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Wilmar Industries Inc – ‘10-K405’ for 12/31/99

On:  Friday, 3/24/00   ·   For:  12/31/99   ·   Accession #:  1036050-0-420   ·   File #:  0-27424

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/24/00  Wilmar Industries Inc             10-K405    12/31/99    5:147K                                   Donnelley R R & S..14/FA

Annual Report — [x] Reg. S-K Item 405   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Wilmar Industries, Inc. Form 10-K405                  39    240K 
 2: EX-9        Voting and Exchange Agreement                          6     31K 
 3: EX-21       Wilmar Industries, Inc List of Subsidiaries            1      5K 
 4: EX-23       Consent of Deloitte and Touche LLP                     1      6K 
 5: EX-27       Financial Data Schedule                                2      6K 


10-K405   —   Wilmar Industries, Inc. Form 10-K405
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
3Item 1. Business
6Item 2. Properties
7Item 3. Legal Proceedings
"Item 4. Submission of Matters to a Vote of Security Holders
"Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
8Item 6. Selected Financial Data
9Item 7. Management's Discussion and Analysis of Financial Condition and Result
13Item 7A. Quantitative and Qualitative Disclosures About Market Risk
"Item 8. Financial Statements and Supplementary Data
"Item 9. Changes In and Disagreements with Accountants on Accounting and
14Board of Directors
16Item 11. Executive Compensation
19Item 12. Security Ownership of Certain Beneficial Owners and Management
20Item 13. Certain Relationships and Related Transactions
21Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
24Independent Auditors' Report
25Item 1 -. Financial Statements
"Consolidated Balance Sheets
27Consolidated Statements of Stockholders' Equity
29Notes to Consolidated Financial Statements
39Schedule II
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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 No Fee Required for the fiscal year ended December 31, 1999 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 No Fee Required for the transition period from ________ to ________ Commission file number 0-27424 ------- WILMAR INDUSTRIES, INC. (Exact name of registrant as specified in its charter) [Download Table] New Jersey 22-2232386 ------------------------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 303 Harper Drive Moorestown, New Jersey 08057 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (856) 439-1222 -------------- [Enlarge/Download Table] Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, without par value Nasdaq National Market ------------------------------- ---------------------- Securities registered pursuant to Section 12(g) of the Act: None ---- (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 the definitive proxy statement incorporated by reference in Part III of this annual report on Form 10-K or any amendment to this annual report on Form 10-K. [X] As of March 1, 2000, the aggregate market value of the Common Stock held by non- affiliates of the registrant was $96,391,275. Such aggregate market value was computed by reference to the closing sale price of the Common Stock as reported on the National Market segment of The Nasdaq Stock Market on such date. For purposes of making this calculation only, the registrant has defined affiliates as including all directors and beneficial owners of more than ten percent of the Common Stock of the Company. As of March 1, 2000, there were 12,407,826 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: None
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WILMAR INDUSTRIES, INC. FORM 10-K ANNUAL REPORT For Fiscal Year Ended December 31, 1999 TABLE OF CONTENTS [Enlarge/Download Table] PART I PAGE ---- Item 1. Business 1 Item 2. Properties 4 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5 Item 6. Selected Financial Data 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 11 Item 8. Financial Statements and Supplementary Data 11 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 11 PART III Item 10. Directors and Executive Officers of the Registrant 12 Item 11. Executive Compensation 14 Item 12. Security Ownership of Certain Beneficial Owners and Management 17 Item 13. Certain Relationships and Related Transactions 18 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 19
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This document contains certain forward-looking statements that are subject to risks and uncertainties. Forward-looking statements include certain information relating to future growth plans, the anticipated costs associated with those plans, the Company's liability and capital resources, as well as information contained elsewhere in this report where statements are preceded by, followed by or include the words "believes," "expects," "anticipates" or similar expressions. For such statements the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including without limitation, general market conditions, increased competition, failure to locate and acquire acquisition candidates, and factors discussed elsewhere in this report and in the documents incorporated herein by reference. The following discussion should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this report on Form 10-K. PART I Item 1. Business. ------ -------- Overview Wilmar Industries, Inc. ("Wilmar" or the "Company") is a national marketer and direct distributor of repair and maintenance products to facilities maintenance markets. Through its 1,000+ page Wilmar Master Catalog, the Company has become a "one-stop shopping" resource for apartment maintenance managers by offering the industry's most extensive selection of over 15,000 standard and specialty plumbing, hardware, electrical, janitorial and related products. Through the Sexauer Group, the Company markets plumbing specialties products to maintenance managers in the education, healthcare, commercial real estate, lodging and other facilities maintenance industries. By purchasing directly from domestic and foreign manufacturers in relatively large volumes, the Company is able to offer customers competitive prices on both name brand and private label products. The Company seeks to win new accounts and increase sales to existing accounts through a direct sales force, outbound telesales representatives, a national accounts sales program and monthly direct mail flyers. Customer service representatives located at Wilmar's regional call centers use the Company's proprietary software applications to quickly process orders and answer customer inquiries. The Company provides free, same-day or next-day delivery in local markets served by its distribution centers and ships by parcel delivery services to other areas. The Company was formed in 1978, initially doing business in the Philadelphia area. Since 1991, Wilmar has expanded from four distribution centers located in Philadelphia, Washington, D.C., Houston and Indianapolis to twenty-six distribution centers, as well as an inventory transfer center, located throughout the United States and Canada. From 1994 to 1999, the Company's net sales increased at a compound annual rate of 36.5%. From November 1995 through December 1999, Wilmar has acquired fifteen regional repair and maintenance supply companies with total annualized net sales of approximately $162 million. Throughout this report, references to 1997, 1998 and 1999 refer to the fiscal years ended December 26, 1997, December 25, 1998 and December 31, 1999, respectively. On December 23, 1999, the Company entered into an Agreement and Plan of Merger and Recapitalization (as amended, the "Merger Agreement") with WM Acquisition, Inc., a subsidiary of an investor group led by Parthenon Capital and Chase Capital Partners. The managing director of Parthenon Capital is also a memeber of the Board of directors of Wilmar. Pursuant to the terms of the Merger Agreement, as a result of the merger (the "Merger") contemplated by the Merger Agreement, WM Acquisition will be merged with and into the Company, each share of the Company's Common Stock will be exchanged for $18.25 per share and the Company shall remain as the surviving corporation. The Merger is contingent upon certain conditions, including approval by the shareholders of the Company. Upon consummation of the Merger, the Company's Common Stock will no longer be traded on the Nasdaq National Market System, price quotations will no longer be available and registration of the Company's Common Stock under the Securities and Exchange Act of 1934 will terminate, resulting in part in no further public reporting by Wilmar under such act. Acquisitions An important element of the Company's growth strategy has been to take advantage of the highly fragmented nature of its industry by continuing to explore strategic acquisitions. The Company made several acquisitions in 1999, as described below, each of which was accounted for using the purchase method. In July 1999, the Company acquired certain assets of The Mini Blind Company, Inc. ("Mini Blind"), a distributor of vertical and mini blinds to the multi- family or apartment housing market, based in San Antonio, TX. The total purchase price of the acquisition was paid in cash. In October 1999, the Company acquired 100% of the capital stock of Ace Maintenance Mart USA, Inc. ("Ace"), a direct mail distributor of repair and maintenance supplies, based in San Diego, CA. The purchase price of this acquisition consisted of cash and has been allocated to the assets acquired based upon their estimated fair market values. 1
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In December 1999, the Company acquired 100% of the capital stock of J.A. Sexauer, Inc. ("Sexauer"), based in Scarsdale, NY and its wholly owned subsidiary Sexauer Ltd. ("Sexauer Ltd."), based in Toronto, Ontario, and 100% of the capital stock of Trayco of S.C., Inc. ("Trayco"), based in Florence, SC (Sexauer together with Sexauer Ltd. and Trayco referred to hereafter as the "Sexauer Group") from The Dyson-Kissner-Moran Corporation ("DKM"). The purchase price of this acquisition consisted of cash and has been allocated on a preliminary basis to the assets acquired based upon their estimated fair market values. Goodwill and other intangibles recorded in connection with each of the acquisitions above are being amortized on a straight-line basis over 5 to 40 years. Products and Merchandising Wilmar markets over 43,000 repair and maintenance products. These items constitute a full range of standard and specialty products in the following product categories: plumbing, hardware, electrical, chemical and janitorial, appliances, appliance parts, window and floor coverings, heating, ventilating and air conditioning ("HVAC"), and paint and paint accessories. Wilmar offers a broad range of name brands such as Kwikset, Insinkerator, Delta Faucet, Moen, Philips Lighting, and Briggs Plumbingware. In fiscal 1999, excluding unassimilated acquisitions, private label products marketed under the "Wilmar" and "Wilflo" names accounted for 14 % of net sales, and no single product accounted for more than 1 % of the Company's net sales. Through its inventory management system, the Company is able to identify sales trends and adjust the Company's merchandise mix accordingly. Product Categories. For the periods presented, the approximate percentages of the Company's net sales by product category were as follows: [Download Table] Product Category FISCAL YEAR ---------------- ----------- 1997 1998 1999* -------------------------------- Plumbing 30% 27% 29% Electrical 18 18 17 Hardware 15 14 14 Chemical and janitorial 5 6 6 Appliances 5 9 8 Appliance parts 5 5 5 Window and floor coverings 7 6 6 HVAC 8 8 8 Paint and paint accessories 3 3 3 Other 4 4 4 -------------------------------- 100% 100% 100% ================================ __________________ (*) Includes sales by the Sexauer Group, from the date of acquisition (which was in December 1999.) Sales and Marketing The Company markets and sells through a direct sales force to all levels of the customer's organization, including senior managers of property management companies, local and regional property managers and, most importantly, on-site maintenance managers. The Company's sales and marketing efforts are designed to establish and solidify customer relationships through frequent contact, and to emphasize the Company's broad product selection, reliable same-day or next-day delivery, high level of customer service and competitive pricing. Wilmar's base of active customers (customers that have purchased in the preceding 12 months) has grown to approximately 89,000 at December 31,1999 (including 44,000 active customers acquired in connection with the Sexauer Group acquisition) from approximately 43,000 at December 25, 1998. No single property accounted for as much as 1% of the Company's net sales during fiscal 1999, although approximately 2,200 properties owned or managed by one large property management company accounted for an aggregate of 7.5% of the Company's net sales during this period. 2
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Wilmar maintains one of the largest direct sales forces in its industry. At December 31, 1999, the Company had 431 field sales representatives covering markets throughout the United States and Canada. The Company has found that it garners a greater percentage of its customers' overall spending on repair and maintenance supplies in markets serviced by their local sales representatives, particularly where local sales representatives are supported by a nearby distribution center, thus enabling free, same-day or next-day delivery of the Company's entire product line. To generate new customers, the Company provides its sales representatives with lists of prospective customers and generally expects them to call on existing customers approximately every two weeks. In servicing existing customers, local sales representatives are expected not only to generate orders but also to be problem solvers. Typical problem solving services include shop organization, special orders, part identification and complaint resolution. Local sales representatives are compensated based on a combination of salary and commission. The Company's sales force is managed by the Company's Director of Sales and Marketing and it's regional sales managers. The Company also employs twelve telesales representatives whose responsibility is to obtain new customers and maintain regular contact with active customers, principally in territories where Wilmar does not employ a local field sales representative. Operations The Company receives all orders placed by customers or customers' local sales representatives at its regional customer service centers via telephone through the Company's toll-free "800" numbers, by fax and internet. Calls are received by customer service representatives who utilize on-line terminals to enter customer orders into a fully computerized order processing system. Through this system, customer service representatives access product availability, product location, pricing and promotions information. Customer service personnel determine immediately whether the product is available at the distribution center closest to the customer and, if not, the closest distribution center with availability. As a result, the customer service representative informs the customer immediately as to when the product can be delivered. Customer service lines are open from 8:00 a.m. to 8:00 p.m. Eastern Standard Time. Once an order is entered into the computer system by a customer service representative, a picking slip is generated at the appropriate distribution center. Items on the picking slip are automatically arranged by warehouse location sequence to facilitate ease of picking within the distribution center. Distribution center personnel pick items from 8:00 a.m. to 6:00 p.m. and all orders received before 3:00 p.m. are readied for shipment on the same day. Wilmar uses bar-coding on all orders to track shipment and delivery status. Most sales are billed on net 30-day terms, with the remaining paid by credit card at the time of sale. The Company seeks to carefully manage inventory to assure product availability and minimize inventory shrinkage. The Company regularly performs cycle counts of key inventory items. Wilmar attempts to ship its products in the most cost-effective and efficient manner. For customers located within the local delivery radius of a distribution center (typically 50 miles), Wilmar's own trucks or a contract delivery service will deliver the products directly to the customer either the same day or next day, at no charge for orders over $25. For customers located outside the local delivery radius of a distribution center, the Company will deliver products via UPS or another parcel delivery company or, in the case of large orders, by less- than-truckload common carrier. For these customers, the Company imposes a $25 minimum order size and does not charge delivery costs if the customer's order exceeds $50, except for heavy or oversized products marked in the catalog with a "plus freight" symbol. The Company arranges for pick-up of returns at no charge to the customer in the local delivery radius. For customers outside the local delivery radius, the Company provides parcel service pick-up of the returns at no charge plus full refund if the return is the result of Company error. In 1999, the Company's return rate was approximately 4.3% of sales. The company offers 12-year warranties on its "Wilflo" faucets and one-year warranties on its "Wilmar" ceiling fans and "Wilmar" garbage disposals. Competition The Company believes that the principal competitive factors in the distribution of repair and maintenance products to the apartment housing market and similar markets are the breadth and quality of products offered, reliability of delivery, customer service, product pricing and sales relationships. The Company believes it competes favorably with respect to these factors. Although there are a large number of repair and maintenance distributors in the United States, based on industry reports and its own experience, the Company believes that most operate in a single region (often with a single distribution center) and have significantly less annual sales than the Company. However, there is a trend toward consolidation in the repair and maintenance distribution industry, and several competitors are building a national presence and are marketing to the apartment housing market. In addition, the Company competes with mail order catalog companies, retail stores including superstores, specialty suppliers and industrial suppliers. Certain of the Company's competitors have greater financial resources and sell more products than Wilmar. 3
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Employees The Company employed 1,338 people as of December 31, 1999. Of these, 431 were in sales, 12 in telesales, 105 in customer service, 522 in operations and 268 in management and administration. Forty of the Company's distribution center employees and truck drivers at the Philadelphia distribution center are covered by a collective bargaining agreement with Highway Truck Drivers and Helpers Local 107. This agreement expires in May 2001. Twenty-two of the Company's distribution center employees and truck drivers at the Washington, D.C. distribution center are covered by a collective bargaining agreement with Highway Truck Drivers and Helpers Local 355 which went into effect in March 1999. The Company has never experienced a work stoppage, and believes its relations with its employees are good. Both local unions are affiliated with the International Brotherhood of Teamsters. Item 2. Properties ------ ---------- The Company acquired two buildings through the Sexauer Group acquisition, a 17,000 square foot facility in Scarsdale, NY which is used for the Sexauer Group corporate headquarters and a 58,400 square foot distribution center in Louisville, KY. The Company leases approximately 12,500 square feet of office space in Moorestown, New Jersey from William Green, Chairman, and Chief Executive Officer of the Company, for its headquarters (see Note 8 to the Consolidated Financial Statements). The Company also leases the following distribution centers (unless otherwise noted): [Download Table] Current Year Distribution Center Square Footage Opened/Acquired ------------------------------------------- -------------- ------------------ Philadelphia, PA........................... 70,000 1978/(1)/ Washington, D.C............................ 28,500 1982 Houston, TX (Inventory Transfer Center).... 25,000 1987 Indianapolis, IN........................... 16,000 1991 Fresno, CA................................. 14,400 1992 Atlanta, GA................................ 28,800 1993 Tampa, FL.................................. 36,700 1994 Columbus, OH............................... 20,800 1995 Seattle, WA................................ 16,200 1995 Miami, FL.................................. 37,200 1995* Denver, CO................................. 44,000 1996/(2)/ Houston, TX................................ 55,000 1996* San Antonio, TX............................ 19,200 1996 Chicago, IL................................ 18,800 1997* Dallas, TX................................. 50,400 1997 Charlotte, NC.............................. 24,000 1997 Phoenix, AZ................................ 33,300 1997 Farmington Hills, MI....................... 70,000 1997*/(3)/ Las Vegas, NV.............................. 21,600 1998 Boston, MA................................. 48,300 1998 Bronx, NY (Kurzon)......................... 18,600 1998* Deptford, NJ (Screen shop)................. 5,000 1999 Los Angeles, CA............................ 39,500 1999 San Diego, CA (Ace Maintenance Mart)....... 24,700 1999* Florence, SC (The Sexauer Group)........... 34,000 1999* Toronto, Ontario (Sexauer Ltd of Canada)... 17,000 1999* Edmonton, Alberta (Sexauer Ltd of Canada).. 4,000 1999* ______________________ * Distribution center acquired. /(1)/ In September 1996, the Company moved its Philadelphia distribution center to a new 70,000 square foot facility, which also houses the Company's national call center. This distribution center is leased from 804 Eastgate Associates LLC, a related party (see Note 8 to the Consolidated Financial Statements). /(2)/ In May 1999, the Denver Distribution Center, which was originally acquired during the Mile High Maintenance Supply, Inc. ("Mile High") acquisition, was moved to a larger facility. /(3)/ During 1999, the company closed its Customer will-call center in Berkley, MI and consolidated it with their facility in Farmington Hills, MI These properties are leased for periods of three to ten years and generally do not include tenant renewal options. The Company believes its current facilities are adequate for its current and reasonably foreseeable needs and that suitable additional or alternative space will be available as needed to accommodate future growth and to open additional distribution centers. 4
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Item 3. Legal Proceedings. ------ ----------------- The Company is involved in various legal proceedings in the ordinary course of its business which are not anticipated to have a materially adverse effect on the Company's results of operations or financial condition. Following the public announcement of the merger and recapitalization, a purported shareholders class action complaint was filed by Phronesis Partners, L.P. on December 27, 1999 against Wilmar, Wilmar's directors and Parthenon Capital, Inc. in the Superior Court of New Jersey, Chancery Division, Burlington County (Docket No. BUR-C-171-99). The complaint alleges, among other things, that Wilmar's directors have breached their fiduciary duties and that Parthenon Capital has aided and abetted those breaches. The complaint also alleges, among other things, that the proposed consideration for the merger and recapitalization is unfair and inadequate. The complaint seeks to enjoin the merger and recapitalization and also seeks damages. On March 17, 2000, the plaintiffs filed a motion seeking leave to file an amended complaint adding a claim alleging Wilmar's directors made misrepresentations in its preliminary proxy solicitation materials and seeking to preliminarily enjoin Wilmar from holding a shareholder vote on the merger and recapitalization. The parties have agreed that the defendants will not object to the filing by the plaintiff of their amended complaint and that the plaintiffs will reconsider the need for pursuing their motion to preliminarily enjoin the shareholders vote. Wilmar and Parthenon believe the allegations are without merit and are vigorously defending against all claims. If plaintiffs decide to pursue their motion for a preliminary injunction, it will be opposed. No final date has been set for a hearing on the motion. Document and deposition discovery is proceeding. The Company collects sales tax in 35 states and the District of Columbia where it has the required contacts. From time to time, various states have sought to impose on direct marketers the burden of collecting use taxes on the sale of products shipped to residents of these states. The United States Supreme Court held that it is unlawful for a state to impose use tax collection obligations on an out-of-state company whose only contacts with the state were the distribution of catalogs and other advertising materials through the mail and subsequent delivery of purchased goods by mail or common carrier. In the event legislation is passed to overturn the Supreme Court's decision, the imposition of a use tax collection obligation on the Company in states into which it ships products but with which it has no other contacts would result in additional administrative expense to the Company and higher prices to customers. Item 4. Submission of Matters to a Vote of Security Holders. ------ --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of 1999. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. ------ --------------------------------------------------------------------- Since completing its initial public offering of Common Stock in the first quarter of 1996, the Company's Common Stock has been listed on the National Market segment of The Nasdaq Stock Market ("Nasdaq National Market") under the symbol "WLMR." The following table sets forth the high and low stock prices for each quarter in 1998 and 1999, as quoted on The Nasdaq National Market. [Download Table] Fiscal Year 1998 High Low ---------------- ---- --- First Quarter $26.00 $20.50 Second Quarter $25.50 $21.50 Third Quarter $28.25 $18.00 Fourth Quarter $25.38 $16.50 Fiscal Year 1999 ---------------- First Quarter $23.50 $14.50 Second Quarter $17.00 $10.63 Third Quarter $14.88 $12.25 Fourth Quarter $17.38 $10.13 At March 1, 2000, there were no shares of Preferred Stock outstanding. On March 1, 2000, the closing sale price for a share of Common Stock as reported by The Nasdaq National Market was $ 17.00. As of March 1, 2000, there were approximately 1,778 holders of the Company's Common Stock. The Company did not declare dividends on its Common Stock in fiscal year 1999 or in fiscal year 1998 and does not intend to declare dividends on its Common Stock in the foreseeable future. 5
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Item 6. Selected Financial Data. ------ ----------------------- The selected financial and operating data set forth below should be read in conjunction with the Consolidated Financial Statements of the Company, including the notes thereto included elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected financial data for the fiscal years presented have been derived from the Company's financial statements, which have been audited by independent auditors. [Enlarge/Download Table] Fiscal Year /(1)/ ----------------- (In thousands, except per share data) 1995 1996 1997 1998 1999 --------- --------- --------- --------- --------- Statement of Operations Data: Net Sales $ 60,823 $100,644 $150,792 $192,605 $225,937 Cost of Sales /(2)/ 41,835 70,853 106,605 136,488 158,542 -------- -------- -------- -------- -------- Gross Profit 18,988 29,791 44,187 56,117 67,395 Operating and Selling Expenses 9,099 14,168 21,024 26,357 32,287 Corporate General & Admin. Expenses 3,985 6,718 9,857 11,114 13,942 Non-Recurring Severance Expenses -- -- 259 -- -- -------- -------- -------- -------- -------- Operating Income 5,904 8,905 13,047 18,646 21,166 Interest expense (income), net 1,164 (551) (1,580) (1,511) (753) -------- -------- -------- -------- -------- Income before income taxes 4,740 9,456 14,627 20,157 21,919 -------- -------- -------- -------- -------- Income tax provision /(3)/ 1,896 3,593 5,393 7,692 8,545 -------- -------- -------- -------- -------- Net income /(3)/ $ 2,844 $ 5,863 $ 9,234 $ 12,465 $ 13,374 ======== ======== ======== ======== ======== Net income per share /(3)/ - Basic $ 0.37 $ 0.53 $ .70 $ .93 $ 1.05 ======== ======== ======== ======== ======== - Diluted $ 0.36 $ 0.51 $ .69 $ .92 $ 1.04 ======== ======== ======== ======== ======== Weighted average common shares /(4)/ - Basic 7,765 11,105 13,165 13,368 12,726 ======== ======== ======== ======== ======== - Diluted 7,868 11,458 13,335 13,504 12,858 ======== ======== ======== ======== ======== Balance Sheet Data Working capital (deficit) $ (54) $ 65,300 $ 64,848 $ 72,550 $ 50,646 Total assets 26,871 88,309 108,115 121,696 201,968 Long-term debt, less current portion 5,667 -- 500 -- 55,875 Mandatorily-redeemable preferred stock 25,058 -- -- -- -- Total stockholders' equity (deficit) (27,062) 75,500 90,549 103,789 104,573 /(1)/ The Company's fiscal year is based on a 52/53 week fiscal period ending on the last Friday in December. The fiscal year 1999 consists of 53 weeks while all other years consists of 52 weeks. /(2)/ Cost of sales includes merchandise, freight, distribution center occupancy and delivery costs. /(3)/ Prior to March 1, 1995, the Company elected to be taxed as an S Corporation for federal (and certain state) income tax purposes. Pro forma information has been computed as if the Company had been subject to federal income taxes and all applicable state corporate income taxes for each period presented. The income tax provision and net income for 1996 through 1999 are actual amounts. /(4)/ See Note 2 to the Consolidated Financial Statements for description of the determination of weighted-average common shares outstanding. 6
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Item 7. Management's Discussion and Analysis of Financial Condition and Result ------- ---------------------------------------------------------------------- of Operations ------------- Overview Wilmar was founded in 1978 by its current Chief Executive Officer, William Green, and his father, Martin Green, to provide reliable, next-day delivery of repair and maintenance products to customers in its original Philadelphia market. Since its inception, the Company has experienced significant growth. The Company opened its second distribution center in Washington, D.C. in 1982 and its third in Houston in 1987. Since 1991, the Company has accelerated its growth, opening twelve distribution centers: Indianapolis (1991), Fresno (1992), Atlanta (1993), Tampa (1994), Columbus (1995), Seattle (1995), Dallas (1997), Charlotte (1997), Phoenix (1997), Las Vegas (1998), Boston (1998), and Cerritos, CA opened in January 2000. The Company has acquired twelve additional distribution centers through acquisitions: Miami (November 1995), Denver (May 1996), Houston (July 1996), San Antonio (July 1996), Chicago (January 1997), Farmington Hills, Michigan (September 1997), Bronx, NY (November 1998), San Diego, CA (October 1999), Louisville (December 1999), Florence, SC (December 1999), Edmonton, Alberta (December 1999) and Toronto, Ontario (December 1999). The Company currently operates twenty-six distribution centers, as well as an inventory transfer center. On December 23, 1999, the Company entered into an Agreement and Plan of Merger and Recapitalization (as amended, the "Merger Agreement") with WM Acquisition, Inc., a subsidiary of an investor group led by Parthenon Capital and Chase Capital Partners. The managing director of Parthenon Capital is also a member of the Board of Directors of Wilmar. Pursuant to the terms of the Merger Agreement, as a result of the merger (the "Merger") contemplated by the Merger Agreement, WM Acquisition will be merged with and into the Company, each share of the Company's common stock will be exchanged for $18.25 per share and the Company shall remain as the surviving corporation. The Merger is contingent upon certain conditions, including approval by the shareholders of the Company. Upon consummation of the Merger, the Company's common stock will no longer be traded on the Nasdaq National Market System, price quotations will no longer be available and registration of the Company's common stock under the Securities and Exchange Act of 1934 will terminate, resulting in part in no further public reporting by Wilmar under such act. Acquisitions In July 1999, the Company acquired certain assets of The Mini Blind Company, Inc. ("Mini Blind"), a distributor of vertical and mini blinds to the multi- family or apartment housing market, based in San Antonio, TX. The total purchase price of the acquisition was paid in cash. In October 1999, the Company acquired 100% of the capital stock of Ace Maintenance Mart USA, Inc. ("Ace"), a direct mail distributor of repair and maintenance supplies, based in San Diego, CA. The purchase price of this acquisition consisted of cash and has been allocated to the assets acquired based upon their estimated fair market values. In December 1999, the Company acquired 100% of the capital stock of J.A. Sexauer, Inc. ("Sexauer"), based in Scarsdale, NY and its wholly owned subsidiary Sexauer Ltd. ("Sexauer Ltd"), based in Toronto, Ontario, and 100% of the capital stock of Trayco of S.C., Inc. ("Trayco"), based in Florence, SC (Sexauer together with Sexauer Ltd and Trayco referred to hereafter as the "Sexauer Group") from The Dyson-Kissner-Moran Corporation ("DKM"). The purchase price of this acquisition consisted of cash and has been allocated on a preliminary basis to the assets acquired based upon their estimated fair market values. Each of the acquisitions is being accounted for under the purchase method. Goodwill and other intangibles recorded in connection with these acquisitions are being amortized on a straight-line basis over 5 to 40 years. 7
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Results of operations The following table sets forth statement of operations data as a percentage of net sales for the periods indicated. [Download Table] Fiscal Year -------------------- 1997 1998 1999 ---- ---- ---- Net Sales 100.0% 100.0% 100.0% Cost of Sales 70.7 70.9 70.2 ----- ----- ----- Gross Profit 29.3 29.1 29.8 Operating and Selling Expenses 13.9 13.7 14.3 Corporate General and Administrative Expenses 6.5 5.7 6.1 Non-Recurring Severance Expenses 0.2 -- -- ----- ----- ----- Operating Income 8.7 9.7 9.4 Interest expense (income) net (1.0) (0.8) (0.3) ----- ----- ----- Income before income taxes 9.7 10.5 9.7 ----- ----- ----- Income tax provision 3.6 4.0 3.8 ----- ----- ----- Net Income 6.1% 6.5% 5.9% ===== ===== ===== Fiscal 1999 Compared to Fiscal 1998 Net Sales. Net sales increased by $33.3 million, or 17.3 %, to $225.9 million in 1999 from $192.6 million in 1998. This increase was attributable to the maturation of the existing sales force, the Company's telesales effort, increased sales to national accounts and a substantial investment in "line- hauling" (the use of third party trucks to ship multiple orders from a distribution center to other markets overnight followed by next day local delivery). Net sales for Fiscal 1999 includes sales of the Sexauer Group, from the date of acquisition (which the company acquired in December of 1999). Net sales, excluding the Sexauer Group, increased $24.9 million, or 12.9% from $192.6 million in 1998. Gross Profit. Cost of sales includes merchandise, freight, distribution center occupancy and delivery costs. As a percentage of net sales, gross profit was 29.8% in 1999 compared to 29.1% in 1998. This increase was partly due to the inclusion of Sexauer Group, which was acquired in December 1999. Sexauer products generally carry higher gross margins than Wilmar products. Operating and Selling Expenses. Operating and selling expenses consist of labor and other costs associated with operating a distribution center, as well as selling expenses and commissions. Operating and selling expenses increased by $5.9 million, or 22.5%, to $32.3 million in 1999 from $26.4 million in 1998. Not including expenses at Sexauer Group, operating and selling expenses increased $4.1 million or 15.6%. As a percentage of net sales, these expenses represented 14.3% for 1999 compared to 13.7% for 1998. Corporate General and Administrative Expenses. Corporate general and administrative expenses increased by $2.8 million or 25.5%, to $13.9 million in 1999 from $11.1 million in 1998. This increase is primarily the result of the enhanced staffing required to manage a larger volume of business, as well as the inclusion of Sexauer Group expenses during the month of December. As a percentage of net sales, corporate general and administrative expenses represented 6.1% for 1999 compared to 5.7% for 1998. Operating Income. Operating income increased by $2.5 million, or 13.5%, to $21.2 million in 1999 from $18.6 million in 1998. As a percentage of net sales, operating income was 9.4% for 1999 compared to 9.7% for 1998. Interest Income. Net interest income for 1999 was $753,000 and $1.5 million for 1998. Net interest income for 1999 decreased due to additional interest expense incurred during 1999. 8
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Fiscal 1998 Compared to Fiscal 1997 Net Sales. Net sales increased by $41.8 million, or 27.7%, to $192.6 million in 1998 from $150.8 million in 1997. This increase was attributable to the maturation of the existing sales force, sales force additions, the Company's telesales effort, increased sales to national accounts and a substantial investment in "line-hauling" (the use of third party trucks to ship multiple orders from a distribution center to other markets overnight followed by next day local delivery). The Company's sales force at the end of 1998 was 233, an increase of 58 when compared with the end of 1997. Sales attributable to the existing sales force (salesmen employed for all of both periods) increased 17%. In addition the acquisitions of MSC and certain assets of AMS-CA, AMS-NV, ACSPS and Kurzon which occurred in September 1997, March 1998, May 1998, June 1998 and November 1998, respectively, also contributed significantly to the Company's growth. Price increases during both periods were modest and made only on selected items. During the year ended December 25, 1998, Wilmar generated approximately $8.2 million in net sales to new end markets as a result of the Company's decision to target customers outside its core apartment housing market beginning in the first quarter of 1995. Gross Profit. Cost of sales includes merchandise, freight, distribution center occupancy and delivery costs. As a percentage of net sales, gross profit was 29.1% in 1998 compared to 29.3% in 1997. This expected decrease in the gross margin resulted from the acquisition of MSC. MSC's gross margins reflect a product mix that includes a larger volume of major appliance sales, that yield a lower gross margin percentage. In addition, the increased delivery expenses associated with "line-hauling" to new markets, as well as higher relative occupancy costs relating to the operation of the Company's new distribution centers in Charlotte, San Antonio, Phoenix, Las Vegas and Boston, also contributed to the decrease in gross margin when compared with 1997. Operating and Selling Expenses. Operating and selling expenses consist of labor and other costs associated with operating a distribution center as well as selling expenses and commissions. Operating and selling expenses increased by $5.3 million, or 25.4%, to $26.4 million in 1998 from $21.0 million in 1997. As a percentage of net sales, these expenses represented 13.7% for 1998 compared to 13.9% for 1997. This decrease was primarily attributable to realizing the benefits of economies of scale through the assimilation of the HMA acquisition in July 1997 and the assimilation of the MSC acquisition in May 1998. Corporate General and Administrative Expenses. Corporate general and administrative expenses increased by $1.3 million or 12.7%, to $11.1 million in 1998 from $9.9 million in 1997. This increase is primarily the result of the enhanced staffing required to manage a larger volume of business. As a percentage of net sales, corporate general and administrative expenses represented 5.8% for 1998 compared to 6.5% for 1997. During 1998, the Company incurred approximately $182,000 in expenses related to the assimilation of MSC and pre-opening expenses for its new San Antonio, Las Vegas and Boston distribution centers, (the "assimilation and pre-opening expenses"). The Company expenses all distribution center pre-opening and acquisition assimilation costs when incurred. Excluding these expenses, corporate general and administrative expenses as a percentage of net sales would have been 5.7% for 1998 compared to 6.3% for 1997. Operating Income. Operating income increased by $5.6 million, or 42.9%, to $18.6 million in 1998 from $13.0 million in 1997. As a percentage of net sales, operating income was 9.7% for 1998 compared to 8.7% for 1997. During the third quarter of 1997, operating income was negatively impacted by a non-recurring severance charge of $259,000. Excluding the non-recurring charge, as well as the assimilation and pre-opening expenses, operating income, as a percentage of net sales, excluding these expenses, would have been 9.8% for 1998 compared to 9.0% for 1997. Interest Income. Net interest income for 1998 was $1.5 million and $1.6 million for 1997. The interest income occurred as a result of the investment income from the proceeds of the secondary public offering completed in July 1996. Seasonality Generally, the Company's sales volumes are not seasonal, although November and December sales tend to be lower because customers defer purchases at year end as their budget limits are met and because of the holiday season between Thanksgiving and New Year's. 9
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Liquidity and Capital Resources Historically, Wilmar's primary source of liquidity has been cash flow from operations, supplemented by borrowings under its bank line of credit to support increases in accounts receivable and inventory, net of accounts payable, and the public sale of its securities. During 1999, the Company repurchased one million shares of its Common Stock at an average price of $12.80 per share, pursuant to its stock buyback program that was announced earlier in the year. Cash provided by operating activities was $23.1 million during 1999 compared to $6.8 million in 1998. Cash provided by operating activities during 1999 consisted of $13.4 million of net income before adding back depreciation and amortization and other non-cash charges of $2.8 million. Further offset by the net changes in operating assets and liabilities of $6.9 million. This difference primarily resulted from a $10.6 million increase in accounts payable, accrued expenses, accrued interest and income taxes payable, offset by an increase in the accounts receivable, inventory and prepaid expenses of $4.4 million, as well as the change in other assets and deferred compensation of approximately $700,000. Cash used in investing activities during 1999 was $95.0 million, which consisted primarily of approximately $1.9 million for the purchase of property and equipment and $93.1 million relating to the acquisitions of Mini Blind, Ace and the Sexauer Group. Cash provided by financing activities during 1999 was approximately $46.6 million, consisting of approximately $59.4 million of net proceeds received from additional notes payable, $93,000 of net proceeds received from the exercise of stock options, offset by the purchase of treasury stock of $12.8 million. Capital expenditures were $1.9 million for 1999 compared to $1.6 million for 1998. Capital expenditures for 1999 were primarily for the improvement and updating of the Company's distribution centers, and the integration of its new supply fulfillment system. The Company spent approximately $ 261,000 during 1999 to equip its new Denver, Chicago and Los Angeles distribution centers. A typical distribution center requires a capital investment of approximately $150,000 to $200,000 for equipment and leasehold improvements and an initial commitment of approximately $250,000 for working capital (net of accounts payable attributable to new inventory). The Company typically incurs expenses of approximately $60,000 before a new distribution center becomes operational. The Company intends to finance its future capital expenditures with cash flow from operations and possibly with a portion of the term debt or capital leases. In December 1999, in connection with the Sexauer Group acquisition (See Note 3 to the accompanying financial statements) the Company entered into a new credit agreement with a syndicate of banks. The credit agreement provides for a five year secured revolving credit facility of $30 million of borrowings ($5 million outstanding and $25 million available at December 31, 1999) and a five year term loan of $55 million ($55 million outstanding as of December 31, 1999), the proceeds of which were used to purchase the Sexauer Group. Borrowings under the revolving credit facility and the term loan facility bear interest at a rate based on certain financial measures. At December 31, 1999 the effective interest rates for the credit facilities was LIBOR plus 175 basis points (8.2% at December 31, 1999). The Company is also required to pay a commitment fee of 0.375% per annum on the unused commitment. Interest on outstanding balances under these credit facilities is due and payable quarterly. Additionally the Company has an unsecured letter of credit facility of $5 million with one of the banks in the syndicate, of which $ 98,495 was outstanding as of December 31, 1999. The credit agreement contains customary affirmative and negative covenants, including certain covenants requiring the Company to maintain it's debt to cash flow ratio, fixed charge ratio in addition to meeting a minimum net worth test. The Company was in compliance with all covenants at December 31, 1999. Generally, prior to the Sexauer acquisition, cash flow from operations has been sufficient to fund the Company's growth. The Company believes that funds generated from operations, together with funds available under the credit facilities discussed above, will be sufficient to fund the Company's current and foreseeable operational needs and growth strategy. The Company believes that its existing cash balances, supplemented by borrowings under existing credit facilities, are adequate to meet planned operating and capital expenditure needs at least through 2000. However, if the Company were to make any significant acquisitions for cash, it may be necessary for the Company to obtain additional debt or equity financing. Inflation The Company does not believe that inflation has had a material effect on its results of operations in recent years. There can be no assurance, however, that the Company's business will not be affected by inflation in the future. 10
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk. ------- ---------------------------------------------------------- The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates. The table set forth below summarizes the fair values and contract terms of financial instruments subject to interest rate risk maintained by us at December 31, 1999 (amounts in thousands): [Enlarge/Download Table] Expected Maturity Date Estimated ---------------------- Fair Value 2000 2001 2002 2003 2004 Total at 12/31/99 ---- ---- ---- ---- ---- ----- ----------- Debt Variable Rate $4,125 $7,563 $10,313 $13,062 $24,937 $60,000 $60,000 Average interest rate 8.2% 8.2% 8.2% 8.2% 8.2% At December 25, 1998, the Company had notes payable in the amount of $1.2 million, which were repaid during 1999. Interest on these notes was 8%. Item 8. Financial Statements and Supplementary Data. ------ ------------------------------------------- The consolidated financial statements of the Company and its subsidiaries and supplementary data required by this item are attached to this report beginning on page F-1. Item 9. Changes In and Disagreements with Accountants on Accounting and ------ --------------------------------------------------------------- Financial Disclosures. --------------------- None. 11
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PART III Item 10. Directors and Executive Officers of the Registrant. ------- -------------------------------------------------- [Enlarge/Download Table] --------------------------------------------------------------------------------------- Name Age Position --------------------------------------------------------------------------------------- William S. Green 41 Chairman and Chief Executive Officer --------------------------------------------------------------------------------------- Fred B. Gross 62 V.P.-Corporate Development, Secretary and Director --------------------------------------------------------------------------------------- Martin E. Hanaka 50 Director --------------------------------------------------------------------------------------- Ernest K. Jacquet 53 Director --------------------------------------------------------------------------------------- Donald M. Wilson 59 Director --------------------------------------------------------------------------------------- The Board of Directors is currently divided into three classes, each having three-year terms that expire in successive years and consists of: Class I William S. Green Term expires at the 2000 Annual Meeting Class II Fred B. Gross Term expires at the 2001 Annual Meeting Martin E. Hanaka Class III Ernest K. Jacquet Term expires at the 2002 Annual Meeting Donald M. Wilson Independent directors are paid directors' fees of $1,500 for each Board meeting they attend. In addition, directors are reimbursed for expenses incurred in connection with their attendance at meetings of the Board and of committee on which they serve. Directors are also eligible to participate in the 1996 Directors Stock Option Plan. In May 1999,Mr. Hanaka, Mr. Jacquet, and Mr. Wilson were each granted options to purchase 20,000 shares at $11.25 per share. Board of Directors William S. Green Mr. Green, age 41, co-founded Wilmar in 1978 with his father and has served as its Chairman, President and Chief Executive Officer since 1986. Fred B. Gross Mr. Gross, age 62, has served as Wilmar's Vice President and Secretary since March 1994 and as Vice President-Corporate Development since November 1995. He has served as a director since July 1995. From 1989 until February 1994, Mr. Gross was Regional Vice President of Angelo Brothers Company, a supplier of electrical products, while also maintaining a private law practice. Before attending law school, Mr. Gross worked for 22 years in the plumbing supply industry. Martin E. Hanaka Mr. Hanaka, age 50, has been a director since December 1996. Since September 1998, he has served as Chief Executive Officer of The Sports Authority, Inc. From October 1997 through August 1998, he served as Vice Chairman of The Sports Authority, Inc. From August 1994 through October 1997, Mr. Hanaka was President and Chief Operating Officer of Staples, Inc. From October 1992 until August 1994, he held the positions of President and Chief Executive Officer of Lechmere, Inc., and earlier as Executive President- Marketing. Prior to joining Lechmere, Inc., Mr. Hanaka was with Sears Roebuck and Co. where, commencing in 1990, he served in various capacities, including Vice President-Brand Central. Ernest K. Jacquet Mr. Jacquet, age 52, has been a director of Wilmar since March 1995. Since June 1998, he has served as managing director of Partheon Capital, a venture partnership. From April 1990 through May 1998, he served as a general partner of Summit Partners, a venture partnership that is the general partner of Summit Ventures III, L.P., Summit Investors II, L.P. and Summit Subordinated Debt, L.P. Mr. Jacquet also serves as a director of CIDCO Incorporated, which designs, develops and markets subscriber telephone equipment. Donald M. Wilson Mr. Wilson, age 58, has been a director of Wilmar since July 1996. Mr. Wilson was employed by Viking Office Products from December 1979 until his retirement in December 1995, most recently serving as its Vice President-Operations. 12
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The Board of Directors currently has three standing committees: Audit Committee The Audit Committee has the authority to recommend the appointment of our independent auditors and review the results and scope of audits, internal accounting controls and tax and other accounting-related matters. The Audit Committee consists of Messrs. Jacquet and Wilson. Compensation Committee The Compensation Committee has the authority to approve salaries and bonuses and other compensation matters for Wilmar's officers. In addition, the Compensation Committee has the authority to approve employee health and benefit plans. The Compensation Committee consists of Messrs. Green, Jacquet and Wilson. Stock Option Committee The Stock Option Committee administers the Stock Option Plan. The Stock Option Committee consists of Messrs. Jacquet and Wilson. In September of 1999, the Board created a special committee consisting of Martin E. Hanaka and Donald M. Wilson, for the purpose of considering any and all proposals with respect to the acquisition of Wilmar. Executive Officers Wilmar's executive officers currently are: [Download Table] -------------------------------------------------------------------------------- Name Age Position -------------------------------------------------------------------------------- William S. Green 41 Chairman and Chief Executive Officer -------------------------------------------------------------------------------- Michael J. Grebe 42 President and Chief Operating Officer -------------------------------------------------------------------------------- William E. Sanford 40 Senior Vice President and Chief Financial Officer -------------------------------------------------------------------------------- Michael T. Toomey 35 Vice President - Finance and Treasurer -------------------------------------------------------------------------------- Fred B. Gross 62 V.P.-Corporate Development, Secretary and Director -------------------------------------------------------------------------------- Biographical information about Messrs. Green and Gross can be found under "Board of Directors". Michael J. Grebe Mr. Grebe, age 42, joined Wilmar in November of 1998 as Executive Vice President and Chief Operating Officer. In October 1999, Mr. Grebe was named President of the Company. Mr. Grebe previously served as a Group Vice President of Airgas, Inc. the nation's largest distributor of industrial gases. Mr. Grebe joined Airgas via the acquisition of IPCO Safety, Inc., a national alternate channel marketer of industrial safety supplies, where he served as President. William E. Sanford Mr. Sanford, age 40, joined Wilmar in April 1999, having spent 16 years with public industrial distribution companies. In addition to his corporate responsibilities for Finance and Administration, Mr. Sanford oversees the Company's acquisition program, long range planning and shareholder relations. Mr. Sanford previously was Vice President Corporate Development at MSC Industrial Direct, a distributor of industrial supplies. Prior to 1997, Mr. Sanford spent 14 years at Airgas, Inc, where he most recently served as Executive Vice President with responsibilities in strategy and business development as well as line responsibility for the company's manufacturing and rental equipment divisions. Michael T. Toomey, Mr. Toomey, age 35, joined Wilmar in 1992 as the company's Controller and Treasurer. In 1995 Mr. Toomey was promoted to the position of Chief Financial Officer, a position he held until 1999. Recently, with the addition of Bill Sanford, Mr. Toomey was transitioned into the role of Vice President of Finance and Treasurer. 13
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Item 11. Executive Compensation. ------- ---------------------- Summary Compensation Table The following table shows, for the last three fiscal years, the cash and other compensation paid to Wilmar's Chief Executive Officer and Wilmar's four other most highly compensated executive officers. [Enlarge/Download Table] ------------------------------------------------------------------------------------------------- Annual Compensation Long Term Compensation --------------------------------------------- Securities Name Year Salary Bonus Underlying All Other Options Compensation/(1)/ ---------------------------------------------------------------------------------------------------------- William S. Green 1999 $240,703 $ -0- 20,000 $3,611 Chairman and Chief Executive 1998 $245,111 $ -0- 10,050 $3,677 Officer 1997 $229,031 $ -0- 10,125 $3,435 ---------------------------------------------------------------------------------------------------------- Michael J. Grebe/(2)/ 1999 $205,382 $100,000 50,000 $ -0- President and Chief Operating 1998 $ 26,923 $ -0- 100,000 $ -0- Officer ---------------------------------------------------------------------------------------------------------- William E. Sanford/(3)/ 1999 $127,500 $ 42,500 130,000 $ -0- Senior Vice President and Chief Financial Officer ---------------------------------------------------------------------------------------------------------- Fred B. Gross 1999 $132,597 $ 20,000 55,000 $3,315 Vice President - Corporate 1998 $120,730 $ 8,000 10,050 $3,018 Development and Secretary 1997 $112,809 $ -0- 5,125 $2,820 ---------------------------------------------------------------------------------------------------------- Michael T. Toomey 1999 $123,925 $ 20,000 35,000 $3,098 Vice President - Finance and 1998 $103,670 $ 13,500 10,050 $2,704 Treasurer 1997 $102,345 $ -0- 5,125 $2,371 ---------------------------------------------------------------------------------------------------------- (1) "All Other Compensation" consists of amounts matched by Wilmar under its 401(k) Plan. (2) Mr. Grebe joined Wilmar in November 1998. Under his employment agreement, his annual base salary is $200,000. (3) Mr. Sanford joined Wilmar in May 1999. Under his employment agreement, his annual base salary is $195,000. 14
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Options Granted in Last Fiscal Year The following table includes information on option grants during the 1999 fiscal year to the executive officers named in the Summary Compensation Table. [Enlarge/Download Table] ------------------------------------------------------------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants (1) for Option Term (2) ---------------------------------------------------------------------------------- Percent of Total Options Options Granted to Exercise Expiration Name Granted Employees Price Date 5% 10% ------------------------------------------------------------------------------------------------------- William S. Green 20,000 3.41% $11.25 5/27/2009 141,500 358,590 ------------------------------------------------------------------------------------------------------- Michael J. Grebe 50,000 8.53% $11.25 5/27/2009 353,750 896,480 ------------------------------------------------------------------------------------------------------- William E. Sanford 130,000 22.18% $11.25 5/27/2009 919,760 2,330,850 ------------------------------------------------------------------------------------------------------- Fred B. Gross 55,000 9.28% $11.25 5/27/2009 389,130 986,130 ------------------------------------------------------------------------------------------------------- Michael T. Toomey 35,000 5.97% $11.25 5/27/2009 247,630 627,540 ------------------------------------------------------------------------------------------------------- (1) Except as otherwise noted, options were granted pursuant to the Stock Option Plan. The options expire on the tenth anniversary of the date of grant. In general, options terminate (a) at any time the optionee's employment is terminated by Wilmar for cause or a voluntary termination of employment by the employee, or (b) one year following the death or disability of the employee. Options granted under the Stock Option Plan are not assignable or otherwise transferrable except by will or the laws of descent and distribution. (2) The dollar amounts under these columns reflect the 5% and 10% rates of appreciation prescribed by the Securities and Exchange Commission. These dollar amounts are not intended to forecast future appreciation of Wilmar's stock price. The Named Executive Officers will not benefit unless Wilmar's stock price increases above the exercise price. Any gain to the Named Executive Officers resulting from an increase in Wilmar's stock price would benefit all shareholders. Aggregated Option Exercised During Fiscal 1999 and Fiscal Year End Values The following table shows the exercise of stock options in fiscal 1999 and the number and value of options held as of December 31, 1999 by the executive officers named in the Summary Compensation Table. [Enlarge/Download Table] ---------------------------------------------------------------------------------------------------------- Number of Number of Securities Value of Unexercised Shares Underlying Unexercised In-the-Money Options at Acquired Value Options at Fiscal Year End Fiscal Year End Upon Realized ------------------------------------------------------------- Exercise Upon Name of Option Exercise Exercisable Unexercisable Exercisable Unexercisable ---------------------------------------------------------------------------------------------------------- William S. Green - - 20,031 20,144 18,797 122,641 ---------------------------------------------------------------------------------------------------------- Michael J. Grebe - - 150,000 318,750 ---------------------------------------------------------------------------------------------------------- William E. Sanford - - 130,000 796,250 ---------------------------------------------------------------------------------------------------------- Fred B. Gross - - 70,376 71,244 711,737 548,650 ---------------------------------------------------------------------------------------------------------- Michael T. Toomey - - 51,631 53,344 490,529 453,755 ---------------------------------------------------------------------------------------------------------- 15
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William S. Green entered into an employment agreement with Wilmar in March 1995. Under the terms of the agreement, Mr. Green will serve as Wilmar's Chief Executive Officer until March 1, 2001, unless earlier terminated by Wilmar. His annual base salary is $200,000, subject to adjustment, and an annual bonus upon achieving specified financial targets set by the Compensation Committee. The agreement contains certain non-competition and related provisions. The agreement will be replaced by a new employment agreement following the Merger Fred B. Gross entered into an employment agreement with Wilmar in March 1996. The term of the agreement expires in April 2000, but is renewed automatically for successive one-year terms unless terminated by either party. The agreement provides that Mr. Gross will receive an annual base salary of not less than $107,500. The agreement contains certain non-competition and related provisions. The Board of Directors created the Compensation Committee and the Stock Option Committee to have responsibility for implementing and administrating Wilmar's compensation policies and programs for its executive officers. The Compensation Committee is responsible for setting the base salaries and the total compensation levels of the Chief Executive Officer and Wilmar's other executive officers. Mr. Green does not participate in the approval of his compensation. The Stock Option Committee is responsible for determining which executives, including the Chief Executive Officer, will be granted stock options and the size of such grants. Compensation Policies Wilmar's compensation policies for executive officers are designed to: (a) provide competitive compensation packages that will attract and retain superior executive talent, (b) link a significant portion of compensation to financial results, so as to reward successful performance, and (c) provide long-term equity compensation, to further align the interests of the executive officers with those of Wilmar's shareholders and further reward successful performance. The principal components of Wilmar's executive officer compensation program are base salary, annual cash incentive awards and grants of stock options. Base salary levels for Wilmar's executive officers are reviewed on an annual basis by the Compensation Committee and are set generally to be competitive with other companies of comparable size and geographic location, taking into consideration the position's complexity, responsibility and need for special expertise. Individual salaries also take into account individual experience and performance. The annual cash incentive award for 1999 was based on individual responsibility and contribution to the Company's performance. Wilmar granted stock options to its executive officers in 1999. The issuance of stock options was based on Wilmar meeting certain earnings targets established by the Board of Directors. Long-Term Compensation The Stock Option Committee annually considers the desirability of granting stock options to Wilmar's officers and other employees. The objective of the Stock Option Plan is to align senior management and shareholder long-term interests by creating a strong and direct link between the executive's accumulation of wealth and shareholder return to enable executives to develop and maintain a significant, long-term stock ownership position in Wilmar's common stock. Individual grants of stock options under the Stock Option Plan are based upon individual performance. The Stock Option Committee believes that its past grants of stock options have successfully focused Wilmar's executive officers and other members of senior management on building profitability and shareholder value. In May 1999, the Compensation Committee approved an Amendment to the 1995 Stock Option Plan in the form of an Equity Participation Program with the goals of: (i) retaining critical senior management during a time of management transition, (ii) providing incentives to senior managers to accelerate earnings growth, (iii) providing for significant equity appreciation for senior managers if aggressive earnings growth targets were met and (iv) to follow-up the original options awarded in 1995 which were already substantially vested to provide the remaining senior managers with continuing equity incentives. The Equity Participation Program consisted of a one time grant of a total of 250,000 options to seven senior executives. These options expire 10 years from the date of issuance and vest 100% upon the sooner of: (a) achievement by the Company of an annual earnings per share of $1.80, (b) the sale of the Company or (c) five years from the date of issuance. 16
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In determining the compensation of Mr. Green, the Compensation Committee has taken into consideration pay levels of chief executive officers of other companies, his contributions to the profitable growth and increased return on equity over the past several years and Mr. Green's overall management strengths and business acumen. It noted that the earnings per share, assuming dilution, of Wilmar's common stock increased 13% over last year and the return to shareholders, as measured by the December 31, 1999 closing price of Wilmar's common stock, has increased 55% from the IPO price of $11.00 per share. Mr. Green's total annual compensation increased 10% over the same period. The Compensation Committee and the Stock Option Committee determined that Mr. Green should be granted additional options since Wilmar had achieved the earnings target established by the Board of Directors. Therefore, Mr. Green was granted stock options to purchase 20,000 shares of common stock in May 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management. ------- -------------------------------------------------------------- The following table sets forth, as of December 31, 1999, beneficial ownership of shares of Common Stock of Wilmar by (1) each person known to have beneficial ownership of more than five percent of Wilmar's common stock, (2) each director and named executive officer, (3) all directors and executive officers as a group and (4) each of the Management Shareholders. [Enlarge/Download Table] Total Number of Shares of Common Stock Exercisable Percentage of Shareholder Beneficially Owned Options(1) Common Stock(2) -------------------------------------------- ---------------------- ------------ --------------- William S. Green (3),(4) 2,013,536 40,175 16.5% Ernest K. Jacquet (4),(5) 2,013,536 30,000 16.4% WM Acquisition, Inc. (4) 2,013,536 16.2% Dresdner RCM Global Investors LLC (6) 1,949,800 15.7% T. Rowe Price Associates, Inc. (7) 1,404,364 11.3% Brown Investment Advisory and Trust Co. (8) 1,370,051 11.0% The Kaufman Fund (9) 900,000 7.3% The TCW Group, Inc. (10) 681,000 5.5% Denver Investment Advisors LLC (11) 627,350 5.1% Fred B. Gross (12) 48,009 141,620 1.5% Michael J. Grebe - 150,000 1.2% William E. Sanford 500 130,000 1.0% Martin E. Hanaka 1,000 32,500 * Michael T. Toomey - 104,975 * Donald M. Wilson - 32,500 * Directors and Officers as a Group (8 Persons) 2,063,045 661,770 20.8% _____________________ * Less than 1% of Wilmar's outstanding shares of common stock. (1) Assumes acceleration of vesting upon consummation of the merger. (2) All percentages are based on 12,407,826 shares outstanding on December 31, 1999. If a person holds options that are currently exercisable or exercisable within 60 days, the number of shares underlying the options are considered outstanding and beneficially owned for the purpose of computing that person's percentage ownership. Such shares are not considered outstanding for the purpose of computing the beneficial ownership of others listed in the table. (3) Include 3,800 shares of common stock held by the William S. Green Irrevocable Sibling Trust dated December 31, 1998, but excludes 43,009 shares of common stock held by Green Family Associates, L.P. Mr. Green disclaims beneficial ownership of the shares held by Green Family Associates, L.P. (4) As a result of the voting and exchange agreement entered into by William S. Green and WM Acquisition, Inc. on December 22, 1999, the indicated individuals and entities, Parthenon Investors, L.P., Parthenon Investment Advisors, L.L.C., Parthenon Investment Partners, L.L.C., and John C. Rutherford, have shared voting power with respect to 2,013,536 shares of common stock beneficially owned by William S. Green, and, therefore beneficial ownership as defined by the applicable rules of the Securities and Exchange Commission. This information is based upon the Schedule 13 D filed on December 22, 1999 jointly by the individuals and entities, the principal business address of each of whom is c/o Parthenon Capital, Inc., 200 State Street, Boston, MA 02109. (5) Mr. Jacquet received options to purchase 10,000 shares on May 7, 1998 and options to purchase 20,000 shares on May 6, 1999. (6) This information is based upon the Schedule 13G/A filed February 16, 1999 with the Securities and Exchange Commission by Dresdner RCM Global Investors LLC, which is located at Four Embarcadero Center, San Francisco, California 94111, and is a wholly-owned subsidiary of Dresdner RCM US Holdings LLC. 17
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(7) This information is based upon the Schedule 13G filed June 8, 1999 with the Securities and Exchange Commission by T. Rowe Price Associates, Inc., which is located at 100 E. Pratt Street, Baltimore, Maryland 21202, and includes 850,000 shares of common stock held by T. Rowe Price New Horizons Fund, Inc. (8) This information is based upon the Schedule 13G/A filed April 13, 1999 with the Securities and Exchange Commission by Brown Investment Advisory & Trust Company, which is located at 19 South Street, Baltimore, Maryland 21202, and includes 1,016,000 shares of common stock held by Brown Advisory Incorporated. (9) This information is as of December 31, 1998 and is based on available public information. The Kaufman Fund is located at 140 East 45th Street, 43rd Floor, New York, New York 10017. (10) This information is based upon the Schedule 13G filed February 12, 1999 filed with the Securities and Exchange Commission by The TCW Group, Inc., which is located at 865 South Figueroa Street, Los Angeles, California 90017. (11) This information is based upon the Schedule 13G/A filed February 12, 1999 with the Securities and Exchange Commission by Denver Investment Advisors LLC, which is located at 1225 17/th/ Street, 26/th/ Floor, Denver, Colorado 80202. (12) Includes 43,009 shares of common stock held by Green Family Associates, L.P., of which Mr. Gross is an officer of its general partner, ALA Green Corporation. Item 13. Certain Relationships and Related Transactions. ------- ---------------------------------------------- Exchange of Shares by William Green On December 23, 1999, the Company entered into an Agreement and Plan of Merger and Recapitalization (as amended, the "Merger Agreement") with WM Acquisition, Inc., a subsidiary of an investor group led by Parthenon Capital and Chase Capital Partners. Pursuant to the terms of the Merger Agreement, as a result of the merger (the "Merger") contemplated by the Merger Agreement, WM Acquisition will be merged with and into the Company, each share of the Company's common stock will be exchanged for $18.25 per share and the Company shall remain as the surviving corporation. The Merger is contingent upon certain conditions, including approval by the shareholders of the Company. Upon consummation of the Merger, the Company's common stock will no longer be traded on the Nasdaq National Market System, price quotations will no longer be available and registration of the Company's common stock under the Securities and Exchange Act of 1934 will terminate, resulting in part in no further public reporting by Wilmar under such act. In connection with the Merger, William S. Green has agreed to a recapitalization exchange in which an aggregate of 164,384 of his shares of Wilmar common stock will be exchanged for an equal number of shares of new Class C Preferred Stock of Wilmar. Mr. Green will, however, receive merger consideration in the amount of $18.25 per share for the remaining 1,849,152 shares of common stock owned by him. Wilmar has agreed to take all reasonable actions necessary to ensure that this exchange is completed. Lease On April 29, 1996, Wilmar entered into an operating lease agreement with 804 Eastgate Associates, LLC, an entity owned by William S. Green, Fred B. Gross and an unrelated third party, pursuant to which Wilmar leases approximately 70,000 square feet for a warehouse and customer service center in Mount Laurel, New Jersey. The minimum monthly rent is $24,052 from January 1, 1997 through May 31, 2001; from June 1, 2001 through the end of the lease term, the rent will increase based on the Consumer Price Index. Wilmar pays, as additional rent, all real estate taxes and assessments, all utilities and insurance premiums for casualty insurance and any other public liability insurance relating to the premises. Under the terms of the lease, Wilmar is solely responsible for the costs of maintenance, operation and repair of the property. The lease expires on May 31, 2006. Wilmar believes that the terms of the lease are no less favorable to it than could be obtained from an unaffiliated third party. Wilmar paid rent under this lease of approximately $289,000 in fiscal 1999. Wilmar's headquarters in Moorestown, New Jersey, is leased to Wilmar by William S. Green. Under the lease dated March 1, 1994, and amended March 7, 1995, Wilmar rents approximately 12,500 square feet at an annual minimum rent of $137,500. Wilmar pays, as additional rent, all real estate taxes and assessments, all utilities and insurance premiums for casualty insurance and any other public liability insurance relating to the premises. Under the terms of the lease, Wilmar is solely responsible for the costs of maintenance, operation and repair of the property. The lease expires on February 28, 2004 and does not contain any renewal terms. Wilmar believes that the terms of the lease are no less favorable to it than could be obtained from an unaffiliated third party. Wilmar paid rent under this lease in the amount of $137,500 in fiscal 1999. These leases shall remain in effect after the consummation of the Merger. 18
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PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. ------- ---------------------------------------------------------------- (a) 1. Financial Statements. Financial Statements listed in the -------------------- accompanying Index to Financial Statements and Financial Statement Schedules appearing on page F-1 are filed as part of this annual report on Form 10-K. 2. Financial Statement Schedules. Financial Statement Schedules ----------------------------- listed in the accompanying Index to Financial Statements and Financial Statement Schedules appearing on page F-1 are filed as part of this annual report on Form 10-K. (b) Reports on Form 8-K. ------------------- On December 20, 1999 the Company filed Form 8-K pertaining to the stock purchase agreement with Dyson-Kissner-Moran Corporation for the acquisition of the Sexauer Group. On December 29,1999 the Company filed Form 8-K pertaining to the plan of merger and recapitalization entered into with WM Acquisition, Inc., a subsidiary of an investor group led by Parthenon Capital and Chase Capital Partners. (c) Exhibits. -------- The following is a list of exhibits filed as part of this annual report on Form 10-K. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. Exhibit No. Description ---------- ------------ 3.1(a)+ Certificate of Incorporation. 3.2+ Bylaws. 9 Voting and Exchange Agreement dated December 22, 1999 between William S Green and WM Acquisition, Inc. 10.1+ Amended and Restated 1995 Stock Option Plan. 10.2++ Lease Agreement, dated April 29, 1996, between the Company and 804 Eastgate Associates, L.L.C. 10.3++ Assumption Agreement, dated as of June 1, 1996, between the Company and 804 Eastgate Associates, L.L.C. 10.4+ Amended and Restated Registration Rights Agreement, dated as of March 9, 1996, among the Company, William Green and the Summit Investors. 10.5+ Registration Rights Agreement, dated as of July 8, 1996, among the Company and the shareholders of HMA Enterprises, Inc. 10.6+ Amended and Restated Employment Agreement, dated as of April 12, 1994 between the Company and Fred B. Gross, Esq. 10.7+ Employment Agreement, dated as of March 9, 1995, between the Company and William S. Green. 10.8+++ Agreement and Plan of Merger and Recapitalization dated December 23, 1999 by and among the Company and WM Acquisition, Inc., a subsidiary of an investor group led by Parthenon Capital and Chase Partners 21 Subsidiaries of the Company. 23 Consent of Deloitte & Touche, LLP. 27 Financial Data Schedule + Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-99750), filed with the Securities and Exchange Commission on November 22, 1995. ++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1996. +++ Incorporated by reference to the Company's filing form 8-K, filed December 29, 1999. 19
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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. WILMAR INDUSTRIES, INC. Date: March 24, 2000 By /s/ William S. Green ---------------------- William S. Green Chairman and Chief Executive 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 and on the dates indicated. Each person, in so signing also makes, constitutes and appoints William S. Green, Chairman and Chief Executive Officer of Wilmar Industries, Inc., and Fred B. Gross, Vice President - Corporate Development and Secretary of Wilmar Industries, Inc., and each of them acting alone, as his true and lawful attorneys-in-fact, in his name, place and stead, to execute and cause to be filed with the Securities and Exchange Commission any or all amendments to this report. Signature Capacity Date -------------------------------------------------------------------------------- /s/ William S. Green Chairman and Chief Executive Officer March 24, 2000 -------------------- (principal executive officer) and William S. Green Director /s/ Michael J. Grebe President and Chief Operating Officer March 24, 2000 -------------------- Michael J. Grebe /s/ William E. Sanford Senior Vice President and Chief March 24, 2000 ---------------------- Financial Officer (principal financial William E. Sanford and accounting officer) /s/ Fred B. Gross Vice President - Corporate Development, March 24, 2000 ----------------- Secretary and Director Fred B. Gross /s/ Michael T. Toomey Vice President - Finance and Treasurer March 24, 2000 --------------------- Michael T. Toomey /s/ Martin E. Hanaka Director March 24, 2000 --------------------- Martin E. Hanaka /s/ Ernest K. Jacquet Director March 24, 2000 --------------------- Ernest K. Jacquet /s/ Donald M. Wilson Director March 24, 2000 -------------------- Donald M. Wilson 20
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Wilmar Industries, Inc. Index to Consolidated Financial Statements and Financial Statement Schedules [Download Table] Independent Auditors' Report.......................................... F-2 Consolidated Balance Sheets........................................... F-3 Consolidated Statements of Income..................................... F-4 Consolidated Statements of Stockholders' Equity....................... F-5 Consolidated Statements of Cash Flows................................. F-6 Notes to Consolidated Financial Statements............................ F-7 Schedule II - Valuation and Qualifying Accounts....................... F-17
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INDEPENDENT AUDITORS' REPORT To the Board of Directors Wilmar Industries, Inc. Moorestown, NJ We have audited the accompanying consolidated balance sheets of Wilmar Industries, Inc. and its subsidiaries (the "Company") as of December 31, 1999 and December 25, 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three fiscal years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and December 25, 1998, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 6, 2000 F-2
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ITEM 1 - FINANCIAL STATEMENTS WILMAR INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS [Enlarge/Download Table] -------------------------------------------------------------------------------------------------------------------------------- December 31, December 25, 1999 1998 ---------------- ----------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 5,445,468 $ 30,611,955 Cash - restricted 309,054 297,236 Accounts Receivable - trade, net of allowance for doubtful accounts of $2,130,807 in 1999 and $1,399,200 in 1998. 39,442,711 27,535,016 Inventory 40,911,232 30,128,680 Prepaid expenses and other current assets 3,432,122 385,992 Deferred income taxes 2,188,206 1,498,000 ---------------- ----------------- Total current assets 91,728,793 90,456,879 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $10,128,061 in 1999 and $4,740,501 in 1998. 8,972,008 4,183,348 GOODWILL, net of accumulated amortization of $1,746,467 in 1999 and $973,445 in 1998. 84,779,524 22,133,860 INTANGIBLE ASSETS AND OTHER, Net 16,487,886 4,921,704 ---------------- ----------------- TOTAL ASSETS $ 201,968,211 $ 121,695,791 ================ ================= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ - $ 1,208,518 Current portion of long-term debt 4,125,000 Accounts payable 21,884,606 11,991,661 Accrued expenses and other current liabilities 13,898,073 4,294,425 Accrued interest 315,100 Income taxes payable 860,113 412,160 ---------------- ----------------- Total current liabilities 41,082,892 17,906,764 LONG-TERM LIABILITIES Deferred Compensation 437,676 Long-term debt - net of current portion 55,875,000 - ---------------- ---------------- Total liabilities 97,395,568 17,906,764 COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued Common stock, no par value - 50,000,000 shares authorized; 12,407,826 shares issued and outstanding in 1999 13,389,827 shares issued and outstanding in 1998 103,725,914 103,568,743 Accumulated other comprehensive income 56,383 Retained earnings 13,593,909 220,284 ---------------- ---------------- 117,376,206 103,789,027 Less: Treasury stock, at cost (1,000,000 shares in 1999) 12,803,563) ---------------- ---------------- Total stockholders' equity 104,572,643 103,789,027 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 201,968,211 $ 121,695,791 ================ ================ The accompanying notes are an integral part of these consolidated financial statements. F-3
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WILMAR INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------------------------------------------- [Enlarge/Download Table] Year Year Year Ended Ended Ended December 31, December 25, December 26, 1999 1998 1997 ------------ ------------ ------------ NET SALES $ 225,937,584 $ 192,605,005 $ 150,792,516 COST OF SALES 158,542,170 136,488,192 106,604,587 ------------- ------------- ------------- Gross profit 67,395,414 56,116,813 44,187,929 OPERATING EXPENSES: Operating and selling expenses 32,287,060 26,356,579 21,024,183 Corporate general and administrative expenses 13,942,617 11,113,491 9,857,340 ------------- ------------- ------------- Total operating expenses 46,229,677 37,470,070 30,881,523 ------------- ------------- ------------- Operating income 21,165,737 18,646,743 13,306,406 INTEREST INCOME, NET 752,793 1,510,941 1,580,056 ------------- ------------- ------------- Income before income taxes 21,918,530 20,157,684 14,886,462 PROVISION FOR INCOME TAXES 8,544,905 7,692,500 5,393,200 ------------- -------------- ------------- Net income $ 13,373,625 $ 12,465,184 $ 9,493,262 ============= ============= ============= Net income per share - Basic $ 1.05 $ 0.93 $ 0.72 ============= ============= ============= Net income per share - Diluted $ 1.04 $ 0.92 $ 0.71 ============= ============= ============= The accompanying notes are an integral part of these consolidated financial statements. F-4
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WILMAR INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -------------------------------------------------------------------------------- [Enlarge/Download Table] (Accumulated Accumulated Deficit) / Other Total Common Stock Retained Comprehensive Treasury Stockholders' Shares Amount Earnings Income Stock Equity ---------- ------------ ------------- ------------ ------------ ---------------- BALANCE, DECEMBER 27, 1996 13,048,371 $ 96,978,776 $ (21,479,162) $ -- $ 75,499,614 Exercised Stock Options 131,485 1,305,796 1,305,796 Tax Benefit from Exercised Stock Options 660,000 660,000 Issuance of Common Stock - Mile High 4,652 100,024 100,024 Issuance of Common Stock - Management Supply 151,246 3,749,388 3,749,388 Comprehensive income - Net income 9,234,262 9,234,262 ---------- ------------ ------------- ------------ ------------ -------------- BALANCE, DECEMBER 26, 1997 13,335,754 $102,793,984 $ 12,244,900) $ - $ - $ 90,549,084 Exercised Stock Options 48,350 360,446 360,446 Tax Benefit from Exercised Stock Options 283,600 283,600 Issuance of Common Stock - Apartment Cleaning 5,723 130,713 130,713 Comprehensive income - Net income 12,465,184 12,465,184 ---------- ------------ ------------- ------------ ------------ -------------- BALANCE, DECEMBER 25, 1998 13,389,827 $103,568,743 $ 220,284 $ - $ - $ 103,789,027 Exercised Stock Options 17,999 93,041 93,041 Tax Benefit from Exercised Stock Options 64,130 64,130 Repurchase of Common Stock (1,000,000) (12,803,563) (12,803,563) Comprehensive income Net income 13,373,625 Foreign currency translation 56,383 Total comprehensive income 13,430,008 ---------- ------------ ------------- ------------ ------------ -------------- BALANCE, DECEMBER 31, 1999 12,407,826 $103,725,914 $ 13,593,909 $ 56,383 $(12,803,563) $ 104,572,643 ========== ============ ============= ============ ============ ============== The accompanying notes are an integral part of these consolidated financial statements. F-5
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[Enlarge/Download Table] WILMAR INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------------------------------------------------------------------------------------- For the Year For the Year For the Year Ending Ending Ending December 31, 1999 December 25, 1998 December 26, 1997 ----------------- ----------------- ----------------- OPERATING ACTIVITIES: Net Income $ 13,373,625 $ 12,465,184 $ 9,234,262 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,455,559 1,971,872 1,391,884 Deferred income taxes 374,518 (271,000) (205,000) Loss (gain) on disposition of property and equipment 12,939 16,504 (2,012) Changes in assets and liabilities, net of effects of acquisition: Accounts receivable (2,207,096) (2,803,543) (2,767,229) Inventory (52,163) (4,278,081) (4,342,521) Prepaid expenses and other current assets (2,115,052) 501,327 (623,110) Other 1,081,311 (15,432) 121,584 Accounts payable 5,117,281 (1,253,257) 2,787,491 Accrued expenses and other current liabilities 4,815,947 (29,315) 123,009 Accrued interest 315,100 Deferred Compensation (404,350) Income taxes payable 347,914 474,941 (1,524,797) --------------- --------------- ----------------- Net cash provided by operating activities 23,115,533 6,779,200 4,193,561 --------------- --------------- ----------------- INVESTING ACTIVITIES : Purchase of property and equipment, net (1,924,478) (1,559,686) (1,679,103) Proceeds from sale of property and equipment 2,500 4,400 7,958 Proceeds from sale of short-term investments - - 3,927,276 Acquisition of businesses, including escrow (93,075,900) (5,596,151) (15,000,452) --------------- --------------- ----------------- Net cash used in investing activities (94,997,878) (7,151,437) (12,744,321) --------------- --------------- ----------------- FINANCING ACTIVITIES : (Repayment of) proceeds from notes payable 59,359,482 (100,000) (260,000) Purchases of stock for treasury (12,803,563) Net proceeds from exercise of stock options 93,041 360,446 1,305,796 --------------- --------------- ----------------- Net cash provided by financing activities 46,648,960 260,446 1,045,796 --------------- --------------- ----------------- Effect of exchange rate changes on cash 66,898 - - --------------- --------------- ----------------- NET DECREASE IN CASH (25,166,487) (111,791) (7,504,964) CASH, BEGINNING OF PERIOD 30,611,955 30,723,746 38,228,710 --------------- --------------- ----------------- CASH, END OF PERIOD $ 5,445,468 $ 30,611,955 $ 30,723,746 =============== =============== ================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for Interest $ 159,972 $ 11,328 35,329 =============== =============== ================= Income taxes $ 7,849,737 $ 5,765,843 $ 6,872,600 =============== =============== ================= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Issuance of Common Stock in connection with the purchase of : Apartment Cleaning Supply and Pool Supply, Inc. $ 130,713 Management Supply Company $ 3,749,388 Mile High Maintenance Supply, Inc. $ 100,024 Issuance of Notes and other liabilities recorded in connection with the purchase of : Ace Maintenance Mart USA, Inc. $ 120,000 Apartment Cleaning Supply and Pool Supply, Inc. $ 529,350 Kurzon Supply Company $ 658,125 American Maintenance Supply, Inc. - CA $ 109,164 American Maintenance Supply, Inc. - NV $ 150,013 Pier-Angeli Group, Inc. $ 75,000 Management Supply Company $ 1,125,000 The accompanying notes are an integral part of these condensed consolidated financial statements. F-6
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WILMAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE FISCAL YEARS IN THE PERIOD ENDED DECEMBER 31, 1999 -------------------------------------------------------------------------------- 1. DESCRIPTION OF THE BUSINESS Wilmar Industries, Inc. ("Wilmar" or the "Company") is a national marketer and distributor of repair and maintenance products with twenty-six distribution centers throughout the United States. The Company sells primarily to apartment complexes and other institutional customers. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of Wilmar Industries, Inc. and its subsidiaries. Inter-company balances and transactions have been eliminated. Fiscal Year - The Company operates on a 52-53 week fiscal year, which ends on the last Friday in December. The fiscal year ended December 31, 1999 was a fifty-three week year. The fiscal years ended December 25, 1998 and December 26, 1997 were fifty-two week years. References herein to 1999, 1998 and 1997 are for the fiscal years ended December 31, 1999, December 25, 1998 and December 26, 1997, respectively. Cash and Cash Equivalents - Cash and cash equivalents consist of cash and highly liquid investments with an original maturity of three months or less. Inventory - Inventory is stated at the lower of cost (first-in, first-out method) or market. Property and Equipment - Property, equipment and leasehold improvements are stated at cost. Expenditures for additions, renewals and betterments are capitalized; expenditures for maintenance and repairs are charged to expense as incurred. Upon the retirement or disposal of assets, the cost and accumulated depreciation or amortization is eliminated from the accounts and the resulting gain or loss is credited or charged to operations. Depreciation is computed primarily using the straight-line method based upon estimated useful lives of the assets, and amortization is computed using the straight-line method based upon the remaining terms of the associated leases, as follows: Buildings 40 years Machinery and equipment 5-7 years Office furniture and equipment 5-7 years Leasehold improvements Remaining lease term Goodwill - Goodwill, which represents the excess of cost over the fair value of net assets acquired, is being amortized on a straight-line basis over estimated useful lives ranging from 30 to 40 years. The Company assesses the recoverability and the amortization period of goodwill by determining whether the amounts can be recovered through undiscounted net cash flows of the businesses acquired over the remaining respective amortization period. Long-Lived Assets - Intangible assets include amounts assigned to customer lists and non-compete agreements. Intangibles are amortized on a straight- line basis over their useful lives, 20 to 25 years for customer lists and 3 to 10 years for non-compete agreements. The Company analyzes the carrying value of its recorded intangible assets and other long-lived assets periodically or when facts or circumstances indicate that the carrying value may be impaired. The review includes an assessment of customer retention, cash flow projections and other factors the Company believes are relevant. The Company uses the discounted future expected net cash flows of each identifiable asset to measure impairment losses. The Company has not identified any impairment losses with respect to long-lived assets for all fiscal years presented. Deferred Financing Costs - Costs incurred in connection with the issuance of debt are deferred and amortized as a component of interest expense over the term of the related debt using the straight-line method. Foreign Currency Translation - Assets and liabilities of the Company's foreign subsidiary, where the functional currency is the local currency, is translated into United States dollars at the fiscal year end exchange rate. The related translation adjustments are recorded as a component of other comprehensive income. Revenues and expenses are translated using average exchange rates prevailing during the year. Foreign currency transaction gains and losses are included in other (income) expense. F-7
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Estimates - The preparation of 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 disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and assumptions. Fair Value of Financial Instruments - The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short maturities of these items. The carrying values of notes payable and long-term debt are a reasonable estimates of their fair values. The estimated fair values of notes payable and long-term debt were determined by discounting the future cash flows using rates currently available to the Company for similar instruments. Revenue Recognition- Sales are recognized as product is shipped, F.O.B. point of shipment and are net of sales returns, allowances and credits. Cost of Sales - Cost of sales includes merchandise costs, freight, distribution center occupancy and delivery costs. Pre-Opening Distribution Center Expenses - Pre-opening distribution center expenses are expensed as incurred. Advertising Costs - The Company expenses advertising costs as incurred. Advertising expenses were approximately $652,000, $492,500 and $ 448,000 in 1999, 1998 and 1997, respectively. Stock-Based Compensation - Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock (see Note 9). Income Taxes - Taxes on income are provided in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Net Income per Share Data - Net income per share for all periods have been computed in accordance with SFAS No. 128, "Earnings per Share." Basic net income per share is computed by dividing net income by the weighted-average number of shares outstanding during the year. Diluted net income per share is computed by dividing net income by the weighted-average number of shares outstanding during the year, assuming dilution. The amounts used in calculating net income per share data are as follows: [Download Table] 1999 1998 1997 ----------- ----------- ----------- Net Income $13,373,625 $12,465,184 $ 9,234,262 =========== =========== =========== Weighted Average Shares Outstanding - Basic 12,725,630 13,367,815 13,165,416 Effect of Dilutive Stock Options 132,389 136,140 169,214 ----------- ----------- ----------- Weighted Average Shares Outstanding - Diluted 12,858,019 13,503,955 13,334,630 =========== =========== =========== Options to purchase 386,156, 90,625 and 25,900 shares of common stock which were outstanding during 1999, 1998 and 1997, respectively, were not included in the computation of weighted average shares outstanding - Diluted because the options' exercise price was greater than the average market price of common shares. F-8
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Segment Information - The Company is in one industry, the distribution of repair and maintenance products. In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", the Company aggregates all of its distribution centers and reports one operating segment. Approximate sales by product category are as follows: [Enlarge/Download Table] 1999 1998 1997 ------------------ ------------------ ------------------ Plumbing $ 65,522,000 $ 55,855,000 $ 45,238,000 Electrical 38,409,000 38,521,000 27,143,000 Hardware 31,631,000 30,817,000 22,619,000 Appliance and Appliance Parts 29,372,000 26,965,000 15,079,000 Other 61,003,584 40,447,005 40,713,516 ------------------ ------------------ ------------------ $225,937,584 $192,605,005 $150,792,516 ================== ================== ================== The Company's revenues and assets outside the United States are not significant Recent Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as "derivatives") and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -Deferral of the Effective Date of FASB Statement No. 133", is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management has not yet determined what effect, if any, this statement will have on the Company. 3. SIGNIFICANT TRANSACTIONS Merger Agreement - In December 1999, the Company entered into an Agreement and Plan of Merger and Recapitalization (as amended, the "Merger Agreement") with WM Acquisition, Inc., a subsidiary of an investor group led by Parthenon Capital and Chase Capital Partners. The managing director of Parthenon Capital is also a member of the Board of Directors of Wilmar. Pursuant to the terms of the Merger Agreement, as a result of the merger (the "Merger") contemplated by the Merger Agreement, WM Acquisition will be merged with and into the Company, each share of the Company's common stock will be exchanged for $18.25 per share and the Company shall remain as the surviving corporation. The Merger is contingent upon certain conditions, including approval by the shareholders of the Company. Upon consummation of the Merger, the Company's common stock will no longer be traded on the Nasdaq National Market System, price quotations will no longer be available and registration of the Company's common stock under the Securities and Exchange Act of 1934 will terminate, resulting in part in no further public reporting by Wilmar under such act. Acquisitions - During 1999, the Company completed three acquisitions (Ace Maintenance Mart USA, Inc., The Mini Blind Company, Inc., and the Sexauer Group) for an aggregate purchase price of $93.1 million, including costs of acquisition. Goodwill recorded in connection with these acquisitions totaled approximately $ 63.8 million. The allocation of the purchase price for the Sexauer Group has not been finalized; the accompanying financial statements reflect the preliminary allocations. During 1998, the Company completed four acquisitions (The California-based American Maintenance Supply, Inc., Apartment Cleaning Supply and Pool Supply, Inc., the Nevada-based American Maintenance Supply, Inc., and Kurzon Supply Company, Inc.) for an aggregate base purchase price of approximately $7.2 million, including costs of acquisition. Goodwill recorded in connection with these acquisitions was approximately $ 4.5 million. During 1997, the Company completed three acquisitions (Management Supply Company, Pier-Angeli Group, Inc. and Lindley Plumbing and Supply Company) for an aggregate base purchase price of approximately $20.1 million, including costs of acquisition. Goodwill recorded in connection with these acquisitions was $12.6 million. The above acquisitions have been accounted for under the purchase method of accounting, and accordingly, the net assets and results of operations have been included in the accompanying consolidated financial statements since the dates of acquisition. The excess of purchase price over the estimated fair values of the net assets acquired for the above investment has been allocated to intangible assets and goodwill with amortization over 3 to 40 years. F-9
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The following table presents the unaudited results of operations of the Company for each of the three fiscal years in the period ended December 31, 1999 as if the acquisitions had been consummated as of the beginning of the prior fiscal year, and include certain pro forma adjustments to reflect the amortization of intangible assets, reduction of overhead charges, reduction in compensation, interest expense on amounts drawn on the Company's line of credit to finance the acquisition as if the acquisitions had occurred on the dates described above and inclusion of a federal income tax provision: [Download Table] 1999 1998 1997 ------------- ------------ ------------- Revenues $302,556,000 $195,909,000 $172,376,000 Net income 14,979,000 12,904,000 10,018,000 Net income per share - Basic 1.18 0.97 0.75 Net income per share - Diluted 1.16 0.96 0.75 The unaudited pro forma results of operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions occurred at the dates described above or the results which may occur in the future. 4. INTANGIBLE ASSETS AND OTHER Intangible assets and other consist of the following: [Download Table] 1999 1998 ------------------ ----------------- Intangible assets $18,603,692 $5,502,000 Less accumulated amortization (2,581,365) (829,887) ------------------ ----------------- 16,022,327 4,672,113 Deposits 307,427 249,591 Other 158,132 -- ------------------ ----------------- $16,487,886 $4,921,704 ================== ================= 5. Balance Sheet Components [Enlarge/Download Table] Property and equipment 1999 1998 ------------------ ----------------- Land $ 1,060,004 $ Building 3,773,893 Machinery and equipment 4,374,067 3,513,458 Office furniture and equipment 6,402,433 3,489,494 Vehicles 975,717 953,282 Leasehold improvements 1,133,568 967,615 ------------------ ----------------- 17,719,682 8,923,849 Less accumulated depreciation and amortization (8,747,674) (4,740,501) ------------------ ----------------- $ 8,972,008 $ 4,183,348 ================== ================= Depreciation expense was approximately $1,165,216, $1,005,000 and $786,000 for 1999, 1998 and 1997, respectively. Accrued Expenses and Other Current Liabilities Sales tax payable $ 1,109,154 $ 759,798 Accrued compensation and related benefits 5,065,598 934,320 Other accrued liabilities 7,723,321 2,600,307 ------------------ ----------------- $13,898,073 $ 4,294,425 ================== ================= F-10
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6. DEBT Notes Payable - At December 25, 1998, the Company had notes payable to the former shareholders of Management Supply Company, which totaled $1,125,000. Also, at December 25, 1998, the Company had current notes payable to former shareholders of other acquired companies, totaling $83,518. These notes were repaid during 1999. Long-term Debt - In December 1999, in connection with the Sexauer Group acquisition, the Company entered into a new credit agreement with a syndicate of banks. The credit agreement provides for a five year revolving credit facility of $30 million of borrowings ($5 million outstanding at December 31, 1999) and a five year term loan of $55 million ($55 million outstanding as of December 31, 1999), the proceeds of which were used to purchase the Sexauer Group. Borrowings under these credit facilities are secured by substantially all assets of the Company and bear interest at a rate which varies based on certain financial measures as defined in the credit agreement. At December 31, 1999 the effective interest rates for the credit facilities was LIBOR plus 175 basis points (8.2% at December 31, 1999). The Company is also required to pay a commitment fee of 0.375% per annum on the unused commitment. Interest on outstanding balances under these credit facilities is due and payable quarterly. Additionally the Company has an unsecured letter of credit facility of $5 million with one of the banks in the syndicate. The credit agreement contains customary affirmative and negative covenants, including certain covenants requiring the Company to maintain it's debt to cash flow ratio, fixed charge ratio in addition to meeting a minimum net worth test. The Company was in compliance with all covenants at December 31, 1999. The maturities of long-term debt for the five fiscal years subsequent to December 31, 1999 are as follows: [Download Table] 2000 $ 4,125,000 2001 7,562,500 2002 10,312,500 2003 13,062,500 2004 24,937,500 --------------- $60,000,000 =============== Interest expense was $ 475,072, $ 68,792, and $ 17,099 for 1999, 1998 and 1997, respectively. 7. PROFIT SHARING PLAN The Company has qualified profit sharing plans under Section 401(k) of the Internal Revenue Code. Contributions to the plan by the Company are made at the discretion of the Company's Board of Directors. Company contributions to the plan were approximately $326,678, $208,600 and $151,300 for 1999, 1998 and 1997, respectively. 8. COMMITMENTS AND CONTINGENT LIABILITIES Lease Commitments - The Company leases its facilities under operating leases expiring at various dates through 2006. Minimum future rental payments under these leases as of December 31, 1999 are as follows: [Download Table] 2000 4,399,690 2001 4,013,565 2002 3,505,030 2003 2,492,983 2004 1,360,971 Thereafter 207,246 --------------- Total $15,979,485 =============== The Company operates a distribution center, which is leased from an entity, which is partially owned by two officers of the Company. Minimum annual rent payable under this lease is approximately $289,000, plus all real estate taxes and assessments, utilities and insurance related to the premises. Total rent expense for this lease was approximately $289,000 for each fiscal year in the period ended December 31, 1999. This lease expires on May 31, 2006 and does not contain any renewal terms. The Company believes that the terms of the lease are no less favorable to it than could be obtained from an unaffiliated party. F-11
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The Company maintains its executive office, which is leased from a stockholder of the Company. As amended in March 1995, under the terms of the lease, the Company is required to pay approximately $137,500 annually, plus all real estate taxes and assessments, utilities and insurance related to the premises. Total rental expense for this lease was $ 137,500, for each fiscal year in the period ended December 31, 1999. The lease expires on February 28, 2004 and does not contain any renewal terms. The Company believes that the terms of the lease are no less favorable to it than could be obtained from an unaffiliated party. Rent expense under all operating leases was approximately $3.3 million, $3.9 million and $2.2 million for 1999, 1998 and 1997, respectively. Certain of the leases provide that the Company pays taxes, insurance and other operating expenses applicable to the leased premises. Employment Agreement - The Company has an employment agreement with its Chief Executive Officer until March 2001, unless terminated earlier by the Company, at an annual base salary of $200,000, subject to adjustments plus bonus. Contingent Liabilities - At December 31,1999, the Company was contingently liable for unused letters of credit aggregating approximately $717,273. Legal Proceedings - The Company is involved in various legal proceedings in the ordinary course of its business, which are not anticipated to have a material adverse effect on the Company's results of operations or financial position. Following the public announcement of the merger and recapitalization, a purported shareholders class action complaint was filed by Phronesis Partners, L.P. on December 27, 1999 against Wilmar, Wilmar's directors and Parthenon Capital, Inc. in the Superior Court of New Jersey, Chancery Division, Burlington County (Docket No. BUR-C-171-99). The complaint alleges, among other things, that Wilmar's directors have breached their fiduciary duties and that Parthenon Capital has aided and abetted those breaches. The complaint also alleges, among other things, that the proposed consideration for the merger and recapitalization is unfair and inadequate. The complaint seeks to enjoin the merger and recapitalization and also seeks damages. On March 17, 2000, the plaintiffs filed a motion seeking leave to file an amended complaint adding a claim alleging Wilmar's directors made misrepresentations in its preliminary proxy solicitation materials and seeking to preliminarily enjoin Wilmar from holding a shareholder vote on the merger and recapitalization. The parties have agreed that the defendants will not object to the filing by the plaintiffs of their amended complaint and that the plaintiffs will reconsider the need for pursuing their motion to preliminarily enjoin the shareholders vote. Wilmar and Parthenon believe the allegations are without merit and are vigorously defending against all claims. If plaintiffs decide to pursue their motion for a preliminary injunction, it will be opposed. No final date has been set for a hearing on the motion. Document and deposition discovery is proceeding. The Company collects sales tax in 35 states and the District of Columbia where it has the required contacts. From time to time, various states have sought to impose on direct marketers the burden of collecting use taxes on the sale of products shipped to residents of these states. The United States Supreme Court held that it is unlawful for a state to impose use tax collection obligations on an out-of-state company whose only contacts with the state were the distribution of catalogs and other advertising materials through the mail and subsequent delivery of purchased goods by mail or common carrier. In the event legislation is passed to overturn the Supreme Court's decision, the imposition of a use tax collection obligation on the Company in states into which it ships products but with which it has no other contacts would result in additional administrative expense to the Company and higher prices to customers. F-12
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9. STOCK OPTION PLAN The Company has a stock option plan (the "1995 Plan") under which employees may be granted options to purchase shares of Common Stock. The Company also has a plan (the "Director Plan") under which non-employee directors may be granted options to purchase shares of Common Stock. The 1995 Plan and the Director Plan, together, are referred to hereafter as the Option Plans. Options granted are to be issued at prices equal to at least fair market value and expire up to ten years after the grant date. The stock option plans are administered by the Compensation Committee of the Board of Directors, which determines the vesting provisions, the form of payment for shares and all other terms of the options. The maximum number of shares to be reserved under the 1995 Plan (as amended in 1999) and Director Plan is 1,600,000 and 100,000 shares, respectively. At December 31, 1999, 394,628 shares were available for future grants. Stock option transactions are summarized as follows: [Enlarge/Download Table] Weighted Number Exercise Price Average Exercise of Shares Per Share Price Per Share -------------------------------------------------------------------- Outstanding at December 27, 1996: 398,200 $ 4.23 - $24.25 $ 6.72 1997: Granted 187,900 $15.25 - $29.75 $18.83 Exercised (131,485) $ 4.23 - $15.50 $10.00 Forfeited (17,600) $ 4.23 - $29.75 $19.23 --------- Outstanding at December 26, 1997: 437,015 $ 4.23 - $29.75 $10.43 1998: Granted 291,138 $16.50 - $25.88 $19.96 Exercised (48,350) $ 4.23 - $21.00 $ 7.46 Forfeited (35,050) $15.50 - $29.75 $21.93 --------- Outstanding at December 25, 1998: 644,753 $ 4.23 - $28.75 $14.33 1999: Granted 585,700 $11.25 - $23.50 $11.52 Exercised (17,999) $ 4.23 - $15.50 $ 5.17 Forfeited (102,793) $ 4.23 - $28.75 $14.96 Expired (2,123) $15.50 - $26.25 $16.95 --------- Outstanding at December 31, 1999: 1,107,538 $ 4.23 - $28.75 $12.91 --------- The following table summarizes information about the stock options outstanding under the Option Plans as of December 31, 1999: [Enlarge/Download Table] Options Outstanding Options Exercisable ------------------- ------------------- Number Weighted Average Weighted- Number Weighted- Range of Outstanding at Remaining Average Exercisable Average Exercise Prices 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price --------------- -------------- ---------------- -------------- ----------- -------------- $ 4.23 188,337 5.2 years $ 4.23 121,366 $ 4.23 $11.00 - $16.50 605,820 9.1 years 11.90 56,395 14.31 $16.88 - $25.25 308,381 8.3 years 19.99 78,796 21.36 $25.38 - $28.75 5,000 7.9 years 26.32 1,000 26.52 --------- ------- ------ 1,107,538 257,557 $11.76 ========= ======= ====== F-13
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All stock options are granted at a price not less than the fair market value of the Common Stock at the grant date. The weighted average fair value of the stock options granted during 1999, 1998 and 1997 were $6.42, $10.70 and $10.06, respectively. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997: 1999 1998 1997 --------- --------- --------- Risk-free interest rate 5.5 % 5.1 % 6.5 % Expected volatility 63.0 % 60.0 % 57.3 % Expected life 4.5 years 4.5 years 4.5 years Contractual life 10 years 10 years 10 years Dividend yield 0.0 % 0.0 % 0.0 % The Company accounts for the Option Plans in accordance with APB Opinion No. 25, under which no compensation cost has been recognized for stock option awards. Had compensation cost for the Option Plans been determined with SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's pro forma net income and earnings per share for each of the fiscal years in the period ended December 31, 1999 would have been as follows (in thousands, except per share amounts): 1999 1998 1997 ------- ------- ------- Net Income: As reported $13,374 $12,465 $ 9,234 Pro forma $12,842 $11,765 $ 8,579 Net Income per share: As reported $ 1.05 $ 0.93 $ 0.70 Pro forma $ 1.01 $ 0.88 $ 0.65 Net Income per share, assuming dilution: As reported $ 1.04 $ 0.92 $ 0.69 Pro forma $ 1.00 $ 0.87 $ 0.64 F-14
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10. PROVISION FOR INCOME TAXES The income tax provision for each of the fiscal years in the period ended December 31, 1999 is as follows: 1999 1998 1997 ---------- ---------- ---------- Current: Federal $7,202,900 $6,812,800 $4,733,500 State 901,600 1,150,700 864,700 Foreign 65,905 ---------- ---------- ---------- 8,170,405 7,963,500 5,598,200 ---------- ---------- ---------- Deferred: Federal 210,565 (247,600) (181,000) State 163,953 (23,400) (24,000) ---------- ---------- ---------- 374,518 (271,000) (205,000) ---------- ---------- ---------- $8,544,923 $7,692,500 $5,393,200 ========== ========== ========== The reconciliation of the provision for income taxes at the federal statutory tax rate to the provision for income taxes is as follows: 1999 1998 1997 -------- -------- -------- Federal statutory tax rate 34.0 % 34.0 % 34.0 % State income taxes, net of federal benefit 3.0 3.8 4.8 Non-deductible expenses 1.7 1.1 1.0 Non-taxable investment income (0.2) (0.7) (2.3) Other 0.5 - (0.6) -------- -------- -------- 39.0 % 38.2 % 36.9 % ======== ======== ======== Deferred income taxes result primarily from temporary differences in the recognition of certain expenses for financial and income tax reporting purposes. The components of the Company's net deferred tax asset consisted of the following as of: December 31, December 25, 1999 1998 -------------- -------------- Inventory $ 1,421,500 $ 935,000 Bad debt reserves 712,626 483,000 State taxes 218,208 146,000 Other (164,128) (66,000) -------------- -------------- $ 2,188,206 $ 1,498,000 ============== ============== F-15
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11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Unaudited quarterly financial information for 1999 and 1998 are as follows (amounts are in thousands, except per share data): [Enlarge/Download Table] 1999 --------------------------------------------------------------------- First Second Third Fourth (13 Weeks) (13 Weeks) (13 Weeks) (14 Weeks) Net sales $48,747 $55,017 $58,616 $63,557 Gross profit 14,695 15,921 16,833 19,946 Operating income 4,610 5,154 5,907 5,495 Net income 3,052 3,351 3,789 3,182 Net income per share - Basic $ 0.23 $ 0.26 $ 0.30 $ 0.26 Net income per share - Diluted $ 0.23 $ 0.26 $ 0.30 $ 0.25 1998 --------------------------------------------------------------------- First Second Third Fourth (13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) Net sales $43,545 $49,659 $52,093 $47,308 Gross profit 12,609 14,303 15,063 14,142 Operating income 3,854 4,662 5,542 4,589 Net income 2,673 3,109 3,631 3,052 Net income per share - Basic $ 0.20 $ 0.23 $ 0.27 $ 0.23 Net income per share - Diluted $ 0.20 $ 0.23 $ 0.27 $ 0.23 The total of the quarterly information presented above may not equal the annual results presented in the Consolidated Statement of Income as a result of rounding. The Company's quarters end on the last Friday of each calendar quarter. The Company's sales volumes tend to be lower in the fourth quarter because customers defer purchases at year end as their budget limits are met. In addition, net sales in the fourth quarter are reduced because of the holidays during the period. F-16
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SCHEDULE II WILMAR INDUSTRIES, INC. VALUATION ACCOUNTS ------------------------------------------------------------------------------- [Enlarge/Download Table] Balance at Balance at Beginning Charged to Other End of Year Expense Deductions/1/ Changes of Year --------------------------------------------------------------------------- Year ended December 26, 1997: Allowance for doubtful accounts $ 806,300 586,025 525,675 493,150/2/ $1,359,800 ------------ --------- --------- ------------ =========== Year ended December 25, 1998: Allowance for doubtful accounts $1,359,800 305,002 265,602 - $1,399,200 ------------ --------- --------- ------------ =========== Year ended December 31, 1999: Allowance for doubtful accounts $1,399,200 240,000 365,680 857,287/3/ $2,130,807 ------------ --------- --------- ------------ =========== 1. Accounts receivable written off as uncollectible, net of recoveries. 2. Represents reserves established in connection with acquisitions of Management Supply Company, Pier-Angeli Group and Lindley Supply Company. See Note 3 to Consolidated Financial Statements. 3. Represents reserves established in connection with acquisitions of The Mini Blind Co, Ace Maintenance USA and the Sexauer Group. See Note 3 to Consolidated Financial Statements. F-17

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