10-Q 1 k78960e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2003 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 ----------------- ---------------------- 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 July 31, 2003 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL INFORMATION --------------------- WOLOHAN LUMBER CO. CONSOLIDATED BALANCE SHEETS (in thousands)

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)

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)

See notes to condensed consolidated financial statements. 5 WOLOHAN LUMBER CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)

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. 13 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

WOLOHAN LUMBER CO 10-Q