Wellco Enterprises, Inc.

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Wellco Enterprises, Inc.

150 Westwood Circle
Waynesville, North Carolina 28786
U.S.A.
Telephone: (828) 456-3545
Toll Free: (800) 840-3155
Fax: (828) 456-3547
Web site: http://www.wellco.com

Public Company
Incorporated: 1941 as Wellco Shoe Corporation
Employees: 799
Sales: $50.5 million (2005)
Stock Exchanges: American
Ticker Symbol: WLC
NAIC: 316219 Other Footwear Manufacturing

Wellco Enterprises, Inc., specializes in the manufacture of military and other rugged footwear, mostly sold to the United States' military, which accounts for 75 percent of all sales. Other armed forces using Wellco boots include the United Kingdom and New Zealand. Relying on Vulcanized Direct Molded Sole (DMS) construction, the company produces jungle boots, first introduced during the Vietnam War, and desert boots, developed for the Persian Gulf War and used again in the war in Iraq. In addition, Wellco offers intermediate cold/wet boots, general issue all-leather combat boots, and MineBogglers blast protective boots and overboots for protection against land mines. The company maintains its headquarters as well as warehousing and manufacturing facilities in Waynesville, North Carolina, but the bulk of the manufacturing is done at its plant in Aguadilla, Puerto Rico. Through subsidiary RoSearch, Inc., Wellco also makes and sells equipment to manufacture footwear using the DMS method and a similar technology called Process-82. Much of the equipment is sold to prisons to provide work for inmates. Wellco is a public company listed on the American Stock Exchange, but nearly 60 percent of the company is owned by the estate of James Emerson, a retired engineer who had no connection to the founding or running of the company but simply acquired stock in the company over many years.

WORLD WAR II ORIGINS

Wellco's heritage can be traced to four members of the Rollman and Kaufman families, owners of the Cologne, Germany-based Romika Company, which in the 1930s began developing a new way to mold and attach a one-piece rubber sole to a shoe upper. The third generation shoemakers—Heinz and Ernst Rollman and their first cousins, Walter and Curt Kaufman—were Jewish, however, and with the rise of the Nazi party to power in Germany, the family had its business confiscated. With Jews being sent to concentration camps, they fled to Brussels in 1935 with little more than their shoemaking skills and technical know-how, forming a partnership to license their technology around the world. As Germany became ever more aggressive and war became inevitable, the families decided in 1939 that it was wise to send one of the family members, Heinz Rollman, to the United States to determine whether the business should be relocated there. Rollman met with American rubber manufacturers, since the partners would need a steady source of compounded rubber. One of those companies was Dayton Tire & Rubber, which was interested in opening a plant in North Carolina in order to serve the textile industry. Dayton saw the shoe company as not only a potential customer for its rubber but also a potential tenant for the facilities it hoped to establish in North Carolina. Hence, in 1940 Heinz Rollman and the president of Dayton Tire paid a visit to the state, initially looking at Charlotte, but soon turning their attention to the Great Smoky Mountains of Western North Carolina where the cold streams would prove beneficial to rubber production. They eventually settled on the small town of Waynesville. Here in 1941 Rollman became a Dayton Tire tenant, a relationship that would last several years. RoSearch was established to develop shoe manufacturing machines and license its patented vulcanizing process to other footwear manufacturers. Rollman also formed Wellco Shoe Corporation, which would use the processes to make casual footwear and slippers with sponge rubber soles, all the while working to apply the technology to permit bonding to thicker uppers.

Ernst Rollman joined his brother by 1943, but the Kaufman brothers and their families were forced to flee Brussels. Unable to reach the United States, they waited out the war in hiding in the Alps. It was not until 1946, when the war was over, that they were able to join their partners in North Carolina and devote their attention to growing the business.

After years of effort the company received a patent in 1957 on Process 82, which allowed for the direct vulcanization of a rubber sole to a welted leather upper. Compared to the conventional way high-quality leather shoes and boots were made at the time, more than 20 steps were eliminated. Wellco began the global licensing of the production method, also providing advice on acquiring the proper equipment and assistance in both manufacturing and marketing of footwear using Process 82. One of Wellco's U.S. licensees, Georgia Shoe Company, did especially well using the technology to make work boots, and Wellco also formed a subsidiary, Gro-Rite Shoe Company, to use the process in the manufacture of children's footwear. In fiscal 1961 almost half of Wellco's revenues came from licensees operating in about a dozen countries. To better reflect the importance of RoSearch to the business, Wellco Shoe changed its name to Wellco RoSearch Industries, Inc., in 1961. The name would only last until 1967 when it was changed to Wellco Enterprises and the company was taken public, its shares initially trading on an over-the-counter basis. In 1968 the company gained a listing on the American Stock Exchange. By this time the company's manufacturing capabilities in Aguadilla, Puerto Rico, were also established, having been set up in 1956. That facility would eventually, in 1979, take over the cutting and stitching operations of the Waynesville plant.

FIRST MILITARY CONTRACT: 1975

Ties to the U.S. military began in 1963 when Wellco successfully demonstrated Process 82 in the making of military footwear. The company began working with the U.S. Army Laboratory in Natick, Massachusetts, to develop military footwear, work that would lead to DMS construction. In 1965, Wellco won its first contract for a boot suitable for the conditions troops encountered in Vietnam, turning out 5,000 pairs a day. With the war escalating, the company was not able to keep pace with the demand and RoSearch was called on to supply equipment and expertise to 11 other manufacturers who also produced the boot. For the next 30 years RoSearch and U.S. Army Natick Research worked together to make continued improvements to the jungle boot.

The first all-leather DMS combat boot was introduced in 1968, replacing boots using the Goodyear Welt construction, providing greater comfort and longer wear. Two years later RoSearch developed a blast protective overboot and later introduced a blast protective boot. The Aguadilla plant supplied the uppers, which were shipped to Waynesville to be attached to the soles.

COMPANY PERSPECTIVES

Wellco Enterprises, Inc., was founded in 1941 by third-generation shoemakers in the beautiful Great Smoky Mountains area of Western North Carolina.

Although the military market took on increasing importance, Wellco remained involved in commercial footwear, producing house slippers, casual shoes, and leather boots that relied on its vulcanizing technology. Brand names included Foamtread, Road Hogs, Welkins, Islanders, Jobease, and HiPal. The footwear was sold through some 10,000 retailers, from large department stores to mom-and-pop stores. However, increasingly less expensive foreign competition drove many U.S. shoe manufacturers out of business. By 1984 about 90 percent of America's commercial footwear was imported. It was at this point that Wellco exited the personal consumer field for the most part—although it did not close any manufacturing plants—and cast its lot with military boot contracts and to a lesser extent with specialty markets. It was a smart move because by law military footwear could only be provided by domestic manufacturers, which protected the business from foreign competition. However, given the results for fiscal 1983, a net loss of $912,000 on sales of $11.4 million, the company had little choice in the matter. As the commercial operations were phased out, Wellco lost another $2.6 million in fiscal 1984, but in fiscal 1985 the company returned to profitability, netting $1.6 million on $15.4 million in revenues, a 25 percent increase on the $12.3 million recorded a year earlier. The key to the company's success was a new water-repellent combat boot that was selected by the U.S. Army over six other prototypes, each tested in a "walk-off" competition. Not only was Wellco doing well with U.S. military contracts, RoSearch was supplying equipment and expertise in the manufacture of military footwear for the governments of El Salvador and Uruguay.

In 1988 Ro-Research began developing a prototype for a desert boot to provide troops with footwear suitable for hot, dry, and sandy conditions. General Norman Schwarzkopf then specified certain improvements in the fall of 1990 after Iraq invaded Kuwait to precipitate the Gulf War, and the so-called Schwarzkopf boot, combining leather and nylon to keep feet cool in extremely high temperatures, was rushed into production. It later assumed a less evocative name, Hot Weather Boot, Type II. The boot was worn by the troops in the Operation Desert Storm phase of the conflict when Iraq was driven out of Kuwait. Like the Hummer vehicle and desert camouflage clothing, the Schwarzkopf boot caught the fancy of a segment of the U.S. population. Desert Storm lasted mere days, but the military had prepared for a longer struggle, contracting with Wellco to provide 1.4 million pairs of the Schwarzkopf boots (available in 105 sizes for men and women). Even with the war over, the army urged Wellco to keep turning out the boots. To take advantage of the public interest in all things Schwarzkopf, Wellco arranged with retailers to make the desert boot available to the public.

Wellco received a $1.2 million development contract with U.S. Army Natick Research in 1995 to apply running shoe technology to combat boots in order to improve comfort and foot health by increasing flexibility and adding better impact absorption properties, while retaining the support previous boots provided as well as resistance to the elements. By the end of the 1990s Wellco offered a prototype that when tested resulted in 30 percent fewer injuries than with other military boots. A year later this new line of combat boots was introduced.

Wellco's revenues hovered around the $18 million level in the first half of the 1990s as military spending was cut in the wake of the Cold War coming to an end, but business began to pick up in the second half of the decade. In 1997 the company was awarded three U.S. military contracts, one to supply jungle boots and desert boots, another for intermediate cold/wet boots suitable for use in such cold climates as Korea and Bosnia, and the third for a new waterproof boot for the Marine Corps using a Gore-Tex bootie. Around this time peacekeeping troops were operating in Bosnia clearing mines, creating an increased demand for blast protective boots and overboots. As a result, sales approached $20 million in fiscal 1996 and reached $22.2 million a year later. Unfortunately, events conspired in fiscal 1998 to produce the first losing year since fiscal 1984 and Wellco's exit from the commercial footwear market. The military decided to reduce its DMS combat boot inventories, which meant that new orders for Wellco were cut in half. Wellco also incurred heavy start-up fees in producing the new Marine combat boot, which involved a new and complicated manufacturing process.

KEY DATES

1941:: The company is founded.
1956:: A factory in Puerto Rico is established.
1963:: The military boot business is launched.
1967:: The company is taken public.
1984:: Wellco ceases commercial footwear production.
1999:: Most manufacturing operations are moved to Puerto Rico.
2003:: The Iraq war spurs business.

MANUFACTURING MOVED TO PUERTO RICO: 1999

Wellco experienced a second straight losing year in fiscal 1999. In order to cut costs, the company decided to move almost all of its lasting, bottoming, and finishing operations to Puerto Rico, costing the Waynesville facility about 85 jobs. However, the company's headquarters, machine shop, warehousing and distribution operation, product development unit, and the RoSearch unit remained in North Carolina. Much of fiscal 2000 was spent in transferring and integrating the manufacturing operations to Puerto Rico. Once that was completed Wellco began looking to improve the balance sheet. When the fiscal year came to a close on July 1, 2000, the company was once again in the black, reporting net income of $711,000, a significant improvement over the $837,000 it lost the previous year. Sales also improved to $22.2 million.

Due to the timing of a pair of contracts that came to an end, Wellco saw its sales drop to $19.4 million in fiscal 2001, but the company's renewed health was reflected in the $1.1 million profit it posted. Ten weeks after the fiscal year closed, business began to pick up significantly in the aftermath of the terrorist attacks on September 11, 2001, as the United States made plans to invade Afghanistan and the military asked Wellco and other boot manufacturers to step up production. In addition, the U.S. Army in October 2001 asked for bids on contracts to provide berets, which a year earlier had become part of the army's standard headgear. It was a tempting opportunity, since the contract would be worth about $10 million per year. Although Wellco had never manufactured berets, it invested in equipment and raw materials and hired consultants to train personnel in how to manufacture the item. The company failed to win the contract, however, resulting in a $335,000 write-off in fiscal 2002, and contributing to the fall of net income to $683,000 despite an increase in revenues to $20 million. The company did better with another sideline, however, marketing shoe manufacturing equipment to state prison systems, especially to Pennsylvania where it installed seven systems for inmates to manufacture work shoes.

The war in Iraq and the need for desert boots spurred Wellco's business in fiscal 2003 and beyond. At the behest of the U.S. military, Wellco ramped up production. Not only did the company produce a large number of DMS combat boots, it also won a contract to produce the new infantry combat boot. As a result of these developments, revenues surged to $24.8 million in 2003 and $45.7 million in fiscal 2004, while net income improved to $2.4 million. Sales continued to grow in fiscal 2005, reaching $50.5 million, although business fell off in the second half of the year. While the lion's share of these increases were related to the ongoing Iraq war, Wellco was also making strides in selling its military footwear to the commercial market. In addition, it offered similar boots to consumers that were not made for the military market.

In fiscal 2006 Wellco won a new contract to provide cold-weather boots to the U.S. Army, which made up for the decline in orders of desert boots. In addition, Wellco was working on a development contract to provide a boot that could adjust to temperatures from as high as 120 degrees Fahrenheit to as low as 60 degrees below zero. The company also saw some changes in its ownership structure and management ranks. James T. Emerson, who, with a 58 percent stake was the company's principal shareholder, died at the age of 82 in Danville, Virginia. After retiring as an engineering consultant, he turned to investing and kept buying shares of Wellco stock on the open market for several decades until he owned a controlling interest, worth about $10.3 million. His sister, Sarah E. Lovelace, gained control of the stock, acting as executor of his estate. Emerson had been a member of Wellco's board of directors and was replaced. A few months later, in March 2006, Wellco's chief executive and chairman, David Lutz, who had been with the company for 32 years, turned over the CEO position to 54-year-old Lee Ferguson, who was well experienced in defense contracting. Previously he had served as the chief operating officer at Specialty Defense Systems in Dunmore, Pennsylvania, and president of the Armor and Defense Group of Auburn, Alabama-based Arotech Company.

Ed Dinger