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 28, 1997 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 April 10, 1997 HOWARD B. WOLF, INC. INDEX Page Number PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations and Retained Earnings for the three-month and nine-month periods ended February 28, 1997 and February 29, 1996 (Unaudited) 3 Consolidated Balance Sheets February 28, 1997(Unaudited) and May 31, 1996 4 Consolidated Statements of Cash Flows for the nine-month period ended February 28, 1997 and February 29,1996(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 & 9 PART II. OTHER INFORMATION Item 9. Exhibits and Reports on Form 8-K 9 Part 1. FINANCIAL INFORMATION Item 1. Financial Statement HOWARD B. WOLF, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Unaudited) Three Months Ended Nine Months Ended Feb 28, Feb29, Feb 28, Feb 29, 1997 1996 1997 1996 Net sales $3,421,547 $3,752,625 $10,692,947 $11,418,028 Cost and expenses: Cost of sales 2,237,838 2,439,587 6,942,117 7,342,520 Selling, general and administrative expenses 934,327 984,451 2,942,844 3,010,137 Provision for bad debt expense 22,500 12,500 90,199 57,500 3,194,665 3,436,538 9,975,160 10,410,157 226,882 316,087 717,787 1,007,871 Gain on sale of property, plant and equipment not used in operations -- -- -- 144,172 Other income 15,507 10,665 46,546 38,342 Interest income 17,827 8,016 38,839 15,133 Interest expense (8,987) (10,518) (23,110) (38,607) Income before federal income tax 251,229 324,250 780,062 1,166,911 Provision for federal income tax (92,791) (113,467) (288,672) (408,238) Net income 158,438 210,783 491,390 758,673 Retained earnings - beginning of period 5,238,198 4,919,069 5,074,237 4,540,170 Cash dividends (84,495) (84,495) (253,486) (253,486) Retained earnings - end of period $5,312,141 $5,045,357 $ 5,312,141 $ 5,045,357 Average number of shares outstanding 1,056,191 1,056,191 1,056,191 1,056,191 Net income per share $.15 $.20 $.47 $.72 Cash dividends per share $.08 $.08 $.24 $.24 See notes to consolidated financial statements. HOWARD B. WOLF, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS February 28, May 31, 1997 1996 Current assets Cash and cash equivalents $1,532,891 $1,261,987 Accounts receivable (net) 2,242,300 1,976,798 Inventories 3,343,074 4,147,286 Prepaid expenses 147,160 160,367 Deferred federal income tax benefit 204,000 177,000 Total current assets 7,469,425 7,723,438 Property, plant and equipment 2,402,632 2,372,296 Less accumulated depreciation and amortization (1,403,014) (1,286,013) 999,618 1,054,698 Property, plant and equipment not used in operations, less accumulated depreciation 5,810 5,810 Other assets 48,665 48,835 $8,524,518 $8,833,611 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable 449,600 $1,096,197 Accrued compensation 350,873 253,871 Accrued taxes 1,737 56,127 Other accrued liabilities 24,799 16,629 Federal income tax payable 14,880 (35,938) Total current liabilities 841,889 1,386,886 Deferred federal income tax 76,000 78,000 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 5,312,141 5,074,237 Less common stock in treasury, at cost, 25,000 shares (100,000) (100,000) 7,606,629 7,368,725 $8,524,518 $8,833,611 Note: The consolidated balance sheet at May 31, 1996 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 February 28, February 29, 1997 1996 Cash flows from operating activities: Net income $ 491,390 $ 758,673 Adjustments to reconcile net income to net cash provided by (used in) operating activities-- Depreciation and amortization 117,001 112,558 Provision for losses on accounts receivable 90,199 57,500 Deferred federal income tax (29,000) (57,000) Gain on sale of property, plant and equipment not used in operations -- (44,172) Net changes in operating assets and liabilities Accounts receivable (355,701) 43,896 Inventories 804,212 (106,248) Prepaid expenses 13,207 (52,231) Accounts payable and accrued liabilities (595,815) (661,824) Federal income tax payable 50,818 45,480 Net cash provided by (used in) operating activities 586,311 (3,368) Cash flows from investing activities: Additions to property, plant and equipment (61,921) (258,595) Sale of property, plant and equipment not used in operations -- 250,000 Net cash used in investing activities (61,921) (8,595) Cash flows from financing activities: Cash dividends paid (253,486) (253,486) Net cash used in financing activities (253,486) (253,486) Net change in cash and cash equivalents 270,904 (265,449) Cash and cash equivalents at beginning of period 1,261,987 1,375,569 Cash and cash equivalents at end of period $ 1,532,891 $ 1,110,120 See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The consolidated balance sheet as of February 28, 1997, the consolidated statements of operations and the consolidated statements of cash flows for the three-month and nine-month periods ended February 28, 1997 and February 29, 1996 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 28, 1997 and February 29, 1996 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, 1996 annual report to shareholders. The results of operations for the nine-month period ended February 28, 1997 are not necessarily indicative of the operating results for the full year ending May 31, 1997. Feb. 28, 1997 May 31, 1996 (UNAUDITED) Cash and cash equivalents consist of: Cash $ 140,282 $ 138,018 Money market funds 146,368 516,165 Matured funds at factor 1,246,241 607,804 $ 1,532 891 $ 1,261,987 Allowances for collection losses and discounts are: Collection losses $ 118,296 $ 76,728 Discounts 10,164 8,758 $ 128,460 $ 85,486 Inventories consist of: Raw materials $ 888,953 1,195,129 Work-in-process 804,845 995,539 Finished goods 1,649,276 1,956,618 $ 3,343,074 $ 4,147,286 Accumulated depreciation on property, plant and equipment not used in operations is: $ 131.195 $ 131,195 Provision for federal income tax detail is: Current tax expense $ 317,672 $ 458,194 Deferred tax benefit (29,000) 2,000 $ 288,672 $ 460,194 Cash flow information: Cash payments for interest $ 23,110 $ 48,511 Cash payments for federal income taxes $ 340,532 $ 460,000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation LIQUIDITY AND CAPITAL RESOURCES Working capital at February 28, 1997 was $6,627,536, an increase of $290,984 from May 31, 1996. Cash and cash equivalents increased $270,904 during the nine-month period ended February 28, 1997. The cash increase resulted primarily from lower cash requirements for raw material due to reduced inventory balances. Cash was used to fund normal working capital requirements, including the acquisition of additions to property, plant and equipment and payment of dividends. Accounts receivable increased $265,502 as a result of the timing of shipments during the third quarter. Inventories decreased $804,212 to align with lower sales volume. Accounts payable and accrued liabilities decreased $595,815 primarily due to the payment of normal maturities and accrued expenses during the nine-month period. The current ratio at February 28, 1997 is 8.9 to 1 (5.5 to 1 at May 31, 1996). Total liabilities to assets equals eleven percent (seventeen percent at May 31, 1996). 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. Any credit extended by the company in excess of the credit line is factored on a recourse basis ($1,323,000 at February 28,1997 - $948,000 at May 31, 1996). Capital acquisition and improvement expenditures totaled $61,921 during the nine-month period ended February 28, 1997. It is estimated that approximately $40,000 additional capital expenditures will be made over the next quarter, consisting primarily of equipment and improvements to existing facilities. Funding will come from cash flows generated through operating activities. No significant dispositions of equipment occurred during the nine-month period ended February 28, 1997 and none are expected during the next three-month period. 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 quarter and nine-month periods ended February 28, 1997 decreased approximately nine percent and six percent, respectively, in each period compared to the 1996 third quarter and nine-month periods. Net sales for the third quarter ended February 28, 1997 were approximately six percent lower than in the preceding second quarter. The decreases in each period resulted primarily from an overall weak demand for women's fashion apparel. Cost of sales, as a percentage relationship to net sales, for the third quarter ended February 28, 1997 increased approximately four tenths of one percentage point over the 1996 third quarter. 1997 third quarter cost of sales, as a percentage relationship to net sales, compared to the preceding second quarter was approximately two and one-half percentage points higher. For the nine-month periods ended February 28, 1997 and February 29, 1996, cost of sales, as a percentage relationship to net sales, was approximately six tenths of one percentage point higher in the 1997 period. The increases in each period resulted primarily from the effect of lower net sales and higher sales discounts and allowances. Selling, general and administrative expenses increased, as a percentage relationship to net sales for the third quarter and nine-month periods ended February 28, 1997 and February 29, 1996, approximately one and one tenth of one percentage point in each period over the comparable periods of the preceding year. The percentage increases resulted from the effect of lower net sales. 1997 third quarter selling, general and administrative expenses decreased as a percentage relationship to net sales by one and eight tenths of one percent compared to the previous second quarter primarily resulting from the effect of higher selling and marketing expenses in the second quarter. The provision for bad debts for the nine-month period ended February 28, 1997 of $90,199 compares to the 1996 provision of $57,500. The increase is due primarily to the continuing overall weak demand in the women's fashion apparel market. Other income in the 1997 third quarter increased approximately forty five percent compared to the 1996 third quarter. Other income in the 1997 nine-month period ended February 28, 1997 increased approximately twenty one percent over the 1996 comparable period. Other income decreased approximately seven percent in the 1997 third quarter compared to the receding second quarter ended November 30, 1996. The changes in each period resulted primarily from differences in rental income from property not used in operations. Interest income in the three-month and nine-month periods ended February 28, 1997 increased approximately one hundred twenty two percent and one hundred fifty seven percent, respectively, compared to the same periods in 1996. Interest income increased approximately twenty nine percent in the 1997 third quarter compared to the preceding second quarter. The increases resulted primarily from higher average cash balances. For the three-month and nine-month periods ended February 28, 1997 interest expense decreased approximately fifteen percent and forty percent , respectively, compared to the same periods ended in 1996. Interest expense in the February 28, 1997 third quarter increased approximately sixty five percent compared to the preceding second quarter ended November 30, 1996. The changes in each period resulted primarily from factor interest costs on recourse accounts receivable. The federal income tax provision effective tax rate of thirty seven percent is greater 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 the doubtful account write-off. Part II. OTHER INFORMATION Item 9. No reports on Form 8-K were filed during the three-month period ended February 28, 1997. 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) Robert D Wolf /s/ Robert D. Wolf President (Chief Executive Officer) April 14, 1997