SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THIS SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended May 31, 1998 Commission file number 1-6775
HOWARD B. WOLF, INC.
(Exact name of registrant as specified in its charter)
Texas 75-0847571
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3809 Parry Avenue, Dallas, Texas 75226-1753
(Address of principal executive offices) (Zip Code)
(214) 823-9941
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $0.331/3 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein; and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
The aggregate market value of Registrant's common stock held by non-
affiliates (based upon the closing sale price on the American Stock
Exchange) on August 10, 1998 was approximately $3,238,937.
As of August 10, 1998, there were 1,056,191 shares of common stock
outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders on September 15, 1998 are incorporated by reference into Part
III.
HOWARD B. WOLF, INC.
FORM 10-K
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED MAY 31, 1998
PART I
Item 1. Business
General
Howard B. Wolf, Inc. (the "Company"), incorporated under the laws of
the State of Texas in 1952, designs, manufactures and sells women's fashion
apparel consisting primarily of dresses, suits, shirts and coordinated
groups of sportswear.
The Company's products are designed and presented for each season
(fall,holiday, spring and summer). Sales generally do not fluctuate
materially from quarter to quarter as a result of seasonal sales patterns
of the Company's business. Accordingly, there are no significant seasonal
fluctuations in quarterly fiscal year shipments.
Working capital requirements do not fluctuate materially. The Company
produces merchandise to meet sales orders and does not carry large
inventories to meet estimated sales requirements. The Company does not sell
on consignment. The merchandise return policy provides for return of
defective merchandise within ten days after receipt. Primary sale terms are
8/10 EOM and Net/10 EOM. Requests are received for extended payment terms
for up to thirty days from due date primarily for shipments made early in a
season. These requests are generally granted subject to the credit standing
of the customer. Extended payment requests do not have a material effect on
cash flow.
Principal Products and Markets
The Company merchandises its products (fashion apparel for women)
under the following labels:
HOWARD WOLF DRESS label-comprised of dresses, ensembles and suits
and retails from approximately $100 to $250. It is intended for
career/professional and fashionable women who desire current styling and
good taste. The Howard Wolf Dress label, introduced in 1956, is well known
in the fashion field.
HOWARD WOLF SPORTSWEAR label-designed for career/professional and
fashionable women, is presented as separate shirts, pants, tops, jackets
and sweaters in coordinated groups. Introduced during the Fall 1972 season,
this label retails from approximately $50 to $250.
<PAGE>
ERNESTO W label-was introduced in 1976. This label is currently
used on special request only. It retails from approximately $40 to $150.
PRET-A-PORTE label-established in 1969, is currently used on
special request only. It retails from approximately $40 to $125.
HOWARD WOLF W label-started in 1993-is designed as separates in
fashionable larger sizes (0x-3x) that retails from approximately $60 to
$250.
The Howard Wolf collections are sold by independent sales
representatives, most of whom are compensated on a commission basis.
Representatives, during each fashion season, call upon retailers throughout
the country and show at the major domestic and regional fashion markets.
In addition, the Company has opened two factory retail stores in
upscale factory outlet mall centers.
Design and Production
The Company maintains a design staff in Dallas to design the styles
Manufactured and sold by it. To an extent which the Company believes to be
unique for manufacturers in its price range, the Company continuously
monitors trends in style and fabric with particular emphasis on
developments in design for career/professional and fashionable women.
Design personnel of the Company make frequent trips to domestic and foreign
fashion markets. The Company operated one manufacturing facility during the
year on a forty-hour week, one shift basis, with employment and production
virtually constant throughout the year. The Company utilized primarily
domestic independent contractors for most of its sewing operations, which
are under the Company's supervision and made in accordance with its
specifications and production schedules. Certain manufacturing operations,
pattern making, grading and predominantly all cutting continue to be
performed by the Company's employees at its Dallas facility.
The Company maintains strict quality control during the manufacturing
process. Finished products are received in the Dallas facility and are
carefully inspected and shipped from this location.
Raw Materials
Raw materials used in the Company's products are primarily fabrics and
trim items. They are of both domestic and foreign origin and are obtainable
from many resources.
Customers
The Company sells to approximately 800 retailers who operate more than
1,200 stores throughout North America. No customer accounts for more than
10 percent of sales. Customers include many leading department and
specialty stores. Permanent showrooms are maintained in the Dallas Apparel
Mart and the Atlanta Merchandise Mart.
<PAGE>
In addition to sales to retailers, the Company operates two factory
outlet mall stores in upscale factory outlet malls in Napa, California and
in Las Vegas, Nevada and operates its two "Fashion Showroom" factory outlet
retail stores located in Dallas and San Benito, Texas for the sale of
merchandise resulting from excess production, specially produced merchandise
and seconds.
Backlog Orders
The Company had approximately $4,300.000 of unshipped order on hand at
May 31, 1998 ($4,600.000 on May 31, 1997). These orders are believed to be
firm. All backlog orders are expected to be filled in the current fiscal
year.
Competition
The fashion apparel manufacturing industry is highly competitive, and
the Company competes with many other manufacturers, some of which are
larger in sales and resources. The principal methods of competition are
price and style. Price is primarily based on fabrication, trim and style.
Manufacturing processes employed by the Company provide competitive product
pricing. Style is based on current trends and fashions. The Company's
design techniques and thorough exploration of fashion centers worldwide
provide competitive styling. The Company believes that its products compete
effectively in terms of buyer acceptance with those of its competition in
the Company's price range and areas of style concentration. The Company has
no information to determine what share of the market its products represent
in terms of sales.
Employees
The Company employed 102 persons on a full-time basis at May 31, 1998.
Of these, 12 were executive, administrative and clerical employees; 13 were
sales representatives; 64 were design, cutting and manufacturing personnel
and 13 were engaged in other activities such as shipping, warehouse
management, security and transportation. The Company had no employees
represented by a union and believes that it enjoys good relations with its
employees.
Environmental Considerations
The cost and effect of complying with environmental regulations are
not material due to the nature of the Company's business.
Item 2. Properties
<PAGE>
The principal offices of the Company are in Dallas, Texas where the
Company owns a three-story brick building containing approximately 90,000
square feet. This facility, containing the executive, design,
administrative, and data processing facilities, is also devoted to some
manufacturing, and all merchandise is shipped from this location. These
facilities are suitable for the Company's operations with adequate space
and improvements. Approximately twenty percent of the 90,000 square feet is
not presently utilized by the Company and has been leased to an unrelated
entity.
The Company owns one other facility in Greenville, Texas, which is
leased to a nonrelated entity and is shown in the balance sheet as
property, plant and equipment not used in operations.
The following table sets forth pertinent information concerning each
of the above properties:
Interest in Square
Location property feet
Principal office and manufacturing facility Fee 90,000
Greenville facility Fee 11,900
The Company leases (under short-term leases from three to five years)
permanent showrooms in the apparel marts in Atlanta and Dallas and
retail stores in factory outlet malls in Napa, California and Las Vegas,
Nevada.
Substantially all of the machinery, equipment, furniture and fixtures
required in the operation of the business is either owned or leased by the
Company under short term leases from thirty six months to forty eight months,
and is in good operating condition.
Item 3. Legal Proceedings
The Company is not involved in any material litigation.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matter
The common stock of the Company is traded on the American Stock
Exchange. The following table gives the high and low sales prices and the
amount of dividends paid for the fiscal quarters indicated:
<PAGE>
1998 Date ended High Low Dividend
First quarter August 31, 1997 $6 1/2 $5 3/8 .08
Second quarter November 30, 1997 6 1/2 5 13/16 .08
Third quarter February 28, 1998 6 1/4 5 1/2 .08
Fourth quarter May 31, 1998 6 1/4 5 1/2 .08
1997 Date ended High Low Dividend
First quarter August 31, 1996 $7 5/8 $6 1/2 .08
Second quarter November 30, 1996 7 3/8 6 1/8 .08
Third quarter February 28, 1997 6 3/4 5 7/8 .08
Fourth quarter May 31, 1997 7 5 1/2 .08
The Company's common stock closed at $5.375 on August 10, 1998.
As of August 10, 1998, there were 247 holders of record of the
Company's common stock. The Company paid dividends during fiscal years 1998
and 1997. There are no restrictions on the Company's ability to pay
dividends other than those provided by statute. The payment of dividends is
reviewed each period by the Board of Directors taking into consideration
earnings, business requirements and economic conditions. A dividend of $.08
per share was declared by the Board of Directors payable August 31, 1998 to
shareholders of record August 7, 1998.
Item 6. Selected Consolidated Financial Data
1998 1997 1996 1995 1994
Net sales $14,322 $14,242 $15,213 $14,436 $14,269
Income before federal
income tax 626 1,004 1,332 1,220 1,222
Provision for federal
income tax 224 370 460 431 441
Net income 402 634 872 789 781
Basic and diluted
earnings per share .38 .60 .83 .75 .74
Cash dividends
per common share .32 .32 .32 .30 .28
Total assets 9,778 9,552 8,834 8,796 8,266
Item 7. Management's Discussion and Analysis of
Financial Conditions and Results of Operations
FINANCIAL CONDITION
Liquidity and Capital Resources
Working capital at May 31, 1998 was $6,810,423, an increase of
$96,739, or one percent from the previous year. The current ratio at May
31, 1998 is 4.4 to 1 (4.7 to 1 in 1997). Total liabilities to assets equals
twenty one percent (twenty percent in 1997).
<PAGE>
Cash was used to fund normal working capital requirements, including
acquisition of property, plant and equipment, payment of dividends and
payment of matured accounts payable and accrued liabilities and the opening
of two retail stores. The cash balance at May 31, 1998 decreased $792,424, or
approximately forty one percent from 1997. The decrease resulted from
$304,507 used in operating activities,$149,936 used in investing activities
and $337,981 used in financing activities.
The accounts receivable balance increased approximately five percent at
May 31, 1998 primarily related to the timing of shipments during the fourth
quarter. Inventories increased approximately twenty one percent. Six
percent of the inventories are in the two new factory outlet mall stores
and the balance of the increase resulted from the early acquisition and
production of fall merchandise. Accounts payable and accrued liabilities
increased approximately eleven percent primarily due to the acquisition
of fall inventories.
The Company factors its accounts receivable with a commercial factor
on a matured basis. (Funds are remitted by the factor upon maturity of the
invoices, plus a set number of collection days). The factor establishes a
credit line per customer on a non-recourse basis. Credit extended by the
Company in excess of the factor's approved credit line is factored on a
recourse basis.
The Company does not have a retirement plan nor offers post retirement
or employment benefits. Accordingly, there will be no impact on the Company
due to SFAS 106,"Employers'Accounting for Post Employment Benefits".
The provisions of the Taxpayer Relief Act of 1997 are not expected to
have a material impact on liquidity, financial conditions or operations.
The deferred tax asset at May 31, 1998 totals $234,000. Approximately
$688,000 of taxable income will need to be generated in order to fully
utilize the deferred tax. The average taxable income of the company over the
last three years is approximately one million dollars. In view of current
operations management believes that adequate taxable income will be
generated in order to fully utilize the deferred tax.
The deductible temporary differences related to the deferred tax
liability of $74,000 consist of depreciation. It is expected that these
differences should reverse out over the life of the assets, or approxi-
mately ten years. All other temporary differences related to the deferred
tax asset of $234,000 are expected to reverse in fiscal 1999.
Capital acquisition and improvement expenditures during fiscal 1998
totaled approximately $149,000, consisting of new equipment and improvements
to facilities ($40,000) and furniture, fixtures and leasehold improvements
in the two factory outlet mall stores ($109,000). These expenditures were
funded out of current working capital. There were no significant
dispositions of fixed assets used in operations during fiscal 1998 and none
are planned during fiscal 1999. Capital acquisition and improvement
expenditures for the 1999 fiscal year are planned to total approximately
$250,000, which will consist of new equipment to increase operating
efficiencies and improvements to existing facilities. Funding will come
from cash flows generated through operations. Present facilities are
adequate with room for expansion and no material requirements for additional
facilities or major capital expenditures are anticipated in the next few
years.
<PAGE>
Shipments in fiscal 1999 are expected to be relatively equal during
each quarter. Inventories are planned to remain at approximately the same
level during the coming year subject to temporary seasonal requirements.
The payment of dividends is reviewed each quarter taking into consideration
liquidity, net income, business requirements and economic conditions.
Based on current operations and internally generated cash flows,
management believes that adequate resources will be available to meet
current and future liquidity requirements.
Inflation
Inflationary higher prices for materials, labor, overhead and other
expenses increased costs. The Company attempts to offset the effects of
these increased costs through greater productivity, operating efficiencies
and selective price adjustments.
Year 2000 Disclosure
The Company is working to resolve the potential impact of the year 2000
on the ability of the Companys computerized information systems to accurately
process information that may be date-sensitive. Any of the Companys programs
that recognize a date using 00 as the year 1900 rather than the year 2000
could result in errors or system failures. The Company utilizes a number of
computer programs across its entire operation. The Company has not completed
its assessment, but currently believes that costs of addressing this issue
will not have a material adverse impact on the Companys financial position.
However, if the Company and third parties upon which it relies are unable to
address this issue in a timely manner, it could result in a material financial
risk to the Company. In order to assure that this does not occur, the Company
plans to devote all resources required to resolve any significant year 2000
issues in a timely manner.
<PAGE>
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, which is effective for the Companys fiscal year ending
May 31, 1999. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains, and loses)
in a full set of general purpose financial statements. The adoption of SFAS
No. 130, which will be implemented in the Companys fiscal year 1999, may
result in a change in financial statement presentation but will not have an
impact on the Companys financial position or result of operations.
In June 1997, the FASB issued SFAS no. 131, Disclosure about Segments of
an Enterprise and Related Information, which is effective for financial
statements for periods in fiscal years beginning after December 15, 1997,
but does not need to be applied to interim financial statements in the
initial year of its application. SFAS No. 131 changes the way public
companies report information about segments does not presently apply to
the Companys operations. If segment reporting becomes applicable in a
future period, the Company will adopt SFAS No. 131 in that period.
RESULTS OF OPERATIONS
1998 Compared to 1997
Net income for the fiscal year ended May 31, 1998 was $401,921, or
$.38 per share, compared to $633,588, or $.60 per share in the 1997 fiscal
year. Income before federal income tax was $626,398 in 1998 versus income
before federal income tax of $1,004,079 in 1997.
Net sales totaled $14,321,914 for the 1998 fiscal year, approximately
one-half of one percent over the previous year. Sales to retail customers
were $13,834,387. First year net sales in the factory outlet mall stores
were $487,527 and operations resulted in a loss of $233,340.
The HOWARD WOLF label continues to experience good customer acceptance.
However, the Company experienced an overall soft demand for women's apparel
which exerted great competitive pressure on sales and margins. Management's
continuing goal is to broaden the HOWARD WOLF market base by greater
penetration into domestic and foreign markets.
Cost of sales increased .3 percent to 66.2 percent as a percentage
relationship to net sales. The percentage increase resulted primarily from
product sales mix and increased sales allowances.
Selling, general and administrative expenses increased approximately
two percentage points as a percentage relationship to net sales. The
percentage increase resulted primarily from the operations of the factory
outlet mall stores. The provision for bad debt expense increased to $137,969
from $127,491 in 1997.
Other income decreased approximately nineteen percent, primarily due
to lower rental income from property not used in operations.
Interest income decreased approximately twenty eight percent, primarily
due to lower average cash balances.
<PAGE>
Interest expense increased approximately eighteen percent, primarily
due to interest costs on extended terms granted on customer accounts.
RESULTS OF OPERATIONS
1997 Compared to 1996
Net income for the fiscal year ended May 31, 1997 was $633,588, or
$.60 per share, compared to $872,048, or $.83 per share in the 1996 fiscal
year. 1996 net income includes $95,154 (net of tax) or $.09 per share,
from the gain on the sale of property, plant and equipment not used in
operations.
Net sales for the 1997 fiscal year were $14,242,006. Net sales were
approximately six percent lower compared to 1996. 1997 sales reflected the
retail fashion apparel industry's continued tough economic climate.
Segments of our customer base were affected by a negative foreign exchange
rate and an overall weakened consumer demand. Management is working
aggressively to overcome negative industry and economic trends by offering
a broader product line, exploring alternative sales methods and increasing
penetration in our market base.
Cost of sales decreased seven tenths of one percent as a percentage
relationship to net sales. The percentage decrease resulted primarily
from slightly lower overhead costs and expenses.
Selling, general and administrative expenses increased approximately
one and four tenths percent as a percentage relationship to net sales.
The percentage increase resulted primarily due to higher general and
administrative expenses. The provision for bad debt expense increased
to $127,491 in 1997 from $60,204 in 1996.
Other income in fiscal 1997 increased approximately twenty percent,
primarily due to higher rental income from property, plant and equipment
not used in operations.
Interest income increased approximately two hundred four percent,
primarily resulting from higher average cash balances.
<PAGE>
Interest expense decreased approximately thirty nine percent, resulting
primarily from a reduction of extended terms on factored customer accounts.
Item 8. Consolidated Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Management 9
Independent Auditor's Report 9
Consolidated Statements of Operations and
Retained Earnings for the years ended
May 31, 1998, 1997 and 1996 10
Consolidated Balance Sheets at May 31, 1998 and 1997 11
Consolidated Statements of Cash Flows for the years
ended May 31, 1998, 1997 and 1996 12
Notes to Consolidated Financial Statements 13-17
Consolidated Schedules for the years ended
May 31, 1998, 1997 and 1996:
II-Allowance for Collection Losses and Discounts 19
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of
the schedule or because the information required is included in the
consolidated financial statements and notes thereto.
<PAGE>
Report of Management
Management is responsible for the consolidated financial statements
and all information in this annual report. The statements have been
prepared in conformity with generally accepted accounting principles.
Financial information elsewhere in this report is consistent with that in
the consolidated financial statements. The consolidated statements have
been audited by Lane Gorman Trubitt, L.L.P., independent auditors. Their
role is to express an opinion as to whether management's financial state-
ments, considered in their entirety, present fairly the Company's financial
position, operating results and cash flows.
Management maintains and relies on systems of internal accounting
controls designed and intended to provide reasonable assurance that
assets are safeguarded from loss or unauthorized use and that
transactions are executed in accordance with management's authorization
and are properly recorded. These systems are tested and evaluated by
management as well as by the independent auditors in connection with their
annual audit.
The Board of Directors selects an Audit Committee composed of two
directors. The committee meets periodically with the independent auditors
to review the scope and results of the audit, principles applied in
financial reporting, and financial and operational controls. The
independent auditors and corporate accountants have free access to the
audit committee, who are not employees of the company. On the recommen-
dation of the Audit Committee, the Board of Directors selects and
engages the independent auditors.
/s/Eugene K. Friesen
Eugene K. Friesen
Senior Vice President and Treasurer
Chief Financial Officer
<PAGE>
Independent Auditor's Report
The Board of Directors and Shareholders
Howard B. Wolf, Inc.
We have audited the accompanying consolidated balance sheets of Howard
B. Wolf, Inc. and subsidiaries as of May 31, 1998 and 1997, and the
related consolidated statements of operations and retained earnings, and
cash flows for each of the years in the three-year period ended May 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects,the financial position of
Howard B. Wolf, Inc. and subsidiaries as of May 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in
the three-year period ended May 31, 1998 in conformity with generally
accepted accounting principles.
We have also audited Schedule II of Howard B. Wolf, Inc. and subsidiaries
for the years ended May 31, 1998, 1997 and 1996. In our opinion, this
schedule presents fairly, in all material respects, the information
required to be set forth therein.
/s/ Lane Gorman and Trubitt, L.L.P.
Lane Gorman Trubitt, L.L.P., Certified Public Accountants
Dallas, Texas
July 8, 1998
<PAGE>
<TABLE>
HOWARD B. WOLF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Years ended May 31,
1998 1997 1996
<S> <C> <C> <C>
Net sales $14,321,914 $14,242,066 $15,213,047
Cost and expenses:
Cost of sales 9,487,555 9,392,340 10,132,998
Selling, general and
administrative expenses 4,127,553 3,820,471 3,859,302
Provision for bad
debt expense 137,969 127,491 60,204
13,753,077 13,340,302 14,052,504
Income from operations 568,837 901,764 1,160,543
Gain on sale of property,plant
and equipment not used in
operations - - 144,172
Other income 43,881 64,591 53,848
Interest income 48,813 67,399 22,159
Interest expense (35,133) (29,675) (48,510)
Income before federal income tax 626,398 1,004,079 1,332,212
Provision for federal income tax (224,477) (370,491) (460,164)
Net income 401,921 633,588 872,048
Retained earnings-
beginning of year 5,369,844 5,074,237 4,540,170
Cash dividends (337,981) (337,981) (337,981)
Retained earning-end of year $5,433,784 $5,369,844 $5,074,237
Average number of shares
outstanding 1,056,191 1,056,191 1,056,191
Basic and diluted
earnings per share $.38 $.60 $.83
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
HOWARD B. WOLF, INC.
CONSOLIDATED BALANCE SHEETS
May 31,
ASSETS
1998 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,128,991 $1,921,415
Accounts receivable-net 2,530,137 2,415,244
Inventories 4,620,568 3,815,653
Prepaid expenses 159,322 160,994
Refundable federal income tax 112,813 -
Deferred federal income tax 234,000 214,000
8,785,831 8,527,306
Property, plant and equipment 2,494,332 2,360,038
Less accumulated depreciation
and amortization (1,555,118) (1,389,205)
939,214 970,833
Property, plant and equipment
not used in operations 678 2,718
Other assets 51,957 51,097
$9,777,680 $9,551,954
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $1,975,408 $1,772,987
Federal income tax payable - 40,635
Total current liabilities 1,975,408 1,813,622
Deferred federal income tax 74,000 74,000
Shareholders' equity:
Common stock,par $.33 1/3;3,000,000 shares
authorized; 1,081,191 shares issued 360,400 360,400
Additional paid-in capital 2,034,088 2,034,088
Retained earnings 5,433,088 5,369,844
Less common stock in treasury,
at cost, 25,000 shares (100,000) (100,000)
7,728,272 7,664,332
$9,777,680 $9,551,954
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
HOWARD B. WOLF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31
1998 1997 1996
<S> <C> <C> <C>
Cash flows from
operating activities:
Net income $ 401,921 $ 633,588 $ 872,048
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities-
Depreciation and amortization 174,605 150,067 152,625
Provision for losses
on accounts receivable 137,969 127,491 60,204
Change in deferred
federal income tax (20,000) (41,000) 2,000
Cost on abandonment of lease 8,131 - -
Gain on sale of property,
plant and equipment not
used in operations - - (144,172)
Net changes in operating
assets and liabilities-
Accounts receivable (252,862) (565,937) (67,690)
Inventories (804,915) 331,633 (122,426)
Prepaid expenses 1,671 (626) (53,737)
Refundable federal income tax (112,813) - -
Accounts payable and
accrued liabilities 202,421 350,163 (420,924)
Federal income tax payable (40,635) 76,573 (61,594)
Net cash provided by (used in)
operating activities (304,507) 1,061,952 216,334
Cash flows from investing activities:
Other assets (860) (1,432) (830)
Additions to property,
plant and equipment (149,076) (63,111) (241,105)
Sale of property, plant
and equipment not used
in operations - - 250,000
Net cash (used in) provided
by investing activities (149,936) (64,543) 8,065
Cash flows from
financing activities:
Cash dividends paid (337,981) (337,981) (337,981)
Net cash used by
financing activities (337,981) (337,981) (337,981)
Net increase(decrease) in cash
and cash equivalents (792,424) 659,428 (113,582)
Cash and cash equivalents
at beginning of year 1,921,415 1,261,987 1,375,569
Cash and cash equivalents
at end of year $1,128,991 $1,921,415 $1,261,987
See accompanying notes
</TABLE>
<PAGE>
HOWARD B. WOLF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business
The Company designs, manufactures and sells women's fashion apparel.
It's principal market is retail clothing and department stores in the
United States.
Summary of significant accounting policies
The consolidated financial statements include the accounts of the
Company and all subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Raw materials are priced at the lower of cost (identified unit basis)
or market and work-in-process and finished goods are priced at the lower of
average cost or market.
Property, plant and equipment is stated at cost. Depreciation and
amortization of machinery and equipment, leasehold improvements and the
building included in property, plant and equipment are provided by the
straight-line method. Depreciation of the buildings included in property,
plant and equipment not used in operations is provided for by both the
accelerated and straight-line methods.
Income taxes are provided on pre-tax earnings as reported in the
consolidated financial statements. Deferred income taxes result from
temporary differences between pre-tax earnings reported in the consolidated
financial statements and taxable income.
The Company has adopted Statement of Financial Accounting Standards No.
128 (SFAS No, 128), Earnings per Share. SFAS No. 128 established new
requirements for computing and presenting earnings per share. Under the new
requirements, the method previously used to compute earnings per share is
changed and all prior periods presented have been restated to conform to the
new requirements. The new requirements eliminate primary and fully diluted
earnings per share. As a result, under the new requirements, basic and
dilutive net earnings per share are the same under the Companys capital
structure.
Basic and diluted earnings per share is computed on the weighted
average number of common shares outstanding during the period.
In June 1997, the FASB released Statement of Financial Accounting
Standards No. 128 (SFAS No. 128), Earnings per Share. SFAS No. 128
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements and
is effective for the Companys fiscal year 1999. The Company believes that
adoption of SFAS 130 will not have a material impact on the Companys
consolidated financial statements.
<PAGE>
In preparing the Company's financial statements, management is
required to make estimates and assumptions that effect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ form these estimates.
Fair value of financial instruments are estimated to approximate the
related book values, unless otherwise indicated, based on market
information available to the Company.
Cash flow information
The consolidated statement of cash flows provides information about
changes in cash and cash equivalents. Cash equivalents consist of highly
liquid debt instruments with a maturity, when purchased, of three months or
less.
Cash payments for interest were: 1998-$35,133; 1997-$29,675; 1996-
$48,108. Cash payments for federal income taxes were: 1998-$387,925; 1997-
$341,854; 1996-$519,758.
Cash and cash equivalents
Cash and cash equivalents consist of:
1998 1997
Cash $ 290,833 $ 945,759
Money market funds 207,461 400,162
Matured funds at factor 630,697 575,494
$1,128,991 $1,921,415
Credit risk
The Company and its subsidiaries maintain cash balances at several
financial institutions located in Texas. Accounts in each institution are
insured by the Federal Deposit Insurance Corporation up to $100.000.
Uninsured balances aggregate to approximately $855,000 at May 31, 1998,
($1,454,000 at May 31, 1997).The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit
risk.
The balance of accounts receivable factored and matured funds with a
commercial factor of approximately $2,172,000 at May 31, 1998 are
uninsured ($2,538,000 at May 31, 1997).
Accounts receivable
Accounts receivable are net of allowances for collection losses and
discounts of $132,546 in 1998 and $131,931 in 1997.
<PAGE>
HOWARD B. WOLF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
At May 31, 1998 and 1997 approximately $1,542,000 and $1,962,000
respectively, of accounts receivable were factored with a commercial
factor. Approximately $707,000 and $1,133,000 were factored with recourse at
May 31, 1998 and 1997, respectively.
Inventories
Inventories consist of: 1998 1997
Raw materials $ 991,748 $1,237,574
Work-in-process 1,067,345 1,043,457
Finished goods 2,561,475 1,534,622
$4,620,568 $3,815,653
Property, plant and equipment
Details of property, plant and equipment at cost and the estimated
useful lives used in computing depreciation and amortization are:
Estimated
useful lives 1998 1997
Property, plant and
equipment:
Land - $ 109,846 $ 109,846
Buildings 25 years 661,727 661,727
Machinery and
equipment 3-10 years 1,027,109 921,182
Building and lease-
hold improvements 4-10 years 695,650 667,283
$2,494,332 $2,360,038
Plant and equipment
not used in operations:
Buildings 25 years 137,005 137,005
Less accumulated depreciation (136,327) (131,195)
$ 678 $ 5,810
<PAGE>
Accounts payable and accrued liabilities
Accounts payable and accrued
liabilities consist of:
1998 1997
Accounts payable-trade $1,667,482 $1,241,286
Accrued compensation 191,390 410,148
Accrued taxes 100,207 76,795
Other accrued liabilities 16,329 44,758
$1,975,408 $1,772,987
HOWARD B. WOLF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Line of credit
The Company has an oral agreement for a line of credit with a bank in
the amount of $100,000 bearing no interest. The line is collateralized by
the general assets of the company. As of May 31, 1998, amounts available
under this line were $100,000. No amounts were drawn under this line of
credit as of May 31, 1998.
Leases
Certain equipment, manufacturing facilities, showrooms and factory outlet
mall stores are leased for periods expiring at various dates through fiscal
2003, at aggregate annual rentals of approximately $159,000 in 1998,
$103,000 in 1997 and $99,000 in 1996, which consisted entirely of minimum
rentals. In most cases, management expects that in the normal course of
business leases will be renewed or replaced by other leases.
The future minimum lease payments required under operating leases that
have an initial or remaining lease term in excess of one year at May 31,
1998 were as follows:
Operating
leases
1999 $171,030
2000 159,477
2001 148,023
2002 104,347
2003 63,544
$646,421
Shareholders' Equity
On July 22, 1998 the Board of Directors declared a quarterly cash
dividend of $.08 per share payable August 31, 1998 to shareholders of record
on August 7, 1998.
<PAGE>
Federal Income Tax
The detail of the provision for federal income tax follows:
For the years ended May 31,
1998 1997 1996
Current tax expense $244,477 $411,491 $458,194
Deferred tax
(benefit) expense 20,000 (41,000) 2,000
Provision for income tax $224,477 $370,491 $460,194
There are two components of the income tax provision, current and
deferred. Current income tax provisions approximate taxes to be paid or
refunded for the applicable period. Balance sheet amounts of deferred
taxes are recognized on the temporary differences between the bases of
assets and liabilities as measured by tax laws and their bases as reported
in the financial statements. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized. Deferred tax expense
or benefit is then recognized for the change in deferred tax liabilities
or assets between periods.
HOWARD B. WOLF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Total deferred tax assets and liabilities in the consolidated balance
sheets are as follows at May 31,:
Assets 1998 1997 1996
Bad debt reserve $ 40,000 $ 40,000 $ 26,000
Discount reserve 5,000 5,000 3,000
Inventory capitalization
of selling, general and
administrative costs 189,000 169,000 148,000
$234,000 $214,000 $177,000
Liabilities
Depreciation $ 74,000 $ 74,000 $ 78,000
<PAGE>
The income tax provision reconciled to the tax computed at federal
statutory rates is as follows:
For the years ended May 31,
1998 1997 1996
Tax at statutory rates $212,975 $341,387 $452,951
Tax effect on non-
deductible items 14,620 13,472 11,906
Other-net 16,882 56,632 (6,663)
$244,477 $411,491 $458,194
Deferred tax
(benefit) expense (20,000) (41,000) 2,000
$224,477 $370,491 $460,194
The components of deferred income tax (benefit) expense are as follows:
For the years ended May 31,
1998 1997 1996
Difference between tax
and book depreciation $ 282 $ (3,400) $ (4,080)
Difference between tax
and book allowance for
doubtful accounts (810) (13,430) 3,876
Difference between tax
and book basis of
merchandise inventories (20,072) (21,809) 1,890
Reserve for discounts 600 (2,361) 314
Deferred tax
(benefit) expense $(20,000) $(41,000) $ 2,000
Advertising costs
The Companys policy is to expense all advertising costs in the
period in which the advertising first takes place. Advertising expense
was approximately $208,000, $122,000 and $155,000 for the years ended May
31, 1998, 1997 and 1996, respectively.
<PAGE>
<TABLE>
HOWARD B. WOLF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Selected quarterly financial data (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter
Ended Ended Ended Ended
Aug 31,1997 Nov 30,1997 Feb 28,1998 May 31,1998
<S> <C> <C> <C> <C>
Net sales $3,680,093 $3,861,720 $3,276,419 $3,503,682
Gross profit 1,299,050 1,460,640 1,028,199 1,046,470
Income before
federal
income tax 265,460 259,988 80,217 20,733
Net income 170,196 168,996 43,682 19,047
Basic and diluted
earnings per share .16 .16 .04 .02
Average number
of shares
outstanding 1,056,191 1,056,191 1,056,191 1,056,191
Aug 31,1996 Nov 30,1996 Feb 28,1997 May 31,1997
Net sales $3,630,878 $3,640,522 $3,421,547 $3,549,119
Gross profit 1,218,155 1,348,966 1,183,709 1,098,896
Income before
federal
income tax 259,050 269,783 251,229 224,017
Net income 166,714 166,238 158,438 142,198
Basic and diluted
earnings per share .16 .16 .15 .13
Average number
of shares
outstanding 1,056,191 1,056,191 1,056,191 1,056,191
</TABLE>
<PAGE>
Item 9. Changes in and disagreements with accountants
on accounting and financial disclosure matters
None
PART III
The information required by items 10, 11, 12 and 13 of Part III is
incorporated by reference from the indicated pages in the Company's
definitive proxy statement for its annual meeting of shareholders to be
held September 15, 1998.
Pages of Proxy
Statement
Item 10. Directors and Executive
Officers of the Registrant 3-4
Item 11. Executive Compensation 5
Item 12. Executive Ownership of Certain
Beneficial Owners and Management 2-3
Item 15. Certain Relationships and Related Transactions 7
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial statements and financial statement schedules
The financial statements and schedules listed in the accompanying
index to consolidated financial statements are filed as part of
this annual report.
3. Exhibits
None
(b) Report on Form 8-K
No reports were filed in the fourth quarter ended May 31, 1998.
<PAGE>
<TABLE>
HOWARD B. WOLF, INC.
SCHEDULE II-ALLOWANCE FOR COLLECTION LOSSES AND DISCOUNTS
Years ended May 31, 1998, 1997 and 1996
000's Omitted
Balance at Additions Amount Balance
beginning charged charged Discounts at end
of year to income off(2) allowed of year
<S> <C> <C> <C> <C> <C>
Year ended
May 31,1998
Collection losses $116 $ 138 $136 $ - $ 119
Discounts 16 857(1) 1 857 14
$132 $ 995 $137 $ 857 $ 133
Year ended
May 31, 1997
Collection losses $ 77 $ 127 $ 88 $ - $ 116
Discounts 9 1,048(1) (7) 1,048 16
$ 86 $1,175 $ 81 $1,048 $ 13
Year ended
May 31, 1996
Collection losses $ 88 $ 60 $ 72 $ - $ 77
Discounts 10 1,027(1) 1 1,027 9
$ 99 $1,087 $ 73 $1,027 $ 86
(1) Charged to net sales.
(2) Net of recoveries.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) or the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Howard B. Wolf, Inc.
By:/s/ Robert D. Wolf
Robert D. Wolf
President
(Chief Executive Officer)
August 25,1998
By:/s/ Eugene K. Friesen
Eugene K. Friesen
Senior Vice President and Treasurer
(Principal Accounting Officer)
August 25,1998
Pursuant of the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/Creed L. Ford III
Creed L. Ford III
Director
August 25,1998
/s/Eugene K. Friesen
Eugene K. Friesen
Senior Vice President,Treasurer and Director
August 25,1998
/s/Joel Held
Joel Held
Director
August 25,1998
/s/Juan Villamizar
Juan Villamizar
Director
August 25,1998
/s/Howard B. Wolf
Howard B. Wolf
Chairman of the Board,Secretary and Director
August 25,1998
/s/Robert D. Wolf
Robert D. Wolf
President, Chief Executive Officer and Director
August 25,1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 1,129
<SECURITIES> 0
<RECEIVABLES> 2,663
<ALLOWANCES> 133
<INVENTORY> 4,621
<CURRENT-ASSETS> 8,785
<PP&E> 2,494
<DEPRECIATION> 1,555
<TOTAL-ASSETS> 9,778
<CURRENT-LIABILITIES> 1,975
<BONDS> 0
0
0
<COMMON> 360
<OTHER-SE> 7,368
<TOTAL-LIABILITY-AND-EQUITY> 9,778
<SALES> 14,322
<TOTAL-REVENUES> 14,415
<CGS> 9,488
<TOTAL-COSTS> 13,753
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> 626
<INCOME-TAX> 224
<INCOME-CONTINUING> 402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 402
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
