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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
\X\ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarter ended March 31, 2003
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\ \ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
--------------------- --------------------
Commission file number 0-6169
--------------------------------------------------------
WOLOHAN LUMBER CO.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-1746752
- ------------------------------------ ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1740 Midland Road, Saginaw, Michigan 48603
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(989) 793-4532
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 \ \
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes \ \ No \X\
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common stock, $1 par value -- 2,042,688 shares as of April 30, 2003
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
---------------------
WOLOHAN LUMBER CO.
CONSOLIDATED BALANCE SHEETS
(in thousands)
MAR. 31, DEC. 31,
2003 2002
----------- --------
(Unaudited) (Note)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,746 $12,100
Trade receivables, net 15,417 17,272
Inventories, at average cost 25,198 23,599
Reduction to LIFO cost (7,231) (7,231)
--------- --------
Inventories at the lower of LIFO cost or market 17,967 16,368
Other current assets 1,250 1,427
--------- --------
TOTAL CURRENT ASSETS 42,380 47,167
NET PROPERTIES AND EQUIPMENT 18,135 18,174
OTHER ASSETS 18,488 18,439
--------- --------
TOTAL ASSETS $79,003 $83,780
========= ========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 5,889 $ 7,373
Employee compensation and accrued expenses 7,863 9,502
Short-term borrowings 500 1,500
Current portion of long-term debt 104 104
--------- --------
TOTAL CURRENT LIABILITIES 14,356 18,479
LONG-TERM DEBT, NET OF CURRENT PORTION 177 203
--------- --------
TOTAL LIABILITIES 14,533 18,682
SHAREOWNERS' EQUITY
Common stock 2,093 2,073
Additional capital 828 539
Retained earnings 61,549 62,486
--------- --------
TOTAL SHAREOWNERS' EQUITY 64,470 65,098
--------- --------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $79,003 $83,780
========= ========
Note: The consolidated balance sheet at December 31, 2002, has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements.
See notes to condensed consolidated financial statements.
2
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per-share amounts)
THREE MONTHS ENDED
---------------------------------
MAR. 31, MAR. 31,
2003 2002
-------- --------
NET SALES $29,976 $37,870
Cost of sales 22,689 29,536
------- -------
Gross Profit 7,287 8,334
Other operating income 458 576
------- -------
Total operating income 7,745 8,910
OPERATING EXPENSES
Selling, general and administrative 8,694 9,243
Depreciation and amortization 957 1,264
------- -------
Total Operating Expenses 9,651 10,507
------- -------
LOSS FROM OPERATIONS (1,906) (1,597)
OTHER INCOME (EXPENSES)
Gain on sale of properties 672 299
Interest income 51 31
Interest expense (15) (58)
------- -------
OTHER INCOME, NET 708 272
------- -------
LOSS BEFORE INCOME TAXES (1,198) (1,325)
Income tax benefit (407) (450)
------- -------
NET LOSS $ (791) $ (875)
======= =======
Average shares outstanding 2,090 2,056
Net loss per share, basic $(.38) $(.43)
Net loss per share, assuming dilution $(.35) $(.38)
Dividends per share $ .07 $ .07
See notes to condensed consolidated financial statements.
3
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
(in thousands)
COMMON STOCK TOTAL
-------------------- ADDITIONAL RETAINED SHAREOWNERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- ------------
BALANCES AT DEC. 31, 2002 2,073 $2,073 $539 $62,486 $65,098
Net loss (791) (791)
Cash dividends - $.07 per share (146) (146)
Shares issued under Long-Term
Incentive Plan 5 5 107 112
Shares issued in connection with
exercise of stock options 15 15 182 197
----- ------ ---- ------- -------
BALANCES AT MAR. 31, 2003 2,093 $2,093 $828 $61,549 $64,470
===== ====== ==== ======= =======
See notes to condensed consolidated financial statements.
4
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
THREE MONTHS ENDED
----------------------------
MAR. 31, MAR. 31,
2003 2002
-------- --------
OPERATING ACTIVITIES
Net loss $ (791) $ (875)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 932 1,213
Amortization 25 51
Provision for (recovery of) losses on receivables (142) 110
Gain on sale of properties (672) (299)
Gain on sale of equipment (10) (51)
Common stock based compensation 6 17
Changes in operating assets and liabilities
Trade receivables 1,997 2,486
Other assets (467) (318)
Inventories (1,599) (2,173)
Accounts payable and accrued expenses (3,019) (1,517)
------- ------
NET CASH USED IN OPERATING ACTIVITIES (3,740) (1,356)
------- ------
INVESTING ACTIVITIES
Purchases of property and equipment (953) (186)
Proceeds from the sale of properties and equipment 1,313 195
------- ------
NET CASH PROVIDED BY INVESTING ACTIVITIES 360 9
FINANCING ACTIVITIES
Net (repayments of) short-term borrowings (1,000) 500
Repayments of long-term debt (26) (27)
Repurchases of common stock - (169)
Proceeds from exercise of stock options 197 878
Dividends paid (145) (142)
------- ------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (974) 1,040
------- ------
DECREASE IN CASH AND CASH EQUIVALENTS (4,354) (307)
Cash and cash equivalents at beginning of year 12,100 4,798
------- ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,746 $4,491
======= ======
See notes to condensed consolidated financial statements.
5
WOLOHAN LUMBER CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have
been included.
The Company's business is seasonal in nature, subject to general
economic conditions and outside factors, and accordingly, its operating
results for the three months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the entire year
ending December 31, 2003.
The Company recognizes revenues when products, ordered by the customer,
are either delivered to the customer or the customer picks up the
products at one of the Company's retail locations.
For further information, refer to the consolidated financial statements
and footnotes included in the Company's annual report on Form 10-K for
the year ended December 31, 2002.
NOTE B - NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation (FIN) No. 46, "Consolidation of Variable
Interest Entities." This standard clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," and addresses consolidation by business enterprises of
variable interest entities (more commonly known as Special Purpose
Entities or SPE's). FIN No. 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risk among
the parties involved. FIN No. 46 also enhances the disclosure
requirements related to variable interest entities. The Interpretation
is effective for interests in variable interest entities created after
January 31, 2003. For interests in variable interest entities created
before February 1, 2003, the Interpretation shall apply to the first
interim or annual reporting period beginning after June 15, 2003. The
adoption of FIN No. 46 will not have a significant effect on the
financial position or results of operations of the Company.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain information contained in Management's Discussion and Analysis
of Financial Condition and Results of Operations and elsewhere in this
report may be deemed to be forward-looking statements within the
meaning of The Private Securities Litigation Reform Act of 1995 and are
subject to the Act's safe harbor provisions. These statements are based
on current expectations and involve a number of risks and
uncertainties. Actual results could differ materially from the results
expressed in forward-looking statements. Factors that might cause such
a difference include: fluctuations in customer demand and spending,
expectations of future volumes and prices for the Company's products,
prevailing economic conditions affecting the retail lumber and building
materials markets and seasonality of operating results and other
factors, including risk factors, referred to from time to time in
filings made by the Company with the Securities and Exchange
Commission. The Company undertakes no obligation to update or clarify
forward-looking statements, whether as a result of new information,
future events or otherwise.
Accounting Policies and Estimates
The following discussion and analysis of the results of operations and
financial condition are based on the Company's financial statements
that have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of
these financial statements requires management to make estimates that
affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures of contingent assets and liabilities.
The Company bases these estimates on historical results and various
other assumptions believed to be reasonable, the results of which form
the basis for making estimates concerning the carrying values of assets
and liabilities that are not readily available from other sources.
Actual results may differ from these estimates.
The Company's significant accounting polices are described in Note A to
the consolidated financial statements included in the Company's annual
report on Form 10-K for the year ended December 31, 2002. Management
believes that the following accounting policies affect the more
significant estimates used in preparing the consolidated financial
statements.
The Company records an inventory reserve for the estimated shrinkage
between physical inventories. This reserve is based primarily on actual
shrink results from previous physical inventories. Changes in actual
shrink results from completed physical inventories could result in
revisions to previously recorded shrink expense. The Company also
records an inventory reserve for the loss associated with selling
discontinued inventories at below cost. This reserve is based on
management's current knowledge with respect to inventory levels and
historical experience relating to the liquidation of discontinued
inventories. Management does not believe the Company's merchandise
inventories are subject to significant risk of obsolescence.
The Company maintains an allowance for doubtful accounts related to
trade receivables by providing for probable uncollectible amounts
through a charge to earnings and a credit to the allowance. Management
assesses the current status of individual accounts on a quarterly basis
and makes adjustments to the allowance as a result of this assessment.
Balances that are still outstanding after management has used
reasonable collection efforts are written off through a charge to the
allowance.
The Company records a reserve for store closing costs in the period
management identifies such stores for closing. Costs accrued for
include: costs to liquidate
7
remaining inventory, expensing of future lease payments on long-term
leases, writing off leasehold improvements, severance payments and
certain other ongoing fixed costs. Management reviews on a quarterly
basis the balance of the reserve for each closed store and makes
appropriate adjustments based on the expected months remaining until
each closed store is disposed of.
Management believes it has sufficient current and historical knowledge
to record reasonable estimates for its inventory reserves, allowance
for uncollectible trade receivables and store closing reserve.
Results Of Operations
The first quarter 2003 loss was $791,000 (38 cents per share basic; 35
cents per share assuming dilution), compared with a loss of $875,000
(43 cents per share basic; 38 cents per share assuming dilution) for
first quarter 2002. The Company's business is subject to seasonal
influences with lower sales historically recorded in the first quarter,
often resulting in a net loss for the period.
Net sales in first quarter 2003 were $30.0 million, compared with $37.9
million for first quarter 2002. Same-store sales declined 12 percent,
compared with first quarter 2002.
Factors negatively impacting 2003's first quarter sales included: price
deflation in lumber and structural panel products, adverse winter
weather conditions, an uncertain economic and geopolitical climate, and
a reduction in the number of operating stores compared with first
quarter 2002. At March 31, 2003, the Company had 25 stores in operation
compared with 29 at the end of first quarter 2002. In addition, due to
the Company's strategic focus on the professional builder and the large
project-oriented consumer, it continues to eliminate or reduce certain
products previously sold to the do-it-yourself home-improvement market,
which in turn may have a negative impact on sales comparisons.
During the first quarter of 2003, the Company entered into a long-term
sales commitment to supply lumber, trusses, interior doors and
mouldings, and other related products to a large privately owned
housing project in the Dayton, Ohio market. The Company has committed
to supply specific product at fixed and determinable prices over a
three-year period ending in 2005. Sales from this project are expected
to total approximately $7 million. The Company has put strategies in
place to manage the gross margin impact of fluctuations in lumber
pricing over the term of this sales commitment.
The Company estimates that at least two-thirds of its sales were to
professional builders in first quarter 2003 and 2002.
First quarter 2003 results compared with first quarter 2002 also
included:
1) Gains on sale of real estate properties of $672,000 in first quarter
2003, compared with $299,000 in first quarter 2002.
2) An improvement in gross margin to 24.3 percent in 2003, compared
with 2002's first quarter gross margin of 22.0 percent. The 2002 gross
margin percent reflected a significant inventory shrinkage recorded at
one store.
The operating expense ratio was 32.2 percent for the first quarter of
2003, compared with 27.7 percent for the same period in 2002. The
increase in the expense factor in
8
first quarter 2003 was due primarily to increased advertising costs,
higher costs related to health insurance and unemployment taxes and the
significantly lower sales base which minimized leverage gains from
lowering expenses in other areas. Total operating expense dollars were
reduced $856,000 in first quarter 2003 from the prior year and included
a $307,000 reduction in depreciation and amortization expense and a
$252,000 reduction in bad debt expense.
The effective federal income tax rate for the first quarter of 2003 and
2002 was 34 percent.
Financial Condition
At Mar. 31, 2003, the Company's balance sheet remained strong. Net
working capital at Mar. 31, 2003, totaled $28.0 million, compared with
$22.0 million at Mar. 31, 2002, and $28.7 million at Dec. 31, 2002. The
current ratio at Mar. 31, 2003, was 3.0 to 1, compared with 2.0 to 1 at
Mar. 31, 2002, and 2.6 to 1 at Dec. 31, 2002.
Cash and cash equivalents totaled $7.7 million at Mar. 31, 2003,
compared with $4.5 million at Mar. 31, 2002, and $12.1 million at Dec.
31, 2002. The liquidity ratio at Mar. 31, 2003, was .54 to 1, compared
to .20 to 1 at Mar. 31, 2002, and .65 to 1 at Dec. 31, 2002. Cash and
cash equivalents decreased $4.4 million during the first quarter of
2003. Operating activities used net cash of $3.7 million during the
first quarter of 2003. Investing activities in the first quarter of
2003 included $1.3 million in proceeds from the sale of properties and
equipment, offsetting $1.0 million in capital expenditures which were
primarily related to equipment replacements and additional land
purchased at an existing location. Financing activities in the first
quarter of 2003 used net cash of $1.0 million to reduce short-term
borrowings to $500,000 at March 31, 2003.
The Company expects that net cash from operating activities and
available lines of credit should be adequate to meet working capital
needs for the foreseeable future.
Invested capital was equal to 82% of total assets at Mar. 31, 2003,
compared with 78% at year-end 2002. Shareowners' equity accounted for
100 percent of invested capital at Mar. 31, 2003 and Dec. 31, 2002.
Outlook
Wolohan Lumber Co. continues to implement strategies designed to
improve market share to its core customers: professional home builders
and project-oriented consumers. Such strategies include ongoing
initiatives to increase the efficiency and volume of sales made from
existing value-added manufacturing facilities or due to existing
offerings of value-added services such as installation, estimating and
design, and specialized delivery. The Company has also placed renewed
focus on sales training and marketing, both important aspects of
achieving growth in project sales. The Company continues to emphasize
continued improvement in expense control as well.
The Company expects to maintain its traditionally strong balance sheet
in 2003 through the continued attainment of profitable operations, its
annual efforts at inventory management, accounts receivable review and
collection, and responsible cash
9
management. Strategies targeted at continuing the Company's track
record of effectively liquidating or leasing idle properties are
expected to further improve the Company's liquidity and strengthen its
balance sheet.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
As of April 17, 2003, an evaluation was performed under the supervision
of and with the participation of the Company's management, including
the President and Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation,
the Company's management, including the President and Chief Executive
Officer and the Chief Financial Officer, concluded that the Company's
disclosure controls and procedures were effective as of April 17, 2003.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal
controls subsequent to April 17, 2003.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may be involved in various legal
proceedings that are incidental to its business. In management's
opinion, the Company is not a party to any current legal proceedings
that are material to its financial condition, either individually or in
the aggregate.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
99 Exhibits:
EXHIBIT NO. EXHIBIT DESCRIPTION
99.1 Certification of President and Chief
Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
10
99.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The registrant filed no reports on Form 8-K during the quarter for
which this Report is filed.
11
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.
WOLOHAN LUMBER CO.
----------------------------
Registrant
Date: May 9, 2003 James L. Wolohan
------------------------------ -----------------------------------
James L. Wolohan
President and Chief
Executive Officer
Date: May 9, 2003 Edward J. Dean
------------------------------ -----------------------------------
Edward J. Dean
Chief Financial Officer
(Principal Accounting
Officer)
12
CERTIFICATION
I, James L. Wolohan, President and Chief Executive Officer of Wolohan Lumber
Co., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wolohan Lumber
Co. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls;
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 9, 2003 James L. Wolohan
------------------------------------------
James L. Wolohan
President and Chief Executive Officer
13
CERTIFICATION
I, Edward J. Dean, Chief Financial Officer of Wolohan Lumber Co., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wolohan Lumber
Co. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls;
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 9, 2003 Edward J. Dean
----------------------------------------
Edward J. Dean
Chief Financial Officer
14
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
---------- -------------------
99.1 Certification of President and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
15