FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 3, 1999
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 828-456-3545
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. ( )
As of August 31, 1999, 1,163,246 common shares were outstanding, and the
aggregate market value of the common shares (based upon the closing price of
these shares on the American Stock Exchange on August 31, 1999) of Wellco
Enterprises, Inc. held by nonaffiliates was approximately $2,100,000.
Documents incorporated by reference:
Definitive Proxy Statement, to be dated October 15, 1999, in PART IV.
Definitive Proxy Statement, dated October 17, 1997, in PART IV.
Definitive Proxy Statement, dated October 18, 1996, in PART IV.
Definitive Proxy Statement, dated October 17, 1995, in PART IV.
Definitive Proxy Statement dated July 3, 1982, in PART IV.
PART I
Item 1. Business.
The Company operates in one reportable segment. Substantially all of the
Company's operating activity is from the sale of military and other rugged
footwear, the sale of specialized machinery and materials for the manufacture of
this type of footwear and the rendering of technical assistance and other
services to licensees for the manufacture of this type of footwear.
Footnote 15 to the Consolidated Financial Statements contains information about
revenues by similar products and by geographic areas. The majority of revenues
($14,246,000 in 1999 and $17,326,000 in 1998) were from sales to the U. S.
government, primarily the Defense Supply Center Philadelphia (DSCP), under
contracts for the supply of boots used by the U. S. Armed Forces. The loss of
this customer would have a material adverse effect on the Company.
For more than the last five years, the Company has manufactured and sold
military combat boots under firm fixed price contracts with DSCP. 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 (DMS)
process. The Company also supplies the Intermediate Cold/Wet Boot (ICW), the
Infantry Combat Boot/Marine Corps (ICB) and anti-personnel mine protective boots
and overboots. The government awards fixed price boot contracts on the basis of
bids from several qualified U. S. manufacturers. The Company also sells some of
these same boot products to other customers, including customers located in
foreign countries.
The Company provides, primarily under long-term licensing agreements,
technology, assistance and related services for manufacturing military and
commercial footwear to customers in the United States and abroad. Under these
agreements licensees receive technology, services and assistance, and the
Company earns fees based primarily on the licensees' sales volume. In addition
to providing technical assistance, the Company also, from time to time, supplies
certain foreign military footwear manufacturers with some of their machinery and
material needs. The Company builds specialized footwear manufacturing equipment
for use in its own and its customers' manufacturing operations. This equipment
is usually sold, but in some cases it is leased.
Net loss for the 1999 fiscal year was $837,000 ($.72 diluted loss per share)
compared to net loss of $337,000 ($.29 diluted loss per share) for the 1998
fiscal year.
In 1999, the Company implemented major changes to its boot manufacturing
operations. In February, 1999, the Board of Directors approved a restructuring
plan to consolidate and realign the Company's footwear manufacturing operations.
Under this plan, the Company transferred the majority of its Waynesville, North
Carolina footwear operations to and consolidated them with the operations of its
facility in Aguadilla, Puerto Rico, where the Company has had operations since
1956. The 1999 loss includes $1,077,000 of costs (pretax) related to this
action.
The 1998 loss includes two items that affect the comparability of 1999 and 1998
operating results. The 1998 loss was increased by approximately $800,000 of
start up costs incurred in the Company's initial production of the ICB boot.
Also, the 1998 loss was reduced by the recognition of a $226,000 non-recurring
income item under an agreement with the government.
More information about these, and other events affecting Wellco's 1999 and 1998
operating results, are contained in the Management's Discussion and Analysis
section of the Company's 1999 Annual Report to Shareholders which is
incorporated in Part II of this Form 10-K.
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For a number of years DSCP has been carrying out a program to reduce its
inventory of the DMS combat boot. During the Cold War period, DSCP was
authorized to build and maintain a large, ready to go to war inventory of this
boot. With the end of the Cold War and reductions in military budgets, DSCP no
longer has the funding to support a large inventory. Since the early 1990's,
DSCP has been gradually reducing boot inventory by buying fewer pairs than were
used. There are presently four contractors in the United States using the DMS
process to manufacture three types of combat boots. In order to maintain an
industrial base of contractors who could meet wartime needs, this inventory
reduction program is being accomplished over several years.
Starting with Wellco's 1998 fiscal year and continuing throughout the 1999
fiscal year, DSCP accelerated this inventory reduction program. Lower sales of
DMS combat boots have adversely affected Wellco's operating results for both
years. The Company understands the DSCP target inventory level to be a total of
550,000 to 600,000 pairs. At the end of August, 1999 their total inventory was
605,000 pairs. In addition, Wellco has been informed by a DSCP representative
that they have substantially reached their target inventory.
Bidding on U. S. government boot solicitations is open to any qualified U. S.
manufacturer. In addition to meeting very stringent manufacturing and quality
standards, contractors are required to comply with demanding delivery schedules
and a significant investment in specialized equipment is required for the
manufacture of certain types of boots.
The Company competes on U. S. government contracts with several other companies,
none of which dominates the industry. Bidding on contracts is very competitive.
United States footwear manufacturers have been adversely affected by sales of
footwear made in low labor cost countries. This has significantly affected the
competition for contracts to supply boots to U. S. Armed Forces, which by law
must be made in the U. S.
Most boot contracts are for multi-year periods. Therefore, a bidder not
receiving an award from a significant solicitation could be adversely affected
for several years.
Many factors affect the government's demand for boots and the quantity purchased
can vary from year to year. For example, projections show that all service
branches except the Marine Corps will not reach their 1999 recruitment goals.
Contractors cannot influence the government's boot needs. Price, quality, quick
delivery and manufacturing efficiency are the areas emphasized by the Company
that strengthen its competitive position.
The U. S. government usually evaluates bids received on solicitations for boots
using their "best value" system, under which bidders offering the best value to
the government are awarded the contract, or in the case of multiple contract
awards, a greater portion of total boots contracted. Best value usually involves
an evaluation of performance considerations, such as quality and delivery, with
the prices bid being less important. As bidders become more equal in the best
value evaluation, price becomes more important. For the current DMS 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%.
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.
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(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.
All current boot contracts contain options that are exercisable at the
government's discretion. In 1998 the government did not exercise an option on
one of the Company's contracts.
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. These methods include the Goodyear Welt
construction, as well as boots bottomed by injection molding. These methods are
used in work shoes, safety shoes, and hiking boots manufactured both in the U.
S. and abroad for the commercial market. Quality, service and reasonable
manufacturing costs are the most important features used to market the Company's
technology, assistance and services.
The Company has a strong research and development program. While not all
research and development results in successful new products or significant
revenues, the continuing development of new products and processes has been and
will continue to be a significant factor in growth and development. 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 the Company was awarded a three-phase contract to develop
changes to combat boots that will result in fewer lower extremity disorders. The
second phase of this work was completed in 1998. The third phase involves an
extensive wear test using U.S. Army recruits, and in September, 1999 the Company
shipped the boots for this test.
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.
The Company's backlog of all sales, not including license fees and rentals, as
of September, 1999 was approximately $10,200,000 compared to $11,900,000 last
year. The Company estimates that substantially all of the current year backlog
will be shipped in the 2000 fiscal year. The current backlog is less than the
prior year's backlog because, as mentioned above, the government did not
exercise a contract option.
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
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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.
The current DMS boot contract provides for the Company to quickly ship direct to
U. S. Armed Forces installations in both the U. S. and abroad. Compared to prior
years when shipment was to government warehouses, this increases the Company's
investment in inventory.
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 293 persons during the 1999 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.
In 1999, the Company consolidated its existing operations in Puerto Rico and the
operations transferred from its Waynesville, North Carolina factory into a
larger leased building.
Management believes all its plants, warehouses and offices are in good condition
and are reasonably suited for the purposes for which they are presently used. As
has been the case for the last several years, the volume of operations in 1999
caused the Company's facilities to be used at less than normal capacity.
Item 3. Legal Proceedings.
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the Company's business, to which the Company or any of
its subsidiaries 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 1999.
PART II
Items 5, 6, 7, 7A and 8.
The information called for by the following items is in the Company's 1999
Annual Report to Shareholders which is incorporated starting on the following
page in this Form 10-K:
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Annual Report
Page No.
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 37
Item 6. Consolidated Selected Financial Data 1
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition 4-11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk *
Item 8. Financial Statements and Supplementary Data 12-35, 38
* 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 1999 or 1998 fiscal years or during the period
from the end of the 1999 fiscal year through the date of filing this Form 10-K.
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WELLCO(R)
ENTERPRISES, INC.
ANNUAL REPORT
1999
WELLCO ENTERPRISES, INC.
CONSOLIDATED SELECTED FINANCIAL DATA
(In Thousands Except for Per Share Amounts)
Year Ended
July 3, June 27, June 28, June 29, July 1,
1999 1998 1997 1996 1995
------- -------- -------- -------- -------
Revenues $ 21,312 $ 23,917 $ 21,199 $ 19,968 $ 18,003
Net Income (Loss) (837) (337) 758 991 969
Basic Earnings (Loss) per
Share (A) (0.72) (0.29) 0.67 0.53 0.37
Diluted Earnings (Loss) per
Share (A) (0.72) (0.29) 0.66 0.52 0.37
Cash Dividends Declared Per
Share of Common Stock .20 .20 .20 .125 .083
Total Assets at Year End 14,853 16,020 15,652 12,697 22,738
Long-Term Liabilities at Year
End $ 1,721 $ 2,253 $ 2,789 $ 2,431 $ 1,897
(A) All per share amounts reflect 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 16, 1999
Corporate Offices
Waynesville, N.C.
10-K Availability The Company's Form 10-K (annual report filed with the
Securities and Exchange Commission) is available without charge to those who
wish to receive a copy. Write to: Corporate Secretary, Wellco Enterprises, Inc.,
Box 188, Waynesville, N.C. 28786
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Dear Fellow Shareholders:
Some of you who are long term shareholders may remember 1979 when the cutting
and stitching operations of our Waynesville, North Carolina factory were
transferred to and consolidated with the cutting and stitching operations of our
Aguadilla, Puerto Rico facility. You may also recall that five years later, in
1984, we substantially exited the commercial footwear market, a market in which
more than 90% of present U. S. retail sales are of imported footwear, and
started to focus our efforts on military boots.
Using the clarity of hindsight, we feel that these decisions have proven to be
beneficial to the shareholders of our Company. Having all cutting and stitching
operations in Puerto Rico enabled us to be more price competitive. The
commercial footwear market has ever increasingly gone to imports. Since 1984,
your Company's Puerto Rico facility, which has been in existence since 1956, has
manufactured military boot uppers which the Waynesville North Carolina facility
lasted and bottomed into finished boots, warehoused and shipped to the United
States government for use by U. S. Armed Forces.
In 1999 your Company again took significant action that will have a major impact
on our future. After more than eighteen months of competing in a market driven
by the government's inventory reduction program, your Board of Directors, in
February, 1999, approved a restructuring plan to consolidate and realign the
Company's footwear manufacturing operations. Under this plan, the Company
transferred the majority of the lasting, bottoming and finishing operations from
its Waynesville, North Carolina facility and consolidated them with the
operations of its Aguadilla, Puerto Rico facility.
The 1999 loss includes a $1,077,000 pretax charge related to this action. The
loss before income taxes in 1999 was $1,237,000 (a net loss of $837,000 after a
$400,000 benefit from tax loss carryback), and this charge was a major reason
for that loss.
Since most of our military boots are shipped against delivery orders received
four days per week, we had to execute the transfer and consolidation with the
minimum interruption in production. With a lot of planning and hard work by
dedicated people, we were able to do this.
The goal was to have the consolidated operations in place and be manufacturing
boots in Puerto Rico on July 19, 1999. Meeting this target was complicated by
the fact that we had to locate a facility in Aguadilla that was large enough to
house the consolidated operation. By late April, 1999 we found the facility,
transferred the first machines and materials from Waynesville and started
training new employees. In late June, we started the process of transferring the
existing Puerto Rico cutting and stitching machines, and on July 19 were back in
production making complete boots in Puerto Rico.
The Waynesville facility continues to be well used. In addition to manufacturing
small quantities of uppers into finished boots when special customer needs
arise, the Waynesville facility will continue to manufacture specialized
footwear, warehouse and ship boots, and serve as the Company's headquarters, as
well as its sales and product development center. This action did not affect Ro-
Search, Inc., a wholly-owned subsidiary of the Company which makes specialized
footwear manufacturing machinery at the Waynesville facility.
The challenge for the year 2000 is to continue improving the manufacturing
efficiency of the expanded Puerto Rico operations.
We did not take this action to remedy a short term problem. We terminated the
employment of 77 people at the Waynesville facility. Fortunately , we were able
to give them a very generous cash severance based on years of service. We were
also able to amend the pension plan to allow lump sum payments of vested
benefits, and all terminated employees, except for a few who elected early
retirement, took the lump sum.
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For years we have kept you informed of the government's need to reduce their
inventory of combat boots, and how they were accomplishing that reduction. Last
year, we reported the acceleration of this reduction, and a part of what you see
in the results of operations for 1999 and 1998 was the result of that
acceleration.
This year we report the government's success in this endeavor. Their inventory
of combat boots at the end of August, 1999 was 605,000 pairs. We understand the
government's target inventory level to be a total of 550,000 to 600,000 pairs.
In addition, Wellco has been informed by a DSCP representative that they have
substantially reached their target inventory. This should result in DSCP
purchases of combat boots equaling approximately consumption in the not too
distant future. The Forward Looking Information of Management's Discussion and
Analysis section (see page 5) provides more information about the impact this
could have on our sales of combat boots.
Last year we reported our having an unsettled claim of $754,000 under an
Agreement with the government. This claim is still unsettled. Our Agreement
requires binding arbitration. However, it is not a simple process for all of the
procedures to occur that will allow the government to be bound by arbitration.
The lawyers have finally determined what steps need to take place and we hope to
have this issue settled by December 31, 1999.
During the 1999 fiscal year, we saw our employees give their best. Using their
skills, hard work and good character, they accomplished the transfer to and
consolidation of boot manufacturing in Puerto Rico.
Mr. William D. Schubert, a Director of Wellco since 1990, recently died. Bill
had many talents and strengths. His sense of humor and embracing smile always
lifted our spirits. Bill had the ability to see clearly through a complex issue,
and he used this ability to focus your Board. He will be deeply missed.
We appreciate your support and pledge to you our best efforts.
Horace Auberry David Lutz
Chairman of the Board of Directors President, Treasurer
Chief Executive Officer Chief Operating Officer
September 30, 1999
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Comparing the Fiscal Year ended July 3, 1999 to June 27, 1998:
Loss before income taxes was $1,237,000 in the 1999 fiscal year compared with a
loss before income taxes of $527,000 in the 1998 fiscal year. Three significant
items affect the comparability of these two numbers.
1. The 1999 loss includes a $1,077,000 charge for the restructure and
realignment of boot manufacturing operations. In February, 1999, the Board of
Directors approved a restructuring plan to consolidate and realign the Company's
footwear manufacturing operations. Under this plan, the Company consolidated
substantially all footwear manufacturing operations at its facility in
Aguadilla, Puerto Rico, where the Company has made footwear since 1956.
The execution of this plan resulted in the elimination of 77 employment
positions at the Company's Waynesville, North Carolina facility, and in the
transfer of a significant amount of Waynesville machinery and materials to
Aguadilla. Approximately 80 new personnel were added and trained at the
Aguadilla facility. In addition, the present Aguadilla operations have been
moved to a larger facility into which have been incorporated the operations
transferred from Waynesville. Because of certain timing considerations, the
Company has not as yet finalized all of the new facilities lease provisions with
the government of Puerto Rico. However, the Company does not anticipate any
significant changes between the final lease provisions and the ones presently
being discussed. By the middle of July, both the transferred and already
existing operations were fully operational in the new Puerto Rico facility.
As detailed in Note 19 to the Consolidated Financial Statements, the
Restructuring and Realignment Costs charged against 1999 operations totaled
$1,077,000 and are made up:
o Net restructuring costs of $764,000 made up of: terminated employee
severance costs ($380,000); recognition of prior service cost ($220,000)and
actuarial loss ($211,000) related to the pension plan which covered
terminated employees; and a net gain ($47,00) from the reduction of post
employment employee health care cost liability on terminated employees.
o Realignment costs of $313,000 made up of: new employee training costs
($104,000); cost to move machinery, install machinery and refurbish and
prepare building ($119,000); and legal and other costs ($90,000).
2. The 1998 loss was increased by approximately $800,000 of start up costs
incurred in the initial production of the new Infantry Combat Boot/Marine Corps.
This is explained below in the discussion comparing the 1998 and 1997 fiscal
years.
3. The 1998 loss was reduced by the recognition of a $226,000 non-recurring
income item under an agreement with the government. This is also explained below
in the discussion comparing the 1998 and 1997 fiscal years.
Total revenues from the sale of boots were approximately 8% lower in 1999. Pairs
of direct molded sole (DMS) combat boots sold to the Defense Supply Center
Philadelphia (DSCP) in 1999 were down only slightly from 1998. Revenues from DMS
boot shipments in both 1999 and 1998 have been adversely affected by DSCP's
accelerating its inventory reduction program, which is discussed in the forward
looking information section.
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Pairs of the Intermediate Cold/Wet (ICW) boot sold to DSCP in 1999 were
approximately 42% less than the pairs sold in the prior year. This is Wellco's
first contract for the production of this boot, and the contract provides for a
base year with two option years. The contract provides that total pairs
purchased by DSCP during the first option year are approximately 45% less than
pairs purchased during the base year. The contract, as amended, also provides an
even further reduction in the minimum pairs to be purchased in the second option
year.
Revenues from technical assistance fees from licensees were lower in the 1999
year. Prior year fees include an additional fee related to supplying certain
customers with additional services. Wellco completed providing these additional
services by June, 1998. In addition, fees earned from other DMS combat boot
manufacturers, which are based on their sales, were lower because of the DSCP
inventory reduction program.
Sales of boot manufacturing equipment to new licensees increased in the current
year. However, sales of boot lacing system hardware to commercial boot
manufacturers decreased because of both a bad retail sales year and price
pressure in this market.
The major categories of fixed and semi-variable manufacturing costs decreased by
approximately $580,000 in 1999. Employee group health insurance costs, which
varies with actual health care costs incurred by employees because the Company
is self funded, were substantially the same as 1998. Certain 1998 manufacturing
costs were substantially higher because of the ICB boot start up costs.
The rate of income tax benefit for 1999 was 32% compared to 36% in 1998. This
decrease was primarily caused by a reduction in benefit provided by earnings in
Puerto Rico which are substantially exempt from both Puerto Rico and federal
income taxes.
Forward Looking Information:
Related to the realignment costs discussed above, the Company estimates that the
total amount of cost yet to be recognized is between $300,000 and $600,000.
For several years, DSCP has been reducing its inventory of combat boots by
purchasing from contractors fewer pairs than were consumed. For the last two
years, they have accelerated the reduction. Based on information provided by
DSCP, this has resulted in a reduction of these inventories from 1,400,000 pairs
in February, 1998 to 605,000 pairs in August, 1999. We understand their target
inventory to be a total of 550,000 to 600,000 pairs. In addition, Wellco has
been informed by a DSCP representative that they have substantially reached
their target inventory.
Wellco is presently shipping boots under the second option year of its DMS boot
contract which covers the period of April 16, 1999 to April 15, 2000. The
minimum total pairs DSCP is required to buy from Wellco during this option year
is 155,000 pairs, compared to 126,122 pairs in the first option year covering
the period April 16, 1998 to April 15, 1999. However, since DSCP has
substantially reached their target inventory, Wellco anticipates that their
order pattern will in the not too distant future approach the level of current
consumption. Based on boot consumption for the last year, the annual purchase of
combat boots from Wellco, at the current contract's rate of 25% of total DSCP
purchases of combat boots being ordered from Wellco, would be approximately
250,000 pairs.
The current DMS boot contract has two more one-year option periods after April
15, 2000. Wellco understands that the present intent of DSCP is to exercise the
option for the third year, which would cover the year April 16,2000 through
April 15, 2001.
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Wellco is presently shipping ICW boots under the contract's second and last
option year. Shipments under the second option year will affect Wellco's fiscal
year 2000 operations. Although the minimum pairs to be purchased in the second
option are less than first option pairs, orders received to date under the
second option have already substantially exceeded second option minimum pairs.
Wellco understands that this second option increase results from consumption
being greater than expected. If this second option ordering trend continues,
DSCP could order the contract maximum pairs of 99,000.
As stated in Note 17 to the Consolidated Financial Statements, DSCP has paid
$246,000 of a $1,000,000 Wellco claim. Wellco and DSCP have agreed to use
binding arbitration as the method to settle the remaining $754,000 of this
claim. Any amount Wellco receives beyond the $246,000 will be reflected in the
period the arbitrator's decision is known.
The Company recognizes the need to consider whether its operations will be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk.
The Company primarily uses packaged software running on personal computers and
file servers, and does not use mainframes. Packaged software primarily consists
of accounting, payroll, bar coding and inventory control, employee time and
attendance, and Microsoft Windows applications. All of Wellco's packaged
software has been updated to Year 2000 compliant versions. The total cost of
this updating was minimal.
A lack of timely Year 2000 compliance by Wellco's major customers, vendors and
suppliers could have a materially adverse affect on Wellco's results of
operations and financial condition, although such adverse effect should not be
long term or permanent. For example, orders received from the DSCP for boot
shipments are received electronically. After shipment, Wellco electronically
invoices boot shipments as well as receiving payment by bank wire transfer. A
lack of timely Year 2000 compliance by DSCP may significantly delay Wellco's
boot shipments. A lack of timely Year 2000 compliance with related computerized
systems, for example the ability to electronically receive invoicing from
Wellco, may significantly delay Wellco's receipt of cash from invoices. There
may be suppliers of materials, machine replacement parts, and other critical
items who may not be Year 2000 compliant. This may mean a delay in getting the
necessary materials and other items to maintain a continuous flow of production.
The Company has sent written requests to all major vendors and customers asking
confirmation as to their Year 2000 compliance status. Responses received to date
do not indicate a problem.
Only a few requests have not been responded to, and Wellco continues to pursue
getting a response. If vendor responses indicate a problem, Wellco may be able
to find other Year 2000 compliant
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vendors, or order excess materials and other items necessary to continue
operations until the estimated time vendors are compliant. If customer responses
indicate a problem, Wellco will work with those customers to the extent
possible. If Wellco has to take some or all of these actions to minimize any
Year 2000 problems, it may have to have additional financing.
Of course, the favorable responses received to date are only as reliable as the
responders. While Wellco feels the responses are reliable, there can be no
absolute assurance that they are.
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 effect of customers and vendors not being timely in Year 2000
compliance, the ability to control costs under fixed price contracts, the
cancellation of contracts, and other risks detailed from time to time in the
Company's Securities and Exchange Commission filings, including Form 10-K for
the year ended July 3, 1999. Actual results may differ materially from
management expectations.
Comparing the Fiscal Year ended June 27, 1998 to June 28, 1997:
Loss before income taxes was $527,000 in the 1998 fiscal year compared with
income before income taxes of $1,088,000 in the 1997 fiscal year. The 1998
fiscal year pretax income includes a $226,000 non-recurring income item
representing the accrual of a claim under an Agreement with the Defense Supply
Center Philadelphia (DSCP), an agency of the U.S. Department of Defense to which
the Company sells combat boots.
In April 1998 Wellco executed an Agreement with DSCP. The Agreement provides
that DSCP will reimburse the Company for certain costs incurred related to
contract performance during the fourth quarter of the 1997 fiscal year and the
first two quarters of the 1998 fiscal year. Wellco maintained that it was due
reimbursement for costs incurred in performing in accordance with a prior DSCP
interpretation of the contract. This interpretation was later changed to the
detriment of Wellco. The Agreement provides that any disagreement between Wellco
and DSCP on an item of cost will be subject to binding arbitration. The cost
reimbursement is limited to $1,000,000.
Wellco submitted its claim under the Agreement in late May, 1998 documenting
more than $1,000,000 in costs incurred. In an early October, 1998 meeting with
Wellco, DSCP agreed to pay Wellco $246,000 of the $1,000,000 claim. Binding
arbitration will be used to determine how much, if any, of the remaining
$754,000 will be paid by DSCP to Wellco. It is expected that this arbitration
procedure will take a few months and Wellco, despite feeling that a significant
amount of the $754,000 will ultimately be paid, cannot reasonably predict what
the arbitrator will decide. Therefore, the 1998 Consolidated Statements of
Operations includes as an item of income related to this claim $226,000,
representing the agreed to $246,000 less $20,000 of related costs. Any amount
Wellco will receive beyond $246,000 will be recorded at the time of the
arbitration decision.
Pairs of direct molded sole (DMS) combat boots shipped in 1998 were almost half
of 1997. On April 15, 1997, Wellco and three other contractors were awarded DMS
combat boot contracts from DSCP for the one year period starting April 15, with
options for each of the ensuing four years. These are indefinite quantity
contracts under which each contractor is guaranteed delivery orders for a
minimum number of pairs and DSCP can order up to a stated maximum number of
pairs. Wellco's award is for 25% of total combat boot purchases, with the other
three contractors receiving 35%, 20% and 20% of total purchases. DSCP had
estimated award to be in December, 1996, and Wellco substantially
-7-
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 stock boots in anticipation of a contract
award.
This contract is the first one under which boot contractors ship direct to
customers, instead of to government warehouses. Past performance is a key factor
in contractor evaluation, and quick delivery is a significant performance
factor. Wellco built a large inventory in order to be able to ship quickly after
receipt of orders.
This resulted in Wellco having a significant inventory of combat boots at the
date of contract award, and in Wellco being the only contractor which was in
position to start shipping immediately upon contract award. During the fourth
quarter of the 1997 fiscal year, Wellco was allowed to accelerate its first year
shipments and did ship very large quantities against its first year minimum.
Starting in late October, 1997, when Wellco was very close to having shipped its
guaranteed minimum pairs, DSCP significantly reduced Wellco's orders. This was
done to give the other three contractors delivery orders for their guaranteed
minimum pairs.
Because of the delay in contract award, DSCP expressed their non-binding intent
to purchase more than the guaranteed minimum pairs in the first contract year.
Wellco continued to maintain its DMS boot inventory in anticipation of DSCP
purchasing pairs above the minimum. As other contractors reached their minimum,
DSCP determined that it could not buy pairs beyond the minimum. This resulted in
a significant reduction in the pairs of DMS combat boots shipped by Wellco from
late October, 1997 through April, 1998.
On April 10, 1998 DSCP exercised it's first option on the DMS boot for the one
year period April 15, 1998 to April 15, 1999, with Wellco's option being for 25%
of total DMS pairs purchased during this year. For several years, DSCP has been
reducing its depot inventory of DMS boots. Prior to option exercise, in late
February, 1998, DSCP met with all DMS boot contractors informing them that
inventory reduction was behind schedule. Out of this meeting came a contract
modification reducing the total guaranteed minimum pairs to be purchased by DSCP
during the first option year. For Wellco, this is a reduction in the minimum
pairs from 155,000 to 125,000 pairs. The price per pair for the first 155,000
pairs during the first option was increased to compensate for the reduced pairs.
DSCP has again expressed their intent, without giving a binding commitment, to
purchase more than the minimum pairs if their total usage in the first option
year exceeds 900,000 pairs. Boot usage in the year ended April 15, 1998 was
approximately 1,100,000.
The reduction of boot shipments, after the acceleration of shipments in the
first contract year, and the reduction in minimum pairs to be ordered during the
second contract year, were the primary reasons for DMS boot shipments in the
1998 fiscal year being almost half of 1997.
Compared to fiscal year 1997, sales revenues in 1998 increased $2,718,000
primarily because of shipments under two new boot contracts. On February 25,
1997 Wellco was awarded a contract from DSCP to supply the Intermediate Cold/Wet
boot (ICW), and the 1997 fiscal year reflected only the first shipment under
this contract. On June 25, 1997, Wellco was awarded a contract to supply the new
Infantry Combat Boot/Marine Corps (ICB), with shipments starting in October,
1997. Wellco had not previously made either of these boots. As is often the case
when entering the manufacture of new products, margins on both the ICB and ICW
boots are less than those on DMS boots historically supplied by Wellco to DSCP.
-8-
Operating results for 1998 were adversely affected by start-up costs, estimated
to be approximately $800,000, which incurred in the initial production of the
ICB boot. The ICB contract required that Wellco, within 90 days after contract
award, manufacture and have in inventory a significant quantity of this boot. At
the end of this 90 day period, the contract also required Wellco to have the
capacity to quickly deliver orders for this boot to Marine recruit training
centers and major Marine clothing stores. This 90 day period compares to a
normal "make ready" time in government boot contracts of 165 days or longer.
The ICB boot incorporates several technologies and manufacturing methods which
are significantly different than those in the DMS boot. During this 90 day
period, Wellco rearranged its production lines, purchased and installed
significant new manufacturing equipment, hired and trained new employees, tested
new materials, and developed many new manufacturing procedures and methods. If
time had permitted, this should have been done with small trial production runs.
With only 90 days, Wellco had to simultaneously do all of this and reach full
production without the benefit and efficiencies of trial production runs.
ICB boot start-up costs were charged against 1998 operating income. In addition
to labor inefficiencies in training new employees, significant overtime premiums
were paid. Bonuses were paid to direct labor personnel for meeting production
quotas. Instead of using ocean freight, expensive air freight costs were
incurred to send materials to the Company's plant in Puerto Rico and then to
send completed boot uppers to the North Carolina plant for bottoming and
finishing. Because the 90 day period did not give enough time to develop
manufacturing procedures and methods using small trial production runs,
significant material losses were incurred. Production quantities of materials
were purchased and processed. Some materials did not perform as expected,
resulting in boots which could not be shipped under the contract and whose
market value was less than cost.
The start-up of ICB production proved to be more expensive than initially
anticipated. Management's judgement is that, if Wellco had included an adequate
amount of start-up costs in its bid prices, those prices would have been so much
higher than the prices of other bidders that Wellco would not have received the
contract award.
Revenues from technical assistance fees and equipment rentals from licensees
increased almost $200,000 in 1998. Technical assistance fees increased because
of an additional fee, earned through April, 1998, related to supplying certain
customers with additional services. In addition to completing a major mold
order, a new footwear manufacturing installation was completed in 1998. The
second phase of a government research and development contract was completed in
1998. However, the sale of boot making materials, primarily to foreign
customers, decreased in 1998. These sales can vary significantly from period to
period with the needs of this group of customers.
General and administrative expenses decreased $239,000. Bonus expense, the
majority of which varies with net income, decreased. For a number of years
Wellco has made a contribution to The Wellco Foundation in an amount based on
taxable income. Subsequent distributions to qualifying charities is at the
nomination of Wellco shareholders whose names are known to the Company. The
contribution for 1997 was $115,000 , and no contribution was made in 1998. The
rate of Tax Benefit to Income Before Income Taxes is 36% for 1998 compared to a
rate of Tax Provision to Income Before Income Taxes of 30% for 1997. The 1998
benefit results from the taxable loss being carried back for a refund of taxes
paid in prior years.
-9-
LIQUIDITY AND CAPITAL RESOURCES
Wellco uses cash from operations and a bank line of credit to supply most of its
liquidity needs. The following table summarizes at the end of each year the
Company's cash and funds available from the bank line of credit:
( in thousands)
1999 1998 1997
---- ---- ----
Cash ..................... $ 89 $ 196 $ 181
Unused Bank Line of Credit 520 1,115 2,813
----- ------- -----
Total .................... $ 609 $1,311 $2,994
===== ======= =====
Cash used to purchase equipment and to make leasehold improvements related to
the consolidation of boot manufacturing operations in Puerto Rico was the main
cause of the reduction in the unused bank line of credit at the end of 1999.
A reduction of $500,000 in the total bank line available and a higher level of
line usage caused the reduction in the amount of the unused bank line at the end
of 1998. The increased bank line usage was primarily caused by the purchase of
boot production equipment.
The following table summarizes the other major sources and (uses) of cash for
the last three years:
(in thousands)
1999 1998 1997
---- ---- ----
Income (Loss) Before Depreciation ........ $ (292) $ 99 $ 1,083
Net Change in Accounts Receivable,
Inventory, Accounts Payable and Accrued
Liabilities .............................. 1,170 400 (2,718)
Deferred Taxes, Tax Refund Receivable,
and Other ................................ (30) (427) 10
Net Cash Provided By (Used In) Operations 848 72 (1,625)
Cash From Bank Line of Credit ........... 915 1,883 4,350
Cash Used to Repay Bank Line of Credit ... (320) (685) (2,663)
Cash From Bank Loan for Warehouse Addition 400
Cash Used for Warehouse Addition ......... (381)
Cash Used to Repay Bank Loan ............. (145) (73)
-10-
1999 1998 1997
---- ---- ----
Cash Used to Purchase Plant and Equipment (1,172) (1,054) (474)
Cash Dividends Paid ..................... (233) (233) (227)
Cash From Stock Options Exercised ....... 86 147
Net Increase (Decrease) in Cash ......... $ (107) $ 15 $ ( 492)
In 1999, a $1,559,000 net reduction in receivables and inventory less a $575,000
net reduction in accounts payable and accrued liabilities provided $984,000 of
cash from operations. Machinery purchases and leasehold improvements related to
the consolidation of boot manufacturing operations in Puerto Rico were the
primary purchases of plant and equipment.
In the 1999 fiscal year, Wellco substantially reduced the amount of cash
invested in inventory. This was done after DSCP changed its interpretation of a
certain contract clause relating to quick shipment. In addition, a contract
modification was received which allowed the shipment of a significant amount of
finished boots in June, 1999.
For 1998, cash for a $1,831,000 increase in inventory was provided by a decrease
in accounts receivable of $2,679,000. Accounts payable, accrued liabilities and
accrued income taxes decreased by $448,000. These are the primary changes that
resulted in $72,000 of cash provided by operations. Cash from the bank line of
credit was used to finance the purchase of boot production equipment. In
addition, cash from a three year bank term loan was used for a warehouse
addition.
At July 3, 1999, the Company had a $300,000 commitment for capital equipment. In
addition, the Company estimates that approximately $300,000 will be required
after July 3, 1999 to complete the consolidation of manufacturing operations in
Puerto Rico. Note 11 to the Consolidated Financial Statements provides
information about a potential cash payment in the 2003 fiscal year of $309,000
that might result from Wellco's repurchase of its stock in the 1996 fiscal year.
The bank's commitment for a total $4,000,000 line of credit expires on December
31, 1999, and is subject to renewal at the bank's discretion. During the 2000
fiscal year, Wellco expects to continue to rely on the bank line of credit. 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.
-11-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE FISCAL YEARS ENDED
JULY 3, 1999, JUNE 27, 1998, AND JUNE 28, 1997
(in thousands except per share amounts)
JULY 3, JUNE 27, JUNE 28,
1999 1998 1997
------- -------- --------
REVENUES (Notes 4, 15 and 16) ............... $ 21,312 $ 23,917 $ 21,199
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales and services ............. 19,098 22,340 17,611
Restructuring and realignment
costs (Note 19) ........................ 1,077
General and administrative
expenses ............................... 2,136 2,123 2,362
-------- -------- --------
Total .................................. 22,311 24,463 19,973
-------- -------- --------
INCOME FROM CONTRACT CLAIM (Note 17) ........ 226
--------
OPERATING INCOME (LOSS) ..................... (999) (320) 1,226
INTEREST EXPENSE ............................ 242 219 191
DIVIDEND AND INTEREST INCOME ................ 4 12 53
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ........... (1,237) (527) 1,088
PROVISION (BENEFIT) FOR INCOME TAXES
(Note 10) ................................... (400) (190) 330
-------- -------- --------
NET INCOME (LOSS) ........................... (837) (337) 758
OTHER COMPREHENSIVE INCOME (LOSS)
(Notes 1 and 8):
(Increase) Decrease In Additional
Minimum
Pension Liability ...................... 229 (113)
-------- -------- --------
COMPREHENSIVE INCOME (LOSS) ................. $ (608) $ (450) $ 758
======== ======== ========
EARNINGS (LOSS) PER SHARE (Note 14)
Basic earnings (loss) per share $ (0.72) $ (0.29) $ 0.67
Diluted earnings (loss) per
share .................................. $ (0.72) $ (0.29) $ 0.66
======== ======== ========
See Notes to Consolidated Financial Statements.
-12-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JULY 3, 1999 AND JUNE 27, 1998
(in thousands)
ASSETS
JULY 3, JUNE 27,
1999 1998
------- --------
CURRENT ASSETS:
Cash ................................. $ 89 $ 196
Receivables, net (Notes 2, 6 and 17) . 4,683 2,247
Inventories (Notes 3 and 6) .......... 5,513 9,508
Deferred taxes (Note 10) ............ 461 288
Income tax refund receivable (Note 10) 226 292
Prepaid expenses and advances (Note 5) 160 4
------- -------
Total ................................ 11,132 12,535
------- -------
MACHINERY LEASED TO LICENSEES, net
(Note 4) ............................. 6 16
PROPERTY, PLANT AND EQUIPMENT, net
(Notes 5 and 6) ...................... 2,970 2,333
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition (Note 1) 228 228
Intangible pension asset (Note 8) .... 88 440
------- -------
Total ................................ 316 668
------- -------
DEFERRED TAXES (Note 10) .................. 429 468
TOTAL ..................................... $14,853 $16,020
======= =======
(continued on next page)
-13-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JULY 3, 1999 AND JUNE 27, 1998
(in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
JULY 3, JUNE 27,
1999 1998
------- --------
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 6) ..... $ 3,480 $ 2,885
Accounts payable ............................ 1,046 1,696
Accrued liabilities (Notes 7, 8, 9 and 19) .. 1,565 1,490
Accrued income taxes (Note 10) .............. 427 241
Current maturity of note payable (Note 11) .. 146 146
-------- --------
Total ................................... 6,664 6,458
-------- --------
LONG-TERM LIABILITIES:
Pension obligation (Note 8) ................. 1,375 1,762
Notes payable (Note 11) ..................... 346 491
COMMITMENTS (Note 18)
STOCKHOLDERS' EQUITY (Notes 1, 8, 11, 12, and 13):
Common stock, $1.00 par value; shares
authorized- 2,000,000; shares issued and
outstanding- 1,163,246 at 1999 and 1998 . 1,164 1,164
Additional paid-in capital .................. 192 192
Retained earnings ........................... 5,618 6,688
Accumulated other comprehensive loss ........ (506) (735)
-------- --------
Total ................................... 6,468 7,309
-------- --------
TOTAL ............................................ $ 14,853 $ 16,020
======== ========
See Notes to Consolidated Financial Statements.
-14-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JULY 3, 1999, JUNE 27, 1998, AND JUNE 28, 1997
(in thousands)
JULY 3, JUNE 27, JUNE 28,
1999 1998 1997
------- -------- --------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ................... $ (837) $ (337) $ 758
------- ------- -------
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization ... 545 436 325
(Increase) decrease in-
Receivables ................. (2,436) 2,679 316
Inventories ................. 3,995 (1,831) (3,753)
Other current assets ........ (263) (237) 30
Increase (decrease) in-
Accounts payable ............ (650) (368) 285
Accrued liabilities ......... 75 (80) 215
Accrued income taxes ........ 186 (116) 218
Pension obligation .......... 194 (39) (68)
Other ....................... 39 (35) 49
------- ------- -------
Total adjustments ................... 1,685 409 (2,383)
------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................ 848 72 (1,625)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, net .... (1,172) (1,435) (474)
------- ------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ............... (1,172) (1,435) (474)
------- ------- -------
(continued on next page)
-15-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JULY 3, 1999, JUNE 27, 1998, AND JUNE 28, 1997
(in thousands)
JULY 3, JUNE 27, JUNE 28,
1999 1998 1997
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings ..... 915 1,883 4,350
Repayment of short-term borrowings ...... (320) (685) (2,663)
Proceeds from long-term debt ............ 400
Repayment of long-term debt ............. (145) (73)
Cash dividends paid ..................... (233) (233) (227)
Stock option exercise ................... 86 147
------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES .................... 217 1,378 1,607
------- ------- -------
NET INCREASE (DECREASE) IN CASH .............. (107) 15 (492)
CASH AT BEGINNING OF YEAR .................... 196 181 673
------- ------- -------
CASH AT END OF YEAR .......................... $ 89 $ 196 $ 181
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid (received) for-
Interest ............................ $ 233 $ 170 $ 94
Income taxes ........................ (377) 141 192
Noncash investing and financing activity-
Adjustment of stock repurchase note . (828) 646
======= ======= =======
See Notes to Consolidated Financial Statements.
-16-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED
JULY 3, 1999, JUNE 27, 1998, AND JUNE 28, 1997
(in thousands except share data)
JULY 3, JUNE 27, JUNE 28,
1999 1998 1997
------- -------- --------
COMMON STOCK (Notes 11, 12 and 13):
Balance at beginning of year ........... $ 1,164 $ 1,151 $ 374
Common stock issued in stock split ..... 749
Stock option exercise .................. 13 28
------- ------- -------
Balance at end of year ................. 1,164 1,164 1,151
------- ------- -------
ADDITIONAL PAID-IN CAPITAL (Notes 12 and 13):
Balance at beginning of year ........... 192 119 598
Transfer to common stock the par value
of stock issued in stock split ..... (598)
Stock option exercise .................. 73 119
------- ------- -------
Balance at end of year ................. 192 192 119
------- ------- -------
RETAINED EARNINGS (Notes 11 and 13):
Balance at beginning of year ........... 6,688 6,430 6,696
Adjustment of note payable from stock
repurchase ......................... 828 (646)
Transfer to common stock the par value
of stock issued in stock split ..... (151)
Net income (loss) ...................... (837) (337) 758
Cash dividends (per share: 1999, 1998
and 1997 - $.20) (233) (233) (227)
------- ------- -------
Balance at end of year ................. 5,618 6,688 6,430
------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Additional Minimum Pension Liability
(Notes 1 and 8):
Balance at beginning of year ........... (735) (622) (622)
Change for the year .................... 229 (113)
------- ------- -------
Balance at end of year ................. (506) (735) (622)
------- ------- -------
TOTAL STOCKHOLDERS' EQUITY .................. $ 6,468 $ 7,309 $ 7,078
======= ======= =======
See Notes to Consolidated Financial Statements.
-17-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended July 3, 1999, June 27, 1998, and June 28, 1997
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 all material
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.
-18-
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 values of cash, receivables and accounts payable
at July 3, 1999 approximate 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 and thus approximates fair value.
Depreciation
The Company uses the straight-line method to compute
depreciation on machinery leased to licensees and property,
plant and equipment used by the Company.
Research and Development Costs
All research and development costs are expensed as incurred
unless subject to reimbursement.
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.
Revenue Recognition
All government combat boot production contracts are fixed
price with multi-year options exercisable at the discretion of
the government . If a contracts delivery 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 a contracts delivery
order requires shipment directly to the consumer, revenues are
recognized upon shipment.
Revenues from government research and development contracts
are 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. Consequently, the 1999 fiscal year contains 53 weeks of
operating results and the 1998 and 1997 fiscal years each
contain 52 weeks.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and
liabilities, as well as the disclosure of contingent assets
and liabilities, at the date of
-19-
the financial statements. They also affect the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans
using the compensation recognition provisions of Accounting
Principles Board Opinion 25 (APB 25), "Accounting for Stock
Issued to Employees". The Company also provides the
disclosures required by Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation." Compensation expense under this method 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.
Comprehensive Income
Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income," became effective for
the Company's fiscal year ending July 3, 1999. This statement
established standards for reporting and display of
comprehensive income and its components and accumulated
balances. Comprehensive income is defined as net income (loss)
and all changes in equity except those resulting from
investments by owners and distributions to owners. Under SFAS
130, the Company's pension liability adjustment is reported as
an item of comprehensive income.
2. RECEIVABLES:
The majority of receivables at July 3, 1999 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 1999 and 1998 are not
significant.
3. INVENTORIES:
The components of inventories are:
(in thousands)
1999 1998
---- ----
Finished Goods ........... $1,948 $4,747
Work in Process .......... 1,712 2,077
Raw Materials and Supplies 1,853 2,684
------ ------
Total .................... $5,513 $9,508
====== ======
4. MACHINERY LEASED TO LICENSEES:
Accumulated depreciation netted against the cost of leased assets in
the 1999 and 1998 Consolidated Balance Sheets is $1,513,000 and
$1,503,000, respectively. Rental revenues for the fiscal years 1999,
1998, and 1997 were $100,000, $141,000 and $178,000, substantially all
of which vary with lessees' production or shipments.
5. PROPERTY, PLANT AND EQUIPMENT:
The cost and accumulated depreciation of property, plant and equipment
are summarized as follows:
(in thousands)
Estimated
1999 1998 Useful Life
---- ---- -----------
Land $ 107 $ 107 N/A
Buildings 1,176 774 40-45 Years
Construction in Progress
(Warehouse Addition) 381 N/A
Machinery & Equipment 4,139 3,632 2-20 Years
Furniture & Fixtures 792 709 2-10 years
Leasehold Improvements 457 63 *
Total Cost $ 6,671 $ 5,666
Total Accumulated
Depreciation $ 3,701 $ 3,333
*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.
Advance payments on equipment, included in prepaid expenses and advances, were
$134,000 at July 3, 1999.
6. LINES OF CREDIT:
The Company maintains a $4,000,000 bank line of credit.The line, which
expires December 31, 1999, can be renewed annually at the bank's
discretion. This line of credit is secured by a blanket lien on all
machinery and equipment (carrying value of $2,914,000 at July 3,
1999) and all non-governmental receivables and inventory ($1,494,000
at July 3, 1999). At July
-20-
3, 1999, borrowings on the line of credit were $3,480,000 with $520,000
available in additional borrowings.
Interest is at the prime rate of 7.75% at July 3, 1999. The bank credit
agreement contains, among other provisions, defined levels of net worth
and current ratio requirements. The Company was not in compliance with
the current ratio loan covenant at July 3, 1999. The Company has
received from the bank a waiver for the period ended July 3, 1999
regarding this loan covenant violation. The covenants are subject to
review at the end of each fiscal quarter.
7. ACCRUED LIABILITIES:
The components of accrued liabilities are:
(in thousands)
1999 1998
---- ----
Compensation (Note 19) ........ $ 738 $ 763
Pension Benefits .............. 161 191
Retiree Health Benefits ....... 170 225
Restructuring Reserve (Note 19) 119
Interest Expense .............. 155 146
Other ......................... 222 165
------ ------
Total ......................... $1,565 $1,490
====== ======
8. PENSION PLANS:
Statement of Financial Accounting Standards No. 132 (SFAS 132),
"Employers' Disclosures About Pensions and Other Postretirement
Benefits," is effective for the Company's 1999 fiscal year. SFAS 132
standardizes the disclosure requirements for pensions and other
postretirement benefits and does not address measurement or recognition
of such items.
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. The Company's pension plans provide
retirement benefits based on either years of service or final average
annual earnings.
The components of pension expense, included in Cost of Sales and
Services in the Consolidated Statements of Operations and Comprehensive
Income (Loss) and computed in accordance with Statement of Financial
Accounting Standards No. 87 "Employers' Accounting For Pensions", are:
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(in thousands)
1999 1998 1997
---- ---- ----
Benefits Earned for Service in the
Current Year ...................... $ 159 $ 139 $ 147
Interest on the Projected Benefit
Obligation ........................ 393 394 388
Return on Plan Assets ............. (255) (254) (234)
Amortization of: Unrecognized Net
Pension Obligation at July 1, 1987;
Cost of Benefit Changes Since That
Date; and Gains and Losses Against
Actuarial Assumptions ............ 174 162 163
----- ----- -----
Pension Expense ................... $ 471 $ 441 $ 464
===== ===== =====
Included in the Restructuring and Realignment Costs (see Note 19) in
the Consolidated Statements of Operations and Comprehensive Income
(Loss) is a cost of $431,000 relating to the curtailment and settlement
of certain pension liabilities. This amount includes $220,000 of
previously unrecognized prior service cost of persons terminated and
$211,000 of previously unrecognized actuarial losses for terminated
participants who received lump-sum cash settlements of their vested
accrued pension benefits prior to July 3, 1999.
Below are various analyses and other information relating to the
Company's pension liability, assets and expense as of June 30, 1999
(most recent actuarial valuation date) and June 30, 1998 (all amounts
are in thousands except for those indicated as percent):
ANALYSIS OF PROJECTED PENSION LIABILITY: 1999 1998
---- ----
Total Projected Liability at Beginning of Year $ 5,815 $ 5,449
Current Year Service Cost .................... 159 139
Interest Cost on Projected Liability ......... 393 394
Benefit Payments ............................. (531) (423)
Actuarial (Gain) Loss ........................ (123) 256
Increased Liability from Plan Amendments ..... 9
------- -------
Total Projected Liability at End of Year ..... $ 5,722 $ 5,815
======= =======
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ANALYSIS OF FAIR VALUE OF PENSION PLAN ASSETS: 1999 1998
---- ----
Fair Value of Plan Assets at Beginning of Year $ 3,530 $ 3,261
Company Contributions ........................ 621 480
Actual Return on Plan Assets ................. 261 212
Benefit Payments ............................. (531) (423)
------- -------
Fair Value of Plan Assets at End of Year ..... $ 3,881 $ 3,530
======= =======
FUNDED STATUS: 1999 1998
---- ----
Excess of Projected Benefit Obligation Over
Fair Value of Plan Assets ................. $ 1,842 $ 2,285
Less Projected Future Salary Increases .... (306) (333)
------- -------
Equal to Liability Recognized in the
Consolidated Financial Statements ......... $ 1,536 $ 1,952
======= =======
COMPONENTS OF PENSION LIABILITY: 1999 1998
---- ----
Unamortized Costs Not Yet Charged Against
Operations-
Net Obligation at July 1, 1987 ............. $ 98 $ 284
Net Obligation From Changes to Plan Benefits
Since July 1, 1987 ......................... 194 276
Net Loss from Actuarial Assumptions Being
Different From Actual ...................... 868 1,325
Less Projected Salary Increases That are in
Total Liability ............................ (306) (331)
Total Liability Not Yet Charged Against
Operations ................................. 854 1,554
Amount of Total Liability Charged Against
Operations ................................. 682 400
------- -------
Total Pension Liability Recognized in
Consolidated Financial
Statements Including Amounts in Accrued
Expenses ................................... $ 1,536 $ 1,954
======= =======
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COMPONENTS OF PENSION LIABILITY THAT HAVE NOT
YET BEEN CHARGED AGAINST OPERATIONS: 1999 1998
---- ----
Intangible Pension Asset ......................... $ 88 $ 440
Deferred Tax Asset ............................... 260 379
Accumulated Other Comprehensive Loss ............. 506 735
------ ------
Total Liability Not Yet Charged Against Operations $ 854 $1,554
====== ======
CERTAIN ACTUARIAL ASSUMPTIONS: 1999 1998
---- ----
Assumed Discount Rate ............................... 7.5% 7.0%
Expected Long-Term Rate of Return on Plan Assets .... 7.5% 7.0%
Rate of Compensation Increase, For the One Plan Whose
Benefits Are Pay Related ............................ 5.0% 5.5%
The Consolidated Statement of Operations and Comprehensive Income
(Loss) shows the amount included in Other Comprehensive Income that
resulted from recording the pension liability that has not yet been
charged against operations.
Because the above amounts are measured by the Company's actuary as of
the end of the pension plan year, June 30, 1999, they do not reflect
the effect of settlement payments made to some of the terminated
employees on July 1, 1999 (see Note 19). A new measurement will be made
by the actuary after all settlement payments are made. The Company
estimates that this will be completed not later than the second quarter
of fiscal year 2000. Any significant change to the above amounts will
be disclosed in the period in which the re-measured amounts are known.
9. RETIREE HEALTH BENEFITS:
The Company accounts for the costs and liability of health care
benefits for retired employees using Statement of Financial Accounting
Standards No. 106 (FAS 106), "Employers Accounting for Postretirement
Benefits Other Than Pensions". The liability at the date of adoption of
FAS 106 (July 4, 1993) is being recognized over employee future service
lives. The disclosure requirements for postretirement benefits required
by SFAS 132 have been adopted.
Employees of the North Carolina plant who meet certain criteria and
retire early (age 62-64) or become disabled, receive for themselves,
but not for their dependents, the same health insurance benefits
received by active employees. All benefits terminate when the employee
becomes eligible to receive Medicare (usually age 65 or 30 months after
disability date). This benefit is provided at no cost to the employee
and the Company does not fund the cost of this
-24-
benefit prior to costs actually being incurred.
The cost of retiree health benefits included in the 1999, 1998 and 1997
Statements of Operations and Comprehensive Income (Loss) was:
(in thousands)
1999 1998 1997
---- ---- ----
Benefits Earned for Current Service ...... $ 35 $ 23 $ 25
Interest Cost on Accumulated Liability ... 24 23 24
Amortization of the July 4, 1993 Liability 14 14 14
---- --- ---
Total Cost ............................... $ 72 $ 60 $ 63
==== === ===
An analysis of the total liability for the last two fiscal years,
including a reconciliation of the liability in the Consolidated Balance
Sheets (see Note 7) at July 3, 1999 and June 27, 1998 is:
(in thousands)
1999 1998
---- ----
Total Liability at Beginning of Year ....................... $ 381 $ 284
Liability for Current Service .............................. 35 23
Interest on Liability ...................................... 24 23
Benefit Payments ........................................... (81) (5)
Actuarial Loss ............................................. 21 56
Reduction in Liability for Employment Terminations (Note 19) (173)
Total Liability at End of Year ............................. 207 381
Less Unamortized Liability at July 4, 1993 ................. (73) (213)
Unrecognized Gain .......................................... 36 57
----- -----
Liability Recognized in the Consolidated Balance Sheets .... $ 170 $ 225
===== =====
The assumed health care cost trend rate used to project expected future
cost was 11.25% in 1999 (12.0% in 1998), gradually decreasing to 6% by
2006 and remaining at 6% thereafter. The assumed discount rate used to
determine the accumulated liability was 7.5% for 1999 and 7% for 1998.
The effect of a 1% increase in the assumed health care cost trend rate
for
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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.
10. 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)
1999 1998 1997
---- ---- ----
Federal Provision (Benefit):
Currently Payable (Refundable) $(158) $(294) $ 355
Deferred ..................... (252) 76 (87)
Total Federal ................ (410) (218) 268
State Provision .................. 10 28 62
Total Provision (Benefit) ........ $(400) $(190) $ 330
A reconciliation of the effective income tax rate for the 1999, 1998 and 1997
fiscal years is as follows:
1999 1998 1997
---- ---- ----
Statutory Federal Income Tax (Benefit) Rate ... (34%) (34%) 34%
Current Period Income of Puerto Rico Subsidiary
Substantially Exempt From Puerto Rican and
Federal Income Taxes .......................... (1%) (9%) (7%)
State Taxes, Net of Federal Tax Benefit ....... 1% 4% 5%
Untaxed Foreign Sales Corporation Income ...... * (2%) *
Non-deductible Expenses ....................... * 4% *
Other ......................................... 2% 1% (2%)
Effective Income Tax (Benefit) Rate ........... (32%) (36%) 30%
* 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. In conjunction
with the consolidation of boot manufacturing operations in Puerto Rico,
the Company has applied for, and expects to
-26-
receive, a new multi-year tax exemption grant with terms similar to the
present one. 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 the federal tax credit
on this income subject to a phase out for existing companies, for tax
years beginning after December 31, 1996. Under the phase out, the
Company 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 ($4,575,000 at July 3, 1999) 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.
At July 3, 1999, the Company has an income tax refund receivable for
the carryback of part of the 1999 loss.
Significant components of the Company's deferred tax assets and
liabilities as of the end of fiscal 1999 and 1998 are as follows:
(in thousands)
Deferred Tax Assets: 1999 1998
---- ----
Pension Cost Charged Against Financial Statement Income,
Not Yet Deducted From Taxable Income ................... $ 216 $ 71
Tax Effect of Pension Liability Charged Against Equity . 260 379
Employee Compensation Charged Against Financial
Statement Income, Not Yet Deducted From Taxable Income . 200 162
Additional Costs Inventoried for Tax Purposes .......... 64 112
Federal NOL Carryforward ............................... 179
State NOL Carryforward ................................. 270 70
Alternative Minimum Tax Credit ......................... 36
Other .................................................. 90 88
Total Deferred Tax Assets .............................. 1,315 882
Valuation Allowance .................................... (360) (70)
Net Deferred Tax Assets ................................ 955 812
Deferred Tax Liabilities:
Depreciation Deducted From Taxable Income Not Yet
Charged Against Financial Statement Income ............. 65 56
Net Deferred Tax Assets ................................ $ 890 $ 756
Because of the level of uncertainty about being able to reduce future
income tax payments by certain tax carryforward items, deferred tax
assets have been reduced by the above shown valuation allowances.
11. NOTES PAYABLE:
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. The Stock Repurchase Agreement provides that
certain additional payments may be made through Wellco's fiscal year
2003.
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 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.
Generally accepted accounting principles require that an obligation be
reflected 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 the estimated payment for fiscal year 2003,
discounted at a rate of 8.5%, is $309,000.
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 Company revised
its estimate of the amount that might be paid during fiscal years 1998
and 1997. For fiscal year 1998 during which there was a net loss, the
revised estimate decreased the Note Payable and increased Retained
Earnings by $828,000 (as required by generally accepted accounting
principles for stock repurchases). For fiscal year 1997 in which there
was net income, the Note Payable was increased and Retained Earnings
was decreased by $646,000.
The Stock Repurchase Agreement does not provide for the payment of
interest. However, generally accepted accounting principles require
that interest be imputed. Interest expense on the Stock Repurchase
Agreement for the fiscal years 1999, 1998, and 1997 was $10,000,
-27-
$97,000 and $49,000 respectively. Total payments under the note cannot
exceed $1,531,000 and all obligations under the note terminate after
the 2003 fiscal year payment.
In 1998, a bank provided a three year term loan as part of the cash
required to construct a new warehouse adjoining the Company's existing
facilities in Waynesville, North Carolina. This loan is payable in
monthly installments of $12,125 plus interest at the bank's prime rate
of 7.75% at July 3, 1999 and $183,000 was outstanding under this loan
at July 3, 1999. The installments of long-term debt maturing in each of
the two remaining fiscal years are: 2000 - $146,000 and 2001 - $37,000.
12. STOCK OPTIONS:
The Board of Directors approved the 1997 Stock Option Plan for Key
Employees (1997 Key Employees Plan) and the 1997 Stock Option Plan for
Non-Employee Directors (1997 Non- Employee Directors Plan). These Plans
provide for the granting of options to purchase 99,000 shares (1997 Key
Employee Plan) and 16,000 shares (1997 Non-Employee Directors Plan),
and at July 3, 1999 options for the purchase of 93,000 shares had been
granted under the 1997 Key Employee Plan and 14,000 shares under the
1997 Non-Employee Directors Plan. Under both Plans, the option price is
the market price on the date granted and options have a life of 10
years from the date granted. Options granted under both of these plans
were fully exercisable on the date granted except for certain options
granted to certain officers which are not fully exercisable until
future years in order to qualify them for certain tax treatment.
Options for the purchase of 83,600 shares were immediately exercisable
and 11,700 became exercisable during 1999 with the remaining options
being exercisable in 2000 - 8,300 and 2001 - 3,400.
Under the 1996 Stock Option Plan, the Compensation Committee of the
Board of Directors was authorized to grant stock options for the
purchase of up to 60,000 shares of the Company's common stock. Options
for 52,500 shares have been granted under the 1996 Plan and the option
exercise price was the market price on the date granted.
Transactions involving these Plans for the last three fiscal years are
summarized below:
Weighted-
No. of Average
Option Shares: Shares Exercise Price
Outstanding at June 29, 1996 54,600 $5.33
Exercised (27,500) 5.34
Outstanding at June 28, 1997 27,100 5.32
Granted 107,000 12.10
Exercised (12,600) 6.73
Forfeited (2,000) 12.00
-28-
Outstanding at June 27, 1998 119,500 11.13
Expired (1,500) 5.50
Outstanding at July 3, 1999 118,000 $11.20
The following table summarizes information about fixed stock options outstanding
at July 3, 1999:
Weighted-Average
Remaining
Range of Exercise Weighted Average Contractual Life
Number Prices Exercise Price in Years
15,000 $5.00 $5.00 6.0
103,000 $12.00-$17.50 $12.11 8.0
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock- Based Compensation," became 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 loss
and net loss per share would have been reduced to the pro forma amounts
shown below for fiscal years 1999 and 1998 (in thousands, except per
share amounts):
1999 1998
---- ----
Net Loss, As Reported ........................ $ (837) $ (337)
Net Loss, Pro Forma .......................... $ (882) $ (626)
Net Loss Per Share, As Reported .............. $ (0.72) $ (0.29)
Net Loss Per Share, Pro Forma ................ $ (0.76) $ (0.54)
No options were granted during 1999 and 1997.
The fair value on the date options were granted (the amount deducted
from net income as reported in arriving at pro forma net loss amounts
above) was estimated using the Black- Scholes option pricing model
using the following assumptions:
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1999 1998
---- ----
Expected Dividend Yield ........................ 1.67% 1.67%
Expected Stock Price Volatility ................ 43.30% 39.40%
Risk-Free Interest Rate ......................... 5.62% 5.55%
Expected Life of Options in Years ................. 3.0 2.9
Weighted-Average Fair Value of Options
Granted ...................................... $ 3.83 $ 3.54
13. STOCK SPLIT:
All common shares and per share amounts give effect to a three-for-one
stock split effected 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).
14. EARNINGS PER SHARE:
The Company computes its basic and diluted earnings per share amounts
in accordance with Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings per Share." Basic earnings per share is computed
by dividing net earnings by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is
computed by dividing net earnings by the weighted average number of
common shares outstanding during the period plus the dilutive potential
common shares that would have been outstanding upon the assumed
exercise of dilutive stock options.
The following is the reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations:
For the Fiscal Year Ended 7-03-99
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $(837,000) 1,163,246 $(0.72)
Effect of Dilutive Stock-based Compensation
Arrangements (Note: N/A - Anti-dilutive)
---------- --------- -------
Diluted EPS Available to Shareholders $(837,000) 1,163,246 $(0.72)
========== ========= =======
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For the Fiscal Year Ended 6-27-98
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $(337,000) 1,161,103 $(0.29)
Effect of Dilutive Stock-based Compensation
Arrangements (Note: N/A - Anti-dilutive)
---------- --------- -------
Diluted EPS Available to Shareholders $(337,000) 1,161,103 $(0.29)
========== ========= =======
For the Fiscal Year Ended 6-28-97
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS Available to Shareholders $758,000 1,126,113 $0.67
Effect of Dilutive Stock-based Compensation
Arrangements 26,698
-------- --------- -----
Diluted EPS Available to Shareholders $758,000 1,152,811 $0.66
======== ========= =====
15. SEGMENT AND REVENUE INFORMATION:
Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures About Segments of an Enterprise and Related Information,"
is effective for the Company's 1999 fiscal year. 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 operates in one reportable segment. Substantially all of
the Company's operating activity is from the sale of military and other
rugged footwear, the sale of specialized machinery and materials for
the manufacture of this type of footwear and the rendering of technical
assistance and other services to licensees for the manufacture of this
type of footwear. The Company identifies segments based on the
Company's organization under one management group. The Company's
operations are managed as one unit and resources are allocated without
regard to separate functions.
Information about the Company's revenues is as follows:
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(in thousands)
1999 1998 1997
---- ---- ----
Sales of Footwear and Related Items .............. $20,913 $22,745 $20,387
Revenues from Licensees .......................... 399 1,172 812
Total Revenues by Major Product Group ............ 21,312 23,917 21,199
Revenues from U. S. Customers .................... 18,816 22,653 20,496
Revenues from International Customers ............ 2,496 1,264 703
Total Revenues by Geographic Region .............. 21,312 23,917 21,199
Location of Major International Customers:
Latin America .................................... 1,252 529 64
Canada ........................................... 833 369 313
Asia/Pacific ..................................... 374 331 322
Major Customer- U. S. Government ................. $14,246 $17,326 $14,611
The Company does not have long-lived assets or operations in foreign
countries. The categorization of revenues as being from international
customers was based upon the final destination of products sold or
services rendered.
16. GOVERNMENT BOOT CONTRACT REVENUES:
From time to time, the Company records estimates of revenues or costs
associated with certain contract actions not yet settled with the U. S.
government. Any difference between these estimates and the actual
amounts agreed to are included in the period of settlement. There were
no significant unsettled contract actions at July 3, 1999. Income
before income taxes in 1997 was decreased by $73,000 from contract
actions settled with the U.S. Government at amounts different than
previously recorded estimates. There were no significant differences
between estimated and actual amounts for contract actions settled in
fiscal years 1999 and 1998.
17. CONTRACT CLAIM:
In April 1998 Wellco executed an Agreement with Defense Supply Center
Philadelphia (DSCP). The Agreement provides that DSCP will reimburse
the Company for certain costs
-32-
incurred related to contract performance during the fourth quarter of
the 1997 fiscal year and the first two quarters of the 1998 fiscal
year. Wellco maintained that it was due reimbursement for costs
incurred in performing in accordance with a prior DSCP interpretation
of the contract. This interpretation was later changed to the detriment
of Wellco. The Agreement provides that any disagreement between Wellco
and DSCP on an item of cost will be subject to binding arbitration. The
cost reimbursement is limited to $1,000,000.
Wellco submitted its claim under the Agreement in late May, 1998
documenting more than $1,000,000 in costs incurred. In an early
October, 1998 meeting with Wellco, DSCP agreed to pay, and has paid,
$246,000 of the $1,000,000 claim.
The Agreement's binding arbitration provision has proven to be
procedurally impossible for DSCP. This has resulted in Wellco filing a
claim with DSCP which, as agreed with DSCP counsel, will be settled by
using an Armed Services Board of Contract Appeals judge as an
arbitrator, whose decision will be binding. It is anticipated that the
arbitration will be held in November or December 1999.
Wellco cannot reasonably predict what the arbitrator will decide.
Therefore, the 1998 Consolidated Statements of Operations and
Comprehensive Income (Loss) included $226,000 of income related to this
claim, representing the$246,000 agreed to by DSCP less $20,000 of
related costs. Any amount Wellco will receive beyond $246,000 will be
recorded
at the time of the arbitration decision.
18. COMMITMENTS:
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 number of shares that could be purchased at July
3, 1999 is approximately 83,000.
The Company is negotiating the terms of an operating lease for the
larger facility which houses its manufacturing operations in Puerto
Rico (see Note 19). The Company expects the final lease to stipulate
total lease payments for the period January 1, 2000 through June 30,
2009 of $1,425,000. Lease payments for each of the Company's five
fiscal years ending after July 3, 1999 are expected to be: $60,000,
$120,000, $120,000, $135,000 and $150,000. Lease expense for the
Company's former Puerto Rico facility in the 1999, 1998 and 1997 fiscal
years was: $59,000, $54,000 and $54,000.
19. RESTRUCTURING AND REALIGNMENT COSTS:
In February, 1999, the Board of Directors approved a restructuring plan
to consolidate and realign the Company's footwear manufacturing
operations. Under this plan, the Company consolidated substantially all
footwear manufacturing operations in Aguadilla, Puerto Rico,
-33-
where the Company has had operations since 1956.
The execution of this plan, which started in early May 1999, resulted
in the elimination of 77 employment positions at the Company's
Waynesville, North Carolina facility, and in the transfer of a
significant amount of Waynesville machinery and materials to Aguadilla.
Approximately 80 new personnel were added and trained in Aguadilla and
the Aguadilla operations have been moved to a larger facility which
incorporates the operations transferred from Waynesville. Because of
certain timing considerations, the Company has not yet finalized all of
the new facilities lease provisions with the government of Puerto Rico.
However, the Company does not anticipate any significant changes
between the final lease provisions and the ones presently being
discussed. By the middle of July 1999, the new facility was fully
operational.
Below is an analysis (amounts in thousands) of the Restructuring and
Realignment Costs included in the Consolidated Statement of Operations
and Comprehensive Income (Loss):
Costs Recognized as of July 3, 1999:
Restructuring Costs Under EITF 94-3:
Employee Cash Severance and Continuation of Group Health Insurance $ 380
Recognition of Pension Prior Service Cost on Employees Terminated 220
Recognition of Unrealized Actuarial Loss on Lump-Sum Pension Payments
Made 211
Reduction in Liability for Future Retiree Health Care Cost (47)
Total Restructuring Costs 764
Realignment Costs:
Cost to Move and Install Machinery, Including Building Preparation Cost 119
Actual Employee Training Cost Paid 104
Legal and Other Costs 90
Total Realignment Costs 313
Total Costs Recognized $ 1,077
Below is an analysis of the disposition as of July 3, 1999 of the
Restructuring and Realignment Costs recognized:
-34-
Disposition of Restructure and Realignment Costs as of July 3, 1999:
Costs Paid Before July 3, 1999, Primarily Employee Severance,
Training and Moving $ 549
Increase in Pension Liability 431
Reduction in Liability For Future Retiree Health Cost (47)
Increased Payroll Tax Liability * 25
Recognized as Restructuring Liability, Primarily Employee
Severance Cost (Note 7) 119
Total Cost Recognized $ 1,077
* Included in "Compensation" in Note 7
In addition to manufacturing small quantities of uppers into finished
boots when special customer needs arise, the Waynesville facility will
continue to manufacture specialized footwear, warehouse and ship boots,
and serve as the Company's headquarters, as well as its sales and
product development center. This action will not affect Ro-Search,
Inc., a wholly-owned subsidiary of the Company which makes specialized
footwear manufacturing machinery at the Waynesville facility.
After July 3, 1999, the Company will incur certain additional
Realignment Costs. These costs will primarily be related to the final
move of machinery and materials to Aguadilla, machinery installation,
the completion of employee training and the recognition of the
previously unrecognized actuarial loss in a pension plan. The Company
estimates that the total amount of cost yet to be recognized will be
between $300,000 and $600,000.
The Company has been informed by the government of Puerto Rico that it
will receive a government grant of up to $400,000 as reimbursement for
certain costs, as approved by the government, related to the increased
operations in Puerto Rico. These amounts will be recorded in the period
received.
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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 (the "Company") as of July 3, 1999 and June
27, 1998, and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity, and cash flows for each of
the three years in the period ended July 3, 1999. 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 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 the Company as of July 3, 1999 and
June 27, 1998, and the results of their operations and comprehensive income
(loss) and their cash flows for each of the three years in the period ended July
3, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
September 23, 1999
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WELLCO ENTERPRISES, INC.
PRICE RANGE, DIVIDENDS AND MARKET OF COMMON STOCK
Fiscal Year 1999 Quarters
First Second Third Fourth
Market Price Per Share-
High 12 3/4 12 1/8 10 1/8 9 1/2
Low 10 1/2 9 3/8 5 1/4 5 3/8
Per Share Cash Dividend Declared $.10 $.10
Fiscal Year 1998 Quarters
First Second Third Fourth
Market Price Per Share-
High 20 7/8 17 1/2 14 1/4 13
Low 12 13 3/4 11 3/4 10 1/2
Per Share Cash Dividend Declared $.10 $.10
The Company's Common Stock is traded on the American Stock Exchange.
The number of holders of record of Wellco's Common Stock as of September 17,
1999 was 269.
Registrar and Transfer Agent
ChaseMellon Shareholders Services
New York, N. Y.
-37-
WELLCO ENTERPRISES, INC.
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
(In Thousands Except for Per Share Amounts)
Fiscal Year 1999 Quarters
First Second Third Fourth
Revenues $ 4,957 $ 3,829 $ 4,383 $ 8,143
Cost of Sales and Services 4,484 3,667 3,841 7,106
Net Loss (149) (278) (A)(376) (A) (34)
Net Loss Per Share $ (0.13) $ (0.24) $ (0.32) $ (0.03)
Fiscal Year 1998 Quarters
First Second Third Fourth
Revenues $ 5,676 $ 7,926 $ 5,162 $ 5,153
Cost of Sales and Services 5,435 7,317 5,046 4,542
Net Income (Loss) (233) 15 (B) 434 (C) (553)
Net Income (Loss) Per Share) $ (0.20) $ 0.01 $ 0.37 $ (0.48)
(A) Reduced by $403,000 in the third quarter and $413,000 in the fourth
quarter, representing restructuring and realignment costs. See Note 19
to the Consolidated Financial Statements.
(B) Increased by $718,000 for the contract claim discussed in Note 17 to
the Consolidated Financial Statements. In the March, 1998 meeting which
resulted in this claim, Wellco outlined the cost items that would be in
its claim and DSCP did not react unfavorably to any item. After a
$20,000 reduction for certain costs related to reaching this Agreement,
in accordance with SOP 81-1, "Accounting For Performance of
Construction - Type and Certain Production - Type Contracts, $980,000
was recorded as an item of income in the third quarter of the 1998
fiscal year.
(C) Decreased by $501,000 related to the adjustment of the claim receivable
mentioned in (B) above. See Note 17 to the Consolidated Financial
Statements.
-38-
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
FRED K. WEBB, Jr.
Vice President of Marketing
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.
TAMMY FRANCIS
Assistant Secretary and Controller
Directors
WILLIAM M. COUSINS, Jr.
President of William M. Cousins, Jr., Inc.
(Management Consultants)
JAMES T. EMERSON
Retired Engineer
CLAUDE S. ABERNETHY, Jr.
Senior Vice President of Interstate / Johnson Lane
J. AARON PREVOST
Retired Banker
WILLIAM D. SCHUBERT (Deceased, August, 1999)
Principal of Advanced Management Concepts
(Management Consultants)
-39-
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 15, 1999,
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 68 Chairman of the Board of Directors,
Chief Executive Officer
David Lutz, CPA 54 President, Treasurer and Director
Rolf Kaufman 69 Vice Chairman, Board of Directors
Sven Oberg 60 Vice President-Technical Director
Fred K. Webb, Jr. 39 Vice President of Marketing
Richard A. Wood, Jr. 62 Secretary
Tammy Francis, CPA 40 Controller, Assistant Secretary
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 and was elected Assistant Secretary in November, 1998. 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. Mr. Webb has been a
director since 1996 and an employee with the Company since August 1998. In
February 1999, Mr. Webb was elected Vice President of Marketing. Mr. Webb was
employed as an Accounting Team Leader with United Guaranty Corporation from 1989
until 1998.
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)
-6-
Item 13. Certain Relationships and Related Transactions. (Board of
Directors/Security Ownership)
Since the beginning of the 1999 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.
Since the beginning of the 1999 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' Consent 10
The following consolidated financial statements of Wellco
Enterprises, Inc. are in the Registrant's 1999 Annual Report
to Shareholders which is integrated into Part II of this
Form 10-K immediately after page 5
Consolidated Balance Sheets-at July 3, 1999 and June 27, 1998 13-14*
Consolidated Statements of Operations and Comprehensive Income
(Loss)-years ended July 3,1999, June 27, 1998 and June 28, 1997 12*
Consolidated Statements of Cash Flows-years ended July 3, 1999,
June 27, 1998 and June 28, 1997 15-16*
Consolidated Statements of Stockholders' Equity-years ended
July 3, 1999, June 27, 1998 and June 28, 1997 17*
Independent Auditors' Report 36*
Notes to Consolidated Financial Statements 18-35*
* Page number in the 1999 Annual Report to Shareholders integrated in Part II of
this Form 10-K.
2. Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable,
not required, or the information contained is not material.
-7-
3. Exhibits
Exhibit Page
Number Description Number
3 Articles of Incorporation and By-Laws (a)
10 Material Contracts:
A. Bonus Arrangement* (b)
B. 1996 Stock Option Plan for Key Employees of Wellco
Enterprises, Inc.* (c)
C. 1997 Stock Option Plan for Key Employees of Wellco
Enterprises, Inc.* (d)
D. 1997 Stock Option Plan for Non-Employee Directors of
Wellco Enterprises, Inc.* (d)
21 Subsidiaries of Registrant 11
23 Consent of Experts 10
* Management Compensation Arrangement/Plan.
Copies of the below listed exhibits may be obtained on written request to
Corporate Secretary, Wellco Enterprises, Inc., Box 188, Waynesville, N. C.
28786, accompanied by payment of the following amounts for each copy:
Exhibit 3 $40.00
Exhibit 10 A. 2.00
Exhibit 10 B. 3.00
Exhibit 10 C. 3.00
Exhibit 10 D. 3.00
(a) Exhibit was filed in Part IV of Form 10-K for the fiscal year
ended July 1, 1995, and is incorporated herein by reference.
(b) Exhibit was filed in PART IV of Form 10-K for the fiscal year
ended July 3, 1982, and is incorporated herein by reference.
(c) Exhibit was filed as Exhibit A to the Proxy Statement dated
October 18, 1996, and is incorporated herein by reference.
(d) Exhibit was filed as Exhibit A to the Proxy Statement dated
October 17, 1997, and is incorporated herein by reference.
Item 14 (b) - Reports on Form 8-K
There were no reports on Form 8-K for the three months ended July 3, 1999.
-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: October 1, 1999
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/ Fred K. Webb, Jr.
Fred K. Webb, Jr., Director
Date: October 1, 1999
-9-
INDEPENDENT AUDITORS' CONSENT
Board of Directors and Stockholders
Wellco Enterprises, Inc.
Waynesville, North Carolina
We consent to the incorporation by reference in the Registration Statement of
Wellco Enterprises, Inc. and subsidiaries on Form S-8 of our report dated
September 23, 1999, appearing in the Annual Report on Form 10-K of Wellco
Enterprises, Inc. for the year ended July 3, 1999.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
October 4, 1999
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