-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LqXjUuQex1a3lsqd+Es2R0YUkvvFCaRBpJZhOap3zVE70Dkl0wWXIlbXtpWBu0l4 putb4Gr5QDOZgkOR3Gv4Uw== 0000108018-98-000009.txt : 19980827 0000108018-98-000009.hdr.sgml : 19980827 ACCESSION NUMBER: 0000108018-98-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980826 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: WOLF HOWARD B INC CENTRAL INDEX KEY: 0000108018 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 750847571 STATE OF INCORPORATION: TX FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06775 FILM NUMBER: 98697967 BUSINESS ADDRESS: STREET 1: 3809 PARRY AVE CITY: DALLAS STATE: TX ZIP: 75226-1753 BUSINESS PHONE: 2148239941 MAIL ADDRESS: STREET 1: 3809 PARRY AVE CITY: DALLAS STATE: TX ZIP: 75226 10-K 1 10-K 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. 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. 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. 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 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: 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). 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. 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. 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. 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. 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. 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 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 HOWARD B. WOLF, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS Years ended May 31, 1998 1997 1996 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
HOWARD B. WOLF, INC. CONSOLIDATED BALANCE SHEETS May 31, ASSETS 1998 1997 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
HOWARD B. WOLF, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended May 31 1998 1997 1996 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
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. 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. 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 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. 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 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. 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 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
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. 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 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.
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 EX-27 2
5 12-MOS MAY-31-1998 MAY-31-1998 1,129 0 2,663 133 4,621 8,785 2,494 1,555 9,778 1,975 0 0 0 360 7,368 9,778 14,322 14,415 9,488 13,753 0 0 35 626 224 402 0 0 0 402 .38 .38
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