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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 June 30, 2003
---------------------------------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-6169
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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
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(Address of principal executive offices)
(989) 793-4532
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(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 July 31, 2003
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
---------------------
WOLOHAN LUMBER CO.
CONSOLIDATED BALANCE SHEETS
(in thousands)
JUNE 30, DEC. 31,
2003 2002
-------- --------
(Unaudited) (Note)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,116 $ 12,100
Trade receivables, net 21,413 17,272
Inventories, at average cost 23,834 23,599
Reduction to LIFO cost (7,231) (7,231)
-------- --------
Inventories at the lower of LIFO cost or market 16,603 16,368
Other current assets 1,158 1,427
-------- --------
TOTAL CURRENT ASSETS 50,290 47,167
NET PROPERTIES AND EQUIPMENT 18,186 18,174
OTHER ASSETS 16,891 18,439
-------- --------
TOTAL ASSETS $ 85,367 $ 83,780
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 9,937 $ 7,373
Employee compensation and accrued expenses 9,087 9,502
Short-term borrowings 1,000 1,500
Current portion of long-term debt 104 104
-------- --------
TOTAL CURRENT LIABILITIES 20,128 18,479
LONG-TERM DEBT, NET OF CURRENT PORTION 151 203
-------- --------
TOTAL LIABILITIES
SHAREOWNERS' EQUITY 20,279 18,682
Common stock 2,043 2,073
Additional capital -- 539
Retained earnings 63,045 62,486
-------- --------
TOTAL SHAREOWNERS' EQUITY 65,088 65,098
-------- --------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 85,367 $ 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
-----------------------
JUNE 30, JUNE 30,
2003 2002
-------- --------
NET SALES $ 51,662 $ 56,690
Cost of sales 39,259 43,614
-------- --------
Gross Profit 12,403 13,076
Other operating income 612 652
-------- --------
Total operating income 13,015 13,728
OPERATING EXPENSES
Selling, general and administrative 10,191 11,202
Depreciation and amortization 935 1,178
-------- --------
Total Operating Expenses 11,126 12,380
-------- --------
INCOME FROM OPERATIONS 1,889 1,348
OTHER INCOME (EXPENSES)
Gain on sale of properties 755 --
Interest income 41 27
Interest expense (6) (24)
-------- --------
OTHER INCOME, NET 790 3
-------- --------
INCOME BEFORE INCOME TAXES 2,679 1,351
Income taxes 911 459
-------- --------
NET INCOME $ 1,768 $ 892
======== ========
Average shares outstanding 2,050 2,098
Net income per share, basic $ .85 $ .44
Net income per share, assuming dilution $ .78 $ .39
Dividends per share $ .07 $ .07
See notes to condensed consolidated financial statements.
3
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per-share amounts)
SIX MONTHS ENDED
------------------------
JUNE 30, JUNE 30,
2003 2002
-------- --------
NET SALES $ 81,638 $ 94,560
Cost of sales 61,948 73,150
-------- --------
Gross Profit 19,690 21,410
Other operating income 1,070 1,228
-------- --------
Total operating income 20,760 22,638
OPERATING EXPENSES
Selling, general and administrative 18,885 20,445
Depreciation and amortization 1,892 2,442
-------- --------
Total Operating Expenses 20,777 22,887
-------- --------
LOSS FROM OPERATIONS (17) (249)
OTHER INCOME (EXPENSES)
Gain on sale of properties 1,427 299
Interest income 92 58
Interest expense (21) (82)
-------- --------
OTHER INCOME, NET 1,498 275
-------- --------
INCOME BEFORE INCOME TAXES 1,481 26
Income taxes 504 9
-------- --------
NET INCOME $ 977 $ 17
======== ========
Average shares outstanding 2,070 2,077
Net income per share, basic $ .47 $ .01
Net income per share, assuming dilution $ .43 $ .01
Dividends per share $ .14 $ .14
See notes to condensed consolidated financial statements.
4
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
Net income 1,768 1,768
Cash dividends - $.07 per share (143) (143)
Shares repurchased and retired (50) (50) (828) (129) (1,007)
------- -------- -------- -------- --------
BALANCES AT JUNE 30, 2003 2,043 $ 2,043 -- $ 63,045 $ 65,088
======= ======== ======== ======== ========
See notes to condensed consolidated financial statements.
5
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
SIX MONTHS ENDED
-----------------------
June 30, June 30,
2003 2002
--------- ---------
OPERATING ACTIVITIES
Net income $ 977 $ 17
Adjustments to reconcile net income to net
cash (used in) provided by operating activities
Depreciation 1,842 2,342
Amortization 50 100
Provision for losses on receivables 157 116
Effect of LIFO -- (225)
Gain on sale of properties (1,427) (299)
Gain on sale of equipment (126) (238)
Common stock based compensation 13 34
Changes in operating assets and liabilities
Trade receivables (4,298) (1,150)
Other assets (91) (474)
Inventories (235) (1,776)
Accounts payable and accrued expenses 2,448 2,843
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (690) 1,290
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment (1,894) (1,084)
Proceeds from the sale of properties and equipment 3,253 475
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,359 (609)
-------- --------
FINANCING ACTIVITIES
Net repayments of short-term borrowings (500) --
Repayments of long-term debt (52) (2,052)
Repurchases of common stock (1,007) (169)
Proceeds from exercise of stock options 197 878
Dividends paid (291) (287)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (1,653) (1,630)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (984) (949)
Cash and cash equivalents at beginning of period 12,100 4,798
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,116 $ 3,849
======== ========
See notes to condensed consolidated financial statements.
6
WOLOHAN LUMBER CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 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 and six months ended June 30, 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 April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149 which amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 149 requires
that contracts with comparable characteristics be accounted for
similarly. In particular, SFAS No. 149 clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in paragraph 6(b) of Statement
133, clarifies when a derivative contains a financing component, amends
the definition of an underlying to conform to language used in FASB
Interpretation No. 45, and amends certain other existing
pronouncements. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003. The adoption of SFAS No. 149 will not
have a significant effect on the financial position or results of
operations of the Company
In May 2003, the FASB issued SFAS No. 150 which establishes standards
for how an issuer classifies and measures certain financial instruments
with
7
characteristics of both liabilities and equity. SFAS No. 150 requires
that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS No.
150 will not have a significant effect on the financial position or
results of operations of the Company
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 but are not limited to: 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
8
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. Accrued costs include:
costs to liquidate 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
Net income was $1.77 million (85 cents per share basic; 78 cents per
share fully diluted) for the second quarter ended June 30, 2003,
compared with $892,000 (44 cents per share basic; 39 cents per share
fully diluted) for the same period of 2002. For the six-month period
ended June 30, 2003, net income totaled $977,000 (47 cent per share
basic; 43 cents per share fully diluted), compared with $17,000 (1 cent
per share basic and fully diluted) for the similar period of 2002.
Net sales in 2003 were $51.7 million for the second quarter and $81.6
million for the first six months, compared with $56.7 million and $94.6
million for the comparable periods of 2002. Compared with 2002,
same-store sales in 2003 declined 2 percent for the second quarter and
6 percent for the six-month period.
Sales results reflect a reduction in the number of operating stores
compared with 2002. At June 30, 2003, the Company had 25 stores
compared with 29 at the end of the second quarter of 2002. In addition,
with 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.
9
The Company estimates that at least two-thirds of its sales were to
professional builders in the second quarter and six-month period of
2003 and 2002.
The net income improvement in the second quarter and six month-period
of 2003, compared with similar periods in 2002 reflects:
1. Higher pre-tax gains (net) recorded on the sale of real estate
properties in 2003 versus 2002 ($755,000 more for the second
quarter and $1.13 million more for the six-month period).
2. An improvement in gross margin to 24.0 percent for the second
quarter and 24.1 percent for the six-month period of 2003,
compared with 23.1 percent and 22.6 percent, respectively, for the
similar periods of 2002. The 2002 gross margin percentages reflect
a significant inventory shrinkage recorded at one store.
The operating expense ratio for the second quarter of 2003 was 21.5
percent, compared with 21.8 percent for the same period in 2002. For
the 2003 six-month period, the ratio was 25.5 percent compared with
24.2 percent in 2002. The increase for the six-month period was due
primarily to higher advertising costs and the significantly lower sales
base which minimized leverage gains from lowering expenses in other
areas. Total operating expense dollars were reduced $1.3 million and
$2.1 million, respectively, for the second quarter and six-month
period, compared with similar periods in 2002.
The effective federal income tax rate for the second quarter and six
month period of 2003 and 2002 was 34 percent.
Financial Condition
At June 30, 2003, the Company's balance sheet remained strong. Net
working capital at June 30, 2003, totaled $30.2 million, compared with
$23.0 million at June 30, 2002, and $28.7 million at Dec. 31, 2002. The
current ratio at June 30, 2003, was 2.5 to 1, compared with 2.0 to 1 at
June 30, 2002, and 2.6 to 1 at Dec. 31, 2002.
Cash and cash equivalents totaled $11.1 million at June 30, 2003,
compared with $3.8 million at June 30, 2002, and $12.1 million at Dec.
31, 2002. The liquidity ratio at June 30, 2003, was .55 to 1, compared
to .16 to 1 at June 30, 2002, and .65 to 1 at Dec. 31, 2002. Cash and
cash equivalents decreased $1.0 million during the first half of 2003.
Operating activities used net cash of $.7 million during the first half
of 2003. Investing activities in the first half of 2003 included $3.3
million in proceeds from the sale of properties and equipment,
offsetting $1.9 million in capital expenditures, which were primarily
related to equipment replacements and additional land purchased at an
existing location. Financing activities in the first half of 2003 used
net cash of $1.7 million and included $1.0 million to purchase 50,000
shares of Company common stock at $20.14 per
10
share, $.5 million to reduce short-term borrowings to $1.0 million at
June 30, 2003 and $.3 million for dividend payments.
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 76% of total assets at June 30, 2003,
compared with 78% at year-end 2002. Shareowners' equity accounted for
100 percent of invested capital at June 30, 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 sales. The Company continues to emphasize continued
improvement in expense control as well.
The Company expects to maintain a 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 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 July 18, 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 July 18, 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 July 18, 2003.
11
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
The following information is furnished with respect to the Annual
Meeting of security holders of the Registrant held during May 2003:
(a) A meeting was held on May 1, 2003 and was an Annual Meeting.
(b) Not applicable.
(c) At such meeting the following nominees for election as
directors were elected to hold office until the next annual
meeting of stockholders or until their successors are elected
and qualified. The votes cast with respect to each nominee for
director are as follows:
Votes to Withhold
Authority to Vote for
Nominee Votes for Nominee the Nominee
------- ----------------- ---------------------
Hugo E. Braun, Jr. 1,897,917 3,438
James L. Wolohan 1,899,917 1,438
Charles R. Weeks 1,899,917 1,438
Lee A. Shobe 1,899,917 1,438
John Sieggreen 1,892,176 9,179
12
ITEM 5. OTHER INFORMATION
On May 16, 2003 the Board of Directors of Wolohan Lumber Co. announced
it had received a proposal from certain current shareholders and
members of management, including James L. Wolohan, the President and
Chief Executive Officer of the Company, John A. Sieggreen, the
Company's Executive Vice President and Chief Operating Officer, Daniel
P. Rogers, Senior Vice-President-General Merchandise Manager and
Edward J. Dean, Vice President and Chief Financial Officer (the
"Continuing Shareholders"), who own approximately 51.3% of Wolohan
stock, to acquire the shares of common stock of the Company in the
hands of public shareholders at a price of $21.75 per share in a cash
merger transaction.
The Board of Directors has established a Special Committee of the Board
consisting of independent directors to review the proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
99 Exhibits:
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
31.1 Certification of President and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification of President and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 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 two reports on Form 8-K during the quarter for
which this Report is filed. The filing dates were April 23 and May 16,
2003.
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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: August 8, 2003 James L. Wolohan
------------------------ -------------------------------------
James L. Wolohan
President and Chief Executive Officer
Date: August 8, 2003 Edward J. Dean
------------------------ -------------------------------------
Edward J. Dean
Chief Financial Officer
(Principal Accounting Officer)
14
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
31.1 Certification of President and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification of President and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
15