FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 1, 2000
Commission file number 1-5555
WELLCO ENTERPRISES, INC.
(Exact name of Registrant as specified in charter)
North Carolina 56-0769274
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(State of incorporation) (I.R.S.employer identification no.)
Waynesville, North Carolina 28786
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 828-456-3545
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Securities registered pursuant to Section 12(b) of the Act:
Common Capital Stock - $1 par value American Stock Exchange
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(Title of class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Capital Stock - $1 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
As of August 31, 2000, 1,163,246 common shares were outstanding, and the
aggregate market value of the common shares (based upon the closing price of
these shares on the American Stock Exchange on August 31, 2000) of Wellco
Enterprises, Inc. held by nonaffiliates was approximately $2,400,000.
Documents incorporated by reference:
Definitive Proxy Statement, to be dated October 13, 2000, in PART IV.
Definitive Proxy Statement, dated October 17, 1997, in PART IV.
Definitive Proxy Statement, dated October 18, 1996, in PART IV. Definitive
Proxy Statement, dated October 17, 1995, in PART IV. Definitive Proxy
Statement dated July 3, 1982, in PART IV.
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PART I
Item 1. Business.
The Company operates in one reportable segment. Substantially all of the
Company's operating activity is from the sale of military and other rugged
footwear, the sale of specialized machinery and materials for the manufacture of
this type of footwear and the rendering of technical assistance and other
services to licensees for the manufacture of this type of footwear.
Footnote 14 to the Consolidated Financial Statements contains information about
revenues by similar products and by geographic areas. The majority of revenues
($14,378,000 in 2000 and $14,246,000 in 1999) were from sales to the U. S.
government, primarily the Defense Supply Center Philadelphia (DSCP), under
contracts for the supply of boots used by the U. S. Armed Forces. The loss of
this customer would have a material adverse effect on the Company.
For more than the last five years, the Company has manufactured and sold
military combat boots under firm fixed price contracts with DSCP. Boot products
are the general issue combat boot, the hot wet (jungle) boot and the hot dry
(desert) boot, all manufactured using the government specified Direct Molded
Sole (DMS) process. The Company also supplies the Intermediate Cold/Wet Boot
(ICW), the Infantry Combat Boot/Marine Corps (ICB) and anti-personnel mine
protective boots and overboots. The government awards fixed price boot contracts
on the basis of bids from several qualified U. S. manufacturers. The Company
also sells some of these same boot products to other customers, including
customers located in other countries.
The Company provides, primarily under long-term licensing agreements,
technology, assistance and related services for manufacturing military and
commercial footwear to customers in the United States and abroad. Under these
agreements licensees receive technology, services and assistance, and the
Company earns fees based primarily on the licensees' sales volume. In addition
to providing technical assistance, the Company also, from time to time, supplies
certain foreign military footwear manufacturers with some of their machinery and
material needs. The Company builds specialized footwear manufacturing equipment
for use in its own and its customers' manufacturing operations. This equipment
is usually sold, but in some cases it is leased.
Net income for the 2000 fiscal year was $711,000 ($0.61 diluted income per
share) compared to net loss of $837,000 ($0.72 diluted loss per share) for the
1999 fiscal year. The primary reason operating results improved was an increase
in pairs of combat boots shipped under contract with the U.S. government, and
the successful completion of the restructuring of manufacturing operations (see
Footnote 18 to the Consolidated Financial Statements).
For several years DSCP has been carrying out a program to reduce its inventory
of the DMS combat boot. During the Cold War period, DSCP was authorized to build
and maintain a large, ready to go to war inventory of this boot. With the end of
the Cold War and reductions in military budgets, DSCP no longer has the funding
to support a large inventory. Since the early 1990's, DSCP has been gradually
reducing boot inventory by buying fewer pairs than were used. There are
presently four contractors in the United States using the DMS process to
manufacture three types of combat boots. In order to maintain an industrial base
of contractors who could meet wartime needs, this inventory reduction program
was accomplished over several years.
Starting with Wellco's 1998 fiscal year and continuing throughout the 1999
fiscal year, DSCP accelerated this inventory reduction program. Lower sales of
DMS combat boots adversely affected Wellco's operating results for both of those
years. However, during the fiscal year 2000, combat boot sales to the government
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increased. The Company attributes the increase in pairs shipped to the
substantial completion of this inventory reduction program.
In 1999, the Company implemented major changes to its boot manufacturing
operations. In February, 1999, the Board of Directors approved a restructuring
plan to consolidate and realign the Company's footwear manufacturing operations.
Under this plan, the Company transferred the majority of its Waynesville, North
Carolina footwear operations to and consolidated them with the operations of its
facility in Aguadilla, Puerto Rico, where the Company has had operations since
1956. The 1999 loss includes $1,077,000 of costs related to this action. The
2000 fiscal year net income also includes $338,000 of restructuring and
realignment costs (pretax).
More information about these, and other events affecting Wellco's 2000 and 1999
operating results, are contained in the Management's Discussion and Analysis of
Results of Operations and Financial Condition section of the Company's 2000
Annual Report to Shareholders which is incorporated in Part II of this Form
10-K.
Bidding on U. S. government boot solicitations is open to any qualified U. S.
manufacturer. In addition to meeting very stringent manufacturing and quality
standards, contractors are required to comply with demanding delivery schedules
and a significant investment in specialized equipment is required for the
manufacture of certain types of boots.
The Company competes on U. S. government contracts with several other companies,
none of which dominates the industry. Bidding on contracts is very competitive.
United States footwear manufacturers have been adversely affected by sales of
footwear made in low labor cost countries. This has significantly affected the
competition for contracts to supply boots to U. S. Armed Forces, which by law
must be made in the U. S. Most boot contracts are for multi-year periods.
Therefore, a bidder not receiving an award from a significant solicitation could
be adversely affected for several years.
Many factors affect the government's demand for boots and the quantity purchased
can vary from year to year. Contractors cannot influence the government's boot
needs. Price, quality, quick delivery and manufacturing efficiency are the areas
emphasized by the Company that strengthen its competitive position.
The U. S. government usually evaluates bids received on solicitations for boots
using their "best value" system, under which bidders offering the best value to
the government are awarded the contract, or in the case of multiple contract
awards, a greater portion of total boots contracted. Best value usually involves
an evaluation of performance considerations, such as quality and delivery, with
the prices bid being less important. As bidders become more equal in the best
value evaluation, price becomes more important. For the current DMS combat boot
contract awarded April 15, 1997, Wellco and one other bidder were given the
highest possible evaluation. However, since Wellco's bid prices were higher,
Wellco was awarded the 25% allocation of total boots, and the other competitor
received 35%.
Government contracts are subject to partial or complete termination under the
following circumstances:
(1) Convenience of the Government. The government's contracting officer has the
authority to partially or completely terminate a contract for the
convenience of the government only when it is in the government's interest
to terminate. The contracting officer is responsible for negotiating a
settlement with the contractor.
(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.
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Under certain circumstances occasioned by the egregious conduct of a contractor,
contracts may be terminated and a contractor may be prohibited for a certain
period of time from receiving government contracts. The Company has never had a
contract either partially or completely terminated.
All current boot contracts contain options that are exercisable at the
government's discretion. In 1998 the government did not exercise an option on
one of the Company's contracts.
Because domestic commercial footwear manufacturers are adversely affected by
imports from low labor cost countries, the Company targets its marketing of
technology and assistance primarily to military footwear manufacturers. The
Company competes against several other footwear construction methods commonly
used for heavy-duty footwear. These methods include the Goodyear Welt
construction, as well as boots bottomed by injection molding. These methods are
used in work shoes, safety shoes, and hiking boots manufactured both in the U.
S. and abroad for the commercial market. Quality, service and reasonable
manufacturing costs are the most important features used to market the Company's
technology, assistance and services.
The Company has a strong research and development program. While not all
research and development results in successful new products or significant
revenues, the continuing development of new products and processes has been and
will continue to be a significant factor in growth and development. The Company
developed the desert combat boot, first used in Operation Desert Storm.
In August, 1995 the Company was awarded a three-phase contract to develop
changes to combat boots that will result in fewer lower extremity injuries. The
second phase of this work was completed in 1998. The third phase involved an
extensive wear test using U.S. Army recruits, and in September, 1999 the Company
shipped the boots for this test. The test was completed in December 1999 and a
preliminary report has been issued showing an injury rate reduction of 30
percent.
Although not precisely quantified, the Company spends a significant amount of
time and effort on both Company and customer-sponsored research activities
related to the development of new products and processes and to the improvement
of existing ones. A significant amount of this cost is for the personnel costs
of mold engineers, rubber technicians, chemists, pattern engineers and
management, all of whom have many responsibilities in addition to research and
development. The Company estimates that the cost of research and development can
vary from $50,000 to $300,000 per year, depending on the number of research
projects and the specific needs of its customers.
The Company's backlog of all sales, not including license fees and rentals, as
of September, 2000 was approximately $10,800,000 compared to $10,200,000 last
year. The Company estimates that substantially all of the current year backlog
will be shipped in the 2001 fiscal year. The current year's backlog is more than
the prior year's backlog because the government has substantially completed its
inventory reduction program and is purchasing combat boots substantially equal
to consumption. In addition, at September, 1999 the Intermediate Cold Wet (ICW)
contract had a backlog of $4,500,000. The ICW contract was completed in August,
2000 and therefore no ICW backlog exists for the current year. There are two
solicitations currently open for this ICW boot, one due to be awarded within the
period from October through December and the other bid closes on October 27,
2000. The Company hopes to be an awardee on one or both of these solicitations.
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
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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. Compared to prior
years when shipment was to government warehouses, this increases the Company's
investment in inventory.
Compliance with various existing governmental provisions relating to protection
of the environment has not had a material effect on the Company's capital
expenditures, earnings or competitive position.
The Company employed an average of 233 persons during the 2000 fiscal year.
Item 2. Properties.
The Company has manufacturing, warehousing and office facilities in Waynesville,
North Carolina and Aguadilla, Puerto Rico. The building and land in North
Carolina are owned by the Company. The Puerto Rico building and land are leased.
In 1999, the Company consolidated its existing operations in Puerto Rico and the
operations transferred from its Waynesville, North Carolina factory into a
larger leased building.
Management believes all its plants, warehouses and offices are in good condition
and are reasonably suited for the purposes for which they are presently used. As
has been the case for the last several years, the volume of operations in 2000
caused the Company's facilities to be used at less than normal capacity.
Item 3. Legal Proceedings.
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the Company's business, to which the Company or any of
its subsidiaries are a party or of which any of their property is subject.
Management does not know of any director, officer, affiliate of the Company, nor
any stockholder of record or beneficial owner of more than 5% of the Company's
common stock, or any associate thereof who is a party to a legal proceeding that
is adverse to the Company or any of its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
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There were not any submissions of matters to a vote of security holders during
the fourth quarter of fiscal year 2000.
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PART II
Items 5, 6, 7, 7A and 8.
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The information called for by the following items is in the Company's 2000
Annual Report to Shareholders which is incorporated starting on the following
page in this Form 10-K:
Annual Report
Page No.
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Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
34
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Item 6. Consolidated Selected Financial Data 1
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Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition 4-9
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Item 7A. Quantitative and Qualitative Disclosures About
Market Risk *
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Item 8. Financial Statements and Supplementary Data 10-32, 35
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* 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.
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There were no resignations by or dismissals of any independent accountant
engaged by the Company during the 2000 or 1999 fiscal years or during the period
from the end of the 2000 fiscal year through the date of filing this Form 10-K.
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WELLCO(R)
ENTERPRISES, INC.
ANNUAL REPORT
2000
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WELLCO ENTERPRISES, INC.
CONSOLIDATED SELECTED FINANCIAL DATA
(In Thousands Except for Per Share Amounts)
Year Ended
July 1, July 3, June 27, June 28, June 29,
2000 1999 1998 1997 1996
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Revenues $ 22,225 $ 21,312 $ 23,917 $ 21,199 $ 19,968
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Net Income (Loss) 711 (837) (337) 758 991
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Basic Earnings (Loss) per
Share 0.61 (0.72) (0.29) 0.67 0.53
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Diluted Earnings (Loss) per
Share 0.61 (0.72) (0.29) 0.66 0.52
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Cash Dividends Declared Per
Share of Common Stock 0.25 0.20 0.20 0.20 0.125
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Total Assets at Year End 12,950 14,853 16,020 15,652 12,697
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Long-Term Liabilities at
Year End $ 1,593 $ 1,721 $ 2,253 $ 2,789 $ 2,431
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See the Management's Discussion and Analysis of Results and Operations and
Financial Condition section.
Independent Auditors
Deloitte & Touche LLP
Charlotte, N.C.
Annual Meeting
November 14, 2000
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 year 2000 was a year of solid progress for Wellco Enterprises, Inc. Our
challenge for the year 2000 was to improve the efficiency of our manufacturing
operations recently consolidated in Puerto Rico and we made great strides in
this area. As fiscal year 2000 progressed, we were able to shift our strategic
emphasis from restructuring to the profitablily of our operations. We are now
focused on improving our sales and profit margins. While we have a ways to go,
we have seen some encouraging signs.
Our financial results for fiscal year 2000, presented in detail on the following
pages, are the best evidence of improvement. In a very competitive market, sales
increased to $22,225,000 from $21,312,000 in fiscal year 1999. Net income for
fiscal year 2000 was $711,000 which was reduced by a $338,000 pre-tax charge for
restructuring and realignment costs. Also included in the 2000 fiscal year net
income is a non-recurring pretax income item of $203,000 representing the final
settlement of a contract claim with the U. S. government. Operations for the
1999 fiscal year resulted in a $837,000 net loss that included a $1,077,000
pretax charge for restructuring and realignment costs.
In fiscal year 1999, we announced and implemented a plan to restructure and
realign our footwear manufacturing operations. Under this plan, the Company
transferred the majority of the lasting, bottoming and finishing operations from
its Waynesville, North Carolina facility and consolidated them with the
operations of its Aguadilla, Puerto Rico facility. This decision by your Board
of Directors and management has proven to be very beneficial.
Implementation of this plan was not easy. For example, most of our military boot
shipments to the U. S. government are against delivery orders received four days
per week, and a significant part of the government's evaluation of our contract
performance is based on how fast we ship. With a lot of planning and hard work
by dedicated people, we were able to transfer the operations to Puerto Rico and
still ship all orders the same day they were received.
For the past few years,we have reported to you on the U. S. government's program
to significantly reduce its inventory of Direct Molded Sole (DMS) combat boots,
and the negative effect this program had on operating results. Last year we
reported that the U. S. government was on the verge of completing their program.
We are very glad to report that in the second half of fiscal year 2000 we
started realizing the results of the completion of this program, as delivery
orders for DMS boots increased significantly.
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We are well positioned to take advantage of future growth. With the transfer of
manufacturing operations to Puerto Rico and the completion of the government's
inventory reduction program, we can focus on the future. We are presently
concentrating our efforts on developing new product lines and manufacturing
processes to place your Company in excellent position to take advantage of new
opportunities in the military footwear area. These new products should also
increase our opportunities in the related commercial footwear market segments.
In addition, the favorable results during fiscal year 2000 have contributed to
a substantial improvement in your Company's financial liquidity. Using cash
provided by fiscal year 2000 operations, we have reduced advances against our
bank line of credit by $1,780,000. Since July 1, 2000, we have substantially
stopped using this line of credit as a source of cash.
Our co-workers at all levels have contributed immensely to accomplishing the
restructuring of footwear manufacturing operations and to the improvement of
operating results. The way they performed in the past year, particularly when
faced with many difficult tasks that had to be done in a short period of time,
demonstrated that they are very strong, dedicated people.
We appreciate your support and pledge to you our best efforts.
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Horace Auberry David Lutz
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Chairman of the Board of Directors President, Treasurer
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Chief Executive Officer Chief Operating Officer
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September 29, 2000
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Comparing the Fiscal Year ended July 1, 2000 to July 3, 1999:
Income before income taxes was $824,000 in the 2000 fiscal year compared to a
loss before income taxes of $1,237,000 in the 1999 fiscal year.
The fiscal year 2000 includes restructuring and realignment costs totaling
$338,000. These costs relate to a February, 1999 restructuring plan under which
the Company has consolidated substantially all footwear manufacturing operations
at its facility in Aguadilla, Puerto Rico. The execution of this plan resulted
in the elimination of 77 employment positions at the Company's Waynesville,
North Carolina facility, and in the transfer of a significant amount of
Waynesville machinery and materials to Aguadilla.
As detailed in Note 18 to the Consolidated Financial Statements, the
Restructuring and Realignment Costs charged against 2000 operations are made up
of:
* Realignment costs of $428,000 consisting of: new
employee training costs ($186,000); cost to move
machinery, install machinery and refurbish and
prepare building ($108,000); and legal and other
costs ($134,000)
* Restructuring credit of $ 90,000. In the quarter
ending April 1, 2000, the Company's actuary
completed calculation of actual pension cost for
terminated employees. The estimated cost was
originally recorded in the fourth quarter of the
1999 fiscal year. The actual cost was $122,000
less than originally estimated. In addition, the
2000 fiscal year includes $32,000 for health care
costs on terminated employees in addition to the
amount accrued at July 3, 1999. A part of the
severance compensation for terminated Waynesville
employees was the continuation of health
insurance for two months past termination. The
Company is self funded for its group health
insurance, and actual health care costs for
terminated employees were greater than originally
estimated.
Also included in the 2000 fiscal year is a non-recurring income item of
$203,000, net of related costs representing the final settlement of a contract
claim (see Note 16 to the Consolidated Financial Statements). In January, 2000
the federal government's Alternative Disputes Resolution procedure was used to
reach a final and non-appealable settlement of a contract claim Wellco filed
against the U. S. government. In the 1998 fiscal year, when this claim
originated, Wellco recognized an income item of $226,000, net of related costs
which represented the amount of the claim acknowledged and paid by the
government in 1998.
Restructuring and Realignment Costs charged against 1999 operations total
$1,077,000 and are made up of $380,000 employee severance costs and $384,000 of
other restructuring costs related to the pension plan and other certain costs
which covered terminated employees, and $313,000 of realignment costs.
Revenues in 2000 were $913,000 greater than in the prior year. The primary
reason for this increase was a 17% increase in pairs of combat boots shipped
under contract with the U. S. government. For several years the government has
been reducing its depot inventories of combat boots by purchasing from
contractors fewer pairs than were consumed. The Company attributes the increase
in pairs shipped in fiscal year 2000 to the substantial completion of this
inventory reduction program.
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Cost of sales and services in 2000 was $75,000 less than 1999. The decrease was
primarily caused by:
* The overall reduction of costs from the consolidation of substantially
all manufacturing operations in Puerto Rico.
* Semi-variable costs not increasing in proportion to the increase in
revenues.
The increase in revenues combined with the reduction in cost of sales and
services resulted in gross profit for 2000 increasing by $988,000.
A decrease in the number of administrative employees and decreased legal fees
were the primary reasons general and administrative expenses decreased by
$130,000 in fiscal year 2000.
Sales of boot manufacturing equipment and materials to licensees decreased
significantly during the 2000 fiscal year. These sales vary with the needs of
existing licensees and the licensing of new customers. In addition, the sale of
lacing system hardware decreased because of lower North American customer
production.
The 2000 rate of tax provision for income before income taxes was 14% compared
to the 32% rate of tax benefit for 1999. The 2000 income tax rate is lower
because a greater proportion of consolidated pretax income was from operations
in Puerto Rico which are substantially exempt from both Puerto Rican and federal
income taxes. The 1999 benefit results from part of the taxable loss being
carried back for a refund of taxes paid in prior years.
Forward Looking Information:
For several years, DSCP (Defense Supply Center Philadelphia, the government
agency with which Wellco contracts for the supply of combat boots) was reducing
its inventory of combat boots by purchasing from contractors fewer pairs than
were consumed. Wellco believes the government has now completed this inventory
reduction program and is purchasing combat boots at a rate substantially equal
to its consumption.
Wellco is presently shipping boots under the third option year of its combat
boot contract which covers the period from April 16, 2000 to April 15, 2001.
This contract has one more one-year option period after April 15, 2001. It is
not known whether DSCP intends to exercise the fourth and final option, which
would cover the year April 16, 2001 through April 15, 2002. If DSCP does not
exercise the fourth option, there should be another solicitation issued to
procure boots.
In August, 2000, Wellco completed shipments under a three year contract to
supply DSCP with the Intermediate Cold Wet (ICW) boot. DSCP has an outstanding
solicitation for the next ICW boot contract with awards estimated to be made
within the period from October through December, 2000. As with any solicitation,
Wellco cannot predict with certainty its success in receiving a contract from a
new solicitation.
Since November, 1998 Wellco has been supplying, under contract, a state prison
system with an inmate work shoe. During this period, a prison in that state was
installing a production facility where inmates would manufacture this shoe.
Wellco understands that this facility is now manufacturing the shoe in
quantities to meet the prison system's needs and, therefore the prison system
will not be purchasing this boot from Wellco during the 2001 fiscal year.
As stated in Note 18 to the Consolidated Financial Statements, the Company has
filed for a $400,000 reimbursement from the government of Puerto Rico, under an
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incentive grant, relating to certain costs incurred in consolidating
substantially all footwear manufacturing operations in Puerto Rico. Any amounts
collected will be recorded in the period received.
In June 1998, the Financial Accounting Standards Board issued the Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. SFAS No. 133 was effective for the Company's first fiscal quarter of the
2001 fiscal year. The Company has analyzed contracts and instruments outstanding
on July 2, 2000 and has determined that there is no impact from adopting this
standard on its consolidated results of operations or financial position.
The Company did not experience any problems with the conversion to Year 2000 and
the cost to update and test equipment and software for Year 2000 compliance was
minimal. However, this does not mean that a problem will not arise in the
future.
Except for historical information, this Annual Report includes forward looking
statements that involve risks and uncertainties, including, but not limited to,
the receipt of contracts from the U. S. government and the performance
thereunder, the ability to control costs under fixed price contracts, the
cancellation of contracts, and other risks detailed from time to time in the
Company's Securities and Exchange Commission filings, including Form 10-K for
the year ended July 1, 2000. Those statements include, but may not be limited
to, all statements regarding intent, beliefs, expectations, projections,
forecasts, and plans of the Company and its management. Actual results may
differ materially from management expectations. The Company assumes no
obligation to update any forward-looking statements.
Comparing the Fiscal Year ended July 3, 1999 to June 27, 1998:
Loss before income taxes was $1,237,000 in the 1999 fiscal year compared with a
loss before income taxes of $527,000 in the 1998 fiscal year. Three significant
items affect the comparability of these two numbers.
1. The 1999 loss includes a $1,077,000 charge for the restructure and
realignment of boot manufacturing operations (see Note 18 to the Consolidated
Financial Statements).The Restructuring and Realignment Costs charged against
1999 operations are made up:
* Net restructuring costs of $764,000 made up of:
terminated employee severance costs ($380,000);
recognition of prior service cost ($220,000) and
actuarial loss ($211,000) related to the pension
plan which covered terminated employees; and a
net gain ($47,00) from the reduction of post
employment employee health care cost liability on
terminated employees.
* Realignment costs of $313,000 made up of: new
employee training costs ($104,000); cost to move
machinery, install machinery and refurbish and
prepare building ($119,000); and legal and other
costs ($90,000).
2. The 1998 loss was increased by approximately $800,000 of start up costs
incurred in the initial production of the new Infantry Combat Boot/Marine(ICB).
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.
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The ICB boot incorporates several technologies and manufacturing methods which
are significantly different than those in the DMS boot. During this 90 day
period, Wellco rearranged its production lines, purchased and installed
significant new manufacturing equipment, hired and trained new employees, tested
new materials, and developed many new manufacturing procedures and methods. If
time had permitted, this should have been done with small trial production runs.
With only 90 days, Wellco had to simultaneously do all of this and reach full
production without the benefit and efficiencies of trial production runs.
ICB boot start-up costs were charged against 1998 operating income. In addition
to labor inefficiencies in training new employees, significant overtime premiums
were paid. Bonuses were paid to direct labor personnel for meeting production
quotas. Instead of using ocean freight, expensive air freight costs were
incurred to send materials to the Company's plant in Puerto Rico and then to
send completed boot uppers to the North Carolina plant for bottoming and
finishing. Because the 90 day period did not give enough time to develop
manufacturing procedures and methods using small trial production runs,
significant material losses were incurred. Production quantities of materials
were purchased and processed. Some materials did not perform as expected,
resulting in boots which could not be shipped under the contract and whose
market value was less than cost.
3. The 1998 loss was reduced by the recognition of a $226,000 non-recurring
income item under an agreement with the government (see Note 16 to the
Consolidated Financial Statements).
Total revenues from the sale of boots were approximately 8% lower in 1999. Pairs
of direct molded sole (DMS) combat boots sold to the Defense Supply Center
Philadelphia (DSCP) in 1999 were down only slightly from 1998. Revenues from DMS
boot shipments in both 1999 and 1998 have been adversely affected by DSCP's
accelerating its inventory reduction program, which has been discussed in the
forward looking information section.
Pairs of the Intermediate Cold/Wet (ICW) boot sold to DSCP in 1999 were
approximately 42% less than the pairs sold in the prior year. This is Wellco's
first contract for the production of this boot, and the contract provides for a
base year with two option years. The contract provides that total pairs
purchased by DSCP during the first option year are approximately 45% less than
pairs purchased during the base year. The contract, as amended, also provides an
even further reduction in the minimum pairs to be purchased in the second option
year.
Revenues from technical assistance fees from licensees were lower in the 1999
year. Prior year fees include an additional fee related to supplying certain
customers with additional services. Wellco completed providing these additional
services by June, 1998. In addition, fees earned from other DMS combat boot
manufacturers, which are based on their sales, were lower because of the DSCP
inventory reduction program.
Sales of boot manufacturing equipment to new licensees increased in the current
year. However, sales of boot lacing system hardware to commercial boot
manufacturers decreased because of both a bad retail sales year and price
pressure in this market.
The major categories of fixed and semi-variable manufacturing costs decreased by
approximately $580,000 in 1999. Employee group health insurance costs, which
varies with actual health care costs incurred by employees because the Company
is self funded, were substantially the same as 1998. Certain 1998 manufacturing
costs were substantially higher because of the ICB boot start up costs.
The rate of income tax benefit for 1999 was 32% compared to 36% in 1998. This
-7-
<PAGE>
decrease was primarily caused by a reduction in benefit provided by earnings in
Puerto Rico which are substantially exempt from both Puerto Rico and federal
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Wellco uses cash from operations and a bank line of credit to supply most of its
liquidity needs. The following table summarizes at the end of each year the
Company's cash and funds available from the bank line of credit:
( in thousands)
2000 1999 1998
-----------------------------------------------------------
Cash $ 73 $ 89 $ 196
-----------------------------------------------------------
Unused Bank Line of Credit 2,300 520 1,115
-----------------------------------------------------------
Total $ 2,373 $ 609 $1,311
-----------------------------------------------------------
The increase in the unused line of credit at July 1, 2000 resulted primarily
from cash provided by operations and decreases in accounts receivable and
inventory during fiscal year 2000 being used to pay down the line of credit. In
1999, cash from the line of credit was used to purchase equipment and make
leasehold improvements related to the consolidation of boot manufacturing
operations in Puerto Rico.
The following table summarizes the other major sources and (uses) of cash for
the last three years:
(in thousands)
2000 1999 1998
---------------------------------------------------------------------------
Income (Loss) Before Depreciation $ 1,385 $ (292) $ 99
---------------------------------------------------------------------------
Net Change in Accounts Receivable,
Inventory, Accounts Payable
and Accrued Liabilities 2,002 1,170 400
---------------------------------------------------------------------------
Deferred Taxes, Tax Refund Receivable,
and Other (66) (30) (427)
---------------------------------------------------------------------------
Net Cash Provided By (Used In)
Operations 3,321 848 72
---------------------------------------------------------------------------
Cash From Bank Line of Credit 395 915 1,883
---------------------------------------------------------------------------
Cash Used to Repay Bank Line of Credit (2,175) (320) (685)
---------------------------------------------------------------------------
Cash From Bank Loan for Warehouse
Addition 400
---------------------------------------------------------------------------
Cash Used for Warehouse Addition (381)
---------------------------------------------------------------------------
Cash Used to Repay Bank Loan (147) (145) (73)
---------------------------------------------------------------------------
Cash Used to Purchase Plant and
Equipment (1,119) (1,172) (1,054)
---------------------------------------------------------------------------
Cash Dividends Paid (291) (233) (233)
---------------------------------------------------------------------------
Cash From Stock Options Exercised 86
---------------------------------------------------------------------------
Net Increase (Decrease) in Cash $ (16) $ (107) $ 15
---------------------------------------------------------------------------
-8-
<PAGE>
In 2000, cash provided by operations increased by $2,473,000. This increase
resulted primarily from cash provided by income and reductions in accounts
receivable ($1,575,000) and inventory ($416,000). Cash was received in 2000 from
a significant final contract shipment of boots in June, 1999. Inventory
decreased at the end of 2000 primarily because the Company was nearing the end
of its contract to supply the ICW boot and its contract to supply a state prison
system with inmate boots. Cash from operations was primarily used to pay down
the bank line of credit and purchase equipment.
In 1999, a $1,559,000 net reduction in receivables and inventory less a $575,000
net reduction in accounts payable and accrued liabilities provided $984,000 of
cash from operations. Machinery purchases and leasehold improvements related to
the consolidation of boot manufacturing operations in Puerto Rico were the
primary purchases of plant and equipment.
For 1998, cash for a $1,831,000 increase in inventory was provided by a decrease
in accounts receivable of $2,679,000. Accounts payable, accrued liabilities and
accrued income taxes decreased by $448,000. These are the primary changes that
resulted in $72,000 of cash provided by operations. Cash from the bank line of
credit was used to finance the purchase of boot production equipment. In
addition, cash from a three year bank term loan was used for a warehouse
addition.
At July 1, 2000, the Company had a $800,000 commitment to purchase capital
equipment. Note 11 to the Consolidated Financial Statements provides information
about a potential cash payment in the 2003 fiscal year of $701,000 that might
result from Wellco's repurchase of its stock in the 1996 fiscal year.
The bank's commitment for a total $4,000,000 line of credit expires on December
31, 2000, and is subject to renewal at the bank's discretion. During the 2001
fiscal year, Wellco expects to continue to rely on the bank line of credit. The
Company does not know of any other demands, commitments, uncertainties, or
trends that will result in or that are reasonably likely to result in its
liquidity increasing or decreasing in any material way.
-9-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE FISCAL YEARS ENDED
JULY 1, 2000, JULY 3, 1999, AND JUNE
27, 1998 (in thousands except per
share amounts)
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
--------- --------- ---------
REVENUES (Notes 4, 14 and 15) ........... $ 22,225 $ 21,312 $ 23,917
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales and services ............. 19,023 19,098 22,340
Restructuring and realignment
costs (Note 18) ........................ 338 1,077
General and administrative
expenses ............................... 2,006 2,136 2,123
-------- -------- --------
Total .................................. 21,367 22,311 24,463
-------- -------- --------
INCOME FROM CONTRACT CLAIM
(Note 16) .............................. 203 226
-------- -------- --------
OPERATING INCOME (LOSS) .................. 1,061 (999) (320)
INTEREST EXPENSE ......................... 238 242 219
DIVIDEND AND INTEREST INCOME ............. 1 4 12
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ........ 824 (1,237) (527)
PROVISION (BENEFIT) FOR INCOME
TAXES (Note 10) .......................... 113 (400) (190)
-------- -------- --------
NET INCOME (LOSS) ........................ 711 (837) (337)
OTHER COMPREHENSIVE INCOME (LOSS)
(Notes 1 and 8):
(Increase) Decrease In Additional
Minimum Pension Liability, Net
of Tax ................................. 76 229 (113)
-------- -------- --------
COMPREHENSIVE INCOME (LOSS) .............. $ 787 $ (608) $ (450)
======== ======== ========
EARNINGS (LOSS) PER SHARE
(Note 13):
Basic earnings (loss) per share ........ $ 0.61 $ (0.72) $ (0.29)
Diluted earnings (loss) per
share .................................. $ 0.61 $ (0.72) $ (0.29)
======== ======== ========
See Notes to Consolidated Financial Statements.
-10-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JULY 1, 2000 AND JULY 3, 1999
(in thousands)
ASSETS
JULY 1, JULY 3,
2000 1999
------- -------
CURRENT ASSETS:
Cash ........................................... $ 73 $ 89
Receivables, net (Notes 2 and 6) ............... 3,108 4,683
Inventories (Notes 3 and 6) .................... 5,097 5,513
Deferred taxes (Note 10) ...................... 676 461
Income tax refund receivable (Note 10) ......... 226
Prepaid expenses ............................... 37 160
------- -------
Total .......................................... 8,991 11,132
------- -------
MACHINERY LEASED TO LICENSEES, net
(Notes 1 & 4) .................................. 24 6
PROPERTY, PLANT AND EQUIPMENT, net
(Notes 5 and 6) ................................ 3,397 2,970
INTANGIBLE ASSETS:
Excess of cost over net assets of
subsidiary at acquisition (Note 1) .......... 228 228
Intangible pension asset (Note 8) .............. 52 88
------- -------
Total .......................................... 280 316
------- -------
DEFERRED TAXES (Note 10) ............................. 258 429
------- -------
TOTAL ................................................ $12,950 $14,853
======= =======
(continued on next page)
-11-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JULY 1, 2000 AND JULY 3, 1999
(in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
JULY 1, JULY 3,
2000 1999
------- -------
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 6) ........ $ 1,700 $ 3,480
Accounts payable ............................... 861 1,046
Accrued liabilities (Notes 7, 8, 9 and 18) ..... 1,559 1,565
Accrued income taxes (Note 10) ................. 629 427
Current maturity of note payable (Note 11) ..... 36 146
-------- --------
Total ...................................... 4,785 6,664
-------- --------
LONG-TERM LIABILITIES:
Pension obligation (Note 8) .................... 892 1,375
Notes payable (Note 11) ........................ 701 346
COMMITMENTS (Note 17)
STOCKHOLDERS' EQUITY (Notes 8, 11 and 12):
Common stock, $1.00 par value; shares
authorized- 2,000,000; shares issued and
outstanding- 1,163,246 ..................... 1,164 1,164
Additional paid-in capital ..................... 192 192
Retained earnings .............................. 5,646 5,618
Accumulated other comprehensive loss ........... (430) (506)
-------- --------
Total ...................................... 6,572 6,468
-------- --------
TOTAL ................................................ $ 12,950 $ 14,853
======== ========
See Notes to Consolidated Financial Statements.
-12-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JULY 1, 2000, JULY 3, 1999, AND JUNE 27, 1998
(in thousands)
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
------- ------- --------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ....................... $ 711 $ (837) $ (337)
------- ------- -------
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization ....... 674 545 436
(Increase) decrease in-
Receivables ..................... 1,575 (2,436) 2,679
Inventories ..................... 416 3,995 (1,831)
Other current assets ............ 134 (263) (237)
Increase (decrease) in-
Accounts payable ................ (185) (650) (368)
Accrued liabilities ............. (6) 75 (80)
Accrued income taxes ............ 202 186 (116)
Pension obligation .............. (371) 194 (39)
Other ........................... 171 39 (35)
------- ------- -------
Total adjustments ....................... 2,610 1,685 409
------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES .................... 3,321 848 72
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, net ............. (1,119) (1,172) (1,435)
------- ------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ................... (1,119) (1,172) (1,435)
------- ------- -------
(continued on next page)
-13-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JULY 1, 2000, JULY 3, 1999, AND JUNE 27, 1998
(in thousands)
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings ..... 395 915 1,883
Repayment of short-term borrowings ...... (2,175) (320) (685)
Proceeds from note payable .............. 400
Repayment of note payable ............... (147) (145) (73)
Cash dividends paid ..................... (291) (233) (233)
Stock option exercise ................... 86
------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES .................... (2,218) 217 1,378
------- ------- -------
NET INCREASE (DECREASE) IN CASH ............... (16) (107) 15
CASH AT BEGINNING OF YEAR ..................... 89 196 181
------- ------- -------
CASH AT END OF YEAR ........................... $ 73 $ 89 $ 196
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid (received) for-
Interest ............................ $ 234 $ 233 $ 170
Income taxes ........................ (238) (377) 141
NONCASH INVESTING AND FINANCING
ACTIVITY:
Adjustment of stock repurchase note ..... $ 392 $ (828)
======= ======= =======
See Notes to Consolidated Financial Statements.
-14-
<PAGE>
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED
JULY 1, 2000, JULY 3, 1999, AND JUNE 27, 1998
(in thousands except share data)
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
------- ------- --------
COMMON STOCK :
Balance at beginning of year ............ $ 1,164 $ 1,164 $ 1,151
Stock option exercise (Notes 12 and 13) . 13
------- ------- -------
Balance at end of year .................. 1,164 1,164 1,164
------- ------- -------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year ............ 192 192 119
Stock option exercise (Notes 12 and 13) . 73
------- ------- -------
Balance at end of year .................. 192 192 192
------- ------- -------
RETAINED EARNINGS:
Balance at beginning of year ............ 5,618 6,688 6,430
Adjustment of note payable from stock
repurchase (Note 11) .................... (392) 828
Net income (loss) ....................... 711 (837) (337)
Cash dividends (per share:
2000 - $.25, 1999
and 1998 - $.20) ...................... (291) (233) (233)
------- ------- -------
Balance at end of year .................. 5,646 5,618 6,688
------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Additional Minimum Pension Liability,
Net of Tax (Note 8):
Balance at beginning of year ............ (506) (735) (622)
Change for the year ..................... 76 229 (113)
------- ------- -------
Balance at end of year .................. (430) (506) (735)
------- ------- -------
TOTAL STOCKHOLDERS' EQUITY .................... $ 6,572 $ 6,468 $ 7,309
======= ======= =======
See Notes to Consolidated Financial Statements.
-15-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended July 1, 2000, July 3, 1999, and June 27, 1998
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
identification 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 cash, receivables and accounts payable at
July 1, 2000 approximate fair value. The carrying value of the
note payable from the stock repurchase agreement (see Note 11 to
the Consolidated Financial Statements) 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 and Amortization
The Company uses the straight-line method to compute depreciation
and amortization 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.
Research and Development Costs
All research and development costs are expensed as incurred unless
subject to reimbursement.
Intangible Asset
The excess of the fair value (as determined by the Board of
Directors) of Wellco Enterprises, Inc. common stock issued over
the net assets of Ro-Search, Incorporated, a wholly owned
subsidiary of Wellco, at acquisition is not being amortized. This
asset arose prior to 1970 and, in the opinion of management, there
has not been any diminution in its value.
-16-
<PAGE>
Revenue Recognition
All United States government combat boot production contracts are
fixed price with multi-year options exercisable at the discretion
of the government. If a contracts delivery order requires shipment
to a depot warehouse, revenue is recognized for each boot shipment
after it has been accepted by the government's Quality Assurance
Representative. If a contracts delivery order requires shipment
directly to the consumer, revenues are recognized upon shipment.
Revenues from government research and development contracts are
recognized as services are performed and invoiced. Revenues from
licensees are recognized in the period services are rendered or
products are shipped.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to June 30.
Consequently, the 2000 fiscal year contains 52 weeks of operating
results. The 1999 fiscal year contained 53 weeks and 1998 fiscal
year contained 52 weeks.
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimate and assumptions.
These estimates and assumptions affect the reported amounts of
assets and liabilities, as well as the disclosure of contingent
assets and liabilities, at the date of the financial statements.
They also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans using
the compensation recognition provisions of Accounting Principles
Board Opinion 25 (APB 25), "Accounting for Stock Issued to
Employees". The Company also provides the disclosures required by
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation." Compensation expense
under the APB 25 method is recognized when there is a difference
between the exercise price for stock options and the stock's
market price on the measurement date, which for the Company, is
normally the date of award.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded
in other contracts, by requiring that an entity recognize those
items as assets or liabilities in the statement of financial
position and measure them at fair value. SFAS No. 133 was
effective for the Company's first fiscal quarter of the 2001
fiscal year. The Company has analyzed contracts and instruments
outstanding on July 2, 2000 and has determined that there is no
impact from adopting this standard on its consolidated results
of operations or financial position.
2. RECEIVABLES:
The majority of receivables at July 1, 2000 are from the U. S. Government.
The Company's policy is to require either a confirmed irrevocable bank
-17-
<PAGE>
letter of credit or advance payment on significant order from foreign
customers. Allowances for doubtful accounts in 2000 and 1999 are not
significant.
Receivables at July 1, 2000 include $150,000 from the Puerto Rican
government for reimbursement of certain costs made to the current Puerto
Rican facility.
3. INVENTORIES:
The components of inventories are:
(in thousands)
2000 1999
-----------------------------------------------------
Finished Goods $ 1,811 $ 1,948
-----------------------------------------------------
Work in Process 1,224 1,712
-----------------------------------------------------
Raw Materials and Supplies 2,062 1,853
-----------------------------------------------------
Total $ 5,097 $ 5,513
-----------------------------------------------------
4. MACHINERY LEASED TO LICENSEES:
Accumulated depreciation netted against the cost of leased assets in the
2000 and 1999 Consolidated Balance Sheets is $1,521,000 and $1,513,000,
respectively. Rental revenues for the fiscal years 2000, 1999, and 1998
were $116,000, $100,000 and $141,000, respectively, substantially all of
which vary with lessees' production or shipments.
5. PROPERTY, PLANT AND EQUIPMENT:
The components of property, plant and equipment are summarized as follows:
(in thousands)
Estimated
2000 1999 Useful Life
------------------------------------------------------------------
Land $ 107 $ 107 N/A
------------------------------------------------------------------
Buildings 1,176 1,176 40-45 Years
------------------------------------------------------------------
Machinery & Equipment 5,034 4,139 2-20 Years
------------------------------------------------------------------
Furniture & Fixtures 873 792 2-10 years
------------------------------------------------------------------
Leasehold Improvements 526 457 *
------------------------------------------------------------------
Total Cost $ 7,716 $ 6,671
------------------------------------------------------------------
Total Accumulated Depreciation and
Amortization $ 4,319 $ 3,701
------------------------------------------------------------------
*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.
-18-
<PAGE>
6. LINES OF CREDIT:
The Company maintains a $4,000,000 bank line of credit. The line, which
expires December 31, 2000, can be renewed annually at the bank's
discretion. This line of credit is secured by a blanket lien on all
machinery and equipment (carrying value of $2,023,000 at July 1, 2000) and
all non-governmental receivables and inventory ($1,008,000 at July 1,
2000). At July 1, 2000, borrowings on the line of credit were $1,700,000
with $2,300,000 available in additional borrowings.
Interest is at the prime rate of 9.5% at July 1, 2000. The bank credit
agreement contains, among other provisions, defined levels of net worth and
current ratio requirements. The Company was in compliance with the loan
covenants at July 1, 2000. The covenants are subject to review at the end
of each fiscal quarter.
7. ACCRUED LIABILITIES:
The components of accrued liabilities are:
(in thousands)
2000 1999
----------------------------------------------------------
Compensation $ 930 $ 738
----------------------------------------------------------
Pension Benefits 124 161
----------------------------------------------------------
Retiree Health Benefits (Note 9) 146 170
----------------------------------------------------------
Restructuring Reserve (Note 18) 119
----------------------------------------------------------
Interest Expense 159 155
----------------------------------------------------------
Accrued Lease Payments (Note 17) 83
----------------------------------------------------------
Other 117 222
----------------------------------------------------------
Total $ 1,559 $ 1,565
----------------------------------------------------------
8. PENSION PLANS:
The Company has two non-contributory, defined benefit pension plans. The
components of pension expense, included in Cost of Sales and Services in
the Consolidated Statements of Operations and Comprehensive Income (Loss)
are as follows:
(in thousands)
2000 1999 1998
------------------------------------------------------------------
Benefits Earned for Service in the
Current Year $ 138 $ 159 $ 139
------------------------------------------------------------------
Interest on the Projected Benefit
Obligation 346 393 394
------------------------------------------------------------------
Return on Plan Assets (267) (255) (254)
------------------------------------------------------------------
-19-
<PAGE>
2000 1999 1998
------------------------------------------------------------------
Amortization of: Unrecognized Net
Pension Obligation at July 1, 1987;
Cost of Benefit Changes Since That
Date; and Gains and Losses
Against Actuarial Assumptions 118 174 162
------------------------------------------------------------------
Pension Expense 335 471 441
------------------------------------------------------------------
The 1999 Consolidated Statements of Operations and Comprehensive Income
(Loss) included as a part of the Restructuring and Realignment Costs, an
estimated cost of $431,000 relating to the curtailment and settlement of
pension liabilities for terminated employees ($220,000 of previously
unrecognized prior service cost and $211,000 of previously unrecognized
actuarial losses). The actuary computed the actual amounts as $309,000
($193,000 for prior service cost and $116,000 for actuarial loss), and the
Restructuring and Realignment Costs shown in the 2000 Consolidated
Statements of Operations and Comprehensive Income (Loss) include an income
item of $122,000 adjusting the previously recorded estimate to the actual
amount.
Below are various analyses and other information relating to the Company's
pension liability, assets and expense as of June 30, 2000 and June 30,
1999, (all amounts are in thousands except for those indicated as percent):
Change in Benefit Obligation: 2000 1999
------------------------------------------------------------------
Benefit Obligation at Beginning of Year $ 5,722 $ 5,815
------------------------------------------------------------------
Current Year Service Cost 138 159
------------------------------------------------------------------
Interest Cost on Projected Liability 346 393
------------------------------------------------------------------
Benefit Payments (499) (531)
------------------------------------------------------------------
Curtailment of Liability for Terminated
Employees (417)
------------------------------------------------------------------
Actuarial (Gain) Loss (64) (123)
------------------------------------------------------------------
Increased Liability from Plan Amendments 9
------------------------------------------------------------------
Benefit Obligation at End of Year $ 5,226 $ 5,722
------------------------------------------------------------------
Change in Plan Assets: 2000 1999
------------------------------------------------------------------
Fair Value of Plan Assets at Beginning
of Year $ 3,881 $ 3,530
------------------------------------------------------------------
Company Contributions 580 621
------------------------------------------------------------------
Actual Return on Plan Assets 352 261
------------------------------------------------------------------
MetLife Demutualization 302
------------------------------------------------------------------
Benefit Payments (499) (531)
------------------------------------------------------------------
-20-
<PAGE>
Change in Plan Assets: 2000 1999
------------------------------------------------------------------
Settlement Payments to Terminated Employees (477)
------------------------------------------------------------------
Fair Value of Plan Assets at End of Year $ 4,139 $ 3,881
------------------------------------------------------------------
Reconciliation of Funded Status:
------------------------------------------------------------------
Funded Status $ (1,087) $ (1,842)
------------------------------------------------------------------
Unrecognized Transitional Amount 81 98
------------------------------------------------------------------
Unrecognized Actuarial Loss 589 868
------------------------------------------------------------------
Unrecognized Prior Service Cost 104 194
------------------------------------------------------------------
Net Amount Recognized $ (313) $ (682)
------------------------------------------------------------------
Amounts Recognized in the Consolidated Balance Sheets:
------------------------------------------------------------------
Intangible Pension Asset $ 52 $ 88
------------------------------------------------------------------
Deferred Tax Asset 222 260
------------------------------------------------------------------
Accumulated Other Comprehensive Loss 430 506
------------------------------------------------------------------
Accrued Pension Liability:
------------------------------------------------------------------
Prepaid Benefit Cost 44
------------------------------------------------------------------
Booked (357) (682)
------------------------------------------------------------------
Additional (704) (854)
------------------------------------------------------------------
Net Amount Recognized in Financial Statements (313) (682)
------------------------------------------------------------------
CERTAIN ACTUARIAL ASSUMPTIONS: 2000 1999
------------------------------------------------------------------
Assumed Discount Rate 7.5% 7.5%
------------------------------------------------------------------
Expected Long-Term Rate of Return on Plan
Assets 7.5% 7.5%
------------------------------------------------------------------
Rate of Compensation Increase, For the One
Plan Whose Benefits Are Pay Related 5.5% 5.0%
------------------------------------------------------------------
At June 30, 2000, one of the pension plans has a benefit obligation (
$2,569,000) that is greater than its plan assets ($1,865,000) resulting in
the additional liability of $704,000. At June 30, 1999, both plans had
benefit obligations that were greater than their plan assets.
The Consolidated Statement of Operations and Comprehensive Income (Loss)
shows the amount included in Other Comprehensive Income that resulted from
-21-
<PAGE>
recording the pension liability that has not yet been charged against
operations.
In April, 2000 the plans received a cash distribution of $302,000 from the
conversion of MetLife from a mutual company to a stock company. MetLife is
the company who provides actuary and other services for the pension plans.
In addition, the Company provides retirement benefits to certain employees
through deferred compensation contracts and the unfunded liability
associated with these contracts was $65,000 at July 1, 2000.
9. RETIREE HEALTH BENEFITS:
The Company accounts for the costs and liability of health care benefits
for retired employees using Statement of Financial Accounting Standards No.
106 (FAS 106), "Employers Accounting for Postretirement Benefits Other Than
Pensions". The liability at the date of adoption of FAS 106 (July 4, 1993)
is being recognized over employee future service lives.
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 the 2000, 1999 and 1998
Statements of Operations and Comprehensive Income (Loss) was:
(in thousands)
2000 1999 1998
----------------------------------------------------------------
Benefits Earned for Current Service $ 8 $ 35 $ 23
----------------------------------------------------------------
Interest Cost on Accumulated Liability 14 24 23
----------------------------------------------------------------
Amortization of the July 4, 1993
Liability 14 14 14
----------------------------------------------------------------
Total Cost $ 36 $ 73 $ 60
----------------------------------------------------------------
An analysis of the total liability for the last two fiscal years, including
a reconciliation of the liability in the Consolidated Balance Sheets (see
Note 7) at July 1, 2000 and July 3, 1999 is:
(in thousands)
2000 1999
--------------------------------------------------------------------------
Total Liability at Beginning of Year $ 207 $ 381
--------------------------------------------------------------------------
Liability for Current Service 8 35
--------------------------------------------------------------------------
Interest on Liability 14 24
--------------------------------------------------------------------------
Benefit Payments (60) (81)
--------------------------------------------------------------------------
-22-
<PAGE>
2000 1999
--------------------------------------------------------------------------
Actuarial Loss 221 21
--------------------------------------------------------------------------
Reduction in Liability for Employment Terminations
(Note 18) (173)
--------------------------------------------------------------------------
Total Liability at End of Year 390 207
--------------------------------------------------------------------------
Less Unamortized Liability at July 4, 1993 (59) (73)
--------------------------------------------------------------------------
Unrecognized Gain (Loss) (185) 36
--------------------------------------------------------------------------
Liability Recognized in the Consolidated Balance
Sheets 146 170
--------------------------------------------------------------------------
The assumed health care cost trend rate used to project expected future
cost was 15% in 2000 (11.25% in 1999), gradually decreasing to 6% by 2006
and remaining at 6% thereafter. The assumed discount rate used to determine
the accumulated liability was 7.5% for 2000 and 1999. 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.
10. INCOME TAXES:
The Company accounts for the provision and liability for income taxes using
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The provision for income taxes consist of the following:
(in thousands)
2000 1999 1998
---------------------------------------------------------------------
Federal Provision (Benefit):
---------------------------------------------------------------------
Currently Payable (Refundable) $ 158 $(158) $(294)
---------------------------------------------------------------------
Deferred (83) (252) 76
---------------------------------------------------------------------
Total Federal 75 (410) (218)
---------------------------------------------------------------------
State Provision Currently Payable 38 10 28
---------------------------------------------------------------------
Total Provision (Benefit) $ 113 $(400) $(190)
---------------------------------------------------------------------
A reconciliation of the effective income tax rate for the 2000, 1999 and
1998 fiscal years is as follows:
2000 1999 1998
---------------------------------------------------------------------
Statutory Federal Income Tax (Benefit)
Rate 34% (34%) (34%)
---------------------------------------------------------------------
Current Period Income of Puerto Rico
Subsidiary Substantially Exempt From
Puerto Rican and Federal Income Taxes (25%) (1%) (9%)
---------------------------------------------------------------------
State Taxes, Net of Federal Tax Benefit 5% 1% 4%
---------------------------------------------------------------------
-23-
<PAGE>
2000 1999 1998
---------------------------------------------------------------------
Untaxed Foreign Sales Corporation Income * * (2%)
---------------------------------------------------------------------
Non-deductible Expenses * * 4%
---------------------------------------------------------------------
Other * 2% 1%
---------------------------------------------------------------------
Effective Income Tax (Benefit) Rate 14% (32%) (36%)
---------------------------------------------------------------------
* less than 1%
Income earned in Puerto Rico by the Company's Puerto Rican subsidiary is
90% exempt from Puerto Rican income tax through 2000. In conjunction with
the consolidation of boot manufacturing operations in Puerto Rico, the
Company has applied for, and expects to receive, a new multi-year tax
exemption grant with terms similar to the present one. Income earned in
Puerto Rico by this subsidiary has not been subject to United States
federal income tax. The Small Business Job Protection Act (Act), passed by
Congress on August 2, 1996 and subsequently signed by the President,
terminated the federal tax credit on this income subject to a phase out for
existing companies, for tax years beginning after December 31, 1996. Under
the phase out, the Company should receive a full credit through fiscal year
2002. For fiscal years 2003 through 2006, the credit will be limited, and
will be completely eliminated starting with the 2007 fiscal year.
The accumulated undistributed earnings ($5,543,000 at July 1, 2000) of this
subsidiary are subject to a Puerto Rican tollgate tax (5%) when remitted to
the parent Company. Accrued tax liabilities have been provided for the
tollgate tax reasonably expected to be paid in the future.
At July 3, 1999, the Company had an income tax refund receivable for the
carryback of part of the 1999 loss.
Significant components of the Company's deferred tax assets and liabilities
as of the end of fiscal 2000 and 1999 are as follows:
(in thousands)
Deferred Tax Assets: 2000 1999
--------------------------------------------------------------------------
Pension Cost Charged Against Financial Statement Income,
Not Yet Deducted From Taxable Income $ 79 $ 216
--------------------------------------------------------------------------
Tax Effect of Pension Liability Charged Against Equity 222 260
--------------------------------------------------------------------------
Employee Compensation Charged Against Financial
Statement Income, Not Yet Deducted From Taxable Income 173 200
--------------------------------------------------------------------------
Additional Costs Inventoried for Tax Purposes 54 64
--------------------------------------------------------------------------
Federal NOL Carryforward 399 179
--------------------------------------------------------------------------
State NOL Carryforward 285 270
--------------------------------------------------------------------------
Alternative Minimum Tax Credit 70 36
--------------------------------------------------------------------------
Other 69 90
--------------------------------------------------------------------------
Total Deferred Tax Assets 1,351 1,315
--------------------------------------------------------------------------
-24-
<PAGE>
Deferred Tax Assets: 2000 1999
--------------------------------------------------------------------------
Valuation Allowance (339) (360)
--------------------------------------------------------------------------
Net Deferred Tax Assets 1,012 955
--------------------------------------------------------------------------
Deferred Tax Liabilities:
--------------------------------------------------------------------------
Depreciation Deducted From Taxable Income Not Yet
Charged Against Financial Statement Income 78 65
--------------------------------------------------------------------------
Net Deferred Tax Assets $ 934 $ 890
--------------------------------------------------------------------------
Because of the level of uncertainty about being able to reduce future
income tax payments by certain tax carryforward items, deferred tax assets
have been reduced by the above shown valuation allowances.
The Company has an operating loss carryforward of $1,175,000, which expires
in 2019 and 2020, available to reduce future federal taxable income. In
addition, $4,379,000 of operating loss carryforward, which expires in 2003
through 2005, is available to reduce certain future state taxable income.
The benefit of this state operating loss carryforward is a part of the
Company's deferred tax valuation reserve.
11. NOTES PAYABLE:
On December 29, 1995 Wellco repurchased from Coronet Insurance Company and
some of its affiliates (Coronet and Affiliates) 1,531,272 shares of Wellco
common stock, which represented 57.69% of total shares outstanding at that
time. The Stock Repurchase Agreement provides that certain additional
payments may be made through Wellco's fiscal year 2003.
Although the stock repurchase occurred, the related Stock Repurchase
Agreement was not executed by Coronet and Affiliates, nor have they
performed certain other actions required by the Agreement. In addition, the
Circuit Court of Cook County in Illinois has since issued an Order of
Liquidation (Order) against Coronet Insurance Company. This Order requires
all persons having assets which are, or may be, the property of Coronet
Insurance Company to turn over these assets to the Director of Insurance of
the State of Illinois.
Wellco's counsel has advised that, because the Stock Repurchase Agreement
was not executed by Coronet and Affiliates and other actions required of
them by the Agreement were not performed, and because Coronet Insurance
Company is being liquidated by the Director of Insurance of the State of
Illinois, some uncertainty exists as to: (i) the enforceability of
provisions of the Stock Repurchase Agreement, and (ii) if enforceable, to
whom any additional obligation under the Agreement is owed.
Generally accepted accounting principles require that an obligation be
reflected in the Consolidated Balance Sheets for the estimated additional
payments that would be made if the Agreement is enforceable. Since the date
of stock repurchase, Wellco's Consolidated Balance Sheets have included a
Note Payable representing the present value of the estimated amounts that
would be paid if the Agreement is enforceable. The amount of the estimated
payment due in fiscal year 2003, discounted at a rate of 8.5%, is $701,000
at 7/1/00.
-25-
<PAGE>
The Stock Repurchase Agreement, as drafted, provides that actual payments,
if any, would only be made in the amount by which 60% of each fiscal year's
net income exceeds a certain defined amount, calculated on a cumulative
basis, and applying to fiscal years 1997 through 2002. The Note Payable has
been calculated on this basis. The Company revised its estimate of the
amount that might be paid during fiscal years 2000 and 1998. For fiscal
year 2000 during which there was a return to profitability, the revised
estimate increased the Note Payable and decreased Retained Earnings by
$392,000 (as required by generally accepted accounting principles for
stock repurchases). For fiscal year 1998 during which there was a net loss,
the revised estimate decreased the Note Payable and increased Retained
Earnings by $828,000.
The Stock Repurchase Agreement does not provide for the payment of
interest. However, generally accepted accounting principles require that
interest be imputed. Interest expense on the Stock Repurchase Agreement for
the fiscal years 2000, 1999, and 1998 was $3,000, $10,000 and $49,000
respectively. Total payments under the note cannot exceed $1,531,000 and
all obligations under the note terminate after the 2003 fiscal year
payment.
In 1998, a bank provided a three year term loan as part of the cash
required to construct a new warehouse adjoining the Company's existing
facilities in Waynesville, North Carolina. This loan is payable in monthly
installments of $12,125 plus interest at the bank's prime rate of 9.5% and
three monthly installments or $36,000 was outstanding under this loan at
July 1, 2000.
12. STOCK OPTIONS:
The Board of Directors approved the 1999 Stock Option Plan for Key
Employees (1999 Key Employees Plan) and the 1999 Stock Option Plan for Non-
Employee Directors (1999 Non-Employee Directors Plan). These Plans provide
for the granting of options to purchase 90,000 shares (1999 Key Employee
Plan) and 21,000 shares (1999 Non-Employee Directors Plan), and at
July 1, 2000 options for the purchase of 70,000 shares had been granted
under the 1999 Key Employee Plan and 11,000 shares under the 1999
Non-Employee Directors Plan. The plans permit the issuance of either
incentive stock options or non-qualified stock options. 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 71,000 shares were immediately
exercisable, and 7,750 become exercisable during fiscal year 2001 with the
remaining 2,250 options being exercisable in fiscal year 2002.
The Board of Directors approved the 1997 Stock Option Plan for Key
Employees (1997 Key Employees Plan) and the 1997 Stock Option Plan for
Non-Employee Directors (1997 Non-Employee Directors Plan). These Plans
provide for the granting of options to purchase 99,000 shares (1997 Key
Employee Plan) and 16,000 shares (1997 Non-Employee Directors Plan),
and at July 1, 2000 options for the purchase of 93,000 shares had been
granted under the 1997 Key Employee Plan and 14,000 shares under the 1997
Non-Employee Directors Plan. Under both Plans, the option price is the
market price on the date granted and options have a life of 10 years from
the date granted. Options granted under both of these plans were fully
exercisable on the date granted except for certain options granted to
certain officers which are not fully exercisable until future years in
order to qualify them for certain tax treatment. Options for the
purchase of 83,600 shares were exercisable by 1998 fiscal year end, 11,700
became exercisable during 1999, 8,300 became exercisable during 2000,
with the remaining 3,400 options being exercisable in 2001.
-26-
<PAGE>
Under the 1996 Stock Option Plan, the Compensation Committee of the
Board of Directors was authorized to grant stock options for the purchase
of up to 60,000 shares of the Company's common stock. Options for 52,500
shares have been granted under the 1996 Plan and the option exercise price
was the market price on the date granted.
Transactions involving these Plans for the last three fiscal years are
summarized below:
No. of Weighted-Average
Option Shares: Shares Exercise Price
-------------------------------------------------------------------
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
-------------------------------------------------------------------
Expired (1,500) 5.50
-------------------------------------------------------------------
Outstanding at July 3, 1999 118,000 11.20
-------------------------------------------------------------------
Granted 81,000 8.00
-------------------------------------------------------------------
Forfeited (9,000) 12.00
-------------------------------------------------------------------
Outstanding at July 1, 2000 190,000 $9.80
-------------------------------------------------------------------
The following table summarizes information about fixed stock options
outstanding at July 1, 2000:
Weighted-Average
Remaining
Range of Exercise Weighted Average Contractual Life
Number Prices Exercise Price in Years
--------------------------------------------------------------------------
15,000 $5.00 $5.00 5.0
--------------------------------------------------------------------------
94,000 $12.00-$17.50 $12.12 7.0
--------------------------------------------------------------------------
81,000 $8.00 $8.00 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 changed to the pro forma amounts
shown below for fiscal years 2000, 1999 and 1998 (in thousands, except per
share amounts):
-27-
<PAGE>
2000 1999 1998
-------------------------------------------------------------------------
Net Income (Loss), As Reported $ 711 $ (837) $ (337)
-------------------------------------------------------------------------
Net Income (Loss), Pro Forma $ 562 $ (878) $ (626)
-------------------------------------------------------------------------
Basic Earnings (Loss) Per Share,
As Reported $ 0.61 $ (0.72) $ (0.29)
-------------------------------------------------------------------------
Basic Earnings (Loss) Per Share,
Pro Forma $ 0.48 $ (0.75) $ (0.54)
----------------------------------------------------------------------
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:
2000 1998
--------------------------------------------------------------
Expected Dividend Yield 3.125% 1.67%
--------------------------------------------------------------
Expected Stock Price Volatility 33.45% 39.40%
--------------------------------------------------------------
Risk-Free Interest Rate 5.83% 5.55%
--------------------------------------------------------------
Expected Life of Options in Years 3.0 2.9
--------------------------------------------------------------
Weighted-Average Fair Value of Options
Granted $1.69 $3.54
--------------------------------------------------------------
On July 12, 2000, the Company and its Chairman of The Board executed an
Agreement under which the Chairman was granted options to purchase up to
50,000 shares of the Company's common stock at an exercise price of $9.125
per share with such options vesting in 2005 or earlier if certain
performance targets are met.
13. EARNINGS PER SHARE:
The Company computes its basic and diluted earnings per share amounts in
accordance with Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings per Share." Basic earnings per share is computed by
dividing net earnings by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net earnings by the weighted average number of common shares
outstanding during the period plus the dilutive potential common shares
that would have been outstanding upon the assumed exercise of dilutive
stock options.
The following is the reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
-28-
<PAGE>
For the Fiscal Year Ended 7/1/00
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- --------
Basic EPS Available to Shareholders $ 711,000 1,163,246 $ 0.61
----------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 5,310
----------------------------------------------------------------------------
Diluted EPS Available to Shareholders $ 711,000 1,168,556 $ 0.61
----------------------------------------------------------------------------
For the Fiscal Year Ended 7/3/99
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS Available to Shareholders $(837,000) 1,163,246 $(0.72)
----------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements
(Note: N/A - Anti-dilutive)
----------------------------------------------------------------------------
Diluted EPS Available to Shareholders $(837,000) 1,163,246 $(0.72)
----------------------------------------------------------------------------
For the Fiscal Year Ended 6/27/98
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS Available to Shareholders $(337,000) 1,161,103 $(0.29)
----------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements
(Note: N/A - Anti-dilutive)
----------------------------------------------------------------------------
Diluted EPS Available to Shareholders $(337,000) 1,161,103 $(0.29)
----------------------------------------------------------------------------
14. SEGMENT AND REVENUE INFORMATION:
The Company adopted Statement of Financial Accounting Standards No. 131
(SFAS 131), "Disclosures About Segments of an Enterprise and Related
Information," in the 1999 fiscal year. SFAS 131 requires disclosure of
financial and descriptive information about reportable operating segments,
revenues by products or services, and revenues and assets by geographic
areas.
The Company operates in one reportable segment. Substantially all of the
Company's operating activity is from the sale of military and other rugged
footwear, the sale of specialized machinery and materials for the
manufacture of this type of footwear and the rendering of technical
assistance and other services to licensees for the manufacture of this type
of footwear. The Company identifies segments based on the Company's
organization under one management group. The Company's operations are
managed as one unit and resources are allocated without regard to separate
functions.
-29-
<PAGE>
Information about the Company's revenues is as follows:
(in thousands)
2000 1999 1998
----------------------------------------------------------------------------
Sales of Footwear and Related Items $ 21,738 $ 20,913 $ 22,745
----------------------------------------------------------------------------
Revenues from Licensees 487 399 1,172
----------------------------------------------------------------------------
Total Revenues by Major Product Group $ 22,225 $ 21,312 $ 23,917
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenues from U. S. Customers $ 20,740 $ 18,816 $ 22,653
----------------------------------------------------------------------------
Revenues from International Customers 1,485 2,496 1,264
----------------------------------------------------------------------------
Total Revenues by Geographic Region $ 22,225 $ 21,312 $ 23,917
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Location of Major International Customers:
----------------------------------------------------------------------------
Latin America $ 212 $ 1,252 $ 529
----------------------------------------------------------------------------
Canada 195 833 369
----------------------------------------------------------------------------
Asia/Pacific 209 $ 374 $ 331
----------------------------------------------------------------------------
Mexico 281
----------------------------------------------------------------------------
United Kingdom $ 509
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Major Customer- U. S. Government $ 14,378 $ 14,246 $ 17,326
----------------------------------------------------------------------------
The Company does not have long-lived assets or operations in foreign
countries. The categorization of revenues as being from international
customers was based upon the final destination of products sold or services
rendered.
15. GOVERNMENT BOOT CONTRACT REVENUES:
From time to time, the Company records estimates of revenues or costs
associated with certain contract actions not yet settled with the U. S.
government. Any difference between these estimates and the actual amounts
agreed to are included in the period of settlement. There were no
significant unsettled contract actions at July 1, 2000. There were no
significant differences between estimated and actual amounts for contract
actions settled in fiscal years 2000, 1999 and 1998.
16. 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
-30-
<PAGE>
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 provided that any disagreement between Wellco and
DSCP on an item of cost will be subject to binding arbitration.
In October, 1998, DSCP agreed to pay Wellco $246,000 under this Agreement.
The 1998 fiscal year Consolidated Statements of Operations and
Comprehensive Income (Loss) included $226,000 of income related to this
claim, representing the agreed to $246,000 less $20,000 of related costs.
Wellco subsequently filed a contract claim for the additional amount it
felt was due under the Agreement.
In January, 2000 the federal government's Alternative Disputes Resolution
(ADR) procedure was used to reach a final and non-appealable settlement of
the claim. The 2000 Consolidated Statements of Operations and Comprehensive
Income (Loss) include $252,000 less $49,000 of related costs for the
settlement of this claim, which is the amount awarded Wellco by the ADR
Judge less related costs.
17. COMMITMENTS:
Under a Resolution of its Board of Directors, Wellco is committed to
purchase its Common Stock which, as of September 6, 1990, was owned by or
under option with an active or retired employee at that date. This purchase
is at the employee or retiree option and is activated only by the
termination of employment or death of the retiree. The purchase price is to
be based on Wellco's tangible book value at the time of purchase. The
maximum number of shares that could be purchased at July 1, 2000 is
approximately 81,000.
The Company has a non-cancelable operating lease with the Puerto Rican
governmental agency for its manufacturing facility. The term of the lease
is for ten years, beginning July 1, 1999 with monthly payments that
commenced on January 1, 2000. Total lease payments for the period January
1, 2000 through June 30, 2009 are $1,425,000. Lease payments for each of
the Company's five fiscal years ending after July 1, 2000 are: $120,000,
$120,000, $135,000, $150,000 and $156,000. Lease expense for the Company's
current Puerto Rican facility in the 2000 fiscal year was $142,500. Lease
expense for the Company's former Puerto Rican facility in the 1999 and 1998
fiscal years was $59,000 each year.
At July 1, 2000, the Company had a $800,000 commitment to purchase capital
equipment.
18. RESTRUCTURING AND REALIGNMENT COSTS:
In February, 1999, the Board of Directors approved a restructuring plan to
consolidate and realign the Company's footwear manufacturing operations.
Under this plan, the Company consolidated substantially all footwear
manufacturing operations in Aguadilla, Puerto Rico, where the Company has
had operations since 1956.
The execution of this plan, which started in early May 1999, resulted in
the elimination of 77 employment positions at the Company's Waynesville,
North Carolina facility, and in the transfer of a significant amount of
Waynesville machinery and materials to Aguadilla. Approximately 80 new
personnel were added and trained in Aguadilla and the Aguadilla operations
have been moved to a larger facility which incorporates the operations
transferred from Waynesville.
-31-
<PAGE>
Reconciliations of the Restructuring and Realignment Costs and accrual
activity during fiscal years 2000 and 1999 are as follows:
Fiscal Year Ending July 3, 1999:
Activity
Charged
Period Total Against Accrued
Costs Accrual Expenses Accrual Balance
--------------------------------------------------------------------------------
Severance $764,000 $764,000 ($680,000) $84,000
--------------------------------------------------------------------------------
Employee Training Costs $104,000 104,000
--------------------------------------------------------------------------------
Equipment Relocation and
Installation 84,000 35,000 119,000 35,000
--------------------------------------------------------------------------------
Legal and Other 90,000 90,000
--------------------------------------------------------------------------------
Total $278,000 $799,000 $1,077,000 ($680,000) $119,000
--------------------------------------------------------------------------------
Fiscal Year Ending July 1, 2000:
Activity
Charged
Period Total Against Accrued
Costs Accrual Expenses Accrual Balance
--------------------------------------------------------------------------------
Severance ($122,000) $32,000 ($90,000) ($116,000)
--------------------------------------------------------------------------------
Employee Training Costs 186,000 186,000
--------------------------------------------------------------------------------
Equipment Relocation and
Installation 103,000 5,000 108,000 (40,000)
--------------------------------------------------------------------------------
Legal and Other 134,000 134,000
--------------------------------------------------------------------------------
Total $301,000 $37,000 $338,000 ($156,000)
--------------------------------------------------------------------------------
After July 1, 2000, the Company expects no additional restructuring and
realignment costs associated with this plan.
The Company has filed for a $400,000 reimbursement from the government of
Puerto Rico, under an incentive grant, relating to certain costs incurred
in consolidating substantially all footwear manufacturing operations in
Puerto Rico. Any amounts collected will be recorded in the period received.
-32-
<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 (the "Company") as of July 1, 2000 and July
3, 1999, and the related consolidated statements of operations and comprehensive
income (loss), stockholders' equity, and cash flows for each of the three fiscal
years in the period ended July 1, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of July 1, 2000
and July 3, 1999, and the results of its operations and comprehensive income
(loss) and its cash flows for each of the three fiscal years in the period ended
July 1, 2000 in conformity with accounting principles generally accepted in the
United State of America.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
September 28, 2000
-33-
<PAGE>
WELLCO ENTERPRISES, INC.
PRICE RANGE, DIVIDENDS AND MARKET OF COMMON STOCK
Fiscal Year 2000 Quarters
First Second Third Fourth
--------------------------------------------------------------------------------
Market Price Per Share-
--------------------------------------------------------------------------------
High 8 1/8 8 3/8 8 1/8 10 1/2
--------------------------------------------------------------------------------
Low 7 7 6 7/8 7 1/4
--------------------------------------------------------------------------------
Per Share Cash Dividend Declared $.10 $.15
--------------------------------------------------------------------------------
Fiscal Year 1999 Quarters
First Second Third Fourth
--------------------------------------------------------------------------------
Market Price Per Share-
--------------------------------------------------------------------------------
High 12 3/4 12 1/8 10 1/8 9 1/2
--------------------------------------------------------------------------------
Low 10 1/2 9 3/8 5 1/4 5 3/8
--------------------------------------------------------------------------------
Per Share Cash Dividend Declared $.10 $.10
--------------------------------------------------------------------------------
The Company's Common Stock is traded on the American Stock Exchange.
The number of holders of record of Wellco's Common Stock as of September 15,
2000 was 261.
Registrar and Transfer Agent
ChaseMellon Shareholders Services
New York, N. Y.
-34-
<PAGE>
WELLCO ENTERPRISES, INC.
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
(In Thousands Except for Per Share Amounts)
Fiscal Year 2000 Quarters
First Second Third Fourth
--------------------------------------------------------------------------------
Revenues $ 4,732 $ 4,559 $ 6,291 $ 6,643
--------------------------------------------------------------------------------
Cost of Sales and Services 4,093 4,032 5,137 5,761
--------------------------------------------------------------------------------
Net Income (Loss) (A) (191) (B) 198 (A) 398 (A) 306
--------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share $ (0.16) $ 0.17 $ 0.34 $ 0.26
--------------------------------------------------------------------------------
Fiscal Year 1999 Quarters
First Second Third Fourth
--------------------------------------------------------------------------------
Revenues $ 4,957 $ 3,829 $ 4,383 $ 8,143
--------------------------------------------------------------------------------
Cost of Sales and Services 4,484 3,667 3,841 7,106
--------------------------------------------------------------------------------
Net Loss (149) (278) (C) (376) (C) (34)
--------------------------------------------------------------------------------
Basic Loss Per Share $ (0.13) $ .024 $ (0.32) $ (0.03)
--------------------------------------------------------------------------------
(A)Reduced by $359,000 in the first quarter, $19,000 in the third quarter
and $7,000 in the fourth quarter, representing restructuring and
realignment costs. See Note 18 to the Consolidated Financial Statements.
(B)Increased by $47,000 representing a restructuring credit of $122,000 due
to the difference in the estimated and actual pension cost of terminated
employees and realignment costs of $75,000. See Note 18 to the
Consolidated Financial Statements. Also, increased by $203,000 for the
contract claim discussed in Note 16 to the Consolidated Financial
Statements.
(C)Reduced by $403,000 in the third quarter and $413,000 in the fourth
quarter, representing restructuring and realignment costs. See Note 18 to
the Consolidated Financial Statements.
-35-
<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
FRED K. WEBB, Jr.
Vice President of Marketing
Officers
SVEN E. OBERG
V. P. - Technical Director
RICHARD A. WOOD, Jr.
Secretary, Attorney, Member of the law firm of McGuire, Wood & Bissette, P. A.
TAMMY FRANCIS
Assistant Secretary and Controller
Directors
WILLIAM M. COUSINS, Jr.
President of William M. Cousins, Jr., Inc.
(Management Consultants)
JAMES T. EMERSON
Retired Engineer
CLAUDE S. ABERNETHY, Jr.
Senior Vice President of IJL Wachovia
J. AARON PREVOST
Retired Banker
JOHN D. LOVELACE
Vice President of Credit and Collections
United Leasing Corporation
-36-
<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 13, 2000,
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 69 Chairman of the Board of Directors, Chief
Executive Officer
----------------------------------------------------------------------
David Lutz, CPA 55 President, Treasurer and Director
----------------------------------------------------------------------
Rolf Kaufman 70 Vice Chairman, Board of Directors
----------------------------------------------------------------------
Sven Oberg 61 Vice President-Technical Director
----------------------------------------------------------------------
Fred K. Webb, Jr. 40 Vice President of Marketing
----------------------------------------------------------------------
Richard A. Wood, Jr. 63 Secretary
----------------------------------------------------------------------
Tammy Francis, CPA 41 Controller, Assistant Secretary
----------------------------------------------------------------------
In 1996, Mr. Kaufman retired from the office of President and remains active as
a consultant to the Company serving in the position as Vice Chairman, Board of
Directors. Mr. Lutz was elected to the office of President in 1996, previously
serving as Secretary/ Treasurer. Ms. Francis has been Controller since October,
1996 and was elected Assistant Secretary in November, 1998. She was Controller
of Atlas Precision, Inc., an injection molding manufacturer, from 1995 until
October, 1996. From 1990 until 1995, she was Manager of Finance and Accounting
at Haywood Electric Membership Corporation, a rural utility company. Prior to
becoming Secretary of the Company in 1996, Mr. Wood served for more than the
past five years as Assistant Secretary. Mr. Wood is a partner in the law firm of
McGuire, Wood & Bissett, general counsel to the Company. Mr. Webb has been a
director since 1996 and an employee with the Company since August 1998. In
February 1999, Mr. Webb was elected Vice President of Marketing. Mr. Webb was
employed as an Accounting Team Leader with United Guaranty Corporation from 1989
until 1998.
Executive officers are elected by the Board of Directors to serve a term of one
year. There are no arrangements or understandings pursuant to which any of the
officers are elected, and all are elected to serve for one year terms.
Item 11. Executive Compensation. (Executive Compensation)
------- ----------------------
-6-
<PAGE>
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 2000 fiscal year, no executive officer of the
Registrant or member of his immediate family has had any transaction or series
of similar transactions with the Registrant or any of its subsidiaries exceeding
$60,000, and there are no currently proposed transactions exceeding $60,000.
Since the beginning of the 2000 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
--------------------------------------------------------------------------------
The following consolidated financial statements of Wellco
Enterprises, Inc. are in the Registrant's 2000 Annual Report
to Shareholders which is integrated into Part II of this Form
10-K immediately after page 5
--------------------------------------------------------------------------------
Consolidated Balance Sheet-at July 1, 2000 and July 3, 1999 11-12*
--------------------------------------------------------------------------------
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the years ended July 1, 2000, July 3,
1999 and June 27, 1998 10*
--------------------------------------------------------------------------------
Consolidated Statements of Cash Flowsfor the years ended
July 1, 2000, July 3, 1999 and June 27, 1998 13-14*
--------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity for the years
ended July 1, 2000, July 3, 1999 and June 27, 1998 15*
--------------------------------------------------------------------------------
Independent Auditors' Report 33*
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 16-32*
--------------------------------------------------------------------------------
* Page number in the 2000 Annual Report to Shareholders integrated in Part II of
this Form 10-K.
2. Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable,
not required, or the information contained is not material.
-7-
<PAGE>
3. Exhibits
-----------
Exhibit Page
Number Description Number
--------------------------------------------------------------------------------
3 Articles of Incorporation and By-Laws (a)
--------------------------------------------------------------------------------
10 Material Contracts:
--------------------------------------------------------------------------------
A. Bonus Arrangement* (b)
--------------------------------------------------------------------------------
B. 1996 Stock Option Plan for Key Employees of
Wellco Enterprises, Inc.* (c)
--------------------------------------------------------------------------------
C. 1997 Stock Option Plan for Key Employees of
Wellco Enterprises, Inc.* (d)
--------------------------------------------------------------------------------
D. 1997 Stock Option Plan for Non-Employee Directors of
Wellco Enterprises, Inc.* (e)
--------------------------------------------------------------------------------
E. 1999 Stock Option Plan for Key Employees of
Wellco Enterprises, Inc.* (f)
--------------------------------------------------------------------------------
F. 1999 Stock Option Plan for Non-Employee Directors of
Wellco Enterprises, Inc.* (g)
--------------------------------------------------------------------------------
G. Employment Agreement with Chairman of Wellco's
Board of Directors* 11-15
--------------------------------------------------------------------------------
21 Subsidiaries of Registrant 16
--------------------------------------------------------------------------------
* 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
Exhibit 10 F. 3.00
Exhibit 10 G. 3.00
(a) Exhibit was filed in Part IV of Form 10-K for the fiscal year
ended July 1, 1995, and is incorporated herein by reference.
(b) Exhibit was filed in PART IV of Form 10-K for the fiscal year
ended July 3, 1982, and is incorporated herein by reference.
(c) Exhibit was filed as Exhibit A to the Proxy Statement dated
October 18, 1996, and is incorporated herein by reference.
(d) Exhibit was filed as Exhibit A to the Proxy Statement dated
October 17, 1997, and is incorporated herein by reference.
(e) Exhibit was filed as Exhibit B to the Proxy Statement dated
October 17, 1997, and is incorporated herein by reference.
(f) Exhibit will be filed as Exhibit A to the Proxy Statement to be
dated October 13, 2000, and is incorporated herein by reference.
(g) Exhibit will be filed as Exhibit B to the Proxy Statement to be
dated October 13, 2000, and is incorporated herein by reference.
-8-
<PAGE>
Item 14 (b) - Reports on Form 8-K
There were no reports on Form 8-K for the three months ended July 1, 2000.
-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: September 29, 2000
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/ James T. Emerson
--------------------------------------------------------------------------------
David Lutz, Director James T. Emerson, Director
--------------------------------------------------------------------------------
/s/ Fred K. Webb, Jr.
---------------------------------------
Fred K. Webb, Jr., Director
---------------------------------------
Date: September 29, 2000
-10-
<PAGE>
EXHIBIT 10
----------
WELLCO ENTERPRISES, INC.
EMPLOYMENT AGREEMENT WITH CHAIRMAN OF THE BOARD OF WELLCO'S BOARD OF DIRECTORS
The following five pages in this Form 10-K is the complete Employment Agreement
with the Chairman of the Board of Directors of the registrant. The agreement was
approved by the Board of Directors on July 12, 2000 and signed by the Chairman
of the Board, Horace Auberry.
-11-
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF HAYWOOD
AGREEMENT
THIS AGREEMENT, is made and entered into this 12th day of July, 2000,
by and between HORACE AUBERRY, a citizen and resident of Haywood County, North
Carolina (hereinafter referred to as "Auberry"), and WELLCO ENTERPRISES, INC., a
corporation organized and existing under the laws of the State of North Carolina
with its principal place of business in the Town of Waynesville, Haywood County,
North Carolina (hereinafter referred to as "Wellco");
WITNESSETH:
WHEREAS, Auberry is now serving and since 1964 has served Wellco and
its subsidiary corporations in important capacities, most notably as Chairman of
Wellco's Board of Directors since 1968; and
WHEREAS, Wellco desires to assure itself of the continuing availability
of Auberry on the terms set forth in this Agreement;
NOW, THEREFORE, in consideration of the services to be rendered to
Wellco and its subsidiary corporations by Auberry hereunder, and in further
consideration of the several agreements to be kept and performed by the parties
hereto as hereinafter set forth, the parties hereto do hereby contract and agree
with each other as follows:
1. Auberry will continue in the full-time employment of Wellco until
December 31, 2000 or for such later period of time as Wellco and Auberry may
hereafter agree. His base compensation effective July 1, 2000 shall be at the
annual rate of $159,952.00, plus any profit-sharing to be earned during said
year.
2. Commencing January 1, 2001, Auberry will continue employment until
June 30, 2005 devoting approximately 50% of his working time and receiving 50%
of his full-time salary with full fringe, insurance and other benefits available
to other similar executives of Wellco or with working time and compensation
percentages as mutually agreed from time to time between the Company and
Auberry.
3. At all times while Auberry is working as a full- or part-time
employee and otherwise receives remuneration in accordance with the provisions
of this Agreement, Auberry agrees that he will (i) serve as Chairman of the
Board of Directors or member of said Board of Directors for such period of time
as he may be elected to either or both of said positions by Wellco's Board of
Directors or stockholders respectively and (ii) represent Wellco on various
industry organizations (e.g., Footwear Industry of America, AAMA, etc.) and
including service on any governmental advisory committees on which he may be
requested to serve by the Company.
4. Wellco hereby grants to Auberry the option to purchase up to 50,000
shares of the Company's common stock at an exercise price of $9.125 per share as
-12-
<PAGE>
and when said stock options become vested in favor of Auberry based upon
Wellco's earnings per share for it's 2000-2001 fiscal years through its
2004-2005 fiscal years, as follows.
====================================================================
EARNINGS PER SHARE NO. OF SHARES
FOR FISCAL YEAR VESTED ANNUALLY
--------------------------------------------------------------------
$1.50 10,000
--------------------------------------------------------------------
$2.00 20,000
--------------------------------------------------------------------
$2.50 30,000
--------------------------------------------------------------------
$3.00 40,000
--------------------------------------------------------------------
More than $3.00 50,000
====================================================================
Any portion of the 50,000 shares not vested at the end of the Company's
2004-2005 fiscal year in accordance with the foregoing schedule shall
nevertheless become vested at that time.
In no event shall Auberry be granted more than a total of 50,000.00
shares pursuant to said stock option program. The right to exercise this option
with respect to the shares vesting in any particular year shall expire on
earlier of (i) the fifth anniversary of the date of such vesting or (ii) one (1)
year after Auberry's separation from employment hereunder. The option shall be
subject to adjustment, anti-dilution and other provisions relating to corporate
reorganizations and capital events as are applicable to stock options granted
under Wellco's general employee stock option programs.
5. During the term of this Agreement, Auberry shall receive annually a
cash bonus equal to 2.5% of Wellco's consolidated net income after taxes and
after all bonuses, as determined and certified annually by Wellco's Chief
Financial Officer. For any fiscal year during said term in which Auberry's
profit-sharing as stated above is below $25,000.00 or above $150,000.00, the
Compensation Committee will review and possibly recommend to the Company's Board
of Directors an adjusted amount of said profit-sharing.
6. Wellco will continue group health insurance benefits to Auberry and
his dependent while he is engaged in full-time employment hereunder. After
termination of Auberry's full-time employment hereunder and during the remaining
period of this Agreement, Wellco will pay or reimburse to Auberry the cost of
his Medicare Supplement ("Part B") insurance.
7. Auberry will not during the term of this Agreement directly or
indirectly engage in the footwear industry in the United States or any foreign
country, either as an employee, agent, consultant, officer, independent
contractor, sole proprietor, partner, stockholder, contractor or otherwise, with
any firm, partnership or corporation other than Wellco and/or its subsidiary
corporations, without prior written approval of Wellco. Auberry further agrees
that he will not, without prior written approval of Wellco, reveal to or advise
any third person, firm or corporation in the United States or any foreign
country concerning any of the special methods or processes of manufacturing
-13-
<PAGE>
footwear employed by Wellco and its subsidiary corporations or by its licensees
or the licensees of any of its subsidiary corporations. Auberry further agrees
that if, during the time of this Agreement, he shall conceive of or develop any
new or improved machine, method, process or invention for the manufacture,
distribution or sale of footwear, Auberry will disclose to Wellco all pertinent
information within his possession concerning such new or improved machine,
method, process or invention and shall, upon request by Wellco, transfer and
assign to Wellco all rights thereto to the end that Wellco shall thereafter have
the sole right to use, make and sell or otherwise develop and exploit in any way
which it shall deem best and in any country or territory whatsoever such new or
improved machine, method, process or invention. In consideration of Auberry's
undertaking herein Wellco will pay Auberry annually 7 1/2% of Wellco's royalty
income received by Wellco from licensees during the period hereinafter defined
resulting from any products manufactured and sold by Wellco licensees embodying
patentable inventions and U.S. government Value Engineering Change Proposals
("VECP's") developed by Auberry and 7 1/2% of 3% annually of the dollar value of
sales by Wellco itself utilizing such inventions or VECP's. This royalty payment
shall expressly include the "universal boot," polyurethane/rubber injection boot
and the polyurethane blast protective boot in process of patenting by Auberry
for the benefit of Wellco and all VECP's presently outstanding on behalf of
Wellco with the federal government. Future patentable inventions or VEPC's
developed by Auberry and used by Wellco shall be specifically identified in
writing by Auberry and Wellco in order for Auberry to be entitled to receive
such payments hereunder.
The royalty payments shall be calculated quarterly as of the end of
each of Wellco's fiscal quarters and payable within 45 days after the end of
each fiscal quarter. The royalty provided hereunder shall be paid with respect
to a particular patentable invention or VECP, for a period of five years
beginning from the date of the first bona fide sale to a third party of a
product by Wellco or by a licensee embodying the particular patentable invention
or VECP. Wellco shall provide Auberry with a quarterly accounting breakdown of
transactions generating royalties, and shall keep records sufficient for a
determination to be made of the amount of royalty due hereunder. Auberry and his
representatives shall have the right to review Wellco's books and records to
verify the computation of royalties payable under this Agreement upon written
request.
8. Any controversy or claim arising out of or relating to this
Agreement, its interpretation or the breach thereof, shall be settled by
arbitration in Waynesville, North Carolina, in accordance with the rules and
under the procedures of the American Arbitration Association, and the award of
the arbitrator rendered therein shall be binding upon both parties.
9. The rights and obligations of Wellco under this Agreement shall be
binding upon Wellco, its successors and assigns, including, but not limited to,
any person, firm or corporation or other business entity into which it may be in
any manner merged or consolidated or to which it may at any time hereafter
transfer all or substantially all of its assets. The obligations of Auberry, and
the rights of Auberry under Section 7 hereunder shall survive, and shall be
binding upon and inure to the benefit of the executors and heirs of Auberry in
the event of his death during the term of this Agreement. Otherwise, the rights
of Auberry hereunder shall not be assignable by Auberry during the term hereof.
-14-
<PAGE>
10. Except as above provided, this Agreement shall terminate at the end
of Wellco's fiscal year ending in 2005; further provided, however, that if by
subsequent Agreement between Auberry and Wellco Auberry's full-time employment
continues beyond December 31, 2000 the termination of this Agreement shall
instead occur five years after Auberry ceases full-time employment with Wellco.
11. This Agreement shall be governed by the laws of the State of North
Carolina. Any amendment to this Agreement shall be in writing in order to be
enforceable against the other party hereto. IN WITNESS WHEREOF, Wellco has
caused this Agreement to be executed in duplicate originals in its corporate
name and its corporate seal affixed by its duly authorized officers pursuant to
the authority duly given by its Board of Directors, and Auberry has hereunto set
his hand and seal, all as of the day and year first above written.
WELLCO ENTERPRISES, INC.
/s/ Horace Auberry /s/ David Lutz
------------------------- ------------------------
Horace Auberry David Lutz, President
Attest:
/s/ Tammy Francis
----------------------------------
Tammy Francis, Assistant Secretary
-15-
<PAGE>
