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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, 1999 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.)
20005 Lake Road, 44116
Rocky River, Ohio (Zip Code)
(Address of principal executive offices)
(440) 333-9250
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 (Section 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 15, 2000:
approximately $93,596,000.
Number of Common Shares outstanding on March 15, 2000: 8,505,093.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 24, 2000 (the "Proxy Statement") are incorporated
by reference in Part III.
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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. The
Company's operations constitute a single industry segment.
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, 1999, 1998 and
1997 are as follows:
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------
(Net sales in thousands)
1999 1998 1997
---------------------- --------------------- --------------------
Net Sales Percent Net Sales Percent Net Sales Percent
--------- ------- --------- ------- --------- -------
Consumable goods $385,395 83.7% $351,316 84.3% $290,502 81.4%
Hard goods 74,959 16.3% 65,422 15.7% 66,339 18.6%
-------- ----- -------- ----- -------- -----
Total $460,354 100.0% $416,738 100.0% $356,841 100.0%
======== ===== ======== ===== ======== =====
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.
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In early 2000, the Company introduced a new, state-of-the-art line of
"smart" fertilizers that will be sold under the brand name Novex(TM). 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. The
Company has more than 34,000 production acres under contract in these regions.
The Company's seed line includes 32 proprietary varieties as well as 28 standard
blends and mixtures.
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 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. Parts support is fully
computerized, and the Company is generally able to provide overnight parts
delivery nationwide. In early 2000, the Company entered into a contract with a
third party for the distribution of all parts.
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 234 Service
Centers in operation as of December 31, 1999. The Company is currently reviewing
its plan whether or not to open any Service Centers in 2000. 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 71 Stores-on-Wheels consisting of 7 step vans
and 64 tractor trailers as of December 31, 1999. 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 4 Stores-on-Wheels for a
total of 75 as of March 2000.
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, which typically generate
lower gross margins than the Service Centers and Stores-on-Wheels, have declined
as a percentage of total net sales as the number of Service Centers and
Stores-on-Wheels has increased.
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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 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.
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. Novex(TM)
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
early 1999, the Company became the exclusive distributor of Southern Golf
Products, Inc.'s product lines 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, Lebanon,
Scotts, Terra and United Horticultural Supply. The Company's principal
competitors for equipment are Jacobsen, John Deere, Ransomes, Scag and Toro. The
Company, however, believes that it is the only national company that supplies a
full range of products and sells directly to the commercial user. The Company
competes primarily on the basis of service to customers and product quality,
selection and price.
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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, 1999
and 1998 was $6,552,000 and $7,215,000, respectively.
Employees
- ---------
As of December 31, 1999, the Company had 1,363 full-time employees, of
which 393 were involved in manufacturing and warehouse operations, 599 in
sales-related activities and 371 in management and administration. Of the total
number of full-time employees, 838 are salaried and 525 are hourly employees. At
the Company's Martins Ferry facility, 131 employees are 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 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 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. There are no such
reserves for environmental matters at December 31, 1999.
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.
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Item 2. Properties
----------
The Company owns its principal executive office building 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, 1999 is as follows:
Location (1) Principal Use Square Feet Status
- ------------ ------------- ----------- ------
Rocky River, OH Executive offices 41,000 Owned
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(2)
Disputana, VA Manufacturing facility and distribution center for Novex 36,700 Leased(3)
fertilizers
Hamilton, NJ Distribution center for various products 100,000 Leased(4)
Martins Ferry, OH Manufacturing facility and distribution center for 234,000 Owned(5)
fertilizers, including sulfur-coated fertilizers, and
turf control products
Pittsburgh, PA Distribution center for various products 131,000 Leased(6)
Sebring, FL Manufacturing facility for fertilizers and combination 276,000 Owned/
products and distribution center for principal products Leased(7)
Stockton, CA Manufacturing facility and distribution center for 32,000 Owned/
fertilizers and turf control products Leased(8)
Silverton, OR Blending of grass seed and distribution center 66,200 Leased(9)
Wellington, OH Manufacturing facility for turf control products and 60,000 Owned
distribution center for principal products
Windsor, NJ Land and building previously used as a distribution 37,000 Owned
center for principal products
Hatfield, MA Manufacturing facility and distribution center for 77,000 Owned
fertilizers and turf control products, and blending of
turf grass seed
(1) Does not include Service Centers or Stores-on-Wheels. As of December
31, 1999, the Company operated Service Centers in 234 facilities of
which three are owned and 231 are leased by the Company. These
facilities range in size from 3,400 to 14,000 square feet. The Company
owns or leases 71 tractor-trailers for its Stores-on-Wheels.
(2) 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 December 31, 2000.
(3) This facility consists of two buildings which are subject to a lease
expiring April 30, 2006. The Company has two five-year renewal options.
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(4) This facility is subject to a lease expiring December 31, 2000. The
Company has a three-year renewal option.
(5) These facilities are subject to mortgages in the aggregate amount of
$6,299,000 as of December 31, 1999.
(6) This facility is subject to a lease expiring December 31, 2001. The
Company has two five-year renewal options.
(7) These facilities consist of seven buildings. Six buildings are subject
to leases expiring in 2000 and 2001. It is the Company's intent to
renew these leases upon their expiration. 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.
(8) 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 one five-year renewal option.
(9) This facility is subject to a lease, which expires in 2009. The lease
includes an option to purchase.
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
- ---- --- --------
R. Breck Denny 51 Vice President, Chief Financial Officer
William A. Foley 52 Chairman of the Board, President and Chief
Executive Officer
Ware H. Grove 49 Former Vice President, Chief Financial Officer
Charles J. McGonigle 41 Vice President, Operations
Wayne W. Murawski 55 Vice President, Chief Information Officer
Kenneth S. Sekley 41 Former Vice President, Marketing
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.
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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, following the death of James I. FitzGibbon.
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 January 1988 to October 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 Dairy Mart
Convenience Stores, Inc., a chain of convenience stores, and Libbey, Inc., a
producer of glass products.
Ware H. Grove was employed by the Company from June 1996 to July 1999
as Vice President, Chief Financial Officer. From 1994 to 1996, Mr. Grove was
Vice President and Treasurer at Revco D.S. Inc., a national drugstore chain.
From 1991 to 1994, Mr. Grove was Vice President and Treasurer at Vanstar
(formerly Computerland Corporation), a global distributor and reseller of
personal computers and related products. From 1983 to 1991, Mr. Grove was the
Assistant to the President at Manville Corporation, a global building materials
manufacturing company; and from 1977 to 1983, Mr. Grove was Cash Manager at The
Upjohn Company, a multinational pharmaceutical company.
Charles J. McGonigle 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.
Kenneth S. Sekley was employed by the Company from December, 1997 to
December 3, 1999 as Vice President, Marketing. Just prior to his employment with
the Company, Mr. Sekley was General Manager/Vice President, U.S. Crop Protection
for American Cyanamid Company, a $2.5 billion subsidiary of American Home
Products, which is a leading manufacturer of crop protection and lawn-and-garden
chemicals. From 1990 to 1997, Mr. Sekley held the following positions with
American Cyanamid: from 1995 to 1997, Vice President of Marketing; from 1994 to
1995, Business Manager, Retail Distribution/Database Marketing; from 1993 to
1994, District Sales Manager; from 1991 to 1993, Product Manager; and from 1990
to 1991, Manager, Business Development. Prior to his employment with American
Cyanamid, from 1980 to 1990, Mr. Sekley held positions with Quantum Associates,
Alliance Consulting, and Exxon Corporation.
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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:
1999 1998
--------------------- ---------------------
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31 16-11/16 12-1/2 24-1/4 20-1/2
June 30 19-1/8 13 23-3/8 18-3/8
September 30 19-1/2 13 19-7/8 11-5/8
December 31 17-5/16 13 15-3/8 9
The Company paid an annual dividend of $.14 per Common Share in 1999
and $.13 in 1998. 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 2, 2000 there were 1,343 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
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net sales $ 460,354 $ 416,738 $ 356,841 $ 312,031 $ 241,667
Cost of sales 305,404 283,837 238,392 218,596 160,576
---------------------------------------------------------------------
Gross profit on sales 154,950 132,901 118,449 93,435 81,091
Warehouse & delivery expense 36,592 33,710 27,793 23,382 17,351
Selling, general and
administrative expense 95,873 86,541 74,573 72,428 55,319
---------------------------------------------------------------------
Income (loss) from operations 22,485 12,650 16,083 (2,375) 8,421
Other deductions (income)
Interest expense 6,251 5,635 4,749 4,214 2,831
Joint venture loss 1,207 1,845 1,219 0 0
Other - net (3,875) (4,283) (4,025) (3,037) (2,246)
---------------------------------------------------------------------
Income (loss) before income taxes 18,902 9,453 14,140 (3,552) 7,836
Income tax expense (benefit) 7,256 3,561 5,515 (1,203) 3,009
---------------------------------------------------------------------
Net income (loss) $ 11,646 $ 5,892 $ 8,625 $ (2,349) $ 4,827
=====================================================================
Earnings (loss) per share:
Basic $ 1.38 $ .71 $ 1.06 $ (.29) $ .61
=====================================================================
Diluted $ 1.36 $ .69 $ 1.02 $ (.29) $ .59
=====================================================================
Cash dividends declared and paid
per common share $ .14 $ .13 $ .12 $ .11 $ .10
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Year Ended December 31
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $132,882 $116,101 $117,711 $ 99,904 $ 85,950
Total assets $232,783 $207,748 $200,318 $164,673 $137,821
Long-term debt, net
of current portion $ 95,199 $ 83,698 $ 83,353 $ 64,704 $ 43,258
Shareholders' equity $ 90,542 $ 78,697 $ 72,293 $ 61,699 $ 63,878
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Results of Operations
- ---------------------
Company sales rose to a record $460.4 million in 1999, a 10.5% increase compared
with $416.7 million in 1998, which was a 16.8% increase over 1997 sales of
$356.8 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 1999 and 1998. The increase reflected volume growth
primarily from the maturation of Service Centers previously opened. During 1999,
the Company did not open any new stores, rather management focused on increasing
sales and profitability through the Company's existing network. At the end of
1999 and 1998, the Company was operating 234 stores in 37 states compared with
215 stores at the end of 1997. Comparable store sales for 1999 increased 7.9%
compared with a 10.8% increase in 1998.
The Company reported diluted net earnings of $1.36 per share in 1999 compared
with $0.69 per share in 1998 and $1.02 per share in 1997. The increase in
earnings per share compared to a year ago is primarily related to improved sales
mix, cost controls and the improved performance at Commercial Turf Products,
Ltd. (CTP), the Company's 50% owned equity investment in a commercial equipment
joint venture with MTD Products Inc.
The Company's gross profit as a percent of sales in 1999 was 33.7% compared with
31.9% in 1998 and 33.2% in 1997. During 1999, the Company's gross profit percent
increased primarily as a result of a decrease in the Company's cost of major raw
materials and a more favorable product mix.
Warehouse and distribution expenses were 7.9% of sales compared with 8.1% in
1998 and 7.8% in 1997. During 1999 the Company's warehouse and distribution
expenses decreased as a percent of sales due primarily to the efficiencies
gained by the warehouse consolidation that occurred in 1998.
The Company's selling, general and administrative expenses of $95.9 million in
1999 increased 10.8% over $86.5 million in 1998, which represented an increase
of 16.0% over selling expenses of $74.6 million in 1997. Selling, general and
administrative expenses as a percent of sales in 1999 remained unchanged
compared to 1998 and decreased slightly compared to 1997. The expense increase
in 1999 was primarily attributable to the increase in sales and administrative
support personnel added in the first half of 1999 to support the continuing
business growth.
Interest expense increased to $6.3 million from $5.6 million in 1998 and $4.7
million in 1997. The increase in interest expense for both years was primarily
attributable to a higher average interest rate and larger working capital needs
associated with the growth of the business.
Results of operations for CTP represented a loss of $1.2 million in 1999
compared with a $1.8 million loss in 1998 and a $1.2 million loss recognized
from May through December 1997. The improvement in performance is primarily
attributable to the increase in the production volume from year to year.
Other - net consists primarily of customer finance charges. Customer finance
charges totaled $3.2 million in 1999 compared with $3.5 million in 1998 and $3.1
million in 1997. The decrease in 1999 compared to 1998 is primarily due to the
impact of outsourcing the Company's equipment financing programs.
-10-
11
The Company's effective tax rate in 1999 was 38.4% compared with 37.7% in 1998
and 39.0% in 1997. The change in effective tax rates from year to year is
primarily due to the impact of state and local income taxes.
Liquidity and Capital Resources
- -------------------------------
As of December 31, 1999, total assets of the Company were $232.8 million
compared with $207.7 million at year-end 1998 and $200.3 million at year-end
1997. The increase in assets is 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 the increase in borrowings
under the Company's credit facilities.
The Company's debt-to-total capitalization percentage was 51.3% as of December
31, 1999, compared with 51.5% as of December 31, 1998, and 53.6% as of December
31, 1997. The slight decrease in 1999 compared with 1998 was a result of a
larger increase in equity compared with the increase in debt. The decrease from
1998 compared with 1997 was a result of the relatively unchanged level of debt
while equity increased.
Accounts receivable increased 3.7% in 1999 compared with a 10.5% sales increase,
and in 1998, accounts receivable decreased 0.8% compared with a 16.8% sales
increase, due primarily to the outsourcing of equipment financing in mid-1997
and improved focus on management of receivables. In 1997, accounts receivable
increased 14.7%, compared with a sales increase of 14.4%. Inventories increased
16.2% in 1999 compared with 5.5% in 1998 and 20.7% in 1997. The increase in 1999
is primarily attributable to higher turfseed and equipment-related inventories.
The turfseed inventory rose as a result of higher-than-anticipated turfseed crop
yields, while equipment-related inventory rose primarily due to the increased
throughput at CTP and the continuing impact of the Company's new equipment
marketing approach. Accounts payable decreased in 1999 compared with increases
in 1998 and 1997, which was a result of decreased purchasing activity late in
the year in an effort to reduce inventories.
During 1999, the Company's expenditures for capital improvements and additions
totaled $14.0 million. Included in that total were expenditures of approximately
$4.0 million relating to the technology and construction of the Company's Novex
plant, $2.0 million relating to the Sebring fertilizer plant, and $2.7 million
of general improvements to the Company's other manufacturing and distribution
facilities. Additional capital expenditures included approximately $4.2 million
for the continuing design and implementation of information systems and
technology to improve the Company's management of assets and customer service.
The funding for these projects came primarily from an increase in the 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 1999 and
1998 net loss was $1.2 million and $1.8 million, respectively, and was recorded
as a reduction of the Company's original investment of $700,000. In connection
with this joint venture, the Company has extended $3.1 million of advances and
has also guaranteed 50% of certain liabilities of CTP aggregating $16.2 million
as of December 31, 1999, the Company's portion being $8.1 million.
In September 1999, the Company entered into a new revolving credit facility to
replace its previous $80.0 million revolving credit facility with banks. The new
agreement matures on June 30, 2003, and provides for maximum unsecured
borrowings of $60 million with no prepayment penalty. At December 31, 1999, the
Company had $39.0 million of debt outstanding on its revolving line of credit.
As of December 31, 1999, $21.0 million was available under this revolving credit
facility. In February 2000, the Company entered into a short-term note that
provides for borrowings up to a maximum of $10.0 million to support seasonal
working capital needs which matures on May 31, 2000. Interest is payable for
both credit facilities 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 2000 and the foreseeable
future.
Year 2000 Compliance
- --------------------
The Company believes it is now Year 2000 compliant and there were no adverse
events that occurred. No contingency plans were required to be implemented
relating to the Year 2000 issue. The costs associated with identifying and
remediating known Year 2000 problems were not material to the Company's
operations.
-11-
12
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 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 $48.8 million based on current borrowing rates
available for financing with similar terms and maturities. If the Company were
to terminate the seven-year, $7.0 million notional amount interest rate swap
agreement at December 31, 1999, the estimated value received would be $60,000.
See also the Long-Term Debt Note (Note 4) in the Notes to Consolidated Financial
Statements.
-12-
13
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, 1999, 1998 and 1997 F-2
Consolidated Balance Sheets--December 31, 1999 and 1998 F-3
Consolidated Statements of Cash Flows--Years ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity--Years ended December 31, 1999, 1998 and 1997 F-4
Notes to Consolidated Financial Statements F-5
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
Not Applicable.
-13-
14
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.
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, 1999 and 1998
Consolidated Statements of Income--Years ended December 31, 1999, 1998
and 1997
Consolidated Statements of Shareholders' Equity--Years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows--Years ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
The following financial statement schedule is included herewith:
Schedule II--Valuation and Qualifying Accounts--December 31, 1999, 1998
and 1997
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, 1999.
(c) Exhibits--The response to this portion of Item 14 is submitted as a
separate section of this report.
-14-
15
(d) Financial Statement Schedule
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, 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
====================================== ================ ================== ================= =============== =============
Year Ended December 31, 1997:
Deducted from assets accounts-
Reserve for inventory obsolescence $ 7,134,000 $ 457,000 ($3,342,000)(1) $ 4,249,000
====================================== ================ ================== ================= =============== =============
(1) Reserves relieved as obsolete inventory is sold or is otherwise disposed.
-15-
16
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, 2000
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 20, 2000
- ------------------------------- Executive Officer and Director
William A. Foley
/s/ R. Breck Denny Chief Financial Officer March 20, 2000
- -------------------------------
R. Breck Denny
/s/ Ronald Best Director March 20, 2000
- --------------------------------
Ronald Best
/s/ Drexel Bunch Director March 20, 2000
- --------------------------------
Drexel Bunch
/s/ Robert F. Burkhardt Director March 20, 2000
- -------------------------------
Robert F. Burkhardt
/s/ Edward F. Crawford Director March 20, 2000
- -------------------------------
Edward F. Crawford
/s/ J. Martin Erbaugh Director March 20, 2000
- -------------------------------
J. Martin Erbaugh
/s/ Michael J. FitzGibbon Director March 20, 2000
- -------------------------------
Michael J. FitzGibbon
/s/ Michael E. Gibbons Director March 20, 2000
- -------------------------------
Michael E. Gibbons
/s/ Lee C. Howley Director March 20, 2000
- -------------------------------
Lee C. Howley
/s/ Robert B. Stein Jr. Director March 20, 2000
- -------------------------------
Robert B. Stein Jr.
/s/ David L. Swift Director March 20, 2000
- -------------------------------
David L. Swift
-16-
17
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)(8) Loan Agreement dated as of November 1, 1997 between Highlands
County Industrial Development Authority and the Registrant.
4(i)(9) $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(q)(7) Second Amendment to the Credit Agreement dated November 1, 1996.
10(r)(1)(4) Credit Agreement dated September 30, 1994 among National City
Bank, PNC Bank, National Association, NBD Bank, N.A., National
City Bank, as agent, and the Registrant (the "Credit
Agreement")(appears as Exhibit 10(r) to Registrant's Form 10-K
for fiscal year 1994).
10(r)(2)(8) Third amendment to the Credit Agreement dated February 14, 1997
10(r)(3)(8) Fourth amendment to the Credit Agreement dated August 1, 1997
10(r)(4)(8) Fifth Amendment to the Credit Agreement dated January 28, 1998
10(r)(5)(9) Sixth Amendment to the Credit Agreement dated June 25, 1998
-17-
18
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)(8) Letter of Credit Agreement dated as of November 1, 1997 between
PNC Bank, National Association and the Registrant.
10(u)(10) 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)(11) 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..
21(12) Subsidiaries of the registrant
23(12) Consent of Ernst & Young LLP, Independent Auditors
27(12) Financial Data Schedule
-18-
19
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. 33-22685).
6 Incorporated by reference to exhibits, with the corresponding exhibit
numbers, filed by Registrant with its Registration Statement on Form
S-2 (File No. 33-67348).
7 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, 1996.
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 ending December 31, 1997.
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 June 30, 1998.
10 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.
11 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.
12 Filed herewith.
-19-
20
EXECUTIVE COMPENSATION PLANS
AND ARRANGEMENTS
----------------------------
Exhibits 10(a), 10(k), 10(1) and 10(p) are compensation plans in which
executive officers participate.
-20-
21
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 generally accepted accounting principles, 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 generally accepted auditing
standards, including a review of the internal control structure 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 outside
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
Shareholders and Board of Directors of LESCO, Inc.
We have audited the accompanying consolidated balance sheets of LESCO, Inc. as
of December 31, 1999, and 1998, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1999. Our audits also included the financial statement
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
LESCO, Inc. at December 31, 1999, and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, 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.
Cleveland, Ohio
February 4, 2000 /s/ Ernst & Young LLP
F-1
22
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31
- ----------------------------------------------------------------------------------------
(In thousands,except share data) 1999 1998 1997
- ----------------------------------------------------------------------------------------
Net sales $ 460,354 $ 416,738 $ 356,841
Cost of sales 305,404 283,837 238,392
- ----------------------------------------------------------------------------------------
GROSS PROFIT ON SALES 154,950 132,901 118,449
Warehouse and delivery expenses 36,592 33,710 27,793
Selling, general and administrative expenses 95,873 86,541 74,573
- ----------------------------------------------------------------------------------------
132,465 120,251 102,366
- ----------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 22,485 12,650 16,083
Other deductions (income):
Interest expense 6,251 5,635 4,749
Joint venture loss 1,207 1,845 1,219
Other - net (3,875) (4,283) (4,025)
- ----------------------------------------------------------------------------------------
3,583 3,197 1,943
- ----------------------------------------------------------------------------------------
Income before income taxes 18,902 9,453 14,140
Income tax expense 7,256 3,561 5,515
- ----------------------------------------------------------------------------------------
NET INCOME $ 11,646 $ 5,892 $ 8,625
- ----------------------------------------------------------------------------------------
EARNINGS PER SHARE
BASIC $ 1.38 $ 0.71 $ 1.06
DILUTED $ 1.36 $ 0.69 $ 1.02
- ----------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-2
23
CONSOLIDATED BALANCE SHEETS
December 31
- ------------------------------------------------------------------------------------------------------
(In thousands,except share data) 1999 1998
- ------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 2,110 $ 1,841
Accounts receivable, less allowance of $4,000 in 1999; $3,350 in 1998 67,759 65,358
Inventories 100,671 86,662
Deferred federal income taxes 1,154 1,568
Prepaid expenses and other assets 5,480 3,598
- ------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 177,174 159,027
PROPERTY, PLANT AND EQUIPMENT
Land 1,024 1,024
Buildings and improvements 25,680 23,107
Machinery and equipment 34,665 28,483
Furniture and fixtures 20,204 15,260
- ------------------------------------------------------------------------------------------------------
81,573 67,874
Less allowance for depreciation and amortization 35,412 28,796
- ------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 46,161 39,078
OTHER ASSETS 9,448 9,643
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 232,783 $ 207,748
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 33,923 $ 36,138
Salaries, wages and profit sharing 5,822 2,895
Other liabilities and accrued expenses 4,447 3,793
Current portion of long-term debt 100 100
- ------------------------------------------------------------------------------------------------------
Total Current Liabilities 44,292 42,926
LONG-TERM DEBT 95,199 83,698
DEFERRED INCOME TAXES 2,750 2,427
SHAREHOLDERS' EQUITY
Preferred shares - without par value - 500,000 shares authorized
Common shares - without par value - 19,500,000 shares authorized;
8,536,410 shares issued and 8,499,093 shares outstanding in 1999;
8,407,146 shares issued and 8,401,418 shares outstanding in 1998 854 841
Paid-in capital 33,594 31,631
Retained earnings 57,610 47,156
Less treasury shares, 37,317 in 1999 and 5,728 in 1998 (684) (59)
Unearned compensation (832) (872)
- ------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 90,542 78,697
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 232,783 $ 207,748
- ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-3
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
- ---------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 11,646 $ 5,892 $ 8,625
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization 6,920 5,658 4,275
Deferred income taxes 737 1,271 2,679
Increase in accounts receivable (4,839) (1,475) (8,195)
Provision for uncollectible accounts receivable 2,438 2,236 818
Increase in inventories (14,487) (5,587) (10,738)
Change in inventory and plant relocation reserves 478 2,151 (3,587)
(Decrease) increase in accounts payable (2,215) 1,760 6,370
Change in other current items 1,699 1,010 (2,309)
Other 195 (393) 801
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 2,572 12,523 (1,261)
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment - net (14,003) (11,529) (9,882)
Bond proceeds held for construction 0 4,761 (4,761)
Acquisition of businesses 0 (8,174) (2,949)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (14,003) (14,942) (17,592)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from borrowings 236,900 184,897 124,507
Reduction of borrowings (225,399) (184,552) (105,858)
Issuance of common shares 1,383 1,595 2,679
Cash dividends (1,184) (1,083) (972)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,700 857 20,356
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 269 (1,562) 1,503
Cash - beginning of the year 1,841 3,403 1,900
- ---------------------------------------------------------------------------------------------------------------
CASH - END OF THE YEAR $ 2,110 $ 1,841 $ 3,403
- ---------------------------------------------------------------------------------------------------------------
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, 1997 8,067,517 $ 807 $ 26,549 $ 34,694 $ (17) $ (334)
Issuance of common shares 193,295 19 2,787
Forfeiture of restricted common shares (4,728) (1) (68) 69
Amortization of unearned compensation 177
Purchase of 2,578 shares for treasury (42)
Dividends paid - $0.12 per share (972)
Net income 8,625
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 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)
- ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-4
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - LESCO, INC.
NATURE OF BUSINESS The Company is engaged in a single business segment, which is
the manufacture and marketing of 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. 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, and consist of $7,886,000 and $6,609,000 in raw
materials, and $92,785,000 and $80,053,000 in work in process and finished goods
at December 31, 1999, and 1998, respectively.
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 $10,031,000 and $9,213,000 of
intangible assets at December 31, 1999, and 1998, respectively, consisting
primarily of goodwill, patents, trademarks, customer lists and other
specifically identifiable assets arising from recent acquisitions, including
Pro-Lawn, Tri Delta Fertilizer, Inc. (Tri Delta), Agriturf, Inc. and Cadwell &
Jones, Inc. These assets are being amortized using the straight-line method over
periods of three to 20 years. Accumulated amortization was $1,720,000 and
$1,036,000 at December 31, 1999, and 1998, 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
$3,171,000, $3,534,000 and $3,118,000 in customer finance charges in 1999, 1998
and 1997, respectively.
STOCK OPTIONS The Company follows the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). 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 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.
F-5
26
On August 1, 1997, the Company purchased all the outstanding shares of Tri
Delta of Stockton, California, for $3,200,000, consisting of $2,949,000 in cash
and the issuance of 12,465 shares of the Company's common stock. The Company
recorded the acquisition using the purchase method of accounting.
The operating results of the acquired businesses have been included in the
statement 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 $16,242,000, the
Company's portion being $8,121,000, at December 31, 1999. These liabilities
mature through 2002 and bear interest at rates ranging from 3.5% to 8.5%.
Through December 31, 1999, the Company invested $700,000 in CTP and extended
advances of $3,100,000. CTP's financial information at December 31 was as
follows:
December 31
- ------------------------------------------------
(In thousands) 1999 1998
- ------------------------------------------------
Current assets $ 9,420 $ 9,845
Non-current assets 8,756 8,878
Current liabilities 16,568 14,700
Non-current liabilities 8,750 8,750
Net sales 39,935 14,741
Gross profit 728 3,298
Net loss (2,414) (3,689)
- --------------------------------------------------
NOTE 4 -Long - Term Debt
Long-term debt consists of the following:
December 31
- ------------------------------------------------
(In thousands) 1999 1998
- ------------------------------------------------
Term notes payable $50,000 $50,000
Credit agreement 39,000 19,900
Industrial revenue bonds 5,875 13,375
Other debt 424 523
- ------------------------------------------------
Sub-total 95,299 83,798
Less current portion 100 100
- ------------------------------------------------
Total long-term debt $95,199 $83,698
- ------------------------------------------------
In June 1998, the Company issued $50,000,000 in fixed-rate, private
placement notes to five insurance companies. The term notes' maturities range
from three to 10 years, with an average maturity of 7.5 years, and bear a
weighted-average interest rate of 6.81%.
In September 1999, the Company completed the renewal of its previous
$80,000,000 revolving credit facility with banks. The new agreement will mature
on June 30, 2003, and provides for maximum unsecured borrowings of $60,000,000.
Interest is payable at the bank's prevailing base rate (8.50% at December 31,
1999) on $17,000,000 of principal, or at alternative rates (ranging from 7.475%
to 7.968% at December 31, 1999) 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, 1999, $21,000,000 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. If the Company were to terminate this agreement
at December 31, 1999, the estimated value received would be $60,000.
In September 1999, the Company refinanced its $7,500,000 industrial revenue
bond related to a new Sebring, Florida, fertilizer plant. The Company also has
$5,875,000 of industrial revenue bonds outstanding related to its Martins Ferry,
Ohio, facility, which will mature in 2014. The bonds related to the Martins
Ferry facility are backstopped by an undrawn letter of credit, which will expire
in April 2001, and are secured by mortgages on property and equipment acquired
with the proceeds (net book value of $5,800,000 at December 31, 1999). Interest
is payable quarterly for such bonds at a rate based on comparable tax-exempt
market rates (5.65% at December 31, 1999). Under certain circumstances, the
Company may convert the interest rate to a fixed rate.
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27
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 ($1,500,000);
maintenance of certain operating and financial ratios; and maintenance of
minimum net worth. 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 $48,800,000 at December 31, 1999. The carrying amount of the
Company's other debt approximates fair market value. The annual maturities of
long-term debt for the years 2001 through 2004 are $5,097,000, $5,816,000,
$44,821,000 and $5,742,000, respectively. Interest payments were $6,396,000,
$5,863,000 and $4,873,000 in the years ended December 31, 1999, 1998 and 1997,
respectively.
NOTE 5 - Leases
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 1999, 1998 and 1997 was approximately
$16,900,000, $14,800,000 and $13,300,000, respectively. Future minimum lease
payments are as follows:
(In thousands)
YEARS ENDED DECEMBER 31 TOTAL
- ----------------------------------------------------
2000 $11,517
2001 9,742
2002 8,462
2003 6,655
2004 5,457
2005 and thereafter 7,307
- ----------------------------------------------------
Future minimum lease payments $49,140
- ----------------------------------------------------
NOTE 6 - 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
$698,000, $601,000 and $465,000 for 1999, 1998 and 1997, respectively.
NOTE 7 - Income Taxes
The provision for income taxes in the accompanying consolidated statements of
income consists of the following:
Years Ended December 31
- ---------------------------------------------------------------
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------
Current:
Federal $5,431 $1,903 $1,991
State 1,088 387 845
Deferred (principally federal) 737 1,271 2,679
- ---------------------------------------------------------------
Income tax expense $7,256 $3,561 $5,515
- ---------------------------------------------------------------
The provision for income taxes differs from the statutory rate as follows:
Years Ended December 31
- ---------------------------------------------------------------
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------
Income taxes at statutory rate $6,427 $3,214 $4,808
State and local income taxes
net of federal income
tax benefit 718 256 558
Other 111 91 149
- ---------------------------------------------------------------
Provision for income taxes $7,256 $3,561 $5,515
- ---------------------------------------------------------------
Income tax payments were $7,200,000, $2,877,000 and $4,687,000 in 1999, 1998
and 1997, respectively.
The significant components of deferred tax assets and liabilities are as
follows:
December 31,1999 December 31,1998
- --------------------------------------------------------------------------
DEFERRED TAX DEFERRED TAX
- --------------------------------------------------------------------------
(In thousands) ASSETS LIABILITIES ASSETS LIABILITIES
- --------------------------------------------------------------------------
Depreciation $ 2,695 $ 2,238
Allowance for bad
debts $ 1,349 $ 1,124
Accrued employee
benefits 404 325
Net operating loss
carry forward 502 657
Accrued insurance 71 85
Inventory reserves 890 107
Accrued compensation 472 449
Prepaid expenses 280 347
Other 27 13 163
- --------------------------------------------------------------------------
Total 2,798 3,892 2,653 2,855
Valuation
allowance (502) -- (657) --
- --------------------------------------------------------------------------
$ 2,296 $ 3,892 $ 1,996 $ 2,855
- --------------------------------------------------------------------------
F-7
28
As of December 31, 1999, the Company had net operating loss carry forwards of
$1.5 million for federal income tax reporting purposes, which will expire in
varying amounts, if unused, in years 2000 through 2011. These carry forwards
relate to the acquisition of Tri Delta. During 1999, the Company utilized
$455,000 of the carryforwards. The Company has recorded a valuation allowance
due to the uncertainty of the utilization of the carryforwards prior to their
expiration.
NOTE 8 - 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 1,683,875 common shares to key employees and directors.
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 is granted. The Company has in the past, and may from time to time in the
future, issue options outside of the Company's plans at an exercise price lower
than fair market value in connection with the employment or promotion of key
employees. Additional paid-in capital includes tax benefits of $143,000,
$473,000 and $429,000 relating to exercise of options in 1999, 1998 and 1997,
respectively. The following table summarizes the changes in the outstanding
options for the three years ended December 31, 1999:
- -------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Weighted - Weighted - Weighted -
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
Outstanding - beginning of year 734,560 $15.37 723,438 $13.86 811,726 $13.09
Granted 172,859 15.58 155,713 19.76 97,850 17.69
Exercised (94,926) 12.43 (103,741) 10.95 (176,063) 11.82
Canceled/forfeited (43,920) 16.35 (40,850) 14.44 (10,075) 14.04
- -------------------------------------------------------------------------------------------------------------------------
Outstanding - end of year 768,573 $15.79 734,560 $15.37 723,438 $13.86
- -------------------------------------------------------------------------------------------------------------------------
Option price range at end of year $ 7.00 to $ 5.67 to $ 5.67 to
$23.00 $23.00 $21.50
Exercisable - end of year 754,885 700,069 596,268
Reserved for future grants 121,995 255,393 390,189
Weighted-average fair value of options
granted during the year $ 5.05 $ 5.67 $ 4.55
- -------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding as of
December 31, 1999:
Range of Options Options Weighted - Average Weighted - Average
Exercise Prices Outstanding Exercisable Exercise Price Contractual Life
- -------------------------------------------------------------------------------------------
$7.00 to $15.69 478,807 478,807 $ 13.98 6.1 years
$16.00 to $23.00 289,766 276,078 $ 18.79 6.5 years
- -------------------------------------------------------------------------------------------
768,573 754,885 $ 15.79 6.1 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:
Years Ended December 31
- ----------------------------------------------------------------------------
(In thousands,except share data) 1999 1998 1997
- ----------------------------------------------------------------------------
Net income - as reported $ 11,646 $ 5,892 $ 8,625
Net income - pro forma $ 11,064 $ 5,298 $ 8,346
Earnings per share -
as reported
Basic $ 1.38 $ 0.71 $ 1.06
Diluted $ 1.36 $ 0.69 $ 1.02
Earnings per share -
pro forma
Basic $ 1.31 $ 0.64 $ 1.03
Diluted $ 1.29 $ 0.62 $ 0.98
- ----------------------------------------------------------------------------
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29
Included in these pro forma disclosures are stock options issued in 1999, 1998
and 1997 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 1999, 1998 and 1997, respectively:
dividend yield of 0.87%, 0.71% and 0.62%; expected stock price volatility of
0.32, 0.29 and 0.27; risk-free interest rate of 6.5%, 4.70% and 5.70%; 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, 1999.
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 one cent per right at the
option of the Board of Directors. The Rights will expire on May 31, 2004.
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 two- to three-year performance period. Participants in the plans
have the rights of shareholders, including the right to receive dividends and
the right to vote. In 1996, 23,029 shares were granted with a fair market value
of $334,000, of which 4,728 shares with a fair market value of $69,000 were
forfeited in 1997. Compensation expense of $92,000 and $177,000 was recognized
in 1999 and 1997, respectively, under these plans, based upon the probability
that certain threshold performance criteria would be met. In 1999 and 1998,
35,497 and 35,216 shares were granted with a fair market value of $549,000 and
$784,000, respectively. This activity is reflected in the shareholders' equity
as unearned compensation and amortization of unearned compensation.
NOTE 9 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
- ------------------------------------------------------------------------------
(In thousands,except share data) 1999 1998 1997
- ------------------------------------------------------------------------------
Numerator:
Net income $ 11,646 $ 5,892 $ 8,625
Denominator:
Denominator for basic
earnings per share -
weighted-average
shares 8,414,749 8,318,723 8,136,144
Effect of dilutive securities:
Stock options 164,270 238,093 341,643
Restricted shares 18,301 18,301
- ------------------------------------------------------------------------------
Dilutive potential common
shares 164,270 256,394 359,944
- ------------------------------------------------------------------------------
Denominator for diluted
earnings per share -
adjusted weighted-
average shares and
assumed conversions 8,579,019 8,575,117 8,496,088
- ------------------------------------------------------------------------------
Earnings Per Share
Basic $ 1.38 $ 0.71 $ 1.06
Diluted $ 1.36 $ 0.69 $ 1.02
- ------------------------------------------------------------------------------
F-9
30
NOTE 10 -Business Segment Information
The Company operates in one reportable segment, the manufacture and marketing of
turf care products to the professional sector of the green industry. The
revenues and gross profit margins are classified into categories of hard goods
and consumable goods. The table below reflects these classifications:
Years Ended December 31
- ----------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
(In thousands) Hard Consumable Hard Consumable Hard Consumable
- ----------------------------------------------------------------------------------------------------------
Sales $ 74,959 $ 385,395 $ 65,422 $ 351,316 $ 66,339 $ 290,502
Gross profit 40.6% 33.6% 40.5% 30.2% 43.2% 30.9%
- ----------------------------------------------------------------------------------------------------------
NOTE 11 - Quarterly Results (Unaudited)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 1999, and 1998:
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)
- --------------------------------------------------------------------------------
Quarters Ended 1998
- --------------------------------------------------------------------------------
(In thousands,except share data) Mar. 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------
Net sales $ 72,690 $134,446 $118,837 $ 90,765
Gross profit 24,516 45,737 36,841 25,807
Net (loss) income (1,522) 7,334 2,513 (2,433)
(Loss) earnings per share:
Basic (0.18) 0.88 0.30 (0.29)
Diluted (0.18) 0.85 0.30 (0.29)
- --------------------------------------------------------------------------------
(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 quarter of 1999, net income increased by approximately
$550,000 due to inventory adjustments. Also, during the fourth quarters of 1999
and 1998, net income increased and decreased by approximately $608,000 and
$1,629,000, respectively, due to changes in prior-quarter allowance for doubtful
accounts and inventory estimates.
F-10