FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 27, 1998
Commission file number 1-5555
WELLCO ENTERPRISES, INC.
(Exact name of Registrant as specified in charter)
North Carolina 56-0769274
(State of incorporation) (I.R.S. employer identification no.)
Waynesville, North Carolina 28786
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 828-456-3545
Securities registered pursuant to Section 12(b) of the Act:
Common Capital Stock - $1 par value American Stock Exchange
(Title of class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Capital Stock - $1 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
As of August 31,1998 1,163,246 common shares were outstanding, and the aggregate
market value of the common shares (based upon the closing price of these shares
on the American Stock Exchange on August 28, 1998) of Wellco Enterprises, Inc.
held by nonaffiliates was approximately $5,000,000.
Documents incorporated by reference:
Definitive Proxy Statement, to be dated October 16, 1998, in PART IV.
Definitive Proxy Statement, dated October 17, 1997, in PART IV.
Definitive Proxy Statement, dated October 18, 1996, in PART IV.
Definitive Proxy Statement, dated October 17, 1995, in PART IV.
Definitive Proxy Statement dated October 22, 1985, in PART IV.
Definitive Proxy Statement dated July 3, 1982, in PART IV.
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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 (73% in
1998 and 69% in 1997) were from sales to the U. S. government, primarily the
Defense Support Center Philadelphia (DSCP), under contracts for the supply of
boots used by the U. S. Armed Forces.
For more than the last five years, the Company has manufactured and sold
military combat boots under firm fixed price contracts with the United States
government. Boot products are the general issue all-leather boot, the hot
weather boot and the desert boot, all manufactured using the government
specified Direct Molded Sole (DMS) process. In 1998, the Company also supplied
the Intermediate Cold/Wet Boot (ICW) and the new Infantry Combat Boot/Marine
Corps (ICB). The government awards fixed price boot contracts on the basis of
bids from several qualified U. S. 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, from time to time, supplies
certain foreign military footwear manufacturers with some of their machinery and
material needs. The Company builds specialized footwear manufacturing equipment
for use in its own and its customers' manufacturing operations. This equipment
is usually sold, but in some cases it is leased.
Net loss for the 1998 fiscal year was $337,000 ($.29 diluted per share) compared
to net income of $758,000 ($.66 diluted per share) for the 1997 fiscal year.
Three events significantly impacted 1998 results:
The filing of a claim for the recovery of certain costs.
A significant reduction in the number of pairs of DMS combat boots sold
to the U. S. government.
Start up costs on the first production of the ICB boot.
As stated in the Management's Discussion and Analysis section of the Company's
1998 annual report, incorporated in Part II of this Form 10-K, in April, 1998
Wellco reached an Agreement with DSCP providing for Wellco to be reimbursed
certain contract costs. Wellco had spent a significant amount of money to assure
its meeting a performance standard that would have increased its future DMS boot
sales to DSCP during contract option years. The interpretation of the contract
provision providing for this performance standard was later changed by DSCP to
the detriment of Wellco.
Subsequently, Wellco negotiated with DSCP an Agreement for the reimbursement to
Wellco of these costs. In May, 1998 a claim for $1,000,000 was filed by Wellco
under this Agreement. In an early October, 1998 meeting with Wellco, DSCP agreed
to pay Wellco $246,000 of the $1,000,000 claim. Binding arbitration will be used
to determine how much, if any, of the remaining $754,000 will be paid by DSCP to
Wellco. It is expected that this arbitration procedure will take a few months
and Wellco, although feeling that a significant amount of the $754,000 will
ultimately be paid, cannot reasonably predict the what the arbitrator will
decide.
For a number of years DSCP has been carrying out a program to reduce its
inventory of the DMS combat
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boot. During the Cold War period, DSCP was authorized to build and maintain a
large, ready to go to war inventory of this boot. With the end of the Cold War
and reductions in military budgets, DSCP no longer has the funding to support a
large inventory. Since the early 1990's, DSCP has been gradually reducing boot
inventory by buying fewer pairs than were used. There are presently four
contractors in the United States using the DMS process to manufacture three
types of combat boots. In order to maintain an industrial base of contractors
who could meet war time needs, this inventory reduction program is being
accomplished over several years. Information available to the Company shows that
the government's inventory reduction program is working. The Company estimates
that the reduced order level for DMS boots will continue for a few more years.
When this reduction program is completed, combat boot purchases should equal
usage, which is significantly more than the pairs currently being ordered.
In Wellco's 1998 fiscal year, DSCP accelerated its inventory reduction program
which resulted in Wellco's DMS boot sales being about half of 1997. Reduced
revenues from lower sales of DMS combat boots were offset by increased revenues
from the sale of two other boots, the ICW and the ICB boots. Wellco had not
previously made either of these boots. As is often the case when entering the
manufacture of new products, margins on these new boots are less than those on
DMS combat boots historically supplied by Wellco to DSCP.
The ICB boot, a new item presently used only by the Marine Corps, is
significantly different from other boots made by Wellco. The MD&A section
contains information about Wellco incurring start-up costs of approximately
$800,000 related to this boot.
The Management's Discussion and Analysis section of the Company's 1998 Annual
Report contains more information about 1998 operating results.
Bidding on U. S. government boot solicitations is open to any qualified U. S.
manufacturer. In addition to meeting very stringent manufacturing and quality
standards, contractors are required to comply with demanding delivery schedules
and a significant investment in specialized equipment is required for the
manufacture of certain types of boots.
The Company usually competes on U. S. government contracts with several other
companies, none of which dominates the industry. Bidding on contracts is very
competitive, and since most contracts are for multi-year periods, a bidder not
receiving an award from a significant solicitation can be adversely affected.
Many factors affect the government's demand for boots and the quantity purchased
can vary from year to year. Contractors cannot influence the government's boot
needs. Price, quality, quick delivery and manufacturing efficiency are the areas
emphasized by the Company that strengthen its competitive position.
The U. S. government usually evaluates bids received on solicitations for boots
using their "best value" system, under which bidders offering the best value to
the government are awarded a greater portion of total boots purchased. Best
value usually involves an evaluation of performance considerations, such as
quality and delivery, with the prices bid being less important. As bidders
become more equal in the best value evaluation, price becomes more important.
For the current DMS combat boot contract awarded April 15, 1997, Wellco and one
other bidder were given the highest possible evaluation. However, since Wellco's
bid prices were higher, Wellco was awarded the 25% allocation of total boots,
and the other competitor received 35%.
Government contracts are subject to partial or complete termination under the
following circumstances:
(1) Convenience of the Government. The government's contracting officer has the
authority to partially or completely terminate a contract for the
convenience of the government only when
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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. All current boot contracts
contain options that are exercisable at the government's discretion. In 1998 the
government did not exercise an option on an ICB boot contract. Subsequently, the
government agreed to award the Company a contract for total pairs of this boot
that is approximately 5,000 pairs less than the minimum pairs they would have
bought under the option.
Because domestic commercial footwear manufacturers are adversely affected by
imports from low labor cost countries, the Company targets its marketing of
technology and assistance primarily to military footwear manufacturers. The
Company competes against several other footwear construction methods commonly
used for heavy-duty footwear. These methods include the Goodyear Welt
construction, as well as boots bottomed by injection molding. These methods are
used in work shoes, safety shoes, and hiking boots manufactured both in the U.
S. and abroad for the commercial market. Quality, service and reasonable
manufacturing costs are the most important features used to market the Company's
technology, assistance and services.
The Company has a strong research and development program. While not all
research and development results in successful new products or significant
revenues, the continuing development of new products and processes has been and
will continue to be a significant factor in growth and development. The Company
developed the desert combat boot, first used in Operation Desert Storm. In 1993,
the Company completed initial development of improvements to the black hot
weather boot incorporating many of the features it developed for the desert
boot. In 1994 it was awarded an option under that contract for further
development, and the results of this work were subsequently incorporated into
the black hot weather boot. In August, 1995 it was awarded a contract to develop
changes to combat boots that will result in fewer lower extremity disorders, and
completed the second phase of this work in 1998. This contract has three phases,
and after the end of the 1998 fiscal year, the government funded the third
phase.
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 18 to the Consolidated Financial Statements for revenues by class and
information about export revenues. The Company does not have foreign operations.
The Company's backlog of all sales, not including license fees and rentals, as
of September, 1998 was approximately $11,900,000 compared to $18,700,000 last
year. The Company estimates that substantially all of the current year backlog
will be shipped in the 1999 fiscal year. The current backlog is less than the
prior year because of the decrease in the minimum pairs to be bought under the
current DMS boot contract, minimum pairs under the first option of the ICW boot
contract being less than first year pairs, and to last
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year's backlog including several large machinery orders that were shipped in
1998.
Most of the raw materials used by the Company can be obtained from at least two
sources and are readily available. Because all materials in combat boots must
meet rigid government specifications and because quality is the first priority,
the Company purchases most of its raw materials from vendors who provide the
best materials at a reasonable cost. The loss of some vendors would cause some
difficulty for the entire industry, but the Company believes a suitable
replacement could be found in a reasonably short period of time. Major raw
materials include leathers, fabrics and rubber, and by government regulation all
are from manufacturers in the United States.
The current DMS boot contract provides for the Company to quickly ship direct to
U. S. Armed Forces installations in both the U. S. and abroad. This increases
the Company's investment in inventory, compared to prior years when shipment was
to government warehouses.
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 305 persons during the 1998 year.
Item 2. Properties.
The Company has manufacturing, warehousing and office facilities in Waynesville,
North Carolina and Aguadilla, Puerto Rico. The building and land in North
Carolina are owned by the Company. The Puerto Rico building and land are leased.
Management believes all its plants, warehouses and offices are in good condition
and are reasonably suited for the purposes for which they are presently used. As
has been the case for the last several years, the volume of operations in 1998
caused both the Waynesville and Aguadilla facilities to be used at less than
normal capacity.
Item 3. Legal Proceedings.
In April 1997, the Company was served with a subpoena issued by a grand jury
empaneled in the United States District Court for the Eastern District of
Pennsylvania which requires the production of certain documents for the period
January 1, 1990 until April 29, 1997. The Company was informed through its legal
counsel that the grand jury was investigating possible violations of antitrust
laws primarily involving alleged collusive activities among manufacturers of
combat boots for the U.S. Government. In August, 1998, the Company's legal
counsel was notified the Company's documents were being returned and informed
that the grand jury's investigation has been closed.
In March 1998 the Company was served with a civil action complaint. The
Plaintiff is alleging that the Company, during the period October, 1995 through
September, 1996, untimely delivered defective work shoes which resulted in
certain losses for the Plaintiff as well as precluding Plaintiff from competing
on a subsequent contract. In addition, the complaint alleges that Wellco
submitted as its bid prototype one of the Plaintiff's work shoes which resulted
in the subsequent contract being awarded to Wellco. It is the opinion of the
Company's management, based upon the information available at this time, that
the expected outcome of these matters will not have a material adverse effect on
the results of operations and financial condition of the Company.
There are no other material pending legal proceedings, other than ordinary
routine litigation incidental to the
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Company's business, to which the Company or any of its subsidiaries are a party
or of which any of their property is subject.
Management does not know of any director, officer, affiliate of the Company, nor
any stockholder of record or beneficial owner of more than 5% of the Company's
common stock, or any associate thereof who is a party to a legal proceeding that
is adverse to the Company or any of its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
There were not any submissions of matters to a vote of security holders during
the fourth quarter of fiscal year 1998.
PART II
Items 5, 6, 7, 7A and 8.
The information called for by the following items is in the Company's 1998
Annual Report to Shareholders which is incorporated starting on the following
page in this Form 10-K:
Annual Report
Page No.
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 37
Item 6. Consolidated Selected Financial Data 1
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition 4-11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk *
Item 8. Financial Statements and Selected Quarterly Financial Data 13-35, 38
* This information is not required because the registrant is a small business
issuer.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no resignations by or dismissals of any independent accountant
engaged by the Company during the 1998 or 1997 fiscal years or during the period
from the end of the 1998 fiscal year through the date of filing this Form 10-K.
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WELLCO(R)
ENTERPRISES, INC.
ANNUAL REPORT
1998
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED SELECTED FINANCIAL DATA
(In Thousands Except for Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended
June 27, June 28, June 29, July 1, July 2,
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues $23,917 $21,199 $19,968 $18,003 $18,255
Net Income (Loss) (337) 758 991 969 1,542
Basic Earnings (Loss) per
Share (B and C) (0.29) 0.67 0.53 0.37 0.58
Diluted Earnings (Loss) per
Share (B and C) (0.29) 0.66 0.52 0.37 0.58
Cash Dividends Declared Per
Share of Common Stock (B) .20 .20 .125 .083 (A) 2.083
Total Assets at Year End 16,020 15,652 12,697 22,738 20,995
Long-Term Liabilities at
Year End $2,253 $2,789 $2,431 $1,897 $1,647
</TABLE>
(A) Includes a special cash dividend of $2.00 per share.
(B) All per share amounts reflect a three-for-one stock split in the form
of a stock dividend paid on January 3, 1997.
(C) In 1997, the Company adopted FASB Statement No. 128, Earnings per
Share. See Note 17 to the Consolidated Financial Statements for further
information.
See the Management's Discussion and Analysis section.
Independent Auditors
Deloitte & Touche LLP Charlotte, N.C.
Annual Meeting
November 17, 1998
Corporate Offices
Waynesville, N.C.
10-K Availability
The Company's Form 10-K (annual report filed with the Securities and Exchange
Commission) is available without charge to those who wish to receive a copy.
Write to: Corporate Secretary, Wellco Enterprises, Inc., Box 188, Waynesville,
N.C. 28786
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Dear Fellow Shareholders:
Fiscal 1998 has been a difficult year for Wellco, the first losing year since
1984 when we restructured operations and market focus. The three reasons, in
order of magnitude are:
1. Our largest customer, the U.S. Defense Department (DOD), drastically
accelerated their drive to reduce Direct Molded Sole (DMS) combat boot
inventories, which led them to reduce their purchases from us during
our 1998 Fiscal Year by approximately 60,000 pairs from the quantities
foreseen in the current five-year contract awarded in 1997. This
resulted in pairs of DMS boots shipped in fiscal year 1998 being
approximately half of 1997 shipments.
Reduced revenues from lower sales of DMS combat boots were offset by
increased revenues from the sale of two other boots, the Intermediate
Cold Wet boot (ICW) and the Infantry Combat Boot/Marine (ICB) boot.
Wellco had not previously made either of these boots. As is often the
case when entering the manufacture of new products, margins on both
these boots are less than those on DMS combat boots historically
supplied by Wellco to the DOD.
2. A reserve of $754,000 which we were required by circumstances to
record against our claim of $1,000,000 for DOD's reinterpretation
of contract language which led us to expend approximately one million
dollars to satisfy their original interpretation which they
subsequently altered. The settlement agreement reached last April
provided they would promptly pay reasonable documented costs up to
$1,000,000, with any disputed amounts subject to binding arbitration.
Just this week, they have committed to promptly pay the sum of
$246,000. While we believe we will be able to recover most of the
disputed $754,000 balance in arbitration, prudent accounting leads
us to book only what we are sure of collecting.
3. Startup losses in the production of the new Marine Infantry Combat
Boot. These excess costs resulted from a complicated new manufacturing
process, in combination with an unrealistic initial delivery schedule
which we were able to meet only with our employees' superb dedication
to the fulfillment of customer service commitment.
Thankfully, the last two of the above problem areas can have only positive
effects going forward: The proceeds from our claim can only increase as a result
of the arbitration, and we anticipate efficient performance in the present
balance of ICB production, scheduled for completion in the third quarter of the
1999 Fiscal Year.
The DOD initial contract interpretation that resulted in our claim relates to
quickly shipping boots after order receipt. Relying upon this interpretation, we
significantly increased our investment in inventory. With DOD's change in
interpretation, we are currently reducing inventory by producing fewer pairs
than are shipped, and we have a target of reducing total inventory by $2,000,000
to $3,000,000. This will reduce future interest cost and also improve liquidity.
The acceleration of DOD's inventory reduction program will continue until the
end of the second year of the five-year contract in April 1999. Based on the
significant inventory reduction to date and our projection of the further
reduction through April, 1999, we anticipate that, with the exercise of the
third contract year option in April, 1999, DOD will return to the purchase rate
of approximately 775,000 total pairs per year, as foreseen in the initial
contract projections. During the current second contract year, DOD will purchase
approximately 500,000 total pairs. Once DOD reaches their target inventory, they
should resume
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purchasing quantities equal to their consumption, a total of approximately
1,000,000 pairs per year.
We recently submitted bids for the supply of two additional boots to DSCP. We
understand contract award will be made soon after the start of the government's
new fiscal year on October 1, 1998.
The dedication, experience and talents of all our co-workers in Waynesville,
North Carolina and Aguadilla, Puerto Rico remains steadfast. From helping create
a perfect delivery record to meeting the challenges of making a new boot, their
character, worth and skill have been proven.
Horace Auberry David Lutz
Chairman of the Board of Directors President, Treasurer
Chief Executive Officer Chief Operating Officer
October 9, 1998
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Comparing the Fiscal Year ended June 27, 1998 to June 28, 1997:
Loss before income taxes was ($527,000) in the 1998 fiscal year compared with
income before income taxes of $1,088,000 in the 1997 fiscal year. The 1998
fiscal year pretax income includes a $226,000 non-recurring income item
representing the accrual of a claim under an Agreement with the Defense Supply
Center Philadelphia (DSCP), an agency of the U.S. Department of Defense to which
the Company sells combat boots.
In April 1998 Wellco executed an Agreement with DSCP. The Agreement provides
that DSCP will reimburse the Company for certain costs incurred related to
contract performance during the fourth quarter of the 1997 fiscal year and the
first two quarters of the 1998 fiscal year. Wellco maintained that it was due
reimbursement for costs incurred in performing in accordance with a prior DSCP
interpretation of the contract. This interpretation was later changed to the
detriment of Wellco. The Agreement provides that any disagreement between Wellco
and DSCP on an item of cost will be subject to binding arbitration. The cost
reimbursement is limited to $1,000,000.
Wellco submitted its claim under the Agreement in late May, 1998 documenting
more than $1,000,000 in costs incurred. In an early October, 1998 meeting with
Wellco, DSCP agreed to pay Wellco $246,000 of the $1,000,000 claim. Binding
arbitration will be used to determine how much, if any, of the remaining
$754,000 will be paid by DSCP to Wellco. It is expected that this arbitration
procedure will take a few months and Wellco, despite feeling that a significant
amount of the $754,000 will ultimately be paid, cannot reasonably predict what
the arbitrator will decide. Therefore, the 1998 Consolidated Statements of
Operations includes as an item of income related to this claim $226,000,
representing the agreed to $246,000 less $20,000 of related costs. Any amount
Wellco will receive beyond $246,000 will be recorded at the time of the
arbitration decision.
Pairs of direct molded sole (DMS) combat boots shipped in 1998 were almost half
of 1997. On April 15, 1997, Wellco and three other contractors were awarded DMS
combat boot contracts from DSCP for the one year period starting April 15, with
options for each of the ensuing four years. These are indefinite quantity
contracts under which each contractor is guaranteed delivery orders for a
minimum number of pairs and DSCP can order up to a stated maximum number of
pairs. Wellco's award is for 25% of total combat boot purchases, with the other
three contractors receiving 35%, 20% and 20% of total purchases. DSCP had
estimated award to be in December, 1996, and Wellco substantially completed
shipments under its prior contract in that month. Instead of ceasing combat boot
manufacturing operations from January, 1997 to contract award, Wellco continued
to manufacture and stock boots in anticipation of a contract award.
This contract is the first one under which boot contractors ship direct to
customers, instead of to government warehouses. Past performance is a key factor
in contractor evaluation, and quick delivery is a significant performance
factor. Wellco built a large inventory in order to be able to ship quickly after
receipt of orders.
This resulted in Wellco having a significant inventory of combat boots at the
date of contract award, and in Wellco being the only contractor which was in
position to start shipping immediately upon contract award. During the fourth
quarter of the 1997 fiscal year, Wellco was allowed to accelerate its first year
shipments and did ship very large quantities against its first year minimum.
Starting in late October, 1997, when Wellco was very close to having shipped its
guaranteed minimum pairs, DSCP significantly reduced Wellco's orders. This was
done to give the other three contractors delivery orders for their guaranteed
minimum
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pairs.
Because of the delay in contract award, DSCP expressed their non-binding intent
to purchase more than the guaranteed minimum pairs in the first contract year.
Wellco continued to maintain its DMS boot inventory in anticipation of DSCP
purchasing pairs above the minimum. As other contractors reached their minimum,
DSCP determined that it could not buy pairs beyond the minimum. This resulted in
a significant reduction in the pairs of DMS combat boots shipped by Wellco from
late October, 1997 through April, 1998.
On April 10, 1998 DSCP exercised it's first option on the DMS boot for the one
year period April 15, 1998 to April 15, 1999, with Wellco's option being for 25%
of total DMS pairs purchased during this year. For several years, DSCP has been
reducing its depot inventory of DMS boots. Prior to option exercise, in late
February, 1998, DSCP met with all DMS boot contractors informing them that
inventory reduction was behind schedule. Out of this meeting came a contract
modification reducing the total guaranteed minimum pairs to be purchased by DSCP
during the first option year. For Wellco, this is a reduction in the minimum
pairs from 155,000 to 125,000 pairs. The price per pair for the first 155,000
pairs during the first option was increased to compensate for the reduced pairs.
DSCP has again expressed their intent, without giving a binding commitment, to
purchase more than the minimum pairs if their total usage in the first option
year exceeds 900,000 pairs. Boot usage in the year ended April 15, 1998 was
approximately 1,100,000.
The reduction of boot shipments, after the acceleration of shipments in the
first contract year, and the reduction in minimum pairs to be ordered during the
second contract year, were the primary reasons for DMS boot shipments in the
1998 fiscal year being almost half of 1997.
Compared to fiscal year 1997, sales revenues in 1998 increased $2,718,000
primarily because of shipments under two new boot contracts. On February 25,
1997 Wellco was awarded a contract from DSCP to supply the Intermediate Cold/Wet
boot (ICW), and the 1997 fiscal year reflected only the first shipment under
this contract. On June 25, 1997, Wellco was awarded a contract to supply the new
Infantry Combat Boot/Marine Corps (ICB), with shipments starting in October,
1997. Wellco had not previously made either of these boots. As is often the case
when entering the manufacture of new products, margins on both the ICB and ICW
boots are less than those on DMS boots historically supplied by Wellco to DSCP.
Operating results for 1998 were adversely affected by start-up costs, estimated
to be approximately $800,000, which incurred in the initial production of the
ICB boot. The ICB contract required that Wellco, within 90 days after contract
award, manufacture and have in inventory a significant quantity of this boot. At
the end of this 90 day period, the contract also required Wellco to have the
capacity to quickly deliver orders for this boot to Marine recruit training
centers and major Marine clothing stores. This 90 day period compares to a
normal "make ready" time in government boot contracts of 165 days or longer.
The ICB boot incorporates several technologies and manufacturing methods which
are significantly different than those in the DMS boot. During this 90 day
period, Wellco rearranged its production lines, purchased and installed
significant new manufacturing equipment, hired and trained new employees, tested
new materials, and developed many new manufacturing procedures and methods. If
time had permitted, this should have been done with small trial production runs.
With only 90 days, Wellco had to simultaneously do all of this and reach full
production without the benefit and efficiencies of trial production runs.
ICB boot start-up costs were charged against 1998 operating income. In addition
to labor inefficiencies in training new employees, significant overtime premiums
were paid. Bonuses were paid to direct labor personnel for meeting production
quotas. Instead of using ocean freight, expensive air freight costs were
incurred to send materials to the Company's plant in Puerto Rico and then to
send completed boot uppers to the North Carolina plant for bottoming and
finishing. Because the 90 day period did not give enough time to develop
manufacturing procedures and methods using small trial production runs,
significant material
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losses were incurred. Production quantities of materials were purchased and
processed. Some materials did not perform as expected, resulting in boots which
could not be shipped under the contract and whose market value was less than
cost.
The start-up of ICB production proved to be more expensive than initially
anticipated. Management's judgement is that, if Wellco had included an adequate
amount of start-up costs in its bid prices, those prices would have been so much
higher than the prices of other bidders that Wellco would not have received the
contract award.
Revenues from technical assistance fees and equipment rentals from licensees
increased almost $200,000 in 1998. Technical assistance fees increased because
of an additional fee, earned through April, 1998, related to supplying certain
customers with additional services. In addition to completing a major mold
order, a new footwear manufacturing installation was completed in 1998. The
second phase of a government research and development contract was completed in
1998. However, the sale of boot making materials, primarily to foreign
customers, decreased in 1998. These sales can vary significantly from period to
period with the needs of this group of customers.
General and administrative expenses decreased $239,000. Bonus expense, the
majority of which varies with net income, decreased. For a number of years
Wellco has made a contribution to The Wellco Foundation in an amount based on
taxable income. Subsequent distributions to qualifying charities is at the
nomination of Wellco shareholders whose names are known to the company. The
contribution for 1997 was $115,000 , and no contribution was made in 1998. The
rate of Tax Benefit to Income Before Income Taxes is 36% for 1998 compared to a
rate of Tax Provision to Income Before Income Taxes of 30% for 1997. The 1998
benefit results from the taxable loss being carried back for a refund of taxes
paid in prior years.
Forward Looking Information:
Information is given above about the exercise by DSCP of Wellco's first option
on its DMS contract and the reduction in the minimum pairs to be purchased under
this option which was a result to their depot inventory reduction program not
being on schedule. Any amount Wellco will receive from its claim with DSCP,
mentioned above, beyond $246,000 will be recorded at the time of the arbitration
decision.
Information available to the Company shows that the government's inventory
reduction program is working. The Company estimates that the reduced order level
for DMS boots will continue for a few more years. When this reduction program is
completed, DMS boot purchases should equal usage, which is significantly more
than the pairs currently being ordered.
In late June, 1998, Wellco was informed that DSCP was not exercising its option
under the ICB boot contract. After negotiations, DSCP agreed to issue a contract
to Wellco for 27,000 pairs, which is approximately 5,000 pairs less than the
minimum pairs they would have bought under the option. This contract will allow
Wellco to recover its investment in inventory for this boot, instead of having
to hold this inventory until the next contract award.
On February 20, 1998, DSCP exercised its first year option on the ICW boot, and
shipments under this option started in the fourth quarter of the 1998 fiscal
year. Under this option, DSCP will purchase a minimum of 44,000 pairs and no
more than 66,000 pairs from Wellco. Approximately 87,000 pairs were shipped
during the base year of this contract. As specified by the contract, pairs to be
bought in each option year of this contract are less than those of the base
year.
Wellco recently submitted bids for the supply of two additional boots to DSCP.
We understand contract
-6-
<PAGE>
award will be made soon after the start of the government's new fiscal year on
October 1, 1998.
The Company recognizes the need to consider whether its operations will be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk.
The Company primarily uses packaged software running on personal computers and
file servers, and does not use mainframes. Packaged software primarily consists
of accounting, payroll, bar coding and inventory control, employee time and
attendance, and Microsoft Windows applications. All of Wellco's packaged
software has been updated to Year 2000 compliant versions. The total cost of
this updating was minimal.
A lack of timely Year 2000 compliance by Wellco's major customers, vendors and
suppliers could have a materially adverse affect on Wellco's results of
operations and financial condition, although such adverse effect should not be
long term or permanent. For example, orders received from the DSCP for boot
shipments are received electronically. After shipment, Wellco electronically
invoices boot shipments as well as receiving payment by bank wire transfer. A
lack of timely Year 2000 compliance by DSCP may significantly delay Wellco's
boot shipments. A lack of timely Year 2000 compliance with related computerized
systems, for example the ability to electronically receive invoicing from
Wellco, may significantly delay Wellco's receipt of cash from invoices. There
may be suppliers of materials, machine replacement parts, and other critical
items who may not be Year 2000 compliant. This may mean a delay in getting the
necessary materials and other items to maintain a continuous flow of production.
The Company has recently sent written communication to all major vendors and
customers asking confirmation as to their Year 2000 compliance status. Responses
received to date do not indicate a problem.
Wellco will continue monitoring customer and vendor responses to its Year 2000
compliance questionnaire. If vendor responses indicate a problem, Wellco may be
able to find other Year 2000 compliant vendors, or order excess materials and
other items necessary to continue operations until the estimated time vendors
are compliant. If customer responses indicate a problem, Wellco will work with
those customers to the extent possible. If Wellco has to take some or all of
these actions to minimize any Year 2000 problems, it may have to have additional
financing. Early detection of problems will increase the probability of finding
such financing.
Except for historical information, this annual report includes forward looking
statements that involve risks and uncertainties, including, but not limited to,
the receipt of contracts from the U. S. government and the performance
thereunder, the effect of customers and vendors not being timely in Year 2000
compliance, the ability to control costs under fixed price contracts, the
cancellation of contracts, and other risks detailed from time to time in the
Company's Securities and Exchange Commission filings, including Form 10-K for
the year ended June 27, 1998. Actual results may differ materially from
management expectations.
See Note 23 to the Consolidated Financial Statements for information about a
subpoena served on the Company in April 1997. In August, 1998 Wellco's counsel
was informed that the investigation was closed and that no action was being
taken. Note 23 also contains information about a civil action complaint filed
against Wellco.
Comparing the Fiscal Year ended June 28, 1997 to June 29, 1996:
Income before income taxes was $1,088,000 in the 1997 fiscal year compared with
$1,357,000 in the 1996 fiscal year. The 1996 year included several non-recurring
items which were:
-8-
<PAGE>
1. A $601,000 charge for Loss in Affiliate, representing Wellco's $305,000
equity in the six- month (July-December, 1995) loss of Alba-Waldensian,
Inc. (Alba), and the $296,000 write down to fair value of that investment.
Wellco had owned 400,000 common shares of Alba (21.5% of total shares)
since December 30, 1994. Wellco's investment in Alba was exchanged on
December 29, 1995, as part of the price for Wellco's repurchase of
1,531,272 shares of its common stock. Income was also reduced by a Stock
Repurchase Charge of $110,000, which is the portion of the stock repurchase
price allocated to an agreement limiting the selling shareholders'
ownership of total Wellco shares for a period of ten years (see Note 13 to
the Consolidated Financial Statements).
2. The total of interest, dividend and investment income was $1,419,000 in the
1996 year compared to $53,000 of interest income in 1997. The prior period
included gains resulting from the sale of all marketable securities at
amounts significantly greater than their carrying value. All marketable
securities were sold to pay for the stock repurchase. The current period
only includes interest income earned on excess operating funds.
Comparative 1997 operating income, before the above items and interest expense,
was $1,226,000 as compared with $688,000 in the prior year. Several factors
resulted in the $538,000 increase, the more significant ones being:
1. Total revenues increased $1,231,000. Pairs of combat boots
sold to the U. S. government increased approximately 6%. Pairs
of combat boots sold to other customers also increased in the
current year.
2. Greater revenues from the sale of combat boots more than
offset a decrease in sales of boot making machinery and
materials. The 1997 year does include a significant machinery
sale to a new customer. However, the 1996 year included
significant boot making materials sales to a foreign customer
which were not as large as in 1997. These sales can vary
significantly from period to period with the needs of this
group of customers.
3. Revenues from technical assistance fees and equipment rentals
from licensees, which vary with their shipments, increased
approximately 42% in the current year. In addition to the
licensees having increased shipments in 1997, an additional
fee is being earned until April, 1998 related to supplying
certain of these customers with additional services.
4. Revenues from U. S. government research and development
contracts decreased $288,000 in 1997. The prior year includes
Phase I billings under a multi-phase contract whose purpose is
to develop a combat boot that is more impact resistant and
flexible. The government did not commit funding to Phase II of
this contract until after the end of the 1997 year.
Operating income for 1997 was significantly affected by increases in certain
costs:
1. Interest cost increased $152,000. On April 15, 1997, Wellco was awarded a
new contract from the U. S. Defense Personnel Support Center (DSCP) for
their purchases of combat boots. DSCP had estimated award to be in
December, 1996, and Wellco substantially completed shipments under its
prior contract in that month. Instead of ceasing combat boot manufacturing
operations from January, 1997 to contract award, Wellco continued to
manufacture and inventory boots in anticipation of a contract award. This
resulted in significant borrowings from a bank line of credit on which
$79,000 of interest cost was incurred.
-8-
<PAGE>
Although the Note Payable related to the 1996 stock repurchase
(see Note 14) does not provide for the payment of interest,
generally accepted accounting principles require the
imputation of interest. This interest cost for 1997, which did
not occur in 1996, was $97,000.
2. The new DSCP contract requires Wellco to ship combat boots
direct to customers (more than 1,000 locations) instead of to
four government warehouses, as was the case with prior
contracts. Direct customer shipments can be from one to
several hundred pairs per order, compared to warehouse
shipments which averaged several thousand pairs per shipment.
In addition, the contract provides for maximum contractor
evaluation points for shipping within 4 days of order receipt.
Prior contracts provided for monthly shipments against
delivery orders covering several months. After the April 15
contract award, DSCP agreed to let Wellco accelerate
shipments, which had the effect of reducing some of the
significant inventory build-up. Combat boot sales in the
fourth quarter were 120,000 pairs, almost double the average
amount for preceding quarters.
All of this caused excess labor costs, freight costs to air
ship materials, and other inefficiencies in developing new
procedures required by this significant change in boot
shipment methods.
3. In February, 1997 Wellco was awarded a contract from DSCP for
the supply of the intermediate cold/wet boot, which is the
first award to Wellco of this type of boot. The introduction
of this new boot caused start up costs related to labor,
maintenance and supplies.
4. 1997 includes a $73,000 reduction in revenues from the
adjustment of certain estimated contract price adjustments,
which were recorded in 1996, to the actual amounts settled
with the government.
5. Group health insurance, for which the Company is self insured,
increased $69,000 in 1997. This cost varies from period to
period with the actual amount of health costs incurred by
employees.
The percent of income tax provision to pretax income for 1997 was 30% compared
to 27% in 1996. The lower 1996 rate reflects the difference between the book and
tax basis of Wellco's investment in Alba, which was disposed of in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Wellco uses cash from operations and a bank line of credit to supply most of its
liquidity needs. The following table summarizes at the end of each year the
Company's cash and funds available from the bank line of credit:
<TABLE>
<CAPTION>
( in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash .................................... $ 196 $ 181 $ 673
Unused Bank Line of Credit .............. 1,115 2,813 1,500
------ ------ ------
Total ................................... $1,311 $2,994 $2,173
====== ====== ======
</TABLE>
-9-
<PAGE>
A reduction of $500,000 in the total bank line available and a higher level of
line usage caused the reduction in the amount of the unused bank line at the end
of 1998. The increased bank line usage was primarily caused by the purchase of
ICB boot production equipment.
The decrease in cash at the end of 1997 was primarily due to increased combat
boot inventories and the investment in inventory for the ICW boot. For its DMS
combat boot contract, Wellco was maintaining a larger inventory to meet the four
day shipping requirement for maximum evaluation points.
The following table summarizes the other major sources and (uses) of cash for
the last three years:
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income Before Depreciation, Net Investment
Income, Equity in Loss of Affiliate and Stock
Repurchase Charge ............................. $ 99 $ 1,083 $ 810
Net Change in Accounts Receivable, Inventory,
Accounts Payable and Accrued Liabilities ...... 400 (2,718) (1,542)
Deferred Taxes, Tax Refund Receivable, and
Other ......................................... (427) 10 (165)
Net Cash Provided By (Used In) Operations ..... 72 (1,625) (897)
Net Cash From Sale of Marketable Securities ... 5,257
Cash Used to Repurchase Company's Stock ...... (5,579)
Cash From Bank Line of Credit ................ 1,883 4,350 4,500
Cash Used to Repay Bank Line of Credit ........ (685) (2,663) (4,520)
Cash From Bank Loan for Warehouse Addition .... 400
Cash Used for Warehouse Addition .............. (381)
Cash Used to Repay Bank Loan .................. (73)
Cash Used to Purchase Equipment ............... (1,054) (474) (371)
Cash Dividends Paid ........................... (233) (227) (140)
Cash From Stock Options Exercised ............. 86 147
Net Increase (Decrease) in Cash ............... $ 15 $ ( 492) $(1,750)
</TABLE>
For 1998, cash for a $1,831,000 increase in inventory was provided by a decrease
in accounts receivable of $2,679,000. Accounts payable, accrued liabilities and
accrued income taxes decreased by $448,000. These are the primary changes that
resulted in $72,000 of cash provided by operations.
As stated above, cash from the bank line of credit was used to finance the
purchase of equipment for the new ICB contract. In addition, cash from a three
year bank term loan was used for a warehouse addition.
-10-
<PAGE>
The bank's commitment for a total $4,000,000 line of credit expires on December
31, 1998, and is subject to renewal at the bank's discretion.
The primary reason for the 1997 decrease in cash was the increased investment in
DMS combat boot inventories and the investment in inventory for the new ICW
boot.
The primary reason for the 1996 decrease in cash was the increase in accounts
receivable, as explained above, and the use of cash for the Company's stock
repurchase. On December 29, 1995, the Company repurchased 1,531,272 of its
common shares for a price consisting partially of a $5,460,000 cash payment and
$119,000 in related expenses. The initial payment was partially financed by a
short term bank loan. All marketable securities were subsequently sold to repay
the bank loan.
The new warehouse was substantially completed by the end of the 1998 fiscal
year. In order to reduce the amount of cash invested in boot inventory, Wellco
has more recently reduced its production level and has had short periods of
suspended manufacturing operations. The reduction in boot inventories will
extend well into the 1999 fiscal year. During this period, use of the bank line
of credit should gradually decrease. The settlement and collection of the claim
under the April, 1998 Agreement with DSCP should also reduce borrowings under
the line.
The Company has no other material commitments for capital equipment. Note 14 to
the Consolidated Financial Statements provides information about additional cash
payments that might result from Wellco's repurchase of its stock in the 1996
fiscal year. During the 1999 fiscal year, Wellco will continue to rely on the
bank line of credit. The Company does not know of any other demands,
commitments, uncertainties, or trends that will result in or that are reasonably
likely to result in its liquidity increasing or decreasing in any material way.
-11-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED
JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
(in thousands except per share amounts)
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES (Notes 6, 18 and 20) ............... $ 23,917 $ 21,199 $ 19,968
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales and services .............. 22,340 17,611 17,168
General and administrative expenses ..... 2,123 2,362 2,112
-------- -------- --------
Total ................................... 24,463 19,973 19,280
-------- -------- --------
CONTRACT CLAIM (Note 21) ..................... 226
OPERATING INCOME (LOSS) ...................... (320) 1,226 688
-------- -------- --------
INTEREST EXPENSE ............................. 219 191 39
DIVIDEND AND INTEREST INCOME ................. 12 53 215
NET INVESTMENT INCOME (Note 4) ............... 1,204
-------- -------- --------
INCOME (LOSS) BEFORE EQUITY IN LOSS
OF AFFILIATE AND STOCK
REPURCHASE CHARGE ....................... (527) 1,088 2,068
EQUITY IN LOSS OF AFFILIATE (Note 5) ......... (601)
STOCK REPURCHASE CHARGE (Note 13) ............ (110)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ............ (527) 1,088 1,357
PROVISION (BENEFIT) FOR INCOME TAXES
(Note 12) .................................... (190) 330 366
-------- -------- --------
NET INCOME (LOSS) ............................ $ (337) $ 758 $ 991
======== ======== ========
EARNINGS (LOSS) PER SHARE (Note 17)
Basic earnings (loss) per share ......... $ (0.29) $ 0.67 $ 0.53
Diluted earnings (loss) per share ....... $ (0.29) $ 0.66 $ 0.52
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-13-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 27, 1998 AND JUNE 28, 1997
(in thousands)
ASSETS
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash ............................................ $ 196 $ 181
Receivables, net (Notes 2, 8 and 21) ............ 2,247 4,926
Inventories (Notes 3 and 8) ..................... 9,508 7,677
Deferred taxes (Note 12) ....................... 288 341
Income tax refund receivable (Note 12) .......... 292
Prepaid expenses ................................ 4 6
------- -------
Total ........................................... 12,535 13,131
------- -------
MACHINERY LEASED TO LICENSEES, net
(Note 6) ........................................ 16 36
PROPERTY, PLANT AND EQUIPMENT, net
(Note 7) ........................................ 2,333 1,313
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition (Note 1) ........... 228 228
Intangible pension asset (Note 10) .............. 440 511
------- -------
Total ........................................... 668 739
------- -------
DEFERRED TAXES (Note 12) ............................. 468 433
------- -------
TOTAL ................................................ $16,020 $15,652
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
-14-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 27, 1998 AND JUNE 28, 1997
(in thousands except share data)
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
-------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 8) ....... $ 2,885 $ 1,687
Accounts payable .............................. 1,696 2,064
Accrued liabilities (Notes 9, 10 and 11) ...... 1,490 1,570
Accrued income taxes (Note 12) ................ 241 357
Current maturity of note payable (Note 14) .... 146 107
-------- --------
Total ..................................... 6,458 5,785
-------- --------
LONG-TERM LIABILITIES:
Pension obligation (Note 10) .................. 1,762 1,759
Note payable (Note 14) ........................ 491 1,030
COMMITMENT AND CONTINGENCIES (Notes 22 and 23)
STOCKHOLDERS' EQUITY (Notes 5, 10, 13, 14, 15,
and 16):
Common stock, $1.00 par value; shares
authorized- 2,000,000; shares issued
and outstanding- 1,163,246 at 1998,
1,150,646 at 1997 ......................... 1,164 1,151
Additional paid-in capital .................... 192 119
Retained earnings ............................. 6,688 6,430
Pension liability adjustment .................. (735) (622)
-------- --------
Total ..................................... 7,309 7,078
-------- --------
TOTAL .............................................. $ 16,020 $ 15,652
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-15-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
(in thousands)
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ........................ $ (337) $ 758 $ 991
------- ------- -------
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization ........ 436 325 312
Net investment income ................ (1,204)
Equity in loss of affiliate .......... 601
Stock repurchase charge .............. 110
(Increase) decrease in-
Accounts receivable .............. 2,679 316 (1,975)
Inventories ...................... (1,831) (3,753) 371
Other current assets ............. (237) 30 52
Increase (decrease) in-
Accounts payable ................. (368) 285 246
Accrued liabilities .............. (80) 215 (116)
Accrued income taxes ............. (116) 218 (68)
Pension obligation ............... (39) (68) (26)
Other ............................ (35) 49 (191)
------- ------- -------
409 (2,383) (1,888)
------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ..................... 72 (1,625) (897)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales of current
marketable securities ................ 996
Sales of noncurrent
marketable securities ................ 4,261
Purchases of equipment, net .............. (1,435) (474) (371)
------- ------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES .................... (1,435) (474) 4,886
------- ------- -------
(continued on next page)
-16-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
(in thousands)
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings ...... 1,883 4,350 4,500
Repayment of short-term borrowings ....... (685) (2,663) (4,520)
Proceeds from long-term debt ............. 400
Repayment of long-term debt .............. (73)
Cash dividends paid ...................... (233) (227) (140)
Repurchase of common stock ............... (5,579)
Stock option exercise .................... 86 147
------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ..................... 1,378 1,607 (5,739)
------- ------- -------
NET INCREASE (DECREASE) IN CASH ............... 15 (492) (1,750)
CASH AT BEGINNING OF YEAR ..................... 181 673 2,423
------- ------- -------
CASH AT END OF YEAR ........................... $ 196 $ 181 $ 673
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest ............................. $ 170 $ 94 $ 39
Income taxes ......................... 141 192 561
Noncash investing and financing activity-
Adjustment of stock repurchase note .. (828) 646
Noncash decrease in Investment in
Affiliate from stock repurchase .. 4,928
Note issued as part of stock
repurchase ....................... 492
Noncash decrease in marketable
securities to fair value ......... (730)
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
-17-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED
JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
(in thousands except share data)
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
COMMON STOCK (Notes 5, 13, 15 and 16):
Balance at beginning of year .......... $ 1,151 $ 374 $ 885
Repurchase of common stock ............ (511)
Common stock issued in stock split .... 749
Stock option exercise ................. 13 28
-------- -------- --------
Balance at end of year ................ 1,164 1,151 374
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL:
(Notes 5, 13, 15 and 16):
Balance at beginning of year .......... 119 598 1,409
Repurchase of common stock ............ (811)
Transfer to common stock the par value
of stock issued in stock split .... (598)
Stock option exercise ................. 73 119
-------- -------- --------
Balance at end of year ................ 192 119 598
-------- -------- --------
RETAINED EARNINGS (Notes 5, 13, 14 and 16):
Balance at beginning of year .......... 6,430 6,696 15,412
Repurchase of common stock ............ (9,567)
Adjustment of note payable from stock
repurchase ........................ 828 (646)
Transfer to common stock the par value
of stock issued in stock split .... (151)
Net income (loss) ..................... (337) 758 991
Cash dividends (per share: 1998-$.20;
1997-$.20; 1996-$.125) ............ (233) (227) (140)
-------- -------- --------
Balance at end of year ................ 6,688 6,430 6,696
-------- -------- --------
PENSION LIABILITY ADJUSTMENT (Note 10)
Balance at beginning of year .......... (622) (622) (525)
Change for the year ................... (113) (97)
-------- -------- --------
Balance at end of year ................ (735) (622) (622)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY ................. $ 7,309 $ 7,078 $ 7,046
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-18-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended June 27, 1998, June 28, 1997, and June 29, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying financial statements include the consolidated
accounts of the Company and its wholly-owned subsidiaries.
Appropriate eliminations have been made of all material
intercompany transactions and balances.
Inventories
Raw materials and supplies are valued at the lower of
first-in, first-out cost or market. Finished goods and work in
process are valued at the lower of actual cost, determined on
a specific basis, or market.
Income Taxes
The provision for income taxes is based on taxes currently
payable adjusted for the net change in the deferred tax asset
or liability during the current year. A deferred tax asset or
liability arises from temporary differences between the
carrying value of assets and liabilities for financial
reporting and income tax purposes.
Fair Value of Financial Instruments
The carrying values of financial instruments at June 27, 1998
(cash, receivables and accounts payable) approximate fair
value. The carrying value of the note payable is equal to the
present value of estimated future cash flows using a discount
rate commensurate with the uncertainties involved and thus
approximates fair value.
Depreciation
The Company uses the straight-line method to compute
depreciation on machinery leased to licensees and property,
plant and equipment used by the Company.
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.
-19-
<PAGE>
Revenue Recognition
All government combat boot production contracts are fixed
price and usually have a delivery schedule of twelve months.
If the purchase order requires shipment to a depot warehouse,
revenue is recognized for each boot shipment after it has been
accepted by the government's Quality Assurance Representative.
If the purchase order requires shipment directly to the
consumer, revenues are recognized upon shipment.
Government research and development contracts are typically no
more than one year in duration. Revenue is recognized as
services are performed and invoiced. Revenues from licensees
are recognized in the period services are rendered or products
are shipped.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to June
30. All years presented contain 52 weeks.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Stock-Based Compensation Plans
Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock- Based Compensation," was
effective as of the beginning of the 1997 fiscal year. SFAS
123 provides for a choice of using a fair value method to
record compensation expense related to stock-based
compensation, or to continue using the compensation
recognition provisions of Accounting Principles Board Opinion
25 (APB 25), "Accounting for Stock Issued to Employees". The
Company chose to continue using APB 25 under which
compensation expense is generally recognized if there is a
difference between the award price for stock options and the
stock's market price at the date of award.
Recent Statements of the Financial Accounting Standards Board
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income," which is effective for
the Company's fiscal year ending July 3, 1999. This statement
establishes standards for reporting and display of
comprehensive income and its components and accumulated
balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by
owners and distributions to owners. Under SFAS 130, the
Company's pension liability adjustment would be reported as an
item of comprehensive income.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 (SFAS
131), "Disclosures About Segments of an Enterprise and Related
Information," which is effective for the Company's fiscal year
ending July 3, 1999. This Statement supersedes Financial
Accounting Standards Board Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise", which
presently determines the Company's segment and related
reporting, and under which the Company has one segment. SFAS
131 requires disclosure of financial and descriptive
information about reportable operating segments, revenues by
products or services, and revenues and assets
-20-
<PAGE>
by geographic areas. The Company believes that the only
significant effects on its disclosures resulting from SFAS 131
would be the additional disclosures if it has more than one
reportable operating segment. The Company has not as yet
determined if it has more than one reportable operating
segment under SFAS 131.
In February 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132
(SFAS 132), "Employers' Disclosures About Pensions and Other
Postretirement Benefits," which is effective for the Company's
fiscal year ending July 3, 1999. This Statement supersedes the
disclosure requirements of Financial Accounting Standards
Board Statement No. 87, "Employer's Accounting for Pensions",
No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". SFAS 132
standardizes the disclosure requirements for pensions and
other postretirement benefits and does not address measurement
or recognition of such items.
2. RECEIVABLES:
The majority of receivables at June 27, 1998 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 1998 and 1997 are not significant.
3. INVENTORIES:
The components of inventories are:
<TABLE>
<CAPTION>
(in thousands)
1998 1997
---- ----
<S> <C> <C>
Finished Goods ............................... $4,747 $2,551
Work in Process .............................. 2,077 2,647
Raw Materials and Supplies ................... 2,684 2,479
------ ------
Total ........................................ $9,508 $7,677
====== ======
</TABLE>
4. MARKETABLE SECURITIES:
In the 1996 fiscal year, all marketable securities were sold to provide
the majority of the cash portion of the consideration paid by Wellco to
repurchase 1,531,272 shares of its outstanding common stock (see Note
13).
Proceeds from the sale of marketable securities in fiscal 1996 were
$4,261,000. Gross realized gains and losses in fiscal 1996 were as
follows:
-21-
<PAGE>
<TABLE>
<CAPTION>
(in thousands)
1996
----
<S> <C>
Gross Realized Gains .................................... $ 1,326
Gross Realized Losses ................................... (122)
-------
Net Investment Income ................................... $ 1,204
=======
</TABLE>
5. INVESTMENT IN AFFILIATE:
On December 30, 1994, Wellco purchased from Coronet Insurance Company
for cash 400,000 shares of the common stock of Alba Waldensian, Inc.
(Alba) which represented 21.5% of total Alba common shares.
Operating results for the fiscal year ended June 29, 1996 includes as
Equity in Loss of Affiliate a charge of $601,000, representing Wellco's
$305,000 equity in Alba's loss for the six-month period from July
through December, 1995 and a $296,000 reduction of this investment's
carrying value to fair value.
On December 29, 1995, these shares were used as part of the
consideration paid for the repurchase of 1,531,272 shares of Wellco's
common stock (See Note 13).
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 1998 and 1997 Consolidated Balance Sheets is $1,503,000 and
$1,483,000, respectively. Rental revenues for the fiscal years 1998,
1997, and 1996 were $141,000, $178,000 and $128,000, substantially all
of which vary with lessees' production or shipments.
7. PROPERTY, PLANT AND EQUIPMENT:
The cost and accumulated depreciation of property, plant and equipment
are summarized as follows:
<TABLE>
<CAPTION>
(in thousands)
Estimated
1998 1997 Useful Life
---- ---- -----------
<S> <C> <C> <C>
Land ................................ $ 107 $ 107 N/A
Buildings ........................... 774 774 45 Years
Construction in Progress
(Warehouse Addition) ................ 381 N/A
Machinery & Equipment ............... 3,632 2,797 2-20 Years
-22-
<PAGE>
Estimated
1998 1997 Useful Life
---- ---- -----------
<S> <C> <C> <C>
Furniture & Fixtures ................ 709 610 2-10 years
Leasehold Improvements .............. 63 63 *
Total Cost .......................... $5,666 $4,351
Total Accumulated
Depreciation ........................ $3,333 $3,038
</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.
8. LINES OF CREDIT:
In April 1998 the Company increased its bank line of credit from
$2,000,000 to $4,000,000. The increased line, which expires December
31, 1998, can be renewed annually at the bank's discretion. This line
of credit is secured by a blanket lien on all machinery and equipment
(carrying value of $1,646,000) and all non-governmental accounts
receivable and inventory ($1,606,000). At June 27, 1998, borrowings on
the line of credit were $2,885,000 with $1,115,000 available in
additional borrowings.
Interest is at the prime rate of 8.5% at June 27, 1998. The bank credit
agreement contains, among other provisions, defined levels of net worth
and current ratio requirements. The Company was not in compliance with
the current ratio loan covenant at June 27, 1998. The Company has
received from the bank a waiver for the period ended June 27, 1998
regarding this loan covenant violation. The covenants are subject to
review at the end of each fiscal quarter.
9. ACCRUED LIABILITIES:
The components of accrued liabilities are:
<TABLE>
<CAPTION>
(in thousands)
1998 1997
---- ----
<S> <C> <C>
Compensation ................................. $ 763 $ 892
Pension ...................................... 191 133
Retiree Health Benefits ...................... 225 170
Contribution ................................. 115
Interest Expense ............................. 146 97
Other ........................................ 165 163
------ ------
Total ........................................ $1,490 $1,570
====== ======
</TABLE>
-23-
<PAGE>
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)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Benefits Earned for Service in the
Current Year ............................... $ 139 $ 147 $ 148
Interest on the Projected Benefit
Obligation ................................. 394 388 368
Return on Plan Assets ...................... (254) (234) (206)
Amortization of: Unrecognized Net
Pension Obligation at July 1, 1987;
Cost of Benefit Changes Since That
Date; and Gains and Losses
Against Actuarial Assumptions ............. 162 163 156
Pension Expense ............................ $ 441 $ 464 $ 466
</TABLE>
The liability of the plans at June 27, 1998 and June 28, 1997, and the
components of the pension liability accrued in the balance sheets are:
<TABLE>
<CAPTION>
(in thousands)
Pension Liability: 1998 1997
---- ----
<S> <C> <C>
Accumulated Benefit Obligation,
Substantially All Vested ....................... $ 5,482 $ 5,152
Obligation for Actuarially Projected
Future Salary Increases ........................ 333 297
Projected Benefit Obligation ..................... 5,815 5,449
Plan Assets at Fair Value ........................ (3,530) (3,261)
Projected Obligation Greater than Assets ......... 2,285 2,188
Less Projected Future Salary Increases ........... (333) (296)
Pension Liability Recognized in the
Consolidated Financial Statements .............. $ 1,952 $ 1,892
(in thousands)
Components of Pension Liability: 1998 1997
---- ----
Unamortized Costs Not Yet Charged Against Operations-
Net Obligation at July 1, 1987 ........................... 284 355
-24-
<PAGE>
<S> <C> <C>
Net Obligation From Changes to the Plans
Since July 1, 1987 ............................... 276 323
Net Loss From Actuarial Assumptions Being
Different From
Actual ............................................. 1,325 1,072
Less Projected Future Salary Increases ............. (333) (296)
Total Liability Not Yet Charged Against
Operations ....................................... 1,552 1,454
Amount of Liability That Has Been Charged
Against Operations ............................... 400 438
Total Pension Liability ............................ $ 1,952 $ 1,892
</TABLE>
The pension liability not yet charged against operations is a part of
the long-term pension obligation liability. This liability at June
27,1998 is offset by an intangible pension asset of $440,000 ($511,000
at June 28, 1997) and an equity reduction, net of income taxes, of
$735,000 for 1998 and $622,000 for 1997. 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 7.0% for 1998 and 7.5% for
1997. To the extent projected benefits are based on final average
annual earnings, the assumed rate of annual increase in future salary
levels is 5.5%.
11. RETIREE HEALTH BENEFITS:
The Company accounts for the costs and liability of health care
benefits for retired employees using Statement of Financial Accounting
Standards No. 106 (FAS 106), "Employers Accounting for Postretirement
Benefits Other Than Pensions". The liability at the date of adoption of
FAS 106 (July 4, 1993) is being recognized over employee future service
lives.
Employees of the North Carolina plant who meet certain criteria and
retire early (age 62-64) or become disabled, receive for themselves,
but not for their dependents, the same health insurance benefits
received by active employees. All benefits terminate when the employee
becomes eligible to receive Medicare (usually age 65 or 30 months after
disability date). This benefit is provided at no cost to the employee
and the Company does not fund the cost of this benefit prior to costs
actually being incurred.
The cost of retiree health benefits included in 1998, 1997 and 1996
Statements of Operations was:
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Benefits Earned for Current Service ................. $23 $25 $26
Interest Cost on Accumulated Liability .............. 23 24 22
Amortization of the July 4, 1993 Liability .......... 14 14 13
--- --- ---
Total Cost .......................................... $60 $63 $61
=== === ===
</TABLE>
-25-
<PAGE>
The reconciliation of the total liability to the amount included as a
liability in the Consolidated Balance Sheet (see Note 9) at June 27,
1998 and June 28, 1997 is:
<TABLE>
<CAPTION>
(in thousands)
Accumulated Liability For: 1998 1997
---- ----
<S> <C> <C>
Retired Employees .......................................... $ 45 $ 16
Other Employees ............................................ 336 268
Total ...................................................... 381 284
Less Balance of Unrecognized Liability at July 4, 1993 ..... (213) (227)
Unrecognized Net Gain Since July 4, 1993 ................... 57 113
Liability Recognized in the Consolidated Balance Sheet ..... $ 225 $ 170
</TABLE>
The assumed health care cost trend rate used to project expected future
cost was 12.0% in 1998 (11.0% in 1997), gradually decreasing to 6% by
2004 and remaining at 6% thereafter. The assumed discount rate used to
determine the accumulated liability was 7% for 1998 and 8% for 1997.
The effect of a 1% increase in the assumed health care cost trend rate
for each future year would not have a significant effect on the service
and interest cost components of the current period cost or on the
accumulated liability.
12. INCOME TAXES:
The Company accounts for the provision and liability for income taxes
using Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The provision for income taxes consist of the
following:
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal Provision (Benefit):
Currently Payable (Refundable) .......... $(294) $ 355 $ 457
Deferred ............................... 76 (87) (185)
Total Federal .......................... (218) 268 272
State Provision ............................ 28 62 94
Total Provision (Benefit) .................. $(190) $ 330 $ 366
</TABLE>
A reconciliation of the effective income tax rate for the 1998, 1997 and
1996 fiscal years is as follows:
-26-
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<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 ................................ 9% (7%) (7%)
State Taxes, Net of Federal Tax Benefit ............. (4%) 5% 5%
Difference in Book and Tax Basis of Investment
in Affiliate ........................................ (6%)
Standstill Agreement ................................ 3%
Untaxed Foreign Sales Corporation Income ............ 2% * *
Non-deductible Expenses ............................. (4%) * *
Other ............................................... (1%) (2%) (2%)
Effective Income Tax Rate ........................... 36% 30% 27%
* 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.
The accumulated undistributed earnings ($4,577,000 at June 27, 1998) of this
subsidiary are subject to a Puerto Rican tollgate tax (5%) when remitted to the
parent company. Accrued tax liabilities have been provided for the tollgate tax
reasonably expected to be paid in the future.
At June 27,1998, the Company has an income tax refund receivable for the
carryback of the 1998 loss.
Significant components of the Company's deferred tax assets and liabilities as
of the end of fiscal 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(in thousands)
Deferred Tax Assets: 1998 1997
---- ----
<S> <C> <C>
Pension Cost Charged Against Financial Statement Income,
Not Yet Deducted From Taxable Income ......................... $ 71 $104
Tax Effect of Pension Liability Charged Against Equity ....... 379 320
-27-
<PAGE>
<S> <C> <C>
Employee Compensation Charged Against Financial
Statement Income, Not Yet Deducted From Taxable Income .... 162 158
Additional Costs Inventoried for Tax Purposes ............. 112 142
State NOL Carry Forward ................................... 70
Other ..................................................... 88 99
Total Deferred Tax Assets ................................. 882 823
Valuation Allowance ....................................... (70)
Net Deferred Tax Assets ................................... 812 823
Deferred Tax Liabilities:
Depreciation Deducted From Taxable Income Not Yet
Charged Against Financial Statement Income ................ 56 49
Net Deferred Tax Assets ................................... $ 756 $ 774
</TABLE>
The company has recorded a valuation allowance of approximately $70,000
in order to reduce its deferred tax assets relating to certain tax
carry forwards to an amount which is more likely than not to be
realized.
13. REPURCHASE OF STOCK:
On December 29, 1995 Wellco repurchased from Coronet Insurance Company
and some of its affiliates (Coronet and Affiliates) 1,531,272 shares of
Wellco common stock, which represented 57.69% of total shares
outstanding at that time. Cash of $5,460,000 and 400,000 shares of
Alba- Waldensian, Inc. (Alba) common stock was paid to Coronet and
Affiliates for these Wellco shares. In addition, the Stock Repurchase
Agreement provides that certain additional payments may be made through
Wellco's fiscal year 2003 (see Note 14). Under North Carolina law the
shares repurchased constitute authorized but unissued shares.
The Stock Repurchase Agreement provides that for a period of ten years
after December 29, 1995 Coronet and Affiliates will limit their
ownership of Wellco common stock to not more than 20% of total shares
outstanding. The Consolidated Statement of Operations for the fiscal
year ended June 29, 1996 included a Stock Repurchase Charge of $110,000
representing the value assigned to this limitation.
This repurchase was recorded at the cash paid, the fair value of the
Alba shares, the present value of the additional amount projected to be
paid through fiscal year 2002, and the amount of investment banker,
legal, accounting and other costs incurred related to this share
repurchase, a total of $10,884,000. The par value of the common stock
repurchased ($511,000) was charged against Common Stock. The excess of
total amount paid over the par value of Wellco's common stock
repurchased was charged to Additional Paid-In Capital ($811,000) and
Retained Earnings ($9,567,000).
Although the stock repurchase occurred, the related Stock Repurchase
Agreement was not executed by Coronet and Affiliates, nor have they
performed certain other actions required by the
-28-
<PAGE>
Agreement. In addition, the Circuit Court of Cook County in Illinois
has since issued an Order of Liquidation (Order) against Coronet
Insurance Company. This Order requires all persons having assets which
are, or may be, the property of Coronet Insurance Company to turn over
these assets to the Director of Insurance of the State of Illinois.
Wellco's counsel has advised that, because the Stock Repurchase
Agreement was not executed by Coronet and Affiliates and other actions
required of them by the Agreement were not performed, and because
Coronet Insurance Company is being liquidated by the Director of
Insurance of the State of Illinois, some uncertainty exists as to: (i)
the enforceability of provisions of the Stock Repurchase Agreement, and
(ii) if enforceable, to whom any additional obligation under the
Agreement is owed. However, the Consolidated Financial Statements of
Wellco reflect the full application of the stock repurchase agreement
(See Note 14).
14. NOTES PAYABLE:
Note 13 gives information about certain additional payments that may be
made under the Stock Repurchase Agreement, as well as information about
the uncertainty as to the Agreement's enforceability. Notwithstanding
this, generally accepted accounting principles require that an
obligation be reflected as a Note Payable in the Consolidated Balance
Sheets for the estimated additional payments that would be made if the
Agreement is enforceable. Since the date of stock repurchase, Wellco's
Consolidated Balance Sheets have included a Note Payable representing
the present value of the estimated amounts that would be paid if the
Agreement is enforceable. The amount of the estimated payment for the
fiscal year of 2003, discounted at a rate of 8.5%, is $309,000.
During the third and fourth quarters of the 1998 fiscal year, the
Company revised its initial estimate of the amount that might be paid
because of the decreased profits for the fiscal year. This decreased
the Note Payable as shown in the Consolidated Balance Sheet and
increased Retained Earnings by $828,000.
The Stock Repurchase Agreement, as drafted, provides that actual
payments, if any, would only be made in the amount by which 60% of each
fiscal year's net income exceeds a certain defined amount, calculated
on a cumulative basis, and applying to fiscal years 1997 through 2002.
The Note Payable has been calculated on this basis. The Stock
Repurchase Agreement does not provide for the payment of interest.
However, generally accepted accounting principles require that interest
be imputed, and $97,000 of interest expense was recorded in 1997 and
$49,000 in 1998. Total payments under the note cannot exceed $1,531,000
and all obligations under the note terminate after the 2003 fiscal year
payment.
A bank had provided a three year term loan as part of the cash required
to construct a new warehouse adjoining the Company's existing
facilities in Waynesville, North Carolina. This loan is payable in
monthly installments of $12,125 plus interest at the bank's prime rate
of 8.5% at June 27, 1998 and $328,000 was outstanding under this loan
at June 27, 1998. The installments of long-term debt maturing in each
of the three fiscal years are: 1999 - $146,000, 2000 - $146,000 and
2001 - $36,000.
15. STOCK OPTIONS:
On July 2, 1997, the Board of Directors approved the 1997 Stock Option
Plan for Key Employees (1997 Key Employees Plan) and the 1997 Stock
Option Plan for Non-Employee Directors (1997 Non-Employee Directors
Plan). Both plans were subsequently approved by shareholders at their
-29-
<PAGE>
1997 Annual Meeting.
These Plans provide for the granting of options to purchase 99,000
shares (1997 Key Employee Plan) and 16,000 shares (1997 Non-Employee
Directors Plan), and at June 27, 1998, options for the purchase of
93,000 shares were granted under the 1997 Key Emloyee Plan and 14,000
shares under the 1997 Non-Employee Directors Plan. Under both Plans,
the option price is the market price on the date granted and options
have a life of 10 years from the date granted. Options granted under
both of these plans were fully exercisable on the date granted except
for certain options granted to certain officers which are not fully
exercisable until future years in order to qualify them for certain tax
treatment. Options for the purchase of 83,600 shares were immediately
exercisable, with the remaining options being exercisable in 1999 -
11,700; 2000 - 8,300; and 2001 - 3,400.
Under the 1996 Stock Option Plan, the Compensation Committee of the
Board of Directors was authorized to grant stock options for the
purchase of up to 60,000 shares of the Company's common stock. Options
for 52,500 shares have been granted under the 1996 Plan and the option
exercise price was the market price on the date granted.
In addition, the Company has a small number of granted and unexercised,
fully exercisable stock options under the 1985 Stock Option Plan. All
options available under the 1985 Plan have been granted.
Transactions involving these Plans for the last three fiscal years are
summarized below:
<TABLE>
<CAPTION>
No. of Weighted-Average
Option Shares: Shares Exercise Price
<S> <C> <C>
Outstanding at July 1, 1995 ................... 2,100 $ 5.50
Granted ....................................... 52,500 5.32
Outstanding at June 29, 1996 .................. 54,600 5.33
Exercised ..................................... (27,500) 5.34
Outstanding at June 28, 1997 .................. 27,100 5.32
Granted ....................................... 107,000 12.10
Exercised ..................................... (12,600) 6.73
Forfeited ..................................... (2,000) 12.00
Outstanding at June 27, 1998 .................. 119,500 11.13
</TABLE>
The following table summarizes information about fixed stock options
outstanding at June 27, 1998:
-30-
<PAGE>
Weighted-Average
Remaining
Range of Exercise Weighted Average Contractual Life
Number Prices Exercise Price in Years
16,500 $5.00-$5.50 $5.05 7.0
103,000 $12.00-$17.50 $12.11 9.0
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," became effective for the
Company's 1997 fiscal year. As allowed by SFAS 123, the Company elected
to continue applying the compensation expense recognition provisions of
Accounting Principles Board Opinion 25 and related interpretations, and
has not recognized compensation expense for its Plans. If compensation
expense had been recognized, using the fair value of options on the
date granted computed under the method prescribed by SFAS 123, net
income (loss) and net income (loss) per share would have been reduced
to the pro forma amounts shown below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1998 1996
---- ----
<S> <C> <C>
Net Income (Loss), As Reported ...................... $(337) $ 991
Net Income (Loss), Pro Forma ........................ $(626) $ 957
Net Income (Loss) Per Share, As Reported ............ $(.29) $ .53
Net Income (Loss) Per Share, Pro Forma .............. $(.54) $ .51
</TABLE>
No options were granted during 1997.
The fair value on the date options were granted (the amount deducted
from net income as reported in arriving at pro forma net income (loss)
amounts above) was estimated using the Black-Scholes option pricing
model using the following assumptions:
<TABLE>
<CAPTION>
1998 1996
---- ----
<S> <C> <C>
Expected Dividend Yield 1.67% 3.78%
Expected Stock Price Volatility 39.40% 19.24%
Risk-Free Interest Rate 5.55% 5.48%
Expected Life of Options in Years 2.90 2.29
Weighted-Average Fair Value of
Options Granted $3.54 $0.65
</TABLE>
16. STOCK SPLIT:
All common shares and per share amounts give effect to a three-for-one stock
split affected in the
-31-
<PAGE>
form of a stock dividend distributed on January 3, 1997 to stockholders
of record on December 6, 1996. The par value of the new shares issued,
$749,000, was transferred to Common Stock from Additional Paid-In
Capital ($598,000) and Retained Earnings ($151,000).
17. EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings per Share" effective for financial statements issued for
periods ending after December 15, 1997. This Statement requires
companies to present basic earnings per share (EPS) and diluted
earnings per share.
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the period
plus the dilutive potential common shares that would have been
outstanding upon the assumed exercise of dilutive stock options. As
required by SFAS No. 128, all earnings per share data for fiscal
periods prior to 1998 has been restated.
The following is the reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
For the Fiscal Year Ended 6-27-98
Income Shares Per-Share
(Numerator (Denominator) Amount
<S> <C> <C> <C>
Basic EPS Available to Shareholders ..........$(337,000) 1,161,103 $ (0.29)
Effect of Dilutive Stock-based
Compensation
Arrangements (Note: N/A - Anti-dilutive)
Diluted EPS Available to Shareholders ....... $(337,000) 1,161,103 $ (0.29)
For the Fiscal Year Ended 6-28-97
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS Available to Shareholders ......... $ 758,000 1,126,113 $ 0.67
Effect of Dilutive Stock-based Compensation
Arrangements ................................... 26,698
Diluted EPS Available to Shareholders ....... $ 758,000 1,152,811 $ 0.66
-32-
<PAGE>
For the Fiscal Year Ended 6-29-96
Income Shares Per-Share
(Numerator) Denominator) Amount
<S> <C> <C> <C>
Basic EPS Available to Shareholders ............$ 991,000 1,884,648 $ 0.53
Effect of Dilutive Stock-based Compensation
Arrangements ................................... 17,080
Diluted EPS Available to Shareholders ..........$ 991,000 1,901,728 $ 0.52
</TABLE>
18. 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 1998, 1997
and 1996 were:
<TABLE>
<CAPTION>
Percent of Total Revenues
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues By Class of Product:
Sales of Footwear and Related Items ........... 95% 96% 97%
Revenues From Licensees ....................... 5% 4% 3%
Total ......................................... 100% 100% 100%
Major Customer-U. S. Government ............... 73% 69% 70%
Export Revenues ............................... 5% 8% 12%
</TABLE>
The majority of export revenues are to Canada, and Central and South
American countries.
19. YEAR 2000 DATE CONVERSION (UNAUDITED):
The Company recognizes the need to consider whether its operations will
be adversely impacted by Year 2000 software failures. While software
and systems used by Wellco is now compliant with Year 2000, customers
and vendors who will not be timely compliant with Year 2000 could
adversely affect Wellco's results of operations and financial
condition, although such adverse affect should not be long term or
permanent. See the Forward Looking section of the Management's
Discussion and Analysis section of this Annual Report for the actions
Wellco is taking to identify and minimize any Year 2000 problems.
-33-
<PAGE>
GOVERNMENT BOOT CONTRACT REVENUES:
Revenues in 1998 include $210,000 representing the estimated amount of
certain contract actions not yet settled with the U. S. government. Any
difference between these estimates and the actual amounts agreed to
will be included in the period of settlement. Income before income
taxes in 1997 was decreased by $73,000 from contract actions settled
with the U.S. Government at amounts different than previously recorded
estimates. There were no differences of significance for 1998.
21. CONTRACT CLAIM:
In April 1998 Wellco executed an Agreement with Defense Supply Center
Philadelphia (DSCP). The Agreement provides that DSCP will reimburse
the Company for certain costs incurred related to contract performance
during the fourth quarter of the 1997 fiscal year and the first two
quarters of the 1998 fiscal year. Wellco maintained that it was due
reimbursement for costs incurred in performing in accordance with a
prior DSCP interpretation of the contract. This interpretation was
later changed to the detriment of Wellco. The Agreement provides that
any disagreement between Wellco and DSCP on an item of cost will be
subject to binding arbitration. The cost reimbursement is limited to
$1,000,000.
Wellco submitted its claim under the Agreement in late May, 1998
documenting more than $1,000,000 in costs incurred. In an early
October, 1998 meeting with Wellco, DSCP agreed to pay Wellco $246,000
of the $1,000,000 claim. Binding arbitration will be used to determine
how much, if any, of the remaining $754,000 will be paid by DSCP to
Wellco. It is expected that this arbitration procedure will take a few
months and Wellco, although confident that a significant amount of the
$754,000 will ultimately be paid, cannot reasonably predict what the
arbitrator will decide. Therefore, the 1998 Consolidated Statements of
Operations includes $226,000 of income related to this claim,
representing the agreed to $246,000 less $20,000 of related costs. Any
amount Wellco will receive beyond $246,000 will be recorded at the time
of the arbitration decision.
22. 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 27, 1998
is approximately 83,000.
23. CONTINGENCIES:
In April 1997, the Company was served with a subpoena issued by a grand
jury empaneled in the United States District Court for the Eastern
District of Pennsylvania which requires the production of certain
documents for the period January 1, 1990 until April 29, 1997. The
Company was informed through its legal counsel that the grand jury was
investigating possible violations of antitrust laws primarily involving
alleged collusive activities among manufacturers of combat boots for
the U.S. Government. In August, 1998, the Company's legal counsel was
notified the Company's documents were being returned and informed that
the grand jury's investigation has been closed.
In March 1998 the Company was served with a civil action complaint.
The Plaintiff is alleging that
-34-
<PAGE>
the Company, during the period October, 1995 through September, 1996,
untimely delivered defective work shoes which resulted in certain
losses for the Plaintiff as well as precluding Plaintiff from competing
on a subsequent contract. In addition, the complaint alleges that
Wellco submitted as its bid prototype one of the Plaintiff's work shoes
which resulted in the subsequent contract being awarded to Wellco. It
is the opinion of the Company's management, based upon the information
available at this time, that the expected outcome of these matters will
not have a material adverse effect on the results of operations and
financial condition of the Company.
-35-
<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 27, 1998 and June 28, 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended June 27, 1998. 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 27, 1998 and June 28, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 27, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
October 8, 1998
-36-
<PAGE>
WELLCO ENTERPRISES, INC.
PRICE RANGE, DIVIDENDS AND MARKET OF COMMON STOCK
<TABLE>
<CAPTION>
Fiscal Year 1998 Quarters
First Second Third Fourth
<S> <C> <C> <C> <C>
Market Price Per Share-
High 20 7/8 17 1/2 14 1/4 13
Low 12 13 3/4 11 3/4 10 1/2
Per Share Cash Dividend
Declared $.10 $.10
Fiscal Year 1997 Quarters
First Second Third Fourth
Market Price Per Share-
High 10 1/3 15 14 5/8 14 3/4
Low 6 1/2 8 9 11 1/5
Per Share Cash Dividend
Declared $.10 $.10
</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 28, 1998
was 277.
All per share amounts have been adjusted to give effect to a three-for-one split
in the form of a stock dividend paid on January 3, 1997.
Registrar and Transfer Agent
ChaseMellon Shareholders Services
New York, N. Y.
-37-
<PAGE>
WELLCO ENTERPRISES, INC.
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
(In Thousands Except for Per Share Amounts)
<TABLE>
<CAPTION>
Fiscal Year 1998 Quarters
First Second Third Fourth
<S> <C> <C> <C> <C>
Revenues $5,676 $7,926 $5,162 $5,153
Cost of Sales and
Services 5,435 7,317 5,046 4,542
Net Income (Loss) (233) 15 (A) 434 (B) (553)
Net Income (Loss)
Per Share $(.20) $.01 $.37 $(.48)
Fiscal Year 1997 Quarters
First Second Third Fourth
<S> <C> <C> <C> <C>
Revenues $4,990 $4,738 (C) $2,501 $8,970
Cost of Sales and
Services 4,086 3,917 2,008 7,600
Net Income (Loss) 298 208 (91) (D) 343
Net Income (Loss)
Per Share) $.27 $.18 $(.08) $.30
</TABLE>
(A) Increased by $718,000 for the contract claim discussed in Note 21 to
the Consolidated Financial Statements. In the March, 1998 meeting which
resulted in this claim, Wellco outlined the cost items that would be in
its claim and DSCP did not react unfavorably to any item. After a
$20,000 reduction for certain costs related to reaching this Agreement,
in accordance with SOP 81-1, "Accounting For Performance of
Construction - Type and Certain Production - Type Contracts, $980,000
was recorded as an item of income in the third quarter of the 1998
fiscal year.
(B) Decreased by $501,000 related to the adjustment of the claim receivable
mentioned in (A) above. See Note 21 to the Consolidated Financial
Statements.
(C) In December 1996, Wellco substantially completed combat boot shipments
under the prior combat boot contract, and since it was not awarded a
new contract until April 15, 1997, pairs of combat boots shipped in the
quarter ended March 29, 1997 were significantly less that normal.
(D) Reduced by $76,000 contribution to the Wellco Foundation. Reduced by
$28,000 representing the adjustment of tax provisions for the first
three quarters, made at estimated annual effective tax rates, to the
actual rate for the year. Reduced by $54,000 of interest cost. Also
reduced by excess labor costs, freight costs and other inefficiencies
caused by a significant change in combat boot shipment methods.
-38-
<PAGE>
Officers and Directors
HORACE AUBERRY
Chairman of the Board and Chief Executive Officer
ROLF KAUFMAN
Vice Chairman of the Board
DAVID LUTZ
President and Chief Operating Officer and Treasurer
Officers
SVEN E. OBERG
V. P. - Technical Director
RICHARD A. WOOD, Jr.
Secretary, Attorney, Member of the law firm of McGuire, Wood & Bissette, P. A.
TAMMY FRANCIS
Assistant Secretary and Controller
Directors
WILLIAM M. COUSINS, Jr.
President of William M. Cousins, Jr., Inc.
(Management Consultants)
JAMES T. EMERSON
Retired Engineer
CLAUDE S. ABERNETHY, Jr.
Senior Vice President of Interstate / Johnson Lane
J. AARON PREVOST
Retired Banker
WILLIAM D. SCHUBERT
Principal of Advanced Management Concepts
(Management Consultants)
FRED K. WEBB, Jr.
Special Projects Manager of Wellco Enterprises, Inc.
-39-
<PAGE>
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 16, 1998,
and is incorporated herein by reference. After each item and shown in
parenthesis is the proxy heading for the section containing the responsive
information.
Item 10. Directors and Executive Officers of the Registrant. (Board of
Directors)
The Proxy Statement is not expected to contain information disclosing
delinquent Form 4 filers.
Identification of Executive Officers and Certain Significant Employees:
Name Age Office
Horace Auberry 67 Chairman of the Board of Directors,
Chief Executive Officer
Rolf Kaufman 68 Vice Chairman, Board of Directors
Sven Oberg 59 Vice President-Technical Director
David Lutz, CPA 53 President, Treasurer and Director
Richard A. Wood, Jr. 61 Secretary
Tammy Francis, CPA 39 Controller, Assistant Secretary
In 1996, Mr. Kaufman retired from the office of President and remains active as
a consultant to the Company serving in the position as Vice Chairman, Board of
Directors. Mr. Lutz was elected to the office of President in 1996, previously
serving as Secretary/ Treasurer. Ms. Francis has been Controller since October,
1996. She was Controller of Atlas Precision, Inc., an injection molding
manufacturer, from 1995 until October, 1996. From 1990 until 1995, she was
Manager of Finance and Accounting at Haywood Electric Membership Corporation, a
rural utility company. Prior to becoming Secretary of the Company in 1996, Mr.
Wood served for more than the past five years as Assistant Secretary. Mr. Wood
is a partner in the law firm of McGuire, Wood & Bissett, general counsel to the
Company.
Executive officers are elected by the Board of Directors to serve a term of one
year. There are no arrangements or understandings pursuant to which any of the
officers are elected, and all are elected to serve for one year terms.
Item 11. Executive Compensation. (Executive Compensation)
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(Security Ownership)
Item 13. Certain Relationships and Related Transactions. (Board of
Directors/Security Ownership)
Since the beginning of the 1998 fiscal year, no executive officer of the
Registrant or member of his immediate family has had any transaction or series
of similar transactions with the Registrant or any of its subsidiaries exceeding
$60,000, and there are no currently proposed transactions exceeding $60,000.
-6-
<PAGE>
Since the beginning of the 1998 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 11
The following consolidated financial statements of
Wellco Enterprises, Inc. are in the Registrant's 1998
Annual Report which is integrated into Part II of this Form 10-K
immediately after page 12
Balance Sheets-at June 27, 1998 and June 28, 1997 14-15*
Statements of Operations-years ended June 27,1998, June 28, 1997
and June 29, 1996 13*
Statements of Cash Flows-years ended June 27, 1998, June 28, 1997
and June 29, 1996 16-17*
Statements of Stockholders' Equity-years ended June 27, 1998, June
28, 1997 and June 29, 1996 18*
Notes to Consolidated Financial Statements 19-35*
* Page number in the 1998 Annual Report to Shareholders integrated in Part II of
this Form 10-K.
2. Financial Statement Schedules
Page
Number
Schedule II Valuation Accounts 13
All other schedules are omitted because they are not applicable or not required.
-7-
<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)
C. 1996 Stock Option Plan for Key Employees of
Wellco Enterprises, Inc.* (d)
D. 1997 Stock Option Plan for Key Employees of
Wellco Enterprises, Inc.* (e)
E. 1997 Stock Option Plan for Non-Employee
Directors of Wellco (e)
Enterprises, Inc.*
21 Subsidiaries of Registrant 14
23 Consent of Experts (f)
* Management Compensation Arrangement/Plan.
Copies of the below listed exhibits may be obtained on written request to
Corporate Secretary, Wellco Enterprises, Inc., Box 188, Waynesville, N. C.
28786, accompanied by payment of the following amounts for each copy:
Exhibit 3 $40.00
Exhibit 10 A. 2.00
Exhibit 10 B. 3.00
Exhibit 10 C. 3.00
Exhibit 10 D. 3.00
Exhibit 10 E. 3.00
(a) Exhibit was filed in Part IV of Form 10-K for the fiscal year
ended July 1, 1995, and is incorporated herein by reference.
(b) Exhibit was filed in PART IV of Form 10-K for the fiscal year
ended July 3, 1982, and is incorporated herein by reference.
(c) Exhibit was filed as Exhibit A to the Proxy Statement dated
October 22, 1985, and is incorporated herein by reference.
(d) Exhibit was filed as Exhibit A to the Proxy Statement dated
October 18, 1996, and is incorporated herein by reference.
(e) Exhibit was filed as Exhibit A to the Proxy Statement dated
October 17, 1997, and is incorporated herein by reference.
(f) Consent is contained in opinion of independent certified public
accountants on page 11.
-8-
<PAGE>
Item 14 (b) - Reports on Form 8-K
There were no reports on Form 8-K for the three months ended June 27, 1998.
-9-
<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 of the Board of Directors
(Principal Executive Officer)
/s/ David Lutz
By: David Lutz, President and Treasurer
(Principal Financial Officer)
/s/ Tammy Francis
By: Tammy Francis, Controller
(Principal Accounting Officer)
Date: October 9, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Horace Auberry /s/ Rolf Kaufman
Horace Auberry, Chairman Rolf Kaufman, Director
/s/ David Lutz /s/ J. Aaron Prevost
David Lutz, Director J. Aaron Prevost, Director
/s/ Fred K. Webb, Jr.
Fred K. Webb, Jr., Director
Date: October 9, 1998
-10-
<PAGE>
INDEPENDENT AUDITORS' REPORT AND CONSENT
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 27, 1998 and June 28, 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended June 27, 1998. 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 27, 1998 and June 28, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 27, 1998 in conformity with generally accepted accounting principles. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We consent to the incorporation by reference of the above report in the
Prospectus constituting part of the Registration Statement 33-8246 of Wellco
Enterprises, Inc. on Form S-8.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
October 8, 1998
-11-
<PAGE>
WELLCO ENTERPRISES, INC.
FORM 10-K
FISCAL YEAR ENDED JUNE 27, 1998
INDEX TO FINANCIAL STATEMENT SCHEDULE AND EXHIBITS
Page
Financial Statement Schedule: Number
Schedule II-Valuation Accounts 13
Exhibits:
Exhibit 3-Articles of Incorporation and By-Laws (a)
Exhibit 10 A.-Bonus Arrangement (b)
Exhibit 10 B.-1985 Stock Option Plan for Key Employees
of Wellco Enterprises, Inc. (c)
Exhibit 10 C.-1996 Stock Option Plan for Key Employees
of Wellco Enterprises, Inc. (d)
Exhibit 10 D.-1997 Stock Option Plan for Key Employees
of Wellco Enterprises, Inc. (e)
Exhibit 10 E.-1997 Stock Option Plan for Non-Employe
Directors of Wellco Enterprises, Inc. (e)
Exhibit 21-Subsidiaries of Registrant 14
Exhibit 23-Consent of Experts (f)
(a) Exhibit was filed in Part IV of Form 10-K for the fiscal year ended
July 1, 1995, and is incorporated herein by reference.
(b) Exhibit was filed in PART IV of Form 10-K for the fiscal year ended
July 3, 1982, and is incorporated herein by reference.
(c) Exhibit was filed as Exhibit A to the Proxy Statement dated October 22,
1985, and is incorporated herein by reference.
(d) Exhibit was filed as Exhibit A to the Proxy Statement dated October 18,
1996, and is incorporated herein by reference.
(e) Exhibit was filed as Exhibit A to the Proxy Statement dated October 17,
1997, and is incorporated herein by reference.
(f) Consent is contained in opinion of Independent Certified Public Accountants
on page 11.
-12-
<PAGE>
SCHEDULE II
WELLCO ENTERPRISES, INC. AND WHOLLY-OWNED SUBSIDIARIES
VALUATION ACCOUNTS
FOR THE FISCAL YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO BALANCE AT
DESCRIPTION YEAR INCOME DEDUCTIONS END OF YEAR
Allowance for
doubtful
accounts-
1998 $58 $58
1997 $37 $21 (A) $58
1996 $37 $37
(A) Additions to allowance for doubtful accounts.
-13-
<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.
-14-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 27, 1998 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-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> JUN-27-1998
<EXCHANGE-RATE> 1
<CASH> 196
<SECURITIES> 0
<RECEIVABLES> 2,305
<ALLOWANCES> 58
<INVENTORY> 9,508
<CURRENT-ASSETS> 12,535
<PP&E> 7,185
<DEPRECIATION> 4,836
<TOTAL-ASSETS> 16,020
<CURRENT-LIABILITIES> 6,458
<BONDS> 491
0
0
<COMMON> 1,164
<OTHER-SE> 6,145
<TOTAL-LIABILITY-AND-EQUITY> 16,020
<SALES> 23,917
<TOTAL-REVENUES> 24,143
<CGS> 24,463
<TOTAL-COSTS> 24,463
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (527)
<INCOME-TAX> (190)
<INCOME-CONTINUING> (337)
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<CHANGES> 0
<NET-INCOME> (337)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
