incorporated herein by reference.
(e) Consent is contained in opinion of independent certified public
accountants on page 10.
Item 14 (b) - Reports on Form 8-K
There were no reports on Form 8-K for the three months ended June 28, 1997.
-8-
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
By: Horace Auberry, Chairman of the Board of Directors
(Principal Executive Officer)
/s/ David Lutz
By: David Lutz, President and Treasurer
(Principal Financial Officer)
/s/ Tammy Francis
By: Tammy Francis, Controller
(Principal Accounting Officer)
Date: September 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Horace Auberry /s/ Rolf Kaufman
Horace Auberry, Chairman Rolf Kaufman, Director
/s/ David Lutz /s/ J. Aaron Prevost
David Lutz, Director J. Aaron Prevost, Director
/s/ James T. Emerson
James T. Emerson, Director
Date: September 25, 1997
-9-
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 June 28, 1997 and June 29, 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended June 28, 1997. 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
responsibility 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 June 28, 1997 and June 29, 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 28, 1997 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.
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 12, 1997
-10-
WELLCO ENTERPRISES, INC.
FORM 10-K
FISCAL YEAR ENDED JUNE 28, 1997
INDEX TO FINANCIAL STATEMENT SCHEDULE AND EXHIBITS
Page
Financial Statement Schedule: Number
Schedule II-Valuation and Qualifying Accounts 12
Exhibits:
Exhibit 3-Articles of Incorporation and By-Laws (a)
Exhibit 10 A.-Bonus Arrangement (b)
Exhibit 10 B.-1985 Stock Option Plan for Key Employees
of Wellco Enterprises, Inc. (c)
Exhibit 10 C.-1996 Stock Option Plan for Key Employees
of Wellco Enterprises, Inc. (d)
Exhibit 21-Subsidiaries of Registrant 13
Exhibit 23-Consent of Experts (e)
(a) Exhibit was filed in Part IV of Form 10-K for the fiscal year ended
July 1, 1995, and is incorporated herein by reference.
(b) Exhibit was filed in PART IV of Form 10-K for the fiscal year ended
July 3, 1982, and is incorporated herein by reference.
(c) Exhibit was filed as Exhibit A to the Proxy Statement dated October 22,
1985, and is incorporated herein by reference.
(d) Exhibit was filed as Exhibit A to the Proxy Statement dated October 18,
1996, and is incorporated herein by reference.
(e) Consent is contained in opinion of Independent Certified Public Accountants
on page 10.
-11-
SCHEDULE II
WELLCO ENTERPRISES, INC. AND WHOLLY-OWNED SUBSIDIARIES
VALUATION ACCOUNTS
FOR THE FISCAL YEARS ENDED JUNE 28, 1997, JUNE 29, 1996 AND JULY 1, 1995
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO BALANCE AT
DESCRIPTION YEAR INCOME DEDUCTIONS END OF YEAR
Allowance for
doubtful
accounts-
1997 $37 $21 (A) $58
1996 37 37
1995 43 6 (B) 37
(A) Additions for allowance for doubtful accounts.
(B) Write off of uncollectible accounts.
-12-