1
(8)
Exhibit 13
FINANCIAL REVIEW
LESCO, INC.
HIGHLIGHTS For the year ended December 31, 1997, the Company realized record
revenues of $356.8 million, an increase of 14.4% over 1996 and, excluding
non-recurring fourth-quarter charges in 1996, the Company's pre-tax income rose
52% in 1997 compared with 1996.
In August 1997, the Company purchased the outstanding shares of stock of
Tri Delta Fertilizer, Inc., located in Stockton, California, for $3.2 million.
The operations of Tri Delta include granular and liquid fertilizer production
facilities and related warehousing. Tri Delta manufactures, distributes and
sells fertilizer and combination products to both turf and agricultural
customers throughout the western United States. The acquisition of Tri Delta
will provide the Company a base for expanding its business into the western
United States. The acquisition was financed primarily through borrowings under
the Company's credit facilities.
In January 1998, the Company completed the purchase of the turf businesses
of Agriturf, Inc. in Hatfield, Massachusetts, and Cadwell & Jones, Inc. in
Manchester, Connecticut, for $6.0 million in cash, plus the assumption of
approximately $2.1 million of debt. The asset purchase included 11.8 acres of
land, a fertilizer manufacturing facility and related warehousing, working
capital, and other manufacturing equipment and turf business assets located in
Hatfield, Massachusetts. Both companies manufacture, distribute and sell
fertilizer, combination products, turf protection products, turfgrass seed and
other products for the professional, retail and agricultural markets in the
northeastern United States. The acquisition will provide the Company with a
manufacturing and distribution base to more economically serve its customers in
the northeastern United States. The purchase was financed through borrowings
under the Company's credit facilities.
RESULTS OF OPERATIONS Company sales rose to a record $356.8 million in 1997, a
14.4% increase compared with $312.0 million in 1996, which was 29.1% over 1995
sales of $241.7 million. Each of the Company's key sales groups reflected sales
volume growth with Service Centers and Golf Course sales contributing the
largest increase for both years. The increase reflects both the continued growth
in new Service Centers and the maturation of sites already opened. During 1997,
the Company opened 20 new Service Centers so that at the end of the year, the
Company was operating 215 stores in 38 states. During the year, the Company
closed one Service Center when the sales potential was deemed not to meet
Company objectives. At the end of 1996, the Company had 196 sites in operation
compared with 173 stores at the end of 1995. Same-store sales for 1997 increased
15.0% compared with a 13.1% increase in 1996. In 1998, the Company intends to
expand the number of Service Centers by 20 stores, 19 of which are planned for
opening during the first quarter.
The Company recognized diluted net earnings of $1.02 per share in 1997
compared with a loss of $0.29 per share in 1996 and net earnings of $0.59 per
share in 1995. The net loss in 1996 was attributable to $12.9 million of
fourth-quarter pre-tax charges relating to certain non-recurring strategic
activities as follows:
1) the formation of the Company's 50-50 joint venture with MTD Products Inc for
the manufacture of commercial equipment and related relocation of equipment
manufacturing operations from Sebring, Florida, to the joint venture; 2) the
rationalization of the Company's product line and a reserve for the valuation of
slow-moving and discontinued products; 3) the reorganization of the customer
credit function, with an increase in reserves for potential bad debts; 4) the
implementation of Company systems for the improved management of Company
inventories and customer service; and 5) the revaluation of certain other assets
to reflect current values. In connection with the relocation of equipment
manufacturing operations from Sebring, Florida, to the joint venture, the
Company paid $3.1 million of costs in 1997 relating to inventory disposal,
equipment transfer and disposal, employee severance and other costs. The Company
expects the relocation to be completed in 1998 without any material adjustment
to the costs previously accrued.
The Company's gross profit as a percent of sales in 1997 was 33.2% compared
with 29.9% in 1996 and 33.6% in 1995. Excluding the non-recurring fourth-quarter
1996 charges to cost of sales, the gross profit percent in 1996 was 32.1%.
During 1997, the gross profit on the Company's major products such as
fertilizer, combination products, turfgrass seed and turf protection products
increased while gross profit on equipment was unchanged. These gross profit
increases are primarily due to the Company's focus on margin improvements
through refinements in product purchases.
Selling, general and administrative expenses for 1997 were 28.7% of sales
compared with 30.7% of sales in 1996 and 30.1% in 1995. Adjusted for the effects
of fourth-quarter 1996 non-recurring items, selling, general and administrative
expenses for 1996 were 28.8% of sales. A $4.4 million, or 18.9% increase in the
Company's freight and distribution costs accounted for the largest component of
the increase for 1997 compared with 1996. The increase in freight costs during
1997 is attributable primarily to an increased sales volume of granular products
(fertilizer and combination products), which have higher freight costs per
dollar of sales compared with the Company's other product lines. In 1997,
freight and distribution costs were 7.8% of sales compared with 7.5% of sales in
1996 and 7.2% of sales in 1995. Selling expenses of $51.1 million in 1997
increased 7.3% over $47.6 million in 1996, which represented an increase of
25.9% over 1995 selling expenses of $37.8 million. The increase in selling
expenses is attributable primarily to the increase in the number of Service
Centers operated by the Company, from 173 in 1995 to 196 in 1996 to 215 in 1997.
Interest expense increased to $4.7 million from $4.2 million in 1996 and
$2.8 million in 1995. The increase in 1997 is attributable primarily to
additional debt to fund general increases in working capital levels to support
the growth of the business and the purchase of Tri Delta in August. The increase
during 1996 was attributable primarily to additional debt relating to the
purchase of Pro-Lawn in January 1996 and other working capital increases
associated with the growth of the business.
15
2
FINANCIAL REVIEW
LESCO, INC.
The Company's effective tax rate in 1997 was 39.0% compared with 33.9% in
1996 and 38.4% in 1995. The lower tax rate in 1996 reflects the Company's net
loss for that year and the federal effect of state and local income taxes.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1997,
total assets of the Company were $200.3 million compared with $164.7 million at
year-end 1996 and $137.8 million at year-end 1995. The increase in assets is
attributable to growth in the business combined with seasonal working capital
increases, capital additions and improvements, and assets acquired in the
Company's purchase of Tri Delta. Funding for the increase in assets was provided
by cash from operations, an increase in accounts payable and additional
borrowing under the Company's credit facilities.
The Company's debt-to-total capitalization ratio was .54 as of December 31,
1997, compared with .51 as of December 31, 1996, and .40 as of December 31,
1995. On November 5, 1997, the Company borrowed $7.5 million under an Industrial
Revenue Bond (IRB) to fund the construction of its new fertilizer plant in
Sebring, Florida. As of December 31, 1997, $4.8 million of the proceeds from
this debt issue were held in a construction fund for the completion of the
Sebring, Florida, fertilizer plant. It is anticipated that this construction
project will be completed during the first half of 1998.
Accounts receivable balances increased $8.4 million at December 31, 1997,
compared with year-end 1996 and $9.7 million in 1996 compared with year-end
1995, an increase of 14.7% and 20.4%, respectively. These increases compare with
sales increases of 14.4% in 1997 and 29.1% in 1996. Inventories increased $14.1
million as of December 31, 1997, compared with year-end 1996 and $7.3 million as
of December 31, 1996, compared with year-end 1995, a 20.7% and 12.1% increase,
respectively. The increase in inventories relates to the increase in the number
of Service Centers and reflects some early purchases the Company made as of
December 31, 1997, on advantageous terms in anticipation of needs for the 1998
season.
During 1997, the Company's expenditures for capital improvements and
additions totaled $12.8 million. Included in that total were an expenditure of
approximately $3.2 million for the acquisition of Tri Delta and capital
improvements subsequent to the purchase date, approximately $2.7 million for the
design and implementation of information systems and technology designed to
improve the Company's management of inventory and its customer service, and
approximately $3.2 million for construction of the Company's fertilizer plant
and improvement of its distribution facilities in Sebring, Florida. The
remaining capital expenditures were primarily for Service Center expansions and
for other improvements in the Company's manufacturing facilities. Capital
improvement programs planned for 1998 include further expansion of the Company's
network of Service Centers, completion of the fertilizer plant construction
project in Sebring, Florida, and improvements to newly acquired operations in
Hatfield, Massachusetts, and Stockton, California. The funding for these
projects will come from operations, the Company's credit facilities or through
specific IRB financing relating to the Sebring, Florida, capital project.
The Company is a 50% owner of Commercial Turf Products, Ltd. (CTP) and
accounts for this investment using the equity method of accounting. CTP, which
began operations in May 1997, manufactures commercial equipment. For the period
May 1997 through December 31, 1997, CTP incurred a net loss of $2.4 million, of
which the Company has recorded its share ($1.2 million) as a reduction of its
initial investment of $700,000. In connection with this joint venture the
Company has also guaranteed 50% of CTP's long-term obligations which total $14.0
million at December 31, 1997.
At December 31, 1997, the Company had $69.5 million of debt outstanding on
its revolving line of credit. The credit facility matures in April 2000, is
unsecured and has no prepayment penalty. Interest is payable at the bank's
prevailing base rate or at alternative rates based on LIBOR or CD options as
elected by the Company. At December 31, 1997, the Company had $10.5 million
available under this line of credit. In January 1998, the Company borrowed $6.4
million under a bank's $10.0 million money market line of credit at a 6.875%
rate of interest. The Company believes the current borrowing capacity is
adequate for the foreseeable future.
YEAR 2000 IMPACT Over the past three years, the Company has broadly implemented
new information systems and technology with respect to production, production
planning, inventory management, order entry, distribution and financial systems.
This broad-based strategic initiative will be completed by the end of 1998. As a
result, it is the Company's assessment that these new systems and technology
either have the capability now, or will by the end of 1998, to adequately
recognize the year 2000. The Company does not currently expect third-party year
2000 compliance issues to have a material impact on its operation. An internal
initiative has been established to continue to evaluate the potential impact of
year 2000 on its operations.
NEW ACCOUNTING PRONOUNCEMENT In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS
No. 131, which becomes effective in 1998, establishes standards for reporting
segment information in annual and interim financial statements including
disclosures about products and services, geographic areas and major customers.
The Company has not yet determined the impact of adopting SFAS No. 131 on its
financial disclosures.
16
3
SELECTED FINANCIAL DATA, 1997-1993
LESCO, INC.
STATEMENT OF OPERATING DATA
FOR THE YEARS ENDED DECEMBER 31
-------------------------------------------------------------------
(In thousands, except share data) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Net sales $356,841 $312,031 $241,667 $204,523 $166,203
Cost of sales 238,392 211,825 160,576 133,826 108,703
Other cost of sales -- 6,771 -- -- --
- -------------------------------------------------------------------------------------------------------------------
Gross profit on sales 118,449 93,435 81,091 70,697 57,500
Selling, general and administrative expenses 101,548 91,065 71,635 60,175 47,868
Other expenses 818 4,745 1,035 1,071 1,918
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 16,083 (2,375) 8,421 9,451 7,714
Other deductions - net 1,943 1,177 585 71 189
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 14,140 (3,552) 7,836 9,380 7,525
Income tax (benefit) expense 5,515 (1,203) 3,009 3,608 2,765
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
change in accounting principle 8,625 (2,349) 4,827 5,772 4,760
Cumulative effect on prior years of changing the
method of capitalizing certain inventory costs -- -- -- 1,149 --
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 8,625 $ (2,349) $ 4,827 $ 6,921 $ 4,760
====================================================================================================================
EARNINGS PER SHARE
Per share income (loss) before cumulative effect
of change in accounting principle
Basic $ 1.06 $ (0.29) $ 0.61 $ 0.74 $ 0.70
Diluted $ 1.02 $ (0.29) $ 0.59 $ 0.72 $ 0.68
Per share cumulative effect on prior years of
changing the method of
capitalizing certain inventory costs
Basic -- -- -- 0.15 --
Diluted -- -- -- 0.14 --
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ 1.06 $ (0.29) $ 0.61 $ 0.89 $ 0.70
========================================================================================================================
Diluted earnings (loss) per share $ 1.02 $ (0.29) $ 0.59 $ 0.86 $ 0.68
========================================================================================================================
Cash dividends per common share $ 0.12 $ 0.11 $ 0.10 $ 0.09 $ 0.08
BALANCE SHEET DATA
DECEMBER 31
------------------------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Working capital $117,711 $ 99,904 $ 85,950 $ 70,839 $ 65,414
Total assets 200,318 164,673 137,821 114,612 104,471
Long-term debt, net of current portion 83,353 64,704 43,258 29,542 33,122
Shareholders' equity 72,293 61,699 63,878 58,175 50,883
Note: Cumulative effect - 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.
17
4
CONSOLIDATED STATEMENTS OF OPERATIONS
LESCO, INC.
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------
(In thousands, except share data) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Net sales $356,841 $312,031 $241,667
Cost of sales 238,392 211,825 160,576
Other cost of sales -- 6,771 --
- -------------------------------------------------------------------------------------------------------------------
Total cost of sales 238,392 218,596 160,576
- -------------------------------------------------------------------------------------------------------------------
GROSS PROFIT ON SALES 118,449 93,435 81,091
Selling, general and administrative expenses 101,548 91,065 71,635
Other expenses 818 4,745 1,035
- -------------------------------------------------------------------------------------------------------------------
102,366 95,810 72,670
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 16,083 (2,375) 8,421
Other deductions (income):
Interest expense 4,749 4,214 2,831
Other - net (2,806) (3,037) (2,246)
- -------------------------------------------------------------------------------------------------------------------
1,943 1,177 585
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 14,140 (3,552) 7,836
Income tax expense (benefit) 5,515 (1,203) 3,009
- -------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 8,625 $ (2,349) $ 4,827
===================================================================================================================
EARNINGS (LOSS) PER SHARE
BASIC $ 1.06 $ (0.29) $ .61
DILUTED $ 1.02 $ (0.29) $ .59
===================================================================================================================
See notes to consolidated financial statements.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
LESCO, Inc.
We have audited the accompanying consolidated balance sheets of LESCO, Inc. as
of December 31, 1997, and 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
LESCO, Inc. at December 31, 1997, and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Cleveland, Ohio
February 17, 1998
/s/ ERNST & YOUNG LLP
18
5
CONSOLIDATED BALANCE SHEETS
LESCO, INC.
DECEMBER 31
--------------------------
(In thousands, except share data) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 3,403 $ 1,900
Accounts receivable, less allowance of $3,000 in 1997;
$4,100 in 1996 65,869 57,424
Inventories 82,174 68,090
Deferred federal income taxes 2,680 4,734
Prepaid expenses and other assets 5,989 4,398
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 160,115 136,546
PROPERTY, PLANT AND EQUIPMENT
Land 499 499
Buildings and improvements 18,076 13,521
Machinery and equipment 26,887 24,712
Furniture and fixtures 12,992 9,015
- ----------------------------------------------------------------------------------------------------------------------
58,454 47,747
Less allowance for depreciation and amortization 27,238 24,454
- ----------------------------------------------------------------------------------------------------------------------
31,216 23,293
Bond proceeds held for construction 4,761
- ----------------------------------------------------------------------------------------------------------------------
35,977 23,293
OTHER ASSETS 4,226 4,834
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $200,318 $164,673
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 34,002 $ 26,786
Salaries, wages and profit sharing 2,946 2,642
Other liabilities and accrued expenses 5,256 7,014
Current portion of long-term debt 200 200
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 42,404 36,642
LONG-TERM DEBT 83,353 64,704
DEFERRED INCOME TAXES 2,268 1,628
SHAREHOLDERS' EQUITY
Preferred shares - without par value - 500,000 shares authorized
Common shares - without par value - 19,500,000 shares authorized; 8,256,084
shares issued and 8,250,356 shares outstanding in 1997;
8,067,517 shares issued and 8,064,367 shares outstanding in 1996 825 807
Paid-in capital 29,268 26,549
Retained earnings 42,347 34,694
Less treasury shares (59) (17)
Unearned compensation (88) (334)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 72,293 61,699
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $200,318 $164,673
======================================================================================================================
See notes to consolidated financial statements.
19
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
LESCO, INC.
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 8,625 $ (2,349) $ 4,827
Adjustments to reconcile net income (loss) to net cash used by operating
activities:
Depreciation and amortization 4,275 3,728 3,234
Deferred income taxes 2,679 (3,182) 291
Increase in accounts receivable (8,195) (13,094) (10,314)
Provision for uncollectible accounts receivable 818 3,392 1,035
Increase in inventories (10,738) (7,017) (9,097)
Change in inventory and plant relocation reserves (3,587) 8,124
Increase in accounts payable 6,370 3,116 3,003
Change in other current items (2,309) 1,791 (385)
Other 801 (179) 65
- --------------------------------------------------------------------------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (1,261) (5,670) (7,341)
INVESTING ACTIVITIES:
Purchase of property, plant and equipment - net (9,882) (5,140) (7,609)
Acquisition of businesses (2,949) (11,268)
Bond proceeds held for construction (4,761)
- --------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (17,592) (16,408) (7,609)
FINANCING ACTIVITIES:
Proceeds from borrowings 124,507 110,200 81,400
Reduction of borrowings (105,858) (88,754) (67,684)
Issuance of common shares 2,679 791 1,300
Cash dividends (972) (879) (783)
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,356 21,358 14,233
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,503 (720) (717)
Cash - beginning of the year 1,900 2,620 3,337
- --------------------------------------------------------------------------------------------------------------------
CASH - END OF THE YEAR $ 3,403 $ 1,900 $ 2,620
====================================================================================================================
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
LESCO, INC.
COMMON SHARES
----------------------- UNEARNED
PAID-IN RETAINED TREASURY COMPEN-
(IN THOUSANDS, EXCEPT SHARE DATA) SHARES DOLLARS CAPITAL EARNINGS SHARES SATION
- ---------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1995 7,798,923 $781 $23,552 $33,878 $(37)
Issuance of common shares 151,065 15 1,645
Dividends paid-- $.10 per share (783)
Net income 4,827
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 7,949,988 796 25,197 37,922 (37)
Issuance of common shares 87,750 9 987
Issuance of restricted common shares 23,029 2 332 $(334)
Issuance of treasury shares 3,600 33 20
Dividends paid-- $.11 per share (879)
Net loss (2,349)
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 8,064,367 807 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 shares for treasury (2,578) (42)
Dividends paid-- $.12 per share (972)
Net income 8,625
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 8,250,356 $825 $29,268 $42,347 $(59) $ (88)
=====================================================================================================================
See notes to consolidated financial statements.
20
7
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 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 subsidiary, Tri Delta Fertilizer, Inc.
(Tri Delta). All significant intercompany transactions and balances have been
eliminated in consolidation.
INVENTORIES: Inventories are valued principally at the lower of cost (average
cost method) or market, and consist of $3,037,000 and $1,600,000 in raw
materials and $79,137,000 and $66,490,000 in work in process and finished goods
at December 31, 1997, and 1996, 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 5 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 $4,217,000 and $4,023,000 of
intangible assets at December 31, 1997 and 1996 respectively, consisting
primarily of trademarks, customer lists and other specifically identifiable
assets arising from the Pro-Lawn (see Note 2) and Tri Delta acquisitions. These
assets are being amortized using the straight-line method over periods of 3 to
20 years. Accumulated amortization was $522,000 and $246,000 at December 31,
1997, and 1996, 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.
EARNINGS (LOSS) PER COMMON SHARE: Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS No. 128). All per share amounts shown for prior periods have been
restated to conform to the provisions of SFAS No. 128.
FINANCE CHARGES: Other - net in the accompanying statements of operations
includes $3,118,000, $2,643,000 and $2,148,000 in customer finance charges in
1997, 1996 and 1995, respectively.
STOCK OPTIONS: The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, the Company follows the accounting provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," which, if applicable, recognizes as compensation cost the difference
between the fair market value and the exercise price of stock options at the
date of grant.
NEW ACCOUNTING PRONOUNCEMENT: In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS
No. 131, which becomes effective in 1998, establishes standards for reporting
segment information in annual and interim financial statements, including
disclosures about products and services, geographic areas and major customers.
The Company has not yet determined the impact of adopting SFAS No. 131 on its
financial disclosures.
NOTE 2 -- ACQUISITIONS
On August 1, 1997, the Company purchased all of the outstanding shares of
Tri Delta, 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.
During January 1996, the Company completed the purchase of certain assets
of Agway, Inc.'s Pro-Lawn Division. The agreement included 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 $11,268,000 in cash.
The operating results of the acquired businesses have been included in the
statement of operations since the date 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.
Through December 31, 1997, the Company invested $700,000 in CTP. The Company has
also recognized its share of CTP's net loss ($1,219,000) for the period from
commencement of operations (May 1997) through December 31, 1997, which is
included in "Other-net" in the statement of operations. At December 31, 1997,
CTP had total assets of $15,024,000 and total liabilities of $16,063,000. In
addition, the Company has guaranteed 50% of certain liabilities of CTP
aggregating $14,026,000 at December 31, 1997. These liabilities mature through
2002 and bear interest at rates ranging from 3.5% to 8.5%.
NOTE 4 -- LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31
-----------------
(In thousands) 1997 1996
- ---------------------------------------------------------
Credit agreement $69,500 $58,200
Industrial revenue bonds 13,375 5,875
Other debt 678 829
-----------------
83,553 64,904
Less current portion 200 200
-----------------
$83,353 $64,704
=================
The credit agreement, which matures on April 30, 2000, provides for maximum
borrowings of $80,000,000, is unsecured and has no prepayment penalty. Interest
is payable at the bank's prevailing base rate (8.50% at December 31, 1997) as to
$4,500,000 of principal, or at alternative rates elected by the Company as
provided by the agreement (ranging from 6.78% to 6.84% at December 31, 1997) for
the remaining principal due, together with a .125% commitment fee for the unused
portion of the credit line. At December 31, 1997, $10,500,000 is available for
borrowing. In 1998, additional amounts were borrowed principally for the asset
purchases and working capital needs (see Note 11).
21
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LESCO, INC.
The Company has a seven-year, $7,000,000 notional amount interest rate swap
agreement expiring in 2002, which converts existing floating rate debt for
6.335% fixed rate debt. If the Company were to terminate this agreement at
December 31, 1997, the estimated cost would be $103,000.
In November 1997, the Company issued $7,500,000 of industrial revenue bonds
related to a new Sebring, Florida, fertilizer plant. The bonds mature in 2017.
At December 31, 1997, $4,761,000 of the proceeds are restricted for completion
of the Sebring, Florida, fertilizer plant. The Company also has $5,875,000 of
industrial revenue bonds outstanding related to its Martins Ferry, Ohio,
facility, which mature in 2014. Interest is payable quarterly for both bonds at
a rate based on comparable tax-exempt market rates (4.40% at December 31, 1997).
Under certain circumstances, the Company may convert the interest rate to a
fixed rate. The bonds related to the Sebring, Florida, facility are secured by a
$7,726,000 letter of credit. At December 31, 1997, the Company has not drawn any
amounts under the letter of credit. The letter of credit expires in March 2000.
The bonds related to the Martins Ferry, Ohio, facility are secured by mortgages
on property and equipment acquired with the proceeds (net book value of
$7,200,000 at December 31, 1997).
The 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 ($59,400,000 at December
31, 1997). The carrying amount of the Company's long-term debt approximates fair
value at December 31, 1997, based upon consideration of current market rates.
The annual maturities of long-term debt for the years 1999 through 2002 are
$99,000, $69,600,000, $96,600 and $101,500, respectively. Interest payments were
$4,873,000, $4,121,000 and $2,770,000 in the years ended December 31, 1997, 1996
and 1995, 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 1997, 1996 and 1995 was approximately
$13,300,000, $11,400,000 and $8,900,000, respectively. Future minimum lease
payments are as follows:
(In thousands)
YEAR ENDED DECEMBER 31 TOTAL
---------------------------------
1998 $ 9,631
1999 8,191
2000 7,324
2001 5,853
2002 4,502
2003 and thereafter 11,183
--------
$46,684
========
NOTE 6 -- INCOME TAXES
The provision for income taxes in the accompanying consolidated statements
of operations consists of the following:
YEARS ENDED DECEMBER 31
--------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------
Current $2,836 $ 1,979 $2,784
Deferred (benefit) 2,679 (3,182) 225
-------------------------------
Income tax expense (benefit) $5,515 $(1,203) $3,009
===============================
The provision (benefit) for income taxes differs from the statutory rate as
follows:
YEARS ENDED DECEMBER 31
--------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
Income taxes at statutory rate $ 4,808 $(1,208) $ 2,665
State and local income taxes net
of federal income tax benefit 558 (95) 250
Other 149 100 94
--------------------------------------
Income tax expense (benefit) $ 5,515 $(1,203) $ 3,009
======================================
Income tax payments were $4,687,000, $4,006,000 and $4,562,000 in 1997,
1996 and 1995, respectively.
The significant components of deferred tax assets and liabilities are as
follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------- ------------------------
DEFERRED TAX DEFERRED TAX
-------------------------- ------------------------
(In thousands) ASSETS LIABILITIES ASSETS LIABILITIES
- ----------------------------------------------------------------------------------
Depreciation $2,104 $1,607
Allowance for bad
debts $1,020 $1,394
Net operating loss
carryforward 621 97
Inventory reserves 462 684
Accrued compensation 581 667
Reserves for relocation
of equipment manu-
facturing operations 940 2,009
Prepaid expenses 406 355
Other 104 185 349 147
-------------------------- ------------------------
Total 3,728 2,695 5,200 2,109
Valuation allowance (621)
-------------------------- ------------------------
$3,107 $2,695 $5,200 $2,109
========================== =========================
As of December 31, 1997, the Company has net operating loss carryforwards
of $1,800,000 for federal income tax reporting purposes which expire in varying
amounts, if unused, in years 1999 through 2011. The carryforwards relate to the
acquisition of Tri Delta Fertilizer, Inc. The availability of these
carryforwards is subject to certain limitations including those due to a change
in ownership of more than 50% of the value of Tri Delta's capital stock in a
one-year period. The Company has recorded a valuation allowance due to the
uncertainty of the utilization of the net operating loss carryforwards prior to
their expiration.
NOTE 7 -- CAPITAL STOCK AND STOCK PLANS
STOCK OPTIONS: The Company has stock option plans which 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
performance and other share awards. The plans provide for the issuance of a
maximum of 1,583,875 common shares to key employees.
Options are exercisable for up to 10 years, at an option price which
approximates the fair market value on the date the option is granted. Additional
paid-in capital includes tax benefits of $429,000, $205,000 and $352,000
relating to the exercise of options in 1997, 1996 and 1995, respectively. The
following table summarizes the changes in the outstanding options for the three
years ended December 31, 1997:
22
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LESCO, INC.
1997 1996 1995
--------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------ ---------------------------- ----------------------------
Outstanding - beginning of year 811,726 $13.09 635,076 $11.92 656,801 $10.26
Granted 97,850 17.69 272,050 14.56 142,250 15.51
Exercised (176,063) 11.82 (87,750) 9.01 (149,225) 8.60
Canceled/forfeited (10,075) 14.04 (7,650) 15.02 (14,750) 6.31
--------------------------- ---------------------------- ----------------------------
Outstanding - end of year 723,438 $13.86 811,726 $13.09 635,076 $11.92
=========================== ============================ ============================
Option price range at end of year $ 5.67 to $ 5.67 to $ 5.67 to
$21.50 $16.00 $16.00
Exercisable - end of year 596,268 679,726 635,076
Reserved for future grants 290,189 391,825 226,825
Weighted average fair value of
options granted during the year $ 4.55 $ 4.35 $ 4.58
The following table summarizes information about stock options outstanding as of
December 31, 1997:
RANGE OF OPTIONS OPTIONS WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISABLE EXERCISE PRICE CONTRACTUAL LIFE
- --------------------------------------------------------------------------------------------------------------------
$ 5.67 to $ 7.00 88,438 88,438 $ 6.47 2.2 years
$11.33 to $15.00 472,550 410,550 14.10 7.0 years
$16.00 to $21.50 162,450 97,280 16.51 7.0 years
------------------------------------------------------------------
723,438 596,268 $13.36 6.3 years
==================================================================
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). 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 previously existing
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 (loss) and related earnings (loss) per share would
have been reduced to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31
-----------------------------------
(In thousands, except share data) 1997 1996 1995
- ---------------------------------------------------------------------------
Net income (loss) - as reported $8,625 $(2,349) $4,827
Net income (loss) - pro forma $8,346 $(2,751) $4,453
Earnings (loss) per share -
as reported
Basic $ 1.06 $ (.29) $ .61
Diluted $ 1.02 $ (.29) $ .59
Earnings (loss) per share -
pro forma
Basic $ 1.03 $ (.34) $ .57
Diluted $ .98 $ (.34) $ .55
Included in these pro forma disclosures are stock options issued in 1997,
1996 and 1995 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 1997, 1996 and 1995, respectively: dividend yield
of .62%, .69% and .68%; expected stock price volatility of .27, .28 and .29;
risk-free interest rate of 5.70%, 6.00% and 5.35%; 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 the fair value of its employee stock options.
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 10 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. Options for 270,589 shares were
outstanding and 210,598 shares were exercisable at December 31, 1997.
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.
PERFORMANCE SHARE PLAN: During 1996, the Company established a Long-Term
Performance Plan which grants restricted common stock awards to certain
officers. These officers are entitled to receive common stock of the Company
based upon certain performance criteria over a three-year performance period.
Participants in the plan 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,
23
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LESCO, INC.
of which 4,728 shares with a fair market value of $69,000 were forfeited in
1997. Compensation expense of $177,000 was recognized in 1997 under this plan,
based upon the probability that certain threshold performance criteria would be
met. This activity is reflected in the shareholders' equity as unearned
compensation and amortization of unearned compensation.
NOTE 8 -- DEFINED CONTRIBUTION RETIREMENT PLAN
The Company maintains a defined contribution retirement plan for its
employees. The Company matches the contributions of participating employees on
the basis of percentages specified in the plan. Company contributions to the
plan were $465,000, $454,000 and $364,000 for 1997, 1996 and 1995, respectively.
NOTE 9 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
(In thousands, except share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------
NUMERATOR:
Net income (loss) $ 8,625 $ (2,349) $ 4,827
DENOMINATOR:
Denominator for basic
earnings per share -
weighted average
shares 8,136,144 8,007,001 7,878,298
Effect of dilutive
securities:
Employee stock options 341,643 -- 254,428
Performance shares 18,301 -- --
----------------------------------------------------
Dilutive potential
common shares 359,944 -- 254,428
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions 8,496,088 8,007,001 8,132,726
====================================================
EARNINGS (LOSS) PER SHARE
Basic $ 1.06 $ (0.29) $ 0.61
====================================================
Diluted $ 1.02 $ (0.29) $ 0.59
====================================================
NOTE 10 -- OTHER COSTS AND EXPENSES
A summary of significant items included in the statements of operations is
as follows:
OTHER COST
(In thousands) OF SALES OTHER EXPENSES
- ------------------------------------------- ------------------------------------
FOR THE YEARS ENDED
DECEMBER 31 1996 1997 1996 1995
- ------------------------------------------- ------------------------------------
Costs related to the
relocation of equipment
manufacturing
operations $4,555 -- $1,353 --
Inventory reserves 2,216 -- -- --
Provisions for
uncollectible
accounts receivable -- $ 818 3,392 $1,035
----------- ------------------------------------
$6,771 $ 818 $4,745 $1,035
=========== ====================================
In October 1996, the Company entered into an agreement to create a joint
venture to manufacture commercial turf care equipment. In conjunction with this
joint venture, the Company decided to relocate the equipment manufacturing
operations of its Sebring, Florida, plant facility. Accordingly, certain costs
related to this plant relocation were recognized during the fourth quarter of
1996, and consist of inventory valuation reserves of $4,555,000 and other
related plant shutdown costs of $1,353,000. In 1997, the Company began carrying
out its plan to relocate these equipment manufacturing operations. Accordingly,
costs totaling $3,144,000 were paid and charged against the accrual. The Company
anticipates that the shutdown process will be completed in 1998.
During 1996, the Company conducted a comprehensive
product evaluation, which led to the discontinuance of certain
finished goods inventory items. As a result of this evaluation, an inventory
redeployment program was implemented in order to consolidate discontinued and
slow-moving finished goods inventories from the Company's respective Service
Center and golf truck facilities into more centralized locations for
redistribution and liquidation. As a result of this process, the historical cost
of certain inventory items was reduced by $2,216,000 during the fourth quarter
of 1996 to reflect its estimated net realizable value.
Additionally, in the fourth quarter of 1996, the Company revised its
estimated accounts receivable write-off percentages to more closely reflect
current collection trends. The increase in the estimated write-off rates
resulted in a $1,931,000 charge to operations in the fourth quarter of 1996.
The combined effect of these items decreased pre-tax income in the fourth
quarter of 1996 by $10,055,000, and after-tax income by $6,636,000, or $.83 per
share (diluted).
NOTE 11 -- SUBSEQUENT EVENT
On January 30, 1998, the Company completed the purchase of certain assets
of Agriturf, Inc. of Hatfield, Massachusetts, and Cadwell & Jones, Inc. of
Manchester, Connecticut, for $6,000,000 in cash, plus the assumption of
approximately $2,100,000 of debt. The asset purchase included land, a fertilizer
manufacturing facility and related warehouse, working capital and manufacturing
equipment.
NOTE 12 -- QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1997, and 1996:
QUARTER ENDED 1997
(In thousands, -------------------------------------------------------------
except share data) MAR. 31 JUNE 30 SEPT. 30 DEC. 31
- --------------------------------------------------------------------------------------------
Net sales $ 65,267 $111,128 $103,243 $ 77,203
Gross profit 22,251 36,796 33,878 20,738
Net (loss) income (1,009) 6,276 4,445 (1,087)
(Loss) earnings per share:
Basic (.13) .77 .54 (.13)
Diluted (.13) .74 .51 (.13)
QUARTER ENDED 1996
-------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
- --------------------------------------------------------------------------------------------
Net sales $ 53,533 $104,444 $ 91,316 $ 62,738
Gross profit 17,999 33,093 29,247 13,096
Net (loss) income (1,716) 4,759 3,601 (8,993)
(Loss) earnings per share:
Basic (.21) .60 .45 (1.12)
Diluted (.21) .57 .43 (1.12)
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 1997, net income decreased by approximately
$316,000 or $.04 per share (diluted) due to changes in prior quarter estimates
relating to inventory adjustments. See Note 10 regarding Other Costs and
Expenses, which decreased 1996 fourth-quarter gross profit by $6,771,000 and
1996 fourth-quarter net income by $6,636,000, or $.83 per share.
24