FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 29, 1996
Commission file number 1-5555
WELLCO ENTERPRISES, INC.
(Exact name of Registrant as specified in charter)
North Carolina 56-0769274
(State of incorporation) (I.R.S. employer identification no.)
Waynesville, North Carolina 28786
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 704-456-3545
Securities registered pursuant to Section 12(b) of the Act:
Common Capital Stock - $1 par value American Stock Exchange
(Title of class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Capital Stock - $1 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
As of August 30, 1996, 374,382 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 27, 1996) of Wellco Enterprises, Inc.
held by nonaffiliates was approximately $4,600,000.
Documents incorporated by reference:
Definitive Proxy Statement, to be dated October 18, 1996, in PART III.
Definitive Proxy Statement, dated October 17, 1995, in PART IV.
Definitive Proxy Statement dated October 22, 1985, in PART IV.
Definitive Proxy Statement dated July 3, 1982, in PART IV.
<PAGE>
PART I
Item 1. Business.
The Company operates in one industry segment. Substantially all the Company's
revenues are derived from the sale of military footwear and related items,
whether sold by the Company or its licensees. The majority of revenues (70% in
1996, 66% in 1995) were from sales to the U. S. government, primarily the
Defense Logistics Agency.
For more than the last five years, the Company has manufactured and sold
military combat boots under firm fixed price contracts with the United States
government. Boot products are the general issue all-leather boot, the hot
weather boot and the desert boot, all manufactured using the government
specified Direct Molded Sole process. The government awards fixed price boot
contracts on the basis of bids from several qualified manufacturers.
The Company also provides, primarily under long-term licensing agreements,
technology, assistance and related services for manufacturing military and
commercial footwear to customers in the United States and abroad. Under these
agreements licensees receive technology, services and assistance, and the
Company earns fees based primarily on the licensees' sales volume. In addition
to providing technical assistance, the Company also helps supply certain foreign
military footwear manufacturers with some of their machinery and material needs.
The Company builds specialized footwear manufacturing equipment for use in its
own and its customers' manufacturing operations. This equipment is either sold
or leased.
During the 1996 fiscal year, pairs of combat boots sold to the U. S. government
were approximately 9% more than the 1995 fiscal year. From January through June,
1996, the Company was shipping combat boots under the second option of its
current contract. From November, 1994 through December, 1995, shipments were
under the first option. Both options were for the same total pairs, but the
delivery period for the second option is for a shorter period of twelve months.
Pairs of combat boots sold to other customers also increased in the current
year. These sales vary from year to year.
Greater revenues from the sale of combat boots more than offset a decrease in
revenues form machinery sales. Prior period revenues include significant
machinery sales to one new customer and to one long-time customer. Machinery
sales can vary significantly from period to period with the needs of this group
of customers.
Margins on the increased combat boot sales did not offset the loss of margin on
lower machinery sales. Revenues from technical assistance fees and equipment
rentals from licensees, which vary with their shipments, were also lower in the
current period.
In August, 1995, the Company was awarded a U. S. Government research and
development contract with a total estimated value of $1,184,000. The objective
of this contract is to develop changes to the combat boot that will result in
fewer lower extremity disorders. Work has been completed on the first phase of
this contract and work is scheduled to start on the second phase in October,
1996.The contract provides for a third and final phase, and if successful, this
contract will result in a new and improved combat boot. This type of research
and development work is vital to assuring that the U. S. armed forces have the
most serviceable combat boots available. Development work of this type, done by
the Company in a very short period of time in 1991, led to the desert boot which
was first used in Operation Desert Storm.
On December 29, 1996, Wellco repurchased 510,424 common shares from its former
major shareholder which reduced total outstanding shares to 374,382. All of
Wellco's marketable securities were sold to provide the majority of the cash
portion of the consideration paid for these shares, resulting in investment
-1-
<PAGE>
income of $1,204,000. In addition to cash, Wellco's investment in 400,000 shares
of the common stock of Alba-Waldensian, Inc. (described as Investment In
Affiliate in the Consolidated Balance Sheets) was paid for the 510,424 shares.
Net income for 1996 includes a charge of $601,000 representing Wellco's equity
in the losses of Alba prior to the stock repurchase and the excess of the
carrying value of the investment in Alba above its fair value at December 29,
1995. Net income for 1996 also includes a charge of $110,000 representing the
value assigned to the agreement of that former shareholder to limit his
ownership of Wellco shares to not more than 20% of total shares for the next 10
years. Note 14 to the Consolidated Financial Statements incorporated in this
Form 10-K provides more information about the stock repurchase.
Bidding on U. S. government solicitations for combat boots is open to any
qualified U. S. manufacturer. In addition to meeting very stringent
manufacturing and quality specifications, contractors are required to comply
with precise delivery schedules and a significant investment in specialized
equipment is required.
Wellco's current combat boot contract was the first one awarded the Company
under the U. S. government's "best value" system, under which contractors
offering the best value to the government receive the largest contract awards.
On September 26, 1996 Wellco submitted a bid in response to a U. S. government
solicitation for the supply of combat boots for the next five years. The
government will make a base award for the first year, and then have four
one-year options. Contract awards are expected in December, 1996.
The government anticipates receiving four bids and making four contract awards
from this solicitation. Bid evaluation and the allocation of pairs awarded from
this solicitation will again be made using the best value system. Using best
value methodologies, the government will award the bidder offering the best
value 35% of total pairs ordered for the base year, with the next best value
getting 25%, and the other two bidders receiving 20% each. For its current
contract, Wellco received the 25% award. The major factors used by the
government to determine best value are the bidder's experience and past
performance, the ability to significantly and quickly increase boot production
and shipments during times of emergency, and the ability to ship quickly after
the receipt of orders. Prices bid are important under the best value method, but
they are not as important as the other evaluation factors.
Option awards will be different than those under the present contract. For each
of the two options under the present contract, each contractor received the same
percentage of total pairs as was awarded in the base year. For each of the four
option years under the new contracts, each contractor will again be evaluated on
his performance during the prior year and a redetermination of the
35%/25%/20%/20 allocation will be made.
During the five year contract period, the government will continue to reduce its
inventory of combat boots by buying fewer boots than are used. The government
has indicated that their plans are to buy approximately 78% of consumption,
which, based on projected consumption, would result in their reaching their
desired inventory levels by the fifth contract year. After that, it is
anticipated that their purchases will equal consumption. The effect, if any, of
the government's purchasing 78% of consumption will have on the Company's future
operations will significantly depend on the percentage of total pairs awarded to
the Company during the base year and each option year and the price per pair.
The Company believes that the effect will not be negative.
The Company usually competes on U. S. government contracts with three other
companies, none of which dominates the industry. Many factors affect the
government's demand for combat boots and the quantity purchased can vary from
year to year. Contractors cannot influence the government's combat boot needs.
Price, quality, quick delivery and manufacturing efficiency are the areas
emphasized by the Company that strengthen its competitive position.
Government contracts are subject to partial or complete termination under the
following circumstances:
-2-
<PAGE>
(1) Convenience of the Government. The government's contracting
officer has the authority to partially or completely terminate
a contract for the convenience of the government only when it
is in the government's interest to terminate. The contracting
officer is responsible for negotiating a settlement with the
contractor.
(2) Default of the Contractor. The government's contracting
officer has the authority to partially or completely terminate
a contract because of the contractor's actual or anticipated
failure to perform his contractual obligations.
Under certain circumstances occasioned by the egregious conduct of a contractor,
contracts may be terminated and a contractor may be prohibited for a certain
period of time from receiving government contracts. The Company has never had a
contract either partially or completely terminated.
Because domestic commercial footwear manufacturers are adversely affected by
imports from low labor cost countries, the Company targets its marketing of
technology and assistance primarily to military footwear manufacturers. The
Company competes against several other footwear construction methods commonly
used for heavy-duty footwear with leather uppers. These methods include the
Goodyear Welt construction, as well as boots bottomed by injection molding.
These methods are used in work shoes, safety shoes, and hiking boots
manufactured both in the U. S. and abroad for the commercial market. The
Goodyear Welt method is also used for certain types of military boots, although
not for the models manufactured by the Company which are made only in the
government specified Direct Molded Sole construction. Quality, service and
reasonable manufacturing costs are the most important features used to market
the Company's technology, assistance and services.
The Company has a strong research and development program. While not all
research and development results in successful new products or significant
revenues, the continuing development of new products and processes has been and
will continue to be a significant factor in growth and development. The Company
developed the desert combat boot, first used in Operation Desert Storm. In 1993,
the Company completed initial development of improvements to the black hot
weather boot incorporating many of the features it developed for the desert
boot. In 1994 it was awarded an option under that contract for further
development. In August, 1995 it was awarded a contract to develop changes to
combat boots that will result in fewer lower extremity disorders.
Although not precisely quantified, the Company spends a significant amount of
time and effort on both Company and customer-sponsored research activities
related to the development of new products and processes and to the improvement
of existing ones. A significant amount of this cost is for the personnel costs
of mold engineers, rubber technicians, chemists, pattern engineers and
management, all of whom have many responsibilities in addition to research and
development. The Company estimates that the cost of research and development can
vary from $50,000 to $300,000 per year, depending on the number of research
projects and the specific needs of its customers.
See Note 16 to the consolidated financial statements in Item 8 for revenues by
class and information about export revenues. The Company does not have foreign
operations.
The Company's backlog of all sales, not including license fees and rentals, as
of September, 1996 was approximately $5,700,000 compared to $18,100,000 last
year. The Company estimates that substantially all of the current year backlog
will be shipped in the 1997 fiscal year. The current backlog is less than the
prior year because it does not include any estimation of combat boots to be
shipped starting in January, 1997 from contracts to be awarded under the current
solicitation.
Most of the raw materials used by the Company can be obtained from at least two
sources and are readily
-3-
<PAGE>
available. Because all materials in combat boots must meet rigid government
specifications and because quality is the first priority, the Company purchases
most of its raw materials from vendors who provide the best materials at a
reasonable cost. The loss of some vendors would cause some difficulty for the
entire industry, but the Company believes a suitable replacement could be found
in a reasonably short period of time. Major raw materials include leathers,
fabrics and rubber, and by government regulation all are from manufacturers in
the United States.
Compliance with various existing governmental provisions relating to protection
of the environment has not had a material effect on the Company's capital
expenditures, earnings or competitive position. The Company employed an average
of 264 persons during the 1996 year.
Item 2. Properties.
The Company has manufacturing, warehousing and office facilities in Waynesville,
North Carolina and Aguadilla, Puerto Rico. The building and land in North
Carolina is owned by the Company. The Puerto Rico building and land are leased.
Management believes all its plants, warehouses and offices are in good condition
and are reasonably suited for the purposes for which they are presently used.
The volume of operations in 1996 caused both the Waynesville and Aguadilla
facilities to be used at less than normal capacity.
Item 3. Legal Proceedings.
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the Company's business, to which the Company or any of
its subsidiaries is a party or of which any of their property is subject.
Management does not know of any director, officer, affiliate of the Company, nor
any stockholder of record or beneficial owner of more than 5% of the Company's
common stock, or any associate thereof who is a party to a legal proceeding that
is adverse to the Company or any of its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
There were not any submissions of matters to a vote of security holders during
the fourth quarter of fiscal year 1996.
PART II
Items 5, 6, 7 and 8.
The information called for by the following items is in the Company's 1996
Annual Report to Shareholders which is incorporated starting on the following
page in this Form 10-K:
Annual Report Page Number
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 32
Item 6. Selected Financial Data 1
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6-11
Item 8. Financial Statements and Supplementary Data 12-30, 33
-4-
<PAGE>
WELLCO(R)
ENTERPRISES, INC.
ANNUAL REPORT
1996
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED SELECTED FINANCIAL DATA
(In Thousands Except for Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended
June 29, July 1, July 2, July 3, June 27,
1996 1995 1994 (A) 1993 1992
-------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues ..................... $19,968 $18,003 $18,255 $18,977 $16,928
Net Income ................... 991 969 1,542 (B)1,980 2,349
Net Income Per Share ......... 1.58 1.1 1.75 (B) 2.28 2.7
Cash Dividends Declared
Per Share of Common
Stock ........................ .375 .25 (C) 6.25 .25 .25
Total Assets at Year End ..... 12,697 22,738 20,995 25,013 22,953
Long-Term Liabilities at
Year End ..................... $ 2,431 $ 1,897 $ 1,647 $ 1,770 $ 1,498
</TABLE>
(A) Contains 53 weeks. All other years are 52 weeks.
(B) Increased by $260,000 ($.30 per share) representing the cumulative
effect at the beginning of the 1993 fiscal year of a change in
accounting for income taxes.
(C) Includes a special cash dividend of $6.00 per share.
See The Management's Discussion and Analysis section.
Independent Auditors
Deloitte & Touche LLP Charlotte, N.C.
Annual Meeting
November 19, 1996
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
-1-
<PAGE>
Fellow Shareholder:
As it has been for a number of years, your company's most important activity
continues to be the development, manufacture and sale of military footwear.
Although heavily influenced by the size of our country's military establishment
and by Government purchasing patterns, we feel this business continues to
represent a very promising long-term future for a small number of dedicated and
specialized producers, such as Wellco, and we intend to maintain our
concentration on this business, while continuing also to seek opportunities in
related and compatible fields for military and commercial consumption at home
and abroad.
Net income for 1996 was $991,000 compared to $969,000 for 1995. Net income for
1996 includes several significant amounts related to Wellco's repurchase on
December 29, 1995 of 510,424 of its common shares from its former major
shareholder. All of Wellco's marketable securities were sold in fiscal year 1996
to pay for part of the stock repurchase, resulting in investment income of
$1,204,000. Proceeds from the sale of these securities and Wellco's investment
in the common stock of Alba-Waldensian, Inc. (described as Investment In
Affiliate in the Consolidated Balance Sheets) were paid for the 510,424 shares
of Wellco. Net income for 1996 includes a charge of $601,000 representing
Wellco's equity in the losses of Alba prior to the stock repurchase and the
excess of the carrying value of the investment in Alba above its fair value at
December 29, 1995. Net income for 1996 also includes a charge of $110,000
representing the value assigned to the agreement of that former shareholder to
limit his ownership of Wellco shares to not more than 20% of total shares for
the next 10 years. Income before the effect of charges related to this
repurchase and before dividend and interest income, investment income and income
taxes was $649,000 in 1996 compared to $679,000 in 1995. Notes 5 and 14 to the
Consolidated Financial Statements contain more information about the stock
repurchase.
The stock repurchase reduced total Wellco common shares outstanding from 884,806
to 374,382. This has the effect of significantly increasing your earnings per
share. You will notice from the Consolidated Statements of Operations that,
while net income for 1996 increased only $22,000, net income per share was $1.58
compared to $1.10 in 1995, an increase of almost 44%. These per share amounts
are based on the weighted average number of shares outstanding during the year
(628,216 in 1996 and 884,806 in 1995). From the Selected Quarterly Financial
Data table located in the latter part of this Annual Report you will see that
net income per share for the third fiscal quarter, computed based on 374,382
shares and containing a significant amount of the year's total investment
income, was $1.56. For the fourth fiscal quarter, which did not contain any
investment income, net income per share, again computed based on the 374,382
shares, was $.96.
The Management's Discussion and Analysis section of this Annual Report gives you
more detailed information about operations in 1996. The section below will give
you information about what we are currently working on.
NEW U. S. GOVERNMENT SOLICITATION FOR COMBAT BOOTS:
On September 26, 1996 Wellco submitted a bid in response to a U.
S. government solicitation for the supply of combat boots for the next
five years. The government will make a base award for the first year,
and then have four one-year options. Contract awards are expected in
December, 1996.
The government anticipates receiving four bids and making four contract
awards. Bid evaluation and the allocation of pairs awarded from this
solicitation will be substantially the same as used under Wellco's
current contract. Using "best value" methodologies, the government will
award the bidder offering the best value 35% of total pairs ordered for
the base year, with the next best value getting 25%, and the other two
bidders receiving 20% each. For its current contract, Wellco received
the 25% award. The major factors used by the government to determine
best value are the bidder's
-2-
<PAGE>
experience and past performance, ability to significantly and quickly
increase boot production and shipments during times of emergency, and
the ability to ship quickly after the receipt of orders. Prices bid are
important under the best value method, but they are not as important as
the other evaluation factors.
Option awards will be different than those under the present contract.
For each option under the present contract, Wellco received delivery
orders for 25% of total pairs bought. For each of the four option years
under the new contract, each contractor will again be evaluated on his
performance during the prior year and a redetermination of the
35%/25%/20%/20 allocation will be made.
During the five year contract period, the government will continue to
reduce its inventory of combat boots by buying fewer boots than are
used. The government has indicated that their plans are to buy
approximately 78% of consumption, which, based on projected
consumption, would result in their reaching their desired inventory
levels by the fifth contract year. After that, it is anticipated that
their purchases will equal consumption. The effect this will have on
our operations will depend on the percentage of total pairs awarded to
Wellco, as well as the price per pair, both of which are not presently
known. Our feeling is that the effect will not be negative.
Your Company has made significant efforts in the past few years to
maintain the highest possible level of performance and quality under
its contracts with the U. S. government. This will be very important as
the government evaluates bidders, and we feel Wellco is in an excellent
position to receive a favorable award from its bid.
DEVELOPMENT CONTRACT FOR THE NEXT GENERATION OF COMBAT BOOTS:
In 1996, we completed the first phase of a development boot contract
with the U.S. Army Natick Research, Development and Engineering Center.
The objective of this contract is to develop improvements to the combat
boot that will increase its flexibility and impact resistance, while
maintaining its stability. By making these improvements, soldiers will
have fewer lower extremity injuries. Prototype boots delivered in the
first phase have been tested, and in this contract's second phase,
which will start in October, 1996, improvements will be made to the
better performing of these prototypes. In the third phase, the best two
boots will be selected for significant wear testing. If successful,
this work will result in a new and significantly improved combat boot,
and will contribute to maintaining and enhancing your Company's
leadership position in the development and production of military
boots.
ANTI-PERSONNEL MINE PROTECTIVE FOOTWEAR:
For many years, we have sold small quantities of anti-personnel mine
protective boots and over boots, while continuing to make improvements
not only in level of protection but also in comfort. Our mine
protective boots and over boots are being used by soldiers involved in
mine clearance in Bosnia.
In June, 1996, we participated in "EUROSATORY '96", an internationally
attended trade show in Paris for military suppliers. Our mine
protective footwear received significant interest from many countries
and we are presently corresponding with and have sent samples to them.
One of the problems is being able to document the effectiveness and
degree of protection. Although some testing has been done, most
recently at Ft. Benning in Georgia and at Aberdeen Proving Grounds in
Maryland, it is very difficult to develop test procedures and an
apparatus that duplicates what happens when a soldier activates a mine,
or to precisely measure the degree of injury, if any,
-3-
<PAGE>
he would have incurred. Because of the materials involved, this
footwear is expensive when compared to non-protective footwear, and
potential customers want assurance that the price is justified.
The best evidence of this footwear's protection comes from actual use.
In El Salvador, two soldiers activated mines while wearing our
footwear, one sustained minor injury and one had no injury. We recently
learned of a Canadian Forces soldier, participating in a United Nations
Operation in Bosnia, who activated a mine while wearing our boots. We
were told that the soldier sustained no foot injury but did sustain a
compression injury to his knee which was surgically repaired. The
soldier is reported to still be on active duty and does not even have a
limp.
The situation in Bosnia has made almost everyone aware that many areas
of the world are infested with mines. We feel that this market will
grow as the effectiveness of this footwear is proven through actual
use.
OTHER
In 1996, our sales of combat boots to foreign customers
increased. This market remains very competitive, both from low cost
foreign manufacturers and from other U. S. manufacturers. We continue
to feel that foreign countries are beginning to recognize the superior
quality of U. S. made boots, in comparison with lower cost products
made in the Far East and elsewhere.
The sale of boot lacing system hardware and machinery continues
to make a significant contribution to Wellco's operations. One
customer ceased his purchases by closing all of his U. S.
manufacturing facilities, but a new significant U. S.-based customer
was added.
After 40 years of very hard work, one of the key persons involved in preserving
and growing Wellco, Mr. Rolf Kaufman, is retiring on September 30 from his full
time position as President and taking a less active role in the new position of
Vice Chairman, Board of Directors, under which he will provide Wellco with
certain consulting services. Rolf has participated in every aspect of the
Company. He has managed our Puerto Rico factory, sold boots and shoes, sourced
and bought materials, initiated and managed the lacing system hardware business,
scheduled production, done cost estimates, negotiated with governments and other
customers, promoted products, designed products, and done many other things too
numerous to list. He has worked tirelessly, through good and bad times, helped
make the tough decisions, and all the shareholders and employees of Wellco have
significantly benefited from his efforts. Rolf is well known and liked in the
industry. While he will not be as active as in the past, Rolf in his new
capacity will continue to make a significant contribution. Perhaps the best
compliment that can be made about someone is that they were liked by everybody.
This is true of Rolf. Everyone in the industry, all his fellow co-workers,
people in the community, and everyone else we are aware of who comes into
contact with Rolf invariably likes him. We think this is true because Rolf likes
people, is concerned about them and truly cares about what he is doing.
-4-
<PAGE>
Also effective September 30, your Board: Elected Horace Auberry, presently
serving as Chairman of the Board of Directors to the new position of Chairman,
Board of Directors and Chief Executive Officer; Elected David Lutz to the
position of President and Chief Operating Officer.
The dedication, experience and talents of all our co-workers in Waynesville,
North Carolina and Aguadilla, Puerto Rico have always been and will continue to
be a key component of whatever we may accomplish.
Our heartfelt gratitude is extended to all of them.
Respectfully,
Horace Auberry David Lutz
Chairman Executive Vice President and Treasurer
September 27, 1996
-5-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Comparing The Year Ended June 29, 1996 and July 1, 1995:
Income before income taxes in the current period was $1,357,000 compared to
$1,212,000 in the prior one. Current period income was reduced by a $601,000
charge for Loss in Affiliate, representing Wellco's $305,000 equity in the
six-month (July through December, 1995) loss of Alba-Waldensian, Inc. (Alba),
and the $296,000 write down to fair value of that investment. Wellco owned
400,000 common shares of Alba (21.5% of total shares) from December 30, 1994
until December 29, 1995, when these shares were exchanged as part of the
purchase price for Wellco's repurchase of 510,424 shares of its common stock.
Income was also reduced by a Stock Repurchase Charge of $110,000, which is the
portion of the stock repurchase price allocated to an agreement limiting the
selling shareholders' ownership of total Wellco shares for a period of ten years
(see Note 14 to the Consolidated Financial Statements).
Income before income taxes, Loss in Affiliate and Stock Repurchase Charge was
$2,068,000, which compares to income of $1,143,000 in the prior period. The
total of interest, dividend and investment income increased to $1,419,000 in the
current period from $464,000 in the prior period, primarily because the current
period includes gains from the sale of all marketable securities previously
owned by Wellco. The net sales proceeds from the marketable securities' sale
were used for the stock repurchase. Before Loss in Affiliate, Stock Repurchase
Charge and interest, dividend and investment income, the Company had a pretax
income of $649,000 in the current period compared to income of $679,000 in the
prior period. The major reasons for this change are:
1. Revenues increased $1,965,000. Pairs of combat boots sold to
the U. S. government increased approximately 9%. From January
through June, 1996, Wellco was shipping combat boots under the
second option of its current contract. From November, 1994
through December, 1995, shipments were under the first option.
Both options were for the same total pairs, but the delivery
period for the second option is for a shorter twelve month
period. Pairs of combat boots sold to other customers also
increased in the current year. These sales vary from year to
year.
2. Greater revenues from the sale of combat boots more than
offset a decrease in machinery sales. Prior period revenues
include significant machinery sales to one new customer and to
one long-time customer. These sales can vary significantly
from period to period with the needs of this group of
customers.
3. Margins on the increased combat boot sales did not fully
offset the loss of margin on lower machinery sales. Revenues
from technical assistance fees and equipment rentals from
licensees, which vary with their shipments, were also lower in
the current period.
4. In the prior period, the U. S. government issued certain
contract price increase adjustments, primarily for the
increased cost of leather used in manufacturing combat boots,
whose actual amounts were greater than previously recorded
estimates. This increased pretax profits $54,000 in the prior
period.
The major categories of fixed and semi-variable manufacturing costs increased by
$50,000. The cold winter resulted in utility costs increasing $20,000, and
insurance costs, many of which vary with revenues and labor costs, increased
$25,000.
-6-
<PAGE>
The percentage of income tax provision to pretax income increased to 27% in the
current year from 20% in the prior year, primarily because the Equity in Loss of
Affiliate and Stock Repurchase Charge in 1996 are not deductible for income
taxes.
Forward Looking Information:
Deliveries under the second and last option of the current U. S. government
combat boot contract will be substantially completed in December, 1996.
The U. S. government has issued a solicitation for the next contract with awards
estimated to be in mid December, 1996. As with the current contract, the
government plans to make awards to each of the expected four bidders, and will
use the best value method of evaluating bids. Under this method, the highest
rated bidder receives 35% of total pairs, the second highest rated bidder gets
25%, and the other two bidders receive 20% each. Under best value, bidders are
rated on their past performance, quality history and other criteria, and bid
prices are not the most important factor. For the current contract, Wellco is
the 25% supplier.
This solicitation provides for a base year with four options of one year each.
Prior to each option award, contractors will be evaluated on their performance
in the prior contract period, and contractors can be awarded a different percent
of the total pairs.
Since 1992, the government has been reducing its inventory of combat boots by
buying fewer pairs than were consumed. One result of this was the sixteen month
delivery schedule under the first option of the current contract. The current
solicitation establishes minimum and maximum pairs to be ordered for each year
of the contract of 703,220 and 1,055,828. These amounts are less than expected
consumption, and the Company believes that the government will reach its desired
inventory level between the fourth and fifth year of the contract. The maximum
pairs are slightly less than the total pairs being ordered under the present
contract. The effect of reduced total pairs purchased on future operating
results will depend on many factors, with per pair price and the percent awarded
to Wellco being the major ones, and cannot be estimated until after contract
award.
In late August, 1995, the Company was awarded a $1,184,000 boot development
contract from the U. S. government. The objective of this contract is to develop
changes to the combat boot that will result in fewer lower extremity disorders.
This work is divided into three phases and will be completed in about two years.
Development, testing and delivery of prototype boots under the first phase of
this contract was completed in late February, 1996. The contract's continuation
into either one or both of the other phases is at the option of the government,
and depends on an evaluation of first phase results. The Company believes the
government will elect to continue with this work, with significant work on the
next phase beginning in October, 1996.
As discussed below in the section on liquidity and capital resources, Wellco has
sold all of its marketable securities to provide the cash portion of the total
price paid for the repurchase of 510,424 shares of its common stock. These sales
resulted in 1996 net investment income of $1,204,000. This will have a negative
effect on future periods net income to the extent that interest, dividends and
investment income would have been realized from marketable securities. Since the
400,000 shares of Alba-Waldensian, Inc. common stock owned by Wellco were
exchanged as part of the total price to repurchase these Wellco shares, future
periods net income will not include any equity in the income or loss of Alba.
Except for historical information, this Annual Report includes forward looking
statements that involve risks and uncertainties, including, but not limited to,
the receipt of contracts from the U. S. government and the performance
thereunder, the ability to control costs under fixed price contracts, the
cancellation of contracts,
-7-
<PAGE>
and other risks detailed from time to time in the Company's Securities and
Exchange Commission filings, including Form 10-K for the year ended June 29,
1996. Actual results may differ materially from management expectations.
Comparing The Year Ended July 1, 1995 and July 2, 1994:
Income before income taxes in the current year was $1,212,000 compared to
$2,034,000 in the prior one. Several factors resulted in the $822,000 decrease,
the more significant ones being:
1. Pairs of combat boots sold decreased almost 20%. Most of this
decrease was in shipments to the U. S. government.In November,
1994, Wellco made its first shipments against an option
awarded under its current military boot contract. This option
has a delivery schedule of sixteen months, compared to a
twelve month schedule for boots shipped in fiscal year 1994.
2. 1994 includes $255,000 in favorable adjustments to previous
estimates of contracting actions which were finalized in the
fourth quarter. From time to time contract changes will occur
whose financial effect on the Company are included in the
financial statements at estimated amounts until final amounts
are negotiated and settled with the government. Most of this
$255,000 adjustment relates to estimates recorded in the years
1991-1993.
3. Somewhat offsetting the effect of lower combat boots sales was
an increase in machinery and materials sales. A significant
shipment of machinery and boot materials was made to a combat
boot manufacturing factory in El Salvador, which did not occur
in 1994. 1995 also includes substantial machinery sales to one
new boot manufacturing customer and to one long-time customer.
These sales can vary significantly from year to year with the
needs of these customers.
4. Revenues from technical assistance fees and equipment rentals
from licensees, which vary with their shipments, decreased
because the Company's U.S. combat boot manufacturing licensees
were also affected by the government's longer delivery
schedule .
5. While revenues decreased $252,000, certain manufacturing
expenses increased, and this reduced margins. Group health
insurance costs, for which the Company is self funded,
increased $131,000. This cost varies from period to period
with the actual amount of health costs incurred by employees.
Workers' compensation insurance premiums also increased, but
this was more than offset by decreases in the cost of
utilities and maintenance.
6. General and administrative expense decreased $6,000 in 1995.
Employee bonus compensation decreased $69,000 with the lower
net income.
7. Dividend and interest income decreased $52,000. Investment
income decreased $368,000 in the current year, primarily
because two equity securities were sold for prices less than
their carrying value.
The percentage of income tax provision to pretax income decreased in 1995. The
untaxed portion of dividend income from corporate equity securities did not
decrease in proportion to the decrease in pretax income.
In 1995, Wellco adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". This
resulted in the carrying value of Marketable Securities,
-8-
<PAGE>
as shown in the Consolidated Balance Sheets, being increased by the $730,000
excess of fair value over their adjusted cost, and a corresponding increase, net
of the effect of income taxes, in Stockholders' Equity of $482,000.
On December 30, 1994, Wellco purchased 400,000 shares of the common stock of
Alba Waldensian, Inc. (21.5% of total shares outstanding). This investment is
being accounted for on the equity method. Included in the 1995 pretax income is
$69,000 representing Wellco's share of Alba's net income from the date of
purchase through July 1, 1995, and the amortization of the excess of Wellco's
proportionate share of Alba's net assets over Wellco's basis in the stock.
LIQUIDITY AND CAPITAL RESOURCES
Wellco uses cash from operations to supply most of its liquidity needs. A bank
line of credit is maintained for supplying any unforeseen cash needs. The
following table summarizes at the end of each year the availability of cash from
the Company's most liquid assets and from its existing borrowing sources:
<TABLE>
<CAPTION>
( in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash ....................................... $ 673 $2,423 $2,528
Marketable Securities, Current ............. 996 2,894
Unused Line of Credit ...................... 1,500 1,480 1,480
------ ------ ------
Total ...................................... $2,173 $4,899 $6,902
====== ====== ======
</TABLE>
The decrease at the end of 1996 was primarily caused by an increase in accounts
receivable, which results from both an increase in sales of combat boots to the
U. S. government and technical difficulties in their processing of invoice
payments. Also in 1996, marketable securities were sold to pay for the
repurchase of 510,424 Wellco common shares. The decrease at the end of 1995 was
primarily caused by the purchase of the common stock of Alba Waldensian, Inc.
The table on the following page summarizes this and the other major sources
(uses) of cash for the last three years.
-9-
<PAGE>
The major sources (uses) of cash for the last three years were:
<TABLE>
<CAPTION>
(in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Income Before Depreciation, Net Investment
Income, Equity in (Loss) Income of Affiliate and
Stock Repurchase Charge ........................ $ 810 $ 1,214 $ 1,490
Net Change in Accounts Receivable, Inventory,
Accounts Payable and Accrued Liabilities ....... (1,542) 192 (1,970)
Other .......................................... (165) (173) (119)
Net Cash Provided (Used) By Operations ......... (897) 1,233 (599)
Net Cash From Sale of (Purchases of)
Marketable Securities .......................... 5,256 3,653 5,563
Cash Used to Repurchase Company's Stock and
Related Expenses ............................... (5,579)
Cash From Bank Loan Used to Repurchase
Stock .......................................... 4,500
Cash Used to Repay Bank Loan ................... (4,520)
Cash Used to Purchase Affiliate ................ (4,475)
Cash Used to Purchase Equipment ................ (370) (295) (322)
Cash Dividends Paid ............................ (140) (221) (5,530)
Other .......................................... 228
Net Increase (Decrease) in Cash ................ $(1,750) $ (105) $ (660)
</TABLE>
The primary reason for the 1996 decrease was the increase in accounts receivable
as explained above. The government pays interest on late payments. In 1995, cash
from the sale of marketable securities was used to pay for part of the purchase
of Alba Waldensian, Inc. (the affiliate) common stock. Cash from 1995 operations
was also used to purchase Alba's stock, purchase equipment and pay the cash
dividend. Cash from the sale of marketable securities was used to pay 1994 cash
dividends, including a $5,300,000 special dividend.
On December 29, 1995, the Company repurchased 510,424 of its common shares for a
price consisting partially of a $5,460,000 cash payment and $119,000 in related
expenses. The initial payment was partially financed by a short term bank loan.
All marketable securities were subsequently sold to repay the bank loan.
The sale of marketable securities could have a negative effect on liquidity to
the extent that these securities could have been sold to meet future liquidity
and capital needs, and to the extent that they were a source of cash from
interest and dividends. If significant cash needs arise in the future, other
sources may have to be found. The Company does not presently know of any such
significant future cash needs.
The Company believes that its cash resources are adequate to meet presently
known operating activity
-10-
<PAGE>
needs. The Company has no material commitments for capital equipment. Note 13 to
the Consolidated Financial Statements provides information about a commitment to
make additional cash payments for the stock repurchase, contingent upon net
incomes for the six fiscal years 1997 through 2002. The Company does not know of
any other demands, commitments, uncertainties, or trends that will result in or
that are reasonably likely to result in its liquidity increasing or decreasing
in any material way.
The bank line of credit, which provides for total borrowing of $1,500,000, will
expire and be subject to renewal on December 31, 1996.
-11-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED
JUNE 29, 1996, JULY 1, 1995 AND JULY 2, 1994
(in thousands except per share and number of shares)
<TABLE>
<CAPTION>
JUNE 29, JULY 1, JULY 2,
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
REVENUES (Notes 1, 6, 16 and 17) .......... $ 19,968 $ 18,003 $ 18,255
--------- --------- ---------
COSTS AND EXPENSES (Notes 10 and 11):
Cost of sales and services ........... 17,168 15,128 14,903
General and administrative expenses .. 2,151 2,196 2,202
--------- --------- ---------
Total ................................ 19,319 17,324 17,105
--------- --------- ---------
DIVIDEND AND INTEREST INCOME .............. 215 446 498
NET INVESTMENT INCOME (Notes 1 and 4) ..... 1,204 18 386
--------- --------- ---------
INCOME BEFORE EQUITY IN (LOSS)
INCOME OF AFFILIATE AND
STOCK REPURCHASE CHARGE .............. 2,068 1,143 2,034
EQUITY IN (LOSS) INCOME OF AFFILIATE
(Notes 1 and 5) ...................... (601) 69
STOCK REPURCHASE CHARGE (Note 14) ......... (110)
--------- --------- ---------
INCOME BEFORE INCOME TAXES ................ 1,357 1,212 2,034
PROVISION FOR INCOME TAXES
(Notes 1 and 12) ..................... 366 243 492
--------- --------- ---------
NET INCOME ................................ $ 991 $ 969 $ 1,542
========= ========= =========
PER SHARE OF COMMON STOCK (based on
weighted average number of
shares outstanding)-
Net income ........................... $ 1.58 $ 1.1 $ 1.75
========= ========= =========
Weighted average number of shares
outstanding .......................... 628,216 884,806 881,267
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
-12-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 29, 1996 AND JULY 1, 1995
(in thousands)
ASSETS
<TABLE>
<CAPTION>
JUNE 29, JULY 1,
1996 1995
-------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash ............................................ $ 673 $ 2,423
Marketable securities,current
(Notes 1 and 4) ............................. 0 996
Receivables (Note 2) ............................ 5,242 3,267
Inventories (Notes 1 and 3) ..................... 3,924 4,295
Deferred taxes and prepaid expenses
(Note 12) ................................... 377 429
------- -------
Total ........................................... 10,216 11,410
------- -------
MARKETABLE SECURITIES,non-current
(Notes 1 and 4) ................................. 0 3,787
INVESTMENT IN AFFILIATE (Notes 1, 5 and 14) ......... 0 5,529
MACHINERY LEASED TO LICENSEES
(Notes 1 and 6) ................................. 63 111
PROPERTY, PLANT AND EQUIPMENT:
(Notes 1 and 7) ................................. 1,138 1,031
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition (Note 1) ........... 228 228
Intangible pension asset (Note 10) .............. 623 642
------- -------
Total ........................................... 851 870
------- -------
DEFERRED TAXES (Note 12) ............................. 429
------- -------
TOTAL ................................................ $12,697 $22,738
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
-13-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 29, 1996 AND JULY 1, 1995
(in thousands)
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
JUNE 29, JULY 1,
1996 1995
-------- -------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 8) ........... $ 0 $ 20
Accounts payable .................................. 1,779 1,533
Accrued liabilities (Notes 9 and 11) .............. 1,302 1,418
Accrued income taxes (Note 12) .................... 139 207
-------- --------
Total ......................................... 3,220 3,178
-------- --------
LONG-TERM LIABILITIES:
Pension obligation (Note 10) ...................... 1,939 1,887
Deferred taxes (Note 12) .......................... 0 10
Note payable (Note 13) ............................ 492
CONTINGENCY (Note 18)
STOCKHOLDERS' EQUITY (Notes 4, 5, 15 and 18):
Preferred 5% cumulative redeemable,
convertible stock; $100 par value: 3,000
shares authorized, none outstanding
Common stock, $1.00 par value; 2,000,000
shares authorized; shares issued and
outstanding-374,382 at 1996, 884,806 at 1995 . 374 885
Additional paid-in capital ........................ 598 1,409
Retained earnings ................................. 6,696 15,412
Pension liability adjustment (Note 10) ............ (622) (525)
Unrealized gain on marketable
securities (Notes 1 and 4 ) .................. 0 482
-------- --------
Total ......................................... 7,046 17,663
-------- --------
TOTAL .................................................. $ 12,697 $ 22,738
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-14-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JUNE 29, 1996, JULY 1, 1995 AND JULY 2, 1994
(in thousands)
<TABLE>
<CAPTION>
JUNE 29, JULY 1, JULY 2,
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ............................... $ 991 $ 969 $ 1,542
------- ------- -------
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization ........ 312 332 334
Net investment income ................ (1,204) (18) (386)
Equity in loss (income) of affiliate . 601 (69)
Stock repurchase charge .............. 110
(Increase) decrease in-
Accounts receivable .............. (1,975) 1,133 (767)
Inventories ...................... 371 (773) (1,047)
Other current assets ............. 52 (75) (97)
Increase (decrease)in-
Accounts payable ................. 246 (292) (31)
Accrued liabilities .............. (116) 270 (7)
Accrued income taxes ............. (68) (146) (118)
Pension obligation ............... (26) (46) 22
Other ............................ (191) (52) (44)
------- ------- -------
Total adjustments ........................ (1,888) 264 (2,141)
------- ------- -------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES ..................... (897) 1,233 (599)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in affiliate .................. (4,475)
Net sales (purchases) of current
marketable securities ................ 996 1,898 3,766
Purchases of noncurrent
marketable securities ................ -- (2,343) (588)
Sales of noncurrent
marketable securities ................ 4,261 4,098 2,385
Purchases of equipment ................... (371) (295) (322)
------- ------- -------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES .................... 4,886 (1,117) 5,241
------- ------- -------
(continued on next page)
-15-
<PAGE>
JUNE 29, JULY 1, JULY 2,
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan from bank ........................... 4,500 2,050
Repayment of bank loan ................... (4,520) (2,050)
Cash dividends paid ...................... (140) (221) (5,530)
Purchase of common stock ................. (5,579)
Stock option exercise .................... 228
------- ------- -------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES ..................... (5,739) (221) (5,302)
------- ------- -------
NET INCREASE (DECREASE) IN CASH ............... (1,750) (105) (660)
CASH AT BEGINNING OF PERIOD ................... 2,423 2,528 3,188
------- ------- -------
CASH AT END OF PERIOD ......................... 673 2,423 2,528
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ............................. $ 39 $ 44 $ 20
Income taxes ......................... 561 779 745
Noncash investing and financing activity-
Noncash decrease in Investment in
Affiliate from stock repurchase .. 4,928
Note issued as part of stock
repurchase ....................... 492
Noncash increase in Investment in
Affiliate ........................ 986
Noncash increase (decrease ) in
marketable securities to fair
value ............................ $ (730) $ 730
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
-16-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE FISCAL YEARS ENDED
JUNE 29, 1996, JULY 1, 1995 AND JULY 2,
1994 (in thousands except share
data)
<TABLE>
<CAPTION>
JUNE 29, JULY 1, JULY 2,
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
COMMON STOCK (Notes 14 and 15):
Balance at beginning of year .......... $ 885 $ 885 $ 869
Repurchase of common stock ............ (511)
Stock option exercise ................. 16
-------- -------- --------
Balance at end of year ................ 374 885 885
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL:
(Notes 5, 14 and 15):
Balance at beginning of year .......... 1,409 759 547
Repurchase of common stock ............ (811)
Excess of basis over cost of
investment in affiliate ........... 650
Stock option exercise ................. 212
-------- -------- --------
Balance at end of year ................ 598 1,409 759
-------- -------- --------
RETAINED EARNINGS (Note 14):
Balance at beginning of year .......... 15,412 14,664 18,652
Repurchase of common stock ............ (9,567)
Net income ............................ 991 969 1,542
Cash dividends (per share: 1996-$.375;
1994-$.25; 1994-$6.25) ............ (140) (221) (5,530)
-------- -------- --------
Balance at end of year ................ 6,696 15,412 14,664
-------- -------- --------
PENSION LIABILITY ADJUSTMENT
(Note 10):
Balance at beginning of year .......... (525) (306) (327)
Change for the year ................... (97) (219) 21
-------- -------- --------
Balance at end of year ................ (622) (525) (306)
-------- -------- --------
UNREALIZED GAIN ON
MARKETABLE SECURITIES (Notes 1 and 4) . 482
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY ................. $ 7,046 $ 17,663 $ 16,002
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-17-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended June 29, 1996, July 1, 1995 and July 2, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying financial statements include the consolidated
accounts of the Company and its wholly-owned subsidiaries.
Appropriate eliminations have been made of intercompany
transactions and balances.
Inventories
Raw materials and supplies are valued at the lower of
first-in, first-out cost or market. Finished goods and work in
process are valued at the lower of actual cost, determined on
a specific basis, or market.
Income Taxes
The provision for income taxes is based on taxes currently
payable adjusted for the net change in the deferred tax asset
or liability during the current year. A deferred tax asset or
liability arises from temporary differences between the
carrying value of assets and liabilities for financial
reporting and income tax purposes.
Fair Value of Financial Instruments
The carrying value of financial instruments at June 29, 1996
(cash, receivables, accounts payable and note payable)
approximates fair value. The carrying value of the note
payable is equal to the present value of estimated future cash
flows using a discount rate commensurate with the
uncertainties involved.
Marketable Securities
Marketable securities consist of corporate equity and debt
securities and the notes of various U. S. government agencies.
Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity
Securities", was effective as of the beginning of the 1995
fiscal year. Under SFAS 115, corporate equity and debt
securities are classified as available-for-sale and are valued
in the Consolidated Balance Sheets at their fair value
(usually market value). The difference between fair value and
the securities' adjusted cost, net of the effect of income
taxes, is reflected in Stockholders' Equity.
U. S. government agency notes, purchased at a discount to
their face value and held for a very short period prior to
their maturity, are classified as held-to-maturity. These
securities are valued in the Consolidated Balance Sheets at
their cost, which is not significantly less than amortized
cost, and the difference between cost and the amount realized
at maturity is included with Interest Income in the
Consolidated Statements of Operations.
-18-
<PAGE>
Depreciation
The Company uses the straight-line method to compute
depreciation on machinery leased to licensees and property,
plant and equipment.
Investment in Affiliate
Investment in affiliate (Alba-Waldensian, Inc.), defined as
owned more than 20% but not more than 50%, is accounted for on
the equity method. Because the investment in Alba was
purchased from a more-than-50% owner of Wellco (Coronet
Insurance Company), the investment was initially recorded at
Coronet's basis at the date of Wellco's acquisition. The
excess of that basis over Wellco's cost of acquisition
($650,000, net of the effect of income taxes) was recorded as
an increase in Additional Paid-In Capital. On December 29,
1995, the investment in Alba was used as part of the
consideration paid for the repurchase of 510,424 shares of
Wellco's common stock (See Note 14).
Machinery Leased to Licensees
Certain shoe-making machinery is leased to licensees under
cancelable operating leases. Such activity is accounted for by
the operating method whereby leased assets are capitalized and
depreciated over their estimated useful lives (5 to 10 years)
and rentals, based primarily on the volume of shoes produced
or shipped by the lessees, are recorded during the period
earned.
Intangible Asset
The excess of the fair value (as determined by the Board of
Directors) of Wellco Enterprises, Inc. common stock issued
over the net assets of Ro-Search, Incorporated, a wholly owned
subsidiary of Wellco, at acquisition is not being amortized.
This asset arose prior to 1970 and, in the opinion of
management, there has not been any diminution in its value.
Pensions
The Company has two non-contributory, defined benefit pension
plans covering substantially all employees at its North
Carolina plant. The Company's policy is to fund the minimum
amount required by the Employee Retirement Income Security
Act.
Revenue Recognition
All government combat boot production contracts are fixed
price and usually have a delivery schedule of twelve to
sixteen months. Revenue is recognized for each boot shipment
after it has been accepted by the government's Quality
Assurance Representative.
Government research and development contracts are typically no
more than one year in duration. Revenue is recognized as
services are performed and invoiced. Revenues from licensees
are recognized in the period services are rendered or products
are shipped.
-19-
<PAGE>
Statements of Cash Flows
For the purpose of these statements, current marketable
securities are not considered to be cash equivalents since
they are purchased for yield and represent a part of the
Company's investing activities.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to June
30. All years presented contain 52 weeks.
Postemployment Benefits
Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits", was
effective for the Company's 1995 fiscal year. As it applies to
the Company, SFAS No. 112 requires the recording of an expense
and liability for the cost of insurance benefits to employees
who are not actively at work due to illness or layoff. The
amount of this liability at June 29, 1996 and July 1, 1995,
respectively, was not significant.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
2. RECEIVABLES:
The majority of receivables at June 29, 1996 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 1996 and 1995 are not significant.
3. INVENTORIES:
The components of inventories are:
<TABLE>
<CAPTION>
(in thousands)
1996 1995
---- ----
<S> <C> <C>
Finished Goods ............................... $1,296 $1,723
Work in Process .............................. 1,267 1,415
Raw Materials and Supplies ................... 1,361 1,157
Total ........................................ $3,924 $4,295
</TABLE>
4. MARKETABLE SECURITIES:
Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for
Certain Investments
-20-
<PAGE>
in Debt and Equity Securities", was effective as of the beginning of the
1995 fiscal year. Under SFAS 115, corporate equity and debt securities are
classified as available-for-sale and are valued in the Consolidated Balance
Sheets at their fair value (usually market value). The difference between
fair value and the securities' adjusted cost, net of the effect of income
taxes, is reflected in Stockholders' Equity. U. S. government agency notes
are classified as held-to-maturity and are valued at their cost which
approximates amortized cost. Restatement of previously issued financial
statements is not permitted under SFAS 115. The Company's previous method of
accounting for investments was to reflect their value at cost and only
adjust cost by any declines in fair value below cost that were judged to be
other than temporary. Under both SFAS 115 and the previous method of
accounting, any decline in fair value below cost that is judged to be other
than temporary is recognized as an unrealized loss.
Applying FAS 115 to the July 1, 1995 Consolidated Financial Statements
resulted in corporate equity and debt securities being stated at their fair
value (an increase of $730,000 over adjusted cost) with an increase in
Stockholders' Equity, after the effect of income taxes, of $482,000. Fair
value is usually current market value at the financial statement date.
In the 1996 fiscal year, all marketable securities were sold to provide the
majority of the cash portion of the consideration paid by Wellco to
repurchase 510,424 shares of its outstanding common stock (see Note 14).
Adjusted cost, gross unrealized gains and losses and the fair value of all
Marketable Securities at July 1, 1995 was :
<TABLE>
<CAPTION>
(in thousands)
Gross Gross
Unrealized Unrealized Fair
Adjusted Cost Gain Loss Value
------------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Corporate Equity Securities ........ $3,057 $ 778 $ 48 $3,787
U. S. Government Agency Note ....... 996 0 0 996
------ ------ ------ ------
Total .............................. $4,053 $ 778 $ 48 $4,783
====== ====== ====== ======
</TABLE>
Proceeds from the sale of Marketable Securities classified under SFAS 115
for 1996 and 1995 were $4,261,000 and $4,098,000. Gross realized gains and
losses, and unrealized losses for 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(in thousands)
1996 1995
---- ----
<S> <C> <C>
Gross Realized Gains ..................... $ 1,326 $ 354
Gross Realized Losses .................... (122) (142)
Unrealized Loss .......................... (194)
------- -------
Net Investment Income .................... $ 1,204 $ 18
======= =======
</TABLE>
5. INVESTMENT IN AFFILIATE:
On December 30, 1994 Wellco purchased from Coronet Insurance Company
(Coronet) for cash 400,000 shares of the common stock of Alba Waldensian,
Inc. (Alba) which represented 21.5% of total Alba common shares. Because
Coronet owned more than 50% of Wellco's total outstanding common
-21-
<PAGE>
stock, Wellco recorded as its carrying value of this investment Coronet's
basis in these Alba shares. The excess of that basis over Wellco's cost
($986,000) increased Additional Paid-In Capital by $650,000, net of the
effect of income taxes ($336,000). Through December 29, 1995, this
investment was accounted for using the equity method.
Operating results for the fiscal year ended June 29, 1996 includes as
Equity in Loss of Affiliate a charge of $601,000, representing Wellco's
$305,000 equity in Alba's loss for the six month period from July through
December, 1995 and a $296,000 reduction of this investment's carrying value
to fair value. On December 29, 1995, these shares were used as part of the
consideration paid for the repurchase of 510,424 shares of Wellco's common
stock (See Note 14). Operating results for the fiscal year ended July 1,
1995 includes $69,000 as Equity in Income of Affiliate representing
Wellco's equity in Alba's net income for the six month period from January
through June, 1995.
Other than this investment, there were no business relationships or
transactions between Wellco and Alba.
6. MACHINERY LEASED TO LICENSEES:
Accumulated depreciation netted against the cost of leased assets in the
1996 and 1995 consolidated balance sheets is $1,456,000 and $1,408,000.
Rental revenues for the fiscal years 1996, 1995, and 1994 were $128,000,
$122,000 and $146,000, substantially all of which vary with lessee's
production or shipments.
7. PROPERTY, PLANT AND EQUIPMENT:
The cost and accumulated depreciation of property, plant and equipment is
summarized as follows:
<TABLE>
<CAPTION>
(in thousands)
Estimated
1996 1995 Useful Life
---- ---- -----------
<S> <C> <C> <C>
Land ............................. $ 107 $ 107
Buildings ........................ 774 774 45 Years
Machinery &
Equipment ........................ 2,430 2,226 2-20 Years
Furniture & Fixtures ............. 532 411 2-10 years
Leasehold
Improvements ..................... 63 63 *
Total Cost ....................... $3,906 $3,581
Total Accumulated
Depreciation ..................... $2,768 $2,550
</TABLE>
*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.
-22-
<PAGE>
8. LINE OF CREDIT:
The Company has a $1,500,000 unsecured bank line of credit. Interest is at
the bank's prime rate. The line, which expires December 31, 1996, can be
renewed annually at the bank's discretion. At June 29, 1996, $1,500,000 was
available for borrowing under this line. The agreement contains, among
other provisions, defined levels of net worth and current ratio
requirements.
9. ACCRUED LIABILITIES:
The components of accrued liabilities are:
<TABLE>
<CAPTION>
(in thousands)
1996 1995
---- ----
<S> <C> <C>
Compensation ............................. $ 793 $ 744
Pension .................................. 166 286
Other .................................... 343 388
------ ------
Total .................................... $1,302 $1,418
====== ======
</TABLE>
10. PENSION PLANS:
The Company's pension plans provide retirement benefits based on either years of
service or final average annual earnings.
The components of pension expense computed in accordance with Statement of
Financial Accounting Standards No. 87 (Employers' Accounting For Pensions) are:
<TABLE>
<CAPTION>
(in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Benefits Earned for Service in the
Current Year ............................... $ 148 $ 134 $ 97
Interest on the Projected Benefit
Obligation ................................. 368 357 373
Return on Plan Assets ...................... (206) (207) (196)
Amortization of: Unrecognized Net
Pension Obligation at July 1, 1987;
Cost of Benefit Changes Since That
Date; and Gains and Losses
Against Actuarial Assumptions ............. 156 129 131
Pension Expense ............................ $ 466 $ 413 $ 405
</TABLE>
-23-
<PAGE>
The liability of the plans at June 29, 1996 and July 1, 1995, and the components
of the pension liability accrued in the balance sheets are:
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
Pension Liability: 1996 1995
Accumulated Benefit Obligation,
Substantially All Vested ......................... $ 5,054 $ 4,742
Obligation for Actuarially Projected
Future Salary Increases .......................... 291 322
Projected Benefit Obligation ....................... 5,345 5,064
Plan Assets at Fair Value .......................... (2,949) (2,568)
Projected Obligation Greater than Assets ........... 2,396 2,496
Less Projected Future Salary Increases ............. (291) (322)
Pension Liability Recognized in the
Consolidated Financial Statements ................ $ 2,105 $ 2,174
Components of Pension Liability:
Unamortized Costs Not Yet Charged Against
Operations-
Net Obligation at July 1, 1987 ..................... 426 497
Net Obligation From Changes to the Plans
Since July 1, 1987 ............................... 369 369
Net Loss From Actuarial Assumptions Being
Different Than
Actual ............................................. 1,061 893
Less Projected Future Salary Increases ............. (291) (322)
Total Liability Not Yet Charged Against
Operations ....................................... 1,565 1,437
Amount of Liability That Has Been Charged
Against Operations ............................... 540 737
Total Pension Liability ............................ $ 2,105 $ 2,174
</TABLE>
The pension liability not yet charged against operations is a part of the
long-term pension obligation liability. This liability at June 29,1996 is
offset by an intangible pension asset of $623,000 ($642,000 at July 1,1995)
and an equity reduction, net of income taxes, of $622,000 ($525,000 at July
1, 1995).
Plan assets are invested in the General Investment Account of the Company's
actuary. This account invests primarily in high-quality, fixed income
mortgage obligations and corporate bonds. The assumed average discount rate
and the expected long-term rate of return on plan assets is 7.5% for 1996
and 1995. To the extent projected benefits are based on final average
annual earnings, the assumed rate of annual increase in future salary
levels is 5.5%.
11. RETIREE HEALTH BENEFITS:
The Company accounts for the costs and liability of health care benefits for
retired employees using
-24-
<PAGE>
Statement of Financial Accounting Standards No. 106, "Employers Accounting
for Postretirement Benefits Other Than Pensions" (FAS 106). The liability
at the date of adoption of FAS 106 ( July 4, 1993) is being recognized over
employee future service lives.
Employees of the North Carolina plant who meet certain criteria and retire
early (age 62-64) or disabled receive for themselves, but not for their
dependents, the same health insurance benefits received by active
employees. All benefits terminate when the employee becomes eligible to
receive Medicare (usually age 65 or 30 months after disability date). This
benefit is provided at no cost to the employee and the Company does not
fund the cost of this benefit prior to costs actually being incurred.
The cost of retiree health benefits included in 1996, 1995 and 1994
Statements of Operations as computed under FAS 106 was:
<TABLE>
<CAPTION>
(in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Benefits Earned for Current Service ................. $26 $20 $19
Interest Cost on Accumulated Liability .............. 22 20 21
Amortization of the July 4, 1993 Liability .......... 13 13 15
--- --- ---
Total Cost .......................................... $61 $53 $55
=== === ===
</TABLE>
The reconciliation of the total liability to the amount included as a
liability in the Consolidated Balance Sheet at June 29, 1996 and July 1,
1995 is:
<TABLE>
<CAPTION>
(in thousands)
1996 1995
---- ----
<S> <C> <C>
Accumulated Liability For-
Retired Employees .......................................... $ 4 $ 12
Fully Qualified Employees .................................. 7 0
Other Employees ............................................ 293 267
Total ...................................................... 304 279
Less Balance of Unrecognized Liability at July 4, 1993 ..... (240) (254)
Unrecognized Net Gain Since July 4, 1993 ................... 46 32
Liability Recognized in the Consolidated Balance Sheet ..... $ 110 $ 57
</TABLE>
The assumed health care cost trend rate used to project expected future
cost was 12.4% in 1996 (13.2% in 1995), gradually decreasing to 6% by 2004
and remaining at 6% thereafter. The assumed discount rate used to determine
the accumulated liability was 7.75% at June 29, 1996 ( 8% at July 1, 1995).
The effect of a 1% increase in the assumed health care cost trend rate for
each future year would not have a significant effect on the service and
interest cost components of the current period cost or on the accumulated
liability.
-25-
<PAGE>
12. INCOME TAXES:
The Company accounts for the provision and liability for income taxes using
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". The provision for income taxes consist of the following:
<TABLE>
<CAPTION>
(in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal-
Currently Payable .................. $ 457 $ 143 $ 458
Deferred ........................... (185) 45 (84)
----- ----- -----
Total Federal ...................... 272 188 374
State .............................. 94 55 118
----- ----- -----
Total Provision .................... $ 366 $ 243 $ 492
===== ===== =====
</TABLE>
A reconciliation of the effective income tax rate for the 1996, 1995 and 1994
fiscal years is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory Federal Income Tax Rate ................... 34% 34% 34%
Current Period Income of Puerto Rico Subsidiary
Substantially Exempt From Puerto Rican and
Federal Income Taxes ................................ (7%) (11%) (11%)
State Taxes, Net of Federal Tax Benefit ............. 5% 4% 4%
Difference in Book and Tax Basis of Investment
in Affiliate ........................................ (6%)
Standstill Agreement ................................ 3%
Untaxed Portion of Dividend Income .................. * (5%) *
Other ............................................... (2%) (2%) (3%)
Effective Income Tax Rate ........................... 27% 20% 24%
* less than 1%
</TABLE>
Income earned in Puerto Rico by the Company's Puerto Rican subsidiary is
90% exempt from Puerto Rican income tax through 2000. Income earned in
Puerto Rico by this subsidiary has not been subject to United States
federal income tax. The Small Business Job Protection Act (Act), passed by
Congress on August 2, 1996 and subsequently signed by the President,
terminated, subject to a phase out for existing companies, the federal tax
credit on this income for tax years beginning after December 31, 1996.
Under the phase out, the Company should receive a full credit through
fiscal year 2002. For fiscal years 2003 through 2006, the credit will be
limited, and will be completely eliminated starting with the 2007 fiscal
year.
-26-
<PAGE>
The accumulated undistributed earnings ($4,397,000 at June 29, 1996) of
this subsidiary are subject to a Puerto Rican tollgate tax (5%) when
remitted to the parent company. Accrued tax liabilities have been provided
for the tollgate tax reasonably expected to be paid in the future.
Significant components of the Company's deferred tax assets (no valuation
allowance considered necessary) and liabilities as of the end of fiscal
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
(in thousands)
1996 1995
---- ----
<S> <C> <C>
Deferred Tax Assets:
Investment Write Downs Recognized in Financial
Statements, Not Yet Deducted From Taxable Income ............... $209
Pension Cost Charged Against Financial Statement Income,
Not Yet Deducted From Taxable Income ........................... $126 153
Tax Effect of Pension Liability Charged Against Equity ......... 64 270
Employee Compensation Charged Against Financial
Statement Income, Not Yet Deducted From Taxable Income ......... 146 132
Other .......................................................... 146 97
Total Deferred Tax Asset ....................................... 482 861
Deferred Tax Liabilities:
Depreciation Deducted From Taxable Income Not Yet
Charged Against Financial Statement Income ..................... 51 51
Deferred Tax Liability on the Adjustment of Marketable
Securities to Fair Value ....................................... 248
Deferred Tax Liability on Increase in Basis of Investment in
Affiliate ...................................................... 335
Other .......................................................... 23
Total Deferred Tax Liability ................................... 51 657
Net Deferred Tax Asset ......................................... $431 $204
</TABLE>
-27-
<PAGE>
13. NOTE PAYABLE:
This represents the present value of the expected future payments to be
made under the stock repurchase referred to in Note 14. The discount rate
used is 10%, and the expected amounts to be paid are:
<TABLE>
<CAPTION>
Paid in Present Value of
Fiscal Year Expected Payment
<S> <C>
1998 $93,000
1999 -0-
2000 -0-
2001 43,000
2002 186,000
2003 170,000
--------
Total $492,000
========
</TABLE>
Actual payments under the note will only be made for amounts by which 60%
of each fiscal year's net income exceeds certain defined amounts,
calculated on a cumulative basis, with the first payment being due for the
1997 fiscal year which ends June 28, 1997. The note does not provide for
the payment of interest and does not require a minimum yearly payment.
Total payments under the note cannot exceed $1,531,000 and all obligations
under the note terminate after the 2003 fiscal year payment.
Adjustments will be made to the amount recorded based on actual amounts
paid and if future events significantly change estimated future payments.
14. REPURCHASE OF STOCK:
On December 29, 1995 Wellco repurchased from Coronet Insurance Company
(Coronet) 510,424 shares of Wellco common stock, which represented 57.69%
of total shares outstanding at that time. Cash of $5,460,000 and 400,000
shares of Alba-Waldensian, Inc. (Alba) common stock were paid for these
Wellco shares. In addition, certain additional payments may be made through
fiscal year 2002 (see Note 13). After this repurchase there are 374,382
shares of Wellco connom stock outstanding. Under North Carolina law the
shares repurchased constitute authorized but unissued shares.
After this repurchase, Coronet owned 25,000 shares of Wellco which
represents approximately 7% of the remaining shares outstanding. The
Repurchase Agreement provides that for a period of ten years after December
29, 1995 Coronet and any of its affiliates will limit their ownership of
Wellco common stock to not more than 20% of total shares outstanding. The
Consolidated Statement of Operations for the fiscal year ended June 29,
1996 includes a Stock Repurchase Charge of $110,000 representing the value
assigned to this limitation.
This repurchase was recorded at the cash paid, the fair value of the Alba
shares, the present value of the additional amount projected to be paid
through fiscal year 2002, and the amount of investment banker, legal,
accounting and other costs incurred related to this share repurchase, a
total of
-28-
<PAGE>
$10,884,000. The par value of the common stock repurchased ($511,000) was
charged against Common Stock. The excess of total amount paid over the par
value of Wellco's common stock repurchased was charged to Additional
Paid-In Capital ($811,000) and Retained Earnings ($9,567,000). The present
value of projected additional payments ($492,000) to be made in the six
year period is shown in the Consolidated Balance Sheets as Note Payable.
15. STOCK OPTIONS:
All options under the Company's 1985 Stock Option Plan have been granted.
Options have a term of 10 years from the date granted and have an exercise
price equal to the fair market value on the date granted. At June 29, 1996,
options to purchase 700 shares at $16.50 each were fully exercisable.
In September, 1993, 16,100 shares of the Company's Common stock were issued
upon employees' exercise of stock options. The excess of the amount
received over the par value of shares issued increased Additional Paid-in
Capital.
On February 6, 1996, the Board Directors approved a 1996 Stock Option Plan
for granting options to certain key employees for the purchase of 20,000
shares of the Company's common stock at the market price on the date
granted. The Board has issued grants for 15,000 shares at $15.00 each and
2,500 shares at $17.375 each. The 1996 Stock Option Plan is subject to, and
the grants thereunder are contingent upon, shareholder approval at the
November 19, 1996 Annual Meeting of Wellco shareholders.
16. SEGMENT AND REVENUE INFORMATION:
The Company operates in one industry segment. Substantially all the
Company's operating activity is from the sale of military footwear and
related items, whether sold directly by the Company or its licensees.
Revenues by class of product, major customer and export revenues for 1996,
1995 and 1994 were:
<TABLE>
<CAPTION>
Percent of Total Revenues
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues By Class of Product:
Sales of Footwear and Related Items ........... 97% 96% 96%
Revenues From Licensees ....................... 3% 4% 4%
--- --- ---
Total ......................................... 100% 100% 100%
Major Customer-U. S. Government ............... 70% 66% 74%
Export Revenues ............................... 12% 12% 6%
</TABLE>
The majority of export revenues are to Central and South American
countries.
17. GOVERNMENT BOOT CONTRACT REVENUES:
Revenues in 1996 include $963,000 representing the estimated amount of
certain contract actions not yet settled with the U. S. government.
Any difference between these estimates and the actual amounts
-29-
<PAGE>
agreed to will be included in the period of settlement. Income before
income taxes in 1995 and 1994 was increased by $54,000 and $255,000
from contract actions settled with the U. S. government in those years at
amounts in excess of previously recorded estimates.
18. COMMITMENT:
Under a Resolution of its Board of Directors, Wellco is committed to
purchase its Common Stock which, as of September 6, 1990, was owned by or
under option with an active or retired employee at that date. This purchase
is at the employee or retiree option and is activated only by the
termination of employment or death of the retiree. The purchase price is to
be based on Wellco's tangible book value at the time of purchase. The
maximum shares that could be purchased at June 29, 1996 is approximately
31,000.
-30-
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Wellco Enterprises, Inc.
Waynesville, North Carolina
We have audited the accompanying consolidated balance sheets of Wellco
Enterprises, Inc. and subsidiaries as of June 29, 1996 and July 1, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 29, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Wellco Enterprises, Inc. and
subsidiaries as of June 29, 1996 and July 1, 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
June 29,1996 in conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of accounting for marketable securities during fiscal year
1995 to conform with Statement of Financial Accounting Standards No. 115.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
September 11, 1996
-31-
<PAGE>
WELLCO ENTERPRISES, INC.
PRICE RANGE, DIVIDENDS AND MARKET OF COMMON STOCK
Fiscal Year 1996 Quarter
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Market Price Per Share-
High ................................. 16 3/8 16 1/2 17 3/4 32 1/2
Low .................................. 15 1/2 15 14 7/8 17 1/4
Per Share Cash Dividend Declared ..... $.12 1/2 $ .25
Fiscal Year 1995 Quarter
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Market Price Per Share-
High ................................... 17 3/8 18 17 1/2 17 1/8
Low .................................... 14 3/4 15 5/8 14 7/8 15
Per Share Cash Dividend Declared ....... $.12 1/2 $.12 1/2
</TABLE>
The Company's Common Stock is traded on the American Stock Exchange.
The number of holders of record of Wellco's Common Stock as of August 23, 1996
was 297.
Registrar and Transfer Agent
ChaseMellon Shareholders Services
New York, N. Y.
-32-
<PAGE>
WELLCO ENTERPRISES, INC.
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
(In Thousands Except for Per Share Amounts)
Fiscal Year 1996 Quarter
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues .............................. $ 4,378 $ 4,656 $ 5,484 $ 5,450
Cost of Sales and Services ............ 3,959 4,154 4,648 4,407
Net Income ............................ (A)(71) (B)118 (C) 584 (D) 360
Net Income (Loss) Per Share (E) ....... $ (.08) $ .13 $ 1.56 $ .96
Fiscal Year 1995 Quarter
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues ........................... $4,908 $5,045 $4,255 $3,795
Cost of Sales and Services ......... 4,174 4,047 3,775 3,132
Net Income ......................... 220 380 139 (F)230
Net Income Per Share ............... $ .25 $ .43 $ .16 $ .26
</TABLE>
(A) Reduced by $102,000 equity in loss of affiliate.
(B) Increased by $585,000 of investment income.
Reduced by $410,000 of equity in loss of affiliate and $94,000 stock
repurchase charge.
(C) Increased by $347,000 of investment income.
(D) Reduced by $46,000 contribution to the Wellco Foundation.
Increased by $42,000 representing the adjustment of tax provisions for
the first three quarters, made at estimated annual effective tax rates,
to the actual rate for the year.
(E) Net income per share for the third and fourth quarters is based on
374,382 shares, reduced from 884,806 shares in the prior quarters after
the December 29, 1995 repurchase of Wellco shares.
(F) Increased by $116,000 representing the adjustment of tax provisions for
the first three quarters, made at estimated annual effective tax rates,
to the actual rate for the year. Reduced by $89,000 charitable
contribution to the Wellco Foundation.
-33-
<PAGE>
Officers and Directors
HORACE AUBERRY
Chairman of the Board
ROLF KAUFMAN
President
DAVID LUTZ
Executive Vice President and Treasurer
Officers
SVEN E. OBERG
V. P. - Technical Director
RICHARD A. WOOD, Jr.
Secretary; Attorney, Member of the law firm of McGuire, Wood & Bissette, P. A.
Directors
WILLIAM M. COUSINS, Jr.
President of William M. Cousins, Jr., Inc.
(Management Consultants)
JAMES T. EMERSON
Retired Engineer
JOSEPH MINIO
President and Chief Executive Officer of Belle Haven Management, Ltd.
J. AARON PREVOST
Retired Banker
WILLIAM D. SCHUBERT
Principal of Advanced Management Concepts
(Management Consultants)
FRED K. WEBB, JR.
Accounting Team Leader for United Guaranty Corporation
-34-
<PAGE>
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 1995 or 1996 fiscal years or during the period
from the end of the 1996 fiscal year through the date of filing this Form 10-K.
PART III
Responsive information called for by the following Items 10, 11, 12 and 13,
except for certain information about executive officers provided below, will be
filed not later than 120 days after the close of the fiscal year with the
Securities and Exchange Commission in a Proxy Statement dated October 18, 1996,
and is incorporated herein by reference. After each item and shown in
parenthesis is the proxy heading for the section containing the responsive
information.
Item 10. Directors and Executive Officers of the Registrant. (Board of
Directors)
The Proxy Statement is not expected to contain information disclosing
delinquent Form 4 filers.
Identification of Executive Officers:
Name Age Office
Horace Auberry 65 Chairman of the Board of Directors
Rolf Kaufman 65 President and Director
Sven Oberg 57 Vice President-Technical Director
David Lutz, CPA 51 Executive Vice President and
Treasurer
Richard A. Wood, Jr. 59 Secretary
On September 30, 1996 Mr. Kaufman will retire from his position as President but
will remain active as consultant to the Company serving in the position as Vice
Chairman, Board of Directors. Mr. Lutz was elected by the Board of Directors to
the position of President and Chief Operating Officer and Mr. Auberry was
elected to the position of Chairman, Board of Directors and Chief Executive
Officer, both effective September 30, 1996 .
There are no arrangements or understandings pursuant to which any of the
officers are elected, and all are elected to serve for one year terms. All
officers have served in their indicated capacities for more than 5 years.
Item 11. Executive Compensation. (Executive Compensation)
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(Security Ownership)
Item 13. Certain Relationships and Related Transactions. (Board of
Directors/Security Ownership)
-5-
<PAGE>
Since the beginning of the 1996 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 1996 fiscal year, no -
(1) executive officer of the Registrant or member of his immediate family,
(2) corporation or organization of which any such person is an executive
officer, partner, owner or 10% or more beneficial owner, or
(3) trust or other estate in which any such person has a substantial
interest or as to which such person serves as trustee or in a similar capacity,
was indebted to the Registrant or its subsidiaries in an amount exceeding
$60,000.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
1. All Financial Statements
Page
Number
Independent Auditors' Report 9
The following consolidated financial statements of
Wellco Enterprises, Inc. are in the Registrant's 1996
Annual Report which is integrated into Part II of this Form 10-K
immediately after page 4
Balance Sheets-at June 29, 1996 and July 1, 1995 13-14*
Statements of Operations-years ended June 29,1996,
July 1, 1995 and July 2, 1994 12*
Statements of Cash Flows-years ended June 29, 1996,
July 1, 1995, and July 2, 1994 15-16*
Statements of Stockholders' Equity-years ended June 29, 1996,
July 1, 1995 and July 2, 1994 17*
Notes to Consolidated Financial Statements 18-30*
* Page number in the 1996 Annual Report to Shareholders integrated in Part II of
this Form 10-K.
2. Financial Statement Schedules
Page
Number
Schedule II Valuation and Qualifying Accounts 11
All other schedules are omitted because they are not applicable or not required.
-6-
<PAGE>
Exhibits
Exhibit Page
Number Description Number
3 Articles of Incorporation and By-Laws (a)
10 Material Contracts:
A. Bonus Arrangement* (b)
B. 1985 Stock Option Plan for Key Employees of
Wellco Enterprises, Inc.* (c)
21 Subsidiaries of Registrant 14
23 Consent of Experts (d)
* Management Compensation Arrangement/Plan.
Copies of the below listed exhibits may be obtained on written request to
Corporate Secretary, Wellco Enterprises, Inc., Box 188, Waynesville, N. C.
28786, accompanied by payment of the following amounts for each copy;
Exhibit 3 $40.00
Exhibit 10 A. 2.00
Exhibit 10 B. 3.00
(a) Exhibit was filed in Part IV of Form 10-k for the fiscal year
ended July 1, 1995, and is incorporated herein by reference.
(b) Exhibit was filed in PART IV of Form 10-K for the fiscal year
ended July 3, 1982, and is incorporated herein by reference.
(c) Exhibit was filed as Exhibit A to the Proxy Statement dated
October 22, 1985, and is incorporated herein by reference.
(d) Consent is contained in opinion of independent certified
public accountants on page 9.
Item 14 (b) - Reports on Form 8-K
There were no reports on Form 8-K for the three months ended June 29, 1996.
-7-
<PAGE>
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 (Co-Principal Executive Officer)
/s/ Rolf Kaufman
By: Rolf Kaufman, President (Co-Principal Executive Officer)
/s/ David Lutz
By: David Lutz, Executive Vice President and Treasurer
(Principal Financial and Accounting Officer)
Date: September 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Horace Auberry /s/ Rolf Kaufman
Horace Auberry, Chairman Rolf Kaufman, Director
/s/ David Lutz /s/ J. Aaron Prevost
David Lutz, Director J. Aaron Prevost, Director
/s/ James T. Emerson
James T. Emerson, Director
Date: September 26, 1996
-8-
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Wellco Enterprises, Inc.
Waynesville, North Carolina
We have audited the accompanying consolidated balance sheets of Wellco
Enterprises, Inc. and subsidiaries as of June 29, 1996 and July 1, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 29, 1996. Our audits
also included the financial statement schedule filed under Part IV of Item
14(a)2. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Wellco Enterprises, Inc. and
subsidiaries as of June 29, 1996 and July 1, 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
June 29, 1996 in conformity with generally accepted accounting principles. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of accounting for marketable securities during fiscal year
1995 to conform with Statement of Financial Accounting Standards No. 115.
We consent to the incorporation by reference of the above report in the
Prospectus constituting part of the Registration Statement 33-8246 of Wellco
Enterprises, Inc. on Form S-8.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
September 11, 1996
-9-
<PAGE>
WELLCO ENTERPRISES, INC.
FORM 10-K
FISCAL YEAR ENDED JUNE 29, 1996
INDEX TO FINANCIAL STATEMENT SCHEDULE AND EXHIBITS
Page
Financial Statement Schedule: Number
Schedule II-Valuation and Qualifying Accounts 11
Exhibits:
Exhibit 3-Articles of Incorporation and By-Laws (a)
Exhibit 10 A.-Bonus Arrangement (b)
Exhibit 10 B.-1985 Stock Option Plan for Key Employees of
Wellco Enterprises, Inc. (c)
Exhibit 21-Subsidiaries of Registrant 12
Exhibit 23-Consent of Experts (d)
(a) Exhibit was filed in Part IV of Form 10-k for the fiscal year ended
July 1, 1995, and is incorporated herein by reference.
(b) Exhibit was filed in PART IV of Form 10-K for the fiscal year ended
July 3, 1982, and is incorporated herein by reference.
(C) Exhibit was filed as Exhibit A to the Proxy Statement dated October 22,
1995, and is incorporated herein by reference.
(d) Consent is contained in opinion of Independent Certified Public
Accountants on page 9.
-10-
<PAGE>
SCHEDULE II
WELLCO ENTERPRISES, INC. AND WHOLLY-OWNED SUBSIDIARIES
VALUATION ACCOUNTS
FOR THE FISCAL YEARS ENDED JUNE 29, 1996, JULY 1, 1995 AND JULY 2, 1994
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO BALANCE AT
DESCRIPTION YEAR INCOME DEDUCTIONS END OF YEAR
Allowance for
doubtful
accounts-
<S> <C> <C> <C>
1996 $37 $37
1995 43 6(A) 37
1994 61 18(A) 43
(A) Write off of uncollectible accounts.
</TABLE>
-11-
<PAGE>
EXHIBIT 21
WELLCO ENTERPRISES, INC.
SUBSIDIARIES OF THE REGISTRANT
Percentage of Voting
Jurisdiction of Securities Owned by
Name of Company Incorporation Immediate Parent
Wellco Enterprises, Inc. North Carolina Registrant
Wholly-Owned Subsidiaries:
Ro-Search, Incorporated North Carolina 100%
Ro-Search International Inc. Barbados, West Indies 100% (1)
Mo-Ka Shoe Corporation Delaware 100%
(1) Owned by Ro-Search, Incorporated.
All of the Registrant's wholly-owned subsidiaries are included in the
consolidated financial statements.
-12
- -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THTS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 29, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000105532
<NAME> WELLCO ENTERPRISES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-START> JUN-30-1996
<PERIOD-END> JUN-29-1996
<EXCHANGE-RATE> 1
<CASH> 673
<SECURITIES> 0
<RECEIVABLES> 5,279
<ALLOWANCES> 37
<INVENTORY> 3,924
<CURRENT-ASSETS> 10,216
<PP&E> 5,425
<DEPRECIATION> 4,224
<TOTAL-ASSETS> 12,697
<CURRENT-LIABILITIES> 3,220
<BONDS> 492
0
0
<COMMON> 374
<OTHER-SE> 6,672
<TOTAL-LIABILITY-AND-EQUITY> 12,697
<SALES> 19,968
<TOTAL-REVENUES> 19,968
<CGS> 17,168
<TOTAL-COSTS> 17,168
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,068
<INCOME-TAX> 366
<INCOME-CONTINUING> 991
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 991
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.58
</TABLE>
