American Woodmark is an organization of employees and shareholders who have combined their resources to pursue a common goal.

Our common goal is to create value by providing kitchens and baths "of pride" for the American family.

We pursue this goal to earn a profit, which allows us to reward our shareholders and employees and to make a contribution to our society.

Four principles guide our actions:

When we achieve our goal good things happen: sales increase, profits are made, shareholders and employees are rewarded, jobs are created, our communities benefit, we have fun, and our customers are happy and proud--with a new kitchen or bath from American Woodmark.

Company Profile 1

Market Information 1

Financial Highlights 1

Letter from the President 2

Five Year Selected Financial Information 5

Investing in the Future 6

Management's Discussion and Analysis 9

Consolidated Financial Statements 17

Notes to Consolidated Financial Statements 20

Management's Report 28

Report of Independent Auditors 29

Board of Directors and Executive Officers 30

Corporate Information 32

American Woodmark Corporation was formed in 1980 and became a public company through a Common Stock offering in July, 1986.

The Company offers approximately 110 cabinet lines in a wide variety of designs, materials and finishes. Our products are sold across the United States through a network of independent distributors and directly to home centers, major builders and home manufacturers. Approximately 70% of our sales during fiscal year 2000 were to the remodeling market and 30% to the new home market.

The Company is one of the five largest manufacturers of kitchen cabinets in the United States.

American Woodmark Corporation Common Stock, no par value, is quoted on The Nasdaq Stock Market under the "AMWD" symbol. Common Stock per share market prices and cash dividends declared during the last two fiscal years were as follows:

As of June 13, 2000, there were approximately 6,000 shareholders of the Company's Common Stock. Included are approximately 64% of the Company's employees who are shareholders through the American Woodmark Stock Ownership Plan.

To Our Shareholders:

Fiscal 2000 was a year of mixed blessings and results for American Woodmark. Demand for our products continued to be exceptionally strong as we gained market share for the fourth consecutive year. The hyper-growth experienced during much of fiscal 1999 and early fiscal 2000 resulted in an overheating of the Company by the second quarter of the year. The constant pressure to both service incoming demand and implement our capital expansion plan took its toll on short-tem financial performance, especially during the middle two quarters of the year. Net income per diluted share for the full year declined 18% to $1.79.

Our share price, due in large part to the decline in performance, dropped approximately 50% to $18.00 per share. Compounding the downward pressure on our stock was growing concern in the investment community over interest rates. By the end of our fiscal year, building materials stocks were generally out of favor on Wall Street and many, if not most, had experienced significant declines in their share price. To the extent that our price decline was attributable to Company performance, the results are unacceptable. Our management team and all our employees are committed to restoring the Company to acceptable levels of performance. To the extent that our price decline was due to short-term sector devaluation by Wall Street, we remain convinced that real value will be recognized over time by investors. As we continue to build intrinsic value in our Company, we believe the individual investing for the long-term will be rewarded with a superior return.

In fiscal 1999, the Company generated quarterly sales growth of 30%, 27%, 46% and 39% in the first through fourth quarters, respectively. Fiscal 2000 began much like fiscal 1999 ended with net sales growth of almost 30% in the first quarter. During the second quarter it became clear that demand for the Company's products would, left alone, continue to increase at a rate significantly above that experienced by the industry. Net sales increased 25% in the second quarter, approaching $100 million for the first time.

By the fall of 1999, we decided that the Company needed to take aggressive action to rebalance our operations. The continuing effects of hyper-growth were creating an environment of unstable and unsustainable operating performance. In November, we restated our commitment to the capital expansion program and announced our intention to dampen short-term demand for the Company's products by exiting lower margin, non-strategic channels of distribution.

These initiatives had an immediate impact on the Company. Overall net sales growth dropped to 13% in the third quarter as continued high growth with our strategic partners was partially offset by the exit from non-strategic markets. Additional capacity was brought on-line according to plan. By the end of the third quarter, the Company was operating below 100% of practical capacity for the first time in almost two years. While the Company had established enough raw capacity to service demand at the end of January, our efficiencies in operating this capacity lagged behind due to the combination of the learning curve for hundreds of new employees and the need to refine our material flows to and from the additional facilities. Gross margins declined to a low of 24% during the third fiscal quarter.

After spending $60 million over the past two years to almost double capacity, our project load going forward will be at a much more manageable pace. More importantly, the majority of our facilities have completed their long-term site development and will not experience significant expansions or disruptions as we move forward. Hiring activity is at a more manageable level with anticipated annual target growth of 15% to 20%. Capital projects have been reduced to a more reasonable schedule with a balance between capacity expansion, cost reduction and maintenance expenditures. The concentration of major capital expansion to the few, relatively new facilities will enable our core plants to focus on additional efficiencies. By the beginning of the first quarter of fiscal 2001, many of our core facilities were operating at or near record productivity.

As we begin a new fiscal year, we are optimistic that the combination of managed growth and a more balanced capital expansion plan will return the Company to consistent improvement in period-over-period earnings. We have built a financially sound company with superior strategic partners. We are confident that we will continue to grow as an organization and that we will continue to prosper.

I would like to offer my special appreciation to our growing family of men and women that work at American Woodmark. Our employees are the most dedicated and resourceful individuals with whom I have worked in my career. It is during challenging periods like the year just ended that our commitment to our core values and our Vision is truly tested. While our financial performance in fiscal 2000 did not meet our expectations, we accomplished much to position ourselves for sound growth and consistent earnings performance in the years ahead. I am proud of the way that each of our almost 3,400 employees has stepped forward and helped us build an even stronger American Woodmark.

During the year, we added Albert Prillaman and Kent Hussey to our Board of Directors. Albert is Chairman, Chief Executive Officer and President of Stanley Furniture. Kent is President and Chief Operating Officer of Rayovac Corporation. Both Albert and Kent have already made significant contributions to the Board and I look forward to even greater contributions from these gentlemen as we move forward.

I look forward to reporting on our progress through fiscal 2001. Thank you for your continuing support of American Woodmark.

James J. Gosa
President and Chief Executive Officer

Fiscal Years Ended April 30

Investing in the Future

Since the inception of our current six-year Vision in 1995, we have successfully worked to position American Woodmark as a growth Company in our industry.

As we approach the end of this Vision, we have established a position as the leading supplier of stock cabinetry to the home center industry. A wide variety of styles, colors and features are proudly offered under the American Woodmark brand at over 1,000 Home Depot outlets. American Woodmark products, along with an extensive line of exclusive Shenandoah brand cabinetry, are available at over 600 Lowe's home improvement stores. We continue to work tirelessly with these two strategic partners to create unique products and programs in support of their goals.

We have also established American Woodmark as a leading supplier of fine cabinetry to the new construction industry. Home builders across the United States rely on our Timberlake brand program for high quality products and reliable services. Large production builders are demanding that suppliers provide support for their aggressive expansion. American Woodmark is a pioneer in offering programs to these customers and we currently service over 40 of the Top 100 national builders on a direct basis from our network of service centers. To serve local and regional builders, we provide products through a growing network of independent dealers and distributors. These independent companies provide a level of customization and service that keep medium and small sized builders competitive in the marketplace.

Our position in the marketplace, our partnership with key customers, our extensive lines of exclusive products and our superior customer service and support have created tremendous opportunity for American Woodmark. Over the past four years alone, we have almost doubled the size of the Company by adding almost $200 million in annual revenue.

The explosive growth provided by our customers is requiring an unprecedented investment in the future of our Company. We have made, and will continue to make, investments in our production capacity, our information technology and our organization.

In order to keep pace with the growing demand for American Woodmark products, the Company launched a capital plan in 1998 that is on track to more than double production capacity by the end of 2001. Over the past two years, we have spent almost $60 million on capital projects to expand and upgrade our network of manufacturing facilities. Major projects included:

• The initial construction of a new lumber processing facility in Monticello, Kentucky. This facility was the first new manufacturing facility built by the Company in over a decade. The plant was brought on-line ahead of schedule and within budget.
• The completion of three additional phases of expansion at the Kentucky plant. Demand for the Company's products accelerated plans for the development of this site by almost two years. With the completion of these phases, the Company has doubled lumber processing capacity.
• The initial construction of a new assembly facility in Gas City, Indiana. By the end of fiscal 2000, the Gas City facility was ramping up production and was already servicing large portions of the mid-west.
• Facility and capacity expansions at the Berryville, Virginia, Jackson, Georgia and Kingman, Arizona assembly plants. These projects, combined with the construction of the Gas City facility, have significantly increased the assembly capacity of the Company and should provide sufficient resources to meet projected growth for the next two years.
• An expansion and retooling of our flat stock processing facility in Toccoa, Georgia. An increase in floor space provided an opportunity to re-engineer material flows in our processing of particle board and plywood. The new layout, combined with the installation of state-of-the-art equipment, has increased capacity, productivity and quality.
• The commencement of construction of a new flat stock facility in Humboldt, Tennessee. The new plant will support the additional volume generated by the Company's growth. Construction is on schedule with initial production scheduled for fall 2000.
• The expansion of our Hardy County, West Virginia component processing facility. An increase in floor space and the installation of new equipment has substantially increased the capacity of component production in doors, frames and other miscellaneous parts.
• The purchase and installation of two new finishing lines. New finishing lines in our facilities in Ham Lake, Minnesota and Moorefield, West Virginia have increased capacity, quality and capability.
• The construction of a new National Customer Service Center in Winchester, Virginia. The Company has established a dedicated asset specifically designed to meet the customer service needs of our strategic partners.

American Woodmark is committed to supporting the growing needs of our customers and we are not afraid to invest our capital to this end. We believe that our capital plan will continue to position the Company to take advantage of opportunities in the marketplace for our products and services.

American Woodmark is in the business of providing kitchen and bath cabinets for the American home. As a result, our "hard" capacity to manufacture product is a driving force in our daily operation and in our long-term planning. But in this electronic age, our capacity to gather and use information has become equally critical to our success.

In 1995, the Company launched a five-year plan to convert our entire information technology from an old-style, expensive, mainframe based environment to a modern, flexible, responsive and cost effective client-server based model. With the rollover into 2000, our conversion is complete. American Woodmark has built an information technology base that is prepared not only to keep pace with the new way of doing business, but to exploit it.

Our capabilities in information management, operating systems, e-commerce and emerging business-to-business applications present new opportunities to take advantage of our market position. The Company is aggressively working to expand sales opportunities, increase transaction quality, develop new services, improve productivity and lower overall costs through the application of new computer-based technologies. We believe our investment in the capacity for information is building a competitive advantage.

Our capacities to make product and to gather information are only of value if we have the capacity as an organization to use these tools. As a result, we continue to invest heavily in our organization.

Some organizations talk about culture because it is "trendy". We talk about culture because it is the core of our beliefs. We begin every Annual Report with our Mission Statement. Since 1986, this Mission Statement has defined who we are, what we do, why we do it and how it gets done. We are driven by our desire to provide opportunity for our employees and their families, for the communities in which we live and work, for our vendors and for our customers. We remain dedicated to Creating Value Through People.

For these reasons, we must invest in our people. We invest in their working environment and in the tools they need. We invest in their training and development. We invest in programs to attract and retain the right people. We invest in programs and systems to help our people grow and to make them successful. We are proud of these investments and believe that our return is many fold.

These are exciting times for all of us at American Woodmark. We are investing in our products and in our relationships with our strategic partners. We are investing in new facilities and in our information technology. We are investing in our organization and in our people. We are investing in our future.

Net sales for fiscal 2000 increased 18.4% to $387.3 million from $327.0 million in fiscal 1999. Improved sales were the result of new product introductions and continued growth in all primary channels of distribution. In fiscal 2000, the average price per unit increased 6.2% over fiscal 1999. This increase was the result of a combination of improved product and channel mix and price increases implemented during the third quarters of fiscal 1999 and 2000.

Overall unit volume increased approximately 11% from the prior year as the Company gained market share. Within the home center channel, growth was driven by an increased product offering and by the introduction of exclusive branding. Unit shipments to direct builders improved primarily through increased activity in the Sunbelt and Northeastern regions of the United States. Unit shipments to distributors were flat as compared to the prior fiscal year.

Gross profit in fiscal 2000 decreased to 26.2% from 28.6% in fiscal 1999. The decrease in gross profit was due to higher costs for labor, overhead and distribution. The Company experienced higher labor costs primarily due to the impact of new and inexperienced production employees hired to support the Company's growth. Higher overhead costs were the result of start-up and increased depreciation expenses resulting from the Company's capital investments in new facilities and other capacity expansions. Higher distribution costs were the result of increased standard freight rates from third party carriers, increased fuel surcharges and changes to the network of third party carriers utilized by the Company.

Material cost per unit increased 2.6% from prior year due to a shift towards more material intensive products and increased net scrap. The increase in net scrap was attributed to the relative inexperience of new production employees hired in fiscal 2000. The unfavorable impact of out-sourced components experienced in fiscal 1999 was substantially reduced through facility and process expansions that were completed in fiscal 2000.

Labor costs per unit in fiscal 2000 increased approximately 12% over the prior fiscal year as productivity decreased. The decrease in labor productivity was attributed to ineffiencies experienced at the Company's assembly facilities during the second and third fiscal quarters and the relative inefficiency of the new facilities. The inefficiencies at the assembly plants were due to the significant number of new, relatively inexperienced employees hired to increase capacity. Health care costs increased in fiscal 2000 due to both an increase in the number of eligible employees and higher per capita claims.

Freight cost per unit increased approximately 22% over prior year due to higher standard delivery rates from third party carriers and increased cost for diesel fuel, which is passed on to the Company by its carriers in the form of a surcharge.

Selling and marketing expenses as a percent of net sales for fiscal 2000 were 15.4%, up from 15.0% in fiscal 1999. The primary components of the increase were costs associated with performance-based marketing incentives, promotional expense to support product merchandising programs and increases in staffing to support growth.

General and administrative expenses for fiscal 2000 as a percent of sales were 4.0%, down from 5.1% in fiscal 1999. Year-over-year increases in payroll and bad debt expenses were more than offset by a reduction in expense for employee incentives. Bad debt expense increased as a result of on-going evaluation of the collectibility of accounts receivable. The reduction in employee incentives was due to Company performance versus predetermined targets.

During fiscal 2000, the Company recorded a pre-tax restructuring charge of $1.5 million related to its custom cabinet line. Components of this charge included $884,000 for impairment of goodwill, $300,000 for impairment of promotional displays and $316,000 for impairment of certain other assets. The Company acquired Knapp Woodworking in 1998 in order to develop a line of custom cabinets for the home center channel. Test marketing of the line in the spring of 2000 did not meet performance parameters for revenue, margin and return on investment. Based on evaluation of the test, the Company approved a plan to discontinue the custom cabinet line and convert the existing facility to a component manufacturing plant. The converted facility will support the production of other lines offered by the Company. An evaluation of the recoverability of all assets related to the line of custom cabinets was performed and the Company concluded that a complete impairment of goodwill and a partial impairment of certain other assets had occurred.

Net interest expense for fiscal 2000 increased $107,000 from the prior year to $470,000. Additional interest expense on increased debt was partially offset by capitalized interest. Capitalized interest increased from $332,000 to $589,000 as the Company continued its capital spending plan to increase capacity. Total debt increased $10.5 million during fiscal 2000 primarily through borrowings against the Company's five-year revolving credit facility.

Other income decreased $635,000 from $999,000 in fiscal 1999 to $364,000 in fiscal 2000. The decrease was due to the reduction in interest earned from short-term cash investments.

The Company's combined federal and state effective tax rate in fiscal 2000 was 41.1%, an increase from 38.7% in fiscal 1999. The increase was due to the write-off of non-deductible goodwill and a reduction in tax-exempt interest earned.

As reported in the Company's fiscal year 1999 Annual Report and the Company's Form 10Q for the quarterly periods ending July 31, 1999 and October 31, 1999, the financial condition of Hechinger Co., the Company's third largest customer, deteriorated significantly in early 1999. Hechinger Co. filed for protection under Chapter 11 of the United States Bankruptcy Code in June 1999. On September 9, 1999, Hechinger Co. announced that it would proceed with an orderly liquidation of its assets. The Company did not have any material net asset exposure on the date Hechinger Co. announced its intent to proceed with an orderly liquidation of assets.

The Company's operating activities generated $21.3 million in net cash during fiscal 2000 as compared to $12.5 million in the prior year. Cash generated from operations increased from prior year as a decrease in customer receivables, an increase in the provision for depreciation and amortization and the impact of restructuring costs were partially offset by lower net income, a reduction in accounts payable, reduced accrued compensation and increased promotional display additions. Customer receivables decreased from fiscal year 1999 to fiscal 2000, due to a surge in sales during the fourth quarter of fiscal 1999. The increase in the provision for depreciation and amortization was a result of the Company's capital spending program. The restructuring costs relate to the discontinuance of the Company's custom cabinet line. The decrease in cash generated from accounts payable relates to timing differences, as the Company has made no changes to trade credit terms or payment practices. The decrease in cash generated associated with accrued compensation and related expense was related to the Company's performance-based employee incentive compensation programs. Increased promotional display additions were associated with the Company's increased market share, primarily within the home center channel.

Capital spending increased $19.1 million over the prior year as the Company continued its aggressive capital spending program to support both short and long-term growth. During fiscal 2000, the Company invested capital resources in new facilities, the expansion of existing facilities and capacity to support additional products. During fiscal 2000 the Company opened its fourth assembly facility in Gas City, Indiana. The Company also initiated construction of a new facility in Humboldt, Tennessee to increase the Company's capacity to manufacture flat stock components. The Company expanded the Monticello, Kentucky facility to increase lumber and component production capacity. The Company expanded finishing capacity at its facilities in Moorefield, West Virginia and Ham Lake, Minnesota. The Company expects that in order to support continued sales growth, it will be necessary to make continued investments in plant, property and equipment. Capital expenditures in fiscal 2001 are expected to be between $25 million and $30 million.

The Company increased overall debt by $10.5 million during fiscal 2000. During the second quarter of fiscal 2000, the Company began to borrow against the revolving credit facility as cash on-hand combined with cash generated by operating activities became insufficient to support payments to acquire plant, property and equipment.

On February 7, 2000 the Company replaced its $12 million revolving credit facility with a $45 million long-term revolving credit facility. The new facility expires in February 2005.

Cash dividends of $1.5 million were paid on Common Stock during fiscal 2000.

Cash flow from operations combined with accumulated cash on hand and available borrowing capacity is expected to be sufficient to meet forecasted working capital requirements, service existing debt obligations and fund capital expenditures for fiscal 2001.

The Company anticipates continued strength in the domestic economy through fiscal 2001. Under normal conditions, this strength should result in the continued growth and expansion of the relevant markets for the Company. In addition, the Company expects to continue to gain market share based on its position with major customers, its broad product offering and its ability to deliver quality products with superior service. During periods of growth in the housing and remodeling sectors, the Company expects to continue to generate higher sales.

The Company expects to improve recent profitability performance while continuing to invest resources in future products, facilities and markets. Additional volume and improved efficiencies should be sufficient to offset the anticipated rise in other costs.

Over the past two years the Company has expanded overall capacity. Projected growth, however, will require additional capital projects designed to increase both component and assembly manufacturing capacities. Planned for fiscal year 2001 are the opening of a new flat stock facility in Humboldt, Tennessee and expansion of the Monticello, Kentucky wood processing facility. Additional capital spending will include projects planned to improve productivity, support cost saving initiatives and replace aging equipment. Management establishes debt-to-equity targets in order to maintain the financial health of the Company and is prepared to trim investment plans to maintain financial strength.

The aforementioned forward-looking statements should be read in combination with information presented in the Risk Factors section of Management's Discussion and Analysis.

Fiscal 1999 net sales of $327.0 million increased 35.3% from fiscal 1998 net sales of $241.7 million. Improved sales were the result of continued growth with the leading national home center chains, direct shipments to national and regional builders and sales to distributors. In fiscal year 1999, average price per unit increased 2.7% over fiscal year 1998. The average unit price increased primarily as a result of price increases implemented in the third quarter of both fiscal 1999 and 1998 and improvement in both channel and product mix.

Overall unit volume increased approximately 29.8% from the prior year as the Company gained overall market share, especially in the home center channel, due largely to the impact of new product styles introduced over the last two fiscal years. For the second consecutive year, unit shipments to home centers increased to record levels based on strong overall remodeling activity and the Company's relationships with the leading domestic home center chains. Unit shipments to direct builders improved through both increased volume in the Company's existing sales regions and expansion into new markets. Unit volumes to distributors experienced an increase when compared to fiscal year 1998.

Gross profit for fiscal year 1999 declined to 28.6% from 30.3% in fiscal year 1998. The decrease in gross profit was due to the additional cost of using out-sourced components as sales demand exceeded component manufacturing capacity. In addition, the Company experienced higher distribution cost due to a combination of delivery rate increases and changes in customer mix.

Material cost per unit increased from prior year due to the purchase of out-sourced components and the shift towards more material intensive, higher-end products.

Labor costs per unit in fiscal year 1999 were similar to those experienced in fiscal year 1998, as improvements in productivity and lower workers' compensation expenses were offset by normal labor rate increases, the impact of the learning curve associated with new hires and increased health care costs.

Per unit freight costs increased over prior year due to the cost of the Company's initiatives to maintain competitive advantage in the market through a specialized delivery system.

Selling and marketing expenses decreased slightly as a percentage of net sales to 15.0% in fiscal 1999, down from 15.4% in fiscal 1998. Promotional expense to support merchandising efforts and staffing levels to support the Company's growing customer base increased at the same rate as the Company's sales.

General and administrative expenses as a percent of sales decreased from 6.1% in fiscal 1998 to 5.1% in fiscal 1999. Increased spending associated with additional staffing and the Company's pay-for-performance incentive plans were more than offset by the increase in sales.

Interest expense for fiscal 1999 declined to $363,000 from $795,000 in the prior fiscal year. The decrease resulted from capitalized interest of $332,000 associated with the Company's capital spending in fiscal 1999. Total debt increased $2.7 million during fiscal 1999 due primarily to debt assumed in the purchase of Knapp Woodworking, Inc. and funding through the State of West Virginia for the expansion of the Hardy County, West Virginia facility. As of April 30, 1999, long-term debt to total capital was reduced 0.1% to 12.7%.

Other income increased $244,000 for fiscal 1999 compared to the prior year due to a combination of increased interest income from short-term investments and lower net cost for disposal of property, plant and equipment.

In prior years, the Company discussed the nature and progress of its plans related to the Year 2000. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company did not experience any material incremental expense associated with its Year 2000 preparation. No significant additional expense beyond the standard information systems operating cost was incurred. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.

The Company is involved in various suits and claims in the normal course of business which include claims against the Company pending before the Equal Employment Opportunity Commission. Although management believes that such suits and EEOC claims are without merit and intends to vigorously contest them, the ultimate outcome of these matters cannot be determined at this time. In the opinion of management, after consultation with counsel, the ultimate liabilities and losses, if any, that may result from suits and claims involving the Company will not have any material adverse effect on the Company's operating results or financial position. 

During the first quarter of fiscal 2000 the Company adopted the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP requires qualifying computer software costs incurred in connection with obtaining or developing software for internal use to be capitalized. In prior years, the Company capitalized costs of purchased software and expensed internal costs of developing software. The effect of adopting this SOP was not material to the results for fiscal year 2000.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, which the Company will be required to adopt in fiscal 2002, establishes new accounting and reporting standards for derivative instruments and hedging activities. The adoption of SFAS No. 133 is not expected to have a material impact on the Company's financial position or results of operations.

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The Company will be required to adopt this SAB in the fourth quarter of fiscal 2001. The Company is currently evaluating the impact of the SAB on its revenue recognition practices and has not yet determined the impact that the adoption of this SAB will have on the Company's financial position or results of operations.

On May 24, 2000, the Board of Directors approved a $.05 per share cash dividend on its Common Stock. The cash dividend was paid on June 27, 2000, to shareholders of record on June 13, 2000.

The Company's business has historically been subjected to seasonal influences, with higher sales typically realized in the second and fourth fiscal quarters.

The costs of the Company's products are subject to inflationary pressures and commodity price fluctuations. Inflationary pressure and commodity price increases have been relatively modest over the past five years, except for lumber prices which rose significantly during fiscal 1997. The Company has generally been able over time to recover the effects of inflation and commodity price fluctuations through sales price increases.

The Company is also exposed to changes in interest rates primarily from its long-term debt arrangements and, secondarily, its investments in securities. The Company uses interest rate swap agreements to manage exposure to interest rate changes on certain long-term borrowings. The Company has variable-rate debt instruments representing approximately 64% of its total long-term debt at April 30, 2000. If interest rates average 25 basis points more in fiscal 2001 than during fiscal 2000, the Company's interest expense would be increased by approximately $40,000. These amounts are determined by considering the impact of the hypothetical interest rates on the Company's variable-rate, long-term debt at April 30, 2000.

While the Company is not currently aware of any other events that would result in a material decline in earnings from fiscal 2000, we participate in an industry that is subject to rapidly changing conditions. The preceding forward-looking statements are based on current expectations, but there are numerous factors that could cause the Company to experience a decline in sales and/or earnings. These include (1) overall industry demand at reduced levels, (2) economic weakness in a specific channel of distribution, especially the home center industry, (3) the loss of sales from specific customers due to their loss of market share, bankruptcy or switching to a competitor, (4) a sudden and significant rise in basic raw material costs, (5) a dramatic increase to the cost of diesel fuel, and/or transportation related services, (6) the need to respond to price or product initiatives launched by a competitor, (7) a significant investment which provides a substantial opportunity to increase long-term performance and (8) sales growth at a rate that outpaces the Company's ability to install new capacity. While the Company believes that these risks are manageable and will not adversely impact the long-term performance of the Company, these risks could, under certain circumstances, have a materially adverse impact on short-term operating results.

See notes to consolidated financial statements

The following is a description of the more significant accounting policies of the Company.

Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition: Revenue is recognized as shipments are made to the customer. Revenue is based on invoice price less allowances for sales returns and cash discounts.

Advertising Costs: Advertising costs are expensed in the fiscal year incurred.

Cash and Cash Equivalents: Cash in excess of operating requirements is invested in short-term instruments which are carried at fair value (approximates cost). The Company considers all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents.

Inventories: Inventories are stated at lower of cost or market. Inventory costs were determined principally by the last-in, first-out (LIFO) method.

The LIFO cost reserve is determined in the aggregate for inventory and is applied as a reduction to inventories determined on the first-in, first-out method (FIFO). FIFO inventory cost approximates replacement cost.

Promotional Displays: The Company's investment in promotional displays is carried at cost less applicable amortization. Amortization is provided by the straight-line method on an individual display basis over the estimated period of benefit (approximately 30 months).

Property, Plant and Equipment: Property, plant and equipment is stated on the basis of cost less an allowance for depreciation. Depreciation is provided by the straight-line method over the estimated useful lives of the related assets, which range from fifteen to thirty years for buildings and improvements and three to ten years for furniture and equipment. Assets under capital lease are amortized over the shorter of their estimated useful lives or term of the related lease.

Fair Value of Financial Instruments: The carrying amounts of the Company's cash and cash equivalents, customer receivables, accounts payable and long-term debt approximate fair value.

Stock-Based Compensation: As permitted by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company has elected to continue using the intrinsic value method of accounting for stock options and has provided the additional required disclosures. (See Note F to the Consolidated Financial Statements.)

New Accounting Rules: As of May 1, 1999 the Company adopted the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP requires qualifying computer software costs incurred in connection with obtaining or developing software for internal use to be capitalized. In prior years, the Company capitalized costs of purchased software and expensed internal costs of developing software. The effect of adopting this SOP was not material.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, which the Company will be required to adopt in fiscal 2002, establishes new accounting and reporting standards for derivative instruments and hedging activities. The adoption of SFAS No. 133 is not expected to have a material impact on the Company's financial position or results of operations.

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The Company will be required to adopt this SAB in the fourth quarter of fiscal 2001. The Company is currently evaluating the impact of the SAB on its revenue recognition practices and has not yet determined the impact that the adoption of this SAB will have on the Company's financial position or results of operations.

Use of 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications: Certain prior years' amounts have been reclassified to conform to the current year's presentation.

The components of customer receivables were:

Inventories determined using the LIFO inventory method were $21,936 at the end of 2000 (1999 - $17,232). Inventories determined using the FIFO inventory method were $802 at the end of 2000 (1999 - $776).

Depreciation expense amounted to $7,490, $5,184, and $4,845 in fiscal 2000, 1999, and 1998, respectively.

The Company's primary loan agreement provides for a five-year $45 million revolving credit facility which expires on February 7, 2005. Borrowings under the revolving credit facility bear interest at LIBOR rate (6.2% at April 30, 2000) plus a spread (0.50% at April 30, 2000) based on Total Funded Debt to earnings, before deduction of interest and taxes, plus depreciation and amortization (EBITDA).

The Company employs straight-forward interest rate swap agreements to assist in maintaining a balance between fixed and variable interest rates on outstanding debt. Any deferred gain or loss associated with the swap agreements is accounted for over the life of the swaps at the fixed rate stipulated in the executed agreements. On April 30, 2000, these amounts were immaterial. The Company does not invest, trade, or otherwise speculate in any derivatives or similar type financial instruments.

On April 30, 2000, term loans of $2.5 million were outstanding. The term loans bore an average interest rate of 6.7% on April 30, 2000.

On April 30, 2000, the Company had $4.2 million outstanding in industrial revenue bonds, maturing at various dates through 2003. Due to an interest rate swap agreement, a fixed rate of approximately 5.0% applies to $3.5 million through December 1, 2002. The variable rate that would have applied without the rate swap was 5.25% on April 30, 2000. On the remaining $675,000 of outstanding bonds, the variable interest rate was 5.25% on April 30, 2000.

Substantially all of the industrial revenue bonds are redeemable at the option of the bondholder. The Company has irrevocable arrangements to refinance these bonds on a long-term basis in the event they are redeemed.

The average interest rate on the Company's capital lease obligations was 5.4% on April 30, 2000. These obligations mature through 2008.

The Company's loan agreements limit the amount and type of indebtedness the Company can incur and require the Company to maintain specified financial ratios measured on a quarterly basis. A portion of the assets of the Company are pledged as collateral under the industrial revenue bond agreements and capital lease arrangements. The Company was in compliance with all covenants contained in its loan agreements at April 30, 2000.

Interest paid was $1,290,000, $923,000 and $810,000, during fiscal 2000, 1999, and 1998, respectively. Net amounts to be received or paid under interest rate swap agreements are accrued as an adjustment to interest expense.

Interest capitalized was $589,000, $332,000, and $19,000 during fiscal 2000, 1999, and 1998, respectively.

Profit sharing contributions are 3% of after tax earnings, calculated on a quarterly basis and distributed equally to all employees eligible to participate in the plan. The Company recognized expenses for profit sharing contributions of $439,000, $526,000 and $392,000, in fiscal 2000, 1999, and 1998, respectively.

The Company matches 401(k) contributions in the amount of 50% of an employee's contribution to the plan up to 3% of base salary for an effective maximum Company contribution of 1.5% of base salary. The expense for 401(k) matching contributions for this plan was $684,000, $623,000 and $594,000 in fiscal 2000, 1999, and 1998, respectively.

In August 1999, shareholders approved a stock option plan for key employees of the Company. Under the plan, up to 1,000,000 shares of Common Stock may be granted as options, with the term of options granted not exceeding ten years. Options granted are subject to vesting conditions and other requirements prescribed by a participant's stock option agreement. Options vest over 3 years on a straight-line basis. As of April 30, 2000, no options have been granted from the 1999 stock option plan.

In August 1996, shareholders approved a stock option plan for key employees of the Company. Under the plan, up to 750,000 shares of Common Stock may be granted as options, with the term of options granted not exceeding ten years. Options granted are subject to vesting conditions and other requirements prescribed by a participant's stock option agreement. Options vest over 3 years on a straight-line basis.

In August 1995 shareholders approved a stock option plan for non-employee directors. Under the 1995 plan, up to 30,000 shares of Common Stock may be granted as options, with each non-employee director receiving an option to purchase 1,000 shares on the anniversary date of the plan. Outstanding options under the plan are exercisable in annual cumulative increments of 33.33% of options granted beginning one year after the date of grant and must be exercised within twelve months after cumulative increments exercisable equal 100% of options granted, at which time options expire.

The Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Since the exercise price for all options granted is the fair market value of the Company's stock no compensation cost has been recognized for the stock option plans.

For the years ended April 30, 2000, 1999 and 1998, pro forma net income and earnings per share information required by SFAS No. 123 has been determined as if the Company had accounted for its stock options using the fair value method.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows:

To determine these amounts, the fair value of each stock option has been estimated on the date of the grant using a Black-Scholes option-pricing model. Significant assumptions used in this model include a dividend yield of .8% and the following:

The following table summarizes stock option activity and related information under the stock option plans for the fiscal years ended April 30:

The following table summarizes the computations of basic and diluted earnings per share:

For fiscal 2000 both of the Company's pension plans are over-funded. For fiscal 1999 a mounts applicable to the Company's pension plan with accumulated benefit obligations in excess of plan assets are as follows: