Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 Commission File No. 0-13147
LESCO, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-0904517
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15885 Sprague Road, 44136
Strongsville, Ohio (Zip Code)
(Address of principal executive offices)
(440) 783-9250
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None Not Applicable
------------ --------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
--------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of Common Shares held by nonaffiliates on March 20,
2001: approximately $78,175,000.
Number of Common Shares outstanding on March 20, 2001: 8,615,828.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 16, 2001 (the "Proxy Statement") are incorporated
by reference in Part III.
-1-
2
PART I
Item 1. BUSINESS
GENERAL
The Registrant was incorporated in 1962 under the laws of the State of
Ohio. As used in this report, the terms "Company," "LESCO" and "Registrant"
refer to LESCO, Inc.
The Company is engaged in the manufacture and sale of an extensive
array of golf course and lawn care products which are marketed throughout the
United States, primarily under the LESCO name. These products include
fertilizers, turf protection products, grass seed, turf care equipment and
replacement parts and golf course accessories. The Company's customers include
golf courses, lawn care companies, landscapers, municipalities, theme parks and
industrial concerns. Products are marketed directly through the Company's sales
organization, which includes localized service centers and a fleet of LESCO
tractor trailers operated by salesmen trained in turf care management.
BASIS OF REPORTABLE SEGMENTS
As a result of the Company's structural reorganization announced in January
2000, the Company elected to change the reporting of its business segments as of
January 1, 2000, and restated its prior years' presentation to conform to the
revised segment reporting. The Company changed from one reportable segment to
four reportable operating segments to include Product Supply, Lawn Care, Golf
and Corporate, which are defined based on management responsibility.
The Product Supply division manufactures and distributes fertilizers,
combination products, golf course accessories and turfgrass seed and is also
responsible for purchasing raw materials in addition to purchasing and
distributing turf protection products, turf care equipment and related parts,
and golf course accessories. The Product Supply division sells exclusively to
the Lawn Care and Golf divisions of the Company. However, to more fully utilize
production capacity, Product Supply occasionally manufactures for third parties.
The Lawn Care division operates 232 LESCO Service Centers(R), which enable the
Company to market its products on a localized basis. The primary products sold
by the Lawn Care division are turf care products, including turf control
products, fertilizer, grass seed and equipment. The Service Centers market and
sell its products principally to smaller lawn care companies, landscapers,
nurseries, municipalities, churches and condominium associations. This division
also markets and sells its products to large national and regional lawn care
customers through a separate group of sales representatives. This division
distributes selected products through Home Depot stores in the South,
Mid-Atlantic and Northeast areas of the country in addition to selling a
consumer line of lawncare products to nationwide retail stores under several
brand names, including Scenic Green, Professional Turf Products, TruGreen,
ChemLawn and Barefoot.
The Golf division markets and sells its products to private and public golf
courses and other customers having large turf areas through Company salesmen who
operate a fleet of 78 LESCO Stores-on-Wheels(R). The primary products sold by
the Golf division are turf care products, including turf control products,
fertilizer, grass seed and equipment. These Stores-on-Wheels are well-stocked
with a wide variety of turf care products and golf course accessories which are
sold directly from the trucks. The Golf division has conventional sales
representatives strategically located in the various markets to help support the
Stores-on-Wheels and sell to national golf customers. In addition, this division
markets its products internationally, principally through foreign distributors.
The Corporate division includes the administrative functions of the Company,
which support the Product Supply, Lawn Care and Golf divisions and include
Administration, Finance, Information Services, Legal and Human Resources.
-2-
3
The Company is principally engaged in the manufacturing and marketing of turf
care products to the professional sector of the green industry. There are no
significant intervening events, which materially affected the financial
statements. The Company measures segment profit as operating profit. Net assets
is defined as the sum of net accounts receivable, inventory, and net property,
plant, and equipment less accounts payable. Management utilizes this information
as a basis to calculate the divisional return of capital employed. Depreciation
and operating leases for specific Product Supply assets are allocated to
Corporate for operating profit measures. Information on segments are as follows
(in thousands):
FOR THE YEAR ENDED DECEMBER 31, 2000
PRODUCT CORPORATE &
SUPPLY LAWN CARE GOLF ELIMINATION CONSOLIDATED
---------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS $ 350,862 $ 148,781 $ 499,643
INTERSEGMENT NET SALES $ 294,555 $ (294,555)
OPERATING PROFIT 2,380 35,835 11,624 (33,454) 16,385
TOTAL ASSETS 93,747 85,225 32,663 33,258 244,893
NET ASSETS 60,443 85,225 32,663 15,141 193,472
FOR THE YEAR ENDED DECEMBER 31, 1999
PRODUCT CORPORATE &
SUPPLY LAWN CARE GOLF ELIMINATION CONSOLIDATED
---------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS $ 315,972 $ 144,382 $ 460,354
INTERSEGMENT NET SALES $ 308,773 $ (308,773)
OPERATING PROFIT 4,870 31,023 10,571 (23,979) 22,485
TOTAL ASSETS 77,133 90,090 33,061 32,499 232,783
NET ASSETS 43,210 90,090 33,061 14,307 180,668
Segment information for periods prior to 1999 is not presented because it is
impracticable to prepare the information.
-3-
4
PRODUCTS
The Company manufactures and sells to the green industry an extensive
array of turf care products, comprising two major lines: (1) consumable goods,
including turf control products, fertilizer and grass seed, and (2) hard goods,
including equipment, accessories and other related products such as irrigation
equipment, protective gear and hand tools. These products are marketed under the
names LESCO(R), LESCO Products, Aim Lawn & Garden Products, Professional Turf
Products, Scenic Green, TruGreen, Chemlawn and Barefoot. In addition, the
Company sells a diverse line of turf products under the manufacturers' brand
names.
Sales by product line for the years ended December 31, 2000, 1999, and
1998 are as follows:
Year Ended December 31
---------------------------------------------------------------------------
(Net sales in thousands)
2000 1999 1998
---------------------- --------------------- --------------------
Net Sales Percent Net Sales Percent Net Sales Percent
--------- ------- --------- ------- --------- -------
Consumable goods $420,793 84.2% $385,395 83.7% $351,316 84.3%
Hard goods 78,850 15.8% 74,959 16.3% 65,422 15.7%
-------- ------ -------- ------ -------- ------
Total $499,643 100.0% $460,354 100.0% $416,738 100.0%
======== ====== ======== ====== ======== ======
CONSUMABLE GOODS
TURF CONTROL PRODUCTS. The Company offers a full line of turf control
products including herbicides, insecticides and fungicides. These products
control weed growth, insect infestation and fungal diseases of turf, trees,
shrubs and landscape beds. In order to offer its customers a more complete
product line, the Company sells turf control products produced by other major
manufacturers.
FERTILIZER. The Company sells a broad assortment of standard
fertilizers, including combination products that combine fertilizer with turf
control products. The Company also custom-blends fertilizer according to its
customers' specifications. The Company's fertilizers include specialized
products for golf course applications including greens, tees and fairways,
products for use in the lawn care industry, and products for trees, shrubs and
landscape beds. Fertilizers are generally sold in a granular form, although
specialized liquid formulations are also available.
The majority of the fertilizers sold by the Company are formulated with
sulfur-coated urea fertilizer. The Company is one of a few manufacturers of
these products in the world. Sulfur coating produces a gradual release of
nutrients over time, which reduces the number of required applications and the
risk of over fertilization. ELITE(R) is the Company's premium brand
sulfur-coated urea fertilizer, specially sized and formulated for low-cut turf
on golf course greens, tees and fairways.
In early 2000, the Company introduced a new, state-of-the-art line of
"smart" fertilizers that is sold under the brand name NovexTM. The Company
acquired exclusive worldwide rights to this new patented technology in early
1999. Novex is a homogeneous, uncoated product that permits uniform dispersion
of its nutrients into the soil over a controlled time period scientifically
selected to achieve optimum performance. This new product line is designed for
professional turf care managers and, because of its broad range of applications,
will position the Company to enter additional markets such as nurseries,
forestries, fisheries, and specialty agriculture applications for high crop
value.
TURFGRASS SEED. The Company markets LESCO and other brands of turfgrass
seed, most of which are certified by authorities of various states to guarantee
the varietal purity of the seed. The Company contracts for the production of
turfgrass seed with growers in the Pacific Northwest, Western Canada and New
Zealand for cool season grasses and in California for warm season grasses. In
2001, the Company has more than 40,000 production acres under contract in these
regions. The Company's seed line includes 32 proprietary varieties as well as 28
standard blends and mixtures.
-4-
5
HARD GOODS
EQUIPMENT AND ACCESSORIES. The Company purchases a broad assortment of
equipment including rotary mowers, spreaders, sprayers, aerators, renovation
equipment and aftermarket replacement parts from Commercial Turf Products, Ltd.
the Company's 50-50 joint venture. The Company believes that the LESCO spreader,
first introduced in 1982, is an industry leader in sales to the professional
sector of the market. In addition, the Company offers a broad assortment of
handheld power tools produced by third parties and a variety of golf course
accessories including ball washers, tee markers, sand trap rakes, putting green
cups, flags and flagpoles. Equipment sales are supported by a toll-free hotline
staffed by trained technicians and repair facilities in Service Centers. The
Company has a contract with a third party for the distribution of all parts.
Parts support is fully computerized, and the Company is generally able to
provide overnight parts delivery nationwide.
OTHER. The Company offers underground irrigation equipment, protective
gear such as goggles, masks and gloves, and hand tools such as tree pruners,
shovels and rakes. These products are produced for the Company by third parties.
PRODUCT IMPROVEMENT AND DEVELOPMENT
The Company's research and development efforts focus on improvements to
and development of new turf control products and fertilizers, turf care
equipment and golf course accessories and new grass seed varieties. The Company
also has a number of agreements with state universities which test turf control
products, grass seed and fertilizers for the Company.
MARKETING AND DISTRIBUTION
LESCO SERVICE CENTERS(R). The Company operates Service Centers which
enable the Company to market its products on a localized basis. The Service
Centers are generally established in easily accessible industrial parks which
allow for sales directly to commercial users. The Company had 232 Service
Centers in operation as of December 31, 2000. The Company does not plan to open
any Service Centers in 2001. The Service Centers market products principally to
smaller lawn care companies, landscapers, nurseries, municipalities, churches
and condominium associations.
LESCO STORES-ON-WHEELS(R). The Company markets its products to private
and public golf courses and other customers having large turf areas through
salesmen who operate a fleet of 75 Stores-on-Wheels consisting of 10 step vans
and 65 tractor trailers as of December 31, 2000. These trucks are well-stocked
with a wide variety of turf care products and golf course accessories which are
sold directly from the trucks. The Company has added 3 Stores-on-Wheels for a
total of 78 as of March 2001.
CONVENTIONAL SALES FORCE. The Company's conventional sales
representatives are strategically located in the various markets served by the
Company and sell to large customers such as national and regional lawn care
companies. Sales through this distribution channel typically generate lower
gross margins than the Service Centers and Stores-on-Wheels.
OTHER. The Company also markets its products by mail order catalog and
participates in national and regional lawn care and golf course trade shows. A
telemarketing sales group calls on inactive accounts and contacts customers not
currently serviced by the Company's outside sales forces. The Company
distributes selected products through Home Depot stores in the South,
Mid-Atlantic and Northeast areas of the country. The Company sells a consumer
line of lawncare products to nationwide retail stores under several brand names,
including Scenic Green, Professional Turf Products, TruGreen, Chemlawn and
Barefoot. In addition, the Company markets its products internationally
principally through foreign distributors.
TECHNICAL EXPERIENCE OF SALES PERSONNEL. Most of the Company's
salespersons are agronomists or horticultural specialists or have had prior
experience with lawn care companies or golf courses. The Company believes that
the training and experience of its salespersons have helped promote customer
reliance on the Company's technical expertise with respect to existing turf care
products and new product development in the turf care industry.
-5-
6
MANUFACTURING AND SUPPLIERS
FERTILIZERS AND COMBINATION PRODUCTS. Poly Plus(R) sulfur-coated
fertilizers are manufactured by spraying dry fertilizers first with sulfur, then
with a polymer sealant to seal the sulfur and retard the release of nutrients.
Uncoated fertilizers are blended in accordance with Company or customer
specifications. Combination products are processed by impregnating fertilizers
with technical grade herbicides, insecticides or fungicides. NovexTM fertilizers
are a homogenous, uncoated, control released product manufactured by using the
patented technology. Raw materials used in the manufacture of fertilizer are
nitrogen, phosphorus, potash and sulfur.
TURF PROTECTION PRODUCTS. In producing both liquid and granular turf
protection products, the Company purchases technical-grade or highly
concentrated chemicals and blends them with various solvents, emulsifiers and
surfactants purchased from various suppliers.
TURF CARE EQUIPMENT AND GOLF COURSE ACCESSORIES. The Company owns 50%
of a joint venture, Commercial Turf Products, Ltd. (CTP), with MTD Products Inc.
for the manufacture of commercial equipment. Located in Streetsboro, Ohio, the
joint venture manufactures commercial lawn care equipment to be sold to both
partners. The joint venture commenced operations in May 1997, and began to
manufacture equipment in the second half of 1997.
The joint venture manufactures and assembles certain turf care
equipment and related replacement parts in its Streetsboro location. CTP
purchases metal components and performs manufacturing processes such as
stamping, cutting, bending, welding, grinding and punching of many component
parts. Using these manufactured components, together with some components
purchased from a variety of third party suppliers, CTP assembles rotary mowers,
spreaders, sprayers, aerators and turf renovators for sale to each partner. The
Company distributes and sells commercial equipment supplied by CTP under the
LESCO name primarily through its LESCO Service Centers.
The Company also sells golf course accessories, which are manufactured
by various contractors with tooling, dies, and molds owned by the Company. In
August 2000, the Company acquired assets of Southern Golf Products, Inc.,
including product lines consisting of custom made embroidered and silk-screened
flags, flagpoles, tee markers, signage, uniforms and promotional apparel.
SOURCES OF SUPPLY. It is the Company's policy to identify and use
multiple sources of supply or acceptable substitutes for all raw materials used
by the Company in manufacturing its products. The only exception to this policy
is the Company's purchase of proprietary products.
COMPETITION
The Company competes with a number of companies within each of its
product lines including national, regional and local distributors, turf care
product manufacturers and retailers such as mass merchandisers, local nurseries
and hardware stores. Some of these national competitors have greater name brand
recognition than the Company. The Company's principal competitors for its turf
control, fertilizer and grass seed product lines include Andersons, Simplot
Partners, Lebanon, Scotts, ProSource One and United Horticultural Supply. The
Company's principal competitors for equipment are John Deere, Textron, Scag and
Toro. The Company, however, believes that it is the only national company that
supplies and sells a full range of products directly to the commercial user. The
Company competes primarily on the basis of service to customers and product
quality, selection and price.
SEASONALITY AND BACKLOG
The Company's business is seasonal because the customers in northern
states do not have the same year-round requirements for products as do customers
in southern states. Nationwide, demand for the Company's products is generally
greatest during the second quarter of its fiscal year.
The Company offers an early order program to lessen the second quarter
demand on its manufacturing and distribution facilities. This program allows the
Company to schedule manufacturing and distribution of products prior to the time
when customers need such products. This has reduced variations in sales and
earnings from quarter to quarter. The Company's backlog as of December 31, 2000
and 1999 was $6,920,000 and $6,552,000, respectively.
-6-
7
EMPLOYEES
As of December 31, 2000, the Company had 1,474 full-time employees, of
which 423 were involved in manufacturing and warehouse operations, 635 in
sales-related activities and 416 in management and administration. Of the total
number of full-time employees, 884 were salaried and 590 were hourly employees.
121 employees at the Company's Martins Ferry facility were represented by a
union. The Company has not experienced any strikes or work stoppages by
employees and generally considers its employee relations to be good.
ENVIRONMENTAL MATTERS
Turf control products sold by the Company are subject to registration
by the Environmental Protection Agency (the "EPA") and similar regulatory
authorities in various states. The process of obtaining such registration may be
lengthy and expensive. The labeling and advertising of turf control products are
also subject to EPA regulation. While the Company generally believes its turf
control product labels and advertising materials are consistent with EPA and
state guidelines, there can be no assurance that EPA or state regulations or
interpretations may not change in the future or that the EPA or any state will
not challenge the Company's labeling or advertising materials.
Fertilizer products are currently regulated by individual state
departments of agriculture and must generally be registered or licensed in most
states in which they are sold. There can be no assurance that the state
regulations or interpretations of those regulations will not change in the
future or that the Company's registration in any state will not be challenged.
The Company is also required to obtain licenses/permits from a number of
governmental agencies in order to conduct various aspects of its business. These
licenses/permits are subject to modification and revocation, which could impair
the Company's ability to conduct its business in the manner in which and at the
places at which it is presently conducted.
Because of the nature of the Company's business, the Company is subject
to various environmental laws and regulations and incurs routine costs in
complying with these laws and regulations. It is the Company's policy to provide
for nonroutine costs relating to environmental matters when a loss is probable
and the amount of the loss can be reasonably estimated. The Company had $200,000
of reserves for environmental matters at December 31, 2000.
INSURANCE
The Company maintains comprehensive general liability insurance
coverage (which includes product liability insurance coverage) at levels which
the Company believes are prudent and most cost-effective. The Company's
insurance program includes significant deductible amounts with respect to such
coverages. Certain coverages, including environmental pollution, are restricted
or have been excluded under current policies. The level of coverage and
deductible maintained generally reflects trends in the liability insurance
industry and is not unique to the Company. The Company regularly evaluates the
cost-effectiveness as compared to the risks assumed in determining its insurance
program.
-7-
8
Item 2. PROPERTIES
The Company owned its principal executive office building, until it
moved to a leased facility on February 9, 2001, and owns or leases its warehouse
and manufacturing facilities. The Company believes these facilities are
well-maintained, adequately insured and adequate and suitable for their present
and intended uses. In addition, the Company leases facilities for temporary
storage of inventory products during its peak seasonal demand. The Company
maintains sales offices at each of the following locations, including its
executive offices. Detail by location as of December 31, 2000 is as follows:
Location (1) Principal Use Square Feet Status
- ------------ ------------- ----------- ------
Rocky River, OH Former executive offices 41,000 Owned(2)
Avon Lake, OH Blending of grass seed and distribution center and 139,000 Owned
general office space
Charlotte, NC Distribution center for various products 76,800 Leased(3)
Disputana, VA Manufacturing facility and distribution center for Novex 36,700 Leased(4)
fertilizers
Hatfield, MA Manufacturing facility and distribution center for 77,000 Owned
fertilizers and turf control products, and blending of
turf grass seed
Hamilton, NJ Distribution center for various products 100,000 Leased(5)
Martins Ferry, OH Manufacturing facility and distribution center for 234,000 Owned(6)
fertilizers, including sulfur-coated fertilizers, and
turf control products
Peachtree City, GA Production and distribution of golf course accessories 32,650 Leased(7)
Pittsburgh, PA Former distribution center for various products 131,000 Leased(8)
Sebring, FL Manufacturing facility for fertilizers and combination 276,000 Owned/
products and distribution center for principal products Leased(9)
Silverton, OR Blending of grass seed and distribution center 66,200 Leased(10)
Stockton, CA Manufacturing facility and distribution center for 32,000 Owned/
fertilizers and turf control products Leased(11)
Strongsville, OH Executive offices 94,400 Leased(12)
Wellington, OH Former distribution center for various products 60,000 Owned
Windsor, NJ Land and building previously used as a distribution 37,000 Owned
center for principal products
(1) Does not include Service Centers or Stores-on-Wheels. As of December
31, 2000, the Company operated Service Centers in 232 facilities with
three owned and 229 leased by the Company. These facilities range in
size from 3,400 to 14,000 square feet. The Company owns or leases 75
tractor-trailers for its Stores-on-Wheels.
(2) The Company relocated its executive offices as of February 9, 2001. The
property is listed for sale and being actively marketed by a commercial
real estate broker.
-8-
9
(3) This facility is subject to two separate leases, a lease for the main
distribution center expiring in 2001 with a three-year renewal option,
and a lease for an additional 19,200 square feet of warehousing space
expiring on October 31, 2001.
(4) This facility consists of two buildings, which are subject to a lease
expiring April 30, 2006. The Company has two five-year renewal options.
(5) This facility is subject to a lease expiring December 31, 2003.
(6) These facilities are subject to mortgages in the aggregate amount of
$6,209,000 as of December 31, 2000.
(7) This facility is subject to a lease, which expires in 2003. The
lease includes a three-year renewal option.
(8) This facility is subject to a lease expiring December 31, 2001 with two
five-year renewal options. The Company has a sublease on this facility
through December 31, 2001.
(9) These facilities consist of seven buildings. Two buildings are subject
to month to month leases. Four buildings are subject to leases expiring
in 2001, 2002, 2006 and 2017. The new manufacturing facility is owned
by the Company, while the land is subject to a lease which expires in
2017 with four five-year renewal options.
(10) This facility is subject to a lease, which expires in 2009. The lease
includes an option to purchase.
(11) These facilities consist of three buildings, which are owned by the
Company. The land is subject to leases, which expire in 2011. The
Company has a five-year renewal option.
(12) The Company relocated its executive offices as of February 9, 2001.
This facility is subject to a lease expiring January 16, 2016. The
Company has two five-year renewal options.
Item 3. LEGAL PROCEEDINGS
No legal proceedings are pending to which the Company is a party or to
which any of its property is subject other than litigation incidental to the
conduct of its business and which in the aggregate is not material to the
operations of the Company as a whole.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
Company's executive officers, including their respective positions with the
Company.
Name Age Position
- ---- --- --------
Alexander P. Antonio 55 Former Vice President and Former President of the Golf Division
R. Breck Denny 52 Vice President, Chief Financial Officer
William A. Foley 53 Chairman of the Board, President and Chief Executive Officer
Charles J. McGonigle 42 Vice President and President of the Product Supply Division
Wayne W. Murawski 56 Vice President, Chief Information Officer
Dana L. Wilson 49 Vice President and President of the Lawn Care and Golf Divisions
-9-
10
Alexander P. Antonio joined the Company in February 2000 as Vice
President, and President Golf Division, and held that position until December
31, 2000. Mr. Antonio was Chief Executive Officer of Howard Johnson's
Enterprises, Inc., a manufacturer of sophisticated fertilizers, specialty
household plant products, and seasonal control products (consumer and commercial
customer base), from 1995 until 1998. From 1978 to 1995, Mr. Antonio was Vice
President, Marketing and Sales of Miller Compressing Company, a processor and
marketer of ferrous and nonferrous scrap. Mr. Antonio was Vice President,
Purchasing and Sales of Wisconsin Metal & Chemical Company, a chemical processor
of high grade industrial scrap from 1971 to 1978.
R. Breck Denny joined the Company in July 1999 as Vice President, Chief
Financial Officer. Mr. Denny was Vice President, Finance & Treasurer (Chief
Financial Officer) of Medusa Corporation, a manufacturer of cement and
aggregates serving the concrete and building industries, from 1994 until 1998.
From 1970 to 1994, Mr. Denny held a number of positions with J. P. Morgan &
Company, one of the largest commercial and investment banks in the U.S. From
1988 to 1994, Mr. Denny was Vice President, Advisory/Mergers and Acquisitions.
Prior to that, Mr. Denny held the positions of Vice President, Banking from 1982
to 1988; Vice President, Financial Analysis from 1979 to 1982; Assistant Vice
President, Financial Analysis from 1976 to 1979, and Assistant Treasurer from
1971 to 1976.
William A. Foley joined the Company in July 1993 as President, Chief
Executive Officer and a director. He was elected Chairman of the Board by the
Board of Directors in October 1994. Mr. Foley was President and Chief Executive
Officer of Imperial Wallcoverings, Inc., a wallpaper producer and a subsidiary
of Collins & Aikman, Inc., from October 1990 until February 1993. From 1988 to
1990, Mr. Foley was Vice President and General Manager of The Scotts Company
Consumer Business Group, a producer and marketer of turf care products. Mr.
Foley was Vice President and General Manager of Rubbermaid Specialty Products
Division, a producer of rubber and plastic products, from 1984 to 1988, and was
Vice President - Sales and Marketing for Anchor Hocking Corporation, a producer
of glass products from 1970 to 1984. Mr. Foley is also a director of the
following publicly-held companies: Dairy Mart Convenience Stores, Inc., a chain
of convenience stores, and Libbey, Inc., a producer of tabletop products.
Charles J. McGonigle is Vice President and President of the Product
Supply Division. He joined the Company in April of 1998 as Vice President,
Operations. Just prior to his employment with the Company, Mr. McGonigle was
Supply Manager for Proctor & Gamble Company, a manufacturer of consumer,
commercial and pharmaceutical products. From 1993 to 1997, Mr. McGonigle held
the position as Product Supply Manager.
Wayne W. Murawski joined the Company in 1994 as Chief Information
Officer and was elected to the position of Vice President, Chief Information
Officer in 1995. Prior to his employment with the Company, Mr. Murawski was
Chief Information Officer at Imperial Wallcoverings, Inc. a wallpaper producer
and a subsidiary of Collins & Aikman, Inc. Previous to that, Mr. Murawski held a
similar position at American Consumer Products, Inc. a hardware manufacturer and
distributor. From 1980 to 1988, Mr. Murawski was president of COMSOL
Corporation, a professional services firm, which implemented large systems
projects in Fortune 500 companies. Mr. Murawski's career was founded in the IBM
mainframe computing environment. He rose through the ranks of information system
departments in technical, supervisory, and project management roles.
Dana L. Wilson is Vice President and President of the Lawn Care and
Golf Divisions. He joined the Company in 1988 as a Service Center Manager, and
has held positions of increasing responsibility. Thereafter, in 1992, he became
a Regional Manager; in 1995, he became Director of Service Centers; in 1998, he
became Vice President, Service Center and Lawn Care Sales; in 2000, he became
Vice President and President of the Lawn Care Division; and in 2001, he was
promoted to his current position. Prior to joining the Company, he held several
positions with ChemLawn (nka TruGreen-ChemLawn) from 1980-1988.
-10-
11
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Shares are traded in the National Market System
over-the-counter market under the NASDAQ symbol "LSCO." The following are high
and low market prices by quarter:
2000 1999
------------------------------ --------------------------
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31 17-1/2 14-1/4 16-11/16 12-1/2
June 30 17-1/8 14-1/16 19-1/8 13
September 30 18-3/8 15-1/16 19-1/2 13
December 31 15-7/8 11-7/8 17-5/16 13
The Company paid an annual dividend of $.15 per Common Share in 2000
and $.14 in 1999. Certain provisions of the principal credit agreement of the
Company restrict the right of the Company to pay dividends. See Note 4 of Notes
to Financial Statements.
As of March 7, 2001 there were 1,336 holders of record of the Company's
Common Shares.
Item 6. SELECTED FINANCIAL DATA
Five Year Summary
(Amounts in Thousands Except Per Share Data)
Year Ended December 31
---------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net sales $ 499,643 $ 460,354 $ 416,738 $ 356,841 $ 312,031
Cost of sales 337,644 305,404 283,837 238,392 218,596
-------------------------------------------------------------
Gross profit on sales 161,999 154,950 132,901 118,449 93,435
Warehouse & delivery expense 42,315 36,592 33,710 27,793 23,382
Selling, general and
administrative expense 103,299 95,873 86,541 74,573 72,428
--------------------------------------------------------------
Income (loss) from operations 16,385 22,485 12,650 16,083 (2,375)
Other deductions (income)
Interest expense 6,899 6,251 5,635 4,749 4,214
Joint venture loss 33 1,207 1,845 1,219 0
Other - net (2,764) (3,875) (4,283) (4,025) (3,037)
----------------------------------------------------------------
Income (loss) before income taxes 12,217 18,902 9,453 14,140 (3,552)
Income tax expense (benefit) 4,829 7,256 3,561 5,515 (1,203)
-------------------------------------------------------------
Net income (loss) $7,388 $ 11,646 $ 5,892 $ 8,625 $ (2,349)
============================================================
Earnings (loss) per share:
Basic $ .87 $ 1.38 $ .71 $ 1.06 $ (.29)
==============================================================
Diluted $ .86 $ 1.36 $ .69 $ 1.02 $ (.29)
==============================================================
Cash dividends declared and paid
per common share $.15 $.14 $.13 $.12 $.11
-11-
12
Year Ended December 31
---------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $ 137,410 $ 132,882 $ 116,101 $ 117,711 $ 99,904
Total assets $ 244,893 $ 232,783 $ 207,748 $200,318 $164,673
Long-term debt, net
of current portion $ 94,707 $ 95,199 $ 83,698 $ 83,353 $ 64,704
Shareholders' equity $ 97,436 $ 90,542 $ 78,697 $ 72,293 $ 61,699
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Company sales rose to a record $499.6 million in 2000, an 8.5% increase compared
with $460.4 million in 1999, which was a 10.5% increase over 1998 sales of
$416.7 million. Each of the Company's key sales groups contributed to overall
sales growth, with Service Centers and Golf Course sales contributing the
largest increase for 2000 and 1999. The increases reflected volume growth
primarily from the maturation of Service Centers previously opened. During 2000,
the Company did not open any stores; rather, management focused on increasing
sales through the Company's existing network. At the end of 2000, the Company
was operating 232 stores in 37 states compared with 234 stores in 1999 and 1998.
Comparable store sales for 2000 increased 5.1% compared with a 7.9% increase in
1999.
The Company reported diluted net earnings of $0.86 per share in 2000 compared
with $1.36 per share in 1999 and $0.69 per share in 1998. The decrease in
earnings per share compared with a year ago was related primarily to higher
costs of urea, higher delivery costs and greater expenses at the Company's Novex
fertilizer plant. The increase in earnings per share in 1999 compared with 1998
was related primarily to improved sales mix, cost controls and the improved
performance at Commercial Turf Products, Ltd. (CTP), the Company's 50/50
commercial equipment joint venture with MTD Products Inc.
The Company's gross profit as a percent of sales in 2000 was 32.4% compared with
33.7% in 1999 and 31.9% in 1998. During 2000, the Company's gross profit percent
decreased primarily as a result of an increase in the Company's cost of raw
materials and higher manufacturing expenses at the Novex fertilizer plant.
Warehouse and distribution expenses were 8.5% of sales compared with 7.9% in
1999 and 8.1% in 1998. During 2000, the Company's warehouse and distribution
expenses increased as a percent of sales due primarily to increased costs
relating to outbound freight. These freight cost increases resulted from an
increase in the number of direct ship orders to customers and increased transfer
costs from the addition of the Novex plant and several outside warehouses.
The Company's selling, general and administrative expenses of $103.3 million in
2000 increased 7.7% over $95.9 million in 1999, which represented an increase of
10.8% over $86.5 million in 1998. Selling, general and administrative expenses
as a percent of sales in 2000 remained relatively unchanged compared with 1999
and 1998. The expense increase in 2000 was attributable primarily to the
addition of sales and administrative support personnel in the first half of 2000
to support the continuing business growth.
Interest expense increased to $6.9 million from $6.3 million in 1999 and $5.6
million in 1998. The increase in interest expense for both years was
attributable primarily to a higher average interest rate and increased working
capital needs associated with the growth of the business.
Results of operations for CTP represented a loss of $33,000 in 2000 compared
with a $1.2 million loss in 1999 and a $1.8 million loss in 1998. The
improvement in performance was attributable primarily to an increase in
production volume and better cost control from year to year.
-12-
13
Other - net consists primarily of customer finance charges. Customer finance
charges totaled $2.5 million in 2000 compared with $3.2 million in 1999 and $3.5
million in 1998. The decrease in 2000 compared with 1999 was due primarily to a
more aggressive collection of aged receivables and the continued success of
1999's program to outsource the Company's equipment financing programs.
The Company's effective tax rate in 2000 was 39.5% compared with 38.4% in 1999
and 37.7% in 1998. The change in effective tax rate from year to year was due
primarily to the federal marginal tax rate and the impact of state and local
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, total assets of the Company were $244.9 million
compared with $232.8 million at year-end 1999 and $207.7 million at year-end
1998. The increase in assets was attributable to growth in the business combined
with working capital increases, capital additions and improvements. Funding for
the increase in assets was provided primarily by increased borrowings under the
Company's credit facilities.
The Company's debt-to-total capitalization percentage was 50.6% as of December
31, 2000, compared with 51.3% as of December 31, 1999, and 51.5% as of December
31, 1998. The continued decrease was a result of a larger increase in equity,
due primarily to increased earnings compared to the smaller increase in debt.
Accounts receivable increased 15.9% in 2000 compared with an 8.5% sales
increase. In 1999, accounts receivable increased 3.7% compared with a 10.5%
sales increase. The increase in 2000 was due primarily to higher December sales
and extended terms programs to larger customers. The increase in 1999 was due
primarily to the outsourcing of equipment financing and improved focus on
management of receivables. Inventories remained relatively unchanged in 2000,
due to efforts to reduce the number of inventory items with low market demand,
compared with a 16.2% increase in 1999. Accounts payable decreased in 2000 and
1999, a result of decreased purchasing activity late in the year in an effort to
reduce inventories.
During 2000, the Company's expenditures for capital improvements and additions
totaled $10.0 million. These expenditures consisted primarily of approximately
$5.0 million for the continuing design and implementation of information systems
and technology to improve the Company's management of assets and customer
service, $1.0 million relating to the Company's Novex plant, $1.0 million
relating to the Sebring fertilizer plant and $1.5 million of general
improvements to the Company's other manufacturing and distribution facilities.
The funding for these projects came primarily from an increase in borrowings
under the Company's credit facilities.
The Company is a 50% owner of CTP and accounts for this investment using the
equity method of accounting. CTP, which began operations in May 1997,
manufactures commercial turf equipment. The Company's share of CTP's 2000, 1999
and 1998 net loss was $33,000, $1.2 million and $1.8 million, respectively, and
was recorded as a reduction of the Company's original investment of $700,000 and
$3.1 million of advances. The Company has also guaranteed 50% of CTP's long-term
obligations, which totaled $13.2 million as of December 31, 2000.
At December 31, 2000, the Company had $43.6 million of debt outstanding on its
revolving line of credit. The credit facility, which will mature in April 2003,
provides for maximum core borrowings of $60.0 million and allows for maximum
seasonal borrowings from March 1 to May 31 of $70.0 million. This credit
facility is unsecured and has no prepayment penalty. Interest is payable at the
bank's prevailing base rate or at alternative rates based on LIBOR or CD options
as elected by the Company. The Company believes the current borrowing capacity
is adequate for 2001 and the foreseeable future.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk relating to interest rates. The Company's
debt consists primarily of $50.0 million in fixed-rate, private-placement notes
and borrowings under its $60.0 million core and $10.0 million seasonal revolving
credit facility with banks, at floating interest rates. The Company has a $7.0
million notional amount interest rate swap, which effectively converts a portion
of its revolving credit borrowings to a fixed rate. The estimated fair value of
the $50.0 million fixed-rate notes at year end is $53.0 million, based on
current borrowing rates available for financing with similar terms and
maturities. It would have cost the Company $58,000
-13-
14
to terminate the seven-year, $7.0 million notional amount interest rate
swap agreement at December 31, 2000. See the Long-Term Debt Note (Note 4) in the
Notes to Consolidated Financial Statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of LESCO, Inc. and the report of
Ernst & Young LLP, independent auditors, are set forth on the following pages:
Report of Management - LESCO, Inc. F-1
Report of Ernst & Young LLP, Independent Auditors F-1
Consolidated Statements of Income--Years ended December 31, 2000, 1999 and 1998 F-2
Consolidated Balance Sheets--December 31, 2000 and 1999 F-3
Consolidated Statements of Cash Flows--Years ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Shareholders' Equity--Years ended December 31, 2000, 1999 and 1998 F-4
Notes to Consolidated Financial Statements F-5
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information set forth under the captions
"Election of Directors" and "Business Experience of Directors and Nominees" in
the Proxy Statement, which information is incorporated herein by reference.
The information required with respect to executive officers is set
forth in Part I of this Form 10-K under the heading "Executive Officers of the
Registrant." All officers serve at the discretion of the Board of Directors.
Item 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption
"Executive Compensation" in the Proxy Statement, which information is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, which information is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information set forth under the caption
"Certain Transactions" in the Proxy Statement, which information is incorporated
herein by reference.
-14-
15
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2). Financial Statements and Financial Statement Schedule.
The following financial statements of LESCO, Inc. are included in
Item 8:
Consolidated Balance Sheets--December 31, 2000 and 1999
Consolidated Statements of Income--Years ended December 31, 2000,
1999 and 1998
Consolidated Statements of Shareholders' Equity--Years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows--Years ended December 31, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
The following financial statement schedule is included herewith:
Schedule II--Valuation and Qualifying Accounts--December 31,
2000, 1999 and 1998
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(3) See Exhibit Index.
(b) The Registrant has not filed any current report on Form 8-K during the
quarter ended December 31, 2000.
(c) Exhibits--The response to this portion of Item 14 is submitted as a
separate section of this report.
-15-
16
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
LESCO, INC.
===================================================================================================================================
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
DESCRIPTION BALANCE AT DEDUCTIONS BALANCE AT
BEGINNING OF END OF PERIOD
PERIOD
------------------------------------------------------
CHARGED TO COSTS CHARGED TO OTHER COSTS
AND EXPENSES ACCOUNTS--DESCRIBE INCURRED
===================================================================================================================================
Year Ended December 31, 2000:
Deducted from assets accounts-
Reserve for inventory obsolescence $ 1,620,000 $ 307,000 ($ 408,000)(1) $ 1,519,000
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999:
Deducted from assets accounts-
Reserve for inventory obsolescence $ 2,098,000 $ 286,000 ($ 764,000)(1) $ 1,620,000
===================================================================================================================================
Year Ended December 31, 1998:
Deducted from assets accounts-
Reserve for inventory obsolescence $ 4,249,000 $ 214,000 ($2,342,000)(1) $ 2,098,000
===================================================================================================================================
(1) Reserves relieved as obsolete inventory is sold or is otherwise disposed.
-16-
17
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.
LESCO, Inc.
By /s/ William A. Foley
---------------------------
William A. Foley
Date: March 23, 2001
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.
Signature Title Date
- --------- ----- ----
/s/ William A Foley President, Chairman, Chief March 23, 2001
- ------------------------------- Executive Officer and Director
William A. Foley
/s/ R. Breck Denny Chief Financial Officer March 23, 2001
- -------------------------------
R. Breck Denny
/s/ Ronald Best Director March 23, 2001
- ----------------------------------
Ronald Best
/s/ Drexel Bunch Director March 23, 2001
- --------------------------------
Drexel Bunch
/s/ Robert F. Burkhardt Director March 23, 2001
- ----------------------------
Robert F. Burkhardt
/s/ J. Martin Erbaugh Director March 23, 2001
- ------------------------------
J. Martin Erbaugh
/s/ Michael E. Gibbons Director March 23, 2001
- -----------------------------
Michael E. Gibbons
/s/ Lee C. Howley Director March 23, 2001
- --------------------------------
Lee C. Howley
/s/ Christopher H. B. Mills Director March 23, 2001
- ----------------------------------
Christopher H. B. Mills
/s/ Robert B. Stein Jr. Director March 23, 2001
- --------------------------------
Robert B. Stein Jr.
/s/ David L. Swift Director March 23, 2001
- ---------------------------------
David L. Swift
-17-
18
LESCO, INC.
FORM 10-K
EXHIBIT INDEX
Exhibit
Number Description of Document
- -------- -----------------------
3(a)(1) Amended Articles of Incorporation of the Registrant.
3(b)(1) Amended Code of Regulations of the Registrant.
4(a)(2) Specimen certificate for the Registrant's Common Shares.
4(c)(3) Reimbursement Agreement dated March 1, 1993, between Pittsburgh
National Bank and the Registrant.
4(d)(1) Loan Agreement dated as of January 1, 1988 between County of
Belmont, Ohio, and the Registrant ($5,875,000 County of Belmont,
Ohio Industrial Development Revenue Bonds).
4(e)(1) Loan Agreement dated as of January 28, 1988 between the Director
of Development of the State of Ohio and the Registrant.
4(f) Amended Articles of Incorporation of the Registrant (appears as Exhibit 3(a) above).
4(g) Amended Code of Regulations of the Registrant (appears as Exhibit 3(b) above).
4(h)(6) Loan Agreement dated as of November 1, 1997 between Highlands County Industrial Development
Authority and the Registrant.
4(i)(7) $50,000,000 Senior Note Purchase Agreement dated June 15, 1998
10(a)(4) LESCO, Inc. Stock Investment and Salary Savings Plan and Trust, as amended and restated.
10(e)(3) Reimbursement Agreement dated March 1, 1993, between Pittsburgh National Bank and the Registrant
(appears as Exhibit 4(c) above).
10(g)(1) Loan Agreement dated as of January 28, 1988 between the Director of Development of the
State of Ohio and the Registrant (appears as Exhibit 4(e) above).
10(k)(3) 1992 Stock Incentive Plan.
10(l)(5) Stock Bonus Plan (appears as Exhibit 4(d) to Registrant's Form S-8).
10(o)(1) Loan Agreement dated as of January 1, 1988 between County of Belmont, Ohio, and the Registrant
($5,875,000 County of Belmont, Ohio Industrial Development Revenue Bonds) (appears as Exhibit
4(d) to Registrant's Form 10-K for fiscal year 1987).
10(s)(4) Consulting Agreement by and between the Registrant and Robert F. Burkhardt (appears as Exhibit
10(s) to Registrant's Form 10-K for fiscal year 1994).
10(t)(6) Letter of Credit Agreement dated as of November 1, 1997 between PNC Bank, National Association
and the Registrant.
10(u)(8) Employment Agreement by and between the Registrant and William A. Foley (appears as Exhibit 10(u)
to Registrant's Form 10-K for fiscal year 1998).
10(v)(1)(9) Credit Agreement dated September 23, 1999 among National City Bank, PNC Bank, National
Association, Bank One, Michigan, National City Bank, as agent, and the Registrant.
10(v)(2)(11) Amendment to the Credit Agreement dated December 31, 2000.
-18-
19
10(w)(10) 2000 Stock Incentive Plan.
10(x)(10) 2000 Broad Based Stock Option Plan.
21(11) Subsidiaries of the registrant
23(11) Consent of Ernst & Young LLP, Independent Auditors
-19-
20
Exhibit
- -------
1 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its Annual
Report on Form 10-K for the year ending November 30, 1987 (File No.
0-13147).
2 Incorporated by reference to exhibits, with the corresponding exhibit
numbers, filed by Registrant with its Registration Statement on
Form S-l (File No. 2-90900).
3 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its Annual
Report on Form 10-K for the year ending December 31, 1992.
4 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its Annual
Report on Form 10-K for the year ending December 31, 1994.
5 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its
Registration Statement on Form S-8 (File No. 333-22685).
6 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its Annual
Report on Form 10-K for the year ending December 31, 1997.
7 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its
quarterly report on form 10Q for the quarter ended June 30, 1998.
8 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its Annual
Report on Form 10-K for the year ended December 31, 1998.
9 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its
quarterly report on Form 10Q for the quarter ended September 30, 1999.
10 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its
Registration Statement on Form S-8 (File No. 333-49884).
11 Filed herewith.
-20-
21
EXECUTIVE COMPENSATION PLANS
AND ARRANGEMENTS
----------------------------
Exhibits 10(a), 10(k), 10(1), and 10(w) are compensation plans in which
executive officers participate.
-21-
22
LESCO, Inc.
REPORT OF MANAGEMENT-- LESCO, INC.
We have prepared the accompanying consolidated financial statements and related
information included herein. The primary responsibility for the integrity of the
financial information rests with management. This information is prepared in
accordance with accounting principles generally accepted in the United States,
and includes amounts based upon our best estimates and judgments.
The Company maintains accounting and internal control systems, which are
designed to provide reasonable assurance that assets are safeguarded from loss
or unauthorized use, and which produce records adequate for preparation of
financial information. There are limits inherent in all systems of internal
control, based on the recognition that the cost of such systems should be
commensurate with the benefits to be derived. We believe our system provides an
appropriate balance.
Ernst & Young LLP, independent auditors, is retained to audit LESCO, Inc.'s
financial statements. Its accompanying report is based on an audit of LESCO's
financial statements conducted in accordance with auditing standards generally
accepted in the United States, including a review of internal control and tests
of accounting procedures and records.
The Board of Directors pursues its responsibility for these financial
statements through the Finance Committee, composed exclusively of independent
directors. The Finance Committee meets periodically with internal auditors and
our independent auditors, as well as with LESCO management, to discuss the
adequacy of financial controls, the quality of financial reporting, and the
nature, extent and results of the audit effort. Both the internal auditors and
independent auditors have private and confidential access to the Finance
Committee at all times.
/s/ William A. Foley
William A. Foley
Chairman, President and Chief Executive Officer
/s/ R. Breck Denny
R. Breck Denny
Vice President, Chief Financial Officer
/s/ Kenneth J. Kossin, Jr.
Kenneth J. Kossin, Jr.
Corporate Controller
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders LESCO, Inc.
We have audited the accompanying consolidated balance sheets of LESCO,
Inc. as of December 31, 2000 and 1999, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 2000. Our audits also
included the financial statements and schedule listed in the index at
Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
LESCO, Inc. at December 31, 2000 and 1999, and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 7, 2001
F-1
23
LESCO, Inc.
LESCO, Inc. CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA) FOR THE YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------
NET SALES $ 499,643 $ 460,354 $ 416,738
COST OF SALES 337,644 305,404 283,837
--------------------------------------------------------------------------------------
GROSS PROFIT ON SALES 161,999 154,950 132,901
WAREHOUSE AND DELIVERY EXPENSES 42,315 36,592 33,710
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 103,299 95,873 86,541
--------------------------------------------------------------------------------------
145,614 132,465 120,251
--------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 16,385 22,485 12,650
OTHER DEDUCTIONS (INCOME):
INTEREST EXPENSE 6,899 6,251 5,635
JOINT VENTURE LOSS 33 1,207 1,845
OTHER - NET (2,764) (3,875) (4,283)
--------------------------------------------------------------------------------------
4,168 3,583 3,197
--------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 12,217 18,902 9,453
INCOME TAX EXPENSE 4,829 7,256 3,561
--------------------------------------------------------------------------------------
NET INCOME $ 7,388 $ 11,646 $ 5,892
======================================================================================
EARNINGS PER SHARE
BASIC $ 0.87 $ 1.38 $ 0.71
DILUTED $ 0.86 $ 1.36 $ 0.69
======================================================================================
See Notes to Consolidated Financial Statements
F-2
24
LESCO, Inc.
LESCO, Inc. CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31
----------------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
CASH $ 849 $ 2,110
ACCOUNTS RECEIVABLE, LESS ALLOWANCE OF $4,500 IN 2000; $4,000 IN 1999 78,529 67,759
INVENTORIES:
RAW MATERIAL 7,112 8,173
WORK IN PROCESS/FINISHED GOODS 92,931 92,498
----------------------------------------------------------------------------------------------------
TOTAL INVENTORIES 100,043 100,671
DEFERRED FEDERAL INCOME TAXES 1,950 1,154
PREPAID EXPENSES AND OTHER ASSETS 5,595 5,480
----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 186,966 177,174
PROPERTY, PLANT AND EQUIPMENT
LAND 1,024 1,024
BUILDINGS AND IMPROVEMENTS 26,571 25,680
MACHINERY AND EQUIPMENT 36,850 34,665
FURNITURE AND FIXTURES 26,433 20,204
-----------------------------------------------------------------------------------------------------
90,878 81,573
LESS ALLOWANCE FOR DEPRECIATION AND AMORTIZATION 42,674 35,412
----------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 48,204 46,161
OTHER ASSETS 9,723 9,448
----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 244,893 $ 232,783
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 33,304 $ 33,923
SALARIES, WAGES AND PROFIT SHARING 5,093 5,822
OTHER LIABILITIES AND ACCRUED EXPENSES 6,059 4,447
CURRENT PORTION OF LONG-TERM DEBT 5,100 100
----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 49,556 44,292
LONG-TERM DEBT 94,707 95,199
DEFERRED INCOME TAXES 3,194 2,750
SHAREHOLDERS' EQUITY
PREFERRED SHARES - WITHOUT PAR VALUE - 500,000 SHARES AUTHORIZED
COMMON SHARES - WITHOUT PAR VALUE - 19,500,000 SHARES AUTHORIZED;
8,615,328 SHARES ISSUED AND 8,554,235 SHARES OUTSTANDING IN 2000;
8,536,410 SHARES ISSUED AND 8,499,093 SHARES OUTSTANDING IN 1999 862 854
PAID-IN CAPITAL 34,768 33,594
RETAINED EARNINGS 63,730 57,610
LESS TREASURY SHARES, 61,093 IN 2000 AND 37,317 IN 1999 (1,154) (684)
UNEARNED COMPENSATION (770) (832)
----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 97,436 90,542
----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 244,893 $ 232,783
=====================================================================================================
See Notes to Consolidated Financial Statements.
F-3
25
LESCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
NET INCOME $ 7,388 $ 11,646 $ 5,892
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 8,909 6,920 5,658
DEFERRED INCOME TAXES (352) 737 1,271
INCREASE IN ACCOUNTS RECEIVABLE (13,004) (4,839) (1,475)
PROVISION FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE 2,300 2,438 2,236
DECREASE (INCREASE) IN INVENTORIES 953 (13,531) (1,285)
CHANGE IN INVENTORY AND PLANT RELOCATION RESERVES (122) (478) (2,151)
(DECREASE) INCREASE IN ACCOUNTS PAYABLE (713) (2,215) 1,760
CHANGE IN OTHER CURRENT ITEMS (390) 1,699 1,010
OTHER 225 195 (393)
---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,194 2,572 12,523
INVESTING ACTIVITIES
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT - NET (10,032) (14,003) (11,529)
BOND PROCEEDS HELD FOR CONSTRUCTION -- -- 4,761
ACQUISITION OF BUSINESSES -- -- (8,174)
---------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (10,032) (14,003) (14,942)
FINANCING ACTIVITIES
PROCEEDS FROM BORROWINGS 278,200 236,900 184,897
REDUCTION OF BORROWINGS (273,692) (225,399) (184,552)
ISSUANCE OF COMMON SHARES 337 1,383 1,595
CASH DIVIDENDS (1,268) (1,184) (1,083)
---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,577 11,700 857
---------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH (1,261) 269 (1,562)
CASH - BEGINNING OF THE YEAR 2,110 1,841 3,403
CASH - END OF THE YEAR $ 849 $ 2,110 1,841
=========================================================================================================================
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON SHARES UNEARNED
------------------------- PAID-IN RETAINED TREASURY COMPEN-
(IN THOUSANDS, EXCEPT SHARE DATA) SHARES DOLLARS CAPITAL EARNINGS SHARES SATION
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1998 8,256,084 $825 $29,268 $42,347 $ (59) $ (88)
ISSUANCE OF COMMON SHARES 115,846 12 1,583
ISSUANCE OF RESTRICTED COMMON SHARES 35,216 4 780 (784)
DIVIDENDS PAID - $0.13 PER SHARE (1,083)
NET INCOME 5,892
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 8,407,146 841 31,631 47,156 (59) (872)
ISSUANCE OF COMMON SHARES 93,767 9 1,410
ISSUANCE OF RESTRICTED COMMON SHARES 35,497 4 553 (8) (549)
TREASURY SHARE TRANSACTIONS (31,589 SHARES) (625) 497
AMORTIZATION OF UNEARNED COMPENSATION 92
DIVIDENDS PAID - $0.14 PER SHARE (1,184)
NET INCOME 11,646
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 8,536,410 854 33,594 57,610 (684) (832)
- -----------------------------------------------------------------------------------------------------------------------------------
ISSUANCE OF COMMON SHARES 30,726 3 396
ISSUANCE OF RESTRICTED COMMON SHARES 48,192 5 778 (408)
TREASURY SHARE TRANSACTIONS (23,776 SHARES) (470) 470
DIVIDENDS PAID - $0.15 PER SHARE (1,268)
NET INCOME 7,388
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 8,615,328 $862 $34,768 $63,730 $ (1,154) $ (770)
===================================================================================================================================
See Notes to Consolidated Financial Statements.
F-4
26
LESCO, Inc.
LESCO, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF BUSINESS The Company operates in four business segments, which
include Product Supply, Lawn Care, Golf and Corporate. The Company manufactures
and markets turf care products, including turf control products, fertilizer,
grass seed and equipment, to the professional sector of the green industry.
Substantially all of the Company's accounts receivable are due from companies in
the green industry located throughout the United States. Credit is extended
based on an evaluation of each customer's financial condition and, generally,
collateral is not required. Revenue is recognized when goods are shipped to the
customer or when title passes, if earlier.
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires estimates and
assumptions by management, and actual results may differ from these estimates.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The Consolidated Financial Statements include the
accounts of LESCO and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Certain prior-year amounts have been reclassified to conform with current-year
reporting presentations.
INVENTORIES: Inventories are valued principally at the lower of cost (average
cost method) or market.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost
and are depreciated using the straight-line method over the estimated useful
lives of the respective assets. Buildings are depreciated over 15 to 20 years,
and machinery, equipment and other depreciable assets over three to 12 years.
Expenditures for maintenance and repairs are charged to income as incurred.
Additions and improvements are capitalized.
INTANGIBLE ASSETS: Included in "Other Assets" are $11,337,000 and
$10,031,000 of intangible assets at December 31, 2000, and 1999,
respectively, consisting primarily of goodwill, patents, trademarks, cus-
tomer lists and other specifically identifiable assets arising from recent
acquisitions, including Pro-Lawn, Tri Delta Fertilizer, Inc. (Tri Delta), Agri-
turf, Inc., Cadwell & Jones, Inc. and Southern Golf Products, Inc. These
assets are being amortized using the straight-line method over periods of
three to 20 years. Accumulated amortization was $2,141,000 and
$1,720,000 at December 31, 2000, and 1999, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company assesses the recoverability of its
long-lived and intangible assets by determining whether the amortization of the
remaining balance over its remaining useful life can be recovered through
undiscounted future operating cash flows. If impairment exists, the carrying
amount of the related asset is reduced to fair value.
FINANCE CHARGES: "Other - net" in the accompanying Statements of Income includes
$2,489,000, $3,171,000 and $3,534,000 in customer finance charges in 2000, 1999
and 1998, respectively.
STOCK OPTIONS: The Company follows the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation." Accordingly, the Company
follows the accounting provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," which, if applicable,
recognizes as compensation cost the difference between the fair market
value and the exercise price of stock options at the date of grant.
NOTE 2 ACQUISITIONS
On August 28, 2000, a wholly owned subsidiary of the Company completed the
asset purchase of Southern Golf Products, Inc. of Peachtree City, Georgia, for
21,790 restricted shares of the Company's common stock totaling $375,000, and
$900,000 in former advances to Southern Golf Products, Inc. The asset purchase
included working capital, manufacturing equipment and golf accessory assets.
On January 30, 1998, the Company acquired certain assets of Agriturf, Inc.
and Cadwell & Jones, Inc. for $8,200,000, including assumption of $2,200,000 of
debt. The asset purchase included land, a fertilizer manufacturing facility
and related warehouse, working capital and manufacturing equipment. The asset
purchase was financed by the Company's credit facility.
The operating results of the acquired businesses have been included in the
Statements of Income since the dates of the related acquisitions.
NOTE 3 INVESTMENT IN COMMERCIAL TURF PRODUCTS, LTD.
The Company's 50% investment in Commercial Turf Products, Ltd. (CTP) is
accounted for under the equity method of accounting. In addition, the Company
has guaranteed 50% of certain liabilities of CTP aggregating $13,160,000, the
Company's portion being $6,580,000 at December 31,
F-5
27
LESCO, Inc.
2000. These liabilities mature through 2002 and bear interest at rates ranging
from 6.6% to 9.5%. Through December 31, 2000, the Company invested $700,000 in
CTP and extended advances of $3,100,000. CTP's financial information at December
31 is as follows:
DECEMBER 31
- -------------------------------------------------------------------------------
(IN THOUSANDS) 2000 1999 1998
- -------------------------------------------------------------------------------
CURRENT ASSETS $ 8,569 $ 9,420 $ 9,845
NON-CURRENT ASSETS 8,194 8,756 8,878
CURRENT LIABILITIES 15,221 16,568 14,700
NON-CURRENT LIABILITIES 8,750 8,750 8,750
NET SALES 40,773 39,935 14,741
GROSS PROFIT 3,426 728 3,298
NET LOSS (66) (2,414) (3,689)
- -------------------------------------------------------------------------------
NOTE 4 LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31
- -------------------------------------------------------------------------------
(IN THOUSANDS) 2000 1999
- -------------------------------------------------------------------------------
TERM NOTES PAYABLE $50,000 $50,000
CREDIT AGREEMENT 43,600 39,000
INDUSTRIAL REVENUE BONDS 5,875 5,875
OTHER DEBT 332 424
- -------------------------------------------------------------------------------
SUB-TOTAL 99,807 95,299
LESS CURRENT PORTION 5,100 100
- -------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $94,707 $95,199
- -------------------------------------------------------------------------------
In June 1998, the Company issued $50,000,000 in fixed-rate, private placement
notes to five insurance companies. The term notes bear a weighted-average
interest rate of 6.81%. At issuance, the term notes had maturities ranging from
three to 10 years.
The Company's revolving credit agreement with banks, which matures on June
30, 2003, provides for maximum core borrowings of $60,000,000 and allows for
maximum seasonal borrowings from March 1 to May 31 of $70,000,000. Interest on
$6,600,000 of principal is payable at the bank's prevailing base rate (7.50% at
December 31, 2000) or at alternative rates (ranging from 7.57% to 7.77% at
December 31, 2000) elected by the Company as provided by the agreement for the
remaining principal due. In addition, there is a 0.35% facility fee. At December
31, 2000, $16,400,000 was available for borrowing.
The Company has a seven-year, $7,000,000 notional amount interest rate
swap agreement expiring in 2002, which converts existing floating-rate
payments for 6.335% fixed-rate payments. The estimated cost to terminate this
agreement at December 31, 2000, was $58,000.
The Company has $5,875,000 of industrial revenue bonds outstanding
related to its Martins Ferry, Ohio, facility. The bonds will mature in 2014. The
bonds are backstopped by an undrawn letter of credit of $6,231,000, which
expires in April 2001, and are secured by mortgages on property and equipment
acquired with the proceeds (net book value of $6,100,000 at December 31, 2000).
Interest is payable quarterly at a rate based on the comparable tax-exempt
market rates (5.10% at December 31, 2000). Under certain circumstances, the
Company may convert the interest rate to a fixed rate.
The private placement notes, revolving credit agreement and industrial
revenue bonds contain various restrictive covenants, including limits on
additional borrowings, lease payments and annual dividend payments; maintenance
of certain operating and financial ratios; and maintenance of minimum net worth
($72,463,000 as of December 31, 2000). As a result of changes in market
conditions and interest rates, the fair market value of the Company's private
placement notes is estimated to be $53,000,000 at December 31, 2000. The
carrying amount of the Company's other debt approximates fair market value.
Interest payments were $7,108,000, $6,396,000 and $5,863,000 in the years ended
December 31, 2000, 1999 and 1998, respectively. The annual maturities of
long-term debt are as follows:
(IN THOUSANDS)
YEAR
- -------------------------------------------------------------------------------
2001 $ 5,100
2002 5,815
2003 49,421
2004 5,742
2005 714
2006 AND THEREAFTER 33,016
- -------------------------------------------------------------------------------
$99,807
- -------------------------------------------------------------------------------
NOTE 5 LEASES AND OTHER COMMITMENTS
The Company leases certain operating facilities and equipment. Certain lease
agreements provide for renewal options along with provisions for adjusting the
lease payments. Total rent expense for 2000, 1999 and 1998 was approximately
$18,900,000, $16,900,000 and $14,800,000, respectively. Future minimum lease
payments are as follows:
(IN THOUSANDS)
YEARS ENDED DECEMBER 31
- -------------------------------------------------------------------------------
2001 $ 13,240
2002 11,384
2003 9,988
2004 7,950
2005 6,269
2006 AND THEREAFTER 14,781
- -------------------------------------------------------------------------------
$63,612
- -------------------------------------------------------------------------------
At December 31, 2000, the Company was committed to purchasing the seed crop from
40,000 acres of land. The price will be determined at the prevailing market
rate.
28
LESCO, Inc.
NOTE 6 INCOME TAXES
The provision for income taxes in the accompanying Consolidated Statements of
Income consists of the following:
YEARS ENDED DECEMBER 31
- -------------------------------------------------------------------------------
(IN THOUSANDS) 2000 1999 1998
- -------------------------------------------------------------------------------
CURRENT:
FEDERAL $4,321 $5,431 $1,903
STATE 860 1,088 387
DEFERRED (PRINCIPALLY FEDERAL) (352) 737 1,271
- -------------------------------------------------------------------------------
INCOME TAX EXPENSE $4,829 $7,256 $3,561
- -------------------------------------------------------------------------------
The provision for income taxes differs from the statutory rate as follows:
YEARS ENDED DECEMBER 31
- -------------------------------------------------------------------------------
(IN THOUSANDS) 2000 1999 1998
- -------------------------------------------------------------------------------
INCOME TAXES AT STATUTORY RATE $4,276 $6,427 $3,214
STATE AND LOCAL INCOME TAXES NET
OF FEDERAL INCOME TAX BENEFIT 558 718 256
CHANGE IN VALUATION ALLOWANCE (502) -- --
EFFECT OF GRADUATED TAX RATE ON
NET DEFERRED TAX LIABILITY 235 -- --
OTHER 262 111 91
- -------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES $4,829 $7,256 $3,561
- -------------------------------------------------------------------------------
Income tax payments were $6,329,000, $7,200,000 and $2,877,000 in 2000, 1999 and
1998, respectively.
The significant components of deferred tax assets and liabilities are as
follows:
DECEMBER 31, 2000 DECEMBER 31, 1999
- -------------------------------------------------------------------------------
DEFERRED DEFERRED
- -------------------------------------------------------------------------------
(IN THOUSANDS) ASSETS LIABILITIES ASSETS LIABILITIES
- -------------------------------------------------------------------------------
DEPRECIATION -- $3,551 -- $2,695
ALLOWANCE FOR BAD
DEBTS $1,755 -- $1,349 --
ACCRUED EMPLOYEE
BENEFITS 681 -- 404 --
NET OPERATING LOSS
CARRYFORWARD 452 -- 502 --
ACCRUED INSURANCE 318 -- 71 --
INVENTORY RESERVES -- 1,018 -- 890
ACCRUED COMPENSATION 528 -- 472 --
PREPAID EXPENSES -- 316 -- 280
OTHER -- 93 -- 27
- -------------------------------------------------------------------------------
TOTAL 3,734 4,978 2,798 3,892
VALUATION ALLOWANCE -- -- (502) --
- -------------------------------------------------------------------------------
$3,734 $4,978 $2,296 $3,892
- -------------------------------------------------------------------------------
As of December 31, 2000, the Company had net operating loss carryforwards of
$1.3 million for federal income tax reporting purposes, which will expire in
varying amounts, if unused, in years 2001 through 2011. These carryforwards
relate to the acquisition of Tri Delta. During 2000, the Company utilized
$188,000 of the carryforwards. As a result of the merger of the Tri Delta
subsidiary and sufficient earnings trends, the Company determined that the
valuation allowance was no longer required. Due to the increase in annual
taxable income, the Company recognized a tax expense for the adjustment of
deferred tax balances for the effect of an increased graduated tax rate.
NOTE 7 CAPITAL STOCK AND STOCK PLANS
STOCK OPTIONS: The Company has stock option plans that provide for the issuance
of incentive stock options; non-qualified stock options; stock appreciation
rights (SARs) either in connection with, or independent of, any option; and
restricted and other share awards. The plans provide for the issuance of a
maximum of 2,928,297 common shares to employees or directors. At December 31,
2000, there were 938,119 shares reserved for future grants, consisting of
803,602 under the 2000 Stock Incentive Plan, 22,100 under the 2000 Broad-Based
Stock Option Plan, 25,417 under the 1987 discretionary share awards and 87,000
under the 1995 Directors' Stock Option Plan. Options issued pursuant to any of
the Company's plans are exercisable for up to 10 years at an option price
equal to the fair market value on the date the option was granted.
The Company has issued in the past, and may issue from time to time in the
future, options outside of the Company's plans at an exercise price lower than
fair market value in connection with the employment of key employees. Additional
paid-in capital includes tax benefits of $60,000, $143,000 and $473,000 relating
to the exercise of options in 2000, 1999 and 1998, respectively. The following
table summarizes the changes in the outstanding options for the three years
ended December 31, 2000:
29
LESCO, Inc.
2000 1999 1998
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------
OUTSTANDING - BEGINNING OF YEAR 768,573 $15.79 734,560 $15.37 723,438 $13.86
GRANTED 461,047 16.40 172,859 15.58 155,713 19.76
EXERCISED (31,962) 11.31 (94,926) 12.43 (103,741) 10.95
CANCELED/FORFEITED (42,912) 17.15 (43,920) 16.35 (40,850) 14.44
- --------------------------------------------------------------------------------------------------------------------------
OUTSTANDING - END OF YEAR 1,154,746 $16.11 768,573 $15.79 734,560 $15.37
- --------------------------------------------------------------------------------------------------------------------------
OPTION PRICE RANGE AT END OF YEAR $ 7.00 to $ 7.00 to $ 5.67 to
$23.00 $23.00 $23.00
EXERCISABLE - END OF YEAR 926,846 754,885 700,069
RESERVED FOR FUTURE GRANTS 938,119 121,995 255,393
WEIGHTED-AVERAGE FAIR VALUE OF
OPTIONS GRANTED DURING THE YEAR $ 4.56 $ 5.05 $ 5.67
- --------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
as of December 31, 2000:
RANGE OF OPTIONS OPTIONS WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISABLE EXERCISE PRICE CONTRACTUAL LIFE
- -------------------------------------------------------------------------------------------------------------------------------
$ 7.00 to $15.94 674,444 664,944 $14.53 6.3 years
$16.00 to $23.00 480,302 261,902 $18.32 7.3 years
- -------------------------------------------------------------------------------------------------------------------------------
1,154,746 926,846 $16.11 6.8 years
- -------------------------------------------------------------------------------------------------------------------------------
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation expense has been recognized for the stock option
plans, as permitted under previous accounting standards. Had compensation cost
for the stock option plans been determined based on the fair value at the grant
date in accordance with SFAS No. 123, the Company's net income and related
earnings per share would have been changed to the pro forma amounts indicated
below:
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA) 2000 1999 1998
------------------------------------------------------------------------------
NET INCOME - AS REPORTED $7,388 $11,646 $ 5,892
NET INCOME - PRO FORMA $6,730 $11,064 $ 5,298
EARNINGS PER SHARE - AS REPORTED
BASIC $ 0.87 $ 1.38 $ 0.71
DILUTED $ 0.86 $ 1.36 $ 0.69
EARNINGS PER SHARE - PRO FORMA
BASIC $ 0.79 $ 1.31 $ 0.64
DILUTED $ 0.78 $ 1.29 $ 0.62
------------------------------------------------------------------------------
Included in these pro forma disclosures are stock options issued in 2000, 1999
and 1998 that were 100% vested by the end of the year in which the options were
granted. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model, with the following
weighted-average assumptions used for 2000, 1999 and 1998, respectively:
dividend yield of 0.97%, 0.87% and 0.71%; expected stock price volatility of
0.32, 0.32 and 0.29; risk-free interest rate of 4.95%, 6.50% and 4.70%; and
expected lives of four years. This option valuation model requires input of
highly subjective assumptions and, in management's opinion, does not provide a
reliable single measure of fair value of its employee stock options.
The Company has an employment agreement with an executive officer that
provides for the issuance of non-qualified stock options to purchase up to
300,000 common shares. Such options vested ratably over a five-year period
beginning June 30, 1994, and will expire 10 years after each option vested. The
exercise price per share is $9.33 for the first 60,000 common shares and $10.00
for the remaining 240,000 common shares. Options for 232,016 shares were
outstanding and exercisable at December 31, 2000.
RIGHTS PLAN: The Company has a preferred share purchase rights plan, and
declared a distribution of one Preferred Share Purchase Right (Right) on each
outstanding common share. The Rights will become exercisable if a person or
group acquires 20% or more of the Company's common shares, announces a tender
offer for 20% or more of the common shares or is declared an "adverse person" by
the Company's Board of Directors. Each Right entitles shareholders to buy one
one-hundredth of a share of a new series of participating preferred shares at an
exercise price of $75.00.
In addition, if a person or group acquires 20% or more of the Company's
outstanding common shares, each Right will entitle its holder (other than such
person or members of such group) to purchase one of the Company's common shares
(subject to certain adjustments) for a price of $0.50 per share. If, after a
person acquires 20% or more of the Company's common shares, the Company is
acquired in a merger or other business combination transaction with such person,
or 50% or more of its assets or earning power are sold, each Right will entitle
its holder to purchase for a price of $0.50 per share a specified number of the
acquiring company's common shares.
Prior to the acquisition by a person or group of 20% or more of the
Company's common shares, the Rights are redeemable for $0.01 per right at the
option of the Board of Directors. The Rights will expire on May 31, 2004.
30
LESCO, Inc.
PERFORMANCE PLAN: The Company has established long-term performance
plans, which grant restricted common share awards to certain officers. These
officers are entitled to receive common shares of the Company based upon
certain performance criteria over a three-year performance period.
Participants in the plans have the rights of shareholders, including the
right to receive dividends and the right to vote. Compensation expense of
$92,000 was recognized in 1999 under these plans, based upon the probability
that certain threshold performance criteria would be met. In 2000, 18,376
shares with a fair market value of $389,000 for the 1998-2000 performance
plan were forfeited. In 2000 and 1999, 26,402 and 35,497 shares were granted
with a fair market value of $408,000 and $549,000, respectively. This
activity is reflected in the Shareholders' Equity as "Unearned Compensation"
and "Amortization of Unearned Compensation."
NOTE 8 DEFINED CONTRIBUTION RETIREMENT PLAN
The Company maintains a defined contribution retirement plan for its
employees. The Company matches the contributions of participating employees
on the basis of percentages specified in the plan. Company contributions to
the plan were $791,000, $698,000 and $601,000 for 2000, 1999 and 1998,
respectively.
NOTE 9 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earn-
ings per share:
2000 1999 1998
---------------------------------------------------------------------------------------------------
NUMERATOR:
NET INCOME $ 7,388,000 $11,646,000 $ 5,892,000
DENOMINATOR:
DENOMINATOR FOR BASIC
EARNINGS PER SHARE -
WEIGHTED-AVERAGE SHARES 8,469,063 8,414,749 8,318,723
EFFECT OF DILUTIVE SECURITIES:
STOCK OPTIONS 142,559 164,270 238,093
RESTRICTED SHARES 12,219 -- 18,301
---------------------------------------------------------------------------------------------------
DILUTIVE POTENTIAL COMMON
SHARES 154,778 164,270 256,394
---------------------------------------------------------------------------------------------------
DENOMINATOR FOR DILUTED
EARNINGS PER SHARE -
ADJUSTED WEIGHTED-AVERAGE
SHARES AND ASSUMED
CONVERSIONS 8,623,841 8,579,019 8,575,117
---------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
BASIC $ 0.87 $ 1.38 $ 0.71
DILUTED $ 0.86 $ 1.36 $ 0.69
---------------------------------------------------------------------------------------------------
NOTE 10 BUSINESS SEGMENT INFORMATION
As a result of the Company's structural reorganization announced in January
2000, the Company elected to change the reporting of its business segments as of
January 1, 2000, and restated its prior years' presentation to conform to the
revised segment reporting. The Company changed from one reportable segment to
four reportable operating segments, to include Product Supply, Lawn Care, Golf
and Corporate, which are defined based on management responsibility.
The Product Supply division manufactures and distributes fertilizers,
combination products, golf course accessories and turfgrass seed. The division
also is responsible for purchasing raw materials and for purchasing and
distributing turf protection products, turf care equipment and related parts,
and golf course accessories. The Product Supply division sells exclusively to
the Lawn Care and Golf divisions of the Company. However, to more fully utilize
production capacity, Product Supply occasionally manufactures for third parties.
The Lawn Care division operates 232 LESCO Service Centers, which enable the
Company to market its products on a localized basis. The primary products sold
by the Lawn Care division are turf care products, including turf control
products, fertilizer, grass seed and equipment. The Service Centers market and
sell products principally to smaller lawn care companies, landscapers,
nurseries, municipalities, churches and condominium associations. This division
also markets and sells its products to large national and regional lawn care
customers through a separate group of sales representatives. This division
distributes selected products through Home Depot(TM) stores in the South,
Mid-Atlantic and Northeast areas of the country, and sells a consumer line of
lawn care products to nationwide retail stores under several brand names,
including Scenic Green, Professional Turf Products, TruGreen, ChemLawn and
Barefoot.
The Golf division markets and sells its products to private and public golf
courses and other customers with large turf areas through Company sales
personnel who operate a fleet of 78 LESCO Stores-on-Wheels. The primary products
sold by the Golf division are turf care products, including turf control
products, fertilizer, grass seed and equipment. These Stores-on-Wheels are well
stocked with a wide variety of turf care products and golf course accessories,
which are sold directly from the trucks. The Golf division has conventional
sales representatives strategically located in the various markets to support
the Stores-on-Wheels and sell to national golf customers. In addition, this
division markets its products internationally, principally through foreign
distributors.
The Corporate division includes the administrative functions of the Company,
which support the Product Supply, Lawn Care and Golf divisions, and include
Administration, Finance, Information Services, Legal and Human Resources.
The Company is engaged principally in the manufacture and marketing of
turf care products to the professional sector of the green industry.
31
LESCO, Inc.
No significant intervening events materially affected the financial statements.
The Company measures segment profit as operating profit. Net assets is defined
as the sum of net accounts receivable, inventory and net property, plant and
equipment, less accounts payable. Management utilizes this information as a
basis to calculate the divisional return of capital employed. Depreciation and
operating leases for specific Product Supply assets are allocated to Corporate
for operating profit measures. Information on segments is as follows:
FOR THE YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------------------------------------------------------------------------------
CORPORATE &
(IN THOUSANDS) PRODUCT SUPPLY LAWN CARE GOLF ELIMINATION CONSOLIDATED
-----------------------------------------------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS $ 350,862 $ 148,781 $ 499,643
INTERSEGMENT NET SALES $ 294,555 $(294,555)
OPERATING PROFIT 2,380 35,835 11,624 (33,454) 16,385
TOTAL ASSETS 93,747 85,225 32,663 33,258 244,893
NET ASSETS 60,443 85,225 32,663 15,141 193,472
-----------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------------------------------
CORPORATE &
(IN THOUSANDS) PRODUCT SUPPLY LAWN CARE GOLF ELIMINATION CONSOLIDATED
-----------------------------------------------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS $ 315,972 $ 144,382 $ 460,354
INTERSEGMENT NET SALES $ 308,773 $(308,773)
OPERATING PROFIT 4,870 31,023 10,571 (23,979) 22,485
TOTAL ASSETS 77,133 90,090 33,061 32,499 232,783
NET ASSETS 43,210 90,090 33,061 14,307 180,668
-----------------------------------------------------------------------------------------------------------------------
Segment information for periods prior to 1999 is not presented because it is
impracticable to prepare the information.
NOTE 11 QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 2000, and 1999:
QUARTERS ENDED 2000
-----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA) MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-----------------------------------------------------------------------------------------------------------------------
NET SALES $ 98,878 $ 158,288 $ 139,640 $ 102,837
GROSS PROFIT 33,007 55,960 46,078 26,954
NET (LOSS) INCOME (1,195) 9,960 4,245 (5,622)
(LOSS) EARNINGS PER SHARE:
BASIC (0.14) 1.18 0.50 (0.66)
DILUTED (0.14) 1.16 0.49 (0.66)
-----------------------------------------------------------------------------------------------------------------------
QUARTERS ENDED 1999
-----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA) MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-----------------------------------------------------------------------------------------------------------------------
NET SALES $ 83,054 $150,716 $130,938 $ 95,646
GROSS PROFIT 28,676 51,192 44,375 30,707
NET (LOSS) INCOME (1,796) 8,957 5,797 (1,312)
(LOSS) EARNINGS PER SHARE:
BASIC (0.21) 1.07 0.69 (0.16)
DILUTED (0.21) 1.04 0.68 (0.16)
-----------------------------------------------------------------------------------------------------------------------
(Loss) earnings per share amounts for each quarter are required to be computed
independently and, therefore, may not equal the amount computed on an annual
basis. During the fourth quarters of 2000 and 1999, net income decreased and
increased by approximately $2,439,000 and $550,000, respectively, due to
inventory adjustments. Also, during the fourth quarter of 1999, net income
increased by approximately $608,000 due to changes in prior-quarter allowance
for doubtful accounts and inventory estimates.