10-Q 1 k72446e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED 09/30/02 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 September 30, 2002 ---------------------------------------------------------- [ ] 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 -- 2,073,195 shares as of October 31, 2002 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL INFORMATION WOLOHAN LUMBER CO. CONSOLIDATED BALANCE SHEETS (in thousands)

Note: The consolidated balance sheet at December 31, 2001, 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 OPERATIONS (UNAUDITED) (in thousands, except per-share amounts)

See notes to condensed consolidated financial statements. 3 WOLOHAN LUMBER CO. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per-share amounts)

See notes to condensed consolidated financial statements. 4 WOLOHAN LUMBER CO. CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY (UNAUDITED) (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) SEPTEMBER 30, 2002 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 the timing of store closings, and accordingly, its operating results for the three months and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2002. 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, 2001. NOTE B - NEW ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, in the first quarter of 2002. The Company no longer amortizes goodwill and intangible assets with indefinite useful lives and has completed its initial impairment tests in accordance with the provisions of Statement No. 142. No adjustments resulted from this analysis. Amortization expense reported during the quarter ended September 30, 2001 was $26,000 ($78,000 for the nine-month period of 2001). The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", in August 2001. This statement supercedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". Statement No. 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentations of discontinued operations to include more disposal transactions. The Company adopted the provisions of Statement No. 144 on January 1, 2002. The Company reports store-closing costs as operating expenses and plans to continue to do so. As of September 30, 2002, the Company determined that no long-lived assets are impaired. 7 In June of 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Incurred Costs in a Restructuring)". SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized only when the liability is incurred. This differs from the guidance in EITF 94-3, which required that a liability for costs associated with an exit plan or disposal activity be recognized at the date management committed to an exit plan for an entity. The provisions of the Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company has not adopted SFAS No. 146 as of September 30, 2002. The adoption of SFAS No. 146 will have an as yet undetermined impact on the timing of recognition of liabilities on stores closed or severance arrangements entered into after the adoption date, but will have no impact on the liabilities recorded by the Company for stores already closed and severance arrangements already entered into. 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. Results Of Operations Net income was $1.48 million (71 cents per share basic; 64 cents per share fully diluted) for the third quarter ended September 30, 2002. This compares with net income of $2.06 million (63 cents per share basic; 60 cents per share fully diluted) for the same period of 2001. For the nine-month period, net income totaled $1.49 million (72 cents per share basic; 65 cents per share fully diluted) for 2002, compared with $2.74 million (83 cents per share basic; 80 cents per share fully diluted) for the similar period of 2001. The 2002 third quarter net income per share and the net income per share for the nine-month period then ended was impacted by a significant reduction in average shares outstanding from the same periods in 2001. Average shares outstanding were 2.1 million for the third quarter and nine-month periods of 2002, compared with 3.2 million and 3.3 million shares, respectively, for the same periods in 2001. The 8 reduction in average shares outstanding was primarily a result of repurchasing 1.3 million shares in a stock tender offer in September 2001 at a price of $15 per share. Net sales in 2002 were $59.6 million for the third quarter and $154.1 million for the first nine months, compared with $72.3 million and $184.9 million for the comparable periods of 2001. Compared with 2001, same-store sales declined 7 percent for the third quarter and 3 percent for the nine-month period. Third quarter sales and gross margin dollars were negatively impacted by significant price deflation in lumber and structural panel products as well as a reduction in the number of operating stores compared with 2001. At September 30, 2002, the Company had 26 stores in operation compared with 30 at the end of the third quarter of 2001. In addition, due to the Company's strategic focus on the professional builder and the large project-oriented consumer, management continues to eliminate or reduce certain products previously sold to the do-it-yourself home-improvement market, which in turn, has a negative impact on sales comparisons. The lower net income in the third quarter and nine month-period of 2002, compared with similar periods in 2001 reflects: 1) Lower net gains recorded on the sale of real estate properties in 2002 versus 2001 ($110,000 less for the third quarter and $967,000 less for the nine-month period). 2) Inventory shrinkage recorded at one store negatively impacted gross margins for the nine-month period of 2002, compared with 2001. 3) LIFO credits of $300,000 in the third quarter of 2002 and $525,000 for the nine-month period, compared with no LIFO adjustments recorded in the first nine months of 2001. 4) Store closing costs of $360,000 in third quarter 2002, compared with $356,000 in third quarter 2001 and $568,000 for the nine-month period of 2002, compared with $855,000 for the same period of 2001. These costs represent expenses incurred to transition a store from normal operations to a liquidation mode and final closing. Other store closing costs related to stores closed in the first nine months of both years have been accrued in the corresponding prior year. Gross margins for the third quarter of 2002 were 23.4 percent, compared with 23.1 percent for the comparable period in 2001. For the nine-month period of 2002, gross margins were 22.9 percent compared with 23.1 percent for the same period of 2001. The operating expense ratio, excluding store-closing costs, was 20.3 percent for the third quarter of 2002, compared with 19.9 percent for the same period in 2001. For the 2002 nine-month period, the ratio was 22.5 percent compared with 22.3 percent in 2001. In the Company's continuing effort to redeploy investments which do not meet its strategic profit model, the Company has closed four stores in the first nine months of 2002 (eight stores were closed during the first nine months of 2001). The expansion of the Company's Marne, Michigan facility to include a new showroom, an enlarged lumber yard area and improvements to increase manufacturing capabilities for wall-panelization, roof trusses and millwork will be completed in the fourth quarter 2002. This facility will serve professional builders and project-oriented consumers in the greater Grand Rapids, Michigan market. 9 The effective federal income tax rate for the third quarter and nine-month period of 2002 and 2001 was 34 percent. Financial Condition At Sept. 30, 2002, the Company's balance sheet remained strong. Net working capital at Sept. 30, 2002, totaled $24.4 million, compared with $17.9 million at Sept. 30, 2001, and $21.1 million at Dec. 31, 2001. The current ratio at Sept. 30, 2002, was 2.1 to 1, compared with 1.4 to 1 at Sept. 30, 2001, and 2.0 to 1 at Dec. 31, 2001. The balance sheet at Sept. 30, 2001 reflects the Company's repurchase of 1.3 million shares of its common stock on Sept. 21, 2001 in a stock tender offer at a price of $15 per share. Payment for the tender offer ($18.9 million) was made on Oct. 3, 2001 from available cash on hand of $16.4 million plus utilization of a bank line of credit for $2.5 million. Cash and cash equivalents totaled $12.0 million at Sept. 30, 2002, compared with $18.3 million at Sept. 30, 2001, and $4.8 million at Dec. 31, 2001. The liquidity ratio at Sept. 30, 2002, was .52 to 1, compared to .41 to 1 at Sept. 30, 2001, and .22 to 1 at Dec. 31, 2001. Cash and cash equivalents increased $7.2 million during the first nine months of 2002. Operating activities provided net cash of $8.9 million during the first nine months of 2002, primarily from reductions in net working capital and earnings plus depreciation. Investing activities in the first nine months of 2002 included $1.9 million in capital expenditures, primarily related to the expansion of the Company's Marne, Michigan facility, and were offset in part by $1.5 million of proceeds from the sale of properties and equipment. Financing activities in the first nine months of 2002 used net cash of $1.3 million and included $2.1 million for payments on long-term debt, $.7 million used to purchase 34,000 shares of Company common stock and $.4 million for dividend payments, and were offset in part by $.9 million of proceeds from the exercise of stock options and $1.0 million from net credit-line borrowings. 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 (long-term debt and shareowners' equity) was equal to 73% of total assets at Sept. 30, 2002, compared with 74% at year-end 2001. At Sept. 30, 2002, the total long-term debt-to-asset ratio was .003, versus .004 at year-end 2001 and the ratio of equity to total assets was .73 to 1, the same as year-end 2001. Outlook The Company's strategic direction continues to be: (1) revenue growth and operating improvement at existing stores through the advancement of services to its target customers and development of operating efficiencies, and (2) strengthening its balance sheet by improving management of working capital at existing operations and redeploying investments which do not meet its strategic profit model. The Company has consistently utilized its strategic profit model to evaluate overall performance of its assets and intends to continue to do so. Adherence to this model may result in additional store closings or other asset redeployments. 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. ITEM 4. CONTROLS AND PROCEDURES As of October 22, 2002, 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 Corporate Controller, 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 Corporate Controller, concluded that the Company's disclosure controls and procedures were effective as of October 22, 2002. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to October 22, 2002. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, we may be involved in various legal proceedings that are incidental to our business. In our opinion, we are not a party to any current legal proceedings that are material to our 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 (a) 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. 99.2 Certification of Corporate Controller (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 thereto duly authorized. WOLOHAN LUMBER CO. --------------------------------- Registrant Date: November 7, 2002 James L. Wolohan ----------------------------------- --------------------------------- James L. Wolohan President and Chief Executive Officer Date: November 7, 2002 Edward J. Dean ----------------------------------- --------------------------------- Edward J. Dean Corporate Controller (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 officers 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: November 7, 2002 James L. Wolohan --------------------------------- James L. Wolohan President and Chief Executive Officer 13 CERTIFICATION I, Edward J. Dean, Corporate Controller 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 officers 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: November 7, 2002 Edward J. Dean --------------------------------- Edward J. Dean Corporate Controller (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 Corporate Controller (Chief Financial Officer) pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 15

WOLOHAN LUMBER CO 10-Q