UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 1998
Commission file number 1-6775
HOWARD B. WOLF, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-0847571
(State of Incorporation) (IRS Employer Identification No.)
3809 Parry Avenue, Dallas, Texas 75226-1753
(Address of principal executive offices) (Zip Code)
(214) 823-9941
(Telephone number)
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 ____.
Common stock, par value $0.33 1/3 per share:
1,056,191 shares outstanding as of
January 13, 1999
HOWARD B. WOLF, INC.
<PAGE>
INDEX
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of
Operations and Retained Earnings for the
three-month and six-month periods ended
November 30, 1998 and November 30, 1997
(Unaudited) 3
Consolidated Balance Sheets
November 30, 1998 (Unaudited) and May 31, 1998 4
Consolidated Statements of Cash Flows for the
six month period ended November 30, 1998
and November 30, 1997 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 7 & 8
PART II. OTHER INFORMATION
Item 9.
Exhibits and Reports on Form 8-K 8
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<TABLE>
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
HOWARD B. WOLF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Three Months Ended Six Months Ended
November 30, November 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $2,641,063 $3,861,720 $5,789,293 $7,541,813
Cost and expenses:
Cost of sales 2,354,993 2,401,080 4,511,038 4,782,123
Selling, general and
administrative expenses 870,615 1,204,707 1,826,457 2,231,701
Provision for
bad debt expense 37,500 22,500 64,959 45,000
--------- --------- --------- ---------
3,263,108 3,628,287 6,402,454 7,058,824
--------- --------- --------- ---------
Income (loss) from operations (622,045) 233,433 (613,161) 482,989
Other income (expense) (4,595) 18,512 9,502 34,051
Interest income 6,836 15,945 9,865 26,080
Interest expense (4,814) (7,902) (24,514) (17,672)
--------- --------- --------- ---------
Income (loss) before
federal income tax (624,618) 259,988 (618,308) 525,448
Benefit (provision)
for federal income tax 183,155 (90,992) 182,079 (186,256)
--------- --------- --------- ---------
Net income (loss) (441,463) 168,996 (436,229) 339,192
Retained earnings -
beginning of period 5,354,522 5,455,545 5,433,783 5,369,844
Cash dividends (84,496) (84,496) (168,991) (168,991)
--------- --------- --------- ---------
Retained earnings -
end of period $4,828,563 $5,540,045 $4,828,563 $5,540,045
========= ========= ========= =========
Average number of
shares outstanding 1,056,191 1,056,191 1,056,191 1,056,191
Basic and diluted
earnings (loss) per share ($.42) $.16 ($.41) $.32
Cash dividends per share $.08 $.08 $.16 $.16
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HOWARD B. WOLF, INC.
CONSOLIDATED BALANCE SHEETS
November 30, May 31,
ASSETS 1998 1998
(Unaudited) (Audited)
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,061,917 $1,128,991
Accounts receivable (net) 1,949,552 2,530,137
Inventories 4,029,193 4,620,568
Prepaid expenses 204,824 159,322
Refundable federal income tax 190,480 112,813
Deferred federal income tax 239,000 234,000
--------- ---------
Total current assets 7,674,966 8,785,831
Property, plant and equipment 2,481,852 2,494,332
Less accumulated depreciation
and amortization (1,649,439) (1,555,118)
--------- ---------
832,413 939,214
Property, plant and equipment
not used in operations,less
accumulated depreciation 0 678
Other assets 51,957 51,957
--------- ---------
$8,559,336 $9,777,680
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,093,626 $1,667,482
Accrued compensation 74,655 191,390
Accrued taxes 180,877 100,207
Other accrued liabilities 17,126 16,329
--------- ---------
Total current liabilities 1,366,284 1,975,408
Deferred federal income tax 70,000 74,000
Shareholders' equity:
Common stock, par value $.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 4,828,564 5,433,784
Less common stock in treasury,
at cost, 25,000 shares (100,000) (100,000)
--------- ---------
7,123,052 7,728,272
--------- ---------
$8,559,336 $9,777,680
========= =========
Note: The consolidated balance sheet at May 31, 1998 has been taken from
the audited financial statements.
See notes to consolidated financial statements.
</TABLE>
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<TABLE>
HOWARD B. WOLF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
November 30,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (436,229) $ 339,192
Adjustments to reconcile net income to net cash
provided by (used in) operating activities--
Depreciation and amortization 95,000 72,000
Provision for losses on accounts
receivable 64,959 45,000
Abandonment of leasehold improvements 20,000 -
Changes in deferred federal income tax (9,000) 2,000
Net changes in assets and liabilities--
Accounts receivable 515,625 (181,651)
Inventories 591,375 (105,879)
Prepaid expenses (45,502) (97,814)
Refundable federal income tax (77,667)
Accounts payable and accrued liabilities (609,124) (187,396)
Federal income tax payable - (38,669)
--------- ---------
Net cash provided by (used in)
operating activities 109,437 (153,217)
Cash flow from investing activities:
Additions to property, plant and equipment (7,520) (58,471)
--------- ---------
Net cash used in investing activities (7,520) (58,471)
Cash flows from financing activities:
Cash dividends paid (168,991) (168,991)
--------- ---------
Net cash used in financing activities (168,991) (168,991)
--------- ---------
Net increase (decrease) in cash and cash
equivalents (67,075) (380,679)
Cash and cash equivalents at beginning of
period 1,128,991 1,921,415
--------- ---------
Cash and cash equivalents at end of period $1,061,917 $1,540,736
========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of November 30, 1998, the consolidated
statements of operations and the consolidated statements of cash flows for
the three-month and six-month periods ended November 30, 1998 and 1997 have
been prepared by the Company without audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and changes
in cash flows as of and for the periods ended November 30, 1998 and 1997
have been made.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It is
suggested that these consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's May 31, 1998 annual report to shareholders. The results of
operations for the six-month period ended November 30, 1998 are not
necessarily indicative of the operating results for the full year ending
May 31, 1999.
November 30, 1998 May 31, 1998
(Unaudited) (Audited)
--------- ---------
Cash and cash equivalents consist of:
Cash $ 150,973 $ 290,833
Money market funds 211,728 207,461
Matured funds at factor 699,216 630,697
--------- ---------
$ 1,061,917 $ 1,128,991
Allowances for collection
losses and discounts are:
Collection losses $ 152,038 $ 118,609
Discounts 10,967 13,937
--------- ---------
$ 163,005 $ 132,546
Inventories consist of:
Raw materials $ 863,417 $ 991,748
Work-in-process 713,267 1,067,345
Finished goods 2,452,509 2,561,475
--------- ---------
$ 4,029,193 $ 4,620,568
Accumulated depreciation on
property, plant and equipment
not used in operations is: $ 136,327 $ 136,327
Provision for federal income
tax detail is:
Current tax (benefit) expense $ (173,079) $ 244,477
Deferred tax (benefit) expense (9,000) (20,000)
--------- ---------
$ (182,079) $ 224,477
Cash flow information:
Cash payments for interest $ 24,514 $ 35,133
Cash payments for
federal income taxes $ - $ 387,925
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Working capital at November 30, 1998 was $6,308,682, a decrease of
$501,741 from May 31, 1998. Cash and cash equivalents decreased $67,074
during the six-month period ended November 30, 1998. Cash was used to fund
normal working capital requirements, additions to property, plant and
equipment, payment of dividends and payment of matured accounts payable
and accrued liabilities. Accounts receivable decreased $580,585 primarily
due to the timing of shipments and decline in sales during the second quarter.
Inventories decreased approximately thirteen percent primarily to align with
the lower sales volume. Accounts payable and accrued liabilities decreased
approximately thirty-one percent primarily due to payment of normal
maturities and accrued expenses during the six-month period.
The current ratio at November 30, 1998 is 5.6 to 1 (4.4 to 1 at May 31,
1998). Total liabilities to assets equals seventeen percent (twenty-one
percent at May 31, 1998).
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 credit line is factored on a recourse basis
($1,288,990 at November 30, 1998 - $707,000 at May 31, 1998).
Capital acquisition and improvement expenditures totaled $7,520 during
the six-month period ended November 30, 1998. It is estimated that
approximately $100,000 additional capital expenditures will be made over
the next quarter, consisting of equipment and improvements to existing
facilities. Funding will come from cash flows generated through operating
activities. Leasehold improvements in the outlet mall store in Napa,
California were written off totaling $20,000 and is shown in the cash
flow statement as "abandonment of leasehold improvements". No other
significant dispositions of equipment occurred during the six-month period
ended November 30, 1998. The Company has entered into a contract of sale
of its principal office and manufacturing facility in the amount of
$2,500,000. If accepted, the transaction will be completed on January
14, 1999. A six-month leaseback was executed with the contract of sale.
The Company does not offer a retirement plan nor offer post retirement or
employment benefits. Accordingly, there will be no impact on the Company
due to SFAS 106, Employers' Accounting for Post Retirement Benefits Other
Than Pensions and SFAS 112, Employers' Accounting for Post Employment
Benefits.
Based on current operations and internally generated cash flows,
management believes that adequate resources will be available to meet
current and future liquidity requirements.
<PAGE>
The Company is working to resolve the potential impact of the year 2000 on
the ability of the Company's computerized information systems to accurately
process information that may be date sensitive. Any of the Company's
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 Company's 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 is devoting all resources required to resolve any
significant year 2000 issues in a timely manner.
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income,"
which is effective for the Company's 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 losses) in a full
set of general purpose financial statements. SFAS No. 130 has been adopted
by the Company. There are no components of comprehensive income for the
six-month and three-month period ended November 30, 1998 and therefore, no
change in the consolidated financial statement format for the Company as of
November 30, 1998.
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 operating segments does not presently apply to the
Company's operations. If segment reporting becomes applicable in a future
period, the Company will adopt SFAS No. 131 in that period.
RESULTS OF OPERATIONS
Net sales for the second quarter and six-month periods ended November 30,
1998 decreased approximately thirty-two and twenty-three percent,
respectively, in each period compared to the 1997 second quarter and
six-month periods. Net sales for the second quarter ended November 30,
1998 were approximately sixteen percent lower than in the preceding first
quarter. The decrease in each period primarily reflects the very weak
apparel sales experienced by our customers which resulted in lower shipments.
The factory outlet mall store located in Napa, California was closed
September 8, 1998 due to lower than anticipated sales.
Cost of goods sold, as a percentage relationship to net sales for the
second quarter and six-month periods ended November 30, 1998 increased
approximately twenty-seven percentage points and fourteen percentage points,
respectively, over the 1997 second quarter and six-month periods. 1998
second quarter cost of sales, as a percentage relationship to net sales,
compared to the preceding first quarter was approximately twenty-one
percentage points higher. The increases in each period resulted primarily
from higher discounts and allowances and the effect of lower net sales.
<PAGE>
Selling, general and administrative expenses increased, as a percentage
relationship to net sales in the second quarter and six-month periods ended
November 30, 1998 and 1997, approximately two percentage points, respectively,
in each period compared to the comparable periods of the preceding year.
1998 second quarter selling, general and administrative expenses increased
as a percentage relationship to net sales by approximately three percentage
points as compared to the previous first quarter. The increases in each
period resulted from the effect of lower net sales as actual dollar expense
decreased. The provision for bad debts for the six-month periods ended
November 30, 1998 and 1997 is $64,959 and $45,000, respectively.
Other income in the second quarter and six-month periods ended November 30,
1998 increased $4,595 and 9,502, respectively, compared to the comparable
periods of the preceding year. Other income decreased $18,692 in the 1998
second quarter compared to the preceding first quarter ended August 31, 1998.
The decreases resulted primarily from rental income from property not used
in operations and a second quarter charge of $20,000 for the Napa, California
unamortized leasehold improvements which were written off.
Interest income in the three-month and six-month periods ended November 30,
1998 decreased approximately fifty-seven percent and sixty-two percent,
respectively, compared to the same periods in 1997. The decreases resulted
primarily from lower cash balances. Interest income increased
approximately one hundred twenty-six percent in the 1998 second quarter
compared to the preceding first quarter. The increase resulted primarily
due to higher second quarter average cash balances.
For the three-month and six-month periods ended November 30, 1998 interest
expense decreased approximately thirty-nine percent in each period compared
to the same periods ended in 1997. Interest expense in the November 30, 1998
second quarter decreased approximately seventy-six percent compared to the
preceding first quarter ended August 31,1998. The changes in each period
resulted primarily from factor interest costs on recourse accounts receivable.
The federal income tax refund effective tax rate of twenty nine percent
is lower than the statutory rate (thirty four percent) as a result of
nondeductible life insurance premiums, nondeductible portion of meals,
accelerated depreciation, capitalization of certain expenses in inventories
and the difference between the doubtful account reserve and write-offs.
Part II. OTHER INFORMATION
Item 9. No reports on Form 8-K were filed during the three-month period
ended November 30, 1998.
<PAGE>
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.
HOWARD B. WOLF, INC.
Eugene K. Friesen /s/
Eugene K. Friesen
Senior Vice President and Treasurer
(Chief Financial Officer)
Howard B. Wolf /s/
Howard B. Wolf
Chairman of the Board
January 13, 1999
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