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 year ended December 31, 1995 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)
(216) 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 18,
1996: approximately $92,300,000.
Number of Common Shares outstanding on March 18, 1996: 7,986,088.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held in 1996 (the "Proxy Statement") are incorporated by
reference in Part III.
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
line 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 an extensive line of turf care
products to the green industry, 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(TM)," "LESCO Products" and, as of January
1996, "Pro-Lawn Products." In addition, the Company sells a diverse line of
turf products under the manufacturer's brand name.
Sales by product line for the years ended December 31, 1995, 1994 and
1993 are as follows:
Year Ended
----------
(Net sales in thousands)
December 31
-------------------------------------------------------------------------
1995 1994 1993
--------------------- -------------------- --------------------
Net Sales Percent Net Sales Percent Net Sales Percent
--------- ------- --------- ------- --------- -------
Consumable goods $184,545 76.4% $154,408 75.5% $124,330 74.8%
Hard goods 57,122 23.6% 50,115 24.5% 41,873 25.2%
-------- ------ -------- ------ -------- ------
Total $241,667 100.0% $204,523 100.0% $166,203 100.0%
======== ====== ======== ====== ======== ======
Consumable Goods
Turf Control Products. The Company offers a full line of turf control
products including herbicides, insecticides and fungicides. These products
control weeds, insects and fungal diseases for turf, trees, shrubs and
landscape beds. The Company's turf control products include its LESCO
BioChoice(TM) alternative product line. In addition, 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 which 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 lawncare industry, and products for trees, shrubs and
landscape beds. Fertilizers are generally sold in a granular form although
specialized liquid formulations are also available.
-2-
3
The majority of the fertilizers sold by the Company are formulated
with sulfur-coated urea fertilizer, and 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 overfertilization. ELITE(R) is the Company's
premium brand sulfur-coated urea fertilizer, specially sized and formulated
for low-cut turf on greens, tees and fairways.
Grass Seed. The Company markets LESCO and other brands of grass 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 grass
seed with growers in the Pacific Northwest and Western Canada for cool season
grasses and in California, Florida and Georgia for warm season grasses. The
Company has more than 16,500 production acres under contract in these regions.
The Company's seed line includes 28 proprietary varieties as well as 21
standard blends and mixtures.
Hard Goods
Equipment and Accessories. The Company manufactures a broad line of
equipment including reel mowers, such as greens and fairway mowers, rotary
mowers, spreaders, sprayers, aerators, renovation equipment and aftermarket
replacement parts. 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 line of handheld power
tools and a variety of golf course accessories including ball washers, tee
markers, sand trap rakes, putting green cups and flagpoles. Equipment sales
are supported by field equipment specialists, a toll-free hotline staffed by
trained technicians and repair facilities in the Service Centers. Parts
support is fully computerized, and the Company is generally able to provide
overnight parts delivery nationwide.
Other. The Company offers underground irrigation equipment and
systems, 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 opened 35 new
Service Centers in 1995 and had 173 Service Centers in operation as of December
31, 1995. The Company plans to open twenty Service Centers in 1996. The
Service Centers market products principally to smaller lawn care companies,
landscapers, nurseries, municipalities, churches and condominium associations.
The Company may face increased competition in this market.
LESCO Stores-on-Wheels(SM). 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 Stores-on-Wheels consisting of 65
tractor trailers. These trucks are well-stocked with a wide variety of turf
care products, all of which are sold directly from the trucks.
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.
-3-
4
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 force. The
Company distributes selected products through Home Depot stores in the South,
Mid-Atlantic and Northeast areas of the country. 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. 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, Replacement Parts and Golf Course Accessories.
Certain turf care equipment and replacement parts are manufactured and
assembled by the Company, primarily at its Sebring, Florida facilities. The
Company purchases metal components and performs such aspects of manufacturing
as stamping, bending, cutting, welding, drilling, grinding and punching of
parts such as mower reels and bedknives. The Company also assembles greens
mowers, fairway mowers, rotary mowers, aerators, turf renovators, spreaders,
sprayers and other turf care equipment at Sebring using components acquired
from a variety of suppliers or parts manufactured by the Company. Additional
equipment and parts, as well as most golf course accessories, are manufactured
by various contractors with tooling, dies and molds owned by the Company.
Sources of Supply. It is the Company's policy to have multiple
sources of supply or acceptable substitutes for all raw materials and metal
components which the Company uses in manufacturing or assembling 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, Scott's, Terra, United Horticultural Supply and Vigoro. 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.
Seasonality and Backlog
The Company's business is seasonal since the customers in northern
states do not have the same year-round requirements for products as do
customers in southern states. 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 acted to reduce variations in
sales and earnings from
-4-
5
quarter to quarter. The Company's backlog as of December 31, 1995 and 1994 was
$4,100,000 and $3,900,000, respectively.
Employees
As of December 31, 1995, the Company had 1,008 full-time employees, of
which 325 were involved in manufacturing, assembly and warehouse operations,
444 in sales-related activities and 239 in management and administration. Of
the total number of full-time employees, 592 are salaried and 416 are hourly
employees. At the Company's Martins Ferry facility, 84 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 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's 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 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 permits from a number of governmental agencies in order
to conduct various aspects of its business. These 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, 1995.
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 reflect trends in the liability insurance
industry and are not unique to the Company. The Company regularly evaluates
the cost-effectiveness as compared to the risks assumed in determining its
insurance program.
-5-
6
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, except its executive offices. Detail by location is as follows:
Location (1) Principal Use Square Feet Status
- ------------ ------------- ----------- ------
Rocky River, OH Executive offices 41,000 Owned
Avon Lake, OH Blending of seed and distribution center 139,000 Owned
Charlotte, NC Distribution Center for various products 57,600 Leased(2)
Martins Ferry, OH Manufacturing facility and distribution center for 234,000 Owned(3)
fertilizers, including sulfur-coated fertilizers, and
turf control products
Sebring, FL Manufacturing facility for fertilizers; manufacturing 241,000 Leased(4)
and assembly of turf care equipment, replacement parts
and golf course accessories; and distribution center
for principal products
Silverton, OR Distribution center and blending of grass seed 66,200 Leased(5)
Wellington, OH Manufacturing facility for turf control products and 60,000 Owned
distribution center for principal products
Windsor, NJ Distribution center for principal products 37,000 Owned(6)
(1) Does not include Service Centers or Stores-on-Wheels. As of December
31, 1995, the Company operated 173 Service Centers of which two are
owned and 171 are in leased facilities ranging in size from 2,500 to
7,200 square feet. The Company owns or leases its 65 tractor-trailer
Stores-on-Wheels.
(2) This facility is subject to a lease expiring in 1998. The Company has
an option to renew the lease for a three-year term.
(3) The facilities are subject to mortgages in the aggregate amount of
$6,624,000 as of December 31, 1995.
(4) These facilities consist of nine buildings; two are leased
month-to-month and the remainder are subject to leases expiring in
1996 and 2000. It is the Company's intent to renew these leases upon
expiration of their current terms.
(5) This facility is subject to a fifteen year lease expiring in 2009
which includes an option to purchase.
(6) The facility is subject to a mortgage in the amount of $234,000 as of
December 31, 1995.
In January 1996, the Company completed the purchase of certain assets of the
Pro-Lawn Division of Agway, Inc. and intends to distribute Pro-Lawn products
from the six Agway distribution centers used by Pro-Lawn prior to the
acquisition which total approximately 125,000 square feet.
-6-
7
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
---- --- --------
William A. Foley 48 Chairman of the Board, President and Chief Executive Officer
John M. Freise 50 Vice President, Service Centers
Philip R. Gardner 52 Vice President, Lawn Care Sales and National Accounts
C. Thomas Smith 47 Vice President, Operations
Michael A. Sotak 41 Vice President, Marketing
William A. Foley joined the Company in July 1993 as President, Chief
Executive Officer and a director. He was elected Chairman of 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 from
1984 to 1988, and was Vice President - Sales and Marketing for Anchor Hocking
Corporation from 1970 to 1984, a producer of glass products. Mr. Foley is also
a director of Alltrista Corporation, a consumer and industrial products
manufacturing company, Associated Estates Realty Corporation, a real estate
investment trust, and Libbey, Inc., a producer of glass products.
John M. Freise joined the Company in 1995 as Vice President, Service
Centers. From 1991 to 1995, Mr. Freise was a Regional Vice President Store
Operations and Vice President/General Merchandise/Hardlines for Roses Stores, a
regional discount store chain. Mr. Freise was District Manager (Director
Level) from 1990 to 1991, and from 1987 to 1990 was District Manager of Target
Stores, a national discount retailer.
Philip R. Gardner is Vice President, Lawn Care Sales and National
Accounts. From March 1991 until February 1995 he served as Executive Vice
President, Sales of the Company, and served as Vice President, Sales from
January 1985 until March 1991. Mr. Gardner joined the Company in September
1976, was promoted to Regional Sales Manager in 1979 and Southeast Sales
Manager in 1983.
C. Thomas Smith joined the Company is 1994 as Vice President,
Operations. From 1979 to 1994, Mr. Smith was Group Director, Advanced
Manufacturing at Frigidaire Co., a manufacturer of household major appliances.
From 1978 to 1979, Mr. Smith was Manager, Materials and Production at Anderson
IBEC, a manufacturer of food processing equipment. From 1970 to 1977, Mr.
Smith was a Senior Buyer, Mfg. & Capital Equipment at Babcock & Wilcox Co., a
manufacturer of power operation equipment.
-7-
8
Michael A. Sotak joined the Company in 1994 as Vice President,
Marketing. From 1991 to 1993, Mr. Sotak was a Director of Marketing at
Pitman-Moore, Inc., now known as Mallinckrodt Veterinary, Inc., Division of
Mallinckrodt, Inc. Mr. Sotak also held the following positions with
Pitman-Moore, Inc.: 1989 to 1991, Director of Business Management; 1988 to
1989, Director, International Marketing; and, 1987 to 1988, National Sales
Manager. From 1978 to 1987, Mr. Sotak was Senior Product Manager of
Schering-Plough Corporation, a pharmaceutical manufacturer and marketer.
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:
1995 1994
------------------- -------------------
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31 15-3/4 12-3/4 17-3/4 12-1/2
June 30 17-3/4 14-1/4 17 12-3/4
September 30 15-5/8 12-3/4 16-1/2 13-1/2
December 31 15-1/8 13 16-1/4 12-1/2
The Company paid an annual dividend of $.10 per Common Share in 1995
and $.09 in 1994. Certain provisions of the principal credit agreement of the
Company restrict the right of the Company to pay dividends. See Note C of
Notes to Financial Statements.
As of March 18, 1996 there were approximately 1,000 holders of record
of the Company's Common Shares.
-8-
9
Item 6. Selected Financial Data
Five Year Summary
(Amounts in Thousands Except Per Share Data)
Year ended December 31 November 30
- ---------- ---------------------------------------------- -----------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Statement of Income Data:
Net Sales $241,667 $204,523 $166,203 $145,704 $131,401
Cost of sales 160,576 133,826 108,703 97,782 88,711
------------------------------------------------------------
Gross Profit on Sales 81,091 70,697 57,500 47,922 42,690
Selling, general and
administrative expenses 72,670 61,246 49,786 41,313 37,024
------------------------------------------------------------
Income from Operations 8,421 9,451 7,714 6,609 5,666
Other deductions-net 585 71 189 550 1,459
------------------------------------------------------------
Income Before Income Taxes
and Cumulative Effect of
Change in Accounting Principle 7,836 9,380 7,525 6,059 4,207
Income taxes 3,009 3,608 2,765 2,202 1,588
------------------------------------------------------------
Income Before Cumulative Effect
of Change in Accounting Principle 4,827 5,772 4,760 3,857 2,619
Cumulative effect on prior years of
changing the method of capitalizing
certain inventory costs 1,149
------------------------------------------------------------
Net Income $ 4,827 $ 6,921 $ 4,760 $ 3,857 $ 2,619
============================================================
Earnings Per Share:
Income before cumulative effect
of change in accounting principle $.59 $.72 $.68 $.60 $.43
Cumulative effect on prior years of
changing the method of
capitalizing certain
inventory costs .14
------------------------------------------------------------
Earnings Per Share $ .59 $.86 $.68 $.60 $.43
============================================================
Cash dividends per
common share $.10 $.09 $.08 $.07 $.05
Weighted average number of
common and common
equivalent shares
outstanding 8,116,740 8,034,387 6,963,994 6,438,024 6,153,693
-9-
10
Year ended December 31 November 30
- ---------- ------------------------------------------------- -----------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $ 85,950 $ 70,839 $ 65,414 $ 56,873 $ 46,957
Total assets $137,821 $114,612 $104,471 $ 95,882 $ 90,355
Long-term debt, net
of current portion $ 43,258 $ 29,542 $ 33,122 $ 45,499 $ 38,193
Shareholders' equity $ 63,878 $ 58,175 $ 50,883 $ 29,453 $ 26,435
Notes:
A. In December 1991, the Company changed its fiscal year ending
November 30 to a calendar year ending December 31.
B. All per share data have been adjusted to give effect to a
3-for-2 stock split completed by the Company in July 1993.
C. Effective January 1, 1994, the Company changed its method of
accounting for inventory costs to include the capitalization
of certain warehousing, transportation and procurement costs
which were previously expensed.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The Company sales rose to a record level in 1995 increasing 18.2% to
$241,667,000 compared to $204,523,000 in 1994 which was a 23.1% increase over
1993 sales of $166,203,000. All of the Company's sales groups reflected growth
with Service Centers contributing the largest increase for both years. This
increase was due to the expansion of Service Centers in operation to 173 from
138 and 103 as of December 31, 1995, 1994 and 1993, respectively, and the
maturation of existing stores. Same store sales for 1995 increased 16.7%
compared to a 10.1% increase in 1994. The Company's Golf Course sales group
reflected growth of 13.2% in 1995 over 1994 and 15.1% in 1994 over 1993. This
sales group calls directly on golf course superintendents and operates the
Company's Stores-on-Wheels which increased in number to 65 as of December 31,
1995 compared to 59 as of December 31, 1994 and 55 at December 31, 1993. In
1996, the Company intends to expand the Service Center group by 20 stores and
three additional golf course Stores-on-Wheels.
The Company's earnings per share were $.59 per share in 1995 compared
to $.72 per share in 1994, exclusive of the $.14 per share cumulative effect of
an accounting change, and $.68 per share in 1993. As discussed below, the
decrease in earnings is primarily due to fertilizer margin pressures and the
continued expansion of sales facilities for future growth.
Sales of consumable goods increased 19.5% to $184,545,000 in 1995
compared to $154,408,000 in 1994 which increased 24.2% over 1993 sales of
$124,330,000. All components of this category, fertilizers, turf protection
products, combination products and grass seed, recorded sales increases in both
1995 and 1994. Hard goods, primarily equipment, increased to $57,122,000 in
1995, a 14% increase over 1994 sales of $50,115,000, which increased 19.7% over
1993 sales of $41,873,000. The Company anticipates future growth in both
product categories through increases in its sales force and new product
introductions.
The Company's gross profit as a percent of sales was 33.6% in 1995
compared to 34.6% in 1994 and 1993. The 1995 margin decrease was the result of
increasing cost of urea, the Company's major component in fertilizers, which
increased at a greater rate than price increases to customers. The market
price of urea increased over 30% in the fourth quarter of 1994 and continued
this year-to-year increase through the first nine months of 1995. For the year
1995, margins on fertilizer products were down 4.4% from 1994 margins. The
Company increased prices to its customers in 1995 and has negotiated urea
supply contracts for 1996 which will positively impact the Company's fertilizer
margins in 1996. Gross profit margins on hard goods were up slightly in 1995
compared to
-10-
11
1994. Margins for 1994 compared to 1993 were unchanged due to hard goods
margin increases offsetting the decline in consumable goods margins.
Selling, general and administrative expenses were 30.1% of sales in 1995
compared to 29.9% in 1994 and 30% in 1993. Selling expense is the largest
component of this cost and increased 29.2% to $37,818,000 in 1995 compared to
$29,282,000 in 1994 which was an increase of 26.7% over $23,113,000 in 1993.
Selling expense is driven by the Company's Service Centers costs. The number
of Service Centers in operation have increased from 83 stores as of year-end
1992 to 173 stores as of year-end 1995. Golf Course Stores-on-Wheels also
increased during this period from 51 to 65 operating units. The Company's
distribution and delivery expenses have remained relatively unchanged as a
percentage of sales for the three-year period while general and administrative
expenses have declined from 6.8% of sales in 1993 to 6.2% in 1994 and 5.7% in
1995.
Interest expense increased to $2,831,000 in 1995 from $1,931,000 in
1994 and $2,195,000 in 1993. The primary reason for the 1995 increase was
increased borrowing levels with interest rates affecting expense to a lesser
degree. In late 1993, the Company's offering of common stock generated
$16,600,000 in proceeds which was used to reduce debt. This reduced borrowing
levels for 1994 and thereby related interest expense. Other -- net consists
primarily of customer finance charges which total $2,148,000 in 1995 compared
to $1,834,000 in 1994 and $1,965,000 in 1993.
The Company's effective tax rate was 38.4% in 1995 compared to 38.5%
in 1994 and 36.7% in 1993. The rate is inclusive of federal, state and local
rates with the change from 1993 to 1994 reflecting additional state and local
taxes due to the Company's geographic expansion.
Effective January 1, 1994, the Company changed its method of
accounting for inventory costs to include the capitalization of certain
warehousing, transportation and procurement costs which were previously
expensed. The cumulative effect of this change was to increase net income in
1994 by $1,149,000 (net of $735,000 in income taxes) or $.14 per share. The
Company's earnings per share, exclusive of the cumulative effect of the
accounting change, were $.72 per share in 1994 compared to $.68 in 1993.
Financial Position
The Company's debt to total capitalization ratio was .40 as of
December 31, 1995 compared to .34 as of year-end 1994 and .39 as of year-end
1993. This increase was due primarily to the funding of the increase in
working capital and investment in capital assets. Accounts receivable
increased $9,279,000 as of December 31, 1995 compared to year-end 1994 and
$6,099,000 at year-end 1994 over 1993, a 24.2% and 18.9% increase,
respectively. These increases relate to sales increases of 18.2% in 1995 and
23.1% in 1994 with 1995 reflecting an increase in early-order dating program
receivables due in the spring of 1996. Inventories increased $9,097,000 as of
December 31, 1995 compared to year-end 1994 and $4,508,000 at year-end 1994
over 1993, a 17.6% and 9.6% increase respectively. The increase in inventories
relates primarily to the increase in the number of Services Centers and
Stores-on-Wheels in operation as well as a planned shift to earlier production
as the Company moves from principally a "made-to-order" to a "ship-from-stock"
system. This change was prompted by spring seasonal demand exceeding the
Company's production capacity and is designed to improve customer service
performance through higher order fill rates.
During 1995, the Company's expenditures for capital additions and
improvements totaled $7,609,000 which included the purchase and improvements of
its Avon Lake, Ohio distribution facility of $2,731,000, and expenditures for
information system technology of approximately $2,200,000 with the remaining
amount primarily for Service Center and Stores-on-Wheels expansion. The
primary expenditures planned for 1996 include the expansion of the Windsor,
New Jersey distribution facility, continued advancements in information
technology, 20 new Service Centers and three new Stores-on-Wheels. The funding
for these investments will be provided by operations, the Company's credit
facility or by specific project financing.
In January 1996, the Company increased its maximum available line of
credit from $45,000,000 to $70,000,000 through September 1996. This additional
borrowing capacity will provide for 1996 seasonal needs and Pro-Lawn
acquisition financing. The original credit facility matures in September 1998,
is unsecured and does not have a prepayment penalty. Interest is payable at
the bank's prevailing prime rate or at alternative rates based on
-11-
12
LIBOR or CD options as elected by the Company. At December 31, 1995, the
Company had available $8,400,000 under its then existing $45,000,000 line of
credit.
Effective January 22, 1996, the Company completed the cash purchase of
certain assets of Agway, Inc.'s Pro-Lawn Division for $11,200,000. The
agreement includes acquisition of Pro-Lawn's inventories and certain fixed
assets, the sales organization and key administrative personnel, all Pro-Lawn
licenses/trademarks and supply and distribution agreements. Pro-Lawn's sales
for the fiscal year ended June 30, 1995 approximated $30 million.
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 Ernst & Young LLP, Independent Auditors F-1
Balance Sheets--December 31, 1995 and 1994 F-2
Statements of Income--Years ended December 31, 1995, 1994 and 1993 F-4
Statements of Shareholders' Equity--Years ended December 31, 1995, 1994 and 1993 F-5
Statements of Cash Flows--Years ended December 31, 1995, 1994 and 1993 F-6
Notes to Financial Statements F-7
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
-12-
13
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 Schedules.
The following financial statements of LESCO, Inc. are included in
Item 8:
Balance Sheets--December 31, 1995 and 1994
Statements of Income--Years ended December 31, 1995, 1994 and 1993
Statements of Shareholders' Equity--Years ended December 31, 1995,
1994 and 1993
Statements of Cash Flows--Years ended December 31, 1995, 1994 and 1993
Notes to Financial Statements
All 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, 1995.
(c) Exhibits--The response to this portion of Item 14 is submitted as a
separate section of this report.
-13-
14
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 27, 1996
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 27, 1996
------------------- Executive Officer and Director
William A. Foley
/s/Paul D. Arling Acting Chief Financial Officer March 27, 1996
-------------------
Paul D. Arling
/s/Drexel Bunch Director March 27, 1996
---------------
Drexel Bunch
/s/Robert F. Burkhardt Director March 27, 1996
----------------------
Robert F. Burkhardt
/s/Paul H. Carleton Director March 27, 1996
-------------------
Paul H. Carleton
Director March , 1996
-----------------
David H. Clark
/s/J. Martin Erbaugh Director March 27, 1996
--------------------
J. Martin Erbaugh
/s/Stanley M. Fisher Director March 27, 1996
--------------------
Stanley M. Fisher
/s/Michael FitzGibbon Director March 27, 1996
---------------------
Michael FitzGibbon
/s/F. Leon Herron Director March 27, 1996
-----------------
F. Leon Herron
Director March , 1996
-------------
Lee Howley
/s/Karl E. Ware Director March 27, 1996
---------------
Karl E. Ware
-14-
15
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).
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(p)6 Employment Agreement by and between the Registrant and William A. Foley.
10(q)7 Amendment to the Credit Agreement dated January 18, 1996.
10(r)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").
10(s)4 Consulting Agreement by and between the Registrant and Robert F. Burkhardt.
23 7 Consent of Ernst & Young LLP, Independent Auditors.
27 7 Financial Data Schedule.
-15-
16
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 ended 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-1 (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 Filed herewith.
-16-
17
EXECUTIVE COMPENSATION PLANS
AND ARRANGEMENTS
Exhibits 10(a), 10(k), 10(1) and 10(p) are compensation plans in
which executive officers participate.
-17-
18
Report of Ernst & Young LLP, Independent Auditors
Shareholders and Board of Directors
LESCO, Inc.
We have audited the accompanying balance sheets of LESCO, Inc. as of December
31, 1995 and 1994, and the related statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial position of LESCO, Inc. at December 31,
1995 and 1994, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As described in Note B to the financial statements, in 1994 the Company changed
its method of accounting for certain inventory costs.
ERNST & YOUNG LLP
Cleveland, Ohio
February 2, 1996
F-1
19
LESCO, INC.
BALANCE SHEETS
December 31
------------------------------
1995 1994
-------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 2,619,515 $ 3,336,984
Accounts receivable, less
allowance of $2,500,000 47,694,739 38,415,407
Inventories 60,773,248 51,676,234
Prepaid expenses and other assets 4,415,189 3,174,009
------------- -------------
TOTAL CURRENT ASSETS 115,502,691 96,602,634
PROPERTY, PLANT AND EQUIPMENT
Land 498,772 264,658
Buildings and improvements 13,006,881 10,219,497
Machinery and equipment 21,399,112 19,798,666
Trucks and automobiles 1,694,123 1,933,564
Furniture and fixtures 6,272,862 3,775,918
------------- -------------
42,871,750 35,992,303
Less allowance for depreciation
and amortization 21,430,906 18,926,159
------------- -------------
21,440,844 17,066,144
OTHER ASSETS 877,688 942,726
------------- -------------
TOTAL ASSETS $ 137,821,223 $ 114,611,504
============== ==============
F-2
20
December 31
-------------------------------
1995 1994
------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 23,670,302 $ 20,667,349
Salaries, wages and profit sharing 1,329,083 1,119,222
Other liabilities and accrued expenses 4,353,634 3,776,872
Current portion of long-term debt 200,000 200,000
-------------- --------------
TOTAL CURRENT LIABILITIES 29,553,019 25,763,443
LONG-TERM DEBT 43,257,818 29,541,528
DEFERRED INCOME TAXES 1,132,000 1,132,000
SHAREHOLDERS' EQUITY:
Preferred shares--without par value--
authorized 500,000 shares
Common shares--without par value--
19,500,000 shares authorized; 7,956,738 shares issued
and 7,949,988 shares outstanding in 1995; 7,805,673
shares issued and 7,798,923 shares outstanding in 1994 795,674 780,567
Paid-in capital 25,197,613 23,552,180
Retained earnings 37,922,571 33,879,258
Less treasury shares (37,472) (37,472)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 63,878,386 58,174,533
-------------- --------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 137,821,223 $ 114,611,504
============== ==============
See notes to financial statements.
F-3
21
LESCO, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED December 31
----------------------------------------------
1995 1994 1993
------------ -------------- ------------
Net sales $241,666,554 $ 204,523,327 $166,203,286
Cost of sales 160,575,974 133,826,179 108,703,117
------------ -------------- ------------
GROSS PROFIT ON SALES 81,090,580 70,697,148 57,500,169
Selling, general and
administrative expenses 72,669,868 61,245,743 49,785,941
------------ -------------- ------------
INCOME FROM OPERATIONS 8,420,712 9,451,405 7,714,228
Other deductions (income):
Interest expense 2,830,837 1,930,606 2,194,908
Other - net (2,245,924) (1,859,271) (2,006,121)
------------ -------------- ------------
584,913 71,335 188,787
------------ -------------- ------------
Income Before Income Taxes and
Cumulative Effect of Change in
Accounting Principle 7,835,799 9,380,070 7,525,441
Income taxes 3,009,000 3,608,000 2,765,000
------------ -------------- ------------
Income Before Cumulative Effect of
Change in Accounting Principle 4,826,799 5,772,070 4,760,441
Cumulative effect on prior years of
changing the method of capitalizing
certain inventory costs 1,149,268
------------ -------------- ------------
NET INCOME $ 4,826,799 $ 6,921,338 $ 4,760,441
============ ============== ============
Earnings Per Share:
Income before cumulative effect
of change in accounting principle $ .59 $ .72 $ .68
Cumulative effect on prior years of
changing the method of capitalizing
certain inventory costs .14
------------ -------------- ------------
EARNINGS PER SHARE $ .59 $ .86 $ .68
============ ============== ============
Weighted average number of
common and common equivalent
shares outstanding 8,116,740 8,034,387 6,963,994
============ ============== ============
See notes to financial statements.
F-4
22
LESCO, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Common Shares
--------------------- Paid-In Retained Treasury
Shares Dollars Capital Earnings Shares
---------- ---------- ------------ ---------- ---------
Balance at January 1, 1993 4,210,083 $ 421,458 $ 5,663,828 $23,404,946 $(37,472)
Adjustment for 3-for-2 stock split 2,124,077 212,633 (213,627)
Issuance of common shares 1,375,575 137,558 17,042,471
Dividends paid--$.08 per share (509,195)
Net income 4,760,441
---------- ----------- ------------ ----------- --------
Balance at December 31, 1993 7,709,735 771,649 22,492,672 27,656,192 (37,472)
Issuance of common shares 89,188 8,918 1,059,508
Dividends paid--$.09 per share (698,272)
Net income 6,921,338
---------- ----------- ------------ ----------- --------
Balance at December 31, 1994 7,798,923 780,567 23,552,180 33,879,258 (37,472)
Issuance of common shares 151,065 15,107 1,645,433
Dividends paid--$.10 per share (783,486)
Net income 4,826,799
---------- ----------- ------------ ----------- --------
Balance at December 31, 1995 7,949,988 $ 795,674 $ 25,197,613 $37,922,571 $(37,472)
========== =========== ============ =========== ========
See notes to financial statements.
F-5
23
LESCO, INC.
STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED December 31
------------------------------------------------
1995 1994 1993
--------------- -------------- -------------
OPERATING ACTIVITIES:
Net income $ 4,826,799 $ 6,921,338 $ 4,760,441
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Cumulative effect of accounting change (1,149,268)
Depreciation and amortization 3,233,945 3,118,850 2,935,824
Deferred income taxes 291,000 271,000 (566,000)
Increase in accounts receivable (10,314,238) (7,170,513) (1,989,270)
Provision for uncollectible accounts receivable 1,034,906 1,071,314 1,917,919
Increase in inventories (9,097,014) (2,623,880) (8,201,196)
Increase (decrease) in accounts payable 3,002,953 5,439,607 (633,336)
Change in other current items (385,092) 78,766 645,198
Other 65,038 796,340 87,588
--------------- -------------- --------------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (7,341,703) 6,753,554 (1,042,832)
INVESTING ACTIVITIES:
Purchase of property, plant and equipment - net (7,608,645) (2,327,340) (3,122,712)
Proceeds from sale of land and building 600,000
--------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (7,608,645) (2,327,340) (2,522,712)
FINANCING ACTIVITIES:
Proceeds from borrowings 81,400,000 84,600,000 52,500,000
Reduction of borrowings (67,683,710) (88,180,227) (64,876,911)
Issuance of common shares 1,300,075 733,559 17,026,035
Cash dividends (783,486) (698,272) (509,195)
--------------- -------------- --------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 14,232,879 (3,544,940) 4,139,929
--------------- -------------- --------------
Net (decrease) increase in cash (717,469) 881,274 574,385
Cash -- beginning of the year 3,336,984 2,455,710 1,881,325
--------------- -------------- --------------
CASH -- END OF THE YEAR $ 2,619,515 $ 3,336,984 $ 2,455,710
=============== ============== ==============
See notes to financial statements.
F-6
24
NOTES TO 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. The preparation of financial statements
in conformity with generally accepted accounting principles requires estimates
and assumptions by management and actual results may differ from these
estimates.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories: Inventories are valued principally at the lower of cost (average
cost method) or market and consist of $3,174,000 and $2,762,000 in raw
materials and $57,599,248 and $48,914,234 in work-in-process and finished goods
at December 31, 1995 and 1994, 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 with machinery, equipment and other depreciable assets over five to 12
years. Expenditures for maintenance and repairs are charged to income as
incurred. Additions and improvements are capitalized.
Earnings Per Common Share: Earnings per common share is based on the weighted
average number of common and common equivalent shares outstanding.
Finance Charges: Other - net in the accompanying statements of income includes
$2,148,000, $1,834,000 and $1,965,000 in customer finance charges in 1995, 1994
and 1993, respectively.
NOTE B--CHANGE IN INVENTORY ACCOUNTING METHOD
Effective January 1, 1994, the Company changed its method of accounting for
inventory costs to include the capitalization of certain warehousing,
transportation and procurement costs which were previously expensed. The
Company believes this method of accounting provides a better measurement of the
Company's results of operation by more closely matching expenses with revenues.
The cumulative effect of this change at January 1, 1994 was an increase in net
income of $1,149,268 (net of $735,000 in income taxes) or $.14 per share.
The effect of the change during 1994 was to increase income before cumulative
effect of change in accounting principle by $61,000 with no effect on earnings
per share.
Pro forma net income, assuming the change in accounting principle is applied
retroactively to 1993, is $5,772,000 (1994) and $4,940,000 (1993) compared to
reported net income of $6,921,000 (1994) and $4,760,000 (1993). Proforma
earnings per share are $.72 (1994) and $.71 (1993) compared to reported
earnings per share of $.86 (1994) and $.68 (1993).
F-7
25
NOTES TO FINANCIAL STATEMENTS--Continued
LESCO, INC.
NOTE C--LONG-TERM DEBT
Long-term debt consists of the following:
December 31
----------------------------------
1995 1994
----------- -----------
Credit agreement $36,600,000 $22,700,000
Industrial revenue bond 5,875,000 5,875,000
Other, principally notes payable
secured by real estate and
equipment with interest at 5% 982,819 1,166,528
----------- -----------
43,457,819 29,741,528
Less current portion 200,000 200,000
----------- -----------
$43,257,819 $29,541,528
=========== ===========
The credit agreement, which matures on September 30, 1998, provides for a
maximum line of $45,000,000, is unsecured and has no prepayment penalty.
Interest is payable at the bank's prevailing base rate (8.5% at December 31,
1995) or at alternative rates elected by the Company as provided by the
agreement (ranging from 6.25% to 6.96% at December 31, 1995), together with a
.125% commitment fee for the unused portion of the credit line ($8,400,000 at
December 31, 1995). In January 1996, the Company increased its maximum
available line of credit to $70,000,000 through September 1996 to provide 1996
seasonal financing and financing for the Pro-Lawn acquisition.
In June 1995, the Company executed a seven-year, $7,000,000 notional amount
interest rate swap agreement which converts existing floating rate debt for
6.335% fixed rate debt. If the Company was to terminate this agreement, at
December 31, 1995 the estimated cost would be $258,000.
The industrial revenue bond is due in 2014. Interest is payable quarterly at a
rate based on market rates for comparable tax-exempt debt (5.5% at December
31, 1995). Under certain circumstances, the Company may convert the interest
rate to a fixed rate. The industrial revenue bond is secured by mortgages on
property and equipment acquired with the proceeds (net book value of $8,000,000
at December 31, 1995).
The revolving credit agreement and industrial revenue bond contain various
restrictive covenants, including limits on additional borrowings, lease
payments and annual dividend payments ($1.5 million); maintenance of certain
operating and financial ratios and maintenance of minimum net worth (
$53,400,000 at December 31, 1995). The carrying amount of the Company's
long-term debt approximates fair value at December 31, 1995 based upon
consideration of current market rates.
The annual maturities of long-term debt for the years 1997 through 2000 are
$191,000, $36,693,000, $87,000 and $92,000, respectively.
Interest payments were $2,770,000, $2,017,000 and $2,230,000 in the years
ended December 31, 1995, 1994, and 1993, respectively.
F-8
26
NOTES TO FINANCIAL STATEMENTS--Continued
LESCO, INC.
NOTE D--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 1995, 1994 and 1993, was approximately
$8,900,000, $7,070,000 and $5,130,000, respectively. Future minimum lease
payments are as follows:
Year Ended December 31 Total
---------------------- -----------
1996 $ 6,904,000
1997 6,111,000
1998 5,619,000
1999 4,545,000
2000 3,973,000
2001 and thereafter 13,989,000
-----------
$41,141,000
===========
NOTE E--INCOME TAXES
The provision for income taxes applicable to income before cumulative effect of
change in accounting principle consists of the following:
Years Ended December 31
----------------------------------------------
1995 1994 1993
---------- ---------- ----------
Current $2,784,000 $3,929,000 $3,331,000
Deferred (Benefit) 225,000 (321,000) (566,000)
---------- ---------- ----------
Provision for income taxes $3,009,000 $3,608,000 $2,765,000
========== ========== ==========
The provision for income taxes differs from the Federal statutory rate as
follows:
Years Ended December 31
----------------------------------------------
1995 1994 1993
---------- ---------- ----------
Income taxes at statutory rate $2,665,000 $3,190,000 $2,560,000
State and local income taxes
net of federal income tax
benefit 250,000 350,000 346,000
Other 94,000 68,000 (141,000)
---------- ---------- ----------
Provision for income taxes $3,009,000 $3,608,000 $2,765,000
========== ========== ==========
Income tax payments were $4,562,000, $4,022,000 and $2,706,000 in 1995, 1994
and 1993, respectively.
F-9
27
NOTES TO FINANCIAL STATEMENTS--Continued
LESCO, INC.
NOTE E--INCOME TAXES (continued)
For Federal income tax purposes, the Company has a tax loss carryover of
$569,000 which is deductible ratably over a two-year period. The tax loss
carryover expires in 2006.
The significant components of deferred tax assets and liabilities are as
follows:
December 31, 1995 December 31, 1994
------------------------------ --------------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
Depreciation $1,395,000 $1,364,000
Allowance for bad debts $ 850,000 $ 850,000
Tax loss carryover resulting
from change in fiscal year 194,000 290,000
Inventory full absorption 187,000 62,000
Accrued compensation 420,000 398,000
Prepaid expenses 328,000 251,000
Other 474,000 119,000 413,000 74,000
---------- ---------- ---------- ----------
$1,938,000 $2,029,000 $1,951,000 $1,751,000
========== ========== ========== ==========
NOTE F--DEFINED CONTRIBUTION RETIREMENT PLAN
The Company maintains a defined contribution retirement plan for its employees.
The plan provides for discretionary Company contributions which were $364,000,
$295,000 and $253,000 for 1995, 1994 and 1993, respectively.
NOTE G--CAPITAL STOCK AND SHAREHOLDERS' RIGHTS PLAN
The Company effected a 3-for-2 split in its common shares in the form of a
stock dividend on July 30, 1993, payable to shareholders of record on July 14,
1993. All references in the accompanying financial statements to average
number of shares outstanding, per share amounts, and stock option plan reflect
the stock split.
Stock Options:
The Company has stock option plans which provide for the issuance of incentive
stock options, non-qualified stock options, stock appreciation rights (SAR's)
either in connection with, or independent of, any option and performance and
other share awards. The plans provide for the issuance of a maximum of
1,183,875 common shares to key employees. The Company uses the fixed method of
accounting for stock options.
F-10
28
NOTES TO FINANCIAL STATEMENTS--Continued
LESCO, INC.
NOTE G--CAPITAL STOCK AND SHAREHOLDERS' RIGHTS PLAN--Continued
Options are exercisable for up to ten years, at an option price of not less
than the fair market value on the date the option is granted. The Company
granted options for 142,250, 113,250 and 142,500 common shares in 1995, 1994
and 1993, respectively at $15.625, $16.00 and $13.00 per share, respectively.
A total of 151,065 options were exercised during the year at an average price
of $8.61. Additional paid-in capital includes tax benefits of $352,000,
$230,000 and $153,000 relating to the exercise of options in 1995, 1994 and
1993, respectively. Options for 635,076 shares were outstanding and
exercisable at December 31, 1995. At December 31, 1995, there were 226,825
common shares available for future grants of stock options and other purposes.
In 1993, the Company entered into 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 vest ratably over a
five-year period beginning June 30, 1994, and expire ten years after each
option vests. 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. During 1995,
1,840 options were exercised at $9.33. Options for 273,960 shares were
outstanding and 93,960 shares were exercisable at December 31, 1995.
Rights Plan:
In May 1994, the Company adopted 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 $.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 $.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 expire on May 31, 2004.
NOTE H--SUBSEQUENT EVENTS
Effective January 22, 1996, the Company completed the purchase of certain
assets of Agway, Inc.'s Pro-Lawn Division. The agreement includes acquisition
of Pro-Lawn's sales organization and key administrative personnel, inventories
and certain fixed assets, all Pro-Lawn licenses/trademarks and supply and
distribution agreements for $11.2 million in cash.
F-11
29
NOTES TO FINANCIAL STATEMENTS--Continued
LESCO, INC.
NOTE I--QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 1995 and 1994 (in thousands, except for earnings per
share):
Quarter Ended 1995 Quarter Ended 1994
------------------------------------------- -------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- ------- ------- ------- -------- -------
Net sales $47,237 $71,465 $69,429 $53,535 $39,317 $60,506 $57,255 $47,445
Gross profit 15,518 24,197 22,538 18,838 13,064 21,354 19,547 16,732
Income (loss)
before cumula-
tive effect (503) 3,128 2,399 (197) (184) 3,279 2,234 443
Net income
(loss) (503) 3,128 2,399 (197) 965 3,279 2,234 443
Earnings (loss)
per share
before cumula-
tive effect $(.06) $.39 $.30 $(.02) $(.02) $.41 $.28 $.06
Earnings (loss)
per share (.06) .39 .30 (.02) .12 .41 .28 .06
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. See Note B regarding the change in accounting effective January 1,
1994. Included in the fourth quarter of 1994 is a pre-tax charge of $591,000
(after-tax charge of $360,000 or $.04 per share) pursuant to an employment
contract with the Company's former Chairman and co-founder, who passed away in
October 1994.
F-12