WOLOHAN LUMBER CO.
2000
ANNUAL
REPORT
"Quality Home Builders And Remodelers Build With Wolohan"
Dear Shareholders:
The year 2000 was challenging in many ways, both for Wolohan Lumber Co. and for
the building materials industry overall. Several internal and external factors
combined to create a difficult operating environment. Most notable among the
external variables were the effects from a general slowing in the Midwest
economy and severe deflation in prices for lumber and other commodity wood
products. The slowdown softened demand for both of our major customer
segments--home builders, who face a decline in building activity, as well as
individuals erecting pole buildings, garages, decks, or other major projects.
The Company continued its aggressive internal restructuring in 2000. During the
year the Company closed eight stores which did not meet basic criteria for
market share and profitability. This resulted in a number of one-time charges
related to the closing and liquidation process and also required substantial
time and energy. Additionally, the Company continued to reposition its
operations to better serve the home builder and project consumer. This involved
product-line changes and consolidations, and in some cases, capital investment
in store facilities.
In most cases where stores were remodeled, we converted the stores from the
traditional Wolohan format to a model used by CML, the operating name for
Central Michigan Lumber, acquired by Wolohan in June 1998. The Company's CML
Division continues to perform well through its attention to the needs of the
professional home builder and its innovative and advanced approach to sales of
large-ticket projects to consumers. The Company will evaluate the performance of
stores converted to the CML format in determining opportunities for growth and
investment.
The Company continued to provide more value-added services to home builders
during 2000, our first full year of operation at our new wall panel plant in
Dayton, Ohio. We are considering additional investment in this and other
value-added areas such as pre-hung doors, turnkey product installation for home
builders, and design and delivery services. Our greatest success is achieved
when we use these value-added capacities to improve the builders' bottom line.
Finally, a Dutch auction tender offer for up to 1.5 million shares of our common
stock was made in November 2000. Upon completion in December 2000, shareholders
tendered almost 1.2 million shares for which the Company paid $12 per share. We
made this offer because the excess cash on our balance sheet was more than what
we believed necessary to fund foreseeable working capital, physical plant, and
other current operating needs.
Although we are optimistic about our ability to implement initiatives designed
to create shareholder value in 2001, the current difficult operating environment
may well continue, especially in the first half of the year. We have not yet
felt an improvement in housing activity and price deflation in commodity wood
products will continue into the second or third quarter according to most
industry experts. We have responded to this challenge by placing tight controls
on expenses and capital expenditures. We are poised to act when the external
factors improve again--and they will.
In closing, we thank our fine Wolohan and CML associates for their efforts, as
well as you, our shareholders, for your support in these challenging times.
James L. Wolohan, John A. Sieggreen
Chairman of the Board, Executive Vice President and
President and Chief Executive Officer Chief Operating Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2000.
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________.
Commission file number 0-6169
-------------------
WOLOHAN LUMBER CO.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1746752
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1740 Midland Road, Saginaw, Michigan 48603
(Address of principal executive offices)
(517) 793-4532
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
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. |X|
As of March 6, 2001 3,381,598 shares of Common Stock of the registrant were
outstanding and the aggregate market value of the shares of Common Stock held by
non-affiliates (including certain officers and non-officer directors) of the
registrant was approximately $18,622,000.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement of the registrant, dated March 30,
2001, filed pursuant to Regulation 14A are incorporated by reference into Part
III.
[This Pagae Intentional Left Balnk]
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 6, 2001, the registrant operated a chain of 36 building supply
stores located in Illinois, Indiana, Kentucky, Michigan and Ohio.
During 1999 the registrant restructured its stores into two divisions
comprised of the contractor-focused Wolohan division and the CML division
targeting retail project sales and sales to professional home builders.
CML is the operating name of Central Michigan Lumber, acquired by the
registrant in 1998.
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, baths, 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 contractor builders and remodelers and to large
project-oriented consumers. These customer types accounted for
approximately 62% and 38%, respectively, of the registrant's sales for
2000.
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 27,000 different products which are
purchased from approximately 1,500 suppliers. No supplier accounts for
more than 4% of total purchases. The registrant purchases lumber products
primarily from lumber and plywood mills and more than half 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; sheathing plywood; building materials; building
hardware; millwork; plumbing, heating and electrical; kitchen cabinets and
vanities; home decorations; trusses and components, including 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, as well as
1
integrated department stores. 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 2000 the registrant announced the closure and redeployment of
assets at eight store locations and identified six additional locations
which did not meet the financial objectives identified in the registrant's
strategic profit model and are to be closed in 2001.
The registrant had approximately 1,030 full-time employees at December 31,
2000.
To the best of the registrant's knowledge, it is in compliance with all
federal, state and local environmental protection provisions.
Item 2. Properties.
The administrative offices of the registrant are located in a
28,000-square-foot, two-story brick face building situated on three acres
of land owned by the registrant in Saginaw, Michigan.
As of March 6, 2001, the registrant operated 36 building supply stores in
the states of Illinois, Indiana, Kentucky, Michigan and Ohio. The showroom
selling space in the stores averages 23,000 square feet. In addition,
total warehouse and storage space (under roof) ranges in size from 6,000
square feet to 66,000 square feet (average of 28,000 square feet).
All of the building supply stores are owned in fee by the registrant with
the exception of two leased stores.
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 292 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.
2
Executive Officers of the Registrant
The executive officers of the registrant are as follows:
Has Served
In Position
Name Position Since Age
- ----------------- ------------------------------ ----------- ---
James L. Wolohan Chairman of the Board, 1994 49
President and 1986
Chief Executive Officer 1987
John A. Sieggreen Executive Vice President and 1999 38
Chief Operating Officer
David G. Honaman Senior Vice President, 1999 49
Secretary and Chief 1995
Financial Officer
Daniel P. Rogers Senior Vice President, 1999 50
General Merchandise
Manager and President of the
CML Division
Edward J. Dean Corporate Controller 1984 50
Officers of the registrant are elected each year at the Annual Meeting of 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 John A.
Sieggreen and Daniel P. Rogers. Mr. Sieggreen served as Marketing Director of
the registrant until he resigned in February 1994. Thereafter, he was employed
by BMC West until April 1997 when he rejoined the registrant as Vice
President--Operations. 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 Central Michigan Lumber 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, 2000 was 1,376. 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 paid per share in each fiscal
quarter.
3
2000 1999
------------------------------ ------------------------------
MARKET RANGE CASH DIVIDENDS MARKET RANGE CASH DIVIDENDS
HIGH LOW DECLARED HIGH LOW DECLARED
------ ----- -------------- ------ ----- --------------
First Quarter $13.88 $11.00 $.07 $13.00 $12.25 $.07
Second Quarter 11.44 8.50 .07 12.88 10.75 .07
Third Quarter 12.16 8.13 .07 13.75 12.25 .07
Fourth Quarter 12.00 8.00 .07 13.19 11.63 .07
Year 13.88 8.00 $.28 13.75 10.75 $.28
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 Results of Operation and Financial
Condition 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-9 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.
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 caption "Information About Nominees As
Directors" on pages 4 and 5 of the definitive Proxy Statement of the
registrant, dated March 30, 2001, filed with the Securities and Exchange
Commission pursuant to Regulation 14A is incorporated herein by reference
for information as to directors of the registrant.
4
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 5, 6 and 7 and "Executive Compensation" on pages 7, 8 and
9 of the definitive Proxy Statement of the registrant, dated March 30,
2001, 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 "Security Ownership" on pages
2 and 3 of the definitive Proxy Statement of the registrant, dated March
30, 2001, filed with the Securities and Exchange Commission pursuant to
Regulation 14A is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14. 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, 2000 and December
25, 1999.
Consolidated Statements of Income - Years ended December 31,
2000, December 25, 1999 and December 26, 1998.
Consolidated Statements of Shareowners' Equity - Years ended
December 31, 2000, December 25, 1999 and December 26, 1998.
Consolidated Statements of Cash Flows - Years ended December
31, 2000, December 25, 1999 and December 26, 1998.
Notes to consolidated financial statements as of and for the
three years in the period ended December 31, 2000.
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.
5
(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.
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 (4) (a) ***Note Agreement dated as of May 1, 1987, between
registrant and Massachusetts Mutual Life Insurance
Company S(4)
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)
(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.
6
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, 2001.
WOLOHAN LUMBER CO.
/s/ James L. Wolohan
--------------------------------------------------
By: James L. Wolohan
Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
/s/ David G. Honaman
--------------------------------------------------
By: David G. Honaman
Senior Vice President, Chief Financial Officer
and Secretary (Principal Financial Officer)
/s/ Edward J. Dean
--------------------------------------------------
By: Edward J. Dean
Corporate Controller (Principal 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, 2001.
Signature Title Signature Title
- --------- ----- --------- -----
/s/ Hugo E. Braun, Jr. Director /s/ John A. Sieggreen Director
- ---------------------- ---------------------
Hugo E. Braun, Jr. John A. Sieggreen
/s/ Leo B. Corwin Director /s/ Charles R. Weeks Director
- ---------------------- ---------------------
Leo B. Corwin Charles R. Weeks
/s/ Lee A. Shobe Director /s/ James L. Wolohan Director
- ---------------------- ---------------------
Lee A. Shobe James L. Wolohan
7
[This Pagae Intentional Left Balnk]
WOLOHAN LUMBER CO.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
CONTENTS
5-YEAR PERFORMANCE..........................................................F-2
QUARTERLY SUMMARIES.........................................................F-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION...............................F-4
REPORT OF MANAGEMENT........................................................F-7
INDEPENDENT AUDITORS' REPORT................................................F-8
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS........................................F-9
CONSOLIDATED STATEMENTS OF INCOME..................................F-10
CONSOLIDATED STATEMENTS OF
SHAREOWNERS' EQUITY................................................F-11
CONSOLIDATED STATEMENTS OF CASH FLOWS..............................F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.........................F-13
F-1
5-YEAR PERFORMANCE
(In thousands, except per-share amounts, ratios and percentages)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Income Statistics
Net sales $314,650 $404,032 $449,904 $424,503 $430,358
Gross profit 75,860 91,628 102,492 101,583 103,375
Store closing costs 2,955 1,304 1,966 3,800 921
Interest expense 1,158 1,541 1,828 2,212 2,457
Income before income taxes 2,917 10,377 11,186 7,247 10,511
Income taxes 1,330 4,101 4,407 2,915 4,340
Net income 1,587 6,276 6,779 4,332 6,171
Net income per share, basic .33 1.19 1.05 .63 .89
Cash dividends declared:
Amount per share .28 .28 .28 .28 .28
Percent of net income 83.9% 23.4% 26.6% 44.7% 31.6%
Average shares outstanding 4,752 5,271 6,474 6,912 6,968
--------------------------------------------------------
Balance Sheet Statistics
Current assets $ 56,532 $ 83,416 $ 94,951 $ 98,911 $ 96,722
Other assets 13,468 13,886 18,121 7,544 2,311
Properties (net) 36,557 43,344 44,439 51,008 63,676
Total assets 106,557 140,646 157,511 157,463 162,709
Working capital 32,850 52,302 53,202 72,070 61,689
Long-term debt, net of current portion 5,111 12,593 17,091 20,443 19,883
Total liabilities 28,793 43,707 58,840 47,284 54,916
Shareowners' equity:
Amount 77,764 96,939 98,671 110,179 107,793
Book value per share 22.95 19.27 17.78 15.94 15.60
--------------------------------------------------------
Key Operating Percentages
Gross profit margin 24.1% 22.7% 22.8% 23.9% 24.0%
Pre-tax profit margin .9% 2.6% 2.5% 1.7% 2.4%
Return on sales .5% 1.6% 1.5% 1.0% 1.4%
Return on average assets 1.2% 4.2% 4.2% 2.7% 3.7%
Return on average working capital 3.7% 11.9% 10.8% 6.5% 10.1%
Return on beginning shareowners' equity 1.6% 6.4% 6.2% 4.0% 5.9%
Return on average total invested capital 1.6% 5.6% 5.5% 3.4% 4.8%
--------------------------------------------------------
Key Financial Ratios and Measures
Sales to average working capital 7.4:1 7.7:1 7.2:1 6.3:1 7.0:1
Sales to average shareowners' equity 3.6:1 4.1:1 4.3:1 3.9:1 4.1:1
Sales to average total invested capital 3.3:1 3.6:1 3.7:1 3.3:1 3.3:1
Current ratio 2.4:1 2.7:1 2.3:1 3.7:1 2.8:1
Quick ratio 1.2:1 1.2:1 1.1:1 2.1:1 1.4:1
Liquidity ratio .49:1 .10:1 .08:1 .94:1 .44:1
Debt to total assets ratio .05:1 .09:1 .11:1 .13:1 .12:1
Capitalization ratio .06:1 .11:1 .15:1 .16:1 .16:1
Shareowners' equity to total assets ratio .73:1 .69:1 .63:1 .70:1 .66:1
Inventory turnover 7.87 7.30 7.68 6.73 6.30
Asset turnover 2.44 2.71 2.81 2.62 2.58
--------------------------------------------------------
Stores
Number of stores at end of year 40 48 55 55 61
F-2
QUARTERLY SUMMARIES
(in thousands, except per-share amounts)
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- --------
2000
Net sales $ 66,834 $ 91,019 $ 90,321 $ 66,476 $314,650
Gross profit 15,802 21,558 21,533 16,967 75,860
Net income:
Amount (1,206) 1,462 1,085 246 1,587
Per share, basic (.24) .29 .23 .05 .33
1999
Net sales $ 73,148 $117,414 $118,727 $ 94,743 $404,032
Gross profit 17,020 26,477 27,014 21,117 91,628
Net income:
Amount (932) 3,215 3,608 385 6,276
Per share, basic (.17) .60 .68 .08 1.19
F-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Certain information contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations 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 standards are based on current expectations and involve a
number of risks and uncertainties. Actual results could differ materially and
adversely from those described in the forward-looking statements as a result of
various factors outside the Company, including, but not limited to the
following: 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.
Results of Operations
Net income in 2000 totaled $1.6 million (33 cents per share), compared with $6.3
million ($1.19 cents per share) in 1999. The decline in 2000 net income reflects
a 22-percent drop in total sales and $4.5 million in operating losses (inclusive
of store-closing costs) associated with discontinued stores in 2000, compared
with $1.5 million in operating losses (inclusive of store-closing costs)
incurred from discontinued stores in 1999.
Other significant items affecting 2000 net income as compared with the prior
year included : (1) a gain of $831,000 on the sale of properties (compared with
$3.5 million in 1999) and (2) a LIFO credit of $3.5 million (compared with a
LIFO charge of $809,000 in 1999).
Net income in 1999 declined 7 percent from 1998 net income of $6.8 million due
to a 10-percent drop in total sales and the elimination of $1.5 million of
operating income associated with stores divested in late 1998 and early 1999.
Sales of $315 million in 2000 were 22 percent lower than 1999 sales of $404
million, which were 10 percent lower than 1998 sales of $450 million.
Comparable-store sales declined 16 percent in 2000 from 1999. Significant price
deflation in lumber and structural panel products combined with slower
construction activity and strategic product changes were the primary causes for
the lower sales. The sales mix by customer type was approximately 62 percent
contractor builder and remodeler sales and 38 percent project consumer sales in
2000, compared with 64 and 36 percent respectively, for 1999 and 63 and 37
percent, respectively, for 1998.
The gross profit margin in 2000 was 24.1 percent, compared with 22.7 percent in
1999 and 22.8 percent in 1998. Gross profit margin results included a LIFO
credit of $3.5 million and $1.3 million, respectively, for 2000 and 1998,
compared with a LIFO charge of $809,000 in 1999. The significant LIFO credit in
2000 reflects the deflation in lumber and panel costs and lower inventory levels
resulting from reduced store count and product changes. The gross profit margin
in 2000, excluding the provision for LIFO, was 23.0 percent, compared to 22.9
percent in 1999 and 22.5 percent in 1998.
Other operating income, which results primarily from revenue related to
installed labor income, finance charges related to receivables and rental income
totaled $3.2 million in 2000, compared with $3.8 million in 1999 and $3.1
million in 1998.
Selling, general, and administrative expenses (excluding store-closing costs)
declined 16 percent in 2000 to $66.4 million from $78.7 million in 1999 and
$85.7 million in 1998, resulting in an expense factor of 21.1 percent of sales
in 2000 compared with 19.5 percent and 19.0 percent in 1999 and 1998,
respectively. The higher 2000 expense factor was primarily due to the
combination of the 22-percent sales decline, higher costs for health insurance,
higher fuel costs
F-4
and costs related to converting stores to the CML format. The higher 1999
expense factor compared with 1998 was primarily due to the combination of the
10-percent sales decline, a higher provision for uncollectible trade
receivables, training costs related to the installation of a new point-of-sale
computer system and other costs related to the execution of the Company's
strategic plan.
The closing of eight stores in 2000 and the identification of six additional
stores to be closed in 2001 resulted in costs of approximately $5 million,
compared with $1.5 million recorded in 1999 related to the closing of seven
stores (including six stores sold in February 1999) and $3.5 million in 1998
related to closing seven stores. The portion of the closing costs related to the
loss on the sale of inventory ($2.1 million in 2000, $200,000 in 1999 and $1.5
million in 1998) was charged to cost of sales. The closing costs in all three
years were primarily related to liquidating inventories, writing down certain
owned real property, expensing portions of future lease payments on long-term
leases and writing off leasehold improvements. The Company will continue to
evaluate store 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 2000
increased to 23.4 percent of sales from 21.3 percent in 1999 and 20.9 percent in
1998. Depreciation and amortization totaled $7.3 million in both 2000 and 1999,
compared with $8.4 million in 1998.
Other income and expenses netted to an income of $.5 million in 2000 compared
with an income of $2.2 million and $1.6 million in 1999 and 1998, respectively
The decline in 2000 versus 1999 and 1998, was due primarily to the significant
amount of gains on sale of idle properties recorded in 1999 and 1998. Interest
expense was reduced 25 percent to $1.2 million from $1.5 million in 1999 and 37
percent from $1.8 million in 1998. The decreases reflect the reductions made in
long-term debt.
The effective tax rate (including federal and state income and consumption taxes
combined) was 45.6 percent in 2000, compared with 39.5 percent in 1999 and 39.4
percent in 1998. The increase in the income tax rate in 2000 reflects a higher
effective rate for state income taxes.
Financial Condition - Liquidity and Capital Resources
Cash and cash equivalents totaled $1.7 million at year-end 2000, compared with
$3.2 million at year-end 1999. The Company also had $10 million in certificates
of deposit at year-end 2000. Net cash provided by operating activities totaled
$34.1 million in 2000, compared with $4 million in 1999. The significant
increase in net cash from operations in 2000 was primarily a result of
aggressive collections of customer receivables and reductions in inventory
levels. The lower customer receivable balances also reflect lower charge sales
activity during the fourth quarter and the reductions made in store count during
the year. Lower inventory levels reflect the reduction in store count and
progress made in reducing non-strategic inventory at existing operations.
Investing activities used net cash of $10.5 million in 2000, compared with cash
provided by investing activities of $10.4 million in 1999. The decrease in cash
in 2000 was due primarily to the purchase of $10 million in certificates of
deposit. The increase in cash in 1999 was due primarily to the proceeds from the
sale of inventory, trade receivables and equipment related to the sale of six
stores
Financing activities used net cash of $25.1 million in 2000 and included $4.2
million for payments on long-term debt, $1.3 million for dividend payments and
$19.6 million used to repurchase 1,654,000 shares of Company common stock at an
average price of $11.71 per share.
F-5
The stock repurchased in 2000 included 1.2 million shares acquired in the fourth
quarter in a stock tender offer at a price of $12 per share. In 1999, net cash
used in financing activities totaled $14.4 million and included $4.1 million for
payments on long-term debt, $2 million for payment of a short-term credit line,
$1.5 million for dividend payments and $6.9 million used to repurchase 539,000
shares of Company common stock at an average price of $12.76 per share. The
Company has repurchased 3.6 million shares since Jan. 1, 1998 at an average of
$12.01 per share. The book value per share has increased to $22.95 at Dec. 31,
2000 from $19.27 per share at year-end 1999. The Company may continue to make
open market purchases of its stock from time to time based on its cash position
and the market price per share.
The Company has $40 million available in lines of credit arrangements for
short-term debt. There was no outstanding balance under these arrangements at
year-end 2000 and 1999.
Working capital was $32.9 million at the end of 2000, compared with $52.3
million at year-end 1999. The Company expects that net cash provided from
operating activities and available lines of credit will be adequate to meet
working-capital needs and capital expenditures for 2001 and beyond.
The long-term debt-to-asset ratio was lowered to .05:1 at Dec. 31, 2000,
compared with .09:1 for year-end 1999.
Capital expenditures totaled $5.9 million in 2000 and consisted primarily of
replacements and additions of equipment at existing stores and costs related to
converting three stores to the CML format. Capital expenditures have totaled
$29.6 million over the last 5 years.
Invested capital (long-term debt and shareowners' equity) was 78 percent of
total assets at year-end 2000 and 1999. Shareowners' equity has been the
principal financing factor over the years and accounted for 94 percent of
invested capital at year-end 2000.
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 2001 with a strong consolidated balance sheet. A
sluggish economy, lower selling prices for lumber and structural panel products
and lower housing starts are expected to continue to depress sales activity,
especially in the first half of 2001. The Company continues to emphasize its
value-added services to the builder and expects to increase the volume of
wall-panel and truss manufacturing and will continue to provide special delivery
services, design and installation services. Project sales (pole buildings,
sheds, garages, kitchens and other major projects) will be the focus for the
project consumer segment of the Company's sales. The Company will continue to
place strong emphasis on buying and distribution strategies to improve its
competitive position. The Company will work aggressively to lower its
operating-
F-6
expense ratios by focusing on training and more-efficient systems. By proper
execution of these strategies, the Company will strive to improve profitability
in 2001.
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, P.C. 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/ David G. Honaman
David G. Honaman
Senior Vice President, Secretary and
Chief Financial Officer
/s/ Edward J. Dean
Edward J. Dean
Corporate Controller
F-7
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareowners
Wolohan Lumber Company
Saginaw, Michigan
We have audited the accompanying consolidated balance sheets of Wolohan Lumber
Company as of December 31, 2000 and December 25, 1999, 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, 2000. 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 financial position of Wolohan Lumber
Company as of December 31, 2000 and December 25, 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
REHMANN ROBSON, P.C.
Saginaw, Michigan
February 19, 2001
F-8
WOLOHAN LUMBER CO.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(in thousands, except per-share amounts) December 31, December 25,
2000 1999
- --------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 1,705 $ 3,217
Certificates of deposit 10,000 --
Trade receivables, net 17,457 33,741
Builder Finance Program receivables, net 1,478 5,220
Inventories, net 23,127 35,853
Other current assets 2,765 5,385
- --------------------------------------------------------------------------------
Total Current Assets 56,532 83,416
Properties
Land 5,728 6,910
Land improvements 9,899 11,629
Buildings 34,497 40,936
Equipment 41,585 45,361
- --------------------------------------------------------------------------------
Total Properties 91,709 104,836
Accumulated depreciation (55,152) (61,492)
- --------------------------------------------------------------------------------
Properties, Net 36,557 43,344
Other Assets
Properties held for sale 8,893 8,207
Intangible assets, net 3,378 3,684
Other 1,197 1,995
- --------------------------------------------------------------------------------
Total Assets $ 106,557 $ 140,646
================================================================================
Liabilities and Shareowners' Equity
Current Liabilities
Trade accounts payable $ 6,318 $ 12,467
Employee compensation and accrued expenses 9,882 14,458
Current portion of long-term debt 7,482 4,189
- --------------------------------------------------------------------------------
Total Current Liabilities 23,682 31,114
Long-Term Debt, net of current portion 5,111 12,593
- --------------------------------------------------------------------------------
Total Liabilities 28,793 43,707
Shareowners' Equity
Common stock, $1 par value
Authorized - 20,000 shares;
issued and outstanding - 3,388
shares (5,031 in 1999) 3,388 5,031
Additional capital -- 673
Retained earnings 74,376 91,235
- --------------------------------------------------------------------------------
Total Shareowners' Equity 77,764 96,939
- --------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $ 106,557 $ 140,646
================================================================================
Book Value per Share $ 22.95 $ 19.27
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED
--------------------------------------
(in thousands, except per-share amounts) December 31, December 25, December 26,
2000 1999 1998
- --------------------------------------------------------------------------------
Net Sales $ 314,650 $ 404,032 $ 449,904
Cost of sales 238,790 312,404 347,412
- --------------------------------------------------------------------------------
Gross profit 75,860 91,628 102,492
Other operating income 3,229 3,776 3,095
Operating Expenses
Selling, general and administrative 66,362 78,655 85,660
Store closing costs 2,955 1,304 1,966
Depreciation and amortization 7,341 7,310 8,367
- --------------------------------------------------------------------------------
Total operating expenses 76,658 87,269 95,993
- --------------------------------------------------------------------------------
Income from operations 2,431 8,135 9,594
Other (Expenses) Income
Interest expense (1,158) (1,541) (1,828)
Interest income 813 306 596
Gain from sale of properties 831 3,477 2,824
- --------------------------------------------------------------------------------
Other income, net 486 2,242 1,592
- --------------------------------------------------------------------------------
Income Before Income Taxes 2,917 10,377 11,186
Income taxes 1,330 4,101 4,407
- --------------------------------------------------------------------------------
Net Income $ 1,587 $ 6,276 $ 6,779
================================================================================
Net Income Per Share, basic $ .33 $ 1.19 $ 1.05
================================================================================
Net Income Per Share, assuming dilution $ .33 $ 1.17 $ 1.03
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
- --------------------------------------------------------------------------------
(in thousands, except
per-share amounts) Common Stock Total
---------------------- Additional Retained Shareowners'
Shares Amount Capital Earnings Equity
- --------------------------------------------------------------------------------------------------
Balances at December 27, 1997 6,910 $ 6,910 $ 21,819 $ 81,450 $ 110,179
Net income for 1998 6,779 6,779
Cash dividends - $.28 per share (1,800) (1,800)
Shares issued under Long-Term
Incentive Plan, net of related
tax benefit 8 8 52 60
Shares purchased and retired (1,370) (1,370) (15,177) (16,547)
- --------------------------------------------------------------------------------------------------
Balances at December 26, 1998 5,548 5,548 6,694 86,429 98,671
Net income for 1999 6,276 6,276
Cash dividends - $.28 per share (1,470) (1,470)
Shares issued under Long-Term
Incentive Plan, net of
related tax benefit 22 22 317 339
Shares purchased and retired (539) (539) (6,338) (6,877)
- --------------------------------------------------------------------------------------------------
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, net of
related tax benefit 11 11 141 152
Shares purchased and retired (1,654) (1,654) (814) (17,115) (19,583)
- --------------------------------------------------------------------------------------------------
Balances at December 31, 2000 3,388 $ 3,388 -- $ 74,376 $ 77,764
==================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
WOLOHAN LUMBER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED
------------------------------------------
(In thousands) December 31, December 25, December 26,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 1,587 $ 6,276 $ 6,779
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 7,036 7,030 8,236
Amortization 306 280 131
Provision for losses on receivables 1,106 1,438 996
Provision for non-strategic inventory (132) -- 1,900
Effect of LIFO (3,546) 809 (1,286)
Deferred income taxes (benefit) 138 (295) 70
Gain on sale of properties (831) (3,477) (2,824)
Store closing costs related to properties -- -- 195
Common stock based compensation 152 339 60
Changes in assets and liabilities net of effects
in 1999 from sale of stores to Stock Lumber
and in 1998 from purchase of CML
Trade receivables 15,178 912 (5,528)
Builder Finance Program receivables 3,742 (2,174) (2,974)
Other assets 3,648 1,758 (3,127)
Inventories 16,404 192 6,628
Accounts payable and accrued expenses (10,725) (9,065) 4,965
- ---------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 34,063 4,023 14,221
Investing Activities
Purchases of certificates of deposit (10,000) -- --
Additions to properties (5,906) (8,605) (5,384)
Payment for purchase of CML, net of cash acquired -- -- (17,912)
Proceeds from sale of stores to Stock Lumber -- 9,956 --
Proceeds from the sale of properties 5,434 9,092 6,290
- ---------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided By Investing Activities (10,472) 10,443 (17,006)
Financing Activities
Net credit lines (repayments) borrowings -- (2,000) 2,000
Payments on long-term debt (4,189) (4,068) (3,035)
Dividends paid (1,331) (1,470) (1,800)
Purchase and retirement of common stock (19,583) (6,877) (16,547)
- ---------------------------------------------------------------------------------------------------
Net Cash Used In Financing Activities (25,103) (14,415) (19,382)
- ---------------------------------------------------------------------------------------------------
(Decrease) Increase In Cash and Cash Equivalents (1,512) 51 (22,167)
Cash and cash equivalents at beginning of year 3,217 3,166 25,333
- ---------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 1,705 $ 3,217 $ 3,166
===================================================================================================
Supplemental disclosure of cash flows information
Interest paid $ 1,202 $ 1,544 $ 2,117
===================================================================================================
Income taxes paid $ 2,810 $ 4,206 $ 5,670
===================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
WOLOHAN LUMBER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A--Nature of Business and Significant Accounting Practices
Organization. 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 40, (48
in 1999 and 55 in 1998) building supply stores operated in Illinois, Indiana,
Kentucky, Michigan and Ohio. The stores operate primarily under the names
Wolohan Lumber or CML.
The Company sells to professional builders 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 consolidation financial statement 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 allowances for bad debts, reserve 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 assets
held for sale. 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, certificates of deposit, trade accounts
receivable and Builder Finance Program receivables.
The Company maintains liquid investments which include bank money market
funds and certificates of deposit (short-term tax exempt securities at December
25, 1999). Bank money market funds and certificates of deposit are maintained
with financial institutions located primarily in Michigan, and Company policy is
designed to limit exposure to any one institution.
The Company has deposits with financial institutions which exceed
federally insured limits. The Company performs periodic evaluations of the
relative credit standing of those financial institutions that are considered in
the Company's investment strategy. In management's opinion, the Company is not
subject to undue interest rate or financial risk as a result of these
concentrations.
The Company grants credit in the normal course of business related to
product sales and the financing of construction projects through the Builder
Finance Program. Concentrations of credit risk with respect to accounts
receivable from product sales and the Builder Finance
F-13
Program 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 customers in the residential construction industry. Generally, no
collateral is required for trade receivables but security, in the form of a
first mortgage, is obtained for all Builder Finance Program receivables.
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 money market funds.
Certificates of Deposit. Certificates of deposit consist of deposits in banks
with original maturities when purchased of greater than 90 days.
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 $9,397,000 at December 31, 2000 and
$12,943,000 at December 25, 1999. The liquidation of certain LIFO layers in 2000
and 1998 decreased cost of sales by $3,546,000 and $1,286,000, respectively. In
1999, an increase in the LIFO reserve resulted in an $809,000 charge to cost of
sales.
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.
Advertising Expenses. The cost of advertising is expensed as incurred. The
Company incurred $1,254,000, $3,637,000 and $4,214,000 in advertising costs
during 2000, 1999 and 1998, respectively.
Change in Fiscal Year. Effective in the fourth quarter of 2000, the Company
reverted back to calendar months for its fiscal periods. The Company had been
using a "4-5-4" fiscal calendar since the fourth quarter of 1996. Although the
change in the fiscal calendar resulted in eight additional days in fiscal 2000
compared to the "4-5-4" format, the effect of this calendar change on fiscal
2000 operating results was not material.
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 15%
of their wages. The Company matches the employees' contribution up to 1/3 of the
first 6% of wages. In addition, eligible employees receive a Company
contribution equal to 3% of wages. Prior to 1999, the Company contributed up to
a maximum of $500 per year for the matching portion and made a profit-sharing
contribution to the plan annually based on a percentage of the Company's pre-tax
profit. Consolidated profit-sharing contributions approximated $722,000,
$730,000 and $634,000 for 2000, 1999 and 1998, respectively, and consolidated
contributions to the 401(k) plans were approximately $386,000, $468,000 and
$469,000 for 2000, 1999 and 1998, respectively.
F-14
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:
For The Year Ended
--------------------------------------
(in thousands) December 31, December 25, December 26,
2000 1999 1998
--------------------------------------
Weighted average number
of common shares outstanding
used for basic calculation 4,752 5,271 6,474
Dilutive effect of assumed exercise
of common stock options 97 98 104
--------------------------------------
Number of shares outstanding
assuming dilution 4,849 5,369 6,578
======================================
Exercisable stock options not included in the computation of diluted EPS
because the option prices were greater than the average quarterly market prices
totaled 298,000, 237,000 and 193,000 shares, respectively, for 2000, 1999 and
1998. The exercise price for these shares averaged $12.88, $13.36 and $13.52 for
2000, 1999 and 1998, respectively.
Reclassifications. Certain amounts as originally reported in the 1999 and 1998
financial statements have been reclassified to conform to their 2000
presentation.
Note B--Acquisition of Central Michigan Lumber
The Company acquired Central Michigan Lumber ("CML") effective June 29,
1998 in a transaction accounted for as a purchase. CML had seven locations
throughout mid-Michigan upon acquisition and operated as a wholly-owned
subsidiary of WLC until November 1999 when it became a division of WLC. The
purchase price of $17,933,000 was paid in cash and allocated to the assets
acquired and liabilities assumed based on their fair values, as follows (in
thousands):
Total assets $ 21,469
Total liabilities (7,631)
Intangible assets 4,095
--------
Total purchase price 17,933
Less cash received (21)
--------
Net cash paid $ 17,912
========
The intangible assets which consist of goodwill, customer lists and the trained
employee work force are being amortized on a straight-line basis over their
expected lives, which is 5 to 30 years. Results of operations are included in
the consolidated financial statements since the date of acquisition.
F-15
Note C--Valuation Accounts
The following table presents a summary of the changes in the allowances
for doubtful receivables for each of the years in the three-year period ended
December 31, 2000:
(in thousands) 2000 1999 1998
------------------------------------
Balance at beginning of year $ 2,566 $ 2,197 $ 1,933
Provision for doubtful accounts 1,106 1,438 996
Amounts charged off (1,781) (1,069) (732)
------------------------------------
Balance at end of year $ 1,891 $ 2,566 $ 2,197
====================================
Beginning in 1998, the Company recorded a valuation allowance for
non-strategic inventory. The valuation allowance totaled approximately $1.7
million at year-end 2000 and approximately $1.9 million at year ends 1999 and
1998.
Note D--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. The Plan originally provided for 550,000
shares of common stock to be issued through the issuance of stock options and
performance share awards. On February 2, 2001, the Board of Directors approved,
subject to shareowner approval at the annual shareowner meeting to be on May 2,
2001, an amendment to the Long-Term Incentive Plan increasing by 150,000 the
number of shares issuable thereunder. Performance shares awarded are earned and
vested at the rate of 20% per year and become issuable 10 years after the date
of award. During 2000, 17,000 performance shares (17,300 shares in 1999 and
19,500 in 1998) were awarded at average weighted fair values of $10.75 per share
for 2000 and $13.00 per share for 1999 and 1998. At December 31, 2000, there
were 104,000 performance shares awarded but unissued.
The Company also has a stock option plan for non-employee directors in
addition to the Long-Term Incentive Plan for key employees. The following table
summarizes information about stock option transactions:
Weighted
Average
Exercise
Number of Exercise Price Price
Shares Per Share Per Share
- --------------------------------------------------------------------------------
Outstanding at December 27, 1997 117,500 $ 9.25 - 14.50 $12.24
- --------------------------------------------------------------------------------
Granted 196,400 11.13 - 13.25 13.09
Exercised (1,000) 9.31 9.31
Forfeited (18,800) 9.25 - 14.50 12.80
- --------------------------------------------------------------------------------
Outstanding at December 26, 1998 294,100 9.25 - 14.50 12.78
- --------------------------------------------------------------------------------
Granted 36,300 11.88 - 12.25 12.11
Exercised (1,000) 9.31 9.31
Forfeited (17,300) 9.25 - 14.50 12.26
- --------------------------------------------------------------------------------
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
================================================================================
F-16
The number of shares exercisable were 154,000, 131,500, and 112,100 as of
the year-ends 2000, 1999 and 1998, respectively. The fair value of options
granted was $2.89, $4.14 and $4.68 per share in 2000, 1999 and 1998,
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 2000, 1999 and 1998,
respectively: dividend yield of 2.8, 2.3 and 2.1 percent; expected volatility of
24, 29 and 29 percent; risk-free interest rates of 5.3, 5.1 and 5.1 percent and
expected lives of 10 years for all years.
Options outstanding at December 31, 2000 are composed of the following:
---------------------------------------------------------------
Outstanding Exercisable
Weighted
Average Weighted Number of Weighted
Number of Remaining Average Shares at Average
Range of Exercise Shares at Contractual Exercise Dec. 31, Exercise
Prices Dec. 31, 2000 Life Price 2000 Price
- --------------------------------------------------------------------------------
$ 9.25 - 11.13 180,900 9.01 $ 9.96 26,900 $ 9.31
11.88 - 13.06 65,400 8.02 12.33 26,100 12.35
13.13 - 14.00 144,600 7.28 13.13 60,000 13.14
14.38 41,000 3.33 14.38 41,000 14.38
- --------------------------------------------------------------------------------
$ 9.25 - 14.38 431,900 7.74 $11.80 154,000 $12.67
================================================================================
All options expire 10 years after the date of grant. There are 136,000
shares (assuming approval of the amendment to the Plan by shareowners at the May
3, 2001, annual meeting) reserved for future issuance under the Long-Term
Incentive Plan and 28,000 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% of the Company's common shares or more 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, 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 decrease in net
F-17
income of $84,000, or 2 cents per common share in 2000, and a reduction of less
than 2 cents per share in 1999 and 1998.
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 Dutch auction tender offer) of the Company's common stock. Shares
repurchased on the open market totaled 464,598 shares at prices ranging from
$9.75 to $13 in 2000, 539,026 shares at prices ranging from $11.75 to $13 in
1999 and 1,370,640 shares at prices ranging from $11.25 to $13.19 per share in
1998.
Note E--Debt and Lease Transactions
The Company has available, under lines of credit arrangements with several
banks, $40 million in unsecured short-term borrowings. The interest rate
applicable when using these lines is dependent upon a variety of formulae 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 annually. There were no borrowings outstanding
under these arrangements at year-end 2000 and 1999. The Company also has unused
letters of credit in the amount of $5.5 million related to liability coverage
and bonds payable.
Long-term debt consisted of the following obligations:
(in thousands) December 31, December 25,
2000 1999
---------------------------
Unsecured notes to insurance company,
due in annual installments of
$2,050 in 2001 and $2,460 in 2002
Interest is payable quarterly at 8.65% $ 4,510 $ 8,570
Unsecured notes to insurance company,
due in annual installments of
$2,000 in 2001 and 2002
Interest is payable semi-annually
at 8.99% 4,000 4,000
Michigan Strategic Fund limited
obligation revenue bonds, payable
in 2001. Interest varies weekly
at prevailing market rates for
similar tax exempt securities
(average of 4.29% for 2000) and is
paid quarterly 3,300 3,300
Other 783 912
---------------------------
Total long-term debt 12,593 16,782
Less amount due in one year 7,482 4,189
---------------------------
Long-term debt, net of current
maturities $ 5,111 $12,593
===========================
F-18
Properties at December 31, 2000 with a net carrying value of approximately
$2,218,000 are pledged as collateral for the revenue bonds.
Maturities of long-term debt for each of the four years following 2001
approximate: $4,595,000 in 2002; $139,000 in 2003; $143,000 in 2004 and $130,000
in 2005.
The Company leases certain facilities and equipment under various
operating leases. Lease expense for such facilities and equipment totaled
approximately $402,000 in 2000, $504,000 in 1999 and $566,000 in 1998. Future
minimum lease payments for each of the next five years approximate $331,000 and
aggregate $1,381,000 thereafter.
Note F--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. Significant components of
the Company's deferred tax assets are:
(in thousands) December 31, December 25,
2000 1999
----------------------------
Deferred tax assets:
Basis differences in properties $ 279 $ 359
Compensation and employee benefits 541 560
Allowance for doubtful accounts 733 1,001
Basis differences in inventories 757 960
Store closings 730 281
Insurance claims accrual 46 61
Other 59 61
----------------------------
Total deferred tax assets $3,145 $3,283
============================
The provisions for income taxes consist of:
For The Year Ended
-----------------------------------------
(in thousands) December 31, December 25, December 26,
2000 1999 1998
-----------------------------------------
Current:
Federal $ 698 $ 3,517 $ 3,273
State 494 879 1,064
Deferred Federal and
State (benefit) 138 (295) 70
-----------------------------------------
Total provision for income taxes $ 1,330 $ 4,101 $ 4,407
=========================================
F-19
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:
For The Year Ended
----------------------------------------------
(in thousands) December 31, December 25, December 26,
2000 1999 1998
----------------------------------------------
Computed amount $ 992 $ 3,528 $ 3,803
State income taxes, net
of federal income tax
Benefit 338 556 708
Tax exempt investment
Income (35) -- (116)
Other 35 17 12
----------------------------------------------
Total provision for
income taxes $ 1,330 $ 4,101 $ 4,407
==============================================
Note G--Store-Closings and Sales
During 2000, the Company closed eight stores and identified six additional
locations which do not meet the Company's strategic and financial expectations.
Closing costs associated with these stores approximated $5 million including
$2.1 million recorded as a charge to cost of sales. The closing costs were
primarily related to liquidating inventory and absorbing certain other on-going
fixed costs. One store was closed in 1999 and seven stores were closed in 1998.
Closing costs totaled $1.5 million in 1999 including $200,000 recorded as a
charge to cost of sales, and $3.5 million in 1998 including $1.5 million
recorded as a charge to cost of sales. Real estate owned related to closed
stores is held for sale and included with other assets on the accompanying
consolidated balance sheets.
On February 1, 1999, the Company sold inventory, trade receivables and
equipment related to six of its stores to Stock Lumber Co. The selling price,
which approximated net book value, was approximately $10 million.
Note H--Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments.
Cash and Cash Equivalents and Certificates of Deposit. The carrying amounts
reported in the consolidated balance sheets for cash and cash equivalents and
certificates of deposit approximates their fair values.
Accounts Receivable and Accounts Payable. The carrying amounts reported in the
consolidated balance sheets for accounts receivable and accounts payable
approximate their fair values.
F-20
Long-Term Debt. The fair value of the Company's long-term debt is estimated
using discounted cash flow analyses, based on the Company's current borrowing
rates for similar types of borrowing arrangements. The carrying amounts and fair
values of the Company's financial instruments are as follows:
December 31, December 25,
(in thousands) 2000 1999
--------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------- ------------------------
Cash and cash equivalents $ 1,705 $ 1,705 $ 3,217 $ 3,217
Certificates of deposit 10,000 10,000 -- --
Trade receivables 17,457 17,457 33,741 33,741
Builder Finance Program
receivables 1,478 1,478 5,220 5,220
Accounts payable 6,318 6,318 12,467 12,467
Long-term debt including
current portion 12,593 12,721 16,782 16,867
Note I--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.
F-21
Corporate Information
ANNUAL MEETING
The Annual Meeting of shareowners of Wolohan Lumber Co. will be held May
3, 2001, 2 p.m., at the Citizens Bank Building, 101 N. Washington Avenue,
Saginaw, Mich. Shareowners are welcome.
COPIES OF REPORTS
Shareowners may obtain additional copies of this report and quarterly 10Q
reports by writing to the Company's Investor Relations Dept., Wolohan Lumber
Co., P.O. Box 3235, Saginaw, MI 48605. To view quarterly information please
visit our website at: http://www.wolohan.com. The Company will no longer issue
quarterly reports to Shareholders.
HEADQUARTERS
Wolohan Lumber Co. Administrative Offices
1740 Midland Road
P.O. Box 3235
Saginaw, MI 48605
(517) 793-4532
COMMON STOCK
Wolohan's common stock trades on The Nasdaq Stock Market(TM) under the symbol
WLHN.
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 368-5948
GENERAL COUNSEL
Dickinson Wright PLLC
500 Woodward Avenue, Suite 4000
Detroit, MI 48226
INDEPENDENT AUDITORS
Rehmann Robson, P.C.
5800 Gratiot
Saginaw, MI 48603
BOARD OF DIRECTORS
James L. Wolohan
Chairman of the Board,
President and Chief
Executive Officer;
Director since 1986
Hugo E. Braun, Jr.
Partner, Braun Kendrick
Finkbeiner,
Attorneys-at-Law;
Director since 1984
Leo B. Corwin
President, Txcor, Inc.;
Director since 1992
Charles Weeks
Chairman and formerly
Chief Executive Officer of
Citizens Banking Corp.;
Director since 1996
Lee A. Shobe
formerly President and
Chief Executive Officer of
Dow Brands, Inc.;
Director since 1996
John A. Sieggreen
Executive Vice President
and Chief Operating
Officer;
Director since 1999
COMMITTEES
Management Review
Committee
Lee A. Shobe,
Chairman
Hugo E. Braun, Jr.
Leo B. Corwin
Charles R. Weeks
Audit Committee
Hugo E. Braun, Jr.,
Chairman
Leo B. Corwin
Lee A. Shobe
Charles R. Weeks
Compensation Committee
Charles R. Weeks, Chairman
Hugo E. Braun, Jr.
OFFICERS
James L. Wolohan
Chairman of the Board,
President and Chief
Executive Officer
Daniel P. Rogers
Senior Vice President-
General Merchandise
Manager and President
of the CML Division
John A. Sieggreen
Executive Vice President
and Chief Operating Officer
David G. Honaman
Senior Vice President-
Secretary and Chief
Financial Officer
Edward J. Dean
Corporate Controller