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, 1998 Commission File No. 0-13147
LESCO, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-0904517
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20005 Lake Road, 44116
Rocky River, Ohio (Zip Code)
(Address of principal executive offices)
(440) 333-9250
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None Not Applicable
------------------- ----------------
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
--------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of Common Shares held by nonaffiliates on March 23, 1999:
approximately $104,400,000.
Number of Common Shares outstanding on March 23, 1999: 8,357,651.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 19, 1999 (the "Proxy Statement") are incorporated
by reference in Part III.
-1-
2
PART I
Item 1. Business
--------
General
- - -------
The Registrant was incorporated in 1962 under the laws of the State of
Ohio. As used in this report, the terms "Company," "LESCO" and "Registrant"
refer to LESCO, Inc.
The Company is engaged in the manufacture and sale of an extensive
array of golf course and lawn care products which are marketed throughout the
United States, primarily under the LESCO name. These products include
fertilizers, turf protection products, grass seed, turf care equipment and
replacement parts and golf course accessories. The Company's customers include
golf courses, lawn care companies, landscapers, municipalities, theme parks and
industrial concerns. Products are marketed directly through the Company's sales
organization, which includes localized service centers and a fleet of LESCO
tractor trailers operated by salesmen trained in turf care management. The
Company's operations constitute a single industry segment.
Products
- - --------
The Company manufactures and sells to the green industry an extensive
array of turf care products, comprising two major lines: (1) consumable goods,
including turf control products, fertilizer and grass seed, and (2) hard goods,
including equipment, accessories and other related products such as irrigation
equipment, protective gear and hand tools. These products are marketed under the
names LESCO(TM), LESCO Products, Aim Lawn & Garden Products, Professional Turf
Products, Scenic Green, TruGreen, Chemlawn and Barefoot. In addition, the
Company sells a diverse line of turf products under the manufacturers' brand
names.
Sales by product line for the years ended December 31, 1998, 1997 and
1996 are as follows:
Year Ended December 31
--------------------------------------------------------------------------
(Net sales in thousands)
1998 1997 1996
---------------------- ------------------- -------------------
Net Sales Percent Net Sales Percent Net Sales Percent
Consumable goods $351,316 84.3% $290,502 81.4% $247,454 79.3%
Hard goods 65,422 15.7% 66,339 18.6% 64,577 20.7%
-------- ------ -------- ------ -------- ------
Total $416,738 100.0% $356,841 100.0% $312,031 100.0%
======== ====== ======== ====== ======== ======
Consumable Goods
- - ----------------
TURF CONTROL PRODUCTS. The Company offers a full line of turf control
products including herbicides, insecticides and fungicides. These products
control weed growth, insect infestation and fungal diseases of turf, trees,
shrubs and landscape beds. 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 that combine fertilizer with turf
control products. The Company also custom-blends fertilizer according to its
customers' specifications. The Company's fertilizers include specialized
products for golf course applications including greens, tees and fairways,
products for use in the lawn care industry, and products for trees, shrubs and
landscape beds. Fertilizers are generally sold in a granular form, although
specialized liquid formulations are also available.
The majority of the fertilizers sold by the Company are formulated with
sulfur-coated urea fertilizer. The Company is one of a few manufacturers of
these products in the world. Sulfur coating produces a gradual release
-2-
3
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 golf course greens, tees and fairways.
In early 1999, the Company acquired exclusive worldwide rights to a new
matrix technology that allows for a formulation of fertilizers with highly
precise nutrient release characteristics. The first products incorporating this
technology are expected in limited quantities during the second half of 1999.
TURFGRASS SEED. The Company markets LESCO and other brands of turfgrass
seed, most of which are certified by authorities of various states to guarantee
the varietal purity of the seed. The Company contracts for the production of
turfgrass seed with growers in the Pacific Northwest and Western Canada for cool
season grasses and in California for warm season grasses. The Company has more
than 36,000 production acres under contract in these regions. The Company's seed
line includes 34 proprietary varieties as well as 28 standard blends and
mixtures.
Hard Goods
- - ----------
EQUIPMENT AND ACCESSORIES. The Company purchases a broad assortment of
equipment including rotary mowers, spreaders, sprayers, aerators, renovation
equipment and aftermarket replacement parts from Commercial Turf Products, Ltd.
the Company's 50-50 joint venture. The Company believes that the LESCO spreader,
first introduced in 1982, is an industry leader in sales to the professional
sector of the market. In addition, the Company offers a broad assortment of
handheld power tools and a variety of golf course accessories including ball
washers, tee markers, sand trap rakes, putting green cups, flags and flagpoles.
Equipment sales are supported by a toll-free hotline staffed by trained
technicians and repair facilities in Service Centers. Parts support is fully
computerized, and the Company is generally able to provide overnight parts
delivery nationwide.
OTHER. The Company offers underground irrigation equipment, protective
gear such as goggles, masks and gloves, and hand tools such as tree pruners,
shovels and rakes. These products are produced for the Company by third parties.
Product Improvement and Development
- - -----------------------------------
The Company's research and development efforts focus on improvements to
and development of new turf control products and fertilizers, turf care
equipment and golf course accessories and new grass seed varieties. The Company
also has a number of agreements with state universities which test turf control
products, grass seed and fertilizers for the Company.
Marketing and Distribution
- - --------------------------
LESCO SERVICE CENTERS(R). The Company operates Service Centers which
enable the Company to market its products on a localized basis. The Service
Centers are generally established in easily accessible industrial parks which
allow for sales directly to commercial users. The Company opened 20 new Service
Centers in 1998, and had 234 Service Centers in operation as of December 31,
1998. The Company does not plan to open any Service Centers in 1999. The Service
Centers market products principally to smaller lawn care companies, landscapers,
nurseries, municipalities, churches and condominium associations.
LESCO STORES-ON-WHEELS(R). The Company markets its products to private
and public golf courses and other customers having large turf areas through
salesmen who operate a fleet of Stores-on-Wheels consisting of 68 tractor
trailers. These trucks are well-stocked with a wide variety of turf care
products and golf course accessories which are sold directly from the trucks.
The Company has added 3 Stores-on Wheels in 1999, for a total of 71.
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 forces. The Company
distributes selected products through Home Depot stores in the South,
Mid-Atlantic and Northeast areas of the country. The Company sells a consumer
line of lawncare products to nationwide retail stores under several brand names,
including TruGreen, Chemlawn and Barefoot. In addition, the Company markets its
products internationally principally through foreign distributors.
TECHNICAL EXPERIENCE OF SALES PERSONNEL. Most of the Company's
salespersons are agronomists or horticultural specialists or have had prior
experience with lawn care companies or golf courses. The Company believes that
the training and experience of its salespersons have helped promote customer
reliance on the Company's technical expertise with respect to existing turf care
products and new product development in the turf care industry.
Manufacturing and Suppliers
- - ---------------------------
FERTILIZERS AND COMBINATION PRODUCTS. Poly Plus(R) sulfur-coated
fertilizers are manufactured by spraying dry fertilizers first with sulfur, then
with a polymer sealant to seal the sulfur and retard the release of nutrients.
Uncoated fertilizers are blended in accordance with Company or customer
specifications. Combination products are processed by impregnating fertilizers
with technical grade herbicides, insecticides or fungicides. 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. In
October 1996, the Company announced the formation of a 50-50 joint venture,
Commercial Turf Products, Ltd. (CTP), with MTD Products Inc for the manufacture
of commercial equipment. Located in Streetsboro, Ohio, the joint venture
manufactures commercial lawn care equipment to be sold to both partners. The
joint venture commenced operations in May 1997, and began to manufacture
equipment in the second half of 1997. As a result, the Company transitioned its
equipment manufacturing operations from Sebring, Florida to the joint venture,
and transferred much of its manufacturing equipment, parts and work in process
to the joint venture during the second half of 1997. The remainder of the
Company's equipment manufacturing assets not transferred to the joint venture
were liquidated in the first half of 1998.
The joint venture manufactures and assembles certain turf care
equipment and related replacement parts in its Streetsboro location. CTP
purchases metal components and performs manufacturing processes such as
stamping, cutting, bending, welding, grinding and punching of many component
parts. Using these manufactured components, together with some components
purchased from a variety of third party suppliers, CTP assembles rotary mowers,
spreaders, sprayers, aerators and turf renovators for sale to each partner. The
Company distributes and sells commercial equipment supplied by CTP under the
LESCO name primarily through its LESCO Service Centers.
The Company also sells golf course accessories which are manufactured
by various contractors with tooling, dies, and molds owned by the Company. In
early 1999, the Company became the exclusive distributor of Southern Golf
Products, Inc.'s product lines of custom made embroidered and silk-screened
flags, flagpoles, tee markers, signage, uniforms and promotional apparel.
SOURCES OF SUPPLY. It is the Company's policy to 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
-4-
5
nurseries and hardware stores. Some of these national competitors have greater
name brand recognition than the Company. The Company's principal competitors for
its turf control, fertilizer and grass seed product lines include Andersons,
Lebanon, Scotts, Terra and United Horticultural Supply. The Company's principal
competitors for equipment are Jacobsen, John Deere, Ransomes, Scag and Toro. The
Company, however, believes that it is the only national company that supplies a
full range of products and sells directly to the commercial user. The Company
competes primarily on the basis of service to customers and product quality,
selection and price.
Seasonality and Backlog
- - -----------------------
The Company's business is seasonal because the customers in northern
states do not have the same year-round requirements for products as do customers
in southern states. Demand for the Company's products is generally greatest
during the second quarter of its fiscal year.
The Company offers an early order program to lessen the second quarter
demand on its manufacturing and distribution facilities. This program allows the
Company to schedule manufacturing and distribution of products prior to the time
when customers need such products. This has reduced variations in sales and
earnings from quarter to quarter. The Company's backlog as of December 31, 1998
and 1997 was $7,215,000 and $7,186,000, respectively.
Employees
- - ---------
As of December 31, 1998, the Company had 1,244 full-time employees, of
which 330 were involved in manufacturing, assembly and warehouse operations, 599
in sales-related activities and 315 in management and administration. Of the
total number of full-time employees, 805 are salaried and 439 are hourly
employees. At the Company's Martins Ferry facility, 117 employees are
represented by a union. The Company has not experienced any strikes or work
stoppages by employees and generally considers its employee relations to be
good.
Environmental Matters
- - ---------------------
Turf control products sold by the Company are subject to registration
by the Environmental Protection Agency (the "EPA") and similar regulatory
authorities in various states. The process of obtaining such registration may be
lengthy and expensive. The labeling and advertising of turf control products are
also subject to EPA regulation. While the Company believes its turf control
product labels and advertising materials are consistent with EPA and state
guidelines, there can be no assurance that EPA or state regulations or
interpretations may not change in the future or that the EPA or any state will
not challenge the Company's advertising materials.
Fertilizer products are currently regulated by individual state
departments of agriculture and must generally be registered or licensed in most
states in which they are sold. There can be no assurance that the state
regulations or interpretations of those regulations will not change in the
future or that the Company's registration in any state will not be challenged.
The Company is also required to obtain licenses/permits from a number of
governmental agencies in order to conduct various aspects of its business. These
licenses/permits are subject to modification and revocation, which could impair
the Company's ability to conduct its business in the manner in which and at the
places at which it is presently conducted.
Because of the nature of the Company's business, the Company is subject
to various environmental laws and regulations and incurs routine costs in
complying with these laws and regulations. It is the Company's policy to provide
for nonroutine costs relating to environmental matters when a loss is probable
and the amount of the loss can be reasonably estimated. There are no such
reserves for environmental matters at December 31, 1998.
-5-
6
Insurance
- - ---------
The Company maintains comprehensive general liability insurance
coverage (which includes product liability insurance coverage) at levels which
the Company believes are prudent and most cost-effective. The Company's
insurance program includes significant deductible amounts with respect to such
coverages. Certain coverages, including environmental pollution, are restricted
or have been excluded under current policies. The level of coverage and
deductible maintained generally reflects trends in the liability insurance
industry and is not unique to the Company. The Company regularly evaluates the
cost-effectiveness as compared to the risks assumed in determining its insurance
program.
Item 2. Properties
----------
The Company owns its principal executive office building and owns or
leases its warehouse and manufacturing facilities. The Company believes these
facilities are well-maintained, adequately insured and adequate and suitable for
their present and intended uses. In addition, the Company leases facilities for
temporary storage of inventory products during its peak seasonal demand. The
Company maintains sales offices at each of the following locations, including
its executive offices. Detail by location as of December 31, 1998 is as follows:
Location (1) Principal Use Square Feet Status
- - ------------ ------------- ----------- ------
Rocky River, OH Executive offices 41,000 Owned
Avon Lake, OH Blending of grass seed and distribution center 139,000 Owned
Charlotte, NC Distribution center for various products 57,600 Leased(2)
Hamilton, NJ Distribution center for various products 100,000 Leased(3)
Martins Ferry, OH Manufacturing facility and distribution center for 234,000 Owned(4)
fertilizers, including sulfur-coated fertilizers, and
turf control products
Pittsburgh, PA Distribution center for various products 131,000 Leased(5)
Sebring, FL Manufacturing facility for fertilizers and combination 276,000 Owned/
products and distribution center for principal products Leased(6)
Stockton, CA Manufacturing facility and distribution center for 32,000 Owned/
fertilizers and turf control products Leased(7)
Silverton, OR Blending of grass seed and distribution center 66,200 Leased(8)
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(9)
Hatfield, MA Manufacturing facility and distribution center for 77,000 Owned
fertilizers and turf control products, and blending of
turf grass seed
(1) Does not include Service Centers or Stores-on-Wheels. As of December
31, 1998, the Company operated Service Centers in 234 facilities of
which three are owned and 231 are leased by the Company. These
facilities range in size from 3,400 to 14,000 square feet. The Company
owns or leases 68 tractor-trailers for its Stores-on-Wheels.
(2) This facility is subject to a lease expiring in October 31, 2001.
-6-
7
(3) This facility is subject to a lease expiring December 31, 2000.
(4) These facilities are subject to mortgages in the aggregate amount of
$6,387,000 as of December 31, 1998.
(5) This facility is subject to a lease expiring December 31, 2001. The
Company has two five-year renewal options.
(6) These facilities consist of seven buildings. Six buildings are subject
to leases expiring in 2000 and 2001. It is the Company's intent to
renew these leases upon their expiration. The new manufacturing
facility is owned by the Company, while the land is subject to a lease
which expires in 2017 with four five year renewal options.
(7) These facilities consist of three buildings which are owned by the
Company. The land is subject to leases which expire in 2011. The
Company has one five year renewal option.
(8) This facility is subject to a lease which expires in 2009. The lease
includes an option to purchase.
(9) The facility is subject to a mortgage in the amount of $12,000 as of
December 31, 1998.
In January 1996, the Company completed the purchase of certain assets of the
Pro-Lawn Division of Agway, Inc. The Company distributed Pro-Lawn products from
five Agway distribution centers which were used by Pro-Lawn prior to the
acquisition and which total approximately 100,000 square feet. As of December
31, 1998 the Company was no longer using the five Agway distribution centers.
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 51 Chairman of the Board, President and Chief Executive Officer
Ware H. Grove 48 Vice President, Chief Financial Officer
Charles J. McGonigle 40 Vice President, Operations
Wayne W. Murawski 54 Vice President, Information Systems and Chief Information Officer
Kenneth S. Sekley 40 Vice President, Marketing
C. Thomas Smith 50 Former Vice President, Operations
-7-
8
William A. Foley joined the Company in July 1993 as President, Chief
Executive Officer and a director. He was elected Chairman of the Board by the
Board of Directors in October 1994, following the death of James I. FitzGibbon.
Mr. Foley was President and Chief Executive Officer of Imperial Wallcoverings,
Inc., a wallpaper producer and a subsidiary of Collins & Aikman, Inc., from
October 1990 until February 1993. From January 1988 to October 1990, Mr. Foley
was Vice President and General Manager of The Scotts Company Consumer Business
Group, a producer and marketer of turf care products. Mr. Foley was Vice
President and General Manager of Rubbermaid Specialty Products Division, a
producer of rubber and plastic products, from 1984 to 1988, and was Vice
President - Sales and Marketing for Anchor Hocking Corporation a producer of
glass products, from 1970 to 1984. Mr. Foley is also a director of Alltrista
Corporation, a consumer and industrial products manufacturing company, and
Libbey, Inc., a producer of glass products.
Ware H. Grove joined the Company in June 1996 as Vice President, Chief
Financial Officer. From 1994 to 1996, Mr. Grove was Vice President and Treasurer
at Revco D.S. Inc., a national drugstore chain. From 1991 to 1994, Mr. Grove was
Vice President and Treasurer at Vanstar (formerly Computerland Corporation), a
global distributor and reseller of personal computers and related products. From
1983 to 1991, Mr. Grove was the Assistant to the President at Manville
Corporation, a global building materials manufacturing company; and from 1977 to
1983, Mr. Grove was Cash Manager at The Upjohn Company, a multinational
pharmaceutical company.
Charles J. McGonigle joined the Company in April 1998 as Vice
President, Operations. Just prior to his employment with the Company, Mr.
McGonigle was Product Supply Manager for Proctor & Gamble Company, a
manufacturer of consumer, commercial and pharmaceutical products. From 1981 to
1997, Mr. McGonigle held a number of managerial positions with Procter & Gamble
Company.
Wayne W. Murawski joined the Company in 1994 Chief Information Officer
and was elected to the position of Vice President, Chief Information Officer in
1995. Prior to his employment with the Company, Mr. Murawski was Chief
Information Officer at Imperial Wallcoverings, Inc. a wallpaper producer and a
subsidiary of Collins & Aikman, Inc. Previous to that, Mr. Murawski held a
similar position at American Consumer Products, Inc. a hardware manufacturer and
distributor. From 1980 to 1988 Mr. Murawski was president of COMSOL Corporation,
a professional services firm, which implemented large systems projects in
Fortune 500 companies. Mr. Murawski's career was founded in the IBM mainframe
computing environment. He rose through the ranks of information system
departments in technical, supervisory, and project management roles.
Kenneth S. Sekley joined the Company in December 1997 as Vice
President, Marketing. Just prior to his employment with the Company, Mr. Sekley
was General Manager/Vice President, U.S. Crop Protection for American Cyanamid
Company, a $2.5 billion subsidiary of American Home Products, which is a leading
manufacturer of crop protection and lawn-and-garden chemicals. From 1990 to
1997, Mr. Sekley held the following positions with American Cyanamid: from 1995
to 1997, Vice President of Marketing; from 1994 to 1995, Business Manager,
Retail Distribution/Database Marketing; from 1993, District Sales Manager; from
1991 to 1993, Product Manager; and from 1990 to 1991, Manager, Business
Development. Prior to his employment with American Cyanamid, from 1980 to 1990,
Mr. Sekley held positions with Quantum Associates, Alliance Consulting, and
Exxon Corporation.
C. Thomas Smith joined the Company in August 1994 and was employed as
Vice President, Operations until April 14, 1998. 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.
-8-
9
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:
1998 1997
------------------- ----------------------------
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31 24-1/4 20-1/2 17-1/2 15-7/8
June 30 23-3/8 18-3/8 18-5/8 14
September 30 19-7/8 11-5/8 23-1/2 18-1/4
December 31 15-3/8 9 25-1/2 20
The Company paid an annual dividend of $.13 per Common Share in 1998
and $.12 in 1997. Certain provisions of the principal credit agreement of the
Company restrict the right of the Company to pay dividends.
See Note 4 of Notes to Financial Statements.
As of March 3, 1999 there were 1,365 holders of record of the Company's
Common Shares.
-9-
10
Item 6. Selected Financial Data
-----------------------
Five Year Summary
(Amounts in Thousands Except Per Share Data)
Year Ended December 31
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Statement of Operating Data:
Net sales $416,738 $356,841 $312,031 $241,667 $204,523
Cost of sales 283,837 238,392 218,596 160,576 133,826
------------------------------------------------------------
Gross profit on sales 132,901 118,449 93,435 81,091 70,697
Selling, general and
administrative expenses 118,015 101,548 91,065 71,635 60,175
Other expenses 2,236 818 4,745 1,035 1,071
---------------------------------------------------------------
Income (loss) from operations 12,650 16,083 (2,375) 8,421 9,451
Other deductions-net 3,197 1,943 1,177 585 71
--------------------------------------------------------------
Income (loss) before income taxes
and cumulative effect of
change in accounting principle 9,453 14,140 (3,552) 7,836 9,380
Income tax (benefit) expense 3,561 5,515 (1,203) 3,009 3,608
-------------------------------------------------------------
Income (loss) before cumulative
effect of change in accounting
principle 5,892 8,625 (2,349) 4,827 5,772
Cumulative effect on prior years of
changing the method of capitalizing
certain inventory costs (A) -- -- -- -- 1,149
--------------------------------------------------------------
Net Income (Loss) $5,892 $ 8,625 $ (2,349) $ 4,827 $ 6,921
===========================================================
Earnings (Loss) Per Share:
Income (loss) before cumulative effect
of change in accounting principle
Basic $.71 $1.06 ($.29) $.61 $.74
Diluted $.69 $1.02 ($.29) $.59 $.72
Cumulative effect on prior years of
changing the method of
capitalizing certain
inventory costs
Basic -- -- -- -- .15
-------------------------------------------------------------
Diluted -- -- -- -- .14
-------------------------------------------------------------
Earnings (Loss) Per Share:
Basic $.71 $1.06 ($.29) $.61 $.89
============================================================
Diluted $.69 $1.02 ($.29) $.59 $.86
============================================================
Cash dividends declared and paid
per common share $.13 $ .12 $ .11 $.10 $.09
11
Year Ended December 31
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ------- ----
Balance Sheet Data:
Working capital $ 116,101 $117,711 $ 99,904 $ 85,950 $ 70,839
Total assets $ 207,748 $200,318 $164,673 $137,821 $114,612
Long-term debt, net
of current portion $ 83,698 $ 83,353 $ 64,704 $ 43,258 $ 29,542
Shareholders' equity $ 78,697 $ 72,293 $ 61,699 $ 63,878 $ 58,175
Note:
A. 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
- - ---------------------
Company sales rose to a record $416.7 million in 1998, a 16.8% increase compared
with $356.8 million in 1997, which was a 14.4% increase over 1996 sales of
$312.0 million. Each of the Company's key sales groups contributed to overall
sales growth, with Service Centers and Golf Course sales contributing the
largest increase for both 1998 and 1997. The increase reflected volume growth in
new Service Centers and the maturation of sites previously opened. During 1998,
the Company opened 20 new Service Centers so that at the end of the year, the
Company was operating 234 stores in 38 states. At the end of 1997, the Company
had 215 sites in operation compared with 196 stores at the end of 1996.
Comparable store sales for 1998 increased 10.8% compared with a 15.0% increase
in 1997. In 1999, the Company does not plan to open any new Service Centers, and
will focus on increasing sales and profitability through its existing network.
The Company recognized diluted net earnings of $0.69 per share in 1998 compared
with $1.02 per share in 1997 and a net loss of $0.29 per share in 1996. The net
loss in 1996 was attributable to $12.9 million of fourth-quarter pre-tax charges
relating to certain non-recurring strategic activities, including the formation
of Commercial Turf Products, Ltd. (CTP), 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; the rationalization of the Company's product line; and a reserve
for the valuation of slow-moving and discontinued products.
In connection with the relocation of equipment manufacturing operations from
Sebring, Florida, to CTP, the Company paid $1.9 million and $3.1 million of
costs in 1998 and 1997, respectively, relating to inventory disposal, equipment
transfer and disposal, employee severance and other costs. The Company completed
the relocation in 1998 as anticipated.
The Company's gross profit as a percent of sales in 1998 was 31.9% compared with
33.2% in 1997 and 29.9% in 1996. During 1998, the Company's gross profit percent
declined primarily as a result of costs associated with the start-up of the new
Sebring fertilizer facility, a heavier sales mix toward chemical products, a
decline in seed margins due to competitive pricing pressures and a year-end cost
of sales adjustment, which was associated primarily with a mid-1998 conversion
to a new inventory costing system.
Selling, general and administrative expenses for 1998 were 28.9% of sales
compared with 28.7% of sales in 1997 and 30.7% in 1996. A $5.9 million, or
21.3%, increase in the Company's freight and distribution costs accounted for a
large component of the increase for 1998 compared with 1997. The increase in
freight and distribution costs during 1998 is attributable primarily to
increased sales volume, warehouse consolidation costs for the Sebring, Florida,
operations and full-year operating costs and integration expenses for the New
England and California
-11-
12
operations. In 1998, freight and distribution costs were 8.1% of sales compared
with 7.8% of sales in 1997 and 7.5% of sales in 1996. Selling expenses of $58.1
million in 1998 increased 13.7% over $51.1 million in 1997, which represented an
increase of 7.4% over 1996 selling expenses of $47.6 million. The increase in
selling expenses is attributable primarily to the increase in the number of
Service Centers operated by the Company - 196 in 1996, 215 in 1997, 234 in 1998
- - - and the addition of Golf and West Coast sales resources.
Interest expense increased to $5.6 million from $4.7 million in 1997 and $4.2
million in 1996. The increase during 1998 is attributable primarily to a higher
average interest rate and larger seasonal working capital needs associated with
the growth of the business. The increase in 1997 was 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 Fertilizer, Inc. in
August. Other - net consists primarily of customer finance charges and the
Company's 50% share of CTP's results. Customer finance charges totaled $3.5
million in 1998 compared with $3.1 million in 1997 and $2.6 million in 1996. The
loss recognized for CTP in 1998 was $1.9 million compared with $1.2 million
recognized from May through December 1997.
The Company's effective tax rate in 1998 was 37.7% compared with 39.0% in 1997
and 33.9% in 1996. The lower tax rates in 1998 and 1996 reflect the federal
effect of state and local income taxes, while the 1996 rate also reflects the
Company's net loss for that year.
Liquidity and Capital Resources
- - -------------------------------
As of December 31, 1998, total assets of the Company were $207.7 million
compared with $200.3 million at year-end 1997 and $164.7 million at year-end
1996. The increase in assets is attributable to growth in the business combined
with seasonal working capital increases, capital additions and improvements, and
the Company's purchase of certain assets of Agriturf, Inc. and Cadwell & Jones,
Inc. Funding for the increase in assets was provided primarily by cash generated
from operations, while net borrowing under the Company's credit facilities
remained relatively unchanged.
The Company's debt-to-total capitalization percentage was 52% as of December 31,
1998, compared with 54% as of December 31, 1997, and 51% as of December 31,
1996. The slight decrease in 1998 was a result of the relatively unchanged level
of debt while equity increased.
Accounts receivable decreased 0.8% in 1998 compared with a 16.8% sales increase,
due primarily to the outsourcing of equipment financing in mid-1997 and improved
focus on the management of receivables. In 1997 and 1996, accounts receivable
increased 14.7% and 20.4%, respectively, compared with sales increases of 14.4%
and 29.1%. Inventories increased 5.5% in 1998 compared with 20.7% in 1997 and
12.1% in 1996. The increase in inventories in 1998 relates to the increase in
the number of Service Centers, while 1997 reflected some early purchases the
Company made as of December 31, 1997, on advantageous terms. Accounts payable
increased slightly in 1998 compared with larger increases in 1997 and 1996,
which related to increases in inventory.
During 1998, the Company's expenditures for capital improvements and additions
totaled $19.7 million. Included in that total was an expenditure of $8.2 million
for the purchase of certain assets of Agriturf, Inc. and Cadwell & Jones, Inc.
Additional capital expenditures included approximately $6.3 million for the
completion of the Company's fertilizer plant and improvement of its distribution
facilities in Sebring, Florida, and approximately $2.2 million for the
continuing design and implementation of information systems and technology to
improve the Company's management of assets and its customer service. The funding
for these projects came from operations, temporary borrowings from the Company's
credit facilities or specific industrial revenue bond financing relating to the
Sebring, Florida, capital project.
The Company is a 50% owner of CTP and accounts for this investment using the
equity method of accounting. CTP, which began operations in May 1997,
manufactures commercial turf equipment. The Company's share of CTP's 1998 and
1997 net loss was $1.9 million and $1.2 million, respectively, and was recorded
as a reduction of the Company's initial investment of $700,000. In connection
with this joint venture, the Company has extended $2.7 million of advances and
has also guaranteed 50% of CTP's long-term obligations, which totaled $14.8
million at December 31,1998.
-12-
13
In June 1998, the Company issued $50.0 million in fixed-rate, private-placement
notes to five insurance companies. These proceeds were used primarily to reduce
outstanding debt under the Company's credit facility. The notes vary in nature
from three to 10 years with an average maturity of 7.5 years, and bear a
weighted-average interest rate of 6.8%. At December 31, 1998, the Company had
$19.9 million of debt outstanding on its revolving line of credit. The credit
facility will mature 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, 1998,
$60.1 million was available for borrowing under this line of credit. The Company
believes the current borrowing capacity is adequate for 1999 and the foreseeable
future.
Year 2000 Compliance
- - --------------------
The Year 2000 issue concerns the potential inability of computer hardware or
software to properly recognize date-sensitive information relating to the Year
2000 and beyond. To address this potential problem, the Company has implemented
a work plan to identify information systems issues and has surveyed each
manufacturing location to identify mission-critical and support-function system
compliance issues. The Company has assessed potential risks that could impact
the Company's business and is developing appropriate contingency plans in the
event of a temporary disruption. The Company's Vice President, Chief Information
Officer leads this effort.
Since 1995, the Company has conducted a broad-based information systems program
to replace and upgrade computer application software and hardware in its
manufacturing, distribution, point-of-sale, financial and administrative
functions. The primary purpose of this program is to improve operating
efficiencies. With the implementation of a new receivables management system in
1999, the Company expects to complete this broad-based information systems
program by the end of 1999. At the time of purchase of these new systems from
various vendors, the Company required that these systems be Year-2000 compliant.
The Company has obtained written vendor representations as to the new systems'
Year 2000 compliance. It is the Company's belief that these new information
systems and the related hardware to operate these systems are compliant with
Year 2000 computing requirements.
During 1998, the Company completed construction of a new fertilizer
manufacturing plant in Sebring, Florida. It is the Company's belief that all
operating systems at this plant are Year-2000 compliant. During 1998, the
Company conducted a review of each manufacturing site, and internal assessments
with respect to Year 2000 compliance for its desktop and manufacturing process
technology and other potentially date-sensitive technology. The Company has
implemented a work plan to ensure all systems are compliant by the end of 1999.
The Company has been testing and will continue to test Year 2000 compliance
throughout its operations during 1999. In addition, the Company is communicating
with key business partners including suppliers, utilities and customers to
determine their risks associated with the Year 2000.
The primary focus of the Company's broad-based information systems upgrades has
been to improve operating efficiencies; however, Year 2000 compliance has been a
secondary benefit of this initiative. The Company has funded these system
improvements from capital funds and annual operating cash flows. The incremental
cost specifically associated with Year 2000 compliance efforts has been nominal,
and is expected to be less than $150,000 in 1999.
The potential risks associated with the Year 2000 issue include temporary
disruption of manufacturing operations, materials ordering, receiving and
shipping product, order entry, billing and collection of accounts receivable,
and disruption in services from vendors who supply materials or services
necessary to the Company in the conduct of its operations. While there can be no
complete assurances, we believe the risk of disruption to the Company has been
minimized as a result of the information systems upgrades that have occurred
since 1995, the ongoing testing and assessments of operating systems, and the
ongoing communication with key business partners. However, if disruptions
relating to the Year 2000 issue occur, the Company could experience some adverse
effects on its operations. The Company is developing contingency plans for
various functional areas, and anticipates completion of these plans by September
30, 1999. During 1999, the Company will continue to assess risks to minimize the
impact of any potential disruptions.
-13-
14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The Company is exposed to market risk relating to interest rates and commodity
prices. The Company's debt consists primarily of $50.0 million in fixed-rate,
private-placement notes and a seven-year, $7.0 million notional amount interest
rate swap. The estimated fair value of the $50.0 million fixed-rate notes at
year end would not be significantly different from the recorded value based on
current borrowing rates available for financing with similar terms and
maturities. If the Company were to terminate the seven-year, $7.0 million
notional amount interest swap agreement at December 31, 1998, the estimated cost
would be $278,000.
The Company has seven- and eight-month purchase agreements for fixed prices and
quantities for fertilizer raw material commodities that amount to approximately
$4.9 million, to manage the volatility relating to market fluctuations.
Sensitivity analysis of the incremental effect on annual pre-tax income of a
hypothetical 10% decrease in the commodity price for the remaining balance of
purchases at December 31, 1998, would be approximately $485,000. See also the
Long-Term Debt Note in the Notes to Consolidated Financial Statements.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The following financial statements of LESCO, Inc. and the report of
Ernst & Young LLP, independent auditors, are set forth on the following pages:
Report of Ernst & Young LLP, Independent Auditors F-1
Consolidated Statements of Operations--Years ended December 31, 1998, 1997 and 1996 F-1
Consolidated Balance Sheets--December 31, 1998 and 1997 F-2
Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Shareholders' Equity--Years ended December 31, 1998, 1997 and 1996 F-3
Notes to Consolidated Financial Statements F-4
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
Not Applicable.
-14-
15
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Reference is made to the information set forth under the captions
"Election of Directors" and "Business Experience of Directors and Nominees" in
the Proxy Statement, which information is incorporated herein by reference.
The information required with respect to executive officers is set
forth in Part I of this Form 10-K under the heading "Executive Officers of the
Registrant." All officers serve at the discretion of the Board of Directors.
Item 11. Executive Compensation
----------------------
Reference is made to the information set forth under the caption
"Executive Compensation" in the Proxy Statement, which information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Reference is made to the information set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Reference is made to the information set forth under the caption
"Certain Transactions" in the Proxy Statement, which information is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a)(1) and (2). Financial Statements and Financial Statement Schedule.
The following financial statements of LESCO, Inc. are included in Item
8:
Consolidated Balance Sheets--December 31, 1998 and 1997
Consolidated Statements of Operations--Years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Shareholders' Equity--Years ended December
31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows--Years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
The following financial statement schedule is included herewith:
Schedule II--Valuation and Qualifying Accounts--December 31, 1998
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(3) See Exhibit Index.
(b) The Registrant has not filed any current report on Form 8-K during the
quarter ended December 31, 1997.
(c) Exhibits--The response to this portion of Item 14 is submitted as a
separate section of this report.
-15-
16
(d) Financial Statement Schedule
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
LESCO, INC.
DECEMBER 31, 1998
================================ ================== ====================================== =============== ==============
COL. A COL. B COL. C COL. D COL. E
- - -------------------------------- ------------------ -------------------------------------- --------------- --------------
ADDITIONS
DESCRIPTION BALANCE AT DEDUCTIONS BALANCE AT
BEGINNING OF END OF PERIOD
PERIOD
------------------ ------------------- ---------------
CHARGED TO COSTS CHARGED TO OTHER COSTS INCURRED
AND EXPENSES ACCOUNTS--DESCRIBE
================================ ================== ====================================== =============== ==============
Year Ended December 31, 1998:
Deducted from assets
accounts- Reserve for
inventory obsolescence $ 4,249,000 $ 214,000 ($2,342,000) (1)$ 2,098,000
- - -------------------------------- ------------------ ------------------ ------------------- --------------- --------------
Year Ended December 31, 1997:
Deducted from assets
accounts- Reserve for
inventory obsolescence $ 7,134,000 $ 457,000 ($3,342,000) (1)$ 4,249,000
================================ ================== ================== =================== =============== ==============
Year Ended December 31, 1996:
Deducted from assets
accounts- Reserve for
inventory obsolescence $ 250,000 $ 6,884,000 $ 7,134,000
================================ ================== ================== =================== =============== ==============
(1) Reserves relieved as obsolete inventory is sold or is otherwise disposed.
17
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LESCO, Inc.
By /s/ William A. Foley
--------------------------
William A. Foley
Date: March 26, 1999
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 26, 1999
- - ------------------------------- Executive Officer and Director
William A. Foley
/s/ Ware H. Grove Chief Financial Officer March 26, 1999
- - -------------------------------
Ware H. Grove
/s/ Ronald Best Director March 26, 1999
- - -------------------------------
Ronald Best
/s/ Drexel Bunch Director March 26, 1999
- - -------------------------------
Drexel Bunch
/s/ Robert F. Burkhardt Director March 26, 1999
- - -------------------------------
Robert F. Burkhardt
/s/ David H. Clark Director March 26, 1999
- - -------------------------------
David H. Clark
/s/ J. Martin Erbaugh Director March 26, 1999
- - -------------------------------
J. Martin Erbaugh
/s/ Michael J. FitzGibbon Director March 26, 1999
- - -------------------------------
Michael J. FitzGibbon
/s/ Lee C. Howley Director March 26, 1999
- - -------------------------------
Lee C. Howley
-17-
18
LESCO, INC.
FORM 10-K
EXHIBIT INDEX
Exhibit
Number Description of Document
- - ------- -----------------------
3(a)(1) Amended Articles of Incorporation of the Registrant.
3(b)(1) Amended Code of Regulations of the Registrant.
4(a)(2) Specimen certificate for the Registrant's Common Shares.
4(c)(3) Reimbursement Agreement dated March 1, 1993, between Pittsburgh
National Bank and the Registrant.
4(d)(1) Loan Agreement dated as of January 1, 1988 between County of
Belmont, Ohio, and the Registrant ($5,875,000 County of Belmont,
Ohio Industrial Development Revenue Bonds).
4(e)(1) Loan Agreement dated as of January 28, 1988 between the Director
of Development of the State of Ohio and the Registrant.
4(f) Amended Articles of Incorporation of the Registrant (appears as
Exhibit 3(a) above).
4(g) Amended Code of Regulations of the Registrant (appears as Exhibit
3(b) above).
4(h)(8) Loan Agreement dated as of November 1, 1997 between Highlands
County Industrial Development Authority and the Registrant.
4(i)(9) $50,000,000 Senior Note Purchase Agreement dated June 15, 1998
10(a)(4) LESCO, Inc. Stock Investment and Salary Savings Plan and Trust,
as amended and restated.
10(e)(3) Reimbursement Agreement dated March 1, 1993, between Pittsburgh
National Bank and the Registrant (appears as Exhibit 4(c) above).
10(g)(1) Loan Agreement dated as of January 28, 1988 between the Director
of Development of the State of Ohio and the Registrant (appears
as Exhibit 4(e) above).
10(k)(3) 1992 Stock Incentive Plan.
10(l)(5) Stock Bonus Plan (appears as Exhibit 4(d) to Registrant's Form
S-8).
10(o)(1) Loan Agreement dated as of January 1, 1988 between County of
Belmont, Ohio, and the Registrant ($5,875,000 County of Belmont,
Ohio Industrial Development Revenue Bonds) (appears as Exhibit
4(d) to Registrant's Form 10-K for fiscal year 1987).
10(q)(7) Second Amendment to the Credit Agreement dated November 1, 1996.
10(r)(1)(4) Credit Agreement dated September 30, 1994 among National City
Bank, PNC Bank, National Association, NBD Bank, N.A., National
City Bank, as agent, and the Registrant (the "Credit
Agreement")(appears as Exhibit 10(r) to Registrant's Form 10-K
for fiscal year 1994).
10(r)(2)(8) Third amendment to the Credit Agreement dated February 14, 1997
10(r)(3)(8) Fourth amendment to the Credit Agreement dated August 1, 1997
10(r)(4)(8) Fifth Amendment to the Credit Agreement dated January 28, 1998
-18-
19
10(r)(5)(9) Sixth Amendment to the Credit Agreement dated June 25, 1998
10(s)(4) Consulting Agreement by and between the Registrant and Robert F.
Burkhardt (appears as Exhibit 10(s) to Registrant's Form 10-K for
fiscal year 1994).
10(t)(8) Letter of Credit Agreement dated as of November 1, 1997 between
PNC Bank, National Association and the Registrant
10(u)(10) Employment Agreement by and between the Registrant and William A.
Foley (appears as Exhibit 10(u) to Registrant's Form 10-K for
fiscal year 1998).
21(10) Subsidiaries of the registrant
23(10) Consent of Ernst & Young LLP, Independent Auditors
27(10) Financial Data Schedule
20
Exhibit
1 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its Annual
Report on Form 10-K for the year ending November 30, 1987 (File No.
0-13147).
2 Incorporated by reference to exhibits, with the corresponding exhibit
numbers, filed by Registrant with its Registration Statement on Form
S-l (File No. 2-90900).
3 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its Annual
Report on Form 10-K for the year ending December 31, 1992.
4 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its Annual
Report on Form 10-K for the year ending December 31, 1994.
5 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its
Registration Statement on Form S-8 (File No. 33-22685).
6 Incorporated by reference to exhibits, with the corresponding exhibit
numbers, filed by Registrant with its Registration Statement on Form
S-2 (File No. 33-67348).
7 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its Annual
Report on Form 10-K for the year ending December 31, 1996.
8 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its Annual
Report on Form 10-K for the year ending December 31, 1997.
9 Incorporated by reference to exhibits, with the corresponding exhibit
numbers unless otherwise indicated, filed by Registrant with its
quarterly report on form 10Q for the quarter ended June 30, 1998.
10 Filed herewith.
-20-
21
EXECUTIVE COMPENSATION PLANS
AND ARRANGEMENTS
----------------------------
Exhibits 10(a), 10(k), 10(1) and 10(p) are compensation plans in which
executive officers participate.
-21-
22
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors of LESCO, Inc.
We have audited the accompanying consolidated balance sheets of LESCO, Inc. as
of December 31, 1998, and 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1998, and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Cleveland, Ohio
February 5, 1999
/s/ Ernst & Young LLP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31
- - ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data) 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Net sales $416,738 $356,841 $312,031
Cost of sales 283,837 238,392 218,596
- - ---------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT ON SALES 132,901 118,449 93,435
Selling, general and administrative expenses 118,015 101,548 91,065
Other expenses 2,236 818 4,745
- - ---------------------------------------------------------------------------------------------------------------------------
120,251 102,366 95,810
- - ---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 12,650 16,083 (2,375)
Other deductions (income):
Interest expense 5,635 4,749 4,214
Other - net (2,438) (2,806) (3,037)
- - ---------------------------------------------------------------------------------------------------------------------------
3,197 1,943 1,177
Income (loss) before income taxes 9,453 14,140 (3,552)
Income tax expense (benefit) 3,561 5,515 (1,203)
- - ---------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 5,892 $ 8,625 $ (2,349)
- - ---------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE
BASIC $ 0.71 $ 1.06 $ (0.29)
DILUTED $ 0.69 $ 1.02 $ (0.29)
- - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-1
23
CONSOLIDATED BALANCE SHEETS
December 31
- - ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data) 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 1,841 $ 3,403
Accounts receivable, less allowance of $3,350 in 1998; $3,000 in 1997 65,358 65,869
Inventories 86,662 82,174
Deferred federal income taxes 1,568 2,680
Prepaid expenses and other assets 3,598 5,989
- - ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 159,027 160,115
PROPERTY, PLANT AND EQUIPMENT
Land 1,024 499
Buildings and improvements 23,107 18,076
Machinery and equipment 28,483 26,887
Furniture and fixtures 15,260 12,992
- - ---------------------------------------------------------------------------------------------------------------------------
67,874 58,454
Less allowance for depreciation and amortization 28,796 27,238
- - ---------------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 39,078 31,216
Bond proceeds held for construction -- 4,761
- - ---------------------------------------------------------------------------------------------------------------------------
39,078 35,977
OTHER ASSETS 9,643 4,226
- - ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $207,748 $200,318
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 36,138 $ 34,002
Salaries, wages and profit sharing 2,895 2,946
Other liabilities and accrued expenses 3,793 5,256
Current portion of long-term debt 100 200
- - ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 42,926 42,404
LONG-TERM DEBT 83,698 83,353
DEFERRED INCOME TAXES 2,427 2,268
SHAREHOLDERS' EQUITY
Preferred shares -- without par value -- 500,000 shares authorized Common
shares -- without par value -- 19,500,000 shares authorized;
8,401,418 shares issued and 8,366,202 shares outstanding in 1998;
8,256,084 shares issued and 8,250,356 shares outstanding in 1997 841 825
Paid-in capital 31,631 29,268
Retained earnings 47,156 42,347
Less 5,728 treasury shares (59) (59)
Unearned compensation (872) (88)
- - ---------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 78,697 72,293
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $207,748 $200,318
===========================================================================================================================
See Notes to Consolidated Financial Statements.
F-2
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
- - ---------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 5,892 $ 8,625 $ (2,349)
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization 5,658 4,275 3,728
Deferred income taxes 1,271 2,679 (3,182)
Increase in accounts receivable (1,475) (8,195) (13,094)
Provision for uncollectible accounts receivable 2,236 818 3,392
Increase in inventories (5,587) (10,738) (7,017)
Change in inventory and plant relocation reserves 2,151 (3,587) 8,124
Increase in accounts payable 1,760 6,370 3,116
Change in other current items 1,010 (2,309) 1,791
Other (393) 801 (179)
- - ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 12,523 (1,261) (5,670)
- - ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment - net (11,529) (9,882) (5,140)
Bond proceeds held for construction 4,761 (4,761) --
Acquisition of businesses (8,174) (2,949) (11,268)
- - ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (14,942) (17,592) (16,408)
- - ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from borrowings 184,897 124,507 110,200
Reduction of borrowings (184,552) (105,858) (88,754)
Issuance of common shares 1,595 2,679 791
Cash dividends (1,083) (972) (879)
- - ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 857 20,356 21,358
- - ---------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (1,562) 1,503 (720)
Cash - beginning of the year 3,403 1,900 2,620
- - ---------------------------------------------------------------------------------------------------------------------------
CASH - END OF THE YEAR $ 1,841 $ 3,403 $ 1,900
===========================================================================================================================
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Shares
------------------------ Unearned
Paid-In Retained Treasury Compen-
(In thousands, except share data) Shares Dollars Capital Earnings Shares sation
===========================================================================================================================
Balance at January 1, 1996 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-- $0.11 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-- $0.12 per share (972)
Net income 8,625
- - ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 8,250,356 825 29,268 42,347 (59) (88)
Issuance of common shares 115,846 12 1,583
Issuance of restricted common shares 35,216 4 780 (784)
Dividends paid-- $0.13 per share (1,083)
Net income 5,892
- - ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 8,401,418 $841 $31,631 $47,156 $(59) $(872)
===========================================================================================================================
See Notes to Consolidated Financial Statements.
F-3
25
NOTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 subsidiaries. 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 $5,602,000 and $3,287,000 in raw
materials and $81,060,000 and $78,887,000 in work in process and finished goods
at December 31, 1998, and 1997, respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost
and are depreciated using the straight-line method over the estimated useful
lives of the respective assets. Buildings are depreciated over 15 to 20 years,
and machinery, equipment and other depreciable assets over three to 12 years.
Expenditures for maintenance and repairs are charged to income as incurred.
Additions and improvements are capitalized.
INTANGIBLE ASSETS: Included in other assets are $9,213,000 and
$4,217,000 of intangible assets at December 31, 1998, and 1997, respectively,
consisting primarily of goodwill, trademarks, customer lists and other
specifically identifiable assets arising from the Pro-Lawn (see Note 2), Tri
Delta Fertilizer, Inc. (Tri Delta), Agriturf, Inc. and Cadwell & Jones, Inc.
acquisitions. These assets are being amortized using the straight-line method
over periods of three to 20 years. Accumulated amortization was $1,036,000 and
$522,000 at December 31, 1998, and 1997, respectively.
IMPAIRMENT OF LONG-LIVEDASSETS: The Company assesses the recoverability of its
long-lived and intangible assets by determining whether the amortization of the
remaining balance over its remaining useful life can be recovered through
undiscounted future operating cash flows. If impairment exists, the carrying
amount of the related asset is reduced to fair value.
FINANCE CHARGES: "Other - net" in the accompanying statements of operations
includes $3,534,000, $3,118,000 and $2,643,000 in customer finance charges in
1998, 1997 and 1996, 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.
NOTE 2 -- ACQUISITIONS
On January 30, 1998, the Company acquired certain assets of Agriturf, Inc.
and Cadwell & Jones, Inc. for $8,200,000, including assumption of $2,200,000 of
debt. The asset purchase included land, a fertilizer manufacturing facility and
related warehouse, working capital and manufacturing equipment. The asset
purchase was financed by the Company's credit facility.
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 dates of the related acquisitions.
NOTE 3 -- INVESTMENT IN COMMERCIAL TURF PRODUCTS, LTD.
The Company's 50% investment in Commercial Turf Products, Ltd. (CTP) is
accounted for under the equity method of accounting. The Company's share of
CTP's 1998 and 1997 net loss is $1,845,000 and $1,219,000, respectively, and is
included in "Other - net" in the statement of operations. In addition, the
Company has guaranteed 50% of certain liabilities of CTP aggregating $14,786,000
at December 31, 1998. These liabilities mature through 2002 and bear interest at
rates ranging from 3.5% to 8.5%. Through December 31, 1998, the Company invested
$700,000 in CTP and extended advances of $2,700,000. CTP's financial information
at December 31 is as follows:
- - -----------------------------------------------------------
(In thousands) December 1998 May-December 1997
- - -----------------------------------------------------------
Current assets $9,845 $6,552
Non-current assets 8,878 8,472
Current liabilities 14,700 7,313
Non-current liabilities 8,750 8,750
Net sales 14,741 1,765
Gross profit 3,298 (769)
Net loss (3,689) (2,438)
===========================================================
NOTE 4 -- LONG-TERM DEBT
Long-term debt consists of the following:
December 31
- - -------------------------------------------------------
(In thousands) 1998 1997
- - -------------------------------------------------------
Term notes payable $50,000 $ --
Credit agreement 19,900 69,500
Industrial revenue bonds 13,375 13,375
Other debt 523 678
----------------
83,798 83,553
Less current portion 100 200
----------------
$83,698 $83,353
=======================================================
F-4
26
In June 1998, the Company issued $50,000,000 in fixed-rate,
private-placement notes to five insurance companies. The proceeds were used to
reduce outstanding debt under the Company's credit facility. The notes vary in
nature from three to 10 years with an average maturity of 7.5 years, and bear a
weighted-average interest rate of 6.81%.
The credit agreement, which will mature 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 (7.75% at December 31,
1998) as to $900,000 of principal, or at alternative rates (ranging from 6.16%
to 6.30% at December 31, 1998) elected by the Company as provided by the
agreement for the remaining principal due, together with a 0.125% commitment fee
for the unused portion of the credit line. At December 31, 1998, $60,100,000 was
available for borrowing.
The Company has a seven-year, $7,000,000 notional amount interest rate swap
agreement expiring in 2002, which converts existing floating-rate debt for
6.335% fixed-rate debt. If the Company were to terminate this agreement at
December 31, 1998, the estimated cost would be $278,000.
In November 1997, the Company issued $7,500,000
of industrial revenue bonds related to a new Sebring, Florida, fertilizer plant.
The bonds will mature in 2017. The Company also has $5,875,000 of industrial
revenue bonds outstanding related to its Martins Ferry, Ohio, facility, and they
will mature in 2014. Interest is payable quarterly for both bonds at a rate
based on comparable tax-exempt market rates (4.20% at December 31, 1998). 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, 1998, the Company has not drawn any amounts under the
letter of credit. The letter of credit will expire 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 $6,800,000
at December 31, 1998).
The private-placement notes, revolving credit agreement and industrial
revenue bonds contain various restrictive covenants, including limits on
additional borrowings, lease payments and annual dividend payments ($1,500,000);
maintenance of certain operating and financial ratios; and maintenance of
minimum net worth. The carrying amount of the Company's long-term debt
approximates fair value at December 31, 1998, based upon consideration of
current market rates. The annual maturities of long-term debt for the years 2000
through 2003 are $19,992,000, $5,097,000, $5,816,000 and $5,821,000,
respectively. Interest payments were $5,863,000, $4,873,000 and $4,121,000 in
the years ended December 31, 1998, 1997 and 1996, 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 1998, 1997 and 1996 was approximately
$14,800,000, $13,300,000 and $11,400,000, respectively. Future minimum lease
payments are as follows:
- - -------------------------------------------------------
(In thousands)
Year Ended December 31 Total
- - -------------------------------------------------------
1999 $10,908
2000 9,776
2001 8,568
2002 6,584
2003 5,663
2004 and thereafter 11,126
-------
$52,625
=======================================================
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) 1998 1997 1996
- - --------------------------------------------------------
Current $2,290 $2,836 $ 1,979
Deferred (benefit) 1,271 2,679 (3,182)
------------------------
Income tax expense (benefit) $3,561 $5,515 $(1,203)
- - --------------------------------------------------------
The provision (benefit) for income taxes differs from the statutory rate as
follows:
Years Ended December 31
- - ---------------------------------------------------------------
(In thousands) 1998 1997 1996
- - ---------------------------------------------------------------
Income taxes at statutory rate $ 3,214 $ 4,808 $(1,208)
State and local income taxes net
of federal income tax benefit 256 558 (95)
Other 91 149 100
----------------------------
Provision for income taxes $ 3,561 $ 5,515 $(1,203)
===============================================================
Income tax payments were $2,877,000, $4,687,000 and $4,006,000 in 1998,
1997 and 1996, respectively.
The significant components of deferred tax assets and liabilities are as
follows:
December 31, 1998 December 31, 1997
- - ------------------------------------------------------------------------
Deferred Tax Deferred Tax
------------------------------------------
(In thousands) Assets Liabilities Assets Liabilities
- - ------------------------------------------------------------------------
Depreciation $ 2,238 $ 2,104
Allowance for bad debts $ 1,124 $ 1,020
Accrued employee benefits 325 46
Net operating loss
carryforward 657 621
Accrued insurance 85 34
Inventory reserves 107 1,181
Accrued compensation 449 581
Reserves for relocation
of equipment
manufacturing operations 221
Prepaid expenses 347 406
Other 13 163 70 139
------------------------------------------
Total 2,653 2,855 3,728 2,695
Valuation allowance (657) -- (621) --
------------------------------------------
$ 1,996 $ 2,855 $ 3,107 $ 2,695
========================================================================
As of December 31, 1998, the Company had net operating loss carryforwards
of $1,900,000 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. 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 under federal
income tax laws. The Company has recorded a valuation allowance due to the
uncertainty of the utilization of the carryforwards prior to their expiration.
F-5
27
NOTE 7 -- CAPITAL STOCK AND STOCK PLANS
STOCK OPTIONS: The Company has stock option plans that provide for the issuance
of incentive stock options; non-qualified stock options; stock appreciation
rights (SARs) either in connection with, or independent of, any option; and
restricted and other share awards. The plans provide for the issuance of a
maximum of 1,683,875 common shares to key employees and directors.
Options issued pursuant to any of the Company's plans are exercisable for
up to 10 years at an option price equal to the fair market value on the date the
option was granted. The Company has in the past, and may from time to time in
the future, issue options outside of the Company's plans at an exercise price
lower than fair market value in connection with key employees. Additional
paid-in capital includes tax benefits of $473,000, $429,000 and $205,000
relating to the exercise of options in 1998, 1997 and 1996, respectively. The
following table summarizes the changes in the outstanding options for the three
years ended December 31, 1998:
1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- - ---------------------------------------------------------------------------------------------------------------------------
Outstanding - beginning of year 723,438 $13.86 811,726 $13.09 635,076 $11.92
Granted 155,713 19.76 97,850 17.69 272,050 14.56
Exercised (103,741) 10.95 (176,063) 11.82 (87,750) 9.01
Canceled/forfeited (40,850) 14.44 (10,075) 14.04 (7,650) 15.02
===========================================================================================================================
Outstanding - end of year 734,560 $15.37 723,438 $13.86 811,726 $13.09
===========================================================================================================================
Option price range at end of year $ 5.67 to $ 5.67 to $ 5.67 to
$23.00 $21.50 $16.00
Exercisable - end of year 700,069 596,268 679,726
Reserved for future grants 255,393 390,189 491,825
Weighted-average fair value of
options granted during the year $ 5.67 $ 4.55 $ 4.35
===========================================================================================================================
The following table summarizes information about stock options outstanding
as of December 31, 1998:
Range of Options Options Weighted-Average Weighted-Average
Exercise Prices Outstanding Exercisable Exercise Price Contractual Life
- - ---------------------------------------------------------------------------------------------------------------------------
$ 5.67 to $ 7.00 47,627 47,627 $ 6.56 2.1 years
$11.33 to $15.00 418,606 418,606 $14.14 6.3 years
$16.00 to $23.00 268,327 233,836 $19.19 6.7 years
- - ---------------------------------------------------------------------------------------------------------------------------
734,560 700,069 $15.37 6.1 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 changed to the pro forma amounts indicated below:
Years Ended December 31
- - ----------------------------------------------------------------
(In thousands, except share data) 1998 1997 1996
- - ----------------------------------------------------------------
Net income (loss) - as reported $ 5,892 $ 8,625 $(2,349)
Net income (loss) - pro forma $ 5,298 $ 8,346 $(2,751)
Earnings (loss) per share -
as reported
Basic $ 0.71 $ 1.06 $ (0.29)
Diluted $ 0.69 $ 1.02 $ (0.29)
Earnings (loss) per share -
pro forma
Basic $ 0.64 $ 1.03 $ (0.34)
Diluted $ 0.62 $ 0.98 $ (0.34)
================================================================
Included in these pro forma disclosures are stock options issued in 1998,
1997 and 1996 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 1998, 1997 and 1996, respectively:
dividend yield of 0.71%, 0.62% and 0.69%; expected stock price volatility of
0.29, 0.27 and 0.28; risk-free interest rate of 4.70%, 5.70% and 6.00%; 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.
The Company has an employment agreement with an executive officer that
provides for the issuance of non-qualified stock options to purchase up to
300,000 common shares. Such options 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 232,016 shares were
outstanding and 210,598 shares were exercisable at December 31, 1998.
F-6
28
RIGHTS PLAN: The Company has a preferred share purchase rights plan, and
declared a distribution of one Preferred Share Purchase Right (Right) on each
outstanding common share. The Rights will become exercisable if a person or
group acquires 20% or more of the Company's common shares, announces a tender
offer for 20% or more of the common shares or is declared an "adverse person" by
the Company's Board of Directors. Each Right entitles shareholders to buy one
one-hundredth of a share of a new series of participating preferred shares at an
exercise price of $75.00.
In addition, if a person or group acquires 20% or more of the Company's
outstanding common shares, each Right will entitle its holder (other than such
person or members of such group) to purchase one of the Company's common shares
(subject to certain adjustments) for a price of $0.50 per share. If, after a
person acquires 20% or more of the Company's common shares, the Company is
acquired in a merger or other business combination transaction with such person,
or 50% or more of its assets or earning power are sold, each Right will entitle
its holder to purchase for a price of $0.50 per share a specified number of the
acquiring company's common shares.
Prior to the acquisition by a person or group of 20% or more of the
Company's common shares, the Rights are redeemable for one cent per right at the
option of the Board of Directors. The Rights will expire on May 31, 2004.
PERFORMANCE PLAN: During each of 1996 and 1998, the Company established
long-term performance plans, which grant 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 two- to three-year
performance period. Participants in the plans have the rights of shareholders,
including the right to receive dividends and the right to vote. In 1996, 23,029
shares were granted with a fair market value of $334,000, of which 4,728 shares
with a fair market value of $69,000 were forfeited in 1997. Compensation expense
of $177,000 was recognized in 1997 under these plans, based upon the probability
that certain threshold performance criteria would be met. In 1998, 35,216 shares
were granted with a fair market value of $784,000. 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 $601,000, $465,000 and $454,000 for 1998, 1997 and 1996, 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) 1998 1997 1996
- - ----------------------------------------------------------------------------
NUMERATOR:
Net income (loss) $ 5,892 $ 8,625 $ (2,349)
DENOMINATOR:
Denominator for basic
earnings per share -
weighted-average shares 8,318,723 8,136,144 8,007,001
Effect of dilutive securities:
Stock options 238,093 341,643 --
Restricted shares 18,301 18,301 --
----------------------------------------
Dilutive potential
common shares 256,394 359,944 --
----------------------------------------
Denominator for diluted
earnings per share -
adjusted weighted-
average shares and
assumed conversions 8,575,117 8,496,088 8,007,001
EARNINGS (LOSS) PER SHARE
Basic $ 0.71 $ 1.06 $ (0.29)
----------------------------------------
Diluted $ 0.69 $ 1.02 $ (0.29)
============================================================================
NOTE 10 - OTHER COSTS AND EXPENSES
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 (included in
"Cost of sales") and other related plant shutdown costs of $1,353,000 (included
in "Other expenses"). In 1997, the Company began carrying out its plan to
relocate these equipment manufacturing operations. Costs of $1,890,000 and
$3,144,000 were paid and charged against the accrual in 1998 and 1997,
respectively.
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 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 in 1996 to reflect estimated net realizable value.
F-7
29
NOTE 11 - BUSINESS SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" (SFAS No. 131).
The Company operates in one reportable segment, the manufacture and
marketing of turfcare products to the professional sector of the green industry.
The revenues and gross profit margins are classified into categories of hard
goods and consumable goods. The table below reflects these classifications:
Years Ended December 31
- - ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------
(In thousands) HARD CONSUMABLE HARD CONSUMABLE HARD CONSUMABLE
- - ----------------------------------------------------------------------------------------------------------------------
Sales $65,422 $351,316 $66,339 $290,502 $64,578 $247,453
Gross profit % 40.5% 30.2% 43.2% 30.9% 32.2% 29.9%
======================================================================================================================
NOTE 12 - QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1998, and 1997:
Quarter Ended 1998
- - ---------------------------------------------------------------------------------------------------------------------
(In thousands, except share data) MAR. 31 JUNE 30 SEPT. 30 DEC. 31
- - ---------------------------------------------------------------------------------------------------------------------
Net sales $72,690 $134,446 $118,837 $90,765
Gross profit 24,516 45,737 36,841 25,807
Net (loss) income (1,522) 7,334 2,513 (2,433)
(Loss) earnings per share:
Basic (0.18) 0.88 0.30 (0.29)
Diluted (0.18) 0.85 0.30 (0.29)
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 (0.13) 0.77 0.54 (0.13)
Diluted (0.13) 0.74 0.51 (0.13)
=====================================================================================================================
(Loss) earnings per share amounts for each quarter are required to be
computed independently and, therefore, may not equal the amount computed on an
annual basis. During the fourth quarter of 1998 and 1997, respectively, net
income decreased by approximately $1,629,000 and $316,000, or $0.19 and $0.04
per share (diluted), due to changes in prior quarter estimates relating to
inventory adjustments.