FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED: JANUARY 1, 2005
COMMISSION FILE NUMBER: 1-5555
WELLCO ENTERPRISES, INC.
-------------------------
(Exact name of registrant as specified in charter)
NORTH CAROLINA 56-0769274
- ------------------- ----------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
150 Westwood Circle, P.O. Box 188, Waynesville, NC 28786
(Address of Principal Executive Office)
Registrant's telephone number, including area code 828-456-3545
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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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X .
----- -----
1,270,746 shares of $1 par value common stock were outstanding on February 15,
2005.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WELLCO ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS FILED WITH FORM 10-Q
FOR THE FISCAL QUARTER ENDED JANUARY 1, 2005
The attached unaudited financial statements reflect all adjustments which are,
in the opinion of management, necessary to reflect a fair statement of the
financial position, results of operations, and cash flows for the interim
periods presented. All significant adjustments are of a normal recurring nature.
-2-
WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 1, 2005 AND JULY 3, 2004
(in thousands)
ASSETS
(unaudited)
JANUARY 1, JULY 3,
2005 2004
-------------------------
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 57 $ 58
Receivables, net ............................... 8,688 6,070
Inventories-
Finished goods ............................. 3,741 2,228
Work in process ............................ 3,502 2,771
Raw materials .............................. 5,620 6,064
-------- --------
Total ...................................... 12,863 11,063
Deferred income taxes and prepaid expenses ..... 714 324
-------- --------
Total .......................................... 22,322 17,515
-------- --------
MACHINERY LEASED TO LICENSEES,
Net of accumulated depreciation ................ 14 17
PROPERTY, PLANT AND EQUIPMENT:
Land ........................................... 107 107
Buildings ...................................... 1,439 1,439
Machinery and equipment ........................ 10,466 9,553
Office equipment ............................... 830 797
Automobiles .................................... 181 188
Leasehold improvements ......................... 809 809
-------- --------
Total cost ..................................... 13,832 12,893
Less accumulated depreciation and
amortization ................................ (8,406) (7,802)
-------- --------
Net Property Plant and Equipment ............... 5,426 5,091
-------- --------
INTANGIBLE ASSETS:
Intangible pension asset ....................... 19 19
-------- --------
TOTAL ................................................ $ 27,781 $ 22,642
======== ========
(continued on next page)
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WELLCO ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 1, 2005 AND JULY 3, 2004
(in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
JANUARY 1, JULY 3,
2005 2004
--------------------------
CURRENT LIABILITIES:
Short-term borrowing from bank (Note 3) ...... $ 7,735 $ 3,780
Accounts payable ............................. 4,205 3,659
Accrued compensation ......................... 958 1,374
Accrued income taxes ......................... 994 1,048
Dividend payable ............................. 191 --
Other liabilities ............................ 542 604
-------- --------
Total ........................................ 14,625 10,465
-------- --------
LONG-TERM LIABILITIES:
Pension obligation ........................... 1,337 1,337
Notes payable ................................ 226 222
Deferred income taxes ........................ 88 88
Deferred grant income ........................ 136 --
Deferred revenues ............................ 74 78
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value ................ 1,271 1,245
Additional paid-in capital ................... 1,304 1,027
Retained earnings ............................ 10,039 9,499
Accumulated other comprehensive loss ......... (1,319) (1,319)
-------- --------
Total ........................................ 11,295 10,452
-------- --------
TOTAL .............................................. $ 27,781 $ 22,642
======== ========
See Notes to Consolidated Financial Statements.
-4-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 1, 2005 AND JANUARY 3, 2004
(in thousands except per share and number of shares)
(unaudited)
JANUARY 1, JANUARY 3,
2005 2004
---------------------------
REVENUES ....................................... $ 24,595 $ 20,006
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ............... 21,892 17,612
General and administrative expenses ...... 1,482 1,168
----------- -----------
Total .................................... 23,374 18,780
----------- -----------
GRANT INCOME ................................... 89 40
----------- -----------
OPERATING INCOME ............................... 1,310 1,266
INTEREST EXPENSE ............................... (137) (62)
INTEREST INCOME ................................ -- 1
----------- -----------
INCOME BEFORE INCOME TAXES ..................... 1,173 1,205
PROVISION FOR INCOME TAXES ..................... 255 238
----------- -----------
NET INCOME ..................................... $ 918 $ 967
=========== ===========
BASIC EARNINGS PER SHARE (Notes 4 and 5)
based on weighted average number of
shares outstanding ....................... $ 0.73 $ 0.82
=========== ===========
Shares used in computing basic
earnings per share ....................... 1,257,092 1,185,746
=========== ===========
DILUTED EARNINGS PER SHARE (Notes 4 and 5)
based on weighted average number of
shares outstanding and dilutive stock
options .................................. $ 0.70 $ 0.80
=========== ===========
Shares used in computing diluted
earnings per share ....................... 1,312,888 1,202,048
=========== ===========
DIVIDENDS DECLARED PER SHARE ................... $ 0.30 $ 0.20
=========== ===========
See Notes to Consolidated Financial Statements.
-5-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL THREE MONTHS ENDED
JANUARY 1, 2005 AND JANUARY 3, 2004
(in thousands except per share and number of shares)
(unaudited)
JANUARY 1, JANUARY 3,
2005 2004
--------------------------
REVENUES ......................................... $ 13,974 $ 11,389
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services ................. 12,505 10,122
General and administrative expenses ........ 794 534
----------- -----------
Total ...................................... 13,299 10,656
----------- -----------
GRANT INCOME ..................................... 89 20
----------- -----------
OPERATING INCOME ................................. 764 753
INTEREST EXPENSE ................................. (89) (36)
INTEREST INCOME .................................. -- --
----------- -----------
INCOME BEFORE INCOME TAXES ...................... 675 717
PROVISION FOR INCOME TAXES ...................... 154 166
----------- -----------
NET INCOME ....................................... $ 521 $ 551
=========== ===========
BASIC EARNINGS PER SHARE (Notes 4 and 5)
based on weighted average number of
shares outstanding ......................... $ 0.41 $ 0.46
=========== ===========
Shares used in computing basic
earnings per share ......................... 1,266,402 1,185,746
=========== ===========
DILUTED EARNINGS PER SHARE (Notes 4 and 5) based
on weighted average number of
shares outstanding and dilutive stock
options ................................... $ 0.40 $ 0.46
=========== ===========
Shares used in computing diluted
earnings per share ......................... 1,303,970 1,208,260
=========== ===========
DIVIDENDS DECLARED PER SHARE ..................... $ 0.15 $ 0.10
=========== ===========
See Notes to Consolidated Financial Statements.
-6-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 1, 2005 AND JANUARY 3, 2004
(in thousands)
(unaudited)
JANUARY 1, JANUARY 3,
2005 2004
------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ...................................... $ 918 $ 967
------- -------
Adjustments to reconcile net income to net
cash provided (used) by
operating activities:
Depreciation and amortization ............. 607 503
Non-cash grant income recognized .......... -- (40)
Non-cash reduction in deferred revenue .... (4) (4)
Non-cash interest expense ................. 4 4
(Increase) decrease in-
Receivables .......................... (2,618) (1,592)
Inventories .......................... (1,800) (5,564)
Prepaid expenses ..................... (389) (229)
Increase (decrease) in-
Accounts payable ..................... 546 2,985
Accrued compensation ................. (416) 228
Accrued income taxes ................. (54) 240
Other current liabilities ............ 74 (39)
------- -------
Total adjustments ............................... (4,050) (3,508)
-------
NET CASH USED BY
OPERATING ACTIVITIES ............................ (3,132) (2,541)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment ................ (939) (1,179)
------- -------
CASH USED BY INVESTING ACTIVITIES .................... (939) (1,179)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings ............ 3,955 3,875
Cash dividends paid ............................. (188) (237)
Stock options exercised ......................... 303 --
------- -------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES ............................ 4,070 3,638
------- --------
NET DECREASE IN CASH ................................. (1) (82)
CASH AT BEGINNING OF PERIOD .......................... 58 133
-------
CASH AT END OF PERIOD ................................ $ 57 $ 51
-------
(continued on next page)
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WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 1, 2005 AND JANUARY 3, 2004
(in thousands)
(unaudited)
JANUARY 1, JANUARY 3,
2005 2004
------------------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for-
Interest $ 137 $ 62
Income taxes $ 265 $ -
----- ----
See Notes to Consolidated Financial Statements.
-8-
WELLCO ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL SIX MONTHS ENDED
JANUARY 1, 2005
(in thousands except number of shares and per share)
(unaudited)
Common Stock Additional
Par Paid-In Retained
Shares Value Capital Earnings
----------------------------------------------
BALANCE AT JULY 3, 2004 1,245,046 $ 1,245 $ 1,027 $ 9,499
Net income for the fiscal six
months ended January 1, 2005 918
Exercise of stock options 25,700 26 233
Tax benefit from stock options 44
Cash dividend ($.30 per share) (378)
-----------------------------------------------
BALANCE AT JANUARY 1, 2005 1,270,746 $ 1,271 $ 1,304 $ 10,039
-----------------------------------------------
Accumulated
Other
Comprehensive
Loss
----------------
ADDITIONAL PENSION LIABILITY,
NET OF TAX, BALANCE
AT JULY 3, 2004 $ (1,319)
Change for the fiscal six
months ended January 1, 2005 -
----------------
BALANCE AT JANUARY 1, 2005 $ (1,319)
----------------
See Notes to Consolidated Financial Statements.
-9-
WELLCO ENTERPRISES, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------------------
FOR THE FISCAL SIX MONTHS ENDED JANUARY 1, 2005
-----------------------------------------------
1. BUSINESS:
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 majority of revenues 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
United States Armed Forces. The loss of this customer would have a
material adverse effect on the Company.
Bidding on DSCP boot solicitations is open to any qualified U. S.
manufacturer. Bidding on contracts is very competitive. U. S. 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 United States.
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. In addition, current boot contracts contain
options for additional pairs that are exercisable at the government's
discretion. The Company cannot predict with certainty its success in
receiving a contract from any solicitation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), Accounting for
Stock-Based Compensation (SFAS No. 123(R). SFAS No. 123(R) establishes
standards for the accounting for transactions in which an entity exchanges
its equity instruments for goods or services. This Statement focuses
primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R)
requires that the fair value of such equity instruments be recognized as
an expense in the historical financial statements as services are
performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of
fair value were required. The provisions of this Statement are effective
for the first interim reporting period that begins after June 15, 2005.
The adoption of SFAS No. 123(R) is not expected to have a material effect
on our consolidated financial statements.
3. LINE OF CREDIT:
Due to the Company's increased accounts receivable from shipping DMS boots
under surge, and to increased inventories, caused by both surge and the
initial production of the ICB boot, the Company increased its line of
credit during the 2004 fiscal year to $10,000,000 and it was reduced to
$5,000,000 by September 1, 2004. On October 21, 2004, the Company
increased its line of credit to $7,500,000. On December 9, 2004, the
Company increased its line of credit back to $10,000,000 through February
28, 2005 and then the line is reduced to $9,000,000. The Company's line of
credit expires April 30, 2005 and can be renewed annually at the bank's
discretion.
This line of credit is secured by a blanket lien on all machinery and
equipment and all accounts receivable and inventory. At January 1, 2005,
borrowings on this line of credit were $7,735,000 with $2,265,000
-10-
available in additional borrowings. 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
January 1, 2005.
4. EARNINGS PER SHARE:
The Company computes its basic and diluted earnings per share amounts in
accordance with Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings per Share." Basic earnings per share is computed by
dividing net earnings by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net earnings by the weighted average number of common shares
outstanding during the period plus the dilutive potential common shares
that would have been outstanding upon the assumed exercise of dilutive
stock options.
The following is the reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
For the Six Months Ended 1/01/05
---------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Basic EPS Available to Shareholders $ 918,000 1,257,092 $ 0.73
- --------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 55,796
- --------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $ 918,000 1,312,888 $ 0.70
- --------------------------------------------------------------------------------
For the Six Months Ended 1/03/04
---------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Basic EPS Available to Shareholders $ 967,000 1,185,746 $ 0.82
- --------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 16,302
- --------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $ 967,000 1,202,048 $ 0.80
- --------------------------------------------------------------------------------
For the Three Months Ended 1/01/05
------------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Basic EPS Available to Shareholders $ 521,000 1,266,402 $ 0.41
- --------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 37,568
- -------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $ 521,000 1,303,970 $ 0.40
- --------------------------------------------------------------------------------
-11-
For the Three Months Ended 1/03/04
----------------------------------
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Basic EPS Available to Shareholders $ 551,000 1,185,746 $ 0.46
- --------------------------------------------------------------------------------
Effect of Dilutive Stock-based
Compensation Arrangements 22,514
- --------------------------------------------------------------------------------
Diluted EPS Available to Shareholders $ 551,000 1,208,260 $ 0.46
- --------------------------------------------------------------------------------
5. STOCK-BASED COMPENSATION:
The Company uses Accounting Principles Board Opinion No. 25 (APB 25) to
account for stock options granted to employees. Under APB 25, no
compensation cost is reflected in net income for stock option awards as
all options granted had an exercise price equal to or in excess of the
market value of the underlying common stock on the date of grant. Under
SFAS No. 123 and No. 148, a company that uses APB 25 to account for stock
options must disclose the effect on reported net income of using a fair
value based method of accounting for stock-based employee compensation.
The following table summarizes the effect on net income and earnings per
share had the accounting for employee stock options been based on the fair
value method.
For the Six Months Ended
January 1, January 3,
2005 2004
- --------------------------------------------------------------------------------
Net income:
- --------------------------------------------------------------------------------
As reported $ 918,000 $ 967,000
- --------------------------------------------------------------------------------
Compensation expense, net of tax 12,000 12,000
- --------------------------------------------------------------------------------
Pro forma $ 906,000 $ 955,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Basic earnings per share:
- --------------------------------------------------------------------------------
As reported $ 0.73 $ 0.82
- --------------------------------------------------------------------------------
Compensation expense, net of tax 0.01 0.01
- --------------------------------------------------------------------------------
Pro forma $ 0.72 $ 0.81
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diluted earnings per share:
- --------------------------------------------------------------------------------
As reported $ 0.70 $ 0.80
- --------------------------------------------------------------------------------
Compensation expense, net of tax 0.01 0.01
- --------------------------------------------------------------------------------
Pro forma $ 0.69 $ 0.79
- --------------------------------------------------------------------------------
-12-
For the Three Months Ended
January 1, January 3,
2005 2004
- --------------------------------------------------------------------------------
Net income:
- --------------------------------------------------------------------------------
As reported $ 521,000 $ 551,000
- --------------------------------------------------------------------------------
Compensation expense, net of tax 6,000 6,000
- --------------------------------------------------------------------------------
Pro forma $ 515,000 $ 545,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Basic earnings per share:
- --------------------------------------------------------------------------------
As reported $ 0.41 $ 0.46
- --------------------------------------------------------------------------------
Compensation expense, net of tax - -
- --------------------------------------------------------------------------------
Pro forma $ 0.41 $ 0.46
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diluted earnings per share:
- --------------------------------------------------------------------------------
As reported $ 0.40 $ 0.46
- --------------------------------------------------------------------------------
Compensation expense, net of tax - -
- --------------------------------------------------------------------------------
Pro forma $ 0.40 $ 0.46
- --------------------------------------------------------------------------------
6. PENSION PLANS:
The Company has two non-contributory, defined benefit plans. The
components of pension expense, included in Cost of Sales and Services in
the Consolidated Statements of Operations are as follows:
For the Six Months Ended
January 1, January 3,
2005 2004
- --------------------------------------------------------------------------------
Benefits Earned for Service in the
Current Period $ 73,200 $ 64,540
Interest on the Projected Benefit
Obligation 174,000 177,340
Expected Return on Plan Assets (156,200) (148,680)
-13-
For the Six Months Ended
January 1, January 3,
2005 2004
- --------------------------------------------------------------------------------
Amortization of: Unrecognized Net
Pension Obligation at July 1, 1987; Cost
of Benefit Changes Since That Date; and
Gains and Losses Against Actuarial
Assumptions 30,400 58,000
- --------------------------------------------------------------------------------
Pension Expense $ 121,400 $ 151,200
- --------------------------------------------------------------------------------
For the Three Months Ended
January 1, January 3,
2005 2004
- --------------------------------------------------------------------------------
Benefits Earned for Service in the
Current Period $ 36,600 $ 32,270
- --------------------------------------------------------------------------------
Interest on the Projected Benefit
Obligation 87,000 88,670
- --------------------------------------------------------------------------------
Expected Return on Plan Assets (78,100) (74,340)
- --------------------------------------------------------------------------------
Amortization of: Unrecognized Net
Pension Obligation at July 1, 1987; Cost
of Benefit Changes Since That Date; and
Gains and Losses Against Actuarial
Assumptions 15,200 29,000
- --------------------------------------------------------------------------------
Pension Expense $ 60,700 $ 75,600
- --------------------------------------------------------------------------------
7. PUERTO RICAN GOVERNMENT REFUND:
The majority of the Company's boot manufacturing operations occur at the
factory of a wholly-owned subsidiary located in Puerto Rico. The Company
is participating in a Puerto Rican government program under which it is
reimbursed for part of the compensation paid to certain employees. On
September 23, 2004, that subsidiary received a reimbursement of $780,000
for compensation paid employees in the 2004 fiscal year. On December 28,
2004, the subsidiary received an additional $385,000. The Consolidated
Statements of Operations for the six months and three months ended January
1, 2005 include $1,165,000 and $385,000, respectively, as a reduction of
Cost of Sales and Services.
The Company has filed a reimbursement claim for $535,000 for compensation
paid employees and expensed through January 1, 2005. The Company's policy
is to record these reimbursements in the fiscal period in which they are
received.
8. GRANT MONEY RECEIVED:
In December 2004, the Company received $280,000 from the government of
Puerto Rico under a Special Incentives Contract related to creating new
job opportunities in its boot manufacturing operations in Puerto Rico.
-14-
The grant is for a five year period (fiscal years 2004 through 2008) and
requires the Company to maintain a certain level of employment in Puerto
Rico over the grant period. If this requirement is not met, the Company
may be required to refund a pro-rata portion of the total grant. The grant
is for a maximum of $526,000 and monies are disbursed based upon certain
expenditures made by the Company. The Company's policy is to recognize
grant monies pro-rata over the five year grant period, with grant income
first recognized in the period in which it is received. The Consolidated
Statements of Operations for the six-month and three-month periods ended
January 1, 2005 includes $89,000 as a grant income catch-up adjustment
from the $280,000 received. Of the grant monies received to date, $14,000
will be recognized as grant income in each fiscal quarter through fiscal
year 2008.
-15-
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
---------------------
Critical Accounting Policies:
- ----------------------------
The Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles which require the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the Consolidated Financial Statements, and revenues
and expenses during the periods reported. Actual results could differ from those
estimates. The Company believes the following are the critical accounting
policies which could have the most significant effect on the Company's reported
results and require the most difficult, subjective or complex judgements by
management.
o Impairment of Long-Lived Assets:
The Company reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an
asset may not be recoverable. If the sum of the expected cash
flows, undiscounted and without interest, is less than the
carrying amount of the asset, an impairment loss is recognized as
the amount by which the carrying amount of the asset exceeds its
fair value. The Company makes estimates of its future cash flows
related to assets subject to impairment review. One of the most
critical estimates is future demand, primarily through U. S.
Department of Defense contracts, for the Company's products.
Changes to this and other estimates could result in an impairment
charge in future periods.
o Inventory Valuation:
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. The Company estimates which
materials may be obsolete and which products in work in process
or finished goods may be sold at less than cost, and adjusts its
inventory value accordingly. Future periods could include either
income or expense items if estimates change and for differences
between the estimated and actual amount realized from the sale of
inventory.
o Income Taxes:
The Company records a liability for potential tax assessments
based on its estimate of the potential exposure. Due to the
subjectivity and complex nature of the underlying issues, actual
payments or assessments may differ from estimates. Income tax
expense in future periods could be adjusted for the difference
between actual payments and the Company's recorded liability
based on its assessments and estimates.
The Company has recorded a valuation allowance equal to a
significant part of its deferred tax assets. The valuation
allowance is based on an evaluation of the uncertainty of future
taxable income from certain jurisdictions. An adjustment could be
required if circumstances and events cause the Company to change
these estimates.
Since July 3, 2004, the end of the 2004 fiscal year, there have been no changes
in the nature of the estimates and assumptions related to these critical
accounting policies.
-16-
Comparing the Six Months Ended January 1, 2005 and January 3, 2004:
- --------------------------------------------------------------------
OVERVIEW
--------
The most significant events occurring in the six months ended January 1, 2005
(current period) compared to the six months ended January 3, 2004 (prior
period):
1. The increase in pairs of Infantry Combat boots (ICB) sold under contract with
U.S. Department of Defense.
2. The decrease in Hot Weather boots sold to the Defense Department.
3. The increase in reimbursement received from the Puerto Rican government for
certain labor costs incurred.
Comparative results for these two periods is as follows:
Current Period Prior Period
Six Months Ended Six Months Ended % of
(Amounts in thousands) January 1, 2005 January 3, 2004 Change Change
- --------------------------------------------------------------------------------
Revenues $ 24,595 $ 20,006 $ 4,589 23%
- --------------------------------------------------------------------------------
Cost of Sales 21,892 17,612 4,280 24%
- --------------------------------------------------------------------------------
Gross Profit 2,703 2,394 309 13%
- --------------------------------------------------------------------------------
Administrative Expenses 1,482 1,168 314 27%
- --------------------------------------------------------------------------------
Grant Income 89 40 49
- --------------------------------------------------------------------------------
Operating Income 1,310 1,266 44 4%
- --------------------------------------------------------------------------------
Interest Expense, Net 137 61 76
- --------------------------------------------------------------------------------
Income Taxes 255 238 17
- --------------------------------------------------------------------------------
Net Income $ 918 $ 967 $ (49)
- --------------------------------------------------------------------------------
For the current period, Wellco had net income of $918,000 compared to a net
income of $967,000 in the prior period.
o Compared to the prior period, total revenues in the current
period increased by $4,589,000. In the current period the Company
shipped 142,000 pairs of the Infantry Combat Boot (ICB). The
prior period did not contain any ICB boot sales. This increase
offset a 86,000 pair decrease in shipments of Hot Weather boots.
During the current period, the Company was shipping under two
contracts for the ICB boot. In the prior period, the Company had
one ICB boot contract but did not have any shipments.
Shipments of Hot Weather boots in the prior period were under the
Defense Department's surge option, primarily to meet the urgent
need in Iraq. The surge need was substantially met by the end of
the first quarter of the current period.
o Cost of Sales and Services in the current year increased by
$4,280,000, which resulted in an increase in gross profit of only
$309,000. Defense Department contracts under which the Company
shipped in the current period have lower margins than those of
the prior period. The shrinking level of domestic commercial
-17-
footwear manufacturers has increased the emphasis on price when
responding to Defense Department boot solicitations .
Margins in the prior period were adversely affected by costs
related to meeting the Iraq Hot Weather boot surge need and
start-up under a new ICB boot contract. This necessitated the
hiring of more than 500 new employees. Significant excess costs
were incurred in training these employees and in expanding
production lines.
In September 2004, Hurricane Jeanne interrupted power at the
Company's Puerto Rican factory for approximately one week and it
took almost another week for all employees to return to work and
normal production to resume. No damage was done to the factory
building or its contents. However, the interruption resulted in
inefficiencies in production and the air freighting of materials.
In the current period, the Company was changing its production
operations from boots with a solid rubber sole to boots with the
contract-required three layer sole, which is a more complicated
and costly construction. This caused certain delays and
inefficiencies in production.
The majority of the Company's boot manufacturing operations occur
at the factory of a wholly- owned subsidiary located in Puerto
Rico. The Company is participating in a Puerto Rican government
program under which it is reimbursed for part of the compensation
paid to certain employees. Under this program, the Company
received and recognized as a reduction of Cost of Sales and
Services in the current period $1,165,000, compared to $320,000
in the prior period. The majority of the amount received in the
current period is for compensation paid in the prior fiscal year.
The Company's policy is to record these reimbursements in the
fiscal period in which they are received.
o During the current period, the $314,000 increase in general and
administrative expenses was primarily caused by increases in
employee group health insurance costs. The Company has a
self-funded employee group health plan under which employee
health insurance costs vary with actual employee health costs.
o In December 2004, the Company received $280,000 from the
government of Puerto Rico under a Special Incentives Contract
related to creating new job opportunities in its boot
manufacturing operations in Puerto Rico. The grant is for a five
year period (fiscal years 2004 through 2008) and requires the
Company to maintain a certain level of employment in Puerto Rico
over the grant period. If this requirement is not met, the
Company may be required to refund a pro-rata portion of the total
grant. The grant is for a maximum of $526,000 and monies are
disbursed based upon certain expenditures made by the Company.
The Company's policy is to recognize grant monies pro-rata over
the five year grant period, with grant income first recognized in
the period in which it is received. The Consolidated Statements
of Operations for the six-month ended January 1, 2005 includes
$89,000 as a grant income catch-up adjustment from the $280,000
received. Of the grant monies received to date, $14,000 will be
recognized as grant income in each fiscal quarter through fiscal
year 2008.
The Consolidated Statements of Operations for the prior period
included grant income of $40,000 from a prior grant. This grant
required the Company to maintain operations in Puerto Rico for
its five fiscal years 2000 through 2004. This income was all
recognized by the end of fiscal year 2004.
o Interest expense increased $76,000 because of increased
borrowings under a bank line of credit.
-18-
The income tax rate (the percent of Provision for Income Taxes to the Income
Before Income Taxes) for the current period was 22% compared to 20% for the
prior period. The income tax rate increase is primarily due to an increase in
the proportion of total Income Before Income Taxes which is subject to full
federal tax.
Comparing the Three Months Ended January 1, 2005 and January 3, 2004:
- ---------------------------------------------------------------------
OVERVIEW
--------
The most significant events occurring in the three months ended January 1, 2005
(current period) compared to the three months ended January 3, 2004 (prior
period):
1. The increase in pairs of Infantry Combat boots (ICB) sold under contract with
U.S. Department of Defense.
2. The decrease in Hot Weather boots sold to the Defense Department.
3. The increase in reimbursement received from the Puerto Rican government for
certain labor costs incurred.
Comparative results for these two periods is as follows:
Current Period Prior Period
Three Months Ended Three Months Ended % of
(Amounts in thousands) January 1, 2005 January 3, 2004 Change Change
- --------------------------------------------------------------------------------
Revenues $ 13,974 $ 11,389 $ 2,585 23%
- --------------------------------------------------------------------------------
Cost of Sales 12,505 10,122 2,383 24%
- --------------------------------------------------------------------------------
Gross Profit 1,469 1,267 202 16%
- --------------------------------------------------------------------------------
Administrative Expenses 794 534 260 48%
- --------------------------------------------------------------------------------
Grant Income 89 20 69
- --------------------------------------------------------------------------------
Operating Income 764 753 11 2%
- --------------------------------------------------------------------------------
Interest Expense, Net 89 36 53
- --------------------------------------------------------------------------------
Income Taxes 154 166 (12)
- --------------------------------------------------------------------------------
Net Income $ 521 $ 551 $ (30)
- --------------------------------------------------------------------------------
For the three months ended January 1, 2005 (current period), Wellco had net
income of $521,000 compared to a net income of $551,000 in the prior year three
month period ended January 3, 2004 (prior period).
o Compared to the prior period, total revenues in the current
period increased by $2,585,000. In the current period the Company
shipped 102,000 pairs of the Infantry Combat Boot (ICB). The
prior period did not contain any ICB boot sales. This increase
offset an 83,000 pair decrease shipments of the Hot Weather
boots.
During the current period, the Company was shipping under two
contracts for the ICB boot. In the prior period, the Company had
one ICB boot contract but did not have any shipments.
Shipments of Hot Weather boots in the prior period were under the
Defense Department's surge option, primarily to meet the urgent
need in Iraq. The surge need was substantially met by the end of
-19-
the first quarter of the current period
o Cost of Sales and Services in the current year increased by
$2,383,000, which resulted in an increase in gross profit of only
$202,000. Defense Department contracts under which the Company
shipped in the current period have lower margins than those of
the prior period. The shrinking base of domestic production of
commercial footwear manufacturers has increased the emphasis on
price when responding to Defense Department boot solicitations .
Margins in the prior period were adversely affected by costs
related to meeting the Iraq Hot Weather boot surge need and
start-up under a new ICB boot contract. This necessitated the
hiring of more than 500 new employees. Significant excess costs
were incurred in training these employees and in expanding
production lines.
In the current period, the Company was changing its production
operations from boots with a solid rubber sole to boots with the
contract-required three layer sole, which is a more complicated
and costly construction. This caused certain delays and
inefficiencies in production.
The majority of the Company's boot manufacturing operations occur
at the factory of a wholly- owned subsidiary located in Puerto
Rico. The Company is participating in a Puerto Rican government
program under which it is reimbursed for part of the compensation
paid to certain employees. Under this program, the Company
received and recognized as a reduction of Cost of Sales and
Services in the current period $385,000, compared to $274,000 in
the prior period. The Company's policy is to record these
reimbursements in the fiscal period in which they are received.
o During the current period, the $260,000 increase in general and
administrative expenses was primarily caused by increases in
employee group heath insurance costs. The Company has a
self-funded employee group health plan under which employee
health insurance costs vary with actual employee health costs.
o The amount of grant income recognized in the current period under
the Puerto Rico Special Incentives Contract is $89,000.
The Consolidated Statements of Operations for the prior period
included grant income of $20,000 from a prior grant. This grant
required the Company to maintain operations in Puerto Rico for
its five fiscal years 2000 through 2004. This income was all
recognized by the end of fiscal year 2004.
o Interest expense increased $53,000 because of increased
borrowings under a bank line of credit.
The income tax rate (the percent of Provision for Income Taxes to the Income
Before Income Taxes) for both the current period and prior period was 23%.
Forward Looking Information:
- ----------------------------
Below is a summary of the Company's current boot contracts with Defense
Department.
In October 2004, Defense Department exercised the first option term year
under the Hot Weather contract. In the base year of this contract, the
Defense Department ordered 467,000 pairs, representing the maximum pairs
provided for in the contract. Pairs ordered to date under this first year
option total 74,000. For the first option year, the minimum that they
-20-
are required to buy is 83,000 pairs and the maximum that they can buy is
323,000 pairs. The Company cannot reasonably predict whether more than the
minimum 83,000 pairs will be bought in first option term year. The first
option term is for the period October 2004 through September 2005.
In July 2004, Defense Department exercised the first year option under one
of the Company's ICB boot contracts, which will be for July 2004 through
June 2005. Pairs ordered to date under this first year option total
102,000, compared to a total 180,000 ordered in the base year. For the
first option year, the minimum that they are required to buy is 109,000
pairs and the maximum that they can buy is 227,000 pairs. The Company
cannot reasonably predict whether more than the minimum 109,000 pairs will
be bought in first option term year. The Company understands that usage of
this boot is less than projected.
On March 10, 2004, Defense Department awarded a new contract to the
Company to supply 110,010 pairs of the ICB boot in the desert tan color.
The contract has a delivery period of August 2004 through April 2005.
There is currently outstanding a solicitation for this boot, with delivery
from June through December 2005. The Company responded to this
solicitation and cannot predict its receipt of a contract.
Since April 2003, the Company had been producing Hot Weather boots at an
accelerated rate under the Defense Department's surge option contract
clause. Shipments under the surge option were substantially completed in
the first quarter of fiscal year 2005. When compared to fiscal year 2004,
fiscal year 2005 revenues during the last six months will be less. The
Company cannot reasonably estimate how much the decrease will be.
The majority of the Company's boot manufacturing operations occur at the factory
of a wholly-owned subsidiary located in Puerto Rico. The Company is
participating in a Puerto Rican government program under which it is reimbursed
for part of the compensation paid to certain employees. The Consolidated
Statements of Operations for the six months and three months ended January 1,
2005 include $1,165,000 and $385,000, respectively, as a reduction of Cost of
Sales and Services.
The Company has filed a reimbursement claim for $535,000 for compensation paid
employees and expensed through January 1, 2005. The Company's policy is to
record these reimbursements in the fiscal period in which they are received.
The requirements of Section 404 of the Sarbanes-Oxley Act of 2002 will first
apply to the Company's 2006 fiscal year. Section 404 requires the Company to
document, test, and issue an opinion as to the adequacy of their internal
controls over financial reporting. In addition, Section 404 requires the
Company's Independent Accountants to review the Company's internal control
documentation and testing results, and to issue its opinion as to the
correctness of the Company's opinion as to the adequacy of their internal
controls over financial reporting. The Company has received quotations from
outside firms specializing in the review, documentation and testing of internal
controls. The Company estimates that the cost of the internal control review and
audit will be between $125,000 and $200,000. However, the actual cost could be
substantially more. The Company cannot reasonably predict whether material
weaknesses will be found in its internal controls over financial reporting.
The business of providing boots to Defense Department is very competitive, as U.
S. boot manufacturers attempt to replace commercial U. S. production lost to
low-cost foreign-made boots.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Wellco uses cash from operations and a bank line of credit to supply most of its
liquidity needs.
-21-
The following table summarizes, at the end of the most recent fiscal quarter and
the last fiscal year, the amounts of cash and unused line of credit:
(in thousands)
January 1, 2005 July 3, 2004
- --------------------------------------------------------------------------------
Cash and Cash Equivalents $57 $58
- --------------------------------------------------------------------------------
Unused Line of Credit 2,265 3,220
- --------------------------------------------------------------------------------
Total $2,322 $3,278
- --------------------------------------------------------------------------------
The following table summarizes the major sources (uses) of cash for the six
months ended January 1, 2005:
(in thousands)
January 1, 2005
- --------------------------------------------------------------------------------
Income Before Depreciation and Other Non-cash
Adjustments $1,525
- --------------------------------------------------------------------------------
Net Change in Accounts Receivable, Inventories,
Accounts Payable, and Accrued Compensation (4,288)
- --------------------------------------------------------------------------------
Net Change in Income Taxes, Pension Obligation,
and Other (369)
- --------------------------------------------------------------------------------
Net Cash Used by Operations (3,132)
- --------------------------------------------------------------------------------
Cash Used to Purchase Plant and Equipment (939)
- --------------------------------------------------------------------------------
Cash Provided by Line of Credit 3,955
- --------------------------------------------------------------------------------
Stock Options Exercised 303
- --------------------------------------------------------------------------------
Cash Dividends Paid (188)
- --------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents ($1)
- --------------------------------------------------------------------------------
In the six months ended January 1, 2005, cash used by operations was $3,132,000.
Net income of $918,000, depreciation and amortization of $607,000, and a
$546,000 increase in accounts payable were the main operating sources of cash.
The main use of operating cash were an increase in inventories of $1,800,000, an
increase in accounts receivable of $2,618,000, and an decrease in accrued
compensations of $416,000.
Borrowings from the line of credit and the cash from the exercise of stock
options were used to provide the needed cash for operations, plant and equipment
additions, and to pay cash dividends. The increase in accounts receivable and
inventory primarily resulted from a new contract awarded late in fiscal year
2004.
The following table shows aggregated information about contractual obligations
as of January 1, 2005:
-22-
Payments Due by Period
Total Less Than 1 1-3 Years 4-5 Years After 5 Years
Year
- --------------------------------------------------------------------------------
Notes Payable $300,000 $300,000
- --------------------------------------------------------------------------------
Building Lease 762,000 $159,000 $336,000 $267,000 -
- --------------------------------------------------------------------------------
Total $1,062,000 $159,000 $336,000 $267,000 $300,000
- --------------------------------------------------------------------------------
Wellco has paid and recorded as an account receivable $1,300,000 of air freight
charges to meet Defense Department's surge need in Iraq. These payments occurred
primarily in May through August, 2004. Throughout the surge period, Wellco has
paid the air freight and received reimbursement from Defense Department several
months later. The Defense Department has told Wellco that this amount is
approved and that this item is close to having funding allocated to it.
In October 2004, Wellco's bank increased its maximum line of credit from
$5,000,000 to $7,500,000 and on December 9, 2004, the Company further increased
it to $10,000,000 through February 28, 2005. Beginning March 1, 2005 the maximum
line will be $9,000,000 through April 30, 2005.
Borrowings under the line of credit at January 1, 2005 were $7,735,000. As
discussed above in the Forward Looking section, the Company expects reduced boot
sales in fiscal year 2005. Because this will result in lower levels of accounts
receivables and inventory, the Company expects a reduction in future borrowings
under the line of credit.
The bank line of credit will expire and be subject to renewal on April 30, 2005.
Historically, the bank has always renewed the line of credit. Under conditions
of substantial reduction in operations, with little basis for projecting a
reversal of such reduction, it is possible that the bank would cancel the line
of credit. Events that would cause a substantial reduction in operations include
cancellation of existing government contracts, not receiving future contracts
and receiving government contracts that do not provide enough revenues to
provide adequate liquidity. The Company expects continued need of this line of
credit after April 30, 2005, and would be adversely affected if the line is not
renewed.
Loan agreements related to the line of credit contain covenants requiring the
Company to maintain at the end of each fiscal quarter a certain level of working
capital and tangible net worth. The Company met these requirements at January 1,
2005.
The Promissory Note, Loan Agreement and Security Agreement documenting the bank
line of credit provide that:
o All amounts borrowed shall become due and immediately payable
upon demand of the bank.
o The bank's obligation to make advances under the note shall
terminate: if the bank makes a demand for payment; if a default
under any loan document occurs; or, in any event, on April 30,
2005, unless the Note is extended by the bank under terms
satisfactory to the bank.
o All amounts borrowed shall become immediately payable if Wellco
commences or has commenced against it a bankruptcy or insolvency
proceeding, or in the event of default.
Events of default include:
o Having a current ratio less than that prescribed by the bank.
o Having tangible net worth less than that prescribed by the bank.
o Any failure to meet requirements under the Note, Loan Agreement
or Security Agreement.
-23-
Other than the above, Wellco does not know of any other demands, commitments,
uncertainties, or trends that will result in or that are reasonablely likely to
result in its liquidity increasing or decreasing in any material way.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Statements throughout this report that are not historical facts are
forward-looking statements. These statements are based on current expectations
and beliefs, and involve numerous risks and uncertainties. Many factors could
affect the Company's actual results, causing results to differ materially from
those expressed in any such forward-looking information.
These factors include, but are 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 3, 2004. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not have any derivative financial instruments, other financial
instruments, or derivative commodity instruments that require disclosures.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
are filed or submitted under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the reports that are filed under the Exchange Act is
accumulated and communicated to management, including the chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure. Under the supervision of and with the
participation of management, including the chief executive officer and chief
financial officer, the Company has evaluated the effectiveness of the design and
operation of its disclosure controls and procedures as of January 1, 2005, and
based on its evaluation, our chief executive officer and chief financial officer
have concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation described above, including any corrective actions with regard to
significant deficiencies and material weaknesses.
-24-
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings. N/A
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders.
The 2004 Annual Stockholders Meeting of Wellco Enterprises, Inc. was held on
November 16, 2004. The only matter voted on at that meeting was the election of
directors. The results of voting were:
Directors were elected as follows:
Nominee for Director Shares Voted For Shares Withheld From
Claude S. Abernethy, Jr. 1,187,596 788
Horace Auberry 1,187,596 788
William M. Cousins, Jr. 1,187,596 788
Katherine J. Emerson 1,187,596 788
Rolf Kaufman 1,187,596 788
John D. Lovelace 1,187,596 788
Item 5. Other Information. N/A
Item 6. Exhibits.
(31) Certifications of the Chief Executive Officer and
Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
(32) Certifications of the Chief Executive Officer and
Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
-25-
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Wellco Enterprises, Inc., Registrant
\s\ \s\
David Lutz, Chief Executive Officer and Tammy Francis, Controller and Chief
President
(Principal Executive Officer) Financial Officer
February 15, 2005
-26-
Exhibit 31
----------
WELLCO ENTERPRISES, INC. xhibit 31
FORM 10-Q FOR THE SIX MONTHS ENDED JANUARY 1, 2005
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David Lutz, certify that:
1. I have reviewed this report on Form 10-Q of Wellco Enterprises, Inc.(the
registrant);
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d- 15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and (c) Disclosed in this report
any change in the registrant's internal controls over financial
reporting that occurred during the registrant's first fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
-27-
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 15, 2005
/s/ David Lutz
By: David Lutz, Chief Executive Officer and President
(Chief Executive Officer)
-28-
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE SIX MONTHS ENDED JANUARY 1, 2005
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Tammy Francis, certify that:
1. I have reviewed this report on Form 10-Q of Wellco Enterprises, Inc.(the
registrant);
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d- 15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal controls over financial reporting that occurred during
the registrant's first fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
-29-
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 15, 2005
/s/ Tammy Francis
By: Tammy Francis, Controller and Treasurer
(Chief Financial Officer)
-30-
Exhibit 32
----------
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE SIX MONTHS ENDED JANUARY 1, 2005
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, David Lutz, certify that:
1. I am the chief executive officer of Wellco Enterprises, Inc.
2. Attached to this certification is Form 10-Q for the six months ended
January 1, 2005, a periodic report (the "periodic report") filed by the
issuer with the Securities Exchange Commission pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act:),
which contains financial statements.
3. I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that
o the periodic report containing the financial statements
fully complies with the requirements of Section 13(a) or
15(d) of the Exchange Act, and
o the information in the periodic report fairly presents,
in all material respects, the financial condition and
results of operations of the issuer for the periods
presented.
Date: February 15, 2005
/s/ David Lutz
By: David Lutz, Chief Executive Officer and President
(Chief Executive Officer)
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by Wellco Enterprises Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
This certification will not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934 even if the document with which it is submitted to the Securities and
Exchange Commission is so incorporated by reference.
-31-
WELLCO ENTERPRISES, INC.
FORM 10-Q FOR THE SIX MONTHS ENDED JANUARY 1, 2005
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Tammy Francis, certify that:
1. I am the chief financial officer of Wellco Enterprises, Inc.
2. Attached to this certification is Form 10-Q for the three months ended
January 1, 2005, a periodic report (the "periodic report") filed by the
issuer with the Securities Exchange Commission pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act:),
which contains financial statements.
3. I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that
o the periodic report containing the financial statements
fully complies with the requirements of Section 13(a) or
15(d) of the Exchange Act, and
o the information in the periodic report fairly presents,
in all material respects, the financial condition and
results of operations of the issuer for the periods
presented.
Date: February 15, 2005
/s/ Tammy Francis
By: Tammy Francis, Controller and Treasurer
(Chief Financial Officer)
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by Wellco Enterprises Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
This certification will not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934 even if the document with which it is submitted to the Securities and
Exchange Commission is so incorporated by reference.
-32-