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FORM 10-Q
SECURITIES & EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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Or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-9068
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WEYCO GROUP, INC.
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(Exact name of registrant as specified in its charter)
WISCONSIN 39-0702200
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 W. Estabrook Boulevard
P. O. Box 1188
Milwaukee, Wisconsin 53201
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(Address of principal executive offices)
(Zip Code)
(414) 908-1600
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(Registrant's telephone number, including area code)
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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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As of April 26, 2004 the following shares were outstanding:
Common Stock, $1.00 par value 4,338,875 Shares
Class B Common Stock, $1.00 par value 1,306,043 Shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's latest annual report on Form 10-K.
WEYCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
ASSETS
March 31 December 31
2004 2003
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 7,911,001 $ 9,091,567
Marketable securities 3,729,197 4,206,100
Accounts receivable, net 38,835,619 29,900,197
Accrued income tax receivable -- 228,074
Inventories -- finished shoes 36,736,510 43,727,578
Deferred income tax benefits 1,985,878 2,483,037
Prepaid expenses and other current assets 949,681 968,264
------------ ------------
Total current assets 90,147,886 90,604,817
MARKETABLE SECURITIES 7,535,243 6,273,638
OTHER ASSETS 13,730,819 13,750,574
PLANT AND EQUIPMENT 40,651,798 40,914,250
Less - Accumulated depreciation 11,310,433 11,224,993
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29,341,365 29,689,257
TRADEMARK 10,867,969 10,867,969
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$151,623,282 $151,186,255
============ ============
LIABILITIES & SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings $ 24,969,660 $ 27,944,830
Accounts payable 5,813,425 7,465,606
Dividend payable 555,462 563,642
Accrued liabilities 6,310,449 8,279,846
Accrued income taxes 2,263,958 --
------------ ------------
Total current liabilities 39,912,954 44,253,924
LONG-TERM PENSION LIABILITY 3,109,154 3,077,285
DEFERRED INCOME TAX LIABILITIES 5,006,478 5,009,158
SHAREHOLDERS' INVESTMENT:
Common stock 5,644,918 5,630,418
Other shareholders' investment 97,949,778 93,215,470
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$151,623,282 $151,186,255
============ ============
See notes to consolidated condensed financial statements.
-1-
WEYCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)
2004 2003
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NET SALES $ 61,743,369 $ 60,379,924
COST OF SALES 40,484,710 40,195,100
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Gross earnings 21,258,659 20,184,824
SELLING AND ADMINISTRATIVE EXPENSES 12,776,351 12,447,444
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Earnings from operations 8,482,308 7,737,380
INTEREST INCOME 120,863 149,826
INTEREST EXPENSE (167,485) (351,962)
OTHER INCOME (EXPENSE) (32,990) 20,950
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Earnings before provision for
income taxes 8,402,696 7,556,194
PROVISION FOR INCOME TAXES 3,250,000 2,885,000
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Net earnings $ 5,152,696 $ 4,671,194
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WEIGHTED AVERAGE SHARES
OUTSTANDING (Note 2)
Basic 5,637,793 5,685,509
Diluted 5,837,573 5,843,840
EARNINGS PER SHARE (Note 2)
Basic $ .91 $ .82
============ ============
Diluted $ .88 $ .80
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CASH DIVIDENDS PER SHARE $ .10 $ .09
============ ============
See notes to consolidated condensed financial statements.
-2-
WEYCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .............................................................. $ 5,152,696 $ 4,671,194
Adjustments to reconcile net earnings to net cash
provided by operating activities --
Depreciation ......................................................... 678,422 667,439
Amortization ......................................................... 48,649 46,755
Deferred income taxes ................................................ 494,479 111,000
Deferred compensation expense ........................................ 17,400 49,323
Pension expense ...................................................... 150,000 150,000
Gain on sale of assets ............................................... (84,704) --
Increase in cash surrender value of life insurance ................... (102,000) (93,000)
Changes in operating assets and liabilities --
Accounts receivable .................................................. (8,935,422) (9,044,392)
Inventories .......................................................... 6,991,068 (1,457,116)
Prepaids and other current assets .................................... 18,584 323,253
Accounts payable ..................................................... (1,652,181) 6,843,872
Accrued liabilities and other ........................................ (2,103,152) (1,091,131)
Accrued income taxes ................................................. 2,492,032 3,548,331
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Net cash provided by operating activities ....................... 3,165,871 4,725,528
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities ......................................... (1,412,909) (700,000)
Proceeds from maturities of marketable securities ......................... 626,313 1,216,390
Purchase of plant and equipment ........................................... (345,023) (1,038,628)
Proceeds from sales of plant and equipment ................................ 90,611 --
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Net cash used for investing activities .......................... (1,041,008) (522,238)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid ....................................................... (572,272) (490,810)
Proceeds from stock options exercised ..................................... 242,013 64,025
Net (repayments) borrowings under
revolving credit agreement ........................................... (2,975,170) 3,150,717
----------- -----------
Net cash (used for) provided by financing activities ............ (3,305,429) 2,723,932
----------- -----------
Net (decrease) increase in cash and cash equivalents ...................... (1,180,566) 6,927,222
----------- -----------
CASH AND CASH EQUIVALENTS at beginning of period ............................... $ 9,091,567 $ 7,301,104
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CASH AND CASH EQUIVALENTS at end of period ..................................... $ 7,911,001 $14,228,326
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net of refunds ......................................... $ 129,500 $ (937,710)
=========== ===========
Interest paid ............................................................. $ 153,745 $ 396,679
=========== ===========
See notes to consolidated condensed financial statements.
-3-
NOTES:
(1) In the opinion of management, all adjustments (which include only normal
recurring accruals) necessary to present fairly the financial information
have been made. The results of operations for the three months ended
March 31, 2004, are not necessarily indicative of results for the full
year.
(2) The following table sets forth the computation of net earnings per share
and diluted net earnings per share:
March 31, 2004 March 31, 2003
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Numerator:
Net Earnings ................................ $ 5,152,696 $ 4,671,194
============== ==============
Denominator:
Basic weighted average shares .............. 5,637,793 5,685,509
Effect of dilutive securities:
Employee stock options ................... 199,780 158,331
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Diluted weighted average shares ............. 5,837,573 5,843,840
============== ==============
Basic earnings per share ...................... $ .91 $ .82
============== ==============
Diluted earnings per share .................... $ .88 $ .80
============== ==============
Diluted weighted average shares outstanding for the first quarter of 2004
exclude outstanding options to purchase 5,412 shares of common stock at a
price of $36.94 because they are antidilutive. Diluted weighted average
shares outstanding for the first quarter of 2003 include all outstanding
options, as none are antidilutive.
(3) The components of the Company's net periodic pension cost are:
March 31, 2004 March 31, 2003
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Benefits earned during the period ....................... $ 196,000 $ 143,000
Interest cost on projected benefit obligation ........... 396,000 366,000
Expected return on plan assets .......................... (498,000) (418,000)
Net amortization and deferral ........................... 56,000 59,000
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Net pension expense .................................. $ 150,000 $ 150,000
The Company has not and does not expect to make any contributions to its
defined benefit pension plan in 2004.
-4-
(4) The Company continues to operate in two business segments: wholesale
distribution and retail sales of men's footwear. Summarized segment data
for the quarters ended March 31, 2004 and 2003 is:
Wholesale
Distribution Retail Total
----------- ----------- -----------
MARCH 31, 2004
Product sales .................... $54,540,000 $ 6,451,000 $60,991,000
Licensing revenues ............... 752,000 -- 752,000
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Net sales ..................... 55,292,000 6,451,000 61,743,000
Earnings from operations ......... 7,585,000 897,000 8,482,000
MARCH 31, 2003
Product sales .................... $53,944,000 $ 5,679,000 $59,623,000
Licensing revenues ............... 757,000 -- 757,000
----------- ----------- -----------
Net sales ..................... 54,701,000 5,679,000 60,380,000
Earnings from operations .......... 7,138,000 599,000 7,737,000
(5) The Company has stock option plans under which options to purchase Common
Stock are granted to officers and key employees at prices not less than
the fair market value of the Common Stock on the date of the grant. The
Company accounts for such stock option grants under the provisions of APB
Opinion #25, "Accounting for Stock Issued to Employees." No stock-based
employee compensation expense has been reflected in net income, as all
options granted under those plans had an exercise price equal to or
greater than the market value of the underlying common stock on the date
of grant.
The following table illustrates the effect on quarterly net earnings per
share as if the Company had applied the fair value recognition provisions
of FASB Statement No. 123, "Accounting for Stock-Based Compensation", as
amended by SFAS No. 148, to stock-based employee compensation.
March 31 March 31
2004 2003
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Net earnings, as reported ......................... $ 5,152,696 $ 4,671,194
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for
all awards, net of related tax effects ........ -- 83,170
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Pro forma net income .............................. $ 5,152,696 $ 4,588,024
============= =============
Earnings per share
Basic - as reported ............................. $ .91 $ .82
Basic - pro forma ............................... $ .91 $ .81
Diluted - as reported ........................... $ .88 $ .80
Diluted - pro forma ............................. $ .88 $ .79
-5-
(6) Comprehensive income for the three months ended March 31, 2004 and 2003 is
as follows (in thousands):
Three Months Ended
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March 31 March 31
2004 2003
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Net earnings $5,153 $4,671
Foreign currency translation adjustments (82) 173
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Total comprehensive income $5,071 $4,844
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The components of Accumulated Other Comprehensive Income as recorded on
the accompanying balance sheets are as follows (in thousands):
March 31 December 31
2004 2003
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Foreign currency translation adjustments $27 $109
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
OVERVIEW
The Company is a distributor of men's casual, dress and fashion shoes under the
Florsheim, Nunn Bush, Nunn Bush NXXT, Brass Boot, Stacy Adams and SAO by Stacy
Adams brand names. Inventory is purchased from third party overseas
manufacturers. The majority of foreign-sourced purchases are denominated in U.S.
dollars. The Company's products are sold to shoe specialty stores, department
stores and clothing retailers primarily in North America, with some distribution
in Europe. The Company also has a retail division, which consists of 30
Company-owned retail stores in the United States and three in Europe. Sales in
retail outlets are made directly to consumers by Company employees. The Company
also has licensing agreements with third parties who sell its branded shoes
overseas, as well as licensing agreements with apparel and accessory
manufacturers in the United States. As such, the Company's results are primarily
impacted by the economic conditions and the retail environment in the United
States.
Overall, net earnings increased from $4,671,000, or $.80 per diluted share for
the first quarter of 2003, to $5,153,000, or $.88 per diluted share for the
first quarter of 2004. For the first quarter of 2004, the Company had increases
in both its wholesale and retail operations. These increases along with a 1%
increase in overall gross margins resulted in the increase in earnings for the
quarter. A more detailed analysis of operating results follows.
LIQUIDITY & CAPITAL RESOURCES
The Company's primary source of liquidity is its cash and short-term marketable
securities, which aggregated approximately $11,640,000 at March 31, 2004 as
compared with $13,298,000 at December 31, 2003. In the first quarter of 2004,
the primary source of cash was operations, while the primary use of cash was the
repayment of long term debt.
-6-
Net cash provided by operating activities for the first quarter of 2004 was down
$1.6 million compared with the same period in 2003. The increase in net earnings
of $.5 million, offset by a $1.5 million deferred compensation payment (which is
included in accrued liabilities and other) were the principal items affecting
the change in cash provided by operations. The changes in inventory and accounts
payable are due to timing, and together had no impact on the decrease in
operating cash flows.
The increase in net cash used for investing activities is primarily due to an
increase in marketable securities during the first quarter of 2004, as compared
with a decrease during the same period of 2003. This is due to differences in
the timing of investments and maturities between periods. Also, in the first
quarter of 2003, $600,000 of the $1 million of capital expenditures was related
to the 2003 expansion and reconfiguration of the Company's distribution center.
The lower capital spending in 2004 represents a more normal level of quarterly
expenditures.
Cash flows from financing activities decreased due to first quarter 2004
repayments of borrowings. As of March 31, 2004, the Company had a total of $50
million available under its existing borrowing facility, of which total
borrowings were $25.0 million. This facility includes certain financial
covenants, including minimum net worth levels, minimum levels of Earnings Before
Interest, Taxes, Depreciation and Amortization (EBITDA) and a minimum ratio of
funded debt to EBITDA. As of March 31, 2004 the Company was in compliance with
all covenants.
The Company intends to use its 2004 operating cash flows primarily to reduce
outstanding borrowings and pay dividends.
The Company believes that available cash and marketable securities, cash
provided by operations, and available borrowing facilities will provide adequate
support for the cash needs of the business in 2004.
RESULTS OF OPERATIONS
Overall net sales increased 2.3%, from $60,380,000 for the first quarter of 2003
to $61,743,000 for the first quarter of 2004. The increase resulted from
increases in both the wholesale and retail divisions. Wholesale net sales for
the current quarter were $54.5 million versus $53.9 million in the first quarter
last year. This increase resulted from increases of 9% and 1% in the Stacy Adams
and Nunn Bush divisions, respectively, while Florsheim division sales were down
11% for the quarter. The increase in the Stacy Adams division was due to a 16%
increase in the Company's dress shoe business. The decrease in the Florsheim
division sales was due to the Company discontinuing distribution to several
retailers whose image and environment was not appropriate for the Florsheim
brand. The Company also sold less closeout product in 2004. While sales of
Florsheim product were down, the Company still expects to show an increase in
Florsheim sales for 2004. Retail net sales were $6.5 million this year, compared
with $5.7 million last year. Same store sales increased 13% in the first quarter
of 2004. Also included in overall net sales are licensing revenues of $752,000
in the first quarter of 2004 as compared with $757,000 in the same period of
2003.
-7-
Gross earnings as a percent of net sales increased from 33.4% for the first
quarter of 2003 to 34.4% for the first quarter of 2004. This is the result of
increased gross earnings as a percent of net sales in the wholesale division,
which increased from 30.4% in 2003 to 31.2% in 2004. Retail gross margins were
flat. The increase in wholesale gross margins resulted from an increase in
margins at the Company's Florsheim division. This increase resulted from a
reduction of closeout sales. However, the gross margin dollars generated from
the increase in gross margin percentages offset the loss in gross margins
dollars resulting from the decrease in volume for the Florsheim division.
Margins at the Company's Stacy Adams and Nunn Bush divisions were flat.
Selling and administrative expenses as a percent of net sales were 20.6% for the
first quarter of 2003 versus 20.7% in 2004. Wholesale selling and administrative
expenses as a percent of net sales were 17.4% in 2003 and 17.5% in 2004, and
retail selling and administrative expenses as a percent of net sales were 51.6%
in 2003 and 48.2% in 2004. The decrease in retail selling and administrative
expenses as a percent of net sales is primarily due to the fixed component,
principally rent and occupancy costs, of selling and administrative expenses
relative to net sales.
Interest income for the first quarter of 2004 was $121,000 as compared with
$150,000 for the same period in 2003. This decrease was due to reductions in the
average balance of cash and marketable securities outstanding between 2003 and
2004.
Interest expense for the first quarter of 2004 was $167,000 as compared with
$352,000 for the first quarter of 2003. The decrease is primarily due to a
reduction in the average balance of borrowings.
The effective tax rate for the first quarter of 2004 is 38.7% as compared with
38.2% in 2003. This slight increase is due to decreased municipal bond income
this year relative to pre-tax earnings, which results in an increase in the
effective tax rate.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements with respect to the
Company's outlook for the future. These statements represent the Company's
reasonable judgment with respect to future events and are subject to risks and
uncertainties that could cause actual results to differ materially. These
factors could include significant adverse changes in the economic conditions
affecting overseas suppliers or the men's footwear markets served by the
Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from those reported in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.
-8-
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure
that the information the Company must disclose in its filings with the
Securities and Exchange Commission is recorded, processed, summarized and
reported on a timely basis. The Company's principal executive officer and
principal financial officer have reviewed and evaluated the Company's
disclosure controls and procedures as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") as of the end of the period covered by this report (the
"Evaluation Date"). Based on such evaluation, such officers have concluded
that, as of the Evaluation Date, the Company's disclosure controls and
procedures are effective in bringing to their attention on a timely basis
material information relating to the Company required to be included in the
Company's periodic filings under the Exchange Act.
There have not been any changes in the Company's internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) that occurred during the Company's most recent fiscal quarter
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
In April 1998, the Company first authorized a stock repurchase program to
purchase 750,000 shares of its common stock in open market transactions at
prevailing prices. In April 2000 and again in May 2001, the Board of
Directors extended the stock repurchase program to cover the repurchase of
750,000 additional shares. Therefore, 2.25 million shares have been
authorized for repurchase since the program began. The Company did not
repurchase any shares under the program during the quarter ended March 31,
2004. Considering previous years' repurchases, as of March 31, 2004 the
Company had 813,100 shares of Common Stock remaining under the program. The
repurchase authorization does not expire.
-9-
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held April 27, 2004 to elect two
members to the Board of Directors.
Thomas W. Florsheim and Leonard J. Goldstein were nominated for
election to the Board of Directors for terms of three years. A total of
4,986,563 votes were cast for the nominees, with 4,693,929 votes
cast for and 292,634 votes withheld for Mr. Florsheim, and 4,965,533
votes cast for and 21,030 votes withheld for Mr. Goldstein. Thomas
W. Florsheim, Jr. and Robert Feitler continue as Directors of the Company
for a term expiring in 2005. Virgis W. Colbert, John W. Florsheim, and
Frederick P. Stratton continue as Directors of the Company for a term
expiring in 2006.
Item 6. Exhibits and Reports on Form 8-K
See the Exhibit Index included herewith for a listing of Exhibits. There
was one 8-K Filing during the quarter. On February 23, 2004, the Company
filed a press release announcing its results for the quarter ended December
31, 2003.
SIGNATURES
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.
WEYCO GROUP, INC.
May 7, 2004 /s/ John F. Wittkowske
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Date John F. Wittkowske
Senior Vice President
Chief Financial Officer
-10-
WEYCO GROUP, INC.
(THE "REGISTRANT")
(COMMISSION FILE NO. 0-9068)
EXHIBIT INDEX
TO
CURRENT REPORT ON FORM 10-Q
DATE OF March 31, 2004
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE TO HEREWITH
- ------ -------------------------------------------- ------------ --------
31.1 Certification of Principal Executive Officer X
31.2 Certification of Principal Financial Officer X
32.1 Section 906 Certification of Chief
Executive Officer X
32.2 Section 906 Certification of Chief
Financial Officer X