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 February 29, 1996 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 $.033-1/3 per share: 1,056,191 shares outstanding as of April 10, 1996 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 February 29, 1996 and February 28, 1995 ( Unaudited) 3 Consolidated Balance Sheets February 29, 1996 (Unaudited) and May 31, 1995 4 Consolidated Statements of Cash Flows for the nine-month period ended February 29, 1996 and February 28, 1995 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 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 Part I. FINANCIAL INFORMATION Item 1. Financial Statement HOWARD B. WOLF, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Unaudited) Three Months Ended February 29, February 28, 1996 1995 Net sales $3,753 $3,708 Cost and expenses: Cost of sales 2,440 2,402 Selling, general and administrative expenses 984 985 Provision for bad debt expense 13 13 3,437 3,399 316 309 Gain on sale of property, plant and equipment not used in operations - - Other income 11 22 Interest income 8 6 Interest expense (11) (14) Income before federal income tax 324 323 Federal income tax provision (113) (113) Net income 211 210 Retained earnings - beginning of period 4,919 4,349 Cash dividends (84) (84) Retained earnings - end of period $5,045 $4,475 Average number of shares outstanding 1,056 1,056 Net income per share $0.20 $0.20 Cash dividends per share $0.08 $0.08 See notes to consolidated financial statements. HOWARD B. WOLF, INC CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS (Unaudited) Nine Months Ended February 29, February 28, 1996 1995 Net sales $11,418 $10,971 Cost and expenses: Cost of sales 7,343 7,065 Selling, general and administrative expenses 3,010 2,933 Provision for bad debt expense 58 58 10,410 10,055 1,008 917 Gain on sale of property, plant and equipment not used in operations 144 - Other income 38 71 Interest income 15 24 Interest expense (39) (26) Income before federal income tax 1,167 985 Federal income tax provision (408) (346) Net income 759 639 Retained earnings - beginning of period 4,540 4,068 Cash dividends (253) (232) Retained earnings - end of period $5,045 $4,475 Average number of shares outstanding 1,056 1,056 Net income per share $0.72 $0.61 Cash Dividends paid per share $0.24 $0.22 See notes to consolidated financial statements. HOWARD B. WOLF, INC. CONSOLIDATED BALANCE SHEETS February 29, May 31, 1996 1995 ASSETS (Unaudited) Current assets: Cash and cash equivalents $1,110 $1,376 Accounts receivable (net) 1,883 1,984 Inventories 4,131 4,025 Prepaid expenses 159 107 Deferred federal income tax benefit 237 183 Total current assets 7,520 7,674 Property, plant and equipment 2,372 2,114 Less accumulated depreciation and amortization (1,254) (1,155) 1,118 959 Property, plant and equipment not used in operations, less accumulated depreciation - 114 Other assets 49 49 $8,687 $8,796 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 820 $1,278 Accrued compensation 121 156 Accrued taxes 17 56 Other accrued liabilities 239 364 Federal income tax payable 71 26 Total current liabilities 1,268 1,879 Deferred federal income tax 79 82 Shareholders' equity: Common stock, par value $.33-1/3; 3,000,000 shares authorized, 1,081,191 shares issued 360 360 Additional paid-in capital 2,034 2,034 Retained earnings 5,045 4,540 Less common stock in treasury, at cost, 25,000 shares (100) (100) 7,340 6,835 $8,687 $8,796 Note: The consolidated balance sheet at May 31, 1995 has been taken from the audited financial statements. See notes to consolidated financial statements. HOWARD B. WOLF, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended Increase (decrease) in cash) February 29, February 28, 1996 1995 Cash flows from operating activities: Net income $ 759 $ 639 Adjustments to reconcile net income to net cash (used in) provided by operating activities -- Depreciation and amortization 113 92 Provision for losses on accounts receivable 58 58 Decrease in federal income tax credit (3) (3) Gain on sale of property, plant and equipment not used in operations (144) - Net changes in operating assets and liabilities- Accounts receivable 44 (257) Inventories (106) 38 Prepaid expenses (52) (21) Accounts payable and accrued liabilities (662) (828) Federal income tax benefit (54) (24) Federal income tax payable 45 10 Net cash used in operating activities (3) (295) Cash flows from investing activities: Additions to property, plant and equipment 259 (166) Sale of property, plant and equipment not used in operations 250 - Net cash used in investing activities (9) (166) Cash flows from financing activities: Cash dividends paid (253) (232) Net cash used in financing activities (253) (232) Net change in cash and cash equivalents (265) (693) Cash and cash equivalents at beginning of period 1,376 1,790 Cash and cash equivalents at end of period $1,110 $1,097 See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The consolidated balance sheet as of February 29, 1996, the consolidated statements of operations and the consolidated statements of cash flows for the three-month and nine-month periods ended February 29, 1996 and February 28, 1995 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 February 29, 1996 and February 28, 1995 have been made. Certain information and footnote disclosures normally included in 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 financial statements and notes thereto included in the Company's May 31, 1995 annual report to shareholders. The results of operations for the nine-month period ended February 29, 1996 are not necessarily indicative of the operating results for the full year ending May 31, 1996. February 29, 1996 May 31, 1995 Cash and cash equivalents consist of: Cash $ 191 $ 413 Money market funds 919 134 Matured funds at factor - 829 $1,110 $1,376 Allowances for collection losses and discounts are: Collection losses $ 102 $ 88 Discounts 16 10 $ 118 $ 98 Inventories consist of: Raw materials $1,309 $1,381 Work-in-process 955 985 Finished goods 1,867 1,659 $4,131 $4,025 Accumulated depreciation on property, plant and equipment not used in operations is: $ 137 $ 347 Provision for federal income tax detail is: Current tax expense $ 465 $ 480 Deferred tax benefit (57) (49) $ 408 $ 431 Cash flow information: Cash payments for interest $ 39 $ 32 Cash payments for federal income taxes $ 540 $ 460 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations LIQUIDITY AND CAPITAL RESOURCES Working capital at February 29, 1996 was $6,251,944, an increase of $456,977 from May 31, 1995. Cash and cash equivalents decreased $265,449 during the nine-month period ended February 29, 1996. Cash was used to fund normal working capital requirements, including acquisition of property, plant and equipment additions, payment of dividends and payment of matured accounts payable and accrued liabilities. Accounts receivable decreased $101,395 primarily due to the timing of shipments during the quarter. Inventories increased $106,248 primarily to meet increased sales. Accounts payable and accrued liabilities decreased $656,822 primarily due to payment of normal maturities and accrued expenses during the nine-month period. The current ratio at February 29, 1996 is 6 to 1 (4 to 1 at May 31, 1995). Total liabilities to assets equals sixteen percent (twenty-two percent at May 31, 1995). 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 ($1,017,000) at February 29, 1996-$614,000 at May 31, 1995). Capital acquisition and improvement expenditures totaled $258,595 during the nine-month period ended February 29, 1996. It is estimated that approximately $25,000 additional capital expenditures will be made during the fourth quarter, consisting primarily of equipment and improvements to existing facilities. Funding will come from cash flows generated through operating activities. No significant disposition of equipment occurred during the nine-month period ended February 29, 1996, and none is planned during the next fourth quarter. In November 1995 a building, carried in the balance sheet as property, plant and equipment not used in operations was sold for $250,000 from which a gain of $95,154 after taxes was realized. 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 Postretirement 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. RESULTS OF OPERATIONS Net sales for the third and nine-month periods ended February 29, 1996 increased approximately one and two-tenths of one percent and four and one- tenth of one percent, respectively,in each period compared to the 1995 third quarter and nine-month periods. Net sales for the third quarter ended February 29,1996 decreased approximately three and two-tenths of one percent from the preceding second quarter. The increases and decreases resulted primarily from a slightly stronger product demand and a broadened market base and changes in product sales mix. Cost of sales, as a percentage relationship to net sales for the third quarter ended February 29, 1996, increased approximately two-tenths of one percent over the third quarter ended February 28, 1995 and approximately four percent over over the preceding second quarter ended November 30, 1995. For the nine-month period ended February 29, 1996, the cost of sales percentage relationship to net sales decreased approximately one-tenth of one percent compared to the 1995 six-month period. The percentage changes resulted primarily from a change in product sales mix. Selling, general and administrative expenses for the three-month and nine- month periods ended February 29,1996, as a percentage relationship to net sales, decreased approximately three-tenths of one percent and four-tenths of one percent, respectively, compared to the 1995 three-month and nine-month periods. Selling, general and administrative expenses, as a percentage relationship to net sales, were approximately two and seven tenths of one percent lower in the 1996 third quarter compared to the second quarter. The percentage decreases resulted primarily from slightly lower selling and general expenses. The provision for bad debt expense was $57,500, in the 1996 and 1995 nine-month periods. Other income in the 1996 three-month and nine-month periods decreased approximately fifty-two percent and forty-six percent, respectively, in both periods over the 1995 comparable periods. Other income decreased approximately forty percent in the 1996 third quarter compared to the 1996 second quarter. The decrease resulted primarily from rental income from property not used in operations. Interest income in the three-month period ended February 29, 1996 increased approximately forty-one percent and decreased approximately thirty-seven percent in the nine-month period ended February 29, 1996, compared to the same periods in 1995. Interest income increased approximately sixty-three percent in the 1996 third quarter compared to the 1996 second quarter. The changes are primarily due to changes in average cash balances. Interest expense decreased approximately twenty-five percent for the three- month period ended February 29, 1996 and increased approximately forty-six percent for the nine-month period ended February 29, 1996, compared to the same periods in 1995. Interest expense in the 1996 third quarter decreased approximately thirty-five percent from the 1996 second quarter. The changes resulted primarily from factor interest costs on recourse accounts receivable balances. The federal income tax provision effective tax rate of 35 percent differs from the statutory rate (34 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-off. Part II. OTHER INFORMATION Item 9. No reports on Form 8-K were filed during the three-month period ended February 29, 1996. 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 (Principal Accounting Officer) Howard B. Wolf /s Howard B. Wolf Chairman April 12, 1996