WOLOHAN LUMBER CO.
October 10, 2003
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Wolohan Lumber Co. to be held at 11:00 a.m., local time, on November 5, 2003, at
the offices of the Company, 1740 Midland Road, Saginaw, Michigan.
As described in the enclosed Proxy Statement, at the Special Meeting, you
will be asked to approve the Merger of Wolohan Acquisition Co. with and into
Wolohan Lumber Co. as the surviving corporation. In the Merger, shares of our
common stock issued and outstanding immediately prior to the Merger owned by
unaffiliated shareholders will be converted into the right to receive $25.75 per
share, in cash, without interest. Shares, stock options and performance shares
beneficially owned by certain current shareholders and members of management,
including James L. Wolohan, the Company's President and Chief Executive Officer,
John A. Sieggreen, its Executive Vice President and Chief Operating Officer,
Daniel P. Rogers, Senior Vice President, General Merchandise Manager and Edward
J. Dean, its Vice President and Chief Financial Officer (the "Continuing
Shareholders"), who own approximately 51.3% of Wolohan common stock, will remain
as outstanding shares of the surviving corporation.
A Special Committee comprised of independent members of our Board of
Directors, consisting of Lee A. Shobe and Charles R. Weeks, was formed to
consider the proposal. The Special Committee unanimously recommended to our
Board of Directors that the Merger be approved.
In connection with its evaluation of the Merger, the Special Committee
engaged McDonald Investments Inc. to act as its financial advisor. McDonald
Investments has rendered its written opinion that, as of August 13, 2003, based
upon and subject to the assumptions, limitations and qualifications included in
its opinion, the consideration of $25.75 per share to be received in the Merger
is fair from a financial point of view to our unaffiliated shareholders who are
not Continuing Shareholders. McDonald Investments' written opinion dated August
13, 2003, is attached as Appendix B to the accompanying Proxy Statement.
The Board of Directors believes that the terms of the Merger are
procedurally and substantively fair to, and in the best interests of, our
unaffiliated shareholders and recommends that the shareholders approve the
Merger. Since John Sieggreen and I have a personal interest in recommending the
Merger to you, we abstained from voting at the Board meeting at which this
recommendation was made.
Details of the Merger and other important information are described in the
accompanying Notice of Special Meeting and Proxy Statement. You are urged to
read these important documents carefully before casting your vote.
Whether or not you plan to attend the Special Meeting, we urge you to
complete, sign, date and promptly return the enclosed proxy card.
We thank you for your prompt attention to this matter and appreciate your
support.
Very truly yours,
[JAMES L. WOLOHAN SIG]
James L. Wolohan
President and Chief Executive Officer
PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY, WHETHER OR
NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. PLEASE DO NOT SEND IN ANY
CERTIFICATES FOR YOUR COMMON STOCK AT THIS TIME. IF THE MERGER IS APPROVED,
SHAREHOLDERS WILL RECEIVE A LETTER OF TRANSMITTAL AND RELATED INSTRUCTIONS.
WOLOHAN LUMBER CO.
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 5, 2003
---------------------
To the Shareholders of Wolohan Lumber Co.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Wolohan
Lumber Co. (the "Company") will be held on November 5, 2003 at 11:00 a.m., local
time, at the offices of the Company, 1740 Midland Road, Saginaw, Michigan, for
the following purposes:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated as of August 13, 2003 (the "Merger
Agreement"), pursuant to which Wolohan Acquisition Co., a Michigan
corporation, would be merged with and into the Company (the "Merger"). The
Company would be the surviving corporation in the Merger. As a result of
the Merger, each outstanding share of common stock of the Company, other
than shares owned by certain current shareholders and members of
management, will be converted into the right to receive $25.75 in cash,
without interest, all as more fully described in the accompanying Proxy
Statement.
2. To transact such other business as may properly be brought before
the Special Meeting or any adjournments thereof.
Only shareholders of record as of the close of business on September
15, 2003 will be entitled to notice of the Special Meeting and to vote at
the Special Meeting and any adjournments of the meeting.
The Board of Directors acting upon the unanimous recommendation of the
Special Committee of the Board, has approved the Merger Agreement and the
Merger and recommends that you vote FOR approval of the Merger Agreement.
By Order of the Board of Directors,
[GEORGE I. GIBSON, JR. SIG]
George I. Gibson, Jr.
Secretary
October 10, 2003
EACH SHAREHOLDER IS URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
CARD IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. IF A SHAREHOLDER DECIDES TO ATTEND THE SPECIAL MEETING, THE SHAREHOLDERS
MAY, IF SO DESIRED, REVOKE THE PROXY AND VOTE THE SHARES IN PERSON.
WOLOHAN LUMBER CO.
---------------------
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 5, 2003
---------------------
GENERAL
This Proxy Statement is being furnished to holders of Wolohan Lumber Co.
(the "Company") common stock in connection with the solicitation of proxies by
our Board of Directors for use at the Special Meeting of Shareholders, and at
any adjournments of the meeting, to be held at the offices of the Company, 1740
Midland Road, Saginaw, Michigan, on November 5, 2003 beginning at 11:00 a.m.,
local time. The Special Meeting has been called to consider and vote upon a
proposal to approve and adopt the Merger Agreement, dated as of August 13, 2003,
between the Company and Wolohan Acquisition Co. ("Wolohan Acquisition"),
pursuant to which Wolohan Acquisition will be merged with and into the Company.
A copy of the Merger Agreement is attached to this Proxy Statement as Appendix
A.
Only shareholders of record on September 15, 2003 are entitled to receive
notice of and vote at the meeting. On that record date, there were 2,042,688
shares of common stock of the Company outstanding.
Each share of our common stock will be entitled to one vote. The Merger
must be approved by a vote of a majority of the outstanding shares of common
stock. Of those shares, approximately 51.3% were beneficially owned by certain
current shareholders and members of management who will continue as shareholders
after the Merger, including James L. Wolohan, the Company's President and Chief
Executive Officer, John A. Sieggreen, its Executive Vice President and Chief
Operating Officer, and Edward J. Dean, its Vice President and Chief Financial
Officer who have indicated they will vote for the Merger, but are not obligated
to do so. If such shareholders vote as indicated, the Merger Agreement will be
approved and adopted. A quorum for the meeting requires that holders of a
majority of the outstanding shares of common stock must be present in person or
by proxy.
The Board of Directors recommends that you vote "FOR" approval of the
Merger Agreement and the Merger.
Proxies will be voted in the manner you specify in the proxy card. You must
sign your proxy. If you return your proxy but do not specify how it should be
voted, your shares will be voted for the Merger. If your stock is held by a
broker or other custodian in "street name", your shares will not be voted unless
you provide specific instructions to the broker or custodian. Proxies submitted
by brokers or custodians who have not received voting instructions will be
counted for the purposes of determining a quorum, but will not be voted for or
against the Merger. You are urged to complete and return your proxy or, if your
shares are held in street name, to provide voting instructions in accordance
with the materials you receive from your broker or other custodian.
This Proxy Statement and the accompanying form of proxy are first being
mailed to shareholders on or about October 14, 2003.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROXY STATEMENT DOES NOT CONSTITUTE A SOLICITATION OF A
PROXY IN ANY JURISDICTION FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE A PROXY
SOLICITATION IN SUCH JURISDICTION. THE INFORMATION IN THIS PROXY STATEMENT MAY
ONLY BE ACCURATE ON THE DATE OF THIS PROXY STATEMENT.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF THE TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement contains or incorporates by reference certain
forward-looking statements and information relating to us that are based on the
beliefs of management as well as assumptions made by and information currently
available to us. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions and other statements which are other than statements of historical
facts, including statements regarding the completion of the Merger. When used in
this document, the words "anticipate," "believe," "estimate," "expect," "plan,"
"intend," "project," "predict," "may", and "should" and similar expressions, are
intended to identify forward-looking statements. Such statements reflect our
current view with respect to future events, including the completion of the
Merger, and are subject to numerous risks, uncertainties and assumptions. Many
factors could cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements that
may be expressed or implied by the forward-looking statements including, among
others, fluctuations in customer demand and spending, expectations of future
volumes and prices for our 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 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. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this Proxy Statement as anticipated, believed, estimated, expected,
planned or intended.
2
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
GENERAL..................................................... 1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 2
QUESTIONS AND ANSWERS....................................... 5
SUMMARY..................................................... 9
THE SPECIAL MEETING......................................... 12
Time, Place and Date; Proxy Solicitation.................. 12
Matters to be Considered.................................. 12
Required Vote............................................. 12
Voting and Revocation of Proxies.......................... 12
Record Date; Stock Entitled to Vote; Quorum; Voting at the
Special Meeting........................................ 13
Effective Time............................................ 13
Appraisal Rights.......................................... 13
SPECIAL FACTORS............................................. 14
Background of the Merger.................................. 14
Reasons for the Special Committee's Determination......... 20
Recommendations of the Special Committee and the Board of
Directors.............................................. 23
Purposes of the Merger and Plans or Proposals............. 24
Opinion of McDonald Investments........................... 25
Management's Projections.................................. 32
THE MERGER AGREEMENT........................................ 34
The Merger................................................ 34
Conversion of Common Stock................................ 34
Stock Options and Performance Shares...................... 34
Representations and Warranties............................ 35
Covenants................................................. 35
Directors' and Officers' Indemnification.................. 36
Conditions to the Merger.................................. 36
Termination............................................... 36
Effect of Termination..................................... 37
Amendment................................................. 37
Fees and Expenses......................................... 37
Regulatory Approvals...................................... 37
Merger Financing.......................................... 38
Appraisal Rights.......................................... 38
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER...... 39
GENERAL INFORMATION REGARDING WOLOHAN LUMBER AND WOLOHAN
ACQUISITION............................................... 40
Subsequent Events; Shareholder Litigation................. 40
Price Range of Shares; Dividends and Stock Repurchases.... 42
Interests of Certain Persons in the Merger................ 43
Stock Ownership........................................... 44
Executive Officers and Directors.......................... 45
</Table>
3
<Table>
<Caption>
PAGE
----
Officer Agreements........................................ 46
INDEPENDENT AUDITORS........................................ 47
SHAREHOLDER PROPOSALS....................................... 47
WHERE YOU CAN FIND MORE INFORMATION......................... 47
AVAILABLE INFORMATION....................................... 48
MISCELLANEOUS............................................... 48
Appendix A Agreement and Plan of Merger
Appendix B Opinion of McDonald Investments Inc.
Appendix C Names of Continuing Shareholders
Appendix D Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 2002
Appendix E Quarterly Report on Form 10-Q for the Period
Ended June 30, 2003
</Table>
4
QUESTIONS AND ANSWERS
The following questions and answers are intended to address briefly some
commonly asked questions regarding the Merger.
WHAT WILL HAPPEN IN THE MERGER?
If completed, the Merger will result in our shareholders, other than the
Continuing Shareholders:
- receiving $25.75 in cash per share for their stock, without interest,
- no longer holding any equity interest in Wolohan Lumber, and
- no longer participating in any earnings or losses of Wolohan Lumber.
For more information concerning the terms and provisions of the Merger and
the Merger Agreement, see "The Merger Agreement".
WHAT AM I BEING ASKED TO VOTE UPON?
Our Board of Directors is asking you to vote to adopt and approve a Merger
Agreement and Merger which provides that Wolohan Acquisition will merge
into us, and we will be the surviving corporation. Pursuant to the Merger,
each share of our common stock issued and outstanding immediately prior to
the Merger will be converted into the right to receive $25.75 in cash,
without interest, other than shares beneficially owned by certain current
shareholders and members of management and whose shares of our common stock
will continue to represent shares of common stock in the surviving
corporation (the "Continuing Shareholders").
WHAT WILL I RECEIVE IN THE MERGER?
You will be entitled to receive $25.75 in cash, without interest, for each
share of common stock owned by you.
WHO ARE THE CONTINUING SHAREHOLDERS?
The names of the Continuing Shareholders are listed on Appendix C to this
Proxy Statement. They include members of management including James L.
Wolohan, the Company's President and Chief Executive Officer, John A.
Sieggreen, the Company's Executive Vice President and Chief Operating
Officer, Daniel P. Rogers, its Senior Vice President, General Merchandise
Manager, Edward J. Dean, its Vice President and Chief Financial Officer and
the Wolohan Family Trust and members of the Wolohan family.
WHY ARE THE CONTINUING SHAREHOLDERS ACQUIRING WOLOHAN LUMBER?
Those Continuing Shareholders who are executive officers of Wolohan Lumber
believe that Wolohan Lumber suffers from:
- lack of liquidity due to low trading volume in our common stock,
- lack of interest by the financial community in our common stock,
- our relatively small size in relation to our principal competitors,
- increased costs of remaining a public company.
See "Special Factors -- Background of the Merger."
HOW WAS THE AMOUNT OF THE MERGER CONSIDERATION DETERMINED?
The $25.75 per share merger consideration was determined as a result of
negotiations between the Special Committee and certain Continuing
Shareholders who are executive officers of Wolohan Lumber. For
5
further information concerning the negotiation of the merger consideration,
see "Special Factors -- Background of the Merger."
WHY IS THE BOARD OF DIRECTORS RECOMMENDING THAT I VOTE FOR THE MERGER?
In the opinion of the Board of Directors, based upon the unanimous
recommendation of the Special Committee of the Board, the terms and
provisions of the Merger Agreement and the Merger are fair to and in the
best interests of our unaffiliated shareholders, who are all shareholders
other than the Continuing Shareholders. The Board has approved the Merger
Agreement and the Merger and declared it procedurally and substantively
fair to and in the best interests of our unaffiliated shareholders. At that
Board meeting, James L. Wolohan and John A. Sieggreen attended the board
meeting for quorum purposes only and abstained from voting with respect to
the Merger and the Merger Agreement.
The price of $25.75 is a 30.7% premium over the closing price for the
shares on May 15, 2003, the day before we publicly announced the merger
proposal, and a 9.6% premium over the closing price for the shares on
August 12, 2003, the day before we announced the execution of the Merger
Agreement.
See "Special Factors -- Recommendations of the Special Committee and the
Board of Directors."
HOW WILL THE MERGER BE FINANCED?
The Company and Wolohan Acquisition intend to finance the merger from funds
borrowed from a bank under credit facilities and from available cash.
See "The Merger Agreement -- Merger Financing."
WHAT STEPS DID THE BOARD OF DIRECTORS TAKE TO DETERMINE THAT THE PRICE PER SHARE
I WILL RECEIVE IN THE PROPOSED MERGER IS FAIR?
The Board of Directors formed a Special Committee consisting of two
directors who had no conflicts of interest with respect to the Merger to
evaluate and negotiate the terms of the Merger Agreement. The Special
Committee selected and retained legal and financial advisors to assist it
in the evaluation and negotiation of the Merger Agreement and the Merger,
and received a written fairness opinion from its financial advisor. The
Special Committee took into consideration the opinion of its financial
advisor, that as of the date of the Merger Agreement, and based on and
subject to the assumptions, limitations and qualifications contained in
that opinion, the merger consideration each unaffiliated shareholder will
have the right to receive is fair, from a financial point of view, to that
shareholder.
See "Special Factors -- Background of the Merger."
WHAT ARE THE ADVANTAGES AND DISADVANTAGES TO ME OF THE MERGER?
You will receive an immediate cash payment for your shares of our common
stock that represents a premium over market prices in recent periods. This
payment will be taxable to you to the extent it exceeds the tax basis of
your shares. You will have the opportunity to reinvest your net of tax
merger proceeds in other investments.
You will not have the opportunity to participate in our future earnings or
growth. Conversely, you will not have to bear the risk of a possible
decrease in our stock value, whether as a result of operating or market
factors.
WHAT VOTE IS REQUIRED TO APPROVE THE MERGER AGREEMENT?
The holders of a majority of all outstanding shares of our common stock
must vote to approve the Merger Agreement. The Continuing Shareholders
beneficially own approximately 51.3% of the common stock eligible to vote
at the Special Meeting and each of them have indicated that they intend to
vote their common stock in favor of the adoption of the Merger Agreement
although they are not obligated to do so.
6
If the Continuing Shareholders vote as each of them have indicated, the
Merger Agreement will be approved and adopted.
See "The Special Meeting -- Required Vote."
WHAT DO I NEED TO DO NOW?
Please mark your vote on, sign, date and mail your proxy card in the
enclosed return envelope as soon as possible, so that your shares may be
represented at the Special Meeting.
WHO CAN VOTE ON THE MERGER?
If you are a shareholder of record as of the close of business on September
15, 2003, you will be entitled to notice of, and to vote at, the Special
Meeting to adopt and approve the Merger Agreement and the Merger.
See "The Special Meeting -- Record Date; Stock Entitled to Vote; Quorum;
Voting at the Special Meeting."
WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
Your receipt of the merger consideration will be a taxable transaction for
federal income tax purposes. See "Federal Income Tax Consequences."
ARE THERE APPRAISAL RIGHTS?
No. Under Michigan law shareholders do not have the right to dissent from
the Merger and obtain appraisal rights.
See "The Merger Agreement -- Appraisal Rights."
SHOULD I SEND MY STOCK CERTIFICATES NOW?
No. If the Merger is completed, we will send you a transmittal form and
written instructions for exchanging your share certificates.
IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
Your broker will vote your shares ONLY IF you instruct your broker on how
to vote. You should follow the directions provided by your broker regarding
how to vote your shares.
MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
Yes, your vote can be changed at any time before the proxy is voted at the
Special Meeting. This can be done in one of two ways. First, just send in a
written revocation or another signed proxy card with a later date to George
I. Gibson, Jr., Secretary of the Company, 1740 Midland Road, Saginaw,
Michigan 48603, before the Special Meeting. Or, second, you may, as long as
you, and not your broker, are a record holder of our common stock, attend
the Special Meeting and vote in person.
See "The Special Meeting -- Voting and Revocation of Proxies."
IF THE MERGER IS COMPLETED, WHEN CAN I EXPECT TO RECEIVE THE MERGER
CONSIDERATION FOR MY SHARES?
We will send payment of the merger consideration to you as promptly as
practicable following the completion of the Merger and our receipt of your
stock certificates and other required documents.
7
WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
We are working toward completing the Merger as quickly as possible. If the
Merger Agreement is approved by the shareholders and the other conditions
to the Merger are satisfied, we expect to complete the Merger as soon as
practicable after the Special Meeting.
See "The Special Meeting -- Effective Time."
WHAT HAPPENS TO THE RIGHTS OUTSTANDING WHICH ARE ATTACHED TO EACH SHARE OF
COMMON STOCK AND REPRESENT THE RIGHT TO PURCHASE ONE SHARE OF COMMON STOCK UPON
THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH IN THE RIGHTS AGREEMENT?
Prior to the completion of the Merger, the Board of Directors will redeem
the Rights at a redemption price of $.01 per Right.
WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETING?
We do not expect that any other matters will be voted upon at the Special
Meeting.
See "Miscellaneous."
8
SUMMARY
The following summary, together with the previous Question and Answer
section, provides an overview of all material information discussed in this
Proxy Statement and presented in the attached Appendixes. You are urged to
review this entire Proxy Statement carefully, including the Appendixes.
OVERVIEW
We are furnishing this Proxy Statement to allow our shareholders to
consider and vote on a proposal to approve and adopt the Merger Agreement and
Merger. The Merger Agreement provides that Wolohan Acquisition will be merged
with and into us and our unaffiliated shareholders will receive $25.75 per share
for each share of our common stock that they own at the effective time of the
Merger.
During the time the Merger Agreement was negotiated and at the time the
Merger Agreement was executed, James L. Wolohan was the President and Chief
Executive Officer and a member of the Board of Directors of Wolohan Lumber and
John A. Sieggreen was our Executive Vice President, Chief Operating Officer and
a member of our Board of Directors. Mr. Sieggreen is also the sole shareholder
and director of Wolohan Acquisition.
Our Board of Directors formed the Special Committee composed of two
independent directors to consider the offer made by the Continuing Shareholders.
The Special Committee negotiated the terms of the Merger Agreement on behalf of
the Board and us. In connection with the execution of the Merger Agreement, both
the Board and the Special Committee determined that the Merger and the Merger
Agreement are procedurally and substantively fair to and in the best interests
of our unaffiliated shareholders.
PARTIES TO THE MERGER
Wolohan Lumber Co.
1740 Midland Road
Saginaw, Michigan 48603
(989) 793-4532
Wolohan Lumber is a Michigan corporation engaged in the retail sale of a
full line of lumber and building materials and related products used primarily
for new home construction and large home-improvement projects. It operates a
chain of 25 building supply stores located in Illinois, Indiana, Kentucky,
Michigan and Ohio.
Wolohan Acquisition Co.
1740 Midland Road
Saginaw, Michigan 48603
(989) 793-4532
Wolohan Acquisition is a Michigan corporation organized specifically for
the Merger and has not carried on any activities to date other than those
incident to its formation and the negotiation and execution of the Merger
Agreement.
THE MERGER
EFFECT OF THE MERGER (SEE "SPECIAL FACTORS -- PURPOSES OF THE MERGER AND PLANS
AND PROPOSALS")
Pursuant to the Merger Agreement, Wolohan Acquisition will be merged
directly into us and we will be the surviving corporation. Each share of our
common stock, other than shares owned by the Continuing Shareholders, will be
automatically converted into the right to receive an amount in cash equal to
$25.75 per share.
9
COMPANY STOCK OPTIONS AND PERFORMANCE SHARES (SEE "THE MERGER
AGREEMENT -- STOCK OPTIONS AND PERFORMANCE SHARES")
At the effective time of the Merger, all stock options held by persons
other than the Continuing Shareholders, will automatically be converted into the
right to receive an amount in cash equal to the merger consideration, less the
applicable exercise price for each share of common stock subject to such stock
options. At the effective time of the Merger, all stock options held by the
Continuing Shareholders will be assumed by us as the surviving corporation and
will remain outstanding.
At the effective time of the Merger, all performance shares under the
Long-Term Incentive Plan held by persons other than the Continuing Shareholders
will be entitled to receive an amount in cash equal to the product of the number
of performance shares and the merger consideration. At the effective time of the
Merger, all performance shares held by Continuing Shareholders will be assumed
by us as the surviving corporation and remain outstanding.
CONDITIONS TO THE MERGER (SEE "THE MERGER AGREEMENT -- CONDITIONS TO THE
MERGER")
We and Wolohan Acquisition will not complete the Merger unless several
conditions are satisfied or waived by us and Wolohan Acquisition. These include:
The Merger Agreement and the Merger shall have been approved by the
requisite vote of the holders of our common stock.
No final restraining order or permanent injunction or other final order
issued by any court of competent legal jurisdiction or other legal prohibition
preventing the consummation of the Merger shall be in effect.
All governmental and other consents and approvals necessary to consummate
the Merger shall have been obtained.
Our Board of Directors shall have taken all action required to redeem the
Rights outstanding under the Rights Agreement dated February 16, 2000.
The merger consideration shall have been delivered to the Paying Agent.
There shall not be pending any litigation pertaining to the Merger.
TERMINATION OF THE MERGER AGREEMENT (SEE "THE MERGER
AGREEMENT -- TERMINATION")
The Merger Agreement may be terminated at any time prior to the effective
time of the Merger, whether before or after shareholder approval is obtained:
by mutual written consent of Wolohan Acquisition and the Special Committee;
or
by Wolohan Acquisition or the Special Committee: (i) if the effective time
of the Merger shall not have occurred on or before December 31, 2003; or (ii) if
there shall be any law that makes consummation of the Merger illegal or
prohibited, or if any court of competent jurisdiction in the United States shall
have issued an order, judgment, decree or ruling, or taken any other action
restraining, enjoining or otherwise prohibiting the Merger and such order,
judgment, decree, ruling, or other action shall have become final and
non-appealable; or
by the Special Committee: (i) if there is a superior proposal (as defined
under "The Merger Agreement -- Covenants") and if with respect thereto the
Special Committee or our Board of Directors determines in good faith that the
failure to take such action to terminate the Merger Agreement would be
inconsistent with its fiduciary duties to our shareholders.
by Wolohan Acquisition: if the Board of Directors shall have withdrawn or
modified, in a manner that is materially adverse to Wolohan Acquisition, its
approval or recommendation of the Merger Agreement and the Merger or shall have
recommended another merger, consolidation or business combination involving, or
acquisition of, the Company or our assets or a tender offer for common stock, or
shall have resolved to do any of the foregoing.
10
OPINION OF FINANCIAL ADVISOR (SEE "SPECIAL FACTORS -- OPINION OF MCDONALD
INVESTMENTS")
The Special Committee retained McDonald Investments Inc. as its financial
advisor to render an opinion as to the fairness of the merger consideration each
unaffiliated shareholder will have the right to receive in the proposed Merger.
McDonald Investments delivered its written opinion to the Special Committee
that, as of the date of the opinion, and based on and subject to the
assumptions, limitations, and qualifications contained in that opinion, the
merger consideration each of our unaffiliated shareholders will have the right
to receive in the proposed merger is fair.
A copy of McDonald Investments' written opinion is attached to this Proxy
Statement as Appendix B. We urge you to read McDonald Investments' opinion in
its entirety.
MERGER FINANCING (SEE "THE MERGER AGREEMENT -- MERGER FINANCING")
The total amount of cash required to consummate the transactions
contemplated by the Merger Agreement, including payment of related fees and
expenses, will be paid from funds borrowed from a bank under credit facilities
and from available cash.
SELECTED HISTORICAL FINANCIAL DATA
The following selected financial data is only a summary and should be read
with our financial statements and the notes to those statements included in our
Form 10-K for the year ended December 31, 2002 and Form 10-Q for the quarter
ended June 30, 2003, which are attached to this Proxy Statement as Appendixes D
and E, respectively. The statement of operations data for the years ended
December 31, 2001 and December 31, 2002 and the balance sheet data at December
31, 2001 and December 31, 2002 are derived from our financial statements which
have been audited by our independent auditors. The statement of operations data
for the six months ended June 30, 2002 and 2003 and the balance sheet data at
June 30, 2003 and 2002 are derived from our unaudited financial statements.
<Table>
<Caption>
SIX MONTHS ENDED TWELVE MONTHS ENDED
(UNAUDITED) (AUDITED)
------------------- ---------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
(000'S OMITTED) 2003 2002 2002 2001
- --------------- -------- -------- ------------ ------------
INCOME STATEMENT DATA
Net sales........................................ $81,638 $94,560 $197,638 $239,895
Gross profit..................................... 19,690 21,410 46,840 58,312
Other operating income........................... 1,070 1,228 2,430 3,041
Selling, general and administrative expenses..... 18,952 20,452 40,057 47,096
Depreciation and amortization.................... 1,892 2,442 4,594 6,166
Store closing costs.............................. (67) (7) 511 3,440
Income from operations........................... (17) (249) 4,108 4,651
Income before income tax......................... 1,481 26 5,174 7,256
Net income....................................... 977 17 3,400 4,772
Net income per share, basic...................... $ 0.47 $ 0.01 $ 1.63 $ 1.61
Net income per share, assuming dilution.......... $ 0.43 $ 0.01 $ 1.49 $ 1.53
Weighted average number of shares outstanding.... 2,070 2,077 2,080 2,971
OTHER DATA:
Ratio of earnings to fixed charges............... 72 1 61 18
</Table>
11
<Table>
<Caption>
SIX MONTHS ENDED TWELVE MONTHS ENDED
(UNAUDITED) (AUDITED)
------------------- ---------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
(000'S OMITTED) 2003 2002 2002 2001
- --------------- -------- -------- ------------ ------------
BALANCE SHEET DATA
Working capital.................................. $30,162 $23,039 $ 28,688 $ 20,526
Total assets..................................... 85,367 86,570 83,780 85,356
Long-term debt less current installments......... 151 256 203 307
Shareholders' equity............................. 65,088 62,357 65,098 61,697
Book value per share............................. $ 31.86 $ 29.72 $ 31.40 $ 30.44
Tangible book value (shareholders'
equity -- intangible assets)................... 62,265 59,384 62,225 58,624
Tangible book value per share.................... $ 30.48 $ 28.31 $ 30.02 $ 28.92
</Table>
THE SPECIAL MEETING
TIME, PLACE AND DATE, PROXY SOLICITATION
The Special Meeting will be held on November 5, 2003 at 11:00 a.m., local
time, at the offices of the Company, 1740 Midland Road, Saginaw, Michigan. We
will bear the cost of soliciting proxies from shareholders. In addition to
soliciting proxies by mail, our officers and directors and employees, without
receiving additional compensation, may solicit proxies by telephone, facsimile
or in person. In addition the Company has engaged MacKenzie Partners, Inc. at a
cost of $3,500 plus out of pocket expenses as proxy solicitor and advisor to
solicit proxies primarily from brokerage firms. Arrangements may also be made
with brokerage firms and other custodians, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of shares held of record by such
persons, and we will reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them.
MATTERS TO BE CONSIDERED
The purpose of the Special Meeting is to vote upon a proposal to approve
and adopt the Merger Agreement and the Merger. If the Merger Agreement is
approved by our shareholders and the other conditions to the Merger are
satisfied or waived, Wolohan Acquisition will merge with and into us and all
shares currently held by our unaffiliated shareholders will be converted into
the right to receive $25.75 in cash, without interest. Shares of our common
stock held by the Continuing Shareholders will continue to represent shares in
the surviving corporation.
The Merger Agreement is attached to this Proxy Statement as Appendix A.
REQUIRED VOTE
The affirmative vote of at least a majority of the outstanding shares
entitled to vote thereon is required to approve and adopt the Merger Agreement
and the Merger.
The Continuing Shareholders are beneficial owners of approximately 51.3% of
the outstanding shares of our common stock, all of which are eligible to vote at
the Special Meeting. The Continuing Shareholders have indicated that they intend
to vote their shares in favor of the adoption of the Merger Agreement, although
they are not obligated to do so. Accordingly, the Continuing Shareholders have
sufficient voting power to cause the approval and adoption of the Merger
Agreement and the Merger without the affirmative vote of any of the unaffiliated
shareholders.
VOTING AND REVOCATION OF PROXIES
Shares that are entitled to vote and are represented by a proxy properly
signed and received at or prior to the Special Meeting, unless subsequently
properly revoked, will be voted in accordance with the instructions
12
indicated thereon. If a proxy is signed and returned without indicating any
voting instructions, shares represented by the proxy will be voted for the
proposal to approve and adopt the Merger Agreement and the Merger. The Board is
not currently aware of any business to be acted upon at the Special Meeting
other than as described in this Proxy Statement.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the shares represented by the proxy are voted at
the Special Meeting by:
attending and voting in person at the Special Meeting,
giving notice of revocation of the proxy at the Special Meeting, or
delivering to our Secretary George I. Gibson, Jr., at 1740 Midland
Road, Saginaw, Michigan 48603, a written notice of revocation or a duly
executed proxy relating to the same shares and matters to be considered at
the Special Meeting, bearing a date later than the proxy previously
executed.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM; VOTING AT THE SPECIAL MEETING
Only holders of shares of common stock on the record date, September 15,
2003, will be entitled to receive notice of and to vote at the Special Meeting.
At the close of business on the record date, there were outstanding and entitled
to vote 2,042,688 shares of common stock. Each holder of record of common stock
on the record date will be entitled to one vote for each share held on all
matters to be voted upon at the Special Meeting. The presence, in person or by
proxy, at the Special Meeting of the holders of at least a majority of the
shares entitled to vote is necessary to constitute a quorum for the transaction
of business.
Abstentions will be counted as present for the purpose of determining
whether a quorum is present but will not be counted as votes cast in favor of
the Merger proposal. Abstentions, therefore, will have the same effect as a vote
against the Merger proposal.
Brokerage firms who hold shares in "street name" for customers will not
have the authority to vote those shares with respect to the Merger if such firms
have not received voting instructions from a beneficial owner. The failure of a
broker to vote shares in the absence of instructions (a "broker non-vote") will
be counted as present for the purpose of determining whether a quorum is present
but will not be counted as votes cast in favor of the Merger proposal. Broker
non-votes, therefore, will have the same effect as a vote against the Merger.
EFFECTIVE TIME
The Merger will be effective following shareholder approval of the Merger
Agreement when a certificate of merger is filed with the State of Michigan. If
the Merger is approved by the shareholders at the Special Meeting, we expect to
complete the Merger as soon as practicable after the Special Meeting, subject to
the satisfaction or waiver of the other terms and conditions included in the
Merger Agreement. See "The Merger -- Conditions."
APPRAISAL RIGHTS
Under the Michigan Business Corporation Act shareholders do not have the
right to dissent from the Merger and obtain appraisal rights.
13
SPECIAL FACTORS
BACKGROUND OF THE MERGER
We have long been concerned about the lack of liquidity in our common
stock. A very thin trading market has prevailed for a considerable time. The
average trading volume per day for the period January 2, 2003 to August 13, 2003
was 926 shares. On days when the stock has traded, very often the daily volume
has been considerably below 1,000 shares per day. Indeed there have been many
days over the past several years when our common stock did not trade at all. It
is not uncommon for trades of merely 100 shares to move the price of the common
stock inordinately in either direction.
Contributing to this lack of liquidity has been the lack of interest by the
financial community in our common stock. No equity analysts follow the Company
and publish research reports thereon. There is no significant sponsorship from
the investment community. Consequently, trading prices for our common stock are
not reflective of a broad-based assessment of value by the investment community.
Further exacerbating the liquidity situation is the large percentage ownership
of the Company by members of the Wolohan family. Given the lack of liquidity for
our common stock, the public market has not been a source of capital for the
Company and the common stock has not been an attractive security to use for
acquisitions.
The lack of liquidity in our common stock has also been a concern to our
shareholders, some of whom, from time to time, have encouraged us to try to
improve our liquidity situation. To that end, we engaged in two self-tender
offers to purchase shares of our common stock, in December of 2000 and September
of 2001. Under those two offers, we acquired 1,189,113 shares under the 2000
offer at $12.00 per share and 1,258,295 shares under the 2001 offer at $15.00
per share. The self-tenders provided an opportunity for shareholders to sell
shares in amounts and at prices that they would not likely have obtained were
they to have relied on the public trading market alone. Pursuant to those
offers, institutional ownership of shares of our common stock has declined from
over 1.4 million shares prior to the December 2000 tender offer to less than
150,000 shares as of August 13, 2003.
The absence of liquidity in our common stock has been of all the more
concern because of the cyclical nature of our business, the industry in which we
operate and the relatively small size of the Company in relation to its
principal competitors. Over the last several years, intense competitive
pressures in the industry have forced numerous of our competitors out of
business, several of them by declaring bankruptcy. These conditions were a major
factor in our decision to engage in a significant restructuring, downsizing and
a reduction in force.
Many uncertainties associated with current and future industry and market
conditions remain.
As a result of the above, it is apparent that we are unable to realize the
principal benefits of being a public company, and that the costs of remaining a
public company such as those associated with compliance with the reporting
requirements and public filing requirements are no longer merited. Furthermore
the increased costs of being a public company as a result of the adoption of the
Sarbanes-Oxley Act of 2002 have contributed to the decision to go private at
this time as opposed to any other time in the Company's public operating
history.
Certain members of the Wolohan family, along with certain members of
management (the "Continuing Shareholders", see attached Appendix C) who own in
the aggregate approximately 1,048,151 shares, or 51.3%, of the issued and
outstanding shares have determined that an offer to acquire the shares of common
stock in the hands of the unaffiliated shareholders would be advisable and
beneficial.
The Continuing Shareholders would be able to acquire the entire remaining
equity interest in the Company which they do not now own. The Company would
avoid the time and expense of maintaining a public listing of the common stock
and the Continuing Shareholders may be able to deal more flexibly with the
Company's assets in responding to difficult and changing industry conditions.
On May 16, 2003, the Continuing Shareholders presented an offer to the
Board of Directors offering to acquire the remaining shares of our common stock
held by the unaffiliated shareholders (approximately 994,537 shares) at a price
of $21.75 per share in cash.
14
Thereupon, the Board of Directors established a Special Committee of
independent non-employee directors, to review the offer, to appoint an
investment banking firm to assist the Special Committee in evaluating the
fairness of the offer, to engage legal counsel to the Special Committee, to
negotiate with the Continuing Shareholders and to make its recommendation to the
Board of Directors. The Board established the compensation of the Special
Committee members at $1,000 per meeting ($500 if a telephonic meeting) and
$1,500 per meeting for the Chairman ($750 if a telephonic meeting).
The Special Committee appointed on May 16, 2003 initially consisted of
Charles R. Weeks, Lee A. Shobe and Hugo E. Braun, Jr. The Committee met on May
16, immediately following the Board of Directors meeting at which it was
appointed. Mr. Weeks was appointed Chairman of the Committee and Mr. Braun was
appointed Secretary. At this meeting, the Committee discussed the offer from the
Continuing Shareholders and the role of the Committee, as well as the retention
of independent counsel and an independent financial advisor. The Committee
discussed possible candidates for these roles and agreed to hire counsel first
so as to have advice of counsel available in connection with the retention of a
financial advisor.
The Committee next met by conference telephone call on May 20, 2003. Mr.
Braun reported that he had interviewed Justin G. Klimko of the firm of Butzel
Long, Detroit, Michigan, regarding the possibility of Butzel Long serving as
counsel to the Committee and had discussed the details of engaging Butzel Long.
After discussion, the Committee determined to retain Butzel Long as the
Committee's counsel. Butzel Long had no previous affiliation with and had not
provided services to the Company, its management or any other member of the
Continuing Shareholder group. Mr. Klimko and Christopher M. Moore acted as the
principal legal advisors to the Committee on behalf of Butzel Long. At the May
20 meeting, the Committee also agreed to meet in person on June 3, 2003 to
interview four designated advisory firms as candidates to serve as the
Committee's financial advisor.
The Committee next met on June 3, 2003. Counsel attended the meeting. At
the beginning of the meeting, Mr. Braun raised the issue of his continued
participation on the Committee. Mr. Braun explained that he performed legal
services for certain Wolohan family members who were included in the Continuing
Shareholder group and not members of the Management Group. Although the services
he performed were unrelated to the offer made by the Continuing Shareholders or
the transaction proposed by them, Mr. Braun expressed a desire to avoid any
appearance of conflict. The Committee discussed the matter and agreed with Mr.
Braun that his recusal would be appropriate under the circumstances. Mr. Braun
then recused himself from membership on the Committee and did not participate
further in the Committee's activities.
The Committee then met with and separately interviewed representatives from
four financial advisory firms. Based on the interviews, the Committee members
expressed a preference to engage McDonald Investments Inc. ("McDonald
Investments") to act as independent financial advisor to the Committee. McDonald
Investments had not previously provided services to the Company, its management
or any other member of the Continuing Shareholder group.
The Committee's preference for McDonald Investments was based on the
following:
- McDonald Investments' expertise and experience in valuation matters for
public companies, including its experience in going private transactions.
- McDonald Investments' understanding of issues related to the proposed
transaction as demonstrated in its interview with the Committee. McDonald
Investments expressed an understanding and appreciation of the role of
the Company's reduction in size in recent years through store closings,
and its liquidation of related properties and assets, as an important
element in analyzing the business and value of the Company.
- The Committee members' level of comfort with the McDonald Investments'
personnel who made the presentation (Charles F. Clarke, Jr., Kevin J.
Mayer and Mark Yasinsky), who indicated that they would be the principal
personnel assigned to perform advisory services rendered to the
Committee.
15
- The fact that McDonald Investments had not previously provided services
to the Company, its management or any other member of the Continuing
Shareholder group and was not otherwise affiliated with the Company, its
management or the Continuing Shareholders or their affiliates.
These factors led the Committee to choose McDonald Investments over the
three other firms interviewed. Two of the other three firms interviewed had
relatively less experience than McDonald Investments with fairness opinions in
going private transactions. The third firm had comparable experience and
favorably impressed the Committee members, and was considered a strong
candidate. The Committee considered both that firm and McDonald Investments to
be highly qualified and selected McDonald Investments based on the second and
third factors listed above.
Thereafter the Committee engaged in negotiations through its counsel with
McDonald Investments over the terms of McDonald Investments' engagement. The
Committee met by conference telephone call on June 5, 2003 to discuss the
proposed terms of engagement. The Committee determined that if satisfactory
terms of engagement could be reached, it would engage McDonald Investments. The
meeting of June 5 was recessed to allow counsel to engage in further discussion
on behalf of the Committee regarding the terms of engagement. After
re-convening, the Committee voted unanimously to engage McDonald Investments and
directed counsel to negotiate the language of an engagement letter. The
engagement letter with McDonald Investments was subsequently negotiated and
dated June 9, 2003. It was executed by Mr. Shobe on behalf of the Committee in
Mr. Weeks' absence on June 11, 2003.
McDonald Investments was retained by the Committee as its separate
financial advisor to act solely on behalf of the unaffiliated shareholders of
the Company. The McDonald Investments' engagement letter provided that McDonald
Investments would assist the Committee in evaluating the fairness to the
Company's unaffiliated shareholders, from a financial standpoint, of the
consideration offered in the proposed transaction and would assist the Committee
in negotiating the financial aspects of the transaction, assisting in the
evaluation of any alternate transaction which might be presented during the
course of the Committee's activities and advising and assisting the Committee in
evaluating the various structures and forms of any transaction. McDonald
Investments also undertook to conduct a study to enable it to render an opinion
to the Committee and the Board of Directors of the Company as to the fairness,
from a financial point of view, of the consideration to be received by the
unaffiliated shareholders in connection with any transaction that the Board
determined to consider.
Following its engagement, McDonald Investments engaged in an extensive due
diligence investigation of the Company. This included reviewing publicly
available information about the Company, its industry and its competitors;
meeting with members of management to discuss the Company's assets, business,
finances and operations; and reviewing nonpublic information regarding the
Company, including financial projections provided by management, a summary of
which is included elsewhere in this Proxy Statement.
On June 26, 2003, the Committee met with representatives of McDonald
Investments and Butzel Long in a meeting held by conference telephone call. At
that meeting, McDonald Investments discussed the status of its investigation to
date and informed the Committee that it had been provided with all information
it had sought from the Company's management except individual store information.
Although McDonald Investments engagement letter contained confidentiality
provisions, Company management had requested additional confidentiality
provisions prior to releasing store information, because of the sensitivity of
that information to the Company's competitive position. Mr. Klimko informed the
Committee that he had rejected certain additional confidentiality language
proposed by the Company's counsel, but had suggested alternate language that
would retain the Committee's discretion to disclose information. The Committee
agreed with the modified language. Following the June 26 meeting, the Company's
counsel also agreed to the language. Thereafter, Company management provided
McDonald Investments with the individual store information it had sought.
On July 14, 2003, the Committee met in person, together with
representatives of McDonald Investments and Butzel Long. At that meeting,
McDonald Investments made an oral presentation to the Committee members
regarding the results of its analysis of the Continuing Shareholders' offer of
$21.75 per share. McDonald Investments informed the Committee that in its
judgment the offer price was inadequate and it
16
would not be able to deliver an opinion that the offer price was fair to the
unaffiliated shareholders from a financial standpoint. McDonald Investments also
distributed materials showing certain results of its evaluation to date.
McDonald Investments' representatives cautioned the Committee members that its
analysis had not been completed, and that the materials were prepared solely as
a presentation aide and to assist the Committee in determining a negotiating
strategy, and therefore tended to reflect best-case scenarios. For this reason,
McDonald Investments collected the materials at the end of the meeting.
McDonald Investments' analysis discussed at the July 14 meeting included a
market value analysis, a liquidation analysis, a premium paid analysis, a
comparable company analysis, a precedent transaction analysis, a discounted cash
flow analysis and a leveraged buyout analysis. The composite valuation range
indicated by aggregating all methodologies suggested a range of fairness for the
Company of between $23.00 and $27.00 per share. McDonald Investments indicated
that some of these analyses were not particularly instructive, particularly the
market value analysis (because of the historically thin trading market for the
Company's shares and the significant role of Company tender offers and market
repurchases in recent years) and the comparable companies analysis (because of
the lack of comparable companies for which financial information is publicly
available and the dominance of Lowe's and Home Depot in the Company's industry).
In response to this presentation, the Committee members requested that
McDonald Investments do additional work on its liquidation analysis and revise
certain of the assumptions contained in that analysis. Mr. Shobe stated his
belief that the historical performance of the Company in closing stores and
liquidating related assets had been better than the assumptions contained in the
liquidation analysis. He requested that the proceeds assumed for liquidating
real properties be compared to the state equalized value assigned to properties
for real estate taxation. McDonald Investments indicated that it would review
the history of the Company's property liquidations, compare the proceeds
received to the state equalized value amounts for the properties already
liquidated and then compare those results to the assumptions contained in the
liquidation analysis.
At the July 14 meeting counsel informed the Committee that it had received
and reviewed a draft of the Agreement and Plan of Merger from Verne C. Hampton,
II of Dickinson Wright, PLLC, counsel to the Company and the Continuing
Shareholders. Mr. Klimko informed the Committee that he had requested certain
changes to the form of Merger Agreement, most of which had been accepted, but
that two issues remained open: whether any transaction would require approval of
a majority of the unaffiliated shareholders, and whether the agreement would
contain a "no-shop" provision preventing the Company from seeking another
transaction. The Committee agreed that inclusion of a provision requiring
approval of a majority of the unaffiliated shareholders was relatively more
important to it, and that it would accept a no-shop provision so long as it
included a "fiduciary out" allowing the directors to consider unsolicited offers
in connection with the discharge of their fiduciary duties.
At the July 14 meeting, the Committee also discussed with its advisors the
advisability of performing a market check. The Committee determined not to
conduct such a check at that time. The Committee believed that it should first
contact the Continuing Shareholders to inform them that it would not be in
position to recommend the offer price of $21.75 per share and to see if the
Continuing Shareholders would negotiate for an increased price. The Committee
believed that a market check would be of limited value because the Continuing
Shareholders controlled a majority of the Company's stock and had announced
their intention not to sell their shares to any other person if the proposed
transaction was not consummated. The Committee determined to consider a market
check only after it determined whether further negotiations with the Continuing
Shareholders could be fruitful. The Committee then instructed Mr. Klimko to
contact Mr. Hampton to inform him of the Committee's unwillingness to recommend
a transaction at the offer price of $21.75 per share and to inquire whether the
Continuing Shareholders would agree to negotiate a higher price. Mr. Klimko left
the room to call Mr. Hampton. When he returned he indicated that Mr. Hampton had
agreed to a meeting, which was then scheduled for July 21, 2003.
The Committee met with its advisors by conference telephone call on July
18, 2003. During that meeting, McDonald Investments indicated that it had
performed the additional analysis requested by the Committee regarding real
property values and their impact on its liquidation analyses. McDonald
Investments indicated
17
that this additional analysis had yielded a higher potential liquidation value
of up to $28.00 per share. McDonald Investments also indicated that liquidation
analysis necessarily involves numerous assumptions and variables, many of which
could prove untrue, but that as a result of its additional work it now felt that
an appropriate range of fairness for negotiating purposes was between $24.00 and
$28.00 per share.
The Committee and its advisors met with representatives of the Continuing
Shareholders on July 21, 2003 as scheduled. In attendance on behalf of the
Continuing Shareholders were James L. Wolohan, President, Chief Executive
Officer and Director of the Company, John A. Sieggreen, Executive Vice
President, Chief Operating Officer and Director of the Company, Stephen V.
Murphy of S.V. Murphy & Co., Inc., the Continuing Shareholders' financial
advisor, and Mr. Hampton. At this meeting, the Committee indicated that it would
not recommend the offer price of $21.75 per share, and representatives of the
Continuing Shareholders agreed to discuss a higher price. Additional discussion
centered on the Committee's request that any transaction be conditioned on
approval of a majority of the shares not owned by the Continuing Shareholders
and their affiliates. The representatives of the Continuing Shareholders stated
they were not prepared to agree to such a provision but indicated they would
study the matter further and discuss at a subsequent meeting.
After further discussion, the representatives of the Continuing
Shareholders offered to increase the offer price to $24.50 per share, but with
no majority of the unaffiliated shareholder approval provision. In response, the
Committee indicated that under those conditions an offer price of $26.50 per
share would be acceptable to the Committee. The negotiation session ended
without agreement as to price, but the parties agreed to meet again on July 30
to continue negotiations.
The parties met again to continue negotiations on July 30, 2003. The
participants in the meeting were the same as in the July 21 meeting. The
representatives of the Continuing Shareholders objected to making the
transaction contingent on approval of a majority of the unaffiliated
shareholders stating that, after analysis, due to the concentration of the
Company's shares, such a provision would put disproportionate voting power in
the hands of a small number of unaffiliated shareholders and could potentially
deprive the remaining unaffiliated shareholders of the benefit of a transaction
that the Committee, after substantial consideration and extensive negotiation,
had determined to be fair. During this negotiating session, Mr. Thomas G.
McNeill of Dickinson Wright, PLLC, was connected by telephone. Mr. McNeill
reported on the status of the lawsuit brought by certain unaffiliated
shareholders of the Company (see "General Information Regarding Wolohan Lumber
and Wolohan Acquisition -- Subsequent Events; Shareholder Litigation"), in which
he was defending the Committee and the Board of Directors. Mr. McNeill reported
that substantial progress had been made in settlement discussions and that,
subject to confirmatory discovery by plaintiffs' counsel and a review of the
terms of any transaction by plaintiffs' financial expert, he believed that there
was a good possibility that the action could be settled if a transaction was
negotiated. The Continuing Shareholders' representatives thereafter suggested
that in light of the advanced progress of settlement discussions, which
indicated oversight by outside unaffiliated shareholders, the Committee should
be more comfortable accepting a transaction without a majority of the
unaffiliated shareholder approval provision.
The negotiations returned to the subject of the offer price, and the
representatives of the Continuing Shareholders increased the price they would be
willing to offer to $25.00 per share, still without a majority of the
unaffiliated shareholder approval provision. The Committee responded by
requesting a price above $26.00 per share for any transaction that lacked a
majority of the unaffiliated shareholder approval provision. The Continuing
Shareholders' representatives indicated that they believed that their price of
$25.00 was fair, and that they would not increase the price beyond $25.00. The
Committee indicated that it would not recommend a transaction at that price. In
light of the deadlock over the price, both sides agreed to adjourn negotiations.
The full Board of Directors of the Company met in Saginaw, Michigan at its
regular quarterly meeting on July 31 and August 1, 2003. During this period, Mr.
Weeks had additional discussions with Mr. Wolohan. On July 31 Mr. Weeks
indicated to Mr. Wolohan that the Committee would not recommend a transaction at
a price of $25.00 per share and that the Continuing Shareholders should increase
their offer if they desired to complete a transaction. On August 1, Mr. Wolohan
contacted Mr. Weeks and indicated a willingness to increase the offer price to
$25.50 per share, provided that the transaction would not include a majority of
the
18
unaffiliated shareholder approval provision. Mr. Weeks told Mr. Wolohan that he
did not believe that $25.50 was enough to convince the Committee to recommend
the offer but that he would convey the revised offer to the Committee. Mr. Weeks
contacted Mr. Klimko by telephone in the evening of August 1 to inform him of
these events and to ask him to contact Mr. Shobe (who was traveling) and
McDonald Investments' representatives to attempt to arrange a meeting of the
Committee and its advisors on August 4. Mr. Klimko spoke with McDonald
Investments on August 1 and with Mr. Shobe on August 3.
On August 4, 2003, the Committee and its advisors again met by conference
telephone call. Mr. Weeks reiterated his discussions with Mr. Wolohan. Mr. Weeks
and Mr. Shobe both expressed a preference for an offer price above $26.00 per
share, but Mr. Weeks indicated that while he believed that he could get the
offer price increased to $25.75 per share, he wasn't certain if he could get the
price increased to $26.00 per share. Mr. Shobe indicated that if Mr. Weeks could
negotiate the offer price to $25.75 per share, Mr. Shobe would support
acceptance of such a price. The Committee tentatively agreed that, subject to
receiving an opinion from McDonald Investments as to the fairness of the price,
it would support $25.75, but that Mr. Weeks should press for $26.00 per share.
Mr. Weeks indicated that he would report back to the Committee after he had
spoken to Mr. Wolohan again.
Mr. Weeks subsequently contacted Mr. Wolohan by phone on August 4 and told
him that the Committee would not recommend an offer price of $25.50 per share.
He requested a price of $26.00 per share. Mr. Wolohan indicated that the
Continuing Shareholders would not agree to that price. He offered to increase
the price to $25.60 per share. After further discussions and negotiations, Mr.
Wolohan and Mr. Weeks agreed to a price of $25.75 per share.
Mr. Weeks contacted Mr. Klimko thereafter on August 4 to inform him of the
results of these discussions. Mr. Weeks stated that he felt that $25.75 per
share was the highest price that the Continuing Shareholders were willing to
pay. Mr. Klimko contacted McDonald Investments and Mr. Shobe to relay this
information. Mr. Shobe confirmed his support for a price of $25.75, subject to
McDonald Investments' opinion as to the fairness of the price to the
unaffiliated shareholders. A meeting was scheduled for August 13, 2003 at which
McDonald Investments would present its report and opinion as to the fairness to
the unaffiliated shareholders of the price from a financial standpoint.
On August 11 and 12, 2003, McDonald Investments delivered to the Committee
members and counsel its report regarding the fairness of the $25.75 offer price
and a draft of its opinion regarding fairness.
The Special Committee and its advisors met by conference telephone call on
August 13, 2003. At this meeting, McDonald Investments made a presentation on
the fairness of the proposed offer price of $25.75 per share and reviewed its
draft opinion that such price is fair to the unaffiliated shareholders from a
financial standpoint. The basis for McDonald Investments' conclusions and the
methodologies employed by it are described elsewhere in this Proxy Statement.
See "Special Factors -- Opinion of McDonald Investments."
Also at the August 13 meeting, counsel reviewed with the Committee the
terms and conditions of the proposed Agreement and Plan of Merger by which the
proposed transaction would be effected and reviewed with the Committee the
Memorandum of Understanding and related documents that had been proposed in
connection with possible settlement of the pending litigation. Counsel informed
the Committee that McDonald Investments' presentation materials had been
delivered to plaintiffs' counsel and reviewed by plaintiffs' financial expert,
and that prior to submission of any settlement to the court, plaintiffs would
depose Mr. Wolohan, Mr. Weeks and Mr. Clarke of McDonald Investments.
After receiving McDonald Investments' presentation, reviewing the Agreement
and Plan of Merger and receiving counsel's report, and following further
questions and discussion, the Committee on August 13:
- Approved the offer price of $25.75 per share to be paid to shareholders
other than the Continuing Shareholders as fair to and in the best
interests of the unaffiliated shareholders;
- Approved the form of Agreement and Plan of Merger, subject to such
additional changes as counsel deemed advisable, upon consultation with
the Chairman of the Committee, as fair to and in the best interests of
the unaffiliated shareholders;
19
- Voted to recommend to the Board of Directors of the Company that it
approve the proposed transaction whereby the Continuing Shareholders
would acquire the Company's shares not owned by them for a price of
$25.75 per share in cash;
- Authorized the Committee's counsel to execute and deliver the Memorandum
of Understanding and related documents on behalf of the members of the
Committee, conditioned upon the execution and delivery by counsel for
plaintiffs and counsel for the Company of the Memorandum of
Understanding;
The Committee requested that McDonald Investments deliver an executed copy
of its opinion letter. McDonald Investments subsequently faxed an executed copy
of its opinion to the Committee's counsel on August 13, and Mr. Klimko delivered
a copy to Mr. Weeks. During the afternoon of August 13, Mr. Klimko and Mr. Weeks
negotiated the final changes to the Agreement and Plan of Merger with
representatives of the Continuing Shareholders and their counsel.
REASONS FOR THE SPECIAL COMMITTEE'S DETERMINATION
In concluding that the Merger is fair to the unaffiliated shareholders and
recommending adoption of the Agreement and Plan of Merger to the Company's Board
of Directors, the Committee considered various factors, including the following:
- The following facts relating to the composition and activities of the
Committee:
- The Committee is composed solely of independent directors who are
not officers or employees of the Company and will not be
shareholders, directors, officers or employees of the Company
following the Merger. The Committee members have no financial
interest in the Merger that is different from the interests of the
unaffiliated shareholders, other than the receipt of Board and
Committee fees;
- The Committee was given unlimited authority, among other things, to
evaluate, negotiate and recommend the terms of any proposed
transaction, and to refuse to recommend a transaction that it did
not believe to be fair;
- The Committee engaged its own separate independent legal counsel and
financial advisor in evaluating, negotiating and recommending the
terms of the Agreement and Plan of Merger. The Committee's advisors
had no previous affiliation or involvement with the Company, its
management or the Continuing Shareholders and were under the
exclusive direction of the Committee;
- The Committee, together with its advisors, conducted multiple active
negotiating sessions and discussions with representatives of the
Continuing Shareholders. These led to an increase in the price
offered from $21.75 per share of common stock to $25.75 per share;
- The Committee members' familiarity with the Company's business, financial
results and prospects and their knowledge of the Company's industry,
which they have developed through their years of service as members of
the Company's Board of Directors, and their general business knowledge
and experience;
- McDonald Investments' presentation at the August 13, 2003 Committee
meeting regarding the fairness of the price, and its opinion, subject to
the considerations and limitations set forth in the opinion, that the
price is fair, from a financial standpoint, to the unaffiliated
shareholders. See "Special Factors -- Opinion of McDonald Investments"
and the copy of McDonald Investments' opinion attached as Appendix B to
this Proxy Statement;
- The relationship between the $25.75 price per share to be paid in the
Merger and the recent market prices of the Company's common stock. As
reported by McDonald Investments, the $25.75 per share to be paid in the
Merger represents (i) a 30.7% premium over the closing sale price for the
shares of common stock on the Nasdaq Stock Market on May 15, 2003, the
last trading day before the Continuing Shareholders first announced their
proposal to acquire the outstanding shares not owned by them, (ii) a
28.8% premium over the closing sale price per share for the one week
prior to the initial
20
announcement and (iii) a 27.9% premium over the closing price for the
four weeks prior to the initial announcement. These premiums compared to
the median premiums in 42 going private transactions analyzed by McDonald
Investments of 24.8%, 23.3% and 34.0%, respectively. In addition, the
merger consideration of $25.75 per share is higher than the reported
closing sales price of the shares at any time within the previous two
years;
- The fact that the price to be paid in the Merger is within the range of
share prices implied by McDonald Investments' comparable company
analysis; is higher than the range of implied equity values per share of
the Company's shares resulting from McDonald Investments' discounted cash
flow analysis and within the range of implied equity values per share
resulting from McDonald Investments' sensitivity analysis conducted as
part of its discounted cash flow analysis; is within the range of implied
enterprise values per share resulting from McDonald Investments'
comparable merger and acquisition analysis; is higher than the range of
implied leverage acquisition prices per share resulting from McDonald
Investments' leveraged buyout analysis; and is within the range of
indicated equity values per share resulting from McDonald Investments'
liquidation analysis. See "Special Factors -- Opinion of McDonald
Investments";
- The fact that the Company is involved in a competitive industry in which
its major competitors, Lowe's Company Inc. and Home Depot, Inc. are much
larger than the Company and have substantially greater resources. The
Committee noted that the Company's revenues and number of locations have
contracted significantly in recent years as part of management's
strategic repositioning of the Company and considered it unlikely that
the Company would grow through new store locations or market share gains
vis-a-vis its major competitors. The Committee also noted that Lowe's and
Home Depot have entered into many of the Company's markets;
- The Committee's belief that management's projections, showing reversal of
the decline in sales revenues and slight growth in sales in future years,
would be difficult to achieve in the Company's competitive position;
- The limited benefit to the Company's shareholders resulting from the
Company being publicly held. Holdings of the Company's shares are
concentrated in members of the Wolohan family. The common stock has
experienced very thin trading volume, particularly when the effects of
Company repurchases and self tenders are considered. On many days the
Company's shares do not trade and relatively small trades can have a
significant impact on the trading price. There is no significant
institutional sponsorship of the Company's shares and no coverage by
institutional research analysts. As a result, shareholders do not enjoy
meaningful liquidity in their holdings and are unable to sell significant
numbers of shares without a negative effect on the trading price, and the
Company's shares are not viable currency for acquisitions. The Company
also is not in a position to raise additional financing through the
public capital markets;
- The expenses to the Company of the reporting and compliance requirements
of a public company, and the increased costs likely to be faced by the
Company for reporting and compliance issues following adoption of the
Sarbanes-Oxley Act of 2002 and related rules and regulations, which are
likely to further negatively affect the trading price of the Company's
shares;
- The Committee's belief, following extensive negotiations with the
Continuing Shareholders, that $25.75 per share was the highest price that
the Continuing Shareholders would agree to pay. The Committee's belief
was based on the duration and tenor of negotiations, statements made by
the representatives of the Continuing Shareholders during the
negotiations and the general experience and judgment of the Committee and
its advisors;
- The Committee's belief that in the absence of a transaction, the
shareholders' ability to realize value in excess of $25.75 per share
would be doubtful and would be accompanied by significant risks. The
Committee's belief was based on the strength and resources of the
Company's competitors, the state of the economy, trends in the Company's
industry and the Company's relative size;
21
- The Committee's belief that it was unlikely that any other buyer would be
willing to pay a price for the Company equal to or greater than $25.75
per share in cash. This belief was based on the Company's competitive
position and prospects; the stated intention of the Continuing
Shareholders, who control a majority of the outstanding shares, not to
sell their shares to any other party if the proposed transaction was not
consummated; and the fact that although the proposed transaction was
first announced three months prior to the Committee's recommendation of
the Merger, no other bidders had expressed an interest in acquiring the
Company;
- The fact that the merger consideration will be paid entirely in cash,
which eliminates any issues related to valuing the merger consideration;
- The fact that the Company may consider unsolicited alternative
acquisition proposals that are superior to the merger, to the extent
required in connection with the directors' discharge of their fiduciary
duty. See "The Merger Agreement -- Covenants";
- The absence of any break-up fee payable to the Continuing Shareholders in
the event the transaction is not consummated;
- The Committee's ability to remove or change through negotiations certain
provisions, conditions and contingencies in the Agreement and Plan of
Merger, including removal of a financing condition; revisions to
representations, warranties, covenants and closing conditions; extension
of the time during which the merger consideration will remain with the
Paying Agent; and requiring that the entire merger consideration be
delivered to the Paying Agent as a condition to closing. See "The Merger
Agreement -- Amendment."
Although the Committee negotiated for inclusion of a majority of the
unaffiliated shareholder approval provision, the Committee determined that,
based on the foregoing factors and the Continuing Shareholders' unwillingness to
negotiate a transaction including such a provision, it would recommend the
transaction to provide the unaffiliated shareholders the opportunity to receive
the merger price of $25.75 per share. The Committee determined, based on the
foregoing factors, that the Merger is procedurally fair to the unaffiliated
shareholders despite the fact that the terms of the Agreement and Plan of Merger
do not require the approval of at least a majority of the unaffiliated
shareholders.
The Committee also considered a variety of risks and other potential
detriments concerning the Merger, including the following:
- Following the Merger, shareholders (other than the Continuing
Shareholders) will cease to participate in any future earnings growth of
the Company or benefit from any increase in the value of the Company;
- Michigan law does not provide appraisal rights to shareholders who vote
against the Merger, and shareholders therefore will not have the right to
dissent from the Merger and seek to obtain a different value as
determined under statutory procedures;
- Under the terms of the Agreement and Plan of Merger, the Company is
unable to solicit or encourage other acquisition proposals;
- A shareholder generally will be required to include in his or her taxable
income the amount by which $25.75 exceeds the shareholder's basis in his
or her shares of the Company's common stock. If the shares are a capital
asset in the hands of the shareholder, resulting gain may be long-term or
short-term capital gain, depending on the shareholder's holding period
for the shares. See "Material Federal Income Tax Consequences of the
Merger";
- The Continuing Shareholders control sufficient shares to approve the
Merger at the Special Meeting of Shareholders. As a result, the Merger
will not require the approval of any unaffiliated shareholders if all of
the Continuing Shareholders vote in favor of the Merger;
22
- The Continuing Shareholders, who include the Company's President and
Chief Executive Officer and Executive Vice President and Chief Operating
Officer, have conflicts of interest because of their continued employment
and equity ownership in the Company following the Merger;
- The Continuing Shareholders who are officers and directors of the Company
will not be subject to liability under the new and previously existing
Federal securities laws that govern the actions of officers and directors
of public companies;
- Disruption to the operations of the Company and the morale of its
employees might result following announcement of the Merger, with adverse
effects on the Company if, for any reason, the Merger was not completed.
- The fact that the merger consideration of $25.75 per share is less than
the book value of the Company of $31.86 per share as of June 30, 2003.
The Committee understood that book value could only be realized by
selling the assets for prices at or above the recorded book value. The
Committee did not determine whether the Company's assets would sell for
less than, more than or equal to their book value. The Committee's belief
that the merger consideration was fair to the unaffiliated shareholders,
although less than the book value per share, was based on the following:
- The opinion of McDonald Investments that the merger consideration is
fair to the unaffiliated shareholders from a financial point of
view. McDonald Investments' opinion did not discuss the amount that
would be realized in a sale of assets.
- The fact that attempting to sell the Company's assets for book value
would involve considerable market risk and uncertainty and could
result in prices below book value.
- The fact that if the assets were sold, the proceeds to the Company
would be reduced by (i) transaction costs and (ii) taxes payable by
the Company to the extent that assets were sold at prices in excess
of their adjusted tax basis.
- The fact that any sale of assets would have to be conducted over a
relatively long period to occur in an orderly fashion, which would
defer the receipt and disbursing of proceeds.
- The fact that intangible assets such as goodwill, with a value of
approximately $2.8 million at June 30, 2003, was included in book
value but would not be realized in any sale of assets not involving
the sale of the Company as a going concern.
- The fact that book value at June 30, 2003 does not give effect to
the dilutive value of in-the-money stock options and performance
shares.
Based on these considerations, the Committee believed that the prospects of
achieving book value would not be a superior alternative to the receipt by the
unaffiliated shareholders of the merger consideration.
The Committee concluded that the positive factors described above
supporting the fairness of the Merger to the unaffiliated shareholders
outweighed the negative factors. In evaluating the various factors, the
Committee generally felt that the premiums paid analysis (due to the
historically thin trading market for the Company's shares) and the comparable
Company analysis (due to the absence of comparable companies) were of relatively
less importance than the other factors and analyses. However, because of the
number and variety of factors considered, the Committee members did not find it
practicable to quantify or otherwise assign specific relative weights to each of
the factors and analyses considered by them in reaching their conclusion. The
Committee's determination was made after considering all these factors together.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND BOARD OF DIRECTORS
On August 13, 2003, the Special Committee unanimously determined that the
Merger and the Merger Agreement are fair to and in the best interests of our
unaffiliated shareholders and recommended that our Board and our shareholders
adopt and approve the Merger Agreement and the Merger.
23
On August 13, 2003, the Board of Directors relied on the unanimous
recommendation of the Special Committee, adopted the Special Committee's
conclusions and determined that the Merger and the Merger Agreement are
procedurally and substantively fair to and in the best interests of our
unaffiliated shareholders and recommended that our shareholders adopt the Merger
Agreement and approve the Merger. James L. Wolohan and John A. Sieggreen
attended the Board meeting for quorum purposes, but abstained from voting with
respect to the Merger and the Merger Agreement. The Board of Directors did not
consider any other alternatives to the Merger.
The Board further believes that the transaction is procedurally fair to the
unaffiliated shareholders despite not obtaining the approval of a majority of
the unaffiliated shareholders to the Merger Agreement. Due to the concentration
of the Company's shares, such a voting provision would put disproportionate
voting power in the hands of a small number of unaffiliated shareholders and
could potentially deprive the remaining unaffiliated shareholders of the benefit
of the merger consideration.
PURPOSES OF THE MERGER AND PLANS AND PROPOSALS
If the Merger Agreement is approved by the holders of a majority of the
shares, and the other conditions to the closing of the Merger are satisfied or
waived, we and Wolohan Acquisition will complete the Merger at or as soon as
practical after the Special Meeting:
the unaffiliated shareholders will cease to have any ownership
interest in us or rights as holders of our common stock;
the unaffiliated shareholders will no longer benefit from any
increases in our earnings or the payment of dividends on shares of our
common stock, if any;
the unaffiliated shareholders will no longer bear the risk of any
decreases in our value;
the aggregate interests of the Continuing Shareholders in our business
and its net earnings will increase from approximately 51.3% prior to the
Merger to 100% following the Merger. Based on the Company's June 30, 2003
balance sheet, net of the total amount of cash required to consummate the
Merger (approximately $27.8 million), the Continuing Shareholders' 100%
interest in the net book value of the Company would approximate $37.3
million. Based on the Company income statement for the six month period
ending June 30, 2003, the Continuing Shareholders' 100% interest in the net
earnings of the Company would approximate $977,000 for the six month
period.
the Continuing Shareholders will be the sole beneficiaries of any of
our future earnings and profits and will have the ability to benefit from
any strategic acquisitions, divestitures, or other corporate opportunities
that may be pursued by us in the future;
we will be privately held, there will be no public market for our
common stock;
there will not be another meeting of our unaffiliated shareholders;
the Continuing Shareholders will cause us to terminate the
registration of the common stock under the Securities Exchange Act of 1934
as soon as the Merger is completed; and
we will no longer be required to file reports with the Securities and
Exchange Commission under the Securities Exchange Act of 1934 once the
registration of the common stock has been terminated. Such reports include
quarterly reports on Form 10-Q, annual reports on Form 10-K; and proxy
statements. In addition officers and directors of the Company will no
longer be subject to the short swing trading provisions and stock ownership
reporting provisions of such Act as well as the corporate governance
provisions of the Sarbanes-Oxley Act of 2002. Our officers will benefit by
no longer having to spend the time complying with the preparation of such
reports and provisions.
we expect to save approximately $150,000 per year as a result of being
no longer subject to the federal securities laws and no longer publicly
traded or listed on the Nasdaq Stock Market.
24
Subsequent to the Merger, the Continuing Shareholders have stated to us
that they have no present intentions, plans or proposals with regard to any of
the following in regard to us:
extraordinary transactions, such as a merger, reorganization or
liquidation, involving us;
purchase, sale or transfer of a material amount of our assets;
material changes in our corporate structure or business;
acquisitions by any person of our securities or the disposition of our
securities; or
material changes in our capitalization.
Nevertheless, following completion of the Merger, the Continuing
Shareholders in the ordinary course of business will continually review the
Company and its assets, corporate structure, capitalization, operations,
properties and personnel and will determine what changes, if any, may be
desirable following the Merger to enhance the operations of the Company.
Under the terms of the Merger Agreement, we will maintain our existing
officers. The directors of the Company after the Merger will be James L. Wolohan
and John A. Sieggreen.
OPINION OF MCDONALD INVESTMENTS
On June 11, 2003, the Special Committee retained McDonald Investments to
act as its financial advisor in connection with the proposed merger and in the
event of a sale to deliver an opinion to the Company's Board of Directors as to
the fairness, from a financial point of view, to the unaffiliated shareholders
of the consideration to be received in connection with a transaction (as defined
in the Merger Agreement).
The engagement letter between McDonald Investments and the Special
Committee provides that, for its services, McDonald Investments is entitled to
receive a fee of $275,000, of which $100,000 was payable upon its engagement and
$175,000 was payable upon delivery of McDonald Investments' oral opinion. In
addition, McDonald Investments is to be paid an incentive fee of $267,851 based
on the excess of the merger consideration over $23.50 times the number of shares
outstanding and the number of stock options and performance shares outstanding.
McDonald Investments will be reimbursed for certain of its out-of pocket
expenses, including legal fees, and be indemnified for certain losses, claims,
damages and liabilities relating to or arising out of services provided by
McDonald Investments.
The following paragraphs summarize the financial and comparative analyses
performed by McDonald Investments in connection with its opinion. The following
paragraphs also describe the financial and comparative analyses used in
preparation of the materials distributed to the Special Committee on July 14,
2003 and August 13, 2003. McDonald Investments has consented to being named in
this Proxy Statement. The summary does not represent a complete description of
the analyses performed by McDonald Investments.
McDonald Investments was retained by the Special Committee on the basis of
its experience, expertise and familiarity with a wide variety of retail and
consumer businesses and its service as a financial advisor in connection with
sale engagements involving a number of retailers. As part of its investment
banking business, McDonald Investments is customarily engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. On July 14, 2003, McDonald Investments met in
person with the Special Committee and discussed its analysis to date. At this
meeting, McDonald Investments made an oral presentation and distributed
materials to the Special Committee regarding its preliminary analysis. McDonald
Investments stressed to the Special Committee that its evaluation was
preliminary and had not yet been finalized. On August 13, 2003, McDonald
Investments delivered to the Special Committee an oral opinion, confirmed by
delivery of a written opinion dated August 13, 2003, to the effect that, as of
that date, and based upon and subject to the assumptions, considerations and
limitations set forth in its opinion, the consideration to be received in the
Merger was fair, from a financial point of view, to the unaffiliated
shareholders.
25
MCDONALD INVESTMENTS' OPINION IS DIRECTED TO THE SPECIAL COMMITTEE OF THE
BOARD OF DIRECTORS AND ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF
VIEW, TO THE UNAFFILIATED SHAREHOLDERS OF THE MERGER CONSIDERATION AND DOES NOT
ADDRESS THE COMPANY'S UNDERLYING BUSINESS DECISION TO ENTER INTO THE MERGER OR
ANY OTHER TERMS OF THE MERGER AGREEMENT. THE OPINION WAS PROVIDED FOR THE
INFORMATION AND ASSISTANCE OF THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS IN
CONNECTION WITH ITS CONSIDERATION OF THE TRANSACTION CONTEMPLATED BY THE
AGREEMENT. THE OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY WOLOHAN
SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT ANY MEETING OF
SHAREHOLDERS HELD IN CONNECTION WITH THE MERGER.
It should be noted that McDonald Investments' opinion is based on economic
and market conditions and other circumstances existing on, and information made
available as of, the date thereof and does not address any matters subsequent to
such date. In addition, the opinion is, in any event, limited to the fairness,
as of such date, from a financial point of view, of the merger consideration to
be received by the unaffiliated shareholders pursuant to the Merger Agreement
and does not address the Company's underlying business decision to effect the
Merger or any other terms of the Merger Agreement. McDonald Investments was not
engaged to solicit indications of interest or to otherwise explore the viability
of any alternative transaction to the Merger. It should be noted that although
subsequent developments may affect McDonald Investments' opinion, it does not
have any obligation to update, revise or reaffirm it. Although McDonald
Investments assisted the Special Committee in negotiating the financial aspects
of the proposed Merger, it did not determine or recommend the amount of
consideration to be paid pursuant to the Merger Agreement.
The full text of McDonald Investments' written opinion which sets forth,
among other things, the assumptions made, matters considered and limits on the
review undertaken by McDonald Investments in connection with the opinion, is
attached as Appendix B to this Proxy Statement and is incorporated herein by
reference. Shareholders are urged to read the opinion in its entirety.
In connection with rendering its opinion, McDonald Investments reviewed,
among other things: (i) the Merger Agreement, including the exhibits and
schedules thereto; (ii) certain publicly available information concerning the
Company, including its Annual Reports on Form 10-K for each of the years in the
four year period ended December 31, 2002, its Quarterly Report on Form 10-Q for
the quarter ended March 31, 2003, its Proxy Statement for the fiscal year 2002
(Schedule 14A), and its Current Reports on Form 8-K dated April 17, 2003, May
16, 2003 and July 18, 2003; (iii) certain other internal information, primarily
financial in nature, including projections and a liquidation analysis,
concerning the business and operations of the Company furnished to us by the
Company for purposes of our analysis; (iv) certain publicly available
information concerning the trading of, and the trading market for, the Company's
common stock; (v) certain publicly available information with respect to certain
other companies that we believe to be comparable to the Company and the trading
markets for certain of such other companies' securities; and (vi) certain
publicly available information concerning the nature and terms of certain other
transactions that we consider relevant to our inquiry.
In its review and analyses and in arriving at its opinion, McDonald
Investments assumed and relied upon, without assuming any responsibility for
independent verification, the accuracy and completeness of all financial and
other information and data publicly available or furnished to, discussed with or
otherwise reviewed by or for it. McDonald Investments further relied upon the
assurances of management of the Company that they are not aware of any facts
that would make any of such information inaccurate or misleading. McDonald
Investments did not make and was not provided with an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of the Company.
With respect to financial forecasts, McDonald Investments was advised by the
management of the Company and assumed that such forecasts and other information
were reasonably prepared on a basis reflecting the best currently available
estimates and judgment of the management as to the future financial performance
of the Company. McDonald Investments expressed no view with respect to such
projections and other information or the assumptions on which they are based.
26
McDonald Investments' opinion necessarily is based upon industry, market,
general business and economic, financial and other conditions disclosed to it as
they exist and can be evaluated on the date of the opinion, and McDonald
Investments assumed no responsibility to update or revise its opinion based upon
circumstances or events occurring after the date of the opinion.
In evaluating the merger consideration, McDonald Investments performed a
variety of financial and comparative analyses, including those described below.
The summary of these analyses is not a complete description of the analyses
performed by McDonald Investments. The preparation of a fairness opinion and the
related analyses are complex analytical processes involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, such an opinion and the related analyses are not readily
susceptible to summary description. Accordingly, McDonald Investments believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and certain factors, without considering all analyses and all
factors, could create a misleading or incomplete view of the processes
underlying its analyses and opinion. In addition, some of the summaries of the
financial analyses include information presented in tabular format. The tables
are not intended to stand alone, and in order to more fully understand the
financial analyses of McDonald Investments, the tables must be read together
with the full text of each summary.
In its analyses, McDonald Investments considered industry, market, general
business and economic, financial and other conditions and other matters existing
as of the date of its analyses and opinion, many of which are beyond the control
of McDonald Investments and the Company. No company, transaction or business
considered in those analyses as a comparison is identical to the Company or the
proposed Merger, and an evaluation of those analyses is not entirely
mathematical. Rather, the analyses involve complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies,
business segments or transactions analyzed.
McDonald Investments' opinion was among many factors considered by the
Special Committee in its evaluation of the Merger and should not be viewed as
determinative of the views of the Special Committee with respect to the merger
consideration or the Merger.
Historical Stock Trading Analysis. McDonald Investments reviewed the
historical performance of the Company's common stock based on an historical
analysis of closing prices and trading volumes for the six-month, twelve-month,
and two-year periods prior to May 16, 2003, the date on which the proposed
transaction was first publicly announced. McDonald Investments noted that the
average closing price for the Company's common stock over these periods ranged
from $18.68 to $20.44, with the lowest average closing price being the average
for the two-year period and the highest average closing price being the average
for the one-year period.
The following chart summarizes these prices and volume of trading of the
Company's common stock.
WOLOHAN LUMBER CO.
SUMMARY OF PRICE AND VOLUME
<Table>
<Caption>
AVERAGE DAILY CLOSE
AVERAGE DAILY ---------------
CLOSE VOLUME HIGH LOW
------- ------- ------ ------
Last 6 Months.............................................. $20.01 664 $21.40 $18.53
Last 12 Months............................................. $20.44 440 $25.10 $18.26
Last 2 Years............................................... $18.68 734 $25.10 $ 9.65
</Table>
27
McDonald Investments also reviewed the distribution of the closing prices
of Wolohan common stock for the prior six-months, one-year and two-year periods.
<Table>
<Caption>
TRADING TRADING
VOLUME AT DAYS AT
OR BELOW $25.75 OR BELOW $25.75
PRIOR PERIOD CONSIDERATION CONSIDERATION
- ------------ --------------- ---------------
Last 6 Months.............................. 100.0% 100.0%
Last 12 Months............................. 100.0% 100.0%
Last 2 Years............................... 100.0% 100.0%
</Table>
Premiums Paid Analysis. McDonald Investments conducted an analysis of the
premiums paid in forty-two going-private transactions that were similar to the
proposed transaction. Each of the transactions: (i) were announced and not
canceled between January 1, 2000 and August 8, 2003; (ii) involved a U.S. target
company; (iii) had an enterprise value between $25.0 and $100.0 million; and
(iv) had a publicly disclosed value.
For each of the target companies, McDonald Investments examined the closing
stock price one day, one week and four weeks prior to announcement of the
transaction in order to calculate the median premium paid over the target's
closing stock price at those points in time.
<Table>
<Caption>
PERIOD PRIOR TO MEDIAN
ANNOUNCEMENT PREMIUM
- --------------- -------
One Day..................................................... 24.8%
One Week.................................................... 23.3%
Four Weeks.................................................. 34.0%
</Table>
In addition, McDonald Investments calculated the premium that the $25.75
per share consideration contemplated by the Merger Agreement represented to the
closing prices for Wolohan's common stock for the periods one day, one week and
four weeks prior to the announcement date of May 16, 2003.
<Table>
<Caption>
PERIOD PRIOR TO IMPLIED
ANNOUNCEMENT PREMIUM
- --------------- -------
One Day..................................................... 30.7%
One Week.................................................... 28.8%
Four Weeks.................................................. 27.9%
</Table>
McDonald Investments noted that the premium represented by the merger
consideration was lower than the median premium over the trading price for the
target companies included in its analysis for the four weeks prior to the
announcement, but was significantly higher than the premium implied by such
companies' trading prices for the one week and one day periods prior to
announcement.
Comparable Public Company Analysis. McDonald Investments reviewed and
compared the financial performance of the Company to the financial performance
of two publicly traded, U.S. based building materials and/or home improvement
companies. The comparable companies used by McDonald for purposes of this
analysis were Building Materials Holding Corporation ("BMHC") and Wickes, Inc.
("Wickes"). McDonald Investments deemed these companies to be comparable to
Wolohan because these companies have the same primary SIC code (5211 -- lumber
and building materials retail), a similar focus on the professional builder
segment of the industry, and are of a similar relative size as the Company.
McDonald Investments calculated the ratio of each comparable company's
enterprise value to that company's sales, EBIT and EBITDA for its latest twelve
months and each comparable company's market value to that company's Net Income,
Net Book Value and Tangible Book Value. McDonald Investments then applied the
median of each of those ratios to the Company's sales, EBIT, EBITDA, Net Income,
Net Book Value and Tangible Book Value for the latest twelve months to calculate
an implied enterprise value or market value for the Company. McDonald
Investments discounted BMHC's multiples by 20% given the size (in terms of
sales, number of stores, employees, etc.), growth prospects, geographic
location, and market capitalization relative to the Company. McDonald
Investments calculated a range of equity values per share on a non-controlled
fully distributed basis and then applied a 30% control premium to this range.
The control
28
premium was based on the median premiums paid in similar going private
transactions. These calculations resulted in the following implied equity value
per share, as compared to the merger consideration of $25.75.
<Table>
<Caption>
IMPLIED SHARE PRICE
WITH CONTROL
MULTIPLE RANGE PREMIUM[3]
---------------- --------------------
LOW[1] HIGH[2] LOW[1] HIGH[2]
------ ------- -------- ---------
Enterprise Value / Sales................................ 0.21x 0.22x $33.22 $34.08
Enterprise Value / EBIT................................. NM 6.68x NM 29.29
Enterprise Value / EBITDA............................... NM 4.50x NM 33.43
Equity Value / Net Income............................... NM 6.37x NM 15.18
Equity Value / Book Value............................... 0.34x 0.65x 12.11 23.00
Equity Value / Tangible Book Value...................... 0.38x 0.86x 12.88 29.43
</Table>
- ---------------
Note:
All Data as of 8/8/2003
[1] Based on Wickes
[2] Based on BMHC and discounted 20%.
[3] Reflects control premium of 30%
McDonald Investments noted that the merger consideration of $25.75 per
share was above the mid-point of the $12.11 to $34.08 range of share prices
implied by the comparable company analysis.
No company utilized in the comparable public company analysis is identical
to the Company. McDonald Investments made judgments and assumptions with regard
to industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of the
Company.
Discounted Cash Flow Analysis. McDonald Investments analyzed various
financial projections prepared by the management of the Company for the years
2003 through 2008 and performed a discounted cash flow analysis of the Company
based on these projections. A discounted cash flow analysis is a methodology
used to derive a valuation of a corporate entity by discounting to the present
its future expected cash flows. The discounted cash flow analysis was conducted
by estimating the Company's weighted average cost of capital at 16.0%. McDonald
Investments estimated the Company's weighted average cost of capital by
performing analyses consistent with the Capital Asset Pricing Model. In its
analyses McDonald Investments applied the median unlevered beta of 1.22 for the
comparable group and a median target debt to capital ratio of 10.0%. The
comparable group consists of those companies specified in the Comparable Public
Company Analysis and also includes Home Depot, Inc. and Lowe's Companies, Inc.,
as these two company's common stocks provide a better reflection of the
volatility of the equity securities of industry participants given that their
respective common shares are more widely held and trade more frequently than
either BMHC or Wickes.
Using 16.0% as the estimated of cost of capital, McDonald Investments
calculated the present value of free cash flows for each of the years 2004
through 2008 and the present value of the terminal value of the Company (the
calculated value of the Company at the end of the projection period). McDonald
Investments calculated the terminal value in year 2008 two ways: the first was
determined by applying a perpetuity growth rate of 1.0% to the projected 2008
net operating profit after tax and the second was by using an exit EBITDA
multiple of 5.0x. By adding together the present values of free cash flows for
each of 2004 through 2008 and the present value of the terminal value of the
Company using the perpetuity growth rate of 1.0%. McDonald Investments
calculated the equity value per share of the Company to be $20.80. Moreover, by
adding together the present values of free cash flows for each of 2004 through
2008 and the present value of the terminal value of the Company using an exit
multiple of 5.0x EBITDA, McDonald Investments calculated the equity value per
share of the Company to be $24.92
In addition, McDonald Investments conducted a sensitivity analysis as part
of its Discounted Cash Flow Analysis. Using a range of estimated costs of
capital (15.0% -- 17.0%), a range of perpetuity growth rates
29
(0.0% -- 3.0%), and a range of EBITDA exit multiples (4.5x -- 5.5x), McDonald
Investments determined the implied equity value per share to be $20.16 to
$26.37, as compared to the merger consideration of $25.75.
Comparable Merger & Acquisition Analysis. Using publicly available
information, McDonald Investments reviewed transactions in the home improvement,
building materials and lumber industries. Specifically, each of the selected
transactions: (i) involved a U.S. public company; (ii) was announced since
January 1, 1998; and (iii) had a publicly disclosed value. These transactions
were chosen based on the Company's participation in the sale of lumber and
building materials, the comparable size of the transactions and the recent
period in which the transactions were completed.
<Table>
<Caption>
TARGET ACQUIROR
- ---------------------------------------- ----------------------------------------
Matco Ravary BMR, Inc.
Wickes, Inc. United Building Centers
National Home Centers, Inc. Dwain Neumann
Knipp Brothers (51%) Building Materials Holding Corp.
Anderson Lumber Wolseley PLC
Cameron Ashley Building Products Guardian Industries Corp.
American Building Co. Onex Corp.
Knipp Brothers (49%) Building Materials Holding Corp.
Morgan Products Ltd. Anderson Corp.
Adam Wholesalers Morgan Products Ltd.
Eagle Hardware & Garden Lowe's Cos. Inc.
Central Michigan Lumber Company Wolohan Lumber Co.
</Table>
For each of the transactions that it reviewed, McDonald Investments
calculated the ratio of the enterprise value of the transaction to the target
company's latest twelve-month sales, EBIT and EBITDA as well as the ratio of
equity value to the target company's Book Value. McDonald Investments applied
the median of these transaction multiples to the Company's sales, EBIT, EBITDA,
and Book Value, to calculate an implied enterprise value for the Company. These
calculations resulted in the following implied equity values, as compared to the
merger consideration of $25.75.
<Table>
<Caption>
IMPLIED EQUITY
MULTIPLE RANGE VALUE PER SHARE
--------------- ---------------
Enterprise Value / Sales........................... 0.15x 0.24x $20.89 $27.20
Enterprise Value / EBIT............................ 6.40x 8.78x 21.95 26.81
Enterprise Value / EBITDA.......................... 5.00x 7.00x 27.59 35.08
Equity Value / Book Value.......................... 0.80x 0.95x 21.77 26.12
</Table>
Leveraged Buyout Analysis. McDonald Investments performed a leveraged
acquisition analysis in order to ascertain the price at which an acquisition of
the Company would be attractive to a potential financial buyer. McDonald
Investments performed the leveraged acquisition analysis using the Company's
projections. McDonald Investments assumed the following in their analyses: (i) a
capital structure comprised of a $30 million credit facility, (ii) an equity
investment that would achieve a rate of return of approximately 25% to 35% and
(iii) a 4.5 x to 5.5x projected EBITDA exit multiple. Based on these
assumptions, the range of implied leveraged acquisition price per common share
of the Company was $22.50 to $24.75. McDonald Investments noted that the merger
consideration of $25.75 per share is higher than the range implied by this
analysis.
Liquidation Analysis. McDonald Investments also prepared a liquidation
analysis designed to arrive at a range of value that might be available to the
shareholders of the Company assuming: (1) a sale of the Company's assets on an
orderly basis, (2) the payment of outstanding liabilities and other claims that
have a priority position over the shareholders of the Company including expenses
associated with the liquidation, and (3) the distribution of net proceeds to the
shareholders of the Company.
McDonald Investments' liquidation analysis was based on the Company's June
30, 2003 balance sheet, prepared by management. McDonald Investments then
adjusted the book value of certain assets to reflect estimated values realizable
in a liquidation proceeding and certain liabilities were eliminated to reflect
30
estimated payments to creditors by the Company in a liquidation scenario. In
making these adjustments, McDonald Investments primarily relied upon
management's estimates, without independent verification, using both a high- and
low-case scenario. Specifically, McDonald Investments adjusted the recovery
percentage on Accounts Receivable to 90% from the high end of management's
estimate of 78%. McDonald Investments made this adjustment based on the Special
Committee's estimate of the historical recovery rates that the management team
was able to realize for Accounts Receivable in previous store closings.
Additionally, McDonald Investments adjusted the recovery percentage on the
Company's real estate to better reflect the value of these assets. Specifically,
McDonald Investments valued the Company's Building and Properties as well as its
Properties Held for Sale using a multiple of Purchase Price/Tax Value of 1.1x.
Tax Value is defined as State Equalized Value (SEV) divided by the appropriate
state's SEV factor. This multiple was based on an analysis of real estate that
the Company had sold historically. Based on this methodology, McDonald
Investments valued Property and Buildings at $20.9 million, which compares to
managements valuation range of $12.7 million to $13.4 million and a book value
of $12.7 million. McDonald Investments valued Properties Held for Sale at $18.6
million, which compares to management's valuation range of $8.0 million to $14.2
million and a book value $11.4 million. Based on these assumptions, the
indicated equity value per share ranges from $16.74 to $26.77, as compared to
the merger consideration of $25.75.
The Company had a book value per share of $31.86 as of June 30, 2003, which
exceeds the range of liquidation values derived by McDonald Investments.
However, McDonald Investments believes that there are considerable risks and
timing considerations that would make it difficult to attain the recorded book
value per share in an orderly liquidation process. The risks include strained
supplier and customer relationships, and the costs associated with a potentially
lengthy liquidation process. Moreover, the length of time required to liquidate
the Company in an orderly fashion would result in deferred receipt and
disbursement of proceeds to shareholders, and thereby reduce the present value
of the recovery of these assets and further decrease the likelihood of attaining
the recorded book value for these assets.
Moreover, McDonald Investments' liquidation analysis was done on a basis,
which fully accounts for the dilutive value of in-the-money stock options and
performance shares. In addition, McDonald Investments' liquidation analysis
places zero value on intangible assets such as goodwill, which would be included
in the book value per share on the Company's June 30, 2003 balance sheet. As of
June 30, 2003, the Company had intangible assets of approximately $2.8 million.
The analyses described above were essentially the same analyses included in
the materials distributed at the July 14, 2003 meeting with the Special
Committee. While the analyses included at the two meetings were essentially the
same, there were minor differences. Theses differences are primarily related to
the fact that McDonald Investments had not completed its due diligence and its
analysis as of the July 14, 2003 meeting. Furthermore, the materials distributed
at the July 14, 2003 meeting included best case scenarios and were intended to
help establish a negotiating position. The primary differences in the
distributed materials as of July 14, 2003 and August 13, 2003 include the
following:
- Premiums Paid Analysis. At the July 14, 2003 meeting, McDonald
Investments based its analysis on 107 going private transactions rather
than 42 going private transactions. The primary difference was that the
analysis was refined to include transactions with enterprise valuations
between $25 million and $100.0 million rather than $25.0 million and
$500.0 million. This was done to better reflect the size of the proposed
transaction. The one day, one week and four week premium indicated by the
July 14, 2003 analysis were 28.9%, 31.9% and 38.9% respectively. This
compares to the August 13, 2003 analysis which indicated one day, one
week and four week premiums of 24.8%, 23.3% and 34.0%.
- Liquidation Analysis. McDonald Investments' analysis as of July 14, 2003
relied upon management's estimates of a high- and low-case scenario in a
liquidation. However, based on guidance from the Special Committee, as
more fully described above, McDonald Investments adjusted the recovery
rates on specific asset accounts to better estimate the value of those
assets. As of the July 14, 2003 meeting, the estimated equity value per
share per the liquidation analysis was $16.33 to $22.64. The estimated
equity value per share per the revised liquidation analysis as of August
13, 2003 was $16.74 to $26.77.
31
- Discounted Cash Flow Analysis. At the July 14, 2003 meeting, McDonald
Investments used a perpetuity growth rate of 0.0-2.0%, an EBITDA exit
multiple range of 4.0-6.0x and a discount rate of 13.5-15.5%. This
compares to the August 13, 2003 meeting where McDonald Investments used a
perpetuity growth rate of 0.0-3.0%, an EBITDA exit multiple range of
4.5-5.5x and a discount rate of 15.0-17.0%. The range of equity values
implied by the July 14, 2003 analysis was $21.31-$29.11. This compares to
a range of equity values of $20.16-$26.37 as of the August 13, 2003
meeting.
There were no other material differences in the other analyses presented on
July 14, 2003 and August 13, 2003.
Conclusion. The summary set forth above describes the principal elements
of the overview given by McDonald Investments to the Special Committee on August
13, 2003. The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances and, therefore, the
opinion is not readily susceptible to summary description. Each of the analyses
conducted by McDonald Investments was carried out in order to provide a
different perspective on the Merger and add to the total mix of information
available. McDonald Investments did not form a conclusion as to whether any
individual analysis, considered in isolation, supported or failed to support an
opinion as to fairness from a financial point of view. Rather, in reaching its
conclusion, McDonald Investments considered the results of the analyses in light
of each other and ultimately reached its opinion based upon the results of all
analyses taken as a whole. McDonald Investments did not place particular
reliance or weight on any individual analysis, but instead concluded that its
analyses, taken as a whole, support its determination. Accordingly,
notwithstanding the separate factors summarized above, McDonald Investments
believes that its analyses must be considered as a whole and that selecting
portions of its analysis and the factors considered by it, without considering
all analyses and factors, could create an incomplete or misleading view of the
evaluation process underlying its opinion. In performing its analyses, McDonald
Investments made numerous assumptions with respect to industry performance,
business and economic conditions and other matters. The analyses performed by
McDonald Investments are not necessarily indicative of actual value or future
results, which may be significantly more or less favorable than suggested by the
analyses.
Miscellaneous. In the ordinary course of business, McDonald Investments
may actively trade the securities of the Company for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in those securities.
MANAGEMENT'S PROJECTIONS
We do not as a matter of course make public projections as to future sales,
earnings or other financial information. We did, however, prepare various
projections that were provided to the Special Committee and McDonald Investments
in connection with their analysis and evaluation of our financial position. The
projections set forth below are included in this Proxy Statement because such
information was provided to McDonald Investments and the Special Committee. The
Company does not intend to update or otherwise revise the financial projections
to reflect circumstances existing after the date on which the projections were
prepared or to reflect the occurrence of unanticipated events.
The following projections represent a summary of the financial projections
we gave to the Special Committee and McDonald Investments for use in evaluating
the Merger. When compiling these projections, we estimated future Company
performance relative to several key operating variables which affect retail
lumber and building materials suppliers. Such variables include but are not
limited to sales growth, gross margin percentage, operating expense ratios,
inventory turnover, and the average time needed to collect accounts receivable.
In addition, we reviewed the prospects for sale or lease of the various real
estate properties held for sale and developed specific assumptions for each
property regarding the timing and value of any potential sale or lease
transaction. These projections, as well as the estimates and assumptions
underlying the projections, are subject to significant economic, industry, and
competitive uncertainties and contingencies. Many of these potential
uncertainties are beyond our control. Accordingly, there can be no assurance
that
32
these projected results would be realized or that actual results would not be
significantly higher or lower than those projected.
In addition, the projections were prepared by us not with a view to public
disclosure or compliance with the published guidelines of the Securities and
Exchange Commission or the guidelines established by the American Institute of
Certified Public Accountants regarding projections and forecasts. The
projections are based upon a variety of assumptions relating to our business
which, although considered reasonable by us, may not be realized, and are not
subject to our control. Shareholders should not place undue reliance on these
projections. See "Cautionary Statement Regarding Forward-Looking Statements."
PROJECTED BALANCE SHEETS 2003-2008
<Table>
<Caption>
PROJ. PROJ. PROJ. PROJ. PROJ. PROJ.
2003 2004 2005 2006 2007 2008
------- ------- ------- ------- -------- --------
ASSETS:
Current Assets.................. $54,236 $61,154 $67,203 $73,718 $ 78,382 $ 83,063
Net Property, Plant &
Equipment.................... 27,003 23,290 20,679 18,409 18,175 17,984
Goodwill........................ 2,773 2,773 2,773 2,773 2,773 2,773
Other Assets.................... 2,449 2,449 2,449 2,449 2,449 2,449
------- ------- ------- ------- -------- --------
TOTAL ASSETS............... $86,461 $89,666 $93,104 $97,349 $101,779 $106,269
======= ======= ======= ======= ======== ========
LIABILITIES AND SHAREOWNERS'
EQUITY:
Current Liabilities............. $17,666 $17,175 $16,844 $16,706 $ 16,727 $ 16,761
Long Term Debt, net of current
portion...................... -- -- -- -- -- --
------- ------- ------- ------- -------- --------
Total Liabilities.......... 17,666 17,175 16,844 16,706 16,727 16,761
Total Shareowners'
Equity.................. 68,795 72,491 76,260 80,643 85,052 89,508
------- ------- ------- ------- -------- --------
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY..... $86,461 $89,666 $93,104 $97,349 $101,779 $106,269
======= ======= ======= ======= ======== ========
</Table>
PROJECTED INCOME STATEMENTS 2003-2008
<Table>
<Caption>
PROJ. PROJ. PROJ. PROJ. PROJ. PROJ.
2003 2004 2005 2006 2007 2008
-------- -------- -------- -------- -------- --------
Net Sales..................... $183,138 $173,981 $170,501 $170,501 $173,912 $177,390
Gross Profit.................. 42,671 40,886 40,238 40,238 41,217 42,041
Other Income.................. 4,225 3,393 2,802 2,990 2,854 2,953
Operating Expenses:
Selling, General and
Administrative Expense...... 37,677 35,793 35,087 34,575 35,257 35,953
Depreciation and
Amortization................ 3,618 2,886 2,242 2,013 2,134 2,291
-------- -------- -------- -------- -------- --------
Total Operating Expenses...... 41,295 38,679 37,329 36,588 37,391 38,244
-------- -------- -------- -------- -------- --------
Income Before Tax............. 5,601 5,600 5,711 6,640 6,680 6,750
Income Taxes.................. 1,905 1,904 1,942 2,258 2,271 2,295
-------- -------- -------- -------- -------- --------
Net Income.................... $ 3,696 $ 3,696 $ 3,769 $ 4,382 $ 4,409 $ 4,455
======== ======== ======== ======== ======== ========
</Table>
33
THE MERGER AGREEMENT
This section of the Proxy Statement describes material aspects of the
Merger, including material provisions of the Merger Agreement. A copy of the
Merger Agreement is attached to this Proxy Statement as Appendix A and which is
incorporated by reference. You are urged to read the entire Merger Agreement
carefully.
THE MERGER
The Merger Agreement provides that, upon the terms and subject to the
conditions in the Merger Agreement, and in accordance with Michigan law, Wolohan
Acquisition will be merged with and into Wolohan Lumber. As a result of the
Merger, Wolohan Acquisition's corporate existence will cease and we will
continue as the surviving corporation in accordance with Michigan law. The
Merger will become effective at the time a certificate of merger is filed with
the State of Michigan. The Merger is expected to occur as soon as practicable
after all conditions to the Merger have been satisfied or waived.
Our Board of Directors, based upon the recommendation of the Special
Committee (with Messrs. Wolohan and Sieggreen abstaining), has approved, and
deems it fair to and in the best interests of our unaffiliated shareholders to
consummate the Merger of Wolohan Acquisition with and into us. Upon consummation
of the Merger, each issued and outstanding share of our common stock other than
shares beneficially owned by the Continuing Shareholders, will be cancelled and
converted automatically into the right to receive $25.75 per share.
The Merger Agreement provides that our officers immediately prior to the
effective time of the Merger will be the officers of the surviving corporation.
The directors of the surviving corporation will be James L. Wolohan and John A.
Sieggreen. Our articles of incorporation as in effect immediately prior to the
effective time of the Merger, will be the articles of incorporation of the
surviving corporation after the Merger. Our bylaws, as in effect immediately
prior to the effective time of the Merger, will be the bylaws of the surviving
corporation after the Merger.
CONVERSION OF COMMON STOCK
Once the Merger is completed, the following will occur to those shares held
by the unaffiliated shareholders:
each share of our common stock, issued and outstanding immediately
prior to the effective time of the Merger, will, automatically, be
converted into the right to receive an amount in cash equal to $25.75 per
share payable to you without interest;
all shares of our common stock, when converted, will no longer be
outstanding and will automatically be cancelled and retired;
each share of Wolohan Acquisition common stock will be automatically
cancelled;
each holder of a certificate formally representing shares of our
common stock will cease to have any rights, except the right to receive the
merger consideration;
after the Merger is completed, we will send you a transmittal form and
written instructions for exchanging your share certificates for the merger
consideration. Do not send share certificates now;
our transfer agent acting as Paying Agent will pay the merger
consideration to our unaffiliated shareholders.
STOCK OPTIONS AND PERFORMANCE SHARES
At the effective time of the Merger each outstanding stock option to
purchase shares under our stock option plans, whether vested or unvested, owned
by persons other than any of the Continuing Shareholders will automatically be
converted into the right to receive an amount in cash (subject to applicable
withholding taxes) equal to the merger consideration, less the applicable
exercise price, for each share of common stock
34
subject to such options. At the effective time of the Merger, each outstanding
option to purchase shares under our stock option plans, whether vested or
unvested, owned by any of the Continuing Shareholders will be assumed by the
surviving corporation. Each such option so assumed shall continue to have, and
be subject to, the same terms and conditions set forth in our stock option plan
and the applicable stock option agreement immediately prior to the effective
time of the Merger.
At the effective time of the Merger, each holder of performance shares
under our Long-Term Incentive Plan, whether vested or unvested, except
performance shares held by any of the Continuing Shareholders will be entitled
to receive a payment in cash (subject to any applicable withholding taxes) for
all shares of our common stock allocated to his or her account in an amount
equal to the product of (i) the number of performance shares, and (ii) the
merger consideration. Each performance share held by a Continuing Shareholder at
the effective time of the Merger, by virtue of the Merger and without any action
on our part or the holder thereof, shall continue to represent a performance
share in the surviving corporation and continue to have the same rights and
privileges as prior to the effective time of the Merger.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains our representations and warranties relating
to: existence, good standing, corporate authority, authorization, validity and
effect of agreements, capitalization, proxy statement, brokers, state takeover
statutes, and required vote of our shareholders.
The Merger Agreement also contains Wolohan Acquisition's representations
and warranties relating to: existence, good standing and corporate authority,
capitalization, authorization, validity and effect of agreements, no violation,
interim operations, brokers, and solvency.
The representations and warranties of the parties in the Merger Agreement
will expire upon completion of the Merger.
COVENANTS
In the Merger Agreement, we agreed that until the effective time of the
Merger, we and our subsidiaries will carry on our respective businesses in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent therewith, use all reasonable
efforts to preserve intact our current business organization, keep available the
services of our current officers and employees and preserve our relationships
with customers, suppliers, licensors, licensees, distributors and others having
business dealings with us, in each case consistent with past practice, to the
end that ongoing business relationships will be unimpaired to the fullest extent
possible at the effective time of the Merger.
We also agreed in the Merger Agreement that until the effective time of the
Merger, neither we nor any of our officers, directors, agents and
representatives will initiate, solicit or knowingly encourage, any inquiries or
the making or implementation of any proposal or offer to acquire us pursuant to
a merger, acquisition, consolidation or similar transaction, or any purchase of
all or in excess of 20% of our assets or equity securities or engage in any
negotiations concerning, or provide any confidential information or data to,
afford access to our properties, books or records or have any discussions with,
any person relating to the foregoing.
Provided, however, nothing shall prohibit us upon approval of the Special
Committee, from (i) prior to the effective time of the Merger, furnishing
information to, or entering into discussions or negotiations with, any person
that makes an unsolicited bona fide proposal, only if (i) such proposal was not
initially solicited, encouraged or knowingly facilitated by us; (ii) prior to
furnishing information to, or entering into discussions or negotiations with,
such person, we provide written notice thereof to Wolohan Acquisition; and (iii)
the Special Committee determines that such proposal is, or is likely to lead to
a proposal that is, more favorable from a financial point of view to our
shareholders as compared to the Merger (such proposal meeting the requirements
of (i), (ii) and (iii) being a "superior proposal").
35
DIRECTORS' AND OFFICERS' INDEMNIFICATION
In the Merger Agreement, we agreed that all rights to indemnification
existing in favor of our present or former directors and officers as provided
under Michigan law and in our articles of incorporation or bylaws as in effect
on the date of the Merger Agreement with respect to matters occurring up to and
including the effective time of the Merger shall survive the Merger. In the
event any person entitled to indemnification becomes involved in any claim,
action, proceeding or investigation after the Merger, we shall periodically
advance to such person his or her reasonable legal and other reasonably incurred
expenses, subject to such person providing an undertaking to reimburse all
amounts so advanced if it is determined that such person is not entitled to
indemnification.
CONDITIONS TO THE MERGER
Under the Merger Agreement, the respective obligation of each party to
effect the Merger is subject to the satisfaction or waiver, on or prior to the
effective time of the Merger, of the following conditions:
The Merger Agreement and the Merger shall have been approved by the
requisite vote of the holders of our common stock;
No final restraining order or permanent injunction or other final
order issued by any court of competent legal jurisdiction or other legal
prohibition preventing the consummation of the Merger shall be in effect;
All governmental and other consents and approvals necessary to
consummate the Merger shall have been obtained;
Our Board of Directors shall have taken all action required to redeem
the Rights outstanding under the Rights Agreement dated February 16, 2000;
The merger consideration shall have been delivered to the Paying
Agent;
There shall not be pending any litigation pertaining to the Merger.
The parties are not aware of any facts or circumstances under which either
of them would waive any of the above conditions. However, if any facts or
circumstances arise in the future and the Board of Directors of each party
believes it is in the respective companies best interest to waive a condition,
it is expected that a condition may be waived. A resolicitation of a shareholder
vote would only occur if the Merger Agreement was amended to decrease the merger
consideration or an event occurs which adversely affects the rights of, or the
income tax consequences, to the shareholders.
TERMINATION
The Merger Agreement may be terminated at any time prior to the effective
time of the Merger, whether before or after shareholder approval is obtained:
by mutual written consent of Wolohan Acquisition and the Special
Committee; or
by Wolohan Acquisition or the Special Committee:
(i) if the effective time of the Merger shall not have occurred on
or before December 31, 2003; or
(ii) if there shall be any law that makes consummation of the
Merger illegal or prohibited, or if any court of competent jurisdiction
in the United States shall have issued an order, judgment, decree or
ruling, or taken any other action restraining, enjoining or otherwise
prohibiting the Merger and such order, judgment, decree, ruling, or
other action shall have become final and non-appealable; or
36
by the Special Committee:
(i) if there is a superior proposal (as defined) and if with
respect thereto the Special Committee or our Board of Directors
determines in good faith that the failure to take such action would be
inconsistent with its fiduciary duties to our shareholders; or
(ii) if Wolohan Acquisition shall have breached in any material
respect any of its representations, warranties or covenants contained in
the Merger Agreement; or
by Wolohan Acquisition:
(i) if the Board of Directors shall have withdrawn or modified, in
a manner that is materially adverse to Wolohan Acquisition, its approval
or recommendation of the Merger Agreement and the Merger or shall have
recommended another merger, consolidation or business combination
involving, or acquisition of, the Company or our assets or a tender
offer for common stock, or shall have resolved to do any of the
foregoing.
EFFECT OF TERMINATION
In the event of termination of the Merger Agreement and the abandonment of
the Merger, all obligations of the parties shall terminate, except our
obligations as to continued indemnification of our directors and officers, and
there shall be no liability on our part or Wolohan Acquisition or their officers
or directors, except for any breach of a party's obligations under the Merger
Agreement.
AMENDMENT
The Merger Agreement may be amended by action taken by the Board of
Directors of each of the parties thereto and with the approval of the Special
Committee at any time before or after adoption of the Merger Agreement by our
shareholders, provided, however, that after shareholder approval, no amendment
shall be made which decreases the merger consideration or which adversely
affects the rights of, or the income tax consequences to, our shareholders
without the approval of such shareholders.
FEES AND EXPENSES
The following is an estimate of expenses incurred or to be incurred in
connection with the Merger.
<Table>
<Caption>
Printing and mailing Proxy Statement........................ $ 17,153
Legal fees Special Committee................................ 76,000
Legal fees Company -- General............................... 195,000
Filing fees................................................. 2,140
Financial Advisor fees...................................... 542,851
Special Committee fees and expenses......................... 24,782
Financial Advisory Fees -- Company.......................... 175,000
Litigation legal fees....................................... 307,957
Proxy Solicitation Firm fees................................ 3,500
----------
Total..................................................... $1,344,383
</Table>
REGULATORY APPROVALS
We are not aware of any license or other regulatory permit that appears to
be material to our business that might be adversely affected by the Merger, or
of any approval or other action by any domestic (federal or state) or
administrative or regulatory authority or agency that would be required prior to
the Merger. Should any such approval or other action be required, it is our
present intention to seek such approval or action.
The Merger will not require a filing or approval under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
37
MERGER FINANCING
The total amount of cash required to consummate the Merger is estimated to
be approximately $27.8 million, which will be paid by us from our cash on hand
and borrowings from Citizens Bank of Flint, Michigan.
The borrowings will consist of two types of credit facilities, namely an
unsecured line of credit not to exceed $15 million and an unsecured term loan
not to exceed $7,500,000. The interest rate on the line of credit will be 90
basis points over the 30-day Libor rate at the time of borrowing and the
interest rate on the term loan will be 115 basis points over the 30, 60, 90, 180
or 1 year Libor rate at the time of funding. The Continuing Shareholders expect
to satisfy the repayment obligations of those borrowings with the surviving
corporation's cash flow from operations. The line of credit will have monthly
payments of interest with principal payable on demand while the term loan will
provide for semi-annual payments of $750,000 plus interest over five years.
The loan agreement evidencing the term loan contains various requirements
and covenants regarding the Company's financial condition including maintaining
a minimum tangible net worth, a maximum ratio of debt to tangible net worth, a
minimum debt service coverage, working capital provisions and restrictions on
capital expenditures.
APPRAISAL RIGHTS
Holders of common stock are not entitled to dissenters rights of appraisal
by reason of the Merger under the Michigan Business Corporation Act. No other
rights may be available to the shareholders.
38
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of material federal income tax consequences of
the Merger to holders of common stock. The discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
current final and temporary regulations promulgated thereunder and
administrative and judicial interpretations thereof, all of which are subject to
change, possibly with retroactive effect. The discussion applies only to
shareholders who hold shares as capital assets within the meaning of Section
1221 of the Code, and may not apply to common stock received pursuant to
compensation arrangements, common stock held as part of a "straddle," "hedge,"
"conversion transaction," "synthetic security," or other integrated investment,
or to certain types of shareholders, such as financial institutions, insurance
companies, tax-exempt organizations and broker-dealers, who may be subject to
special rules. In addition, this discussion applies only to shareholders who
dispose of all of their shares of common stock for cash in the Merger and will
not reacquire or continue to own stock in the Company either directly or
constructively under the constructive ownership rules of Section 318 of the
Code. This summary also does not address holders of performance shares, or
shareholders who acquired their shares pursuant to the exercise of an employee
stock option or otherwise as compensation. Finally, this discussion does not
address the federal income tax consequences to any shareholder who, for federal
income tax purposes, is a non-resident alien individual, a foreign corporation,
a foreign partnership or a foreign estate or trust (as defined in the Code), nor
does it consider the effect of any foreign, state, local or other tax laws.
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH HOLDER OF COMMON STOCK IS
URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO DETERMINE THE TAX EFFECTS TO
SUCH SHAREHOLDER OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN,
STATE, LOCAL AND OTHER TAX LAWS.
The receipt of cash for shares pursuant to the Merger will be a taxable
sale or exchange transaction for federal income tax purposes, and may also be a
taxable transaction under applicable foreign, state, local or other tax laws.
For federal income tax purposes, the Merger will be treated as a redemption by
us of the shares held by shareholders in exchange for cash, entitled to sale or
exchange treatment pursuant to Section 302 of the Code. In general, for federal
income tax purposes, a shareholder receiving cash consideration as a result of
the Merger, will recognize capital gain or loss equal to the difference between
the shareholder's adjusted tax basis in common stock and the amount of cash
received therefor. The Continuing Shareholders who are not required to and do
not otherwise surrender their shares in the Merger should not recognize any
taxable event as a result of the Merger because their equity investment in the
Company will continue after the Merger.
Capital gain in excess of capital loss recognized by an individual investor
upon a disposition of common stock that has been held for more than 12 months
will generally be subject to a maximum tax rate of 15%. Capital gain, in the
case of common stock that has been held for 12 months or less, will be subject
to tax at ordinary income tax rates. There are also limitations on a
shareholder's deductibility of capital losses.
Payments in connection with the Merger may be subject to backup
withholding, at a rate of 28%. Backup withholding does not apply if a
shareholder is a corporation or comes within certain exempt categories and, when
required, demonstrates this fact. Backup withholding also does not apply if the
shareholder provides a correct taxpayer identification number or social security
number to the Paying Agent, and otherwise complies with applicable requirements
of the backup withholding rules of the Code. Our Paying Agent is Registrar and
Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016-3572, telephone
number (800) 368-5948. A shareholder who does not provide a correct taxpayer
identification number may be subject to penalties imposed by the Internal
Revenue Service ("IRS"). Any amount paid as backup withholding does not
constitute an additional tax and will be creditable against the shareholder's
federal income tax liability, provided that the required information is
furnished to the IRS. Each shareholder should consult with such shareholder's
own tax advisor as to qualification or exemption from backup withholding and the
procedure for obtaining an exemption. Shareholders may prevent backup
withholding by completing a Substitute Form W-9 provided by the Paying Agent and
submitting it to the Paying Agent.
39
GENERAL INFORMATION REGARDING WOLOHAN LUMBER AND WOLOHAN ACQUISITION
Wolohan Lumber is engaged in the retail sale of a full-line of lumber and
building materials and related products, used primarily for new home
construction and large home improvement projects. Wolohan Lumber operates a
chain of 25 building supply stores located in Illinois, Indiana, Kentucky,
Michigan and Ohio. Wolohan Lumber was organized as a Michigan corporation in
1964. Its principal executive offices are located at 1740 Midland Road, Saginaw,
Michigan 48603 and its telephone number is (989) 793-4532.
Wolohan Acquisition is a Michigan corporation organized on June 5, 2003
specifically for the Merger and has not carried on any activities to date other
than those incident to its formation, the negotiation and execution of the
Merger Agreement and the transactions contemplated by the Merger Agreement. John
A. Sieggreen, our Executive Vice President and Chief Operating Officer, who is
also on our board of directors, is the sole shareholder and director of Wolohan
Acquisition. The office address and telephone number of Wolohan Acquisition is
the same as that for Wolohan Lumber.
SUBSEQUENT EVENTS; SHAREHOLDER LITIGATION
After the May 16, 2003 announcement that the Continuing Shareholders had
presented an offer to acquire the remaining shares of common stock held by the
unaffiliated shareholders at a price of $21.75 in cash, on May 21, 2003, an
action (the "Shareholder Litigation") entitled William C. Fraser IRA Account and
Samuel Pill v. Wolohan Lumber Co., et al., (the "Plaintiffs") was commenced in
the Saginaw, Michigan Circuit Court ("Court") against the Company, the five
directors of the Company and two other executive officers of the Company (the
"Defendants") seeking certification as a class action. The Plaintiffs, who are
shareholders of the Company allege that the proposed transaction would result in
unfair dealing and the merger consideration to be paid to the public
shareholders is unfair and grossly inadequate. In addition, Plaintiffs alleged
that Defendants were in possession of non-public, material information
concerning the financial condition and prospects of the Company, especially the
true value and expected increased future value of the Company and its assets,
which they had not adequately disclosed to the public stockholders, and that
they had breached their fiduciary duties by failing to disclose such information
to the members of the purported class. The Company's management (principal
members of which are the Defendants) believes that the actions of the Board in
undertaking its evaluation process has resulted in significant enhancement of
value for the benefit of all Company shareholders during which time the Company
and its directors have only acted in good faith in accordance with all of their
fiduciary duties and the exercise of their business judgment to the Company
shareholders and accordingly, that the action is without merit.
The complaint demands judgment as follows:
(a) certifying the action as a class action and certifying Plaintiffs as
the representatives of the class;
(b) ordering Defendants to carry out their fiduciary duties to Plaintiffs
and the other members of the class, including those duties of care, loyalty,
candor and fair dealing;
(c) granting preliminary and permanent injunctive relief against the
consummation of the Merger;
(d) in the event the Merger is consummated, rescinding the Merger and/or
awarding recissory damages to the class;
(e) ordering Defendants, jointly and severally, to account to Plaintiffs
and other members of the class for all damages suffered and to be suffered by
them as the result of the acts and transactions alleged;
(f) awarding Plaintiffs the costs and disbursements of the action including
allowances for Plaintiffs' reasonable attorneys' and experts' fees; and
(g) granting such other and further relief as the Court may deem just and
proper.
On June 10, 2003, the Defendants filed a motion to dismiss the Shareholder
Litigation on the grounds that: (a) the claims were legally premature because
the Special Committee of the Board of Directors had not had an opportunity to
review, evaluate, analyze and respond to the Continuing Shareholders' offer of
$21.75 per share and had not had an opportunity to negotiate with the Continuing
Shareholders and that there was no
40
agreed upon Merger for the Court to consider or enjoin; and (b) the Plaintiffs'
purported claims, although denied by the Defendants, could be asserted only by
the Company, and not any shareholder, and that the Plaintiffs had failed to
comply with the legal prerequisites established by the Michigan Business
Corporation Act for bringing a "derivative" action on behalf of the Company
against its officers and directors.
On August 13, 2003, the attorneys for the Plaintiffs and the attorneys for
the Defendants reached an agreement in principle, embodied in a signed
Memorandum of Understanding, to resolve the Shareholder Litigation (the
"Settlement"). The Settlement was made expressly subject to additional
procedures, including Court approval, to confirm the fairness of the Settlement
to the Company and to the unaffiliated shareholders (excluding the Continuing
Shareholders).
The following are the principal terms of the Settlement, all of which are
conditioned upon Court approval:
(a) The Merger will be consummated by purchasing all common stock held by
all shareholders other than the Continuing Shareholders for $25.75 cash per
share;
(b) The Plaintiffs and the Defendants jointly will submit to the Court a
proposed order providing for conditional certification of a class of Plaintiffs
comprised of all unaffiliated shareholders of the Company as of May 15, 2003 and
all times thereafter through consummation of the Merger but excluding the
Defendants and the Continuing Shareholders (the "Plaintiff Class");
(c) The Plaintiff Class will release all state and federal claims
(including under the United States Securities laws), known and unknown,
presently asserted or which could be asserted in the future, against any or all
Defendants and any other person or entity in connection with the Merger, this
Proxy Statement and any matters that were or could have been asserted in the
Shareholder Litigation.
(d) The Plaintiffs and the Defendants will present the Settlement to the
Court for a two-step approval process (i) a hearing for preliminary approval of
the Settlement, after which the Court would issue an order conditionally
certifying the class, directing notice to the class of the terms of the
Settlement which also explains the right of class members to voluntarily
withdraw or be excluded from the Settlement and scheduling a hearing for
consideration of final approval of the Settlement; and (ii) a second hearing for
consideration of final approval of the Settlement during which an opportunity
will be provided for objections to be made to the Settlement and after which, if
it issues final approval of the Settlement, the Court would enter an order and
final judgment dismissing with prejudice the Shareholder Litigation;
(e) The Plaintiffs have reserved the right to withdraw from the Settlement
if continuing investigation and discovery reveals facts that are inconsistent
with the fairness of the Settlement to the class and the Company;
(f) The Defendants have reserved the right to withdraw from the Settlement
in the event that a certain number of shares owned by shareholders other than
the Continuing Shareholders timely deliver valid requests to withdraw or be
excluded from the class;
(g) In connection with the Settlement, the attorneys for the Plaintiffs
will apply to the Court for an award of attorneys' fees and expenses not to
exceed in the aggregate $210,000, to be paid by the Company or its successor;
and Defendants have agreed not to oppose this application; and
(h) If the Settlement is not approved by the Court, or if the Plaintiffs or
the Defendants exercise their right to withdraw from the Settlement (as
described in subsections (e) and (f) above), or if the Merger is not consummated
for any reason, the proposed Settlement, including the conditional certification
of the class, shall be deemed null and void and the proposed Settlement, and/or
termination thereof, shall not be deemed to prejudice the parties' respective
rights and positions in the then continuing Shareholder Litigation.
On September 19, 2003, in furtherance of the Settlement, attorneys for the
Plaintiffs and the Defendants filed a motion and supporting papers, which
referenced testimony from the depositions of the Chairman of the Special
Committee, the Special Committee's financial advisor and the President and Chief
Executive Officer of the Company and excerpts from a fairness opinion prepared
by the Special Committee's financial advisor,
41
requesting the Court to: (a) preliminarily approve the fairness of the
Settlement; (b) conditionally certify the class solely for the purpose of
effecting the Settlement; (c) approve the form of the notice to be sent to
members of the class explaining the Settlement and the actions to be taken by
shareholders with respect to the Settlement, including the right of any
shareholder to timely withdraw or be excluded from the Settlement, and (d) set a
hearing for consideration of final approval of the Settlement, at which time
objections to the Settlement could be presented. The Court granted the motion
and scheduled a hearing for final approval of the settlement to take place on
October 27, 2003.
PRICE RANGE OF SHARES; DIVIDENDS; AND STOCK REPURCHASES
Our common stock is traded on The Nasdaq Stock Market under the symbol
"WLHN". The following table sets forth, for the fiscal quarters indicated, the
high and low sales prices per share on The Nasdaq Stock Market. Such quotations
reflect inter-dealer prices, without retail mark-ups, markdowns or commissions,
and may not necessarily represent actual transactions.
<Table>
<Caption>
2001 2002 2003
-------------------------- --------------------------- --------------------------------
MARKET RANGE CASH MARKET RANGE CASH MARKET RANGE CASH
-------------- DIVIDENDS --------------- DIVIDENDS -------------------- DIVIDENDS
HIGH LOW DECLARED HIGH LOW DECLARED HIGH LOW DECLARED
------ ----- --------- ------ ------ --------- ------ ------ ---------
First Quarter................. $12.00 $6.75 $.07 $25.00 $18.68 $.07 $20.92 $18.41 $.07
Second Quarter................ 10.75 7.62 .07 25.65 19.85 .07 24.00 19.64 .07
Third Quarter................. 15.25 9.90 .07 22.22 18.75 .07 24.45* 22.76* .07
Fourth Quarter................ 23.15 12.95 .07 21.48 18.25 .07
---- ---- ----
Year........................ $23.15 $6.75 $.28 $25.65 $18.25 $.28 (*through August 13) $.21
==== ==== ====
</Table>
Since January 1, 2000 we have repurchased the following number of shares in
the fiscal quarters indicated and at the average purchase prices shown below:
<Table>
<Caption>
RANGE OF PURCHASE AVERAGE PURCHASE
NUMBER OF SHARES PRICE PAID PRICE PER SHARE
---------------- ----------------- ----------------
2000
First Quarter...................... 102,663 $11.13 - $13.00 $12.31
Second Quarter..................... 221,008 9.75 - 11.00 10.64
Third Quarter...................... 102,452 10.06 - 11.00 10.60
Fourth Quarter..................... 1,227,588 10.00 - 12.00 11.94
2001
First Quarter...................... 47,111 10.00 - 11.56 10.32
Second Quarter..................... 48,994 9.72 - 11.38 9.73
Third Quarter...................... 1,258,295 15.00 15.00
Fourth Quarter..................... 37,587 13.90 - 19.25 14.02
2002
First Quarter...................... 8,600 19.75 19.75
Second Quarter..................... -- -- --
Third Quarter...................... 25,000 19.75 19.75
Fourth Quarter..................... 2,766 19.75 -- 20.63 20.07
2003
First Quarter...................... 5 19.00 19.00
Second Quarter..................... 50,000 20.14 20.14
Third Quarter (through August
13)............................. -- -- --
</Table>
42
On November 9, 2000, we commenced a tender offer to purchase up to
1,500,000 shares of our common stock at a purchase price not greater than $12.00
nor less than $10.00 a share. At the termination of the tender offer on December
15, 2000, we purchased 1,189,113 shares at a price of $12.00 per share.
On August 7, 2001, we commenced a tender offer to purchase up to 1,500,000
shares of our common stock at a purchase price of $15.00 a share. At the
termination of the tender offer on September 21, 2001, we purchased 1,258,295
shares.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger and the fairness of the consideration to be
received in the Merger, you should be aware that certain of our officers
including James L. Wolohan, President, Chief Executive Officer and Director,
John A. Sieggreen, Executive Vice President, Chief Operating Officer and
Director, Daniel P. Rogers, Senior Vice President, General Merchandise Manager
and Edward J. Dean, Vice President and Chief Financial Officer have interests in
the Merger, which are described below and which may present them with certain
actual or potential conflicts of interest.
As of August 13, 2003, the directors and executive officers as a group
beneficially owned 1,379,960 shares of our common stock on a fully diluted
basis, or 58% of such shares, which includes 276,500 shares issuable upon
exercise of outstanding stock options and 32,677 outstanding performance shares.
The Continuing Shareholders own approximately 51.3% of the outstanding shares of
common stock and, if acting together, will be able to control all matters
requiring approval of our shareholders, including the approval of the Merger.
Our Board was aware of these actual and potential conflicts of interest and
considered them along with the other matters described under "Special Factors --
Recommendations of the Special Committee and Board of Directors."
After the Merger, the Continuing Shareholders will beneficially own 100% of
the outstanding shares of our common stock.
The members of the Special Committee have been and will be paid a fee for
each meeting of the Committee. As of August 13, 2003, Mr. Shobe earned $8,500
and Mr. Weeks as Chairman of the Special Committee earned $12,750. Pursuant to
the Merger Agreement, if the Merger is completed, our directors, (other than
Messrs. Wolohan and Sieggreen) including members of the Special Committee, who
hold stock options under the Stock Option Plan for Non-Employee Directors will
receive the merger consideration less the exercise price for each share of
common stock subject to such directors' stock options.
Based on our records and on information provided to us by our directors and
executive officers, neither the Company nor, to the best of our knowledge, any
of our directors or executive officers, have effected any transactions involving
shares of our common stock during the 60 business days prior to the date of this
Proxy Statement. Except as otherwise described herein, neither the Company nor,
to the best of our knowledge, any of our directors or executive officers are a
party to any contract, arrangement, understanding or relationship with any other
person relating, directly or indirectly, to the Merger with respect to any of
our securities, including, but not limited to, any contract, arrangement,
understanding or relationship concerning the transfer or the voting of any such
securities, joint ventures, loan or option arrangements, puts or calls,
guarantees of loans, guarantees against loss or the giving or withholding of
proxies, consents or authorizations.
The stock options and performance shares held by those officers named below
will survive the Merger and become obligations of the surviving corporation with
the same terms and conditions as currently in existence.
43
Options Held by Executive Officers
<Table>
<Caption>
NUMBER OF
SHARES AVERAGE PER SHARE
NAME UNDER OPTION OPTION PRICE
- ---- ------------ -----------------
James L. Wolohan................................. 65,000 $10.77
John A. Sieggreen................................ 105,000 11.47
Daniel P. Rogers................................. 75,000 10.875
Edward J. Dean................................... 7,500 12.67
</Table>
Performance Shares Held by Executive Officers
<Table>
<Caption>
NUMBER OF
NAME SHARES
- ---- ---------
James L. Wolohan............................................ 17,380
John A. Sieggreen........................................... 7,500
Daniel P. Rogers............................................ 4,500
Edward J. Dean.............................................. 3,297
</Table>
Options Exercised
James L. Wolohan exercised the following stock options during the past two
years:
<Table>
<Caption>
DATE OF EXERCISE NUMBER OF SHARES OPTION PRICE
- ---------------- ---------------- ------------
2/22/02........................................ 20,000 $14.38
2/22/02........................................ 25,000 13.125
3/15/02........................................ 20,000 13.125
1/15/03........................................ 15,000 13.125
</Table>
STOCK OWNERSHIP
The following table sets forth certain information, as of August 13, 2003,
regarding the ownership of shares by each person known by us to be the
beneficial owner of more than 5% of our common stock.
<Table>
<Caption>
NUMBER OF PERCENT
NAME SHARES (1) OF CLASS
- ---- ---------- --------
Michael J. Wolohan and James L. Wolohan as Co-Trustees
Wolohan Family Trust..................................... 749,609(2) 36.7
James L. Wolohan......................................... 166,866(3) 8.2
1740 Midland Road
Saginaw, Michigan 48603
Wolohan Family Foundation (4)............................ 131,900 6.5
1705 Crosby Road
Wayzata, Minnesota 55391
Timothy W. and Georgine Wolohan.......................... 113,320 5.5
6 Pinehurst Lane
Cincinnati, Ohio 45208
</Table>
- ---------------
(1) Beneficial ownership of shares, as determined in accordance with applicable
Securities and Exchange Commission rules, includes shares as to which a
person has or shares voting power and/or investment power.
(2) In addition, 7,260 shares are held by Michael J. Wolohan's spouse as Trustee
and 1,931 shares are held by Michael J. Wolohan as Trustee.
(3) In addition, James L. Wolohan holds stock options to purchase 65,000 shares;
and James L. Wolohan's spouse holds 242 shares in her own name and 5,263
shares as Trustee of two trusts.
44
(4) James L. Wolohan and Michael J. Wolohan are officers and directors of this
Foundation.
The following table sets forth, as of August 13, 2003, the number of shares
of our common stock beneficially owned by each director, each executive officer
and all directors and executive officers as a group.
<Table>
<Caption>
NUMBER OF PERCENT
NAME OF INDIVIDUAL OR GROUP SHARES (1) OF CLASS
- --------------------------- ---------- --------
Hugo E. Braun, Jr.................................... 16,470(2) *
Edward J. Dean....................................... 16,918(3) *
Daniel P. Rogers..................................... 75,000(3) 3.2
Lee A. Shobe......................................... 10,500(2) *
John A. Sieggreen.................................... 106,000(3)(4) 4.5
Charles R. Weeks..................................... 9,000(2) *
James L. Wolohan..................................... 1,113,375(5) 47.7
--------- ----
All Directors and Executive Officers as a Group (7
persons)........................................... 1,347,263 57.7
</Table>
- ---------------
* Less than one percent
(1) The number of shares shown in the table does not include 5,525 shares owned
by spouses and children where beneficial ownership is disclaimed and does
not include any performance shares held in the Long-Term Incentive Plan.
(2) The number of shares shown in the table includes shares which the following
directors have the right to acquire upon the exercise of stock options
granted under the Stock Option Plan for Non-Employee Directors: Hugo E.
Braun, Jr., Lee A. Shobe and Charles R. Weeks, 8,000 shares each.
(3) The number of shares shown in the table includes shares issuable upon the
exercise of stock options for the following executive officers: Daniel P.
Rogers -- 75,000 shares, John A. Sieggreen -- 105,000 shares and Edward J.
Dean -- 7,500 shares.
(4) The number of shares shown includes 1,000 shares which Mr. Sieggreen holds
as custodian for his son.
(5) The number of shares shown in the table as beneficially owned by James L.
Wolohan includes 166,866 shares which he owns in his own name, 65,000 shares
issuable upon the exercise of stock options, 749,609 shares which he holds
with Michael J. Wolohan as Co-Trustee of the Wolohan Family Trust and
131,900 shares owned by the Wolohan Family Foundation of which he is an
officer and a director.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers of Wolohan are as follows:
<Table>
<Caption>
HAS SERVED IN
NAME AND AGE POSITION POSITION SINCE
- ------------ -------- --------------
James L. Wolohan, 51........... Chairman of the Board, 1994
President and 1986
Chief Executive Officer 1987
John A. Sieggreen, 41.......... Executive Vice President and 1999
Chief Operating Officer
Daniel P. Rogers, 53........... Senior Vice President, General 1999
Merchandise Manager
Edward J. Dean, 53............. Vice President and Chief 2003
Financial Officer
George I. Gibson, Jr., 55...... Corporate Secretary 2001
</Table>
All of the officers of the Company named above have held various positions
with the Company for more than five years.
45
The directors of Wolohan are as follows:
<Table>
<Caption>
HAS SERVED AS
NAME AND AGE POSITION DIRECTOR SINCE
- ------------ -------- --------------
Hugo E. Braun, Jr., 71............. Consulting Partner, Braun Kendrick 1984
Finkbeiner, P.L.C.,
Attorneys-at-law
James L. Wolohan, 51............... Chairman of the Board, President 1986
and Chief Executive Officer of the
Company
Charles R. Weeks, 69............... Formerly Chairman and Chief 1996
Executive Officer, Citizens Banking
Corporation
Lee A. Shobe, 64................... Formerly President and Chief 1996
Executive Officer of Dow Brands,
Inc.
John A. Sieggreen, 41.............. Executive Vice President and Chief 1999
Operating Officer of the Company
</Table>
- ---------------
(1) Each of the directors have had the same principal occupation during the past
five years, except as follows: Prior to April 20, 1999 Mr. Weeks was
Chairman of Citizens Banking Corporation; and from 1997 to 1999 Mr.
Sieggreen served as Vice President of Operations of the Company.
The business address of each executive officer and director is in care of
the Company at 1740 Midland Road, Saginaw, Michigan 48603.
OFFICER AGREEMENTS
The Company has entered into agreements with James L. Wolohan, John A.
Sieggreen and Daniel P. Rogers which provide that in the event of a change in
control of the Company (as defined in the agreements), these persons would have
specific rights and receive certain benefits if, within five years after the
change in control, either employment was terminated by the Company without
"cause" (as defined in the agreements) or the person was to terminate employment
for "good reason" (as defined in the agreements). In these circumstances, the
person would be entitled to receive (a) full base salary through the date of
termination, including vacation, plus a severance payment in an amount equal to
three times the person's base annual salary in effect at the date of
termination, payable at the option of the person either in a lump sum or in
installments, (b) a pro-rata payment of any bonus award earned by the person
during the year of termination under the Company's Incentive Plan, (c) all legal
fees and expenses incurred by the person to enforce the person's rights under
the agreement, and (d) continuation of medical and life insurance coverage for a
period of time. If any amounts which the person is entitled to receive are
deemed "parachute payments" under the Internal Revenue Code, the person will be
entitled to receive certain additional payments from the Company.
The agreements provide that there shall be excluded from the definition of
change in control any transaction in which the management of the Company by
themselves or with other persons acquires a controlling portion of the Company's
stock. Thus if the Merger is consummated, it shall not be deemed a change in
control under the agreements.
46
INDEPENDENT AUDITORS
The firm of Rehmann Robson serves as our independent auditors. The
consolidated financial statements and the related financial statement schedules
as of December 31, 2001 and 2002 and for each of the two fiscal years in the
period ended December 31, 2002 included in this Proxy Statement have been
audited by Rehmann Robson, as stated in their reports, which are included and
incorporated by reference in this Proxy Statement. It is not expected that
representatives of Rehmann Robson will be present at the Special Meeting.
SHAREHOLDER PROPOSALS
If the Merger is consummated, we will no longer have unaffiliated
shareholders or public participation in any future meetings of our shareholders.
However, if the Merger is not consummated, our unaffiliated shareholders will
continue to be entitled to attend and participate in our shareholders' meetings.
Pursuant to Rule 14a-B under the Exchange Act promulgated by the SEC, any
shareholder who wishes to present a proposal at the next Annual Meeting of
Shareholders, in the event the Merger is not consummated, and who wishes to have
the proposal included in our proxy statement for that meeting, must have
delivered a copy of the proposal to us at 1740 Midland Road, Saginaw, Michigan
48603, Attention: Corporate Secretary, on or before November 28, 2003.
Alternatively, if a shareholder does not wish to include a proposal for the 2004
Annual Meeting of Shareholders in the proxy statement, the shareholder may
submit a proposal by February 1, 2004.
WHERE YOU CAN FIND MORE INFORMATION
INCORPORATION BY REFERENCE
The SEC allows us to incorporate, by reference, information into this Proxy
Statement, which means that we can disclose important information by referring
you to another document filed separately with the SEC. The following documents
previously filed by us with the SEC are incorporated by reference in this Proxy
Statement and are deemed to be a part hereof:
Annual Report on Form 10-K for the fiscal year ended December 31, 2002;
Quarterly Report on Form 10-Q for the period ended March 31, 2003;
Quarterly Report on Form 10-Q for the period ended June 30, 2003;
Current Reports on Form 8-K dated April 17, 2003, May 16, 2003, July 18,
2003 and August 13, 2003.
Specifically, the information set forth in the following sections of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2002 is
incorporated by reference in this Proxy Statement and deemed to be a part
hereof:
Item 1: Description of Business;
Item 2: Description of Properties;
Item 6: Management's Discussions and Analysis of Financial Condition and
Results of Operations; and
Item 7: Financial Statements.
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2002
and Quarterly Report on Form 10-Q for the period ended June 30, 2003 are
enclosed with this Proxy Statement. See Appendix D and Appendix E hereto. Any
statement contained in a document incorporated by reference in this Proxy
Statement shall be deemed to be modified or superseded for all purposes to the
extent that a statement contained in this Proxy Statement modifies or replaces
the statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute part of this Proxy Statement.
47
We undertake to provide by first class mail, without charge to any person
to whom a copy of this Proxy Statement has been delivered, a copy of any or all
of the documents referred to above which have been incorporated by reference in
this Proxy Statement, other than exhibits to the documents, unless the exhibits
are specifically incorporated by reference therein. Requests for copies should
be directed to George I. Gibson, Jr., Corporate Secretary, Wolohan Lumber Co.,
1740 Midland Road, Saginaw, Michigan 48603.
AVAILABLE INFORMATION
ADDITIONAL INFORMATION
We are subject to the informational filing requirements of the Exchange Act
and, in accordance therewith, are required to file periodic reports, proxy
statements and other information with the SEC relating to our business,
financial condition and other matters. Information as of particular dates
concerning our directors and officers, their remuneration, stock options granted
to them, the principal holders of our securities and any material interest of
such persons in transactions with us is required to be disclosed in proxy
statements distributed to our shareholders and filed with the SEC. Such reports,
proxy statements and other information should be available for inspection at the
public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and also should be available for
inspection at the SEC's regional office located at the Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may also be obtained by mail, upon payment of the SEC's customary fees, by
writing to its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549. These materials filed by us with the SEC are also available at the
website of the SEC at www.sec.gov.
Because the Merger is a "going private" transaction, the Company and
Wolohan Acquisition have filed with the SEC a Rule 13E-3 Transaction Statement
on Schedule 13E-3 under the Exchange Act with respect to the Merger. This Proxy
Statement does not contain all of the information set forth in the Schedule
13E-3 and the exhibits thereto. Copies of the Schedule 13E-3 and the exhibits
thereto are available for inspection and copying at our principal executive
offices during regular business hours by any of our interested shareholders, or
a representative who has been so designated in writing, and may be inspected and
copied, or obtained by mail, by written request directed to the Company.
Our common stock is listed on the Nasdaq Stock Market (ticker symbol:
WLHN), and materials may also be inspected at:
The National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006
If the Merger is consummated, we will seek to cause the shares of common
stock to be de-listed from trading on the Nasdaq Stock Market and to terminate
the registration of our common stock under the Exchange Act, which will relieve
us of any obligation to file reports and forms, such as an Annual Report on Form
10-K, with the SEC under the Exchange Act.
MISCELLANEOUS
It is not expected that any other matters are likely to be brought before
the Special Meeting. However, if any other matters are presented, it is the
intention of the person named in the proxy to vote the proxy in accordance with
their best judgment.
By Order of the Board of Directors,
[GEORGE I. GIBSON, JR. SIG]
George I. Gibson, Jr.,
Secretary
48
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
WOLOHAN ACQUISITION CO.
AND
WOLOHAN LUMBER CO.
DATED AS OF AUGUST 13, 2003
INDEX
<Table>
<Caption>
PAGE NO.
--------
ARTICLE I -- THE MERGER
1.1 The Merger.................................................. A-1
1.2 The Closing................................................. A-2
1.3 Effective Time.............................................. A-2
1.4 Articles of Incorporation, By-Laws, Directors and Officers
of the Surviving Corporation................................ A-2
ARTICLE II -- EFFECT OF THE MERGER ON SECURITIES OF PURCHASER AND THE
COMPANY
2.1 Purchaser Common Stock...................................... A-2
2.2 Company Common Stock........................................ A-2
2.3 Exchange of Certificates Representing Company Common
Stock....................................................... A-3
2.4 Adjustment of Merger Consideration.......................... A-4
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.1 Existence; Good Standing; Corporate Authority............... A-4
3.2 Authorization, Validity and Effect of Agreements............ A-5
3.3 Capitalization, Etc......................................... A-5
3.4 No Violation................................................ A-5
3.5 Company Proxy Statement..................................... A-6
3.6 Brokers..................................................... A-6
3.7 Opinion of Financial Advisor................................ A-6
3.8 Required Vote of Company Stockholders....................... A-6
ARTICLE IV -- REPRESENTATIONS AND WARRANTIES OF PURCHASER
4.1 Existence; Good Standing; Corporate Authority............... A-6
4.2 Capitalization.............................................. A-6
4.3 Authorization, Validity and Effect of Agreements............ A-6
4.4 No Violation................................................ A-7
4.5 Interim Operations of Purchaser............................. A-7
4.6 Brokers..................................................... A-7
4.7 Solvency.................................................... A-7
ARTICLE V -- COVENANTS
5.1 Alternative Proposals....................................... A-7
5.2 Interim Operations.......................................... A-8
5.3 Company Shareholder Approval; Proxy Statement............... A-8
5.4 Other Action................................................ A-9
5.5 Publicity................................................... A-9
5.6 Further Action.............................................. A-9
5.7 Indemnification............................................. A-9
ARTICLE VI -- CONDITIONS
6.1 Conditions to Each Party's Obligation to Effect the
Merger...................................................... A-9
ARTICLE VII -- TERMINATION
7.1 Termination................................................. A-10
7.2 Effect of Termination and Abandonment....................... A-10
7.3 Amendment................................................... A-10
7.4 Extension Waiver............................................ A-11
ARTICLE VIII -- ADDITIONAL AGREEMENTS; GENERAL PROVISIONS
8.1 Nonsurvival of Representations and Warranties............... A-11
8.2 Notices..................................................... A-11
8.3 Assignment; Binding Effect.................................. A-12
8.4 Entire Agreement............................................ A-12
8.5 Governing Law............................................... A-12
8.6 Fees and Expenses........................................... A-12
8.7 Certain Definitions......................................... A-12
8.8 Headings.................................................... A-12
8.9 Interpretation.............................................. A-12
8.10 Waivers..................................................... A-12
8.11 Severability................................................ A-13
8.12 Enforcement of Agreement.................................... A-13
8.13 Counterparts................................................ A-13
</Table>
i
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of August 13,
2003, between Wolohan Acquisition Co., a Michigan corporation ("Purchaser"), and
Wolohan Lumber Co., a Michigan corporation (the "Company").
RECITALS
WHEREAS, certain members of the Wolohan Family along with certain members
of management of the Company (the "Continuing Shareholders") who are listed on
Appendix A hereto and who own beneficially an aggregate of 1,048,151 shares of
Common Stock of the Company ("Company Common Stock") constituting approximately
51.3% of the total outstanding shares of Company Common Stock, have proposed to
the Company that Purchaser acquire all of the remaining issued and outstanding
shares of Company Common Stock in the hands of the shareholders who are not
included among the Continuing Shareholders (the "Public Shareholders");
WHEREAS, the Special Committee of independent directors of the board of
directors of the Company (the "Company Board") established to consider
Purchaser's proposal (the "Special Committee") has unanimously determined that
the Merger (as defined below) and other transactions contemplated herein are
fair and in the best interests of the Public Shareholders and has unanimously
approved this Agreement and unanimously recommended the adoption of this
Agreement by the Company Board, and unanimously recommends approval of this
Agreement by the shareholders of the Company; and
WHEREAS, the Company Board (with James L. Wolohan and John A. Sieggreen
abstaining), based in part on the recommendation of the Special Committee and
the written opinion of McDonald Investments Inc., the financial advisor to the
Special Committee ("Financial Advisor"), has determined that the Merger is fair
and in the best interests of the Public Shareholders, has adopted this
Agreement, and recommends the approval of this Agreement by the shareholders of
the Company; and
WHEREAS, at the Effective Time (as defined below), Purchaser shall merge
with and into the Company (the "MERGER"), with the Company as the surviving
corporation; and
WHEREAS, the shareholder of the Purchaser has approved this Agreement and
has authorized the execution and delivery of such other agreements and documents
as are necessary to consummate the Merger; and
WHEREAS, the shareholders of the Company shall consider and act upon
resolutions to approve and adopt this Agreement and to authorize the execution
and delivery of such other agreements and other documents as are necessary to
consummate the Merger; and
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with the transactions
contemplated by this Agreement.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
1. The Merger.
1.1 The Merger. At the Effective Time (as defined below), subject to
the terms and conditions of this Agreement and the applicable provisions of
the Michigan Business Corporation Act, as amended (the "Michigan Act"),
Purchaser shall be merged with and into the Company and the separate
corporate existence of Purchaser shall thereupon cease. The Company shall
be the surviving corporation in the Merger (sometimes hereinafter referred
to as the "Surviving Corporation"). The Merger shall have the effects
specified in the Michigan Act.
A-1
1.2 The Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place at
the offices of Dickinson Wright PLLC, 500 Woodward Avenue, Suite 4000,
Detroit, Michigan 48226, at 10:00 a.m., local time, as soon as practicable
following the satisfaction (or waiver if permissible) of the conditions set
forth in Article VI. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth in
Article VI shall have been fulfilled or waived in accordance herewith and
this Agreement shall not have been terminated as provided in ARTICLE VII,
the parties hereto shall cause a certificate of merger meeting the
requirements of the Michigan Act ("Certificate of Merger") to be properly
executed and filed with the Department of Consumer and Industry Services of
the State of Michigan on the Closing Date. The Merger shall become
effective at the time of filing and endorsement of the Certificate of
Merger with the State of Michigan or at such later time which the parties
hereto shall have agreed upon and designated in such filing as the
effective time of the Merger (the "Effective Time").
1.4 Articles of Incorporation, By-Laws, Directors and Officers of the
Surviving Corporation. Unless otherwise agreed by the Company and
Purchaser prior to the Closing, at the Effective Time:
(a) The articles of incorporation of the Company as in effect
immediately prior to the Effective Time shall be the articles of
incorporation of the Surviving Corporation, until duly amended in
accordance with applicable law and the terms thereof;
(b) The by-laws of the Company as in effect immediately prior to the
Effective Time shall be the by-laws of the Surviving Corporation, until
duly amended in accordance with applicable law and the terms thereof;
(c) The officers of the Company immediately prior to the Effective
Time shall continue to serve in their respective offices of the Surviving
Corporation from and after the Effective Time, until their successors are
duly appointed or elected in accordance with applicable law and the
Surviving Corporation's articles of incorporation and by-laws; and
(d) The directors of the Surviving Corporation shall be James L.
Wolohan and John A. Sieggreen who shall serve until their successors are
duly appointed or elected in accordance with applicable law, and the
Surviving Corporation's articles of incorporation and by-laws.
ARTICLE II
2. Effect of the Merger on Securities of Purchaser and the Company.
2.1 Purchaser Common Stock. At the Effective Time, each share of
Purchaser Common Stock that is outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the
part of Purchaser, the Company or the holder thereof, cease to be
outstanding and shall be canceled and retired without payment of any
consideration therefor.
2.2 Company Common Stock.
(a) At the Effective Time, each share of Company Common Stock issued
and outstanding immediately prior to the Effective Time and held by the
Public Shareholders shall, by virtue of the Merger and without any action
on the part of Purchaser, the Company or the holder thereof, be converted
into the right to receive $25.75 per share without interest (the "Merger
Consideration") in accordance with Section 2.3 upon the surrender of a
certificate or certificates (a "Certificate") representing such shares of
Company Common Stock. Shares of Company Common Stock owned by the
Continuing Shareholders shall not be converted into the right to receive
the Merger Consideration at the Effective Time.
(b) Each share of Company Common Stock held by each of the Continuing
Shareholders at the Effective Time shall, by virtue of the Merger and
without any action on the part of the Purchaser, the
A-2
Company or the holder thereof, continue to represent one share of Common
Stock of the Surviving Corporation.
(c) Company Stock Options. At the Effective Time, each outstanding
employee and director stock option to purchase Company Common Stock (the
"OPTIONS") heretofore granted under any stock option plan of the Company
(collectively, the "Stock Plans"), except for any Options held by any of
the Continuing Shareholders, shall no longer be exercisable for the
purchase of shares of Company Common Stock but each such Option shall
entitle each holder thereof, in cancellation, settlement and exchange
therefor, to receive a payment in cash (subject to any applicable
withholding taxes) (the "Cash Payment"), equal to the product of (x) the
number of shares of Company Common Stock covered by the Option immediately
prior to the Effective Time, and (y) the excess, if any, of the Merger
Consideration over the exercise price per share of Company Common Stock
subject to such Option. Any Cash Payment required to be paid shall be paid
to each holder of an outstanding Option on the date occurring on or after
the Effective Time on which such holder executes a document canceling such
Option. Each Option held by a Continuing Shareholder at the Effective Time,
by virtue of the Merger and without any action on the part of the Company
or the holder thereof, shall continue to represent an Option to acquire
common stock in the Surviving Corporation and continue to have the same
rights and privileges as prior to the Effective Date.
(d) Company Performance Shares. At the Effective Time, each holder of
Performance Shares under the Company's Long-Term Incentive Plan
("Performance Shares"), except Performance Shares held by any of the
Continuing Shareholders, will be cancelled and the holders thereof will be
entitled to receive a prompt payment in cash (subject to any applicable
withholding taxes) for all shares of Company Common Stock allocated to his
account in an amount equal to the product of (i) the number of Performance
Shares, and (ii) the Merger Consideration. Each Performance Share held by a
Continuing Shareholder at the Effective Time, by virtue of the Merger and
without any action on the part of the Company or the holder thereof, shall
continue to represent a Performance Share in the Surviving Corporation and
continue to have the same rights and privileges as prior to the Effective
Date.
2.3 Exchange of Certificates Representing Company Common Stock.
(a) Prior to the Effective Time, Purchaser shall appoint a commercial
bank or trust company, subject to the reasonable satisfaction of the
Company, to act as paying agent hereunder for payment of the Merger
Consideration upon surrender of Certificates (the "Paying Agent").
Purchaser shall take all steps necessary to cause the Surviving Corporation
to provide the Paying Agent with cash in amounts necessary to pay for all
the shares of Company Common Stock pursuant to Section 2.2(a) at the
Effective Time. Such amounts shall hereinafter be referred to as the
"Exchange Fund." The Surviving Corporation shall be responsible for payment
of all sums to be paid pursuant to Section 2.2(c) and Section 2.2(d).
(b) As soon as practicable after the Effective Time, the Surviving
Corporation shall cause the Paying Agent to mail to each holder of record
of shares of Company Common Stock (i) a letter of transmittal which shall
specify that delivery shall be effected, and risk of loss and title to such
Certificates shall pass, only upon delivery of the Certificates to the
Paying Agent and which letter shall be in such form and have such other
provisions as are customary for letters of this nature and (ii)
instructions for effecting the surrender of such Certificates in exchange
for the Merger Consideration. Upon surrender of a Certificate to the Paying
Agent together with such letter of transmittal, duly executed and completed
in accordance with the instructions thereto, and such other documents as
may be reasonably required by the Paying Agent, the holder of such
Certificate shall be entitled to receive in exchange therefor the amount of
cash into which shares of Company Common Stock theretofore represented by
such Certificate shall have been converted pursuant to Section 2.2, and the
shares represented by the Certificate so surrendered shall forthwith be
canceled. No interest will be paid or will accrue on the cash payable upon
surrender of any Certificate. Until surrendered as contemplated by this
Section 2.3, each Certificate shall be deemed, at any time after the
Effective Time, to represent only the right to receive on such surrender
the amount,
A-3
without any interest thereon, of cash into which shares of Common Stock
theretofore represented by such Certificate shall have been converted
pursuant to Section 2.2.
(c) At or after the Effective Time, there shall be no transfers on the
stock transfer books of the Company of the shares of Company Common Stock
that were outstanding immediately prior to the Effective Time. From and
after the Effective Time, the holders of Certificates evidencing ownership
of shares of Company Common Stock outstanding immediately prior to the
Effective Time shall cease to have any rights with respect to such shares
except as otherwise provided herein or by applicable law. If, after the
Effective Time, Certificates are presented to the Surviving Corporation,
they shall be canceled and exchanged as provided in this Article II.
(d) Any portion of the Exchange Fund (including the proceeds of any
interest and other income received by the Paying Agent in respect of all
such funds) that remains unclaimed by the former shareholders of the
Company twelve months after the Effective Time shall be delivered to the
Surviving Corporation. Any former shareholders of the Company who have not
theretofore complied with this Article II may thereafter look only to the
Surviving Corporation for payment of any Merger Consideration, without any
interest thereon, that may be payable in respect of each share of Company
Common Stock such shareholder holds as determined pursuant to this
Agreement.
(e) None of Purchaser, the Company, the Surviving Corporation, the
Paying Agent or any other Person shall be liable to any former holder of
shares of Company Common Stock for any amount properly delivered to a
public official pursuant to applicable abandoned property, escheat or
similar laws.
(f) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen or destroyed and, if required
by the Surviving Corporation, the posting by such Person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity
against any claim which may be made against it with respect to such
Certificate, the Paying Agent will issue in exchange for such lost, stolen
or destroyed Certificate the Merger Consideration payable in respect
thereof pursuant to this Agreement.
(g) The Surviving Corporation and the Paying Agent shall be entitled
to deduct and withhold from the consideration otherwise payable pursuant to
the Merger to a holder of shares of Company Common Stock, a holder of an
Option or a holder of Performance Shares such amounts as the Surviving
Corporation and the Paying Agent are required to deduct and withhold with
respect to the making of such payment under the Internal Revenue Code of
1986, as amended (the "Code"), or any provision of state or local law. To
the extent amounts are so withheld by the Surviving Corporation or the
Paying Agent, the withheld amounts (i) shall be treated for all purposes of
this Agreement as having been paid to the holder of the shares in respect
of which the deduction and withholding was made, and (ii) shall be promptly
paid over to the applicable taxing authority.
2.4 Adjustment of Merger Consideration. In the event that,
subsequent to the date of this Agreement but prior to the Effective Time,
the outstanding shares of Company Common Stock shall have been changed into
a different number of shares or a different class as a result of a stock
split, reverse stock split, stock dividend, subdivision, reclassification,
split, combination, exchange, recapitalization or other similar
transaction, the Merger Consideration shall be appropriately adjusted to
eliminate the effects of that event.
ARTICLE III
3. Representations and Warranties of the Company. The Company hereby
represents and warrants to Purchaser as of the date of this Agreement as
follows:
3.1 Existence; Good Standing; Corporate Authority. The Company and
each of its subsidiaries is duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all
requisite power and authority to own or lease and operate its properties
and carry on its business as now conducted, except where the failure to be
so organized, existing or in good standing or to have such
A-4
power and authority would not result, individually or in the aggregate, in
a Material Adverse Effect (as hereinafter defined). For purposes of this
Agreement, a "Material Adverse Effect" means a change or effect that is
materially adverse to the business, operations, assets, or financial
condition of the Company and its subsidiaries, taken as a whole. For
purposes of this Agreement, a "subsidiary" means, any Person in which the
Company owns, directly or indirectly, more than 50% of the stock or other
equity interest that are entitled to vote for the election of the board of
directors or other governing body of such Person.
3.2 Authorization, Validity and Effect of Agreements. The Company
has the requisite corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder, and to consummate the
transactions contemplated hereby. The execution and delivery by the Company
of this Agreement and the consummation by the Company of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action (including without limitation the approval of the Company
Board), and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby (other than the approval of this Agreement by the
holders of the shares of Company Common Stock and other than, in the case
of this Agreement, the filing of the Certificate of Merger as required by
the Michigan Act). This Agreement has been duly and validly executed and
delivered by the Company, and (assuming this Agreement constitutes a valid
and binding obligation of Purchaser and subject to approval by the
Company's shareholders) constitutes and will constitute valid and binding
obligations of the Company, enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, moratorium or other similar
laws relating to creditors' rights and general principles of equity.
3.3 Capitalization, Etc. The authorized capital stock of the Company
consists of 20,000,000 shares of Common Stock. As of the close of business
on August 1, 2003, (a) 2,042,688 shares of Company Common Stock were
outstanding and attached to each outstanding share is a right to acquire
Company Common Stock pursuant to the terms and provisions of the Rights
Agreement dated as of February 16, 2000 between the Company and Registrar
and Transfer Company as Rights Agent, (b) 291,200 shares of Company Common
Stock were reserved for issuance for outstanding Options and (c) 47,012
shares of Company Common Stock were reserved for issuance under outstanding
Performance Shares under the Company's Long-Term Incentive Plan. All issued
and outstanding shares of Company Common Stock are duly authorized, validly
issued, fully paid, nonassessable and free of preemptive rights. Except for
Options issued pursuant to the Company Stock Option Plans and Performance
Shares issued under the Long-Term Incentive Plan, there are no options,
warrants, calls, subscriptions, convertible securities, stock appreciation
rights or other rights (including rights of first refusal), agreements or
commitments which obligate the Company or any of its subsidiaries to issue,
transfer or sell any shares of capital stock of, or equity interests in, or
any material assets of, the Company or any of its subsidiaries. There are
no outstanding obligations of the Company or any subsidiaries to
repurchase, redeem or otherwise acquire any shares of capital stock of the
Company. There are no voting trusts or other agreements or understandings
to which the Company or any of its subsidiaries is a party with respect to
the voting of capital stock of the Company or any of its subsidiaries.
3.4 No Violation.
Assuming that all consents, approvals, authorizations and other
actions described in this Section have been obtained and all filings and
obligations described in this Section have been made, neither the execution
and delivery by the Company of this Agreement, nor (assuming requisite
shareholder approval is obtained) the consummation by the Company of the
transactions contemplated hereby, will: (i) violate, conflict with or
result in a breach of any provision of the articles of incorporation or
by-laws of the Company or any subsidiary; (ii) other than (A) the filing of
a premerger notification and report form by the Company under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), if required, (B) the filing with the Securities and Exchange
Commission (the "SEC") of a proxy statement relating to obtaining the
approval of shareholders of the Company to this Agreement and the Merger
(such proxy statement as amended or supplemented from time to time, the
"Proxy Statement"), a Schedule 13E-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and such other reports and filings
as may be required in connection with this Agreement and the
A-5
transactions contemplated hereby, (C) the filing of a Certificate of Merger
as required by the Michigan Act; and (D) any applicable requirements, if
any, of Blue Sky Laws or the Nasdaq National Market, Inc., which require
any consent, approval or authorization of, or declaration, filing or
registration with, any federal, state or local judicial, legislative,
executive, administrative or regulatory body or authority or any court,
arbitration board or tribunal ("Governmental Entity"), the lack of which,
individually or in the aggregate, would have a Material Adverse Effect on
the Company or, by law, prevent or materially delay the consummation of the
transactions contemplated hereby; or (iii) violate any ordinance, rule,
regulation, federal, state or local law, statute, order, judgment or decree
("LAWS"), applicable to the Company, any of its subsidiaries or any of
their respective assets other than any violations which do not have a
Material Adverse Effect on the Company.
3.5 Company Proxy Statement. None of the information in the Proxy
Statement at the time such document is filed with the SEC or first
published, sent or given to the Company's shareholders, will contain any
untrue statement of a material fact or will omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading.
3.6 Brokers. Except for McDonald Investments Inc. (the "Financial
Advisor"), the arrangements of which have been disclosed to Purchaser in
writing, and except for S. V. Murphy & Co., Inc., a financial consultant to
the Company, no broker, finder or financial advisor is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement that is based upon any
arrangement made by or on behalf of the Company.
3.7 Opinion of Financial Advisor. The Special Committee has received
the written opinion of the Financial Advisor to the effect that, as of the
date of this Agreement, the Merger Consideration to be received in the
Merger by the Public Shareholders pursuant to the Merger is fair, from a
financial point of view (the "Opinion"). The Company hereby represents and
warrants that it has been authorized by the Financial Advisor to permit the
inclusion, to the extent required by applicable law, of the Opinion and
references thereto and the Financial Advisor's presentation to the Special
Committee, subject to prior review and consent by the Financial Advisor
(such consent not to be unreasonably withheld), in the Proxy Statement. The
Company has no obligation to the Financial Advisor other than for the fees,
expenses and indemnification provisions provided under the engagement
letter between the Special Committee and the Financial Advisor.
3.8 Required Vote of Company Stockholders. The only vote of the
shareholders of the Company required to adopt this Agreement and to approve
the Merger and the transactions contemplated hereby, is the affirmative
vote of the holders of a majority of the outstanding shares of Company
Common Stock.
ARTICLE IV
4. Representations and Warranties of Purchaser. Purchaser hereby
represents and warrants to the Company as of the date of this Agreement as
follows:
4.1 Existence; Good Standing; Corporate Authority. Purchaser is a
corporation duly incorporated, validly existing and in good standing under
the laws of its jurisdiction of incorporation and has all requisite
corporate power and authority to own, operate and lease its properties and
carry on its business as now conducted, except where the failure to have
such power and authority, individually or in the aggregate, would not
materially adversely affect the ability of Purchaser to consummate the
transactions contemplated hereby.
4.2 Capitalization. The authorized capital stock of the Purchaser
consists of 60,000 shares of Common Stock. At the close of business on
August 1, 2003, 100 shares were outstanding and the sole shareholder of
Purchaser is John A. Sieggreen.
4.3 Authorization, Validity and Effect of Agreements. Purchaser has
the requisite corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder, and
A-6
to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation by Purchaser of the
transactions contemplated hereby have been duly and validly authorized by
all necessary corporate action and no other corporate proceedings on the
part of Purchaser are necessary to authorize this Agreement or to
consummate the transactions contemplated hereby other than, in the case of
this Agreement, the filing of the Certificate of Merger as required by the
Michigan Act. This Agreement has been duly and validly executed and
delivered by Purchaser, and (assuming this Agreement constitutes a valid
and binding obligation of the Company) constitutes and will constitute the
valid and binding obligations of Purchaser, enforceable in accordance with
its respective terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights and general
principles of equity.
4.4 No Violation. Assuming that all consents, approvals,
authorizations and other actions described in this Section and in Section
3.4 have been obtained and all filings and obligations described in this
Section and in Section 3.4 have been made, neither the execution and
delivery of this Agreement by Purchaser, nor the consummation by it of the
transactions contemplated hereby or thereby, will (i) violate, conflict
with or result in any breach of any provision of the articles of
incorporation or by-laws of Purchaser; (ii) other than the filings required
under the Exchange Act, require any consent, approval or authorization of,
or declaration, filing or registration with, any Governmental Entity, the
lack of which, individually or in the aggregate, would have a Material
Adverse Effect on the ability of Purchaser to consummate the transactions
contemplated hereby or prevent or materially delay the consummation of the
transactions contemplated hereby, or (iii) violate any Laws applicable to
Purchaser or any of its assets.
4.5 Interim Operations of Purchaser. Purchaser was formed solely for
the purpose of engaging in the transactions contemplated hereby, has
engaged in no other business activities and has conducted its operations as
contemplated hereby.
4.6 Brokers. No broker, finder or financial advisor is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement that is based upon any
arrangement made by or on behalf of the Purchaser.
4.7 Solvency. After giving effect to the Merger, the Surviving
Corporation will not (i) be insolvent, (ii) have unreasonably small capital
with which to engage in its business, (iii) have total liabilities in
excess of its total assets, or (iv) be unable to pay its debts as the debts
become due in the usual course of its business and, further, the capital of
the Surviving Corporation will not become impaired thereby.
ARTICLE V
5. Covenants.
5.1 Alternative Proposals. The Company agrees (a) that, between the
date hereof and the earlier of the Effective Time or the termination of
this Agreement in accordance with its terms, neither it nor any of its
subsidiaries shall, and it shall direct its officers, directors, agents and
representatives (including, without limitation, any investment banker,
attorney or accountant retained by it or the Special Committee) not to,
initiate, solicit or knowingly encourage, any inquiries or the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer to its shareholders) to acquire the Company pursuant to a
merger, acquisition, consolidation or similar transaction involving, or any
purchase of all or in excess of 20% of the assets or equity securities of,
the Company or any of its subsidiaries (any such proposal or offer being
hereinafter referred to as an "Alternative Proposal") or engage in any
negotiations concerning, or provide any confidential information or data
to, afford access to the properties, books or records of the Company or any
of its subsidiaries to, or have any discussions with, any Person relating
to an Alternative Proposal; and (b) that it will notify Purchaser promptly
of the terms of such Person's or entity's inquiry or proposal if any such
inquiries or proposals are received by the Company; Provided, However, that
nothing contained in this Section 5.1 shall prohibit the Company or
A-7
its subsidiaries, upon approval of the Special Committee, from (i) prior to
the Effective Time, furnishing information to, or entering into discussions
or negotiations with, any Person or entity that makes an unsolicited bona
fide Alternative Proposal, only if (A) such proposal was not initially
solicited, encouraged or knowingly facilitated by the Company, its
subsidiaries or their agents in violation of this Section 5.1, (B) prior to
furnishing information to, or entering into discussions or negotiations
with, such person or entity, the Company provides written notice to
Purchaser to the effect that it is furnishing information to, or entering
into discussions or negotiations with, such person or entity, and (C) the
Special Committee determines that such proposal is, or is likely to lead to
a proposal that is, more favorable from a financial point of view to the
shareholders of the Company as compared to the Merger (such proposal
meeting the requirements of clauses (A), (B) and (C) being a "Superior
Proposal"). The Company shall keep Purchaser informed of the status of any
such discussions or negotiations and the terms of any proposal. Nothing in
this Section 5.1 shall (x) permit the Company to terminate this Agreement
(except as specifically provided in Article VII hereof), (y) permit the
Company to enter into any agreement with respect to an Alternative Proposal
during the term of this Agreement, or (z) affect any other obligation of
the Company under this Agreement
5.2 Interim Operations.
During the period from the date of this Agreement to the Effective
Time (except as otherwise specifically contemplated by the terms of this
Agreement), the Company will and will cause its subsidiaries to carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and, to the extent
consistent therewith, use all reasonable efforts to preserve intact their
current business organizations, keep available the services of their
current officers and employees and preserve their relationships with
customers, suppliers, licensors, licensees, distributors and others having
business dealings with them, in each case consistent with past practice, to
the end that their goodwill and ongoing businesses will be unimpaired to
the fullest extent possible at the Effective Time.
5.3 Company Shareholder Approval; Proxy Statement.
(a) The Company, acting through the Company Board, shall (i) call a
meeting of its shareholders (the "Shareholders Meeting") for the purpose of
voting upon this Agreement and the transactions contemplated hereby, (ii)
hold the Shareholders Meeting as soon as practicable following the date of
this Agreement, and (iii) unless taking such action would be inconsistent
with the fiduciary duties of the directors of the Company or of the
Company's directors constituting the Special Committee to shareholders of
the Company imposed by Law, as determined by such directors in good faith,
and after consultation with independent legal counsel, recommend to the
shareholders the approval of this Agreement and the transactions
contemplated hereby; Provided, However, that the Company Board shall not be
obligated to recommend this Agreement and the transactions contemplated
hereby if, at or prior to the Shareholders Meeting, a Superior Proposal has
been received and if with respect thereto the Special Committee or the
Board of Directors determines in good faith (after consultation with its
legal counsel) that taking such action would be inconsistent with its
fiduciary duties to the shareholders of the Company. In the event a
Shareholders Meeting is called, the Company shall use its reasonable best
efforts to solicit from the shareholders of the Company proxies in favor of
the approval and adoption of this Agreement, and the transactions
contemplated hereby and to secure the vote of shareholders required by the
condition specified in ARTICLE VI to approve and adopt this Agreement,
unless otherwise required by the applicable fiduciary duties of the
directors of the Company or of the Company's directors constituting the
Special Committee, as determined by such directors in good faith, and after
consultation with independent legal counsel.
(b) The Company and Purchaser will, as soon as practicable following
the date of this Agreement, prepare and file a preliminary Proxy Statement
with the SEC with respect to the Shareholders Meeting, a Schedule 13E-3
under the Exchange Act and such other reports and filings as may be
required under applicable securities laws. The Company and Purchaser will
use their best efforts to respond to any comments of the SEC or its staff
and to cause the Proxy Statement to be cleared by, the SEC. As
A-8
promptly as practicable after the Proxy Statement has been declared
effective by the SEC, the Company shall mail the Proxy Statement to the
shareholders of the Company. If at any time prior to the approval of this
Agreement by the Company's shareholders there shall occur any event which
should be set forth in an amendment or supplement to the Proxy Statement
the Company will prepare and mail to its shareholders such an amendment or
supplement.
(c) Purchaser agrees to cause all shares of Company Common Stock owned
by the Continuing Shareholders to be voted in favor of the approval of the
Merger.
5.4 Other Action. The Company and the Purchaser shall use their
reasonable best efforts to take, or cause to be taken, all other action and
do, or cause to be done, all other things necessary, proper or appropriate
to consummate and make effective the transactions contemplated by this
Agreement. If, at any time after the Effective Time, any further action is
necessary or desirable to carry out the purpose of this Agreement, the
proper officers and directors of Purchaser and the Surviving Corporation
shall take all such necessary action.
5.5 Publicity. The Company and Purchaser shall obtain the prior
consent of each other before issuing any press release or otherwise making
any public announcement with respect to the transactions contemplated
hereby, except as may be required by Law.
5.6 Further Action. Each party hereto shall, subject to the
fulfillment at or before the Effective Time of each of the conditions of
performance set forth herein or the waiver thereof, perform such further
acts and execute such documents as may be reasonably required to effect the
transactions contemplated hereby, including the Merger.
5.7 Indemnification.
(a) Each of Purchaser and the Company agrees that all rights to
indemnification existing in favor of the present or former directors,
officers, employees, fiduciaries and agents of the Company or any of its
subsidiaries as provided under the Michigan Act and in the Company's
articles of incorporation or bylaws or the charter and bylaws of the
Company's subsidiaries as in effect on the date hereof with respect to
matters occurring up to and including the Effective Time shall survive the
consummation of the Merger and continue after the Effective Time. Without
limiting the generality of the foregoing, in the event any person entitled
to indemnification under this Section 5.7(a) becomes involved in any claim,
action, proceeding or investigation after the Effective Time, the Company
shall periodically advance to such person his or her reasonable legal and
other reasonably incurred expenses (including the cost of any investigation
and preparation incurred in connection therewith), subject to such person
providing an undertaking to reimburse all amounts so advanced if it is
determined that such person is not entitled to indemnification.
(b) The provisions of this Section 5.7 are intended to be for the
benefit of, and shall be enforceable by, each of the Company's current
directors and officers and their heirs and personal representatives.
ARTICLE VI
6. Conditions.
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject
to the satisfaction or waiver, where permissible, prior to the Effective
Time, of the following conditions:
(a) This Agreement and the Merger shall have been approved by the
requisite vote of the holders of the Company Common Stock.
(b) No final restraining order or permanent injunction or other final
order issued by any court of competent jurisdiction or other legal
prohibition preventing the consummation of the Merger shall be in effect.
A-9
(c) All necessary approvals, authorizations and consents of any
Governmental Entity required to consummate the Merger shall have been
obtained and remain in full force and effect, and all waiting periods
relating to such approvals, authorizations and consents shall have expired
or been terminated.
(d) The Company Board shall have taken all action required to redeem
the Rights outstanding under the Rights Agreement dated February 16, 2000.
(e) The Merger Consideration shall have been delivered to the Paying
Agent.
(f) There shall not be pending any litigation pertaining to the
Merger.
ARTICLE VII
7. Termination.
7.1 Termination. This Agreement, notwithstanding approval thereof by
the shareholders of the Company, may be terminated at any time prior to the
Effective Time:
(a) by mutual written consent of Purchaser and the Special Committee;
or
(b) by the Purchaser or the Special Committee:
(i) if the Effective Time shall not have occurred on or before
December 31, 2003 (provided that, the right to terminate this Agreement
pursuant to this clause (i) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the
cause of or resulted in the failure of the Effective Time to occur on or
before December 31, 2003; or
(ii) if there shall be any Law that makes consummation of the
Merger illegal or prohibited, or if any court of competent jurisdiction
in the United States shall have issued an order, judgment, decree or
ruling, or taken any other action restraining, enjoining or otherwise
prohibiting the Merger and such order, judgment, decree, ruling, or
other action shall have become final and non-appealable; or
(c) by the Special Committee:
(i) if there is a Superior Proposal and if with respect thereto the
Special Committee or the Company Board determines in good faith (after
consultation with its legal counsel) that the failure to take such
action would be inconsistent with its fiduciary duties to the
shareholders of the Company; or
(ii) if Purchaser shall have breached in any material respect any
of its representations, warranties or covenants contained in this
Agreement; or
(d) by Purchaser:
(i) if the Special Committee shall have withdrawn or modified, in a
manner that is materially adverse to Purchaser, its approval or
recommendation of this Agreement and the Merger or shall have
recommended another merger, consolidation or business combination
involving, or acquisition of, the Company or its assets or a tender
offer for Common Stock, or shall have resolved to do any of the
foregoing.
7.2 Effect of Termination and Abandonment. In the event of
termination of this Agreement and the abandonment of the Merger pursuant to
this Article VII, all obligations of the parties hereto shall terminate,
except the obligations of the parties pursuant to this Section 7.2 and
Sections 5.7 and 8.6, and there shall be no liability on the part of the
Company, Purchaser or their respective officers or directors, except for
any breach of a party's obligations under such provisions.
7.3 Amendment. To the extent permitted by applicable law, this
Agreement may be amended by action taken by or on behalf of the board of
directors of each of the parties hereto and, in the case of the Company,
with the approval of the Special Committee at any time before or after
adoption of this
A-10
Agreement by the shareholders of the Company; Provided, However, that after
any such shareholder approval, no amendment shall be made which decreases
the Merger Consideration or which adversely affects the rights of, or the
income tax consequences to, the Company's shareholders hereunder without
the approval of such shareholders. This Agreement may not be amended except
by an instrument in writing signed on behalf of all of the parties.
7.4 Extension; Waiver. At any time prior to the Effective Time, any
party hereto, by action taken by its board of directors, may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other party hereto, (b) waive any
inaccuracies in the representations and warranties made to such party
contained herein or in any document delivered pursuant hereto and (c) waive
compliance with any of the agreements or conditions for the benefit of such
party contained herein; Provided, However, that, if the Company seeks to
make such extension or waiver as provided in (a), (b) or (c) above, it must
first obtain the approval of the Special Committee. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only
if set forth in an instrument in writing signed on behalf of such party.
ARTICLE VIII
8. Additional Agreements; General Provisions.
8.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement, or in any instrument
delivered pursuant to this Agreement, shall survive the Effective Time.
8.2 Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly
given or made as of the date of receipt and shall be delivered personally
or mailed by registered or certified mail (postage prepaid, return receipt
requested), or sent by overnight courier or sent by facsimile, to the
applicable party at the following addresses or facsimile numbers (or at
such other address or telecopy number for a party as shall be specified by
like notice):
<Table>
If to Purchaser: Wolohan Acquisition Co.
1740 Midland Road
Saginaw, Michigan 48603
Facsimile: (989) 793-5066
Attention: John A. Sieggreen, President
With a copy to: Verne C. Hampton II
Dickinson Wright PLLC
500 Woodward Avenue, Suite 4000
Detroit, MI 48226
Facsimile: (313) 223-3598
If to the Company: Wolohan Lumber Co.
1740 Midland Road
Saginaw, MI 48603
Facsimile: (989) 793-5066
Attention: James L. Wolohan, President
With a copy to: Verne C. Hampton II Dickinson Wright
PLLC 500 Woodward Avenue, Suite 4000
Detroit, MI 48226
Facsimile: (313) 223-3598
</Table>
A-11
<Table>
If to the Special Committee: Charles R. Weeks, Chairman
817 Boutell Drive
Grand Blanc, MI 48439
Facsimile:
With a copy to: Justin G. Klimko
Butzel Long PC
150 W. Jefferson, Suite 900
Detroit, Michigan 48226
Facsimile: (313) 225-7037
</Table>
8.3 Assignment; Binding Effect. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties and the Special Committee. This
Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns. Notwithstanding
anything contained in this Agreement to the contrary, except for (i) the
provisions of SECTION 5.7, which may be enforced directly by the
beneficiaries thereof, and (ii) the right of each Public Shareholder and
each holder of Options or Performance Shares to receive payment under the
terms of this Agreement after the Effective Time, nothing in this
Agreement, expressed or implied, is intended to confer on any Person other
than the parties hereto or their respective heirs, successors, executors,
administrators and assigns any rights, remedies, obligations or liabilities
under or by reason of this Agreement.
8.4 Entire Agreement. This Agreement, and the Appendixes, and any
other documents delivered by the parties in connection herewith constitute
the entire agreement among the parties with respect to the subject matter
hereof and supersede all prior agreements and understandings among the
parties with respect thereto.
8.5 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Michigan without regard to its
rules of conflict of laws.
8.6 Fees and Expenses. All fees, costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby
shall be paid by the Company. Provided, however, if this Agreement is
terminated pursuant to Article VII, the party incurring such fees, costs
and expenses shall be responsible for the payment thereof.
8.7 Certain Definitions. For purposes of this Agreement, the
following term shall have the following meaning:
"Person" means an individual, corporation, partnership, limited
liability company, association, trust, unincorporated organization,
entity or group (as defined in the Exchange Act).
8.8 Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given
no substantive or interpretive effect whatsoever. The table of contents
contained in this Agreement is for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
8.9 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and
words denoting natural Persons shall include corporations and partnerships
and vice versa. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be understood to be followed by the
words, "without limitation".
8.10 Waivers. No action taken pursuant to this Agreement, including,
without limitation, any investigation by or on behalf of any party, shall
be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants or agreements
contained in this Agreement. The waiver by any party hereto of a breach of
any provision hereunder shall not operate or be construed as a waiver of
any prior or subsequent breach of the same or any other provision
hereunder.
A-12
8.11 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining
terms and provisions of this Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
8.12 Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with its specific terms or
was otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions hereof in
any Michigan Court, this being in addition to any other remedy to which
they are entitled at law or in equity.
8.13 Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which, when so executed and
delivered, shall be an original. All such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a
number of copies hereof, each signed by less than all, but together signed
by all, of the parties hereto.
A-13
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
WOLOHAN LUMBER CO.
By: /s/ JAMES L. WOLOHAN
------------------------------------
Name: James L. Wolohan
Title: President and Chief
Executive Officer
WOLOHAN ACQUISITION CO.
By: /s/ JOHN A. SIEGGREEN
------------------------------------
Name: John A. Sieggreen
Title: President and Chief
Executive Officer
A-14
APPENDIX B
August 13, 2003
PERSONAL AND CONFIDENTIAL
Special Committee of the Board of Directors
Wolohan Lumber Co.
1740 Midland Road
PO Box 3235
Saginaw, Michigan 84605
Members of the Special Committee:
You have requested our opinion as to the fairness, from a financial point
of view, to the Public Shareholders (as hereinafter defined), of Wolohan Lumber
Co. (the "Company"), of the Consideration (as hereinafter defined) to be
received pursuant to the Agreement and Plan of Merger, which is anticipated to
be signed by August 14, 2003 (the "Merger Agreement") between Wolohan
Acquisition Co. (the "Purchaser") and the Company.
Upon the terms and subject to the conditions set forth in the Merger
Agreement, at the effective time, the Purchaser will be merged with and into the
Company, and each share of the Company's common stock, $1.00 par value (the
"Common Stock"), issued and outstanding and held by those shareholders who are
not identified on Appendix A to the Merger Agreement (the "Public Shareholders")
will be converted into the right to receive $25.75 per share (the
"Consideration"). Each share of Common Stock held by certain members of the
Wolohan family identified on Appendix A to the Merger Agreement (the "Continuing
Shareholders") will continue to represent one share of Common Stock.
McDonald Investments Inc., as part of its investment banking business, is
customarily engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes.
In connection with rendering this opinion, we have reviewed and analyzed,
among other things, the following: (i) the Merger Agreement, including the
exhibits and schedules thereto; (ii) certain publicly available information
concerning the Company, including its Annual Reports on Form 10-K for each of
the years in the four year period ended December 31, 2002, its Quarterly Report
on Form 10-Q for the quarter ended March 31, 2003, its Proxy Statement for the
fiscal year 2002 (Schedule 14A), and its Current Reports on Form 8-K filed May
16, 2003 and July 24, 2003; (iii) certain other internal information, primarily
financial in nature, including projections and a liquidation analysis,
concerning the business and operations of the Company furnished to us by the
Company for purposes of our analysis; (iv) certain publicly available
information concerning the trading of, and the trading market for, the Company's
Common Stock; (v) certain publicly available information with respect to certain
other companies that we believe to be comparable to the Company and the trading
markets for certain of such other companies' securities; and (vi) certain
publicly available information concerning the nature and terms of certain other
transactions that we consider relevant to our inquiry. We have also met with
certain officers and employees of the Company to discuss the business and
prospects of the Company, as well as other matters we believe relevant to our
inquiry.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available. We have not been engaged to,
and have not independently attempted to, verify any of such information. We have
not been engaged to assess the reasonableness or achievability of management's
projections or the assumptions on which they were based and express no view as
to such projections or assumptions. In addition, we have not conducted a
physical inspection or appraisal of any of the assets, properties or facilities
of either the Company nor have we been furnished with any such evaluation or
appraisal. We have also assumed that the Merger would be consummated on a timely
basis in the manner contemplated by the Merger Agreement.
B-1
Special Committee of the Board of Directors
Wolohan Lumber
August 13, 2003
Page 2
It should be noted that this opinion is based on economic and market
conditions and other circumstances existing on, and information made available
as of, the date hereof and does not address any matters subsequent to such date.
In addition, our opinion is, in any event, limited to the fairness, as of the
date hereof, from a financial point of view, of the Consideration to be received
by the Public Shareholders pursuant to the Merger Agreement and does not address
the Company's underlying business decision to effect the merger or any other
terms of the Merger Agreement. We have not been engaged to solicit indications
of interest or to otherwise explore the viability of any alternative transaction
to the merger. It should be noted that although subsequent developments may
affect this opinion, we do not have any obligation to update, revise or reaffirm
our opinion.
We have acted as financial advisor to the Special Committee of the Board of
Directors in connection with the Merger and will receive from the Company a fee
for our services, a portion of which is contingent upon closing, a fee for
rendering this opinion and the Company's agreement to indemnify us under certain
circumstances. In the ordinary course of our business, we may actively trade
securities of the Company for our own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
This opinion is directed to the Special Committee of Board of Directors of
the Company and does not constitute a recommendation to any shareholder of the
Company as to how such shareholder should vote on any matters relating to the
Merger.
Based upon and subject to the foregoing and such other matters as we
consider relevant, it is our opinion that, as of the date hereof, the
Consideration to be received in the Merger is fair from a financial point of
view, to the Public Shareholders.
Very truly yours,
MCDONALD INVESTMENTS INC.
B-2
APPENDIX C
CONTINUING SHAREHOLDERS
<Table>
<Caption>
NAME SHARES
- ---- ---------
Wolohan Family Trust........................................ 749,609
James L. Wolohan............................................ 166,866
Mary K. Ness................................................ 71,308
Patricia A. Kremin.......................................... 24,639
Edward J. Dean.............................................. 9,418
Richard P. Wolohan.......................................... 7,951
Laura K. Wolohan............................................ 2,783
Christopher R. Wolohan...................................... 2,783
Therese R. Wolohan C/F Andrew James Wolohan U/MI/UGMA....... 2,783
Marsha L. Wolohan........................................... 2,562
Therese R. Wolohan C/F Conor J. Wolohan U/MI/UGMA........... 2,480
Christine M. Wolohan........................................ 1,776
Michael J. Wolohan Revocable Trust.......................... 1,931
John Sieggreen Cust Henry Gerald Sieggreen UGMA/MI.......... 1,000
Therese R. Wolohan.......................................... 242
Cathy J. Sieggreen.......................................... 20
Daniel P. Rogers*........................................... 0
---------
1,048,151
=========
</Table>
- ---------------
* Mr. Rogers is the beneficial owner of shares under the Stock Option Plan and
under the Long-Term Incentive Plan
C-1
APPENDIX D
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
<Table>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2002.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM ________ TO ________.
</Table>
COMMISSION FILE NUMBER 0-6169
---------------------
WOLOHAN LUMBER CO.
(Exact name of registrant as specified in its charter)
<Table>
MICHIGAN 38-1746752
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</Table>
1740 MIDLAND ROAD, SAGINAW, MICHIGAN 48603
(Address of principal executive offices)
(989) 793-4532
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<Table>
<Caption>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None None
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $1.00 par value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
The aggregate market value of the common equity held by non-affiliates of
the registrant computed by reference to the average bid and asked price of such
common equity, as of the last business day of the registrant's most recently
completed second quarter, was approximately $22,265,000.
As of March 3, 2003 2,092,688 shares of Common Stock of the registrant were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of the registrant, dated April 2,
2003, filed pursuant to Regulation 14A are incorporated by reference into Part
III.
D-1
PART I
ITEM 1. BUSINESS.
Wolohan Lumber Co. (the "registrant") is engaged in the retail sale of a
full-line of lumber and building materials and related products, used primarily
for new-home construction and home-improvement projects. At March 17, 2003, the
registrant operated a chain of 25 building supply stores located in Michigan,
Ohio, Indiana, Kentucky and Illinois.
The registrant organizes its stores into two primary operating
divisions -- Wolohan and CML. Most Wolohan stores in operation today are of the
traditional "lineyard" format, well suited for the professional customer and
often providing value-added manufacturing or installation services. The CML
Division, named for Central Michigan Lumber, acquired by the registrant in June
1998, operates with a specialized focus on serving the project-oriented consumer
through an innovative marketing approach to sales of large-ticket projects such
as pole buildings, decks, sheds, garages, kitchens and homes. The professional
builder is also a primary customer of the CML division.
Each store provides a strong offering of quality materials, competitive
prices and expert and personal service. Each location includes a retail sales
area (with most stores having significant square footage devoted to displays of
kitchens, doors and windows and other building materials), under-roof storage
areas and an outside lumberyard area with displays of pole barns, garages, decks
and storage buildings. In addition, the registrant has one truss plant, a
specialty millwork operation, two wall-panel facilities and several stores with
door-assembly capabilities.
The registrant sells to professional contractors and to large
project-oriented consumers. The Company estimates that at least two-thirds of
its sales were to professional contractors in 2002.
The registrant offers a wide range of services including house design,
delivery, installation, various financing options and job-site contractor sales
representatives with experienced store support coordination.
The registrant sells more than 8,000 different products which are purchased
from approximately 270 suppliers. No supplier accounts for more than 5% of total
purchases. The registrant purchases forest products primarily from lumber, OSB
and plywood mills and the majority of all other merchandise from original
producers or manufacturers.
The business of the registrant is not dependent upon a single customer or a
few customers for any significant portion of sales.
The registrant believes that backlogs are not significant to its business.
The registrant is engaged in only one line of business -- retail sales of
lumber and building materials and related items. The classes of products include
dimension lumber; OSB; sheathing plywood; building materials; building hardware;
doors and windows; kitchen cabinets; trusses and components; storage barns; and
other forest products, such as fencing and treated lumber.
The business of the registrant is highly competitive, and it encounters
competition from both national and regional chains and from local independent
merchants. Because of the variety of competition faced by the registrant and the
wide range of products it sells, it is virtually impossible to determine the
registrant's competitive position in the markets it serves.
The registrant holds no material patents, trademarks, licenses, franchises
or concessions.
The registrant's business, like the overall retail lumber business,
generally is subject to seasonal influences. The second and third quarters are
generally the periods of highest sales volumes while the first quarter is
usually the period of lowest sales volume.
During 2002 the registrant closed five stores which it had identified in
2001 as not meeting the financial objectives identified in the registrant's
strategic profit model and accrued closing costs with respect thereto in 2001.
D-2
The registrant had approximately 654 full-time employees at December 31,
2002.
To the best of the registrant's knowledge, it is in compliance with all
federal, state and local environmental protection provisions.
The registrant maintains an internet website at www.wolohan.com. The
registrant makes available on or through its website, free of charge, its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practical after the registrant electronically files such material with, or
furnishes it to, the Securities and Exchange Commission.
ITEM 2. PROPERTIES.
Administrative offices are maintained in St. Johns, Michigan to support all
operating units. The offices consist of a 4,400-square-foot one-story building
and another 2,600 square feet of office space located above the registrant's
retail store in St. Johns, Michigan. The registrant also owns and occupies, with
minimal staffing, a 28,000-square-foot, two-story brick face building situated
on three acres of land in Saginaw, Michigan.
As of March 3, 2003, the registrant operated 25 building supply stores in
the states of Michigan, Ohio, Indiana, Kentucky and Illinois. The showroom
selling space in the stores averages 18,000 square feet. In addition, total
warehouse and storage space (under roof) ranges in size from 14,000 square feet
to 66,000 square feet (average of 30,000 square feet).
All of the building supply stores are owned in fee by the registrant.
The registrant believes that all of its building supply stores and the
display, warehouse and storage facilities and equipment located thereon are well
maintained and adequate for the purpose for which they are used. A fleet of
approximately 192 trucks is owned by the registrant for the delivery of its
retail merchandise.
ITEM 3. LEGAL PROCEEDINGS.
Various lawsuits arising during the normal course of business are pending
against the Company. In the opinion of management, the ultimate liability, if
any, resulting from these matters will have no significant effect on the
Company's results of operations, liquidity or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the registrant are as follows:
<Table>
<Caption>
HAS
SERVED
IN POSITION
NAME POSITION SINCE AGE
- ---- -------- ----------- ---
James L. Wolohan................................ Chairman of the Board, 1994 51
President and 1986
Chief Executive Officer 1987
John A. Sieggreen............................... Executive Vice President and 1999 40
Chief Operating Officer
Daniel P. Rogers................................ Senior Vice President, 1999 52
General Merchandise
Manager
Edward J. Dean.................................. Corporate Controller 1984 52
George I. Gibson, Jr............................ Corporate Secretary 2001 54
</Table>
D-3
Officers of the registrant are elected each year by the Board of Directors
to serve for the ensuing year and until their successors are elected and
qualified.
All of the officers of the registrant named above have held various
positions with the registrant for more than five years, with the exception of
Daniel P. Rogers. Mr. Rogers served as Vice President--Merchandising of Central
Michigan Lumber Company prior to its acquisition by the registrant in June 1998.
Thereafter he served as President of CML until elected to his current position
in 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
COMMON STOCK DATA
The Company's common stock trades on The Nasdaq Stock Market(TM) under the
symbol WLHN. The approximate number of record holders of the Company's stock at
December 31, 2002 was 861. The following table sets forth, for the fiscal
quarters indicated, the high and low sales prices per share as reported on The
Nasdaq Stock Market(TM) and the cash dividends declared per share in each fiscal
quarter.
<Table>
<Caption>
2001 2002
------------------------------- --------------------------------
MARKET RANGE MARKET RANGE
-------------- CASH DIVIDENDS --------------- CASH DIVIDENDS
HIGH LOW DECLARED HIGH LOW DECLARED
------ ----- -------------- ------ ------ --------------
First Quarter................... $12.00 $6.75 $.07 $25.00 $18.68 $.07
Second Quarter.................. 10.75 7.62 .07 25.65 19.85 .07
Third Quarter................... 15.25 9.90 .07 22.22 18.75 .07
Fourth Quarter.................. 23.15 12.95 .07 21.48 18.25 .07
---- ----
Year............................ 23.15 6.75 $.28 25.65 18.25 $.28
==== ====
</Table>
ITEM 6. SELECTED FINANCIAL DATA.
Five year selected financial data which is set forth on page F-2 of this
Annual Report, is incorporated here by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations beginning on page F-4 of this Annual Report is incorporated here by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements beginning on page F-11 of this Annual
Report are incorporated here by reference. The Quarterly Summaries on page F-3
of this Annual Report are incorporated here by reference.
D-4
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Information About Nominees As
Directors" on pages 4 and 5 of the definitive Proxy Statement of the registrant,
dated April 2, 2003, filed with the Securities and Exchange Commission pursuant
to Regulation 14A is incorporated herein by reference.
Reference is made to Part I of this Report for information as to executive
officers of the registrant.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Compensation Committee
Report" on pages 6 and 7 and "Executive Compensation" on pages 8 and 9 of the
definitive Proxy Statement of the registrant, dated April 2, 2003, filed with
the Securities and Exchange Commission pursuant to Regulation 14A is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Stock Ownership" on pages 3
and 4 of the definitive Proxy Statement of the registrant, dated April 2, 2003,
filed with the Securities and Exchange Commission pursuant to Regulation 14A is
incorporated herein by reference.
EQUITY PLAN COMPENSATION INFORMATION
The following table summarizes information, as of December 31, 2002,
relating to the registrant's compensations plans under which its equity
securities are authorized for issuance.
<Table>
<Caption>
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER
TO BE ISSUED UPON WEIGHTED AVERAGE EQUITY COMPENSATION
EXERCISE OF OUTSTANDING EXERCISE PRICE OF PLANS (EXCLUDING
OPTIONS, WARRANTS AND OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
PLAN CATEGORY RIGHTS WARRANTS AND RIGHTS COLUMN (A))
- ------------- ----------------------- -------------------- ------------------------
(A) (B) (C)
Equity compensation Plans
approved by security
holders(1)............... 359,160 $11.47 212,000
Equity compensation Plans
not approved by security
holders.................. 0 0 0
Total......................
</Table>
- ---------------
(1) These plans are the Long-Term Incentive Plans and Stock Option Plan for
Non-Employee Directors
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
D-5
PART IV
ITEM 14. CONTROLS AND PROCEDURES
As of December 31, 2002, an evaluation was performed under the supervision
of and with the participation of the registrant's management, including the
President and Chief Executive Officer and the Corporate Controller, of the
effectiveness of the design and operation of the registrant's disclosure
controls and procedures. Based on that evaluation, the registrant's management,
including the President and Chief Executive Officer and the Corporate
Controller, concluded that the registrant's disclosure controls and procedures
were effective as of December 31, 2002. There have been no significant changes
in the registrant's internal controls or in other factors that could
significantly affect internal controls subsequent to December 31, 2002.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) and (2) -- The following consolidated financial statements are
included herein:
Consolidated Balance Sheets -- December 31, 2002 and 2001.
Consolidated Statements of Income -- Years ended December 31, 2002,
2001 and 2000.
Consolidated Statements of Shareowners' Equity -- Years ended
December 31, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows -- Years ended December 31,
2002, 2001 and 2000.
Notes to consolidated financial statements as of and for the three
years in the period ended December 31, 2002.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(3) Listing of Exhibits -- The exhibit marked by one asterisk below was
filed as an exhibit to Form 10-K of the registrant for the year ended December
31, 1980; the exhibits marked with three asterisks below were filed as exhibits
to Form 10-Q of the registrant for the quarter ended June 30, 1987; the exhibit
marked with four asterisks below was filed as an exhibit to Form 10-K of the
registrant for the year ended December 31, 1988; the exhibit marked with five
asterisks below was filed as an exhibit to Form 10-Q of the registrant for the
quarter ended June 30, 1990; the exhibit marked with six asterisks below was
filed as an exhibit to Form 10-Q of the registrant for the quarter ended June
30, 1991; the exhibit marked with eight asterisks below was filed as an exhibit
to Form 10-K of the registrant for the year ended December 31, 1994; and the
exhibit marked with nine asterisks below was filed as an exhibit to Form 8-K of
the registrant dated February 4, 2000 (file number 0-6169), and are incorporated
herein by reference, the exhibit number in parenthesis being those in such Form
10-K, 10-Q or 8-K reports.
<Table>
Exhibit (3)(a)* Articles of Incorporation (1)
Exhibit (3)(b)*** Amendment to Articles of Incorporation (3)(a)
Exhibit (3)(c)***** Amendment to Articles of Incorporation (6)(a)(1)
Exhibit (3)(d)**** By-laws (3) (c)
Exhibit (10)(a)****** 1991 Long-Term Incentive Plan of Wolohan Lumber Co. (6)
(a)(1)(X)
Exhibit (10)(b)******** Stock Option Plan for Non-Employee Directors (10)(b)(X)
Exhibit (21) Subsidiaries of the registrant
Exhibit (23) Consent of Independent Auditors
Exhibit (99)********* Rights Agreement dated as of February 16, 2000 between
registrant and Registrar and Transfer Company as Rights
Agent (4)
</Table>
D-6
<Table>
Exhibit (99.1) CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit (99.2) CFO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
</Table>
(X) A compensatory plan required to be filed as an exhibit.
(b) Reports on Form 8-K.
The Company has not filed any reports on Form 8-K during the last quarter
of the period covered by this Report.
D-7
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 26, 2003.
WOLOHAN LUMBER CO.
By: /s/ JAMES L. WOLOHAN
------------------------------------
James L. Wolohan
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ EDWARD J. DEAN
------------------------------------
Edward J. Dean
Corporate Controller
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 26, 2003.
<Table>
<Caption>
SIGNATURE TITLE SIGNATURE TITLE
--------- ----- --------- -----
/s/ HUGO E. BRAUN, JR. Director /s/ JOHN A. SIEGGREEN Director
- ---------------------------------- ----------------------------------
Hugo E. Braun, Jr. John A. Sieggreen
/s/ LEE A. SHOBE Director /s/ CHARLES R. WEEKS Director
- ---------------------------------- ----------------------------------
Lee A. Shobe Charles R. Weeks
/s/ JAMES L. WOLOHAN Director
----------------------------------
James L. Wolohan
</Table>
D-8
CERTIFICATION
I, James L. Wolohan, President and Chief Executive Officer of Wolohan Lumber
Co., certify that:
1. I have reviewed this annual report on Form 10-K of Wolohan Lumber Co. (the
"registrant");
2. Based on my knowledge, this annual 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 annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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.
<Table>
Date: March 26, 2003 /s/ JAMES L. WOLOHAN
---------------------------------------------
James L. Wolohan
President and Chief Executive Officer
</Table>
D-9
CERTIFICATION
I, Edward J. Dean, Corporate Controller of Wolohan Lumber Co., certify that:
1. I have reviewed this annual report on Form 10-K of Wolohan Lumber Co. (the
"registrant");
2. Based on my knowledge, this annual 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 annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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.
<Table>
Date: March 26, 2003 /s/ EDWARD J. DEAN
---------------------------------------------
Edward J. Dean
Corporate Controller
(Chief Financial Officer)
</Table>
D-10
WOLOHAN LUMBER CO.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
CONTENTS
<Table>
5-Year Performance.......................................... D-12
Quarterly Summaries......................................... D-13
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. D-14
Report of Management........................................ D-18
Independent Auditors' Report................................ D-19
Consolidated Financial Statements
Consolidated Balance Sheets............................... D-20
Consolidated Statements of Income......................... D-21
Consolidated Statements of Shareowners' Equity............ D-22
Consolidated Statements of Cash Flows..................... D-23
Notes to Consolidated Financial Statements................ D-24
</Table>
D-11
5-YEAR PERFORMANCE
(Dollars in thousands, except per-share amounts, ratios and percentages)
<Table>
<Caption>
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
INCOME STATISTICS
Net sales............................... $197,638 $239,895 $314,972 $405,030 $451,477
Gross profit............................ 46,840 58,312 76,223 92,142 103,332
Store closing costs..................... 511 3,440 2,955 1,304 1,966
Interest expense........................ 86 423 1,158 1,541 1,828
Income before income taxes.............. 5,174 7,256 2,404 9,535 10,113
Income taxes............................ 1,774 2,484 817 3,259 3,334
Net income.............................. 3,400 4,772 1,587 6,276 6,779
Net income per share, basic............. 1.63 1.61 .33 1.19 1.05
Net income per share, assuming
dilution.............................. 1.49 1.53 .33 1.17 1.03
Cash dividends declared:
Amount per share...................... .28 .28 .28 .28 .28
Percent of net income................. 17.2% 17.7% 83.9% 23.4% 26.6%
Average shares outstanding.............. 2,080 2,971 4,752 5,271 6,474
-------- -------- -------- -------- --------
BALANCE SHEET MEASURES
Current assets.......................... $ 45,254 $ 42,537 $ 55,801 $ 82,789 $ 94,165
Other assets............................ 18,439 16,001 14,199 14,513 18,907
Properties (net)........................ 18,174 25,477 36,557 43,344 44,439
Total assets............................ 81,867 84,015 106,557 140,646 157,511
Working capital......................... 28,688 20,526 32,119 51,675 52,416
Long-term debt, net of current
portion............................... 203 307 5,111 12,593 17,091
Total liabilities....................... 16,769 22,318 28,793 43,707 58,840
Shareowners' equity:
Amount............................. 65,098 61,697 77,764 96,939 98,671
Book value per share............... 31.40 30.44 22.95 19.27 17.78
-------- -------- -------- -------- --------
KEY OPERATING PERCENTAGES
Gross profit margin..................... 23.7% 24.3% 24.2% 22.7% 22.9%
Pre-tax profit margin................... 2.6% 3.0% .8% 2.4% 2.3%
Return on sales......................... 1.7% 2.0% .5% 1.5% 1.5%
Return on average assets................ 4.1% 4.8% 1.2% 4.2% 4.2%
Return on average working capital....... 13.8% 18.1% 3.8% 12.1% 11.0%
Return on beginning shareowners'
equity................................ 5.5% 6.1% 1.6% 6.4% 6.2%
Return on average total invested
capital............................... 5.3% 6.6% 1.6% 5.6% 5.5%
-------- -------- -------- -------- --------
KEY FINANCIAL RATIOS AND MEASURES
Sales to average working capital........ 8.0:1 9.1:1 7.5:1 7.8:1 7.3:1
Sales to average shareowners' equity.... 3.1:1 3.4:1 3.6:1 4.1:1 4.3:1
Sales to average total invested
capital............................... 3.1:1 3.3:1 3.3:1 3.6:1 3.7:1
Current ratio........................... 2.7:1 1.9:1 2.4:1 2.7:1 2.3:1
Quick ratio............................. 1.7:1 1.1:1 1.2:1 1.2:1 1.1:1
Liquidity ratio......................... .73:1 .22:1 .49:1 .10:1 .08:1
Debt to total assets ratio.............. .002:1 .004:1 .05:1 .09:1 .11:1
Capitalization ratio.................... .003:1 .005:1 .06:1 .11:1 .15:1
Shareowners' equity to total assets
ratio................................. .80:1 .73:1 .73:1 .69:1 .63:1
Inventory turnover...................... 8.76 8.70 7.87 7.31 7.69
Asset turnover.......................... 2.36 2.43 2.45 2.71 2.82
-------- -------- -------- -------- --------
STORES
Number of stores at end of year......... 25 30 40 48 55
</Table>
D-12
QUARTERLY SUMMARIES
(in thousands, except per-share amounts)
<Table>
<Caption>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- --------
2002
Net sales................................... $37,870 $56,690 $59,580 $43,498 $197,638
Gross profit................................ 8,334 13,076 13,923 11,507 46,840
Net income:
Amount.................................... (875) 892 1,476 1,907 3,400
Per share, basic.......................... (.43) .44 .71 .91 1.63
Per share, assuming dilution.............. (.38) .39 .64 .84 1.49
2001
Net sales................................... $44,346 $68,281 $72,278 $54,990 $239,895
Gross profit................................ 10,443 15,530 16,693 15,646 58,312
Net income:
Amount.................................... (615) 1,295 2,056 2,036 4,772
Per share, basic.......................... (.18) .38 .63 .78 1.61
Per share, assuming dilution.............. (.18) .38 .60 .73 1.53
</Table>
D-13
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. 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 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 in 2002 totaled $3.4 million ($1.63 per share), compared with
$4.8 million ($1.61 per share) in 2001. On a diluted basis, earnings per share
were $1.49 in 2002, compared with $1.53 in 2001.
D-14
Significant items affecting net income in 2002 compared with the prior year
included: (1) Gains on sale of real estate properties of $1.0 million in 2002,
compared with $2.6 million recorded in 2001. (2) A LIFO credit resulting in
increased gross margin dollars of $0.9 million in 2002, compared with a LIFO
credit of $1.2 million in 2001. (3) Store closing costs, a portion of which were
charged to cost of sales in 2001, totaled $0.5 million in 2002, compared with
$3.8 million in 2001.
Earnings per share for 2002 and 2001 were positively impacted by a
reduction in shares outstanding due to the Company's share repurchases,
primarily through two tender offers, completed in the third quarter of 2001 and
the fourth quarter of 2000. Average shares outstanding were 30 percent lower for
2002, compared with 2001 and 37 percent lower for 2001, compared with 2000.
Net income in 2001 improved to $4.8 million from $1.6 million in 2000. The
improvement in 2001 net income resulted primarily from a reduction in the
operating expense ratio and a slight improvement in gross margin percentage,
which more than offset lower sales volume. Other significant items affecting net
income in 2001 compared with the prior year included: (1) Gains on sale of real
estate properties of $2.6 million in 2001, compared with $0.8 million recorded
in 2000. (2) A LIFO credit resulting in increased gross margin dollars of $1.2
million in 2001, compared with a LIFO credit of $3.5 million in 2000. (3) Store
closing costs, a portion of which were charged to cost of sales, totaled $3.8
million in 2001, compared with $5.0 million in 2000.
Sales of $197.6 million in 2002 were 18 percent lower than 2001 sales of
$239.9 million, which were 24 percent lower than 2000 sales of $315.0 million.
Comparable-store sales declined 5 percent in both 2002 and 2001, compared with
the prior year. Price deflation in lumber and structural panel products,
strategic product changes and a lower store count negatively impacted sales in
both 2002 and 2001, compared with the prior year. The Company estimates that at
least two-thirds of its sales were to the professional contractor in 2002, 2001
and 2000.
The gross profit margin in 2002 was 23.7 percent, compared with 24.3
percent in 2001 and 24.2 percent in 2000. Gross profit margin included a LIFO
credit of $0.9 million, $1.2 million and $3.5 million, respectively, for 2002,
2001 and 2000. The LIFO credit in both 2002 and 2001 was due primarily to lower
inventory levels resulting from reduced store count and product-line
eliminations. The significant LIFO credit in 2000 was due to deflation in lumber
and panel costs and lower inventory levels. The gross profit margin in 2002,
excluding the provision for LIFO, was 23.2 percent, compared to 23.8 percent in
2001 and 23.1 percent in 2000.
Other operating income, which results primarily from finance charges
related to receivables, rental income and gains from sale of excess equipment,
totaled $2.4 million in 2002, $3.0 million in 2001 and $2.9 million in 2000.
Selling, general, and administrative expenses (excluding store-closing
costs) declined 15 percent in 2002 to $40.1 million from $47.1 million in 2001
and $66.9 million in 2000, resulting in an expense factor of 20.3 percent of
sales in 2002, compared with 19.6 percent and 21.2 percent in 2001 and 2000,
respectively. The higher 2002 expense factor, compared with 2001, includes costs
related to completing the conversion to one computer system for all stores,
costs to complete the transition of all corporate administrative functions to
one office and higher costs for health insurance. The lower 2001 expense factor,
compared with 2000 was primarily due to significantly decreased bad debt
expense, improved labor productivity and elimination of unnecessary expenses.
The closing of five stores in 2002 resulted in costs of approximately $0.5
million, compared with $3.8 million recorded in 2001 resulting from the closing
of ten stores in 2001 and the identification of five additional stores to be
closed or consolidated with other stores in 2002. In 2000, $5.0 million of
closing costs were recorded from the closing of eight stores in 2000 and the
identification of six additional stores to be closed in 2001. Store closing
costs are accrued in the period management identifies such stores for closing.
The portion of the closing costs related to the loss on the sale of inventory
($0.4 million in 2001 and $2.0 million in 2000) was charged to cost of sales.
The closing costs in all three years were primarily related to liquidating
inventories, expensing portions of future lease payments on long-term leases,
writing off leasehold improvements, severance payments and certain other ongoing
fixed costs. The Company will continue to evaluate store
D-15
performances in terms of meeting minimum return-on-investment criteria, and
additional store closings may result from this ongoing review.
Excluding store-closing costs, the total operating expense factor for 2002
was 22.6 percent of sales, compared with 22.2 percent in 2001 and 23.6 percent
in 2000. Depreciation and amortization in 2002 decreased 25 percent to $4.6
million from $6.2 million in 2001, which had been lowered 16 percent from $7.3
million in 2000.
Other income and expenses netted to income of $1.1 million in 2002,
compared with income of $2.6 million and $0.5 million in 2001 and 2000,
respectively. The decrease in 2002 versus 2001, was due primarily to lower gains
on sale of properties recorded in 2002. Gains on property sales totaled $1.0
million in 2002, compared with $2.6 million and $0.8 million for 2001 and 2000,
respectively. Interest expense of $0.1 million was 80 percent lower than
interest expense of $0.4 million in 2001, which in turn was 63 percent lower
than interest expense of $1.2 million in 2000. The decreases reflect the
reductions made in long-term debt.
The effective federal income tax rate was 34.3 percent in 2002, compared
with 34.2 percent in 2001 and 34.0 percent in 2000.
FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $12.1 million at year-end 2002, compared
with $4.8 million at year-end 2001. Net cash provided by operating activities
totaled $7.6 million in 2002, compared with $17.6 million in 2001. The decrease
in net cash from operations in 2002, compared with 2001, was primarily a result
of lower accrued expenses relating to closed store reserves and income taxes
payable, some pre-season inventory purchases and lower net income. The decrease
in net cash from operations in 2001 was primarily a result of stronger charge
sales activity during the fourth quarter of 2001, compared with 2000, which
increased the balance of trade receivables at year-end 2001, compared with 2000.
Both years reflect the Company's aggressive collection efforts of customer
receivables and reductions made in store count during the year. Lower inventory
levels in both 2002 and 2001 are the result of reductions in store count and
progress made in reducing non-strategic inventory at existing operations.
Investing activities provided net cash of $0.7 million in 2002, compared
with cash provided by investing activities of $17.0 million in 2001. The
decrease in cash from investing activities in 2002, compared with 2001, reflects
no certificate of deposit activity in 2002 compared with a maturity of $10.0
million in 2001, $5.5 million less in proceeds from property sales and $0.7
million more in capital expenditures. The increase in cash from investing
activities in 2001 was due to the maturities of $10 million in certificates of
deposit, $4.4 million less in capital expenditures and $3.4 million more in
proceeds from property sales.
Financing activities used net cash of $1.0 million in 2002 and included
$2.1 million for payments on long-term debt, $0.7 million to purchase
approximately 36,000 shares of Company common stock at an average price of
$19.78 per share and $0.6 million for dividend payments, offset in part, by
short-term bank borrowings of $1.5 million and $0.9 million of proceeds from the
exercise of stock options. In 2001, net cash used in financing activities
totaled $31.5 million and included $10.2 million for payments on long-term debt,
$1.0 million for dividend payments and $20.4 million used to repurchase
1,392,000 shares of Company common stock at an average price of $14.63 per
share. The stock repurchased in 2001 included 1.3 million shares acquired in a
stock tender offer at a price of $15 per share. The Company has repurchased 5.0
million shares since Jan. 1, 1998 at an average price of $12.80 per share. The
book value per share has increased to $31.40 at Dec. 31, 2002 from $22.95 per
share at year-end 2000. The Company may continue to make open market purchases
of its stock from time to time.
The Company has $25 million available in lines of credit arrangements for
short-term debt. Borrowings of $1.5 million were outstanding at year-end 2002,
compared with no outstanding balance at year-end 2001.
Working capital was $28.7 million at the end of 2002, compared with $20.5
million at year-end 2001. The Company expects that net cash provided from
operating activities and available lines of credit will be adequate to meet
future needs for working capital and capital expenditures for 2003.
D-16
The Company had virtually no long-term debt, net of current portion, in
either 2002 or 2001.
Capital expenditures totaled $2.2 million in 2002 and consisted primarily
of the expansion of an existing facility to include a new showroom, an enlarged
lumberyard area and improvements to increase capabilities for wall-panelization,
roof trusses and millwork, and replacements and additions of equipment at
existing stores. Capital expenditures to support existing stores are expected to
approximate $1.4 million in 2003. Capital expenditures have totaled $23.6
million over the last 5 years.
Invested capital (long-term debt and shareowners' equity) was 80 percent of
total assets at year-end 2002 and 74 percent at year-end 2001. Shareowners'
equity has been the principal financing factor over the years and accounted for
100 percent of invested capital at year-end 2002.
EFFECT OF INFLATION
The Company does not measure precisely the effect of inflation on its
operations; however, it does not believe inflation had a material effect on
sales or results of operations.
ENVIRONMENTAL
The Company is subject to laws and regulations relating to the protection
of the environment. While it is not possible to quantify with certainty the
potential impact of actions regarding environmental matters, particularly any
future remediation and other compliance effects, in the opinion of management,
compliance with the present environmental-protection laws will not have a
material adverse effect on the financial condition of the Company or on
operating results or cash flows in any one year.
OUTLOOK
Wolohan Lumber Co. enters 2003 prepared 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 will also place renewed focus on sales training and marketing, both
important aspects of achieving growth in project sales. The Company will
emphasize continued improvement in expense control as well, and expects added
efficiencies created by its implementation of a common computer platform
throughout all stores to assist in achieving this goal.
The Company expects to maintain its traditionally strong balance sheet in
2003 through 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 will further improve the Company's liquidity and strengthen its
balance sheet.
D-17
REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS
REPORT OF MANAGEMENT
The accompanying consolidated financial statements of Wolohan Lumber Co.,
together with the other financial information included in this report, were
prepared by management.
The responsibility for the integrity of the consolidated financial
statements, and other financial information included in this report, rests with
management. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles appropriate in the
circumstances and, of necessity, include certain amounts which are based on our
best estimates and judgments. The other financial information included herein is
consistent with that reported in the consolidated financial statements.
Wolohan Lumber Co. maintains internal accounting-control systems that are
designed to provide reasonable assurance that assets are safeguarded from loss
or unauthorized or illegal use and that transactions are executed and recorded
in accordance with management authorization. There are limits inherent in all
systems of internal control, based on the recognition that costs of such a
system should not exceed the benefits to be derived. We believe the Company's
system provides an appropriate balance.
The Board of Directors, through its Audit Committee, is responsible for
assuring that management fulfills its responsibilities in the preparation of the
consolidated financial statements. The Audit Committee meets periodically with
the independent auditors and representatives of management to ensure that each
is discharging its responsibilities. To ensure complete independence, Rehmann
Robson has full and free access to meet with the Audit Committee to discuss the
results of their audit, the adequacy of internal controls, the quality of
financial reporting and other matters of mutual interest.
/s/ JAMES L. WOLOHAN
--------------------------------------
James L. Wolohan
Chairman of the Board,
President and Chief Executive Officer
/s/ EDWARD J. DEAN
--------------------------------------
Edward J. Dean
Corporate Controller
D-18
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareowners
Wolohan Lumber Co.
Saginaw, Michigan
We have audited the accompanying consolidated balance sheets of Wolohan
Lumber Co. as of December 31, 2002 and 2001, and the related consolidated
statements of income, changes in shareowners' equity and cash flows for each of
the three years in the period ended December 31, 2002. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Wolohan Lumber Co. as of December 31, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
REHMANN ROBSON
Saginaw, Michigan
February 14, 2003
D-19
WOLOHAN LUMBER CO.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
-------------------
2002 2001
(in thousands, except per-share amounts) -------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 12,100 $ 4,798
Trade receivables, net.................................... 15,783 18,796
Inventories, net.......................................... 16,368 17,499
Other current assets...................................... 1,003 1,444
-------- --------
TOTAL CURRENT ASSETS........................................ 45,254 42,537
PROPERTIES
Land...................................................... 3,528 4,826
Land improvements......................................... 6,414 8,002
Buildings................................................. 21,807 26,604
Equipment................................................. 24,372 31,858
-------- --------
TOTAL PROPERTIES............................................ 56,121 71,290
Accumulated depreciation.................................. (37,947) (45,813)
-------- --------
PROPERTIES, NET............................................. 18,174 25,477
OTHER ASSETS
Properties held for sale.................................. 13,117 10,383
Intangible assets, net.................................... 2,873 3,073
Other..................................................... 2,449 2,545
-------- --------
TOTAL ASSETS................................................ $ 81,867 $ 84,015
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable.................................... $ 6,949 $ 7,431
Employee compensation and accrued expenses................ 8,013 12,476
Short-term borrowings..................................... 1,500 --
Current portion of long-term debt......................... 104 2,104
-------- --------
TOTAL CURRENT LIABILITIES................................... 16,566 22,011
LONG-TERM DEBT, NET OF CURRENT PORTION...................... 203 307
-------- --------
TOTAL LIABILITIES........................................... 16,769 22,318
SHAREOWNERS' EQUITY
Common stock, $1 par value
Authorized -- 20,000 shares;
issued and outstanding -- 2,073 shares (2,027 in
2001).................................................. 2,073 2,027
Additional capital........................................ 539 --
Retained earnings......................................... 62,486 59,670
-------- --------
TOTAL SHAREOWNERS' EQUITY................................... 65,098 61,697
-------- --------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $ 81,867 $ 84,015
-------- --------
BOOK VALUE PER SHARE........................................ $ 31.40 $ 30.44
======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
D-20
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
(in thousands, except per-share amounts) --------- --------- ---------
NET SALES................................................... $197,638 $239,895 $314,972
Cost of sales............................................... 150,798 181,583 238,749
-------- -------- --------
GROSS PROFIT................................................ 46,840 58,312 76,223
Other operating income...................................... 2,430 3,041 2,866
OPERATING EXPENSES
Selling, general and administrative....................... 40,057 47,096 66,874
Depreciation and amortization............................. 4,594 6,166 7,342
Store closing costs....................................... 511 3,440 2,955
-------- -------- --------
TOTAL OPERATING EXPENSES.................................... 45,162 56,702 77,171
-------- -------- --------
Income from operations...................................... 4,108 4,651 1,918
OTHER INCOME (EXPENSES)
Gain on sale of held for sale properties.................. 1,014 2,640 831
Interest income........................................... 138 388 813
Interest expense.......................................... (86) (423) (1,158)
-------- -------- --------
OTHER INCOME, NET........................................... 1,066 2,605 486
-------- -------- --------
INCOME BEFORE INCOME TAXES.................................. 5,174 7,256 2,404
Income taxes................................................ 1,774 2,484 817
-------- -------- --------
NET INCOME.................................................. $ 3,400 $ 4,772 $ 1,587
======== ======== ========
NET INCOME PER SHARE, BASIC................................. $ 1.63 $ 1.61 $ .33
======== ======== ========
NET INCOME PER SHARE, ASSUMING DILUTION..................... $ 1.49 $ 1.53 $ .33
======== ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
D-21
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
<Table>
<Caption>
COMMON STOCK TOTAL
---------------- ADDITIONAL RETAINED SHAREOWNERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
(in thousands, except per-share amounts) ------ ------- ---------- -------- ------------
BALANCES AT DECEMBER 25, 1999............. 5,031 $ 5,031 $ 673 $ 91,235 $ 96,939
Net income for 2000....................... 1,587 1,587
Cash dividends -- $.28 per share.......... (1,331) (1,331)
Shares issued under Long-Term Incentive
Plan and Stock Option Plan, net of
related tax benefit..................... 11 11 141 152
Shares repurchased and retired............ (1,654) (1,654) (814) (17,115) (19,583)
------ ------- ------ -------- --------
BALANCES AT DECEMBER 31, 2000............. 3,388 3,388 -- 74,376 77,764
Net income for 2001....................... 4,772 4,772
Cash dividends -- $.28 per share.......... (843) (843)
Shares issued under Long-Term Incentive
Plan and Stock Option Plan, net of
related tax benefit..................... 31 31 383 414
Shares repurchased and retired............ (1,392) (1,392) (383) (18,635) (20,410)
------ ------- ------ -------- --------
BALANCES AT DECEMBER 31, 2001............. 2,027 2,027 -- 59,670 61,697
Net income for 2002....................... 3,400 3,400
Cash dividends -- $.28 per share.......... (584) (584)
Shares issued under Long-Term Incentive
Plan and Stock Option Plan, net of
related tax benefit..................... 82 82 1,222 1,304
Shares repurchased and retired............ (36) (36) (683) -- (719)
------ ------- ------ -------- --------
BALANCES AT DECEMBER 31, 2002............. 2,073 $ 2,073 $ 539 $ 62,486 $ 65,098
====== ======= ====== ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
D-22
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
(In thousands) -------- --------- ---------
OPERATING ACTIVITIES
Net income................................................ $ 3,400 $ 4,772 $ 1,587
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation......................................... 4,393 5,862 7,036
Amortization......................................... 201 305 306
Provision for losses on receivables.................. 190 6 1,106
Effect of LIFO....................................... (937) (1,229) (3,546)
Deferred income taxes (benefit)...................... 1,158 (331) 120
Gain on sale of held for sale properties............. (1,014) (2,640) (831)
(Gain) loss on sale of other properties.............. (276) (296) 386
Common stock based compensation...................... 46 208 223
Changes in assets and liabilities
Trade receivables................................. 2,823 (1,345) 15,178
Other assets...................................... 22 1,483 7,408
Inventories at FIFO cost.......................... 2,068 6,857 16,272
Accounts payable and accrued expenses............. (4,444) 3,973 (10,761)
------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 7,630 17,625 34,484
INVESTING ACTIVITIES
Maturities (purchases) of certificates of deposit........... -- 10,000 (10,000)
Additions to properties..................................... (2,204) (1,473) (5,906)
Proceeds from the sale of properties........................ 2,890 8,437 5,048
------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... 686 16,964 (10,858)
FINANCING ACTIVITIES
Net short-term borrowings................................... 1,500 -- --
Repayments of long-term debt................................ (2,104) (10,182) (4,189)
Proceeds from exercise of stock options..................... 890 117 --
Dividends paid.............................................. (581) (1,021) (1,366)
Repurchase and retirement of common stock................... (719) (20,410) (19,583)
------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES....................... (1,014) (31,496) (25,138)
------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 7,302 3,093 (1,512)
Cash and cash equivalents at beginning of year.............. 4,798 1,705 3,217
------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $12,100 $ 4,798 $ 1,705
======= ======== ========
Supplemental disclosures of cash flows information
Interest paid..................................... $ 118 $ 594 $ 1,202
======= ======== ========
Income taxes paid................................. $ 1,828 $ 2,259 $ 2,810
======= ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
D-23
WOLOHAN LUMBER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING PRACTICES
Organization and Business. Wolohan Lumber Co. ("WLC"), together with its
wholly-owned subsidiaries Wolohan Lumber Co., LLC and Wolohan Lumber Co. of
Michigan, LLC, (collectively the "Company"), is engaged in the retail sale of a
full line of lumber and building materials and related merchandise through a
chain of 25 (30 in 2001 and 40 in 2000) building supply stores operated in
Michigan, Ohio, Indiana, Kentucky and Illinois. The stores operate primarily
under the names Wolohan Lumber or CML.
The Company sells to professional contractors and large project-oriented
consumers. The volume of residential construction and large project purchases
can be volatile and is highly dependent on general economic conditions. A
significant decrease in residential construction could have an adverse effect on
the Company's operating results.
Principles of Consolidation. The consolidated financial statements of the
Company include the accounts of WLC and its subsidiaries after elimination of
significant intercompany accounts and transactions.
Use of Estimates. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of income and
expenses during the reporting period. Significant estimates include but are not
limited to the allowance for bad debts, allowance for obsolete inventory,
self-insured medical and workers' compensation accruals, carrying values and
recovery period of intangible assets and fair value less cost to sell of
held-for-sale properties. Actual results could differ from those estimates.
Concentrations of Credit Risk. Financial instruments that potentially
subject the Company to significant concentrations of credit and other financial
risk consist principally of cash investments and trade receivables.
The Company invests its available cash in deposits with a local bank, money
market accounts and tax-exempt securities through a brokerage company. Cash
balances held at financial institutions are insured by the Federal Deposit
Insurance Corporation up to $100,000. Bank balances at December 31, 2002 exceed
this insured limit by approximately $871,000. Investments held by a brokerage
company consist of triple-A-rated tax-exempt securities. Each of these
investments is further supported by private insurance or collateral.
The Company grants credit in the normal course of business related to
product sales. Concentrations of credit risk with respect to trade receivables
from product sales are limited because of the large number of businesses and
individual customers comprising the Company's customer base. The Company's
receivables are primarily from professional contractors.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash equivalents consist principally of demand deposits in banks,
money market funds and short-term tax exempt securities.
Trade Receivables. Trade receivables are stated at the amount management
expects to collect from outstanding balances. Generally, no collateral is
required to support trade receivables; in certain circumstances the Company
files liens to protect its interest in certain accounts. Accounts are considered
delinquent when not paid in accordance with payment terms. Management provides
for probable uncollectible amounts through a charge to earnings and a credit to
a valuation allowance based on its assessment of the current status of
individual accounts. Balances that are still outstanding after management has
used reasonable collection efforts are written off through a charge to the
valuation allowance and a credit to trade receivables.
Inventories. Inventories are stated at the lower of cost, determined by
the last-in, first-out method ("LIFO"), or market. Current cost exceeded the
LIFO value of inventories by approximately $7,231,000 at December 31, 2002 and
$8,168,000 at December 31, 2001. The liquidation of certain LIFO layers
decreased
D-24
WOLOHAN LUMBER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cost of sales and increased pre-tax income by $884,000, $1,395,000 and $637,000
in 2002, 2001 and 2000, respectively.
Properties. Properties are stated at cost. Depreciation is provided on the
straight-line basis over the estimated useful life of the property. Management
reviews these assets quarterly to determine whether carrying values have been
impaired.
Properties Held For Sale. Properties held for sale are stated at the lower
of cost or estimated fair value less costs to sell and consists of land,
buildings and building improvements.
Intangible Assets. Effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets". SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. As of December 31, 2002 the Company has
unamortized goodwill of approximately $2,773,000. Other intangible assets, which
consist of customer lists and the trained employee work force, have been
amortized on a straight-line basis over their expected lives, which is
approximately 5 years. Amortization of intangible assets reported in 2001 and
2000 was approximately $105,000 in each year. The Company evaluates intangible
assets for impairment on an annual basis.
Revenue Recognition. Revenues are generally recognized when product ordered by
the customer is either delivered to the customer or when the customer picks up
the product at one of the Company's retail locations. Accruals for customer
discounts and rebates are provided when sales are recognized.
Income Taxes. Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and federal income tax basis of
assets and liabilities that will result in taxable or deductible amounts in the
future, based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Deferred income taxes
arise from temporary basis differences principally related to inventory, store
closings and properties. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the year plus or minus the change
during the year in deferred tax assets and liabilities.
Advertising Expenses. The cost of advertising is expensed as incurred. The
Company incurred $1,203,000, $1,132,000 and $1,254,000 in advertising costs
during 2002, 2001 and 2000, respectively.
Earnings Per Share. Earnings-per-share information is based on the weighted
average number of shares outstanding for the year. The effect of the assumed
issuance of the performance-based incentive share awards and the assumed
exercise of outstanding stock options is presented in the following table. This
table presents a reconciliation of the denominator used in the calculation of
basic net income per share and net income per share assuming dilution:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2002 2001 2000
(in thousands) ------ ------ ------
Weighted average number of common shares outstanding used
for basic calculation..................................... 2,080 2,971 4,752
Dilutive effect of assumed issuance of performance awards
and exercise of options................................... 200 138 97
----- ----- -----
Number of shares outstanding assuming dilution.............. 2,280 3,109 4,849
===== ===== =====
</Table>
Exercisable stock options not included in the computation of diluted EPS
because the option prices were greater than the average monthly market prices
totaled 3,000, 154,000, and 298,000 shares, respectively, for 2002, 2001 and
2000. The exercise price for these shares averaged $23.05, $12.63 and $12.88 for
2002, 2001 and 2000, respectively.
D-25
WOLOHAN LUMBER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recent Accounting Pronouncements. In April 2002, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 145. SFAS No. 145 requires that gains and losses from
extinguishment of debt be classified as extraordinary items only if they meet
the criteria defined in APB Opinion No. 30 which are that the event or
transaction is both unusual in nature and infrequent in occurrence. Events
considered unusual should have a high degree of abnormality and be clearly
unrelated to the Company's normal operations and infrequency is defined as not
expected to recur in the foreseeable future. It is not expected that provisions
of SFAS No. 145 will have a material impact on the financial position or results
of operations of the Company.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which is effective for exit or disposal
activities that are initiated after December 31, 2002. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issues No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entity's commitment to an exit plan. The Company is currently evaluating
the effects of adopting SFAS No. 146 and cannot predict whether or not its
provisions will have a material impact on its financial position or results of
operations.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which addresses the disclosure
to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees. FIN 45 requires the guarantor to recognize a
liability for the non-contingent component of the guarantee, this is the
obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a
transaction with multiple events. The initial recognition and measurement
provisions are effective for all guarantees within the scope of FIN 45 issued or
modified after December 31, 2002. Adoption of this Interpretation is not
expected to have a significant impact on the Company's financial position.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123", which is effective for years beginning after December 15, 2002. This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock based employee compensation and the
effect of the method used on reported results. The Company is currently
evaluating the effects of voluntarily adopting this statement but does not
believe the provisions, if adopted, will have a material impact on its financial
position or results of operations.
Fair Value of Financial Instruments. The carrying amounts of financial
instruments in the accompanying consolidated balance sheet approximate their
fair values.
Reclassifications. Certain amounts as originally reported in the 2001 and
2000 financial statements have been reclassified to conform to the 2002
presentation.
D-26
WOLOHAN LUMBER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- VALUATION ACCOUNTS
The following tables present a summary of the changes in certain valuation
accounts for each of the years in the three-year period ended December 31, 2002:
(in thousands)
<Table>
<Caption>
2002 2001 2000
ALLOWANCE FOR DOUBTFUL ACCOUNTS ------ ------ -------
Balance at beginning of year.............................. $1,096 $1,891 $ 2,566
Provision for doubtful accounts........................... 190 6 1,106
Amounts charged off....................................... (299) (801) (1,781)
------ ------ -------
Balance at end of year.................................... $ 987 $1,096 $ 1,891
====== ====== =======
</Table>
<Table>
<Caption>
2002 2001 2000
ALLOWANCE FOR NON-STRATEGIC INVENTORY ----- ------- ------
Balance at beginning of year............................... $ 663 $ 1,730 $1,862
Net reduction of allowance................................. (334) (1,067) (132)
----- ------- ------
Balance at end of year..................................... $ 329 $ 663 $1,730
===== ======= ======
</Table>
NOTE C -- SHAREOWNERS' EQUITY AND RELATED MATTERS
The Company's Long-Term Incentive Plan was established to enable key
employees to participate in the future growth and profitability of the Company
by offering them long-term performance-based incentive compensation through
issuance of stock options and performance share awards, which are vested based
on achievement of performance goals. Performance shares awarded are earned and
vested at the rate of 20% per year and become issuable 10 years after the date
of award. No performance shares were awarded during 2002 and 2001 (17,300 shares
were awarded in 2000 at a weighted average fair value of $10.75 per share). At
December 31, 2002, there were 51,260 performance shares awarded but unissued, of
which 21,710 shares are vested.
The Company also has a stock option plan for non-employee directors in
addition to the options available under the Long-Term Incentive Plan for key
employees. The following table summarizes information about all stock option
transactions:
<Table>
<Caption>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE PRICE
SHARES PER SHARE PER SHARE
--------- -------------- ----------------
Outstanding at December 25, 1999...... 312,100 $9.25 - 14.50 $12.74
------- -------------- ------
Granted............................. 156,400 10.06 - 11.88 10.10
Exercised........................... (200) 9.25 9.25
Forfeited........................... (36,400) 9.25 - 14.38 12.61
------- -------------- ------
Outstanding at December 31, 2000...... 431,900 9.25 - 14.38 11.80
------- -------------- ------
Granted............................. 4,000 10.20 10.20
Exercised........................... (12,500) 9.25 - 10.50 9.35
Forfeited........................... (43,200) 9.25 - 14.38 12.79
------- -------------- ------
Outstanding at December 31, 2001...... 380,200 9.25 - 14.38 11.75
------- -------------- ------
Granted............................. 3,000 23.05 23.05
Exercised........................... (66,000) 9.25 - 14.38 13.47
Forfeited........................... (9,300) 9.25 - 14.38 12.52
------- -------------- ------
OUTSTANDING AT DECEMBER 31, 2002...... 307,900 $9.25 - 23.05 $11.47
======= ============== ======
</Table>
D-27
WOLOHAN LUMBER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The number of shares exercisable were 117,720, 147,600, and 154,000 as of
December 31, 2002, 2001 and 2000, respectively. The fair value of options
granted was $10.19, $2.83 and $2.89 per share in 2002, 2001 and 2000,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2002, 2001 and 2000,
respectively: dividend yield of 1.2, 2.7 and 2.8 percent; expected volatility of
35, 25 and 24 percent; risk-free interest rates of 3.9, 4.9 and 5.3 percent and
expected lives of 10 years for all years.
Options at December 31, 2002:
<Table>
<Caption>
OUTSTANDING EXERCISABLE
--------------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
----------------- --------- ---------------- -------- --------- --------
$ 9.25 -- 11.13...... 162,900 7.57 $10.05 7,900 $ 9.72
11.88 -- 13.06...... 61,500 6.05 12.34 43,520 12.37
13.13 -- 14.00...... 73,500 5.27 13.14 59,300 13.14
14.38 -- 23.05...... 10,000 3.73 16.98 7,000 14.38
------- ---- ------ ------- ------
$ 9.25 -- 23.05...... 307,900 6.60 $11.47 117,720 $12.70
======= ==== ====== ======= ======
</Table>
All options expire 10 years after the date of grant. As of December 31,
2002, there are 191,000 shares reserved for future issuance under the Long-Term
Incentive Plan and 21,000 shares reserved for future issuance under the stock
option plan for non-employee directors.
Holders of common shares received a distribution of one right for each
common share held on February 16, 2000. The rights become exercisable ten days
after a person or group acquires or commences a tender or exchange offer that
could result in the acquisition of 20% or more of the Company's common shares
(except pursuant to an offer for all shares determined by the non-officer
Directors to be fair and in the best interest of the Company and its
shareowners). The rights also become exercisable 10 days after an acquisition of
20% or more of the Company's common shares by a person or group deemed by the
Board of Directors to have interests adverse to those of the Company and its
shareowners. Each right would, subject to certain adjustments and alternatives,
entitle the rightholder to purchase common shares of the Company having a market
value of $50 based on a price per share equal to 50% of the then fair market
value of the shares. The rights are nonvoting, may generally be redeemed by the
Company at a price of 1 cent per right and expire on February 15, 2010. The
Company covenants and agrees that it will cause to be reserved and kept
available out of its authorized and unissued shares of common stock the number
of shares of common stock that, as provided in the Rights Agreement, will be
sufficient to permit the exercise in full of all outstanding rights.
The Company has elected to continue to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
accordingly, because the exercise price does not exceed the fair value on the
date of grant, stock options do not constitute compensation expense in the
determination of net income. Had stock option compensation expense been
determined pursuant to the methodology provided in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the
proforma effect on results of operations would have been a reduction in net
income of $89,000 or 4 cents per common share in 2002, a reduction in net income
of $106,000 or 3 cents per share in 2001 and a reduction in net income of
$84,000 or 1 cent per share in 2000.
On August 7, 2001, the Company announced its intention to repurchase up to
1,500,000 shares of the Company's common stock through a self-tender offer at a
price of $15 per share. The tender offer was concluded on September 21, 2001,
with the purchase of 1,258,307 shares.
D-28
WOLOHAN LUMBER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 9, 2000, the Company announced its intention to purchase up to
1,500,000 shares of the Company's common stock pursuant to a Dutch auction
self-tender offer at a price range of $10 to $12 per share. The Dutch auction
was concluded on December 15, 2000, with the purchase of 1,189,113 shares at a
price of $12 per share. The Board of Directors has authorized the Company to
repurchase from time to time on the open market up to 2,500,000 shares
(excluding the two tender offers) of the Company's common stock. Shares
repurchased on the open market totaled 36,354 shares at prices ranging from
$19.75 to $20.63 in 2002, 133,692 shares at prices ranging from $10 to $19.25 in
2001, and 464,598 shares at prices ranging from $9.75 to $13 in 2000.
NOTE D -- DEBT AND LEASE TRANSACTIONS
The Company has available, under revolving lines-of-credit arrangements
with two banks, $25 million in unsecured short-term borrowings. The interest
rate applicable when drawing against these lines is dependent upon a variety of
formulas which utilize different money rate pricing indexes. In no case does the
interest rate exceed the Prime Rate and there are no commitment fees. The terms
of these credit arrangements are reviewed and generally renewed annually. At
December 31, 2002, $1.5 million was outstanding under these arrangements (no
borrowings were outstanding at year-end 2001). The Company also has an unused
letter of credit in the amount of $1.3 million related to liability coverage.
Long-term debt consisted of the following obligations at December 31:
<Table>
<Caption>
2002 2001
(in thousands) ---- ------
Promissory note due in monthly installments through October
2005 plus interest at 7%, collateralized by a mortgage.... $283 $ 383
Other....................................................... 24 28
Unsecured notes to insurance company, repaid in 2002........ -- 2,000
---- ------
Total long-term debt........................................ 307 2,411
Current portion of long-term debt........................... 104 2,104
---- ------
Long-term debt, net of current portion...................... $203 $ 307
==== ======
</Table>
Scheduled maturities of long-term debt for each of the four years following
2003 approximate: $104,000 in 2004, $88,000 in 2005, $5,000 in 2006 and $6,000
in 2007.
The Company leases certain facilities and equipment under various operating
leases which expire at various dates through 2009. Lease expense for such
facilities and equipment totaled approximately $114,000 in 2002, $305,000 in
2001, and $402,000 in 2000. Future minimum lease payments for each of the next
five years approximate $121,000 and aggregate $252,000 thereafter.
NOTE E -- INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
D-29
WOLOHAN LUMBER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's federal deferred income tax assets,
included in other assets on the accompanying balance sheets, are as follows at
December 31:
<Table>
<Caption>
2002 2001
(in thousands) ------ ------
Deferred tax assets
Basis differences in properties........................... $ 335 $ 522
Compensation and employee benefits........................ 342 491
Allowance for doubtful accounts........................... 336 384
Basis differences in inventories.......................... 126 282
Store closings............................................ 512 979
Insurance claims accrual.................................. 133 147
Other..................................................... 131 268
------ ------
Total deferred tax assets................................... $1,915 $3,073
====== ======
</Table>
The provisions for income taxes consist of:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------
2002 2001 2000
(in thousands) ------- ------- -----
Current..................................................... $ 616 $2,815 $697
Deferred (benefit).......................................... 1,158 (331) 120
------ ------ ----
Total provision for income taxes............................ $1,774 $2,484 $817
====== ====== ====
</Table>
A reconciliation of the income tax provisions and the amount computed by
applying the statutory federal income tax rate of 34% to income before income
taxes, is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------
2002 2001 2000
(in thousands) ------- ------- -----
Computed amount............................................. $1,759 $2,467 $817
Tax exempt investment income................................ (18) (11) (35)
Other....................................................... 33 28 35
------ ------ ----
Total provision for income taxes............................ $1,774 $2,484 $817
====== ====== ====
</Table>
NOTE F -- STORE CLOSINGS AND SALES
During 2002, the Company closed five stores which it had identified and had
accrued closing costs in 2001. Closing costs associated with these stores
approximated $511,000 in 2002. The closing costs were primarily related to
liquidating inventory, severance payments and absorbing certain other ongoing
fixed costs. Closing costs in 2001 approximated $3.8 million, including $400,000
recorded as a charge to cost of sales, resulting from the closing of ten stores
in 2001 and the identification of five additional stores to be closed in 2002.
Closing costs in 2000 approximated $5.0 million, including $2.1 million recorded
as a charge to cost of sales, resulting from the closing of eight stores in 2000
and the identification of six additional stores to be closed in 2001. Store
closing costs are accrued in the period management identifies such stores for
closing. Real estate owned related to closed stores is held for sale or lease
and included with properties held for sale on the accompanying consolidated
balance sheets.
D-30
WOLOHAN LUMBER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- CASH-BASED EMPLOYEE BENEFIT PLANS
The Company has a 401(k) retirement savings and profit sharing plan under
which eligible employees may contribute up to the maximum allowed under the
internal revenue code. The Company matches the employees' contribution up to 1/3
of the first 6% of eligible wages. In addition, eligible employees receive a
Company contribution equal to 3% of wages. Profit-sharing contributions
approximated $523,000, $481,000 and $722,000 for 2002, 2001 and 2000,
respectively, and contributions to the 401(k) plan were approximately $252,000,
$289,000 and $386,000 for 2002, 2001 and 2000, respectively.
NOTE H -- CONTINGENCIES
Various lawsuits arising during the normal course of business are pending
against the Company. In the opinion of management, based upon discussion with
legal counsel, the ultimate liability, if any, resulting from these matters will
have no significant effect on the Company's consolidated results of operations,
liquidity or financial position.
D-31
CORPORATE INFORMATION
<Table>
ANNUAL MEETING BOARD OF DIRECTORS
The Annual Meeting of shareowners of Wolohan James L. Wolohan Charles Weeks
Lumber Co. will be held May 1, 2003, 11:00 Chairman of the Board, formerly chairman and Chief
a.m., at the Company's corporate office, President and Chief Executive Executive Officer of Citizens
1740 Midland Road, Saginaw, Michigan. Officer; Director since 1986 Banking Corp., Director since
Shareowners are welcome. 1996
COPIES OF REPORTS
Shareowners may obtain additional copies of Hugo E. Braun, Jr. Lee A. Shobe
this report and quarterly 10-Q reports by Partner, Braun Kendrick Formerly President and Chief
writing to the Company's Investor Relations Finkbeiner, Attorneys-at-Law; Executive Officer Of Dow
Dept., Wolohan Lumber Co., P.O. Box 3235, Director since 1984 Brands, Inc.; Director since
Saginaw, MI 48605. To view quarterly John A. Sieggreen 1996
information please visit our website at: Executive Vice President and
http://www.wolohan.com Chief Operating Officer
Director since 1999
HEADQUARTERS COMMITTEES
Wolohan Lumber Co. Administrative Offices MANAGEMENT REVIEW COMMITTEE AUDIT COMMITTEE
1740 Midland Road Lee A. Shobe, Chairman Hugo Hugo E. Braun, Jr.
P.O. Box 3235 E. Braun, Jr. Chairman
Saginaw, MI 48605 Charles R. Weeks Lee A. Shobe
(989) 793-4532 Charles R. Weeks
COMMON STOCK COMPENSATION COMMITTEE
Wolohan's common stock trades on The Nasdaq Charles R. Weeks, Chairman
Stock Market(TM) under the symbol Hugo E. Braun, Jr.
WLHN
TRANSFER AGENT OFFICERS
Registrar and Transfer Company James L. Wolohan Daniel P. Rogers
10 Commerce Drive Chairman of the Board, Senior Vice President-
Cranford, NJ 0701603572 President and Chief General Merchandise
(800) 368-5948 Executive Officer Manager
GENERAL COUNSEL John A. Sieggreen Edward J. Dean
Dickinson Wright PLLC Executive Vice President Corporate Controller
500 Woodward Avenue, Suite 4000 and Chief Operating Officer
Detroit, Michigan 48226
George I. Gibson Jr.
INDEPENDENT AUDITORS Corporate Secretary
Rehmann Robson
5800 Gratiot
Saginaw, Michigan 48603
</Table>
D-32
APPENDIX E
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
[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 ________.
</Table>
COMMISSION FILE NUMBER 0-6169
---------------------
WOLOHAN LUMBER CO.
(Exact name of registrant as specified in its charter)
<Table>
MICHIGAN 38-1746752
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
</Table>
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)
<Table>
<Caption>
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........................................... 20,279 18,682
SHAREOWNERS' EQUITY
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
======= =======
</Table>
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.
E-2
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per-share amounts)
<Table>
<Caption>
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
</Table>
See notes to condensed consolidated financial statements.
E-3
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per-share amounts)
<Table>
<Caption>
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
</Table>
See notes to condensed consolidated financial statements.
E-4
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
(in thousands)
<Table>
<Caption>
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
===== ====== ===== ======= =======
</Table>
See notes to condensed consolidated financial statements.
E-5
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<Table>
<Caption>
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
======= =======
</Table>
See notes to condensed consolidated financial statements.
E-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
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.
E-7
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 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
E-8
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. 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 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.
E-9
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.
E-10
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:
<Table>
<Caption>
VOTES TO WITHHOLD
VOTES FOR AUTHORITY TO VOTE FOR
NOMINEE 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
</Table>
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.
E-11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
99 Exhibits:
<Table>
<Caption>
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.
</Table>
(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.
E-12
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.
<Table>
WOLOHAN LUMBER CO.
--------------------------------------------
Registrant
Date: August 8, 2003 /s/ JAMES L. WOLOHAN
--------------------------------------------
James L. Wolohan
President and Chief Executive Officer
Date: August 8, 2003 /s/ EDWARD J. DEAN
--------------------------------------------
Edward J. Dean
Chief Financial Officer
(Principal Accounting Officer)
</Table>
E-13
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE WOLOHAN LUMBER CO.
PROXY SOLICITED BY THE BOARD OF DIRECTORS 1. Adoption and approval of the FOR AGAINST ABSTAIN
FOR THE SPECIAL MEETING OF SHAREHOLDERS Agreement and Plan of Merger dated as [ ] [ ] [ ]
TO BE HELD ON NOVEMBER 5, 2003 of August 13, 2003 between Wolohan
Acquisition Co. and Wolohan Lumber
The undersigned hereby appoints JAMES L. Co.
WOLOHAN and GEORGE I. GIBSON, JR., or
either of them, with power of 2. In their discretion, the Proxies are authorized to vote upon
substitution in each. Proxies to vote such other matters as may properly come before the meeting.
all Common Stock of the undersigned in
Wolohan Lumber Co., at the Special
Meeting of Shareholders to be held on
November 5, 2003, and at all
adjournments thereof.
UNLESS OTHERWISE SPECIFIED, THE
PROXIES ARE APPOINTED TO VOTE FOR THE
AGREEMENT AND PLAN OF MERGER.
FOR AGAINST ABSTAIN
Please be sure to sign and date Date
this Proxy in the box below.
- ------------------------------------------------------------------------
- ----Shareholder sign above------------Co-holder (if any) sign above-----
- ------------------------------------------------------------------------------------------------------------------------------------
/\ DETACH ABOVE CARD, SIGN, DATE AND MAIL IN POSTAGE PAID ENVELOPE PROVIDED. /\
WOLOHAN LUMBER CO.
PLEASE VOTE, DATE AND SIGN AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
Please sign exactly as your name(s) appear(s) hereon. Joint owners should each sign personally. Trustees and other fiduciaries
should indicate the capacity in which they sign, and where more than one name appears, a majority must sign. If a corporation, this
signature should be that of an authorized officer who should state his or her title.
IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE
ENVELOPE PROVIDED.
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------