<PAGE> 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, 1996 Commission File No. 0-13147
LESCO, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-0904517
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20005 Lake Road, 44116
Rocky River, Ohio (Zip Code)
(Address of principal executive offices)
(216) 333-9250
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None Not Applicable
- ------------------------ ------------------------
Securities registered pursuant to Section 12(g) of he 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 18,
1997: approximately $104,500,000.
Number of Common Shares outstanding on March 18, 1997: 8,079,675.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1996 Annual Report are incorporated by reference in
Parts III and IV and portions of the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held in 1997 (the "Proxy Statement") are
incorporated by reference in Part III.
<PAGE> 2
PART I
Item 1. Business
--------
General
- -------
The Registrant was incorporated in 1962 under the laws of the State of
Ohio. As used in this report, the terms "Company," "LESCO" and "Registrant"
refer to LESCO, Inc.
The Company is engaged in the manufacture and sale of an extensive line
of golf course and lawn care products which are marketed throughout the United
States, primarily under the LESCO name. These products include fertilizers, turf
protection products, grass seed, turf care equipment and replacement parts and
golf course accessories. The Company's customers include golf courses, lawn care
companies, landscapers, municipalities, theme parks and industrial concerns.
Products are marketed directly through the Company's sales organization, which
includes localized service centers and a fleet of LESCO tractor trailers
operated by salesmen trained in turf care management. The Company's operations
constitute a single industry segment.
Products
- --------
The Company manufactures and sells to the green industry an extensive
line 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" and "Pro-Lawn Products." In addition, the
Company sells a diverse line of turf products under the manufacturer's brand
name.
Sales by product line for the years ended December 31, 1996, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------------
(Net sales in thousands)
1996 1995 1994
---------------------- ------------------- -------------------
Net Sales Percent Net Sales Percent Net Sales Percent
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Consumable goods $247,454 79.3% $184,545 76.4% $154,408 75.5%
Hard goods 64,577 20.7% 57,122 23.6% 50,115 24.5%
-------- ------ -------- ------ -------- ------
Total $312,031 100.0% $241,667 100.0% $204,523 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
Consumable Goods
- ----------------
TURF CONTROL PRODUCTS. The Company offers a full line of turf control
products including herbicides, insecticides and fungicides. These products
control weeds, insects and fungal diseases for turf, trees, shrubs and landscape
beds. The Company's turf control products include its LESCO BioChoice(TM)
alternative product line. In addition, in order to offer its customers a more
complete product line, the Company sells turf control products produced by other
major manufacturers.
FERTILIZER. The Company sells a broad assortment of standard
fertilizers, including combination products which combine fertilizer with turf
control products. The Company also custom-blends fertilizer according to its
customers' specifications. The Company's fertilizers include specialized
products for golf course applications including greens, tees and fairways,
products for use in the lawn care industry, and products for trees, shrubs and
landscape beds. Fertilizers are generally sold in a granular form, although
specialized liquid formulations are also available.
The majority of the fertilizers sold by the Company are formulated with
sulfur-coated urea fertilizer. The Company is one of a few manufacturers of
these products in the world. Sulfur coating produces a gradual release of
nutrients over time, which reduces the number of required applications and the
risk of overfertilization. ELITE(R)
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is the Company's premium brand sulfur-coated urea fertilizer, specially sized
and formulated for low-cut turf on greens, tees and fairways.
GRASS SEED. The Company markets LESCO and other brands of grass seed,
most of which are certified by authorities of various states to guarantee the
varietal purity of the seed. The Company contracts for the production of grass
seed with growers in the Pacific Northwest and Western Canada for cool season
grasses and in California for warm season grasses. The Company has more than
27,000 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 manufactures a broad line of
equipment including reel mowers, such as greens and fairway mowers, rotary
mowers, spreaders, sprayers, aerators, renovation equipment and aftermarket
replacement parts. The Company believes that the LESCO spreader, first
introduced in 1982, is an industry leader in sales to the professional sector of
the market. In addition, the Company offers a broad line of handheld power tools
and a variety of golf course accessories including ball washers, tee markers,
sand trap rakes, putting green cups and flagpoles. Equipment sales are supported
by field equipment specialists, a toll-free hotline staffed by trained
technicians and repair facilities in the Service Centers. Parts support is fully
computerized, and the Company is generally able to provide overnight parts
delivery nationwide.
OTHER. The Company offers underground irrigation equipment and systems,
protective gear such as goggles, masks and gloves, and hand tools such as tree
pruners, shovels and rakes. These products are produced for the Company by third
parties.
Product Improvement and Development
- -----------------------------------
The Company's research and development efforts focus on improvements to
and development of new turf control products and fertilizers, turf care
equipment and golf course accessories and new grass seed varieties. The Company
also has a number of agreements with state universities which test turf control
products, grass seed and fertilizers for the Company.
Marketing and Distribution
- --------------------------
LESCO SERVICE CENTERS(R). The Company operates Service Centers which
enable the Company to market its products on a localized basis. The Service
Centers are generally established in easily accessible industrial parks which
allow for sales directly to commercial users. The Company opened 23 new Service
Centers in 1996, including three Golf Super Stores, and had 196 Service Centers
in operation as of December 31, 1996. The Company plans to open twenty Service
Centers in 1997. With the exception of the new Golf Super Stores, which market
products primarily to golf courses, the Service Centers market products
principally to smaller lawn care companies, landscapers, nurseries,
municipalities, churches and condominium associations. The Company may face
increased competition in this market.
LESCO STORES-ON-WHEELS(SM). The Company markets its products to private
and public golf courses and other customers having large turf areas through
salesmen who operate a fleet of Stores-on-Wheels consisting of 66 tractor
trailers. These trucks are well-stocked with a wide variety of turf care
products, all of which are sold directly from the trucks.
CONVENTIONAL SALES FORCE. The Company's conventional sales
representatives are strategically located in the various markets served by the
Company and sell to large customers such as national and regional lawn care
companies. Sales through this distribution channel, which typically generate
lower gross margins than the Service Centers and Stores-on-Wheels, have declined
as a percentage of total net sales as the number of Service Centers and
Stores-on-Wheels has increased.
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
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through Home Depot stores in the South, Mid-Atlantic and Northeast areas of the
country. In addition, the Company markets its products internationally
principally through foreign distributors.
TECHNICAL EXPERIENCE OF SALES PERSONNEL. Most of the Company's
salespersons are agronomists or horticultural specialists or have had prior
experience with lawn care companies or golf courses. The Company believes that
the training and experience of its salespersons have helped promote customer
reliance on the Company's technical expertise with respect to existing turf care
products and new product development in the turf care industry.
Manufacturing and Suppliers
- ---------------------------
FERTILIZERS AND COMBINATION PRODUCTS. Poly Plus(R) sulfur-coated
fertilizers are manufactured by spraying dry fertilizers first with sulfur, then
with a polymer sealant to seal the sulfur and retard the release of nutrients.
Uncoated fertilizers are blended in accordance with Company or customer
specifications. Combination products are processed by impregnating fertilizers
with technical grade herbicides, insecticides or fungicides. Raw materials used
in the manufacture of fertilizer are nitrogen, phosphorus, potash and sulfur.
TURF PROTECTION PRODUCTS. In producing both liquid and granular turf
protection products, the Company purchases technical-grade or highly
concentrated chemicals and blends them with various solvents, emulsifiers and
surfactants purchased from various suppliers.
TURF CARE EQUIPMENT, REPLACEMENT PARTS AND GOLF COURSE ACCESSORIES.
Certain turf care equipment and replacement parts are manufactured and assembled
by the Company, primarily at its Sebring, Florida facilities. The Company
purchases metal components and performs such aspects of manufacturing as
stamping, bending, cutting, welding, drilling, grinding and punching of parts
such as mower reels and bedknives. The Company also assembles greens mowers,
fairway mowers, rotary mowers, aerators, turf renovators, spreaders, sprayers
and other turf care equipment at Sebring using components acquired from a
variety of suppliers or parts manufactured by the Company. Additional equipment
and parts, as well as most golf course accessories, are manufactured by various
contractors with tooling, dies and molds owned by the Company.
In October 1996, the Company announced the formation of a joint venture
with MTD Products, Inc. This joint venture will manufacture commercial lawn care
equipment to be marketed by both partners. The joint venture will be located in
Streetsboro, Ohio and is expected to commence operations in mid-1997. As a
result, the Company intends to close its current equipment manufacturing
facilities in Sebring, Florida, in late 1997.
SOURCES OF SUPPLY. It is the Company's policy to have multiple sources
of supply or acceptable substitutes for all raw materials and metal components
which the Company uses in manufacturing or assembling its products. The only
exception to this policy is the Company's purchase of proprietary products.
Competition
- -----------
The Company competes with a number of companies within each of its
product lines including national, regional and local distributors, turf care
product manufacturers and retailers such as mass merchandisers, local nurseries
and hardware stores. Some of these national competitors have greater name brand
recognition than the Company. The Company's principal competitors for its turf
control, fertilizer and grass seed product lines include Andersons, Lebanon,
Scott's, Terra, United Horticultural Supply and Vigoro. The Company's principal
competitors for equipment are Jacobsen, John Deere, Ransomes, Scag and Toro. The
Company, however, believes that it is the only national company that supplies a
full range of products and sells directly to the commercial user. The Company
competes primarily on the basis of service to customers and product quality,
selection and price.
Seasonality and Backlog
- -----------------------
The Company's business is seasonal since the customers in northern
states do not have the same year-round requirements for products as do customers
in southern states. Demand for the Company's products is generally greatest
during the second quarter of its fiscal year.
The Company offers an early order program to lessen the second quarter
demand on its manufacturing and distribution facilities. This program allows the
Company to schedule manufacturing and distribution of products prior
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<PAGE> 5
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, 1996 and 1995 was $5,315,000 and $4,100,000, respectively.
Employees
- ---------
As of December 31, 1996, the Company had 1,132 full-time employees, of
which 355 were involved in manufacturing, assembly and warehouse operations, 518
in sales-related activities and 259 in management and administration. Of the
total number of full-time employees, 676 are salaried and 456 are hourly
employees. At the Company's Martins Ferry facility, 86 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's turf control product labels
and advertising materials are consistent with EPA and state guidelines, there
can be no assurance that EPA or state regulations or interpretations may not
change in the future or that the EPA or any state will not challenge the
Company's advertising materials.
Fertilizer products are currently regulated by individual state
departments of agriculture and must generally be registered or licensed in most
states in which they are sold. There can be no assurance that the state
regulations or interpretations will not change in the future or that the
Company's registration in any state will not be challenged. The Company is also
required to obtain permits from a number of governmental agencies in order to
conduct various aspects of its business. These permits are subject to
modification and revocation, which could impair the Company's ability to conduct
its business in the manner in which and at the places at which it is presently
conducted.
Because of the nature of the Company's business, the Company is subject
to various environmental laws and regulations and incurs routine costs in
complying with these laws and regulations. It is the Company's policy to provide
for nonroutine costs relating to environmental matters when a loss is probable
and the amount of the loss can be reasonably estimated. There are no such
reserves for environmental matters at December 31, 1996.
Insurance
- ---------
The Company maintains comprehensive general liability insurance
coverage (which includes product liability insurance coverage) at levels which
the Company believes are prudent and most cost-effective. The Company's
insurance program includes significant deductible amounts with respect to such
coverages. Certain coverages, including environmental pollution, are restricted
or have been excluded under current policies. The level of coverage and
deductible maintained generally reflects trends in the liability insurance
industry and is not unique to the Company. The Company regularly evaluates the
cost-effectiveness as compared to the risks assumed in determining its insurance
program.
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Item 2. Properties
----------
The Company owns its principal executive office building and owns or
leases its warehouse and manufacturing facilities. The Company believes these
facilities are well-maintained, adequately insured and adequate and suitable for
their present and intended uses. In addition, the Company leases facilities for
temporary storage of inventory products during its peak seasonal demand. The
Company maintains sales offices at each of the following locations, except its
executive offices. Detail by location is as follows:
<TABLE>
<CAPTION>
Location (1) Principal Use Square Feet Status
- ------------ ------------- ----------- ------
<S> <C> <C> <C>
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)
Lawrenceville, NJ Distribution center for various products 100,500 Leased(3)
Martins Ferry, OH Manufacturing facility and distribution center for
fertilizers, including sulfur-coated fertilizers,
and turf control products 234,000 Owned(4)
Pittsburgh, PA Distribution center for various products 131,000 Leased(5)
Sebring, FL Manufacturing facility for fertilizers;
manufacturing and assembly of turf care
equipment, replacement parts and golf course
accessories; and distribution center for
principal products 277,000 Leased(6)
Silverton, OR Blending of grass seed and distribution center 66,200 Leased(7)
Wellington, OH Manufacturing facility for turf control products
and distribution center for principal products 60,000 Owned
Windsor, NJ Distribution center for principal products 37,000 Owned(8)
<FN>
(1) Does not include Service Centers or Stores-on-Wheels. As of December
31, 1996, the Company operated Service Centers in 196 facilities of
which three are owned, and 193 are leased, by the Company. These
facilities range in size from 2,500 to 7,200 square feet. The Company
owns or leases 66 tractor-trailers for its Stores-on-Wheels.
(2) This facility is subject to a lease expiring in 1998. The Company has
an option to renew the lease for a three-year term.
(3) This facility is subject to a lease expiring December 31, 1997.
(4) These facilities are subject to mortgages in the aggregate amount of
$6,549,000 as of December 31, 1996.
(5) This facility is subject to a lease expiring in 2001. The Company has
two five-year renewal options.
(6) These facilities consist of nine buildings subject to leases expiring
in 1997, 2000 and 2001. It is the Company's intent to renew these
leases upon their expiration.
(7) This facility is subject to a fifteen year lease, expiring in 2009,
which includes an option to purchase.
(8) The facility is subject to a mortgage in the amount of $155,000 as of
December 31, 1996.
</TABLE>
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In January 1996, the Company completed the purchase of certain assets of the
Pro-Lawn Division of Agway, Inc. The Company distributes 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.
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.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
William A. Foley 48 Chairman of the Board, President and Chief Executive Officer
John M. Freise 50 Vice President, Sales
Philip R. Gardner 52 Vice President, International and Key Accounts
Ware H. Grove 46 Vice President, Chief Financial Officer
C. Thomas Smith 47 Vice President, Operations
Michael A. Sotak 41 Vice President, Marketing
</TABLE>
William A. Foley joined the Company in July 1993 as President, Chief
Executive Officer and a director. He was elected Chairman of the Board of
Directors in October 1994 following the death of James I. FitzGibbon. Mr. Foley
was President and Chief Executive Officer of Imperial Wallcoverings, Inc., a
wallpaper producer and a subsidiary of Collins & Aikman, Inc., from October 1990
until February 1993. From January 1988 to October 1990, Mr. Foley was Vice
President and General Manager of The Scotts Company Consumer Business Group, a
producer and marketer of turf care products. Mr. Foley was Vice President and
General Manager of Rubbermaid Specialty Products Division from 1984 to 1988, and
was Vice President - Sales and Marketing for Anchor Hocking Corporation from
1970 to 1984, a producer of glass products. Mr. Foley is also a director of
Alltrista Corporation, a consumer and industrial products manufacturing company,
and Libbey, Inc., a producer of glass products.
John M. Freise is Vice President, Sales. Mr Freise joined the Company
in 1995 as Vice President, Service Centers. From 1991 to 1995, Mr. Freise was a
Regional Vice President Store Operations and Vice President/General
Merchandise/Hardlines for Roses Stores, a regional discount store chain. Mr.
Freise was District Manager (Director Level) from 1990 to 1991, and from 1987 to
1990 was District Manager of Target Stores, a national discount retailer.
Philip R. Gardner is Vice President Lawn, International and Key
Accounts. He served as Executive Vice President, Sales of the Company from March
1991 until February 1995, and as Vice President-Sales from January 1985 until
March 1991. Mr. Gardner joined the Company in September 1976, was promoted to
Regional Sales Manager in 1979 and Southeast Sales Manager in 1983.
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
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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.
C. Thomas Smith joined the Company is 1994 as Vice President, Operations.
From 1979 to 1994, Mr. Smith was Group Director, Advanced Manufacturing at
Frigidaire Co., a manufacturer of household major appliances. From 1978 to 1979,
Mr. Smith was Manager, Materials and Production at Anderson IBEC, a manufacturer
of food processing equipment. From 1970 to 1977, Mr. Smith was a Senior Buyer,
Mfg. & Capital Equipment at Babcock & Wilcox Co., a manufacturer of power
operation equipment.
Michael A. Sotak joined the Company in 1994 as Vice President,
Marketing. From 1991 to 1993, Mr. Sotak was a Director of Marketing at
Pitman-Moore, Inc., now known as Mallinckrodt Veterinary, Inc., Division of
Mallinckrodt, Inc. Mr. Sotak also held the following positions with
Pitman-Moore, Inc.: 1989 to 1991, Director of Business Management; 1988 to 1989,
Director, International Marketing; and, 1987 to 1988, National Sales Manager.
From 1978 to 1987, Mr. Sotak was Senior Product Manager of Schering-Plough
Corporation, a pharmaceutical manufacturer and marketer.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
---------------------------------------------------------------------
The Company's Common Shares are traded in the National Market System
over-the-counter market under the NASDAQ symbol "LSCO." The following are high
and low market prices by quarter:
<TABLE>
1996 1995
------------------ -----------------
Quarter Ended High Low High Low
------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31 15-3/4 12 15-3/4 12-3/4
June 30 18-5/8 13-3/4 17-3/4 14-1/4
September 30 19-3/4 14-1/2 15-5/8 12-3/4
December 31 18 14-1/2 15-1/8 13
</TABLE>
The Company paid an annual dividend of $.11 per Common Share in 1996 and
$.10 in 1995. Certain provisions of the principal credit agreement of the
Company restrict the right of the Company to pay dividends. See Note C of Notes
to Financial Statements.
As of March 18, 1997 there were approximately 1,160 holders of record
of the Company's Common Shares.
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<PAGE> 9
Item 6. Selected Financial Data
-----------------------
<TABLE>
<CAPTION>
Five Year Summary
(Amounts in Thousands Except Per Share Data)
Year Ended December 31
------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales $312,031 $241,667 $204,523 $166,203 $145,704
Cost of sales 211,825 160,576 133,826 108,703 97,782
Other cost of sales 6,771 -- -- -- --
--------------------------------------------------------------
Gross Profit on Sales 93,435 81,091 70,697 57,500 47,922
Selling, general and
administrative expenses 91,065 71,635 60,175 47,868 39,776
Other expenses 4,745 1,035 1,071 1,918 1,537
--------------------------------------------------------------
(Loss) Income from Operations (2,375) 8,421 9,451 7,714 6,609
Other deductions-net 1,177 585 71 189 550
--------------------------------------------------------------
(Loss) Income Before Income Taxes
and Cumulative Effect of
Change in Accounting Principle (3,552) 7,836 9,380 7,525 6,059
Income tax (benefit) expense (1,203) 3,009 3,608 2,765 2,202
---------------------------------------------------------------
(Loss) Income Before Cumulative
Effect of Change in Accounting
Principle (2,349) 4,827 5,772 4,760 3,857
Cumulative effect on prior years of
changing the method of capitalizing
certain inventory costs -- -- 1,149 -- --
-------------------------------------------------------------
Net (Loss) Income $ (2,349) $ 4,827 $ 6,921 $ 4,760 $ 3,857
=============================================================
Earnings Per Share:
(Loss) Income before cumulative effect
of change in accounting principle ($.29) $.59 $.72 $.68 $.60
Cumulative effect on prior years of
changing the method of
capitalizing certain
inventory costs -- -- .14 -- --
-------------------------------------------------------------
(Loss) Earnings Per Share ($.29) $.59 $.86 $.68 $.60
==========================================================
Cash dividends per
common share $.11 $.10 $.09 $.08 $.07
Weighted average number of
common and common
equivalent shares
outstanding 8,007,001 8,116,740 8,034,387 6,963,994 6,438,024
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 99,904 $ 85,950 $ 70,839 $ 65,414 $ 56,873
Total assets $164,673 $137,821 $114,612 $104,471 $ 95,882
Long-term debt, net
of current portion $ 64,704 $ 43,258 $ 29,542 $ 33,122 $ 45,499
Shareholders' equity $ 61,699 $ 63,878 $ 58,175 $ 50,883 $ 29,453
</TABLE>
Notes:
A. All per share data have been adjusted to give effect to a
3-for-2 stock split completed by the Company in July 1993.
B. 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.
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<PAGE> 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations Results of Operations
- -----------------------------------
Incorporated by reference to pages 12 and 13 of the Registrant's 1996
Annual Report.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Incorporated by reference to pages 15 through 20 of the Registrant's
1996 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
- --------------------
Not Applicable.
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<PAGE> 11
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Reference is made to the information set forth under the captions
"Election of Directors" and "Business Experience of Directors and Nominees" in
the Proxy Statement, which information is incorporated herein by reference.
The information required with respect to executive officers is set
forth in Part I of this Form 10-K under the heading "Executive Officers of the
Registrant." All officers serve at the discretion of the Board of Directors.
Item 11. Executive Compensation
----------------------
Reference is made to the information set forth under the caption
"Executive Compensation" in the Proxy Statement, which information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Reference is made to the information set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Reference is made to the information set forth under the caption
"Certain Transactions" in the Proxy Statement, which information is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a)(1) and (2). Financial Statements and Financial Statement Schedules.
The following financial statements of LESCO, Inc. included in the
Registrant's 1996 Annual Report are incorporated by reference in Item 8:
Balance Sheets--December 31, 1996 and 1995
Statements of Operations--Years ended December 31, 1996, 1995 and 1994
Statements of Shareholders' Equity--Years ended December 31, 1996, 1995
and 1994
Statements of Cash Flows--Years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
The following financial statement schedule is included herewith:
Schedule II--Valuation and Qualifying Accounts--December 31, 1996
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, 1996.
(c) Exhibits--The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedule
<TABLE>
<CAPTION>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
LESCO, INC.
DECEMBER 31, 1996
===================================================================================================================================
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
DESCRIPTION BALANCE AT DEDUCTIONS BALANCE AT
BEGINNING OF DESCRIBE END OF PERIOD
PERIOD
--------------------------------------------
CHARGED TO COSTS CHARGED TO OTHER
AND EXPENSES ACCOUNTS--DESCRIBE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year Ended December 31, 1996:
Deducted from assets accounts-
Reserve for inventory obsolescence $ 250,000 $ 6,884,000 $ 7,134,000
===================================================================================================================================
</TABLE>
-11-
<PAGE> 12
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, 1997
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William A. Foley
- -------------------------- President, Chairman, Chief March 26, 1997
William A. Foley Executive Officer and Director
/s/ Ware H. Grove
- -------------------------- Chief Financial Officer March 26, 1997
Ware H. Grove
/s/ Drexel Bunch
- -------------------------- Director March 26, 1997
Drexel Bunch
/s/ Robert F. Burkhardt
- -------------------------- Director March 26, 1997
Robert F. Burkhardt
/s/ Paul H. Carleton
- -------------------------- Director March 26, 1997
Paul H. Carleton
/s/ David H. Clark
- -------------------------- Director March 26, 1997
David H. Clark
/s/ J. Martin Erbaugh
- -------------------------- Director March 26, 1997
J. Martin Erbaugh
/s/ Stanley M. Fisher
- -------------------------- Director March 26, 1997
Stanley M. Fisher
/s/ Michael FitzGibbon
- -------------------------- Director March 26, 1997
Michael FitzGibbon
/s/ F. Leon Herron
- -------------------------- Director March 26, 1997
F. Leon Herron
/s/ Lee Howley
- -------------------------- Director March 26, 1997
Lee Howley
/s/ Karl E. Ware
- -------------------------- Director March 26, 1997
Karl E. Ware
</TABLE>
<PAGE> 13
LESCO, INC.
FORM 10-K
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------ -----------------------
3(a)1 Amended Articles of Incorporation of the Registrant.
3(b)1 Amended Code of Regulations of the Registrant.
4(a)2 Specimen certificate for the Registrant's Common Shares.
4(c)3 Reimbursement Agreement dated March 1, 1993, between Pittsburgh
National Bank and the Registrant.
4(d)1 Loan Agreement dated as of January 1, 1988 between County of
Belmont, Ohio, and the Registrant ($5,875,000 County of Belmont,
Ohio Industrial Development Revenue Bonds).
4(e)1 Loan Agreement dated as of January 28, 1988 between the Director of
Development of the State of Ohio and the Registrant.
4(f) Amended Articles of Incorporation of the Registrant (appears as
Exhibit 3(a) above).
4(g) Amended Code of Regulations of the Registrant (appears as Exhibit
3(b) above).
10(a)4 LESCO, Inc. Stock Investment and Salary Savings Plan and Trust, as
amended and restated.
10(e)3 Reimbursement Agreement dated March 1, 1993, between Pittsburgh
National Bank and the Registrant (appears as Exhibit 4(c) above).
10(g)1 Loan Agreement dated as of January 28, 1988 between the Director of
Development of the State of Ohio and the Registrant (appears as
Exhibit 4(e) above).
10(k)3 1992 Stock Incentive Plan.
10(l)5 Stock Bonus Plan (appears as Exhibit 4(d) to Registrant's Form S-8).
10(o)1 Loan Agreement dated as of January 1, 1988 between County of
Belmont, Ohio, and the Registrant ($5,875,000 County of Belmont,
Ohio Industrial Development Revenue Bonds) (appears as Exhibit 4(d)
to Registrant's Form 10-K for fiscal year 1987).
10(p)6 Employment Agreement by and between the Registrant and William A.
Foley.
10(q)7 Second Amendment to the Credit Agreement dated November 1, 1996.
10(r)4 Credit Agreement dated September 30, 1994 among National City Bank,
PNC Bank, National Association, NBD Bank, N.A., National City Bank,
as agent, and the Registrant (the "Credit Agreement")(appears as
Exhibit 10(r) to Registrant's Form 10-K for fiscal year 1994).
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).
13 7 The following portions of the 1996 Annual Report: Financial Review,
Financial Statements, Report of Independent Auditors and Notes to
Financial Statements
23 7 Consent of Ernst & Young LLP, Independent Auditors.
27 7 Financial Data Schedule.
-13-
<PAGE> 14
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 Filed herewith.
-14-
<PAGE> 15
EXECUTIVE COMPENSATION PLANS
AND ARRANGEMENTS
----------------------------
Exhibits 10(a), 10(k), 10(1) and 10(p) are compensation plans in which
executive officers participate.
-15-
<PAGE> 1
Exhibit 10(q)
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of 11-1, 1996 (this
"Amendment") is by and among LESCO, INC., an Ohio corporation ("Borrower") and
NATIONAL CITY BANK, PNC BANK, NATIONAL ASSOCIATION, NBD BANK (formerly NBD BANK,
N.A.) (the "Banks") and NATIONAL CITY BANK, as agent of the Banks,
("NCB-Agent").
RECITALS
A. Borrower, the Banks and NCB-Agent have executed a Credit Agreement,
dated as of September 30, 1994, as amended by a First Amendment To Credit
Agreement dated January 16, 1996 pursuant to which the Banks have agreed to make
subject loans to Borrower upon a revolving basis until October 31, 1996 (or such
later expiration date, if any, as may be established from time to time).
B. Borrower, the Banks and NCB-Agent desire to amend the Credit
Agreement to increase the amount of the Revolving Commitments to eighty million
dollars ($80,000,000), extend the Expiration Date to April 30, 2000 and make
certain other changes to the Credit Agreement.
AGREEMENT
Based upon these recitals, the parties agree as follows:
1. Subsection 2A.0 1 AMOUNTS of the Credit Agreement shall be deleted in its
entirety and the following shall be substituted in place thereof:
"2A.0 1 AMOUNTS -- The aggregate amount of the Revolving Commitments
shall not at any time exceed eighty million dollars ($80,000,000).
PROVIDED, HOWEVER, that such amounts may be reduced from time to time
pursuant to subsection 2A.03 and the Revolving Commitments may be
terminated pursuant to section 5B. The amount of each Bank's maximum
Revolving Commitment (subject to such reduction or tenmination), and
the proportion (expressed as a fraction) that it bears to all of the
Revolving Commitments, is set forth opposite the Bank's name below,
to-wit:"
$44,000,000.00 55.0% National City Bank
$18,000,000.00 22.5% NBD Bank
$18,000,000 00 22.5% PNC Bank, National
-------------- ----- Association
$80,000,000.00 100.00% Total
--------------
<PAGE> 2
2. Subsection 2A.02 TERM of the Credit Agreement shall be deleted in its
entirety and the following shall be substituted in place thereof:
"2A.02 TERM -- Each Revolving Commitment shall commence as the date of
this Agreement and shall remain in effect on a revolving basis
until April 30, 2000 (the "Expiration Date"), EXCEPT that a later
Expiration Date may be established from time to time pursuant to
subsection 2A.05 and EXCEPT that the Revolving Commitments shall
end in any event upon any earlier reduction thereof to zero
pursuant to subsection 2A.03 or any earlier termination pursuant
to section 5B."
3. Subsection 3D.03 (vii) of the Credit Agreement is deleted in its entirety and
the following is substituted therefore:
"(vii) any other indebtedness so long as (a) the same is unsecured and
(b) the aggregate unpaid principal amount of such other
indebtedness does not exceed twenty million dollars ($20,000,000)
at any time"
Except for the modifications set forth in this Second Amendment To
Credit Agreement, the credit agreement referred to above, as amended, is
ratified and affirmed and shall be binding upon the parties, their successors
and assigns.
IN WITNESS WHEREOF, the parties have executed this amendment as of the
date first above written.
Address: LESCO, INC.
20005 Road
Rocky River, Ohio 44116 By /s/ Kenneth W. Didion
----------------------------
Title Treasurer
--------------------------
Address: NATIONAL CITY
1900 East Ninth Street
Attn: Multinational Division By:/s/ Robert E. Little
Cleveland, Ohio 44114-3484 ---------------------------
Robert E. Little
Vice President and Senior Lending Officer
-2-
<PAGE> 3
Address: NATIONAL CITY BANK
1900 East Ninth Street
Attn: Multinational Division By:/s/ Robert E. Little
Cleveland, Ohio 44114-3484 ---------------------------
Robert E. Little
Vice President and Senior Lending Officer
Address: PNC BANK, NATIONAL ASSOCIATION
1801 E. 9th St., #715
Cleveland, Ohio 44114-3103 By: /s/ David L. Williams
---------------------------------
Title: Vice President
---------------------------------
Address: NBD BANK
611 Woodward Avenue
Detroit, Michigan 48226 By /s/ Paul R. DeMelo
----------------------------------
Title: Vice President
---------------------------------
-3-
<PAGE> 1
Exhibit 13
FINANCIAL REVIEW
LESCO, INC.
HIGHLIGHTS
PRO-LAWN ACQUISITION. In January 1996, the Company completed the purchase of
certain assets of Agway, Inc.'s Pro-Lawn Division for $11.3 million. The
agreement included the 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. Sales for Pro-Lawn
during 1996 were $32.9 million.
FOURTH QUARTER, 1996 NON-RECURRING CHARGES.
The Company reported a net loss of $2.4 million for 1996, or $.29 per share.
This loss was due primarily to certain non-recurring fourth quarter pre-tax
charges of $12.9 million that related to the following key strategic
initiatives:
- - 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 announced the relocation of the equipment
manufacturing operations of its Sebring, Florida plant facility.
- - During the fourth quarter 1996, the Company rationalized its product lines and
centralized slow moving inventory items to improve the focus on inventory
management and customer service.
- - The credit function was reorganized to better focus on receivables management,
with reserves for uncollectible accounts increased to reflect current
collection trends and general economic conditions.
- - Internal teams of Company managers were established to dedicate their efforts
in the implementation of operating systems upgrades, resulting in incremental
costs being incurred. These upgrades will result in better inventory
management and customer service.
- - Certain other balance sheet items were reduced in order to reflect more
current values.
In management's opinion, these actions will help to improve the Company's
financial performance going forward into 1997 and beyond.
RESULTS OF OPERATIONS
Company sales rose to a record level in 1996 increasing 29.1% to $312.0 million
compared to $241.7 million in 1995, which was an 18.2% increase over 1994 sales
of $204.5 million. Excluding the effects of the Pro-Lawn acquisition, each of
the Company's key sales groups reflected sales volume growth with Service
Centers and Golf Course sales contributing the largest increase for both years.
This increase was due primarily to the maturation of existing stores and the
expansion in the number of Service Centers and Superstores in operation to 196
as of December 31, 1996 compared to 173 as of December 31, 1995, and 138 as of
December 31, 1994. Same store sales for 1996 increased 13.1% compared to a 16.7%
increase in 1995. In 1997, the Company intends to expand the Service Center
group by 20 stores. The Golf Course sales group, which operates the LESCO
Stores-on-Wheels calling directly on golf course superintendents, remained
relatively stable at 66 compared to 65 as of December 31, 1995, and 59 as of
December 31, 1994.
The Company recognized a loss of $.29 per share in 1996 compared to
earnings of $.59 per share in 1995, and $.72 per share in 1994, exclusive of the
cumulative effect of an accounting change of $.14 per share. As noted herein,
the loss is primarily a result of certain non-recurring fourth quarter pre-tax
charges of $12.9 million.
Comparing product categories (excluding Pro-Lawn results), sales of
consumable goods increased 16.3% to $214.6 million in 1996 compared to $184.6
million in 1995, which increased 19.5% over 1994 sales of $154.4 million. All
components of this category (fertilizers, turf protection products, combination
products and turfgrass seed) recorded sales volume increases in both 1996 and
1995. Hard goods, with its major sales component being equipment, also increased
due to sales volume to $64.6 million in 1996, a 13.1% increase over 1995 sales
of $57.1 million, which increased 14.0% over 1994 sales of $50.1 million. The
Company anticipates future growth in both product categories through increases
in its sales force and new product introductions. In the equipment business,
significant improvement is anticipated as the Company realizes cost
improvements, and enhanced product development activities from the joint venture
to manufacture commercial turf care equipment.
The Company's gross profit as a percent of sales was 30.0% in 1996 compared
to 33.6% in 1995, and 34.6% in 1994. Adjusted for the effects of the
non-recurring fourth quarter pre-tax charges of $6.8 million reflected in cost
of sales, 1996 gross profit was 32.1%. The decline in 1996 gross profit,
adjusted for the non-recurring fourth quarter charges, compared to 1995 was
primarily attributable to the effects of lower margins of the Pro-Lawn business.
The 1995 margin decrease compared to 1994 was the result of the increasing cost
of urea. Urea is the major component in fertilizers, and costs increased at a
greater rate than price increases to customers during 1995.
12
<PAGE> 2
Selling, general and administrative expenses were 30.7% of sales in 1996
compared to 30.1% in 1995, and 29.9% in 1994. Adjusted for the effects of the
non-recurring fourth quarter pre-tax charges of $6.1 million included in this
category, selling, general and administrative expenses were 28.7% of sales.
Selling expense is the largest component of this cost and increased 25.9 % to
$47.6 million in 1996 compared to $37.8 million in 1995, which was an increase
of 29.2% over $29.3 million in 1994. Selling expense is driven by the Company's
Service Center expenses. The number of Service Centers in operation increased
from 138 stores at the end of 1994 to 196 stores at the end of 1996. LESCO
Stores-on-Wheels also increased during this period from 59 to 66 operating
units. The Company's distribution and delivery expenses increased slightly to
7.5% of sales in 1996 compared to 7.2% for both 1995 and 1994, due primarily to
the Pro-Lawn acquisition. General and administrative expenses were 6.7% of sales
in 1996 compared to 5.7% in 1995, and 6.2% in 1994. Adjusted for the effects of
costs accrued in conjunction with the relocation of the Sebring equipment
manufacturing operations and changes in the estimated provision for
uncollectible accounts receivable, 1996 general and administrative expenses were
5.7% of sales.
Interest expense increased to $4.2 million in 1996 from $2.8 million in
1995, and $1.9 million in 1994. The primary reason for the 1996 increase was
increased borrowings due primarily to the Pro-Lawn acquisition, with interest
rates affecting expense to a lesser degree. Other - net consists primarily of
customer finance charges which total $2.6 million in 1996 compared to $2.1
million in 1995, and $1.8 million in 1994. The Company's effective tax rate was
33.9% in 1996 compared to 38.4% in 1995 and 38.5% in 1994. The rate is inclusive
of federal, state and local rates with the change from 1995 to 1996 reflecting
the effects of the Company's net loss and recurring permanent book to tax
reconciling items.
Effective January 1, 1994, the Company changed its method of accounting
for inventory costs to include the capitalization of certain warehousing,
transportation and procurement costs which were previously expensed. The
cumulative effect of this change was to increase net income in 1994 by $1.1
million (net of $ .7 million in income taxes), or $.14 per share. The Company's
earnings per share, exclusive of the cumulative effect of the accounting
change, were $.72 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's debt to total capitalization ratio was .51 as of December 31, 1996
compared to .40 as of year-end 1995, and .34 as of year-end 1994. This increase
was due primarily to funding that was required for the Pro-Lawn acquisition.
Accounts receivable increased $9.7 million as of December 31, 1996 compared to
year-end 1995, and $9.3 million at year-end 1995 over 1994, a 20.4% and 24.2%
increase, respectively. These increases relate to sales increases of 29.1% in
1996 and 18.2% in 1995, with 1995 reflecting an increase in early order dating
program receivables due in the Spring of 1996. Inventories increased $7.3
million as of December 31, 1996 compared to year-end 1995, and $9.1 million at
year-end 1995 over 1994, a 12.1% and 17.6% increase, respectively. The increase
in inventories relates primarily to the increase in the number of Service
Centers in operation, along with the inventories acquired in the Pro-Lawn
acquisition.
During 1996, the Company's expenditures for capital additions and
improvements totaled $5.1 million. Included in that total are information
systems technology improvements of approximately $3.7 million designed to
improve inventory control and customer service. The remaining capital
expenditures were primarily for Service Center expansions, and capital for
manufacturing productivity improvements. Capital improvement programs planned
for 1997 include the expansion of the Sebring, Florida fertilizer production
facility, continued advancements in information technology, 20 new Service
Centers, and further improvements in manufacturing processes. The funding for
these investments will be provided by operations, the Company's credit facility
or by specific project financing.
In November 1996, the Company increased its maximum available line of
credit to $80.0 million from $70.0 million. This additional
borrowing capacity will provide for 1997 working capital needs, planned capital
improvements, and capital requirements for the commercial turf equipment joint
venture. The credit facility matures in April 2000, is unsecured and does not
have a prepayment penalty. Interest is payable at the bank's prevailing prime
rate or at alternative rates based on LIBOR or CD options as elected by the
Company. At December 31, 1996, the Company had $21.8 million available under
this line of credit.
13
<PAGE> 3
SELECTED FINANCIAL DATA 1992-96
STATEMENTS OF OPERATIONS DATA
LESCO, INC.
<TABLE>
<CAPTION>
(In thousands, except share data) FOR THE YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $312,031 $241,667 $204,523 $166,203 $145,704
Cost of sales 211,825 160,576 133,826 108,703 97,782
Other cost of sales 6,771 -- -- -- --
- ------------------------------------------------------------------------------------------------
Gross profit on sales 93,435 81,091 70,697 57,500 47,922
Selling, general and
administrative expenses 91,065 71,635 60,175 47,868 39,776
Other expenses 4,745 1,035 1,071 1,918 1,537
- ------------------------------------------------------------------------------------------------
(Loss) Income from operations (2,375) 8,421 9,451 7,714 6,609
Other deductions-net 1,177 585 71 189 550
- ------------------------------------------------------------------------------------------------
(Loss) Income before income
taxes and cumulative effect of
change in accounting principle (3,552) 7,836 9,380 7,525 6,059
Income tax (benefit) expense (1,203) 3,009 3,608 2,765 2,202
- ------------------------------------------------------------------------------------------------
(Loss) Income before
cumulative effect of change
in accounting principle (2,349) 4,827 5,772 4,760 3,857
- ------------------------------------------------------------------------------------------------
Cumulative effect on prior years of
changing the method of capitalizing
certain inventory costs -- -- 1,149 -- --
- ------------------------------------------------------------------------------------------------
Net (loss) income $ (2,349) $ 4,827 $ 6,921 $ 4,760 $ 3,857
- ------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
(Loss) Income before
cumulative effect of change
in accounting principle ($.29) $.59 $.72 $.68 $.60
Cumulative effect on prior years
of changing the method of
capitalizing certain inventory costs -- -- $.14 -- --
- ------------------------------------------------------------------------------------------------
(Loss) Earnings per share ($.29) $.59 $.86 $.68 $.60
Cash dividends per common share $.11 $.10 $.09 $.08 $.07
Weighted average number of
common and common equivalent
shares outstanding 8,007,001 8,116,740 8,034,387 6,963,994 6,438,024
BALANCE SHEET DATA
Working capital $ 99,904 $ 85,950 $ 70,839 $ 65,414 $ 56,873
Total assets 164,673 137,821 114,612 104,471 95,882
Long-term debt, net of current portion 64,704 43,258 29,542 33,122 45,499
Shareholders' equity 61,699 63,878 58,175 50,883 29,453
</TABLE>
NOTES: A. All share data have been adjusted to give effect to a 3-for-2 stock
split completed by the Company in July 1993.
B. Cumulative Effect - Effective January 1, 1994, the Company changed its
method of accounting for inventory costs to include the capitalization
of certain warehousing, transportation and procurement costs which
were previously expensed.
14
<PAGE> 4
STATEMENTS OF OPERATIONS
LESCO, INC.
<TABLE>
<CAPTION>
(In thousands, except share data) For the Years Ended December 31
- ------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $312,031 $241,667 $204,523
Cost of sales 211,825 160,576 133,826
Other cost of sales (Note 4) 6,771 -- --
- ------------------------------------------------------------------------------------------------
Total cost of sales 218,596 160,576 133,826
- ------------------------------------------------------------------------------------------------
GROSS PROFIT ON SALES 93,435 81,091 70,697
Selling, general and administrative expenses 91,065 71,635 60,175
Other expenses (Note 4) 4,745 1,035 1,071
- ------------------------------------------------------------------------------------------------
95,810 72,670 61,246
- ------------------------------------------------------------------------------------------------
(Loss)Income from Operations (2,375) 8,421 9,451
Other deductions (income):
Interest expense 4,214 2,831 1,930
Other - net (3,037) (2,246) (1,859)
- ------------------------------------------------------------------------------------------------
1,177 585 71
- ------------------------------------------------------------------------------------------------
(Loss) Income before income taxes and cumulative effect
of change in accounting principle (3,552) 7,836 9,380
Income tax (benefit) expense (1,203) 3,009 3,608
- ------------------------------------------------------------------------------------------------
(Loss) Income before cumulative effect of
change in accounting principle (2,349) 4,827 5,772
Cumulative effect on prior years of changing the method
of capitalizing certain inventory costs -- -- 1,149
- ------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (2,349) $ 4,827 $ 6,921
- ------------------------------------------------------------------------------------------------
(Loss) Earnings per share:
(Loss) Income before cumulative effect of change in
accounting principle $ (.29) $ .59 $ .72
Cumulative effect on prior years of changing the method
of capitalizing certain inventory costs -- -- .14
- ------------------------------------------------------------------------------------------------
(LOSS) EARNINGS PER SHARE $ (.29) $ .59 $ .86
- ------------------------------------------------------------------------------------------------
Weighted average number of common and common
equivalent shares outstanding 8,007,001 8,116,740 8,034,387
- ------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
LESCO, Inc.
We have audited the accompanying balance sheets of LESCO, Inc. as of
December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LESCO, Inc. at December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As described in Note 9 to the financial statements, in 1994 the Company
changed its method of accounting for certain inventory costs.
Cleveland, Ohio /s/ Ernst & Young LLP
February 14, 1997
15
<PAGE> 5
BALANCE SHEETS
LESCO, INC.
<TABLE>
<CAPTION>
(In thousands, except share data) DECEMBER 31
- ---------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash .................................................................. $ 1,900 $ 2,620
Accounts receivable, less allowance of $4,100 in 1996;
$2,500 in 1995 ...................................................... 57,424 47,695
Inventories ........................................................... 68,090 60,773
Deferred federal income taxes ......................................... 4,734 1,194
Prepaid expenses and other assets ..................................... 4,398 3,221
- ---------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS ................................................ 136,546 115,503
PROPERTY, PLANT AND EQUIPMENT
Land .................................................................. 499 499
Buildings and improvements ............................................ 13,521 13,007
Machinery and equipment ............................................... 23,099 21,399
Trucks and automobiles ................................................ 1,613 1,694
Furniture and fixtures ................................................ 9,015 6,273
- ---------------------------------------------------------------------------------------------------
47,747 42,872
Less allowance for depreciation and amortization ...................... 24,454 21,431
- ---------------------------------------------------------------------------------------------------
23,293 21,441
OTHER ASSETS ............................................................. 4,834 877
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS ........................................................ $ 164,673 $ 137,821
===================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ...................................................... $ 26,786 $ 23,670
Salaries, wages and profit sharing .................................... 2,642 1,329
Other liabilities and accrued expenses ................................ 7,014 4,354
Current portion of long-term debt ..................................... 200 200
- ---------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES ........................................... 36,642 29,553
LONG-TERM DEBT ........................................................... 64,704 43,258
DEFERRED INCOME TAXES .................................................... 1,628 1,132
SHAREHOLDERS' EQUITY
Preferred shares - without par value - 500,000 shares authorized
Common shares - without par value - 19,500,000 shares
authorized; 8,067,517 shares issued and 8,064,367 shares
outstanding in 1996; 7,956,738 shares issued and
7,949,988 shares outstanding in 1995 ................................ 807 796
Paid-in capital ....................................................... 26,549 25,197
Retained earnings ..................................................... 34,694 37,922
Less treasury shares .................................................. (17) (37)
Unearned compensation ................................................. (334) --
- ---------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY .......................................... 61,699 63,878
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......................... $ 164,673 $ 137,821
===================================================================================================
</TABLE>
See notes to financial statements.
16
<PAGE> 6
STATEMENTS OF CASH FLOWS
LESCO, INC.
<TABLE>
<CAPTION>
(In thousands) FOR THE YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (2,349) $ 4,827 $ 6,921
Adjustments to reconcile net (loss) income to
net cash (used) provided by operating activities:
Cumulative effect of accounting change -- -- (1,149)
Depreciation and amortization 3,728 3,234 3,119
Deferred income taxes (3,182) 291 271
Increase in accounts receivable (13,094) (10,314) (7,171)
Provision for uncollectible accounts receivable 3,392 1,035 1,071
Increase in inventories (7,017) (9,097) (2,624)
Provisions for inventory and plant relocation reserves 8,124 -- --
Increase in accounts payable 3,116 3,003 5,440
Change in other current items 1,791 (385) 79
Other (179) 65 796
- ------------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (5,670) (7,341) 6,753
INVESTING ACTIVITIES
Purchase of property, plant and equipment - net (5,140) (7,609) (2,327)
Asset purchase of Pro-Lawn (11,268) -- --
- ------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (16,408) (7,609) (2,327)
FINANCING ACTIVITIES
Proceeds from borrowings 110,200 81,400 84,600
Reduction of borrowings (88,754) (67,684) (88,180)
Issuance of common shares 791 1,300 733
Cash dividends (879) (783) (698)
- ------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 21,358 14,233 (3,545)
Net (decrease) increase in cash (720) (717) 881
- ------------------------------------------------------------------------------------------------
Cash-- beginning of the year 2,620 3,337 2,456
- ------------------------------------------------------------------------------------------------
CASH - END OF THE YEAR $ 1,900 $ 2,620 $ 3,337
- ------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
STATEMENTS OF SHAREHOLDERS' EQUITY
LESCO, INC.
<TABLE>
<CAPTION>
(In thousands, except share data) COMMON SHARES UNEARNED
-------------------- PAID-IN RETAINED TREASURY COMPEN-
SHARES DOLLARS CAPITAL EARNINGS SHARES SATION
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 7,709,735 $772 $22,492 $27,655 $(37)
Issuance of common shares 89,188 9 1,060
Dividends paid - $.09 per share (698)
Net income 6,921
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 1994 7,798,923 781 23,552 33,878 (37)
Issuance of common shares 151,065 15 1,645
Dividends paid - $.10 per share (783)
Net income 4,827
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 1995 7,949,988 796 25,197 37,922 (37)
Issuance of common shares 87,750 9 987
Issuance of restricted
common shares 23,029 2 332 $(334)
Issuance of treasury shares 3,600 33 20
Dividends paid - $.11 per share (879)
Net loss (2,349)
- ----------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 8,064,367 $807 $26,549 $34,694 $(17) $(334)
====================================================================================================
</TABLE>
See notes to financial statements.
17
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS
LESCO, INC.
NATURE OF BUSINESS
The Company is engaged in a single business segment which is the manufacture and
marketing of turf care products, including turf control products, fertilizer,
turfgrass seed and equipment, to the professional sector of the green industry.
Substantially all of the Company's accounts receivable are due from companies in
the green industry located throughout the United States. Credit is extended
based on an evaluation of each customer's financial condition, and generally,
collateral is not required. The preparation of financial statements in
conformity with generally accepted accounting principles requires estimates and
assumptions by management and actual results may differ from these estimates.
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES: Inventories are valued principally at the lower of cost (average
cost method) or market and consist of $1,600,000 and $3,174,000 in raw materials
and $66,490,000 and $57,599,000 in work-in-process and finished goods at
December 31, 1996 and 1995, respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost
and are depreciated using the straight-line method over the estimated useful
lives of the respective assets. Buildings are depreciated over 15 to 20 years
with machinery, equipment and other depreciable assets over 5 to 12 years.
Expenditures for maintenance and repairs are charged to income as incurred.
Additions and improvements are capitalized.
INTANGIBLE ASSETS: Included in other assets are $4,023,000 of intangible assets
consisting primarily of trademarks, customer lists, and other specifically
identifiable assets arising from the Pro-Lawn acquisition. These assets are
being amortized using the straight-line method over periods of 3 to 20 years.
Amortization expense for the year ended December 31, 1996 was $246,000.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company assesses the recoverability of its
long-lived and intangible assets by determining whether the amortization of the
remaining balance over its remaining useful life can be recovered through
undiscounted future operating cash flows. If impairment exists, the carrying
amount of the related asset is reduced.
EARNINGS (LOSS) PER COMMON SHARE: Earnings (loss) per common share is based on
the weighted average number of common shares and, if dilutive, common equivalent
shares outstanding.
FINANCE CHARGES: Other - net in the accompanying statements of operations
includes $2,643,000, $2,148,000 and $1,834,000 in customer finance charges in
1996, 1995 and 1994, 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 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 -- ACQUISITION
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 business have been included in the statement of operations from the
date of acquisition.
NOTE 3 -- 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 $454,000, $364,000 and $295,000 for 1996, 1995 and 1994, respectively.
NOTE 4 -- OTHER COSTS AND EXPENSES
A summary of significant items included in the statements of operations is as
follows:
<TABLE>
<CAPTION>
OTHER COST
(In thousands) OF SALES OTHER EXPENSES
- ----------------------------------------------------- -------------------------
YEARS ENDED
DECEMBER 31 .......................... 1996 1996 1995 1994
- ----------------------------------------------------- -------------------------
<S> <C> <C> <C> <C>
Costs related to the
relocation of equip-
ment manufacturing
operations ......................... $4,555 $1,353 $-- $ --
Inventory reserves ................... 2,216 -- -- --
Provisions for uncollectible
accounts receivable ................ -- 3,392 1,035 1,071
- --------------------------------------------------------------------------------
$6,771 $4,745 $1,035 $1,071
=====================================
</TABLE>
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 has announced the relocation of the equipment
manufacturing operations of its Sebring, Florida plant facility. Accordingly,
certain costs related to this plant relocation have been recognized during the
fourth quarter of 1996, and consist of inventory valuation reserves of
$4,555,000, and other related plant shutdown costs of $1,353,000. The Company
anticipates that this shutdown process will be completed during 1997. At
December 31, 1996, no payments have been made against these respective accruals.
During 1996, the Company conducted a comprehensive product evaluation which
led to the discontinuance of certain finished goods inventory items. As a
result of this evaluation, an inventory redeployment program was implemented in
order to consolidate discontinued and slow moving finished goods inventories
from its respective Service Centers and Stores-on-Wheels into more centralized
locations for redistribution and liquidation. As a result of this process the
historical cost of certain inventory items was reduced by $2,216,000 during the
fourth quarter to reflect its estimated net realizable value.
Additionally, in the fourth quarter of 1996, the Company revised its
estimated provision for uncollectible accounts receivable to more closely
reflect current collection trends. The increase in the estimated provision
resulted in a $1,931,000 charge to operations in the fourth quarter. The
combined effect of these items decreased pre-tax income in the fourth quarter
by $10,055,000, and after-tax income by $6,636,000, or $.83 per share.
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 1996, 1995 and 1994, was approximately
$11,400,000, $8,900,000 and $7,070,000, respectively. Future minimum lease
payments are as follows:
<TABLE>
<CAPTION>
(In thousands)
YEARS ENDED DECEMBER 31 TOTAL
-----------------------------------
<S> <C>
1997 $ 8,227
1998 7,567
1999 6,421
2000 5,679
2001 4,834
2002 and thereafter 12,479
-----------------------------------
$45,207
===================================
</TABLE>
18
<PAGE> 8
NOTE 6 -- CAPITAL STOCK AND STOCK PLANS
STOCK OPTIONS: The Company has stock option plans which provide for the issuance
of incentive stock options, non-qualified stock options and stock appreciation
rights (SAR's) either in connection with, or independent of, any option and
performance and other share awards. The plans provide for the issuance of a
maximum of 1,583,875 common shares to key employees.
Options are exercisable for up to ten years, at an option price which
approximates the fair market value on the date the option is granted. Additional
paid-in capital includes tax benefits of $205,000, $352,000, and $230,000
relating to the exercise of options in 1996, 1995 and 1994, respectively. The
following table summarizes the changes in the outstanding options for the three
years ended December 31, 1996:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------- ------------------------- ---------------------------
1996 1995 1994
-------------------------- ------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
- ----------------------------------------------------------------- ------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 635,076 $ 11.92 656,801 $ 10.26 609,289 $ 8.94
Granted 272,050 14.56 142,250 15.51 113,250 15.99
Exercised (87,750) 9.01 (149,225) 8.60 (64,988) 7.81
Cancelled/Forfeited (7,650) 15.02 (14,750) 6.31 (750) 16.00
- ----------------------------------------------------------------- ------------------------- ---------------------------
Outstanding - end of year 811,726 $ 13.09 635,076 $ 11.92 656,801 $ 10.26
================================================================= ======================================================
Option Price Range at end of year $5.67 to $5.67 to $5.67 to
$ 16.00 $ 16.00 $ 16.00
Exercisable - end of year 679,726 635,076 656,801
Reserved for future grants 391,825 226,825 356,165
Weighted average fair value of options
granted during the year $ 4.35 $ 4.58 N/A
</TABLE>
The following table summarizes information about stock options outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>
RANGE OF OPTIONS OPTIONS WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISABLE EXERCISE PRICE CONTRACTUAL LIFE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$5.67 to $7.00 139,451 139,451 $ 6.46 3.0 Years
--------------------------------------------------------------------------------------------
$11.33 to $16.00 672,275 540,275 14.47 8.0 Years
--------------------------------------------------------------------------------------------
811,726 679,726 $13.09 7.1 Years
============================================================================================
</TABLE>
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 (loss) income and related earnings (loss) per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------
(In thousands, except per share data) 1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Net (loss) income - as reported $(2,349) $4,827
Net (loss) income - pro forma $(2,751) $4,453
Earnings (loss) per share - as reported $ (.29) $ .59
Earnings (loss) per share - pro forma $ (.34) $ .55
</TABLE>
Included in these pro-forma disclosures are stock options issued in 1996 and
1995 that were 100% vested by the end of the year in which the options were
granted. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for 1996 and 1995, respectively: dividend yield of .69% and
.68%; expected stock price volatility of .28 and .29; risk-free interest rate of
6.00% and 5.35%; and expected lives of 4 years. This option valuation model
requires input of highly subjective assumptions and, in management's opinion,
does not provide a reliable single measure of the fair value of its employee
stock options.
In 1993, the Company entered into an employment agreement with an executive
officer that provides for the issuance of non-qualified stock options to
purchase up to 300,000 common shares. Such options vest ratably over a five-year
period beginning June 30, 1994, and expire ten years after each option vests.
The exercise price per share is $9.33 for the first 60,000 common shares and
$10.00 for the remaining 240,000 common shares. Options for 273,960 shares were
outstanding and 153,960 shares were exercisable at December 31, 1996.
RIGHTS PLAN: In May 1994, the Company adopted a preferred share purchase rights
plan and declared a distribution of one Preferred Share Purchase Right (Right)
on each outstanding common share. The Rights will become exercisable if a person
or group acquires 20% or more of the Company's common shares, announces a tender
offer for 20% or more of the common shares, or is declared an "Adverse Person"
by the Company's Board of Directors. Each Right entitles shareholders to buy one
one-hundredth of a share of a new series of participating preferred shares at an
exercise price of $75.00.
In addition, if a person or group acquires 20% or more of the Company's
outstanding common shares, each Right will entitle its holder (other than such
person or members of such group) to purchase one of the Company's common shares
(subject to certain adjustments) for a price of $.50 per share. If, after a
person acquires 20% or more of the Company's common shares, the Company is
acquired in a merger or other business combination transaction with such person,
or 50% or more of its assets or earning power are sold, each Right will entitle
its holder to purchase for a price of $.50 per share, a specified number of the
acquiring Company's common shares.
Prior to the acquisition by a person or group of 20% or more of the Company's
common shares, the Rights are redeemable for one cent per right at the option of
the Board of Directors. The Rights expire on May 31, 2004.
PERFORMANCE SHARE PLAN: During 1996, the Company established a Long-Term
Performance Plan which grants restricted common stock awards to certain
officers. These officers are entitled to receive common stock of the Company
based upon certain performance criteria over a three-year performance period.
Participants in the plan have the rights of shareholders, including the right to
receive dividends and the right to vote. Compensation expense to be recognized
under this plan is based on the extent to which the performance criteria are
being met. In 1996, 23,029 shares were granted with a fair market value of
$334,000 which is reflected in shareholders' equity as unearned compensation.
20
<PAGE> 9
NOTE 7 -- INCOME TAXES
The provision for income taxes applicable to income before cumulative effect of
change in accounting principle consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current ......................... $ 1,979 $ 2,784 $ 3,929
Deferred (benefit) .............. (3,182) 225 (321)
- -------------------------------------------------------------------------------
Income tax
(benefit) expense ............. $(1,203) $ 3,009 $ 3,608
===============================================================================
</TABLE>
The provision (benefit) for income taxes differs from the Federal statutory
rate as follows:
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Income taxes at
statutory rate .................... $(1,208) $ 2,665 $ 3,190
State and local income
taxes net of federal
income tax benefit ................ (95) 250 350
Other ............................... 100 94 68
- --------------------------------------------------------------------------------
Income tax
(benefit) expense ................. $(1,203) $ 3,009 $ 3,608
================================================================================
Income tax payments were $4,006,000, $4,562,000 and $4,022,000 in 1996, 1995
and 1994, respectively.
For Federal income tax purposes, the Company has a tax loss carryover of
$285,000, resulting from a change in fiscal year, which may be used in years
1997 through 2006.
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- -------------------------
DEFERRED TAX DEFERRED TAX
--------------------- -------------------------
(In thousands) ASSETS LIABILITIES ASSETS LIABILITIES
- ---------------------------------------------- -------------------------
<S> <C> <C> <C> <C>
Depreciation $1,607 $1,395
Allowance for
bad debts $1,394 $850
Accrued employee
benefits 128
Tax loss carryover 97 194
Accrued insurance 110
Inventory reserves 684 187
Accrued
compensation 667 420
Reserves for
relocation of
equipment
manufacturing
operations 2,009
Prepaid expenses 355 328
Other 111 147 474 119
- -------------------------------------------------------------------------
$5,200 $2,109 $1,938 $2,029
=========================================================================
</TABLE>
NOTE 8 -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
- -------------------------------------------------------
(In thousands) 1996 1995
- -------------------------------------------------------
<S> <C> <C>
Credit agreement $58,200 $36,600
Industrial revenue bond 5,875 5,875
Other debt 829 983
- -------------------------------------------------------
64,904 43,458
Less current portion 200 200
- -------------------------------------------------------
$64,704 $43,258
=======================================================
</TABLE>
In November 1996, the Company amended its credit agreement to increase the
maximum line of credit to $80,000,000 and to extend the maturity to April 30,
2000. The credit agreement is unsecured and has no prepayment penalty. Interest
is payable at the bank's prevailing base rate (8.25% at December 31, 1996) as to
$3,200,000 of principal, or at alternative rates elected by the Company as
provided by the agreement (ranging from 6.29% to 6.34% at December 31, 1996) for
the remaining principal due, together with a .125% commitment fee for the unused
portion of the credit line.
The Company has a seven-year, $7,000,000 notional amount interest rate swap
agreement which converts existing floating rate debt, expiring in 2002, for
6.335% fixed rate debt. If the Company were to terminate this agreement, at
December 31, 1996 the estimated cost would be $5,000.
The industrial revenue bond is due in 2014. Interest is payable quarterly at
a rate based on market rates for comparable tax-exempt debt (4.25% at December
31, 1996). Under certain circumstances, the Company may convert the interest
rate to a fixed rate. The industrial revenue bond is secured by mortgages on
property and equipment acquired with the proceeds (net book value of $7,500,000
at December 31, 1996).
The revolving credit agreement and industrial revenue bond 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 ($53,400,000 at December
31, 1996). The carrying amount of the Company's long-term debt approximates fair
value at December 31, 1996 based upon consideration of current market rates.
The annual maturities of long-term debt for the years 1998 through 2001 are
$160,000, $87,000, $58,292,000 and $97,000, respectively.
Interest payments were $4,121,000, $2,770,000, and
$2,017,000 in the years ended December 31, 1996, 1995, and 1994, respectively.
NOTE 9 -- CHANGE IN INVENTORY ACCOUNTING METHOD
Effective January 1, 1994, the Company changed its method of accounting for
inventory costs to include the capitalization of certain warehousing,
transportation and procurement costs which were previously expensed. The Company
believes this method more closely matches expenses with revenues. The cumulative
effect of this change at January 1, 1994 was an increase in net income of
$1,149,000 (net of $735,000 in income taxes), or $.14 per share. The effect of
the change during 1994 was not material.
NOTE 10 -- QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 1996 and 1995:
(In thousands, except share data)
QUARTER ENDED 1996
- ----------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
- ----------------------------------------------------------------------
Net sales $53,533 $104,444 $91,316 $62,738
Gross profit 17,999 33,093 29,247 13,096
Net income (loss) (1,716) 4,759 3,601 (8,993)
Earnings (loss) per share (.21) .58 .43 (1.12)
Quarter Ended 1995
- ----------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
- ----------------------------------------------------------------------
Net sales $47,237 $71,465 $69,429 $53,535
Gross profit 15,518 24,197 22,538 18,838
Net income (loss) (503) 3,128 2,399 (197)
Earnings (loss) per share (.06) .39 .30 (.02)
Earnings per share amounts for each quarter are required to be computed
independently and, therefore, may not equal the amount computed on an annual
basis. See Note 4 regarding Other Costs and Expenses which decreased 1996 fourth
quarter gross profit by $6,771,000, and 1996 fourth quarter net income by
$6,636,000, or $.83 per share.
20
<PAGE> 1
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of LESCO, Inc. of our report dated February 14, 1997, included in the 1996
Annual Report to Shareholders of LESCO, Inc.
Our audits also included the financial statement schedule of LESCO, Inc. listed
in Item 14(a). This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-38118) pertaining to the LESCO, Inc. Stock Investment and
Salary Savings Plan and Trust, in the Registration Statement (Form S-8 No.
33-22685) pertaining to the LESCO, Inc. 1988 Stock Option Plan and Stock Bonus
Plan and in the Registration Statement (Form S-8 No. 33-82490) pertaining to the
LESCO, Inc. 1992 Stock Incentive Plan and the Employment Agreement by and
between LESCO, Inc. and William A. Foley, of our report dated February 14, 1997,
with respect to the financial statements incorporated herein by reference,
and our report included in the preceding paragraph with respect to the
financial statement schedule included in this Annual Report (Form 10-K) of
LESCO, Inc.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,900,254
<SECURITIES> 0
<RECEIVABLES> 61,523,821
<ALLOWANCES> 4,100,000
<INVENTORY> 68,090,226
<CURRENT-ASSETS> 136,546,936
<PP&E> 47,746,663
<DEPRECIATION> 24,454,432
<TOTAL-ASSETS> 164,672,866
<CURRENT-LIABILITIES> 36,642,577
<BONDS> 64,704,132
0
0
<COMMON> 806,752
<OTHER-SE> 60,892,726
<TOTAL-LIABILITY-AND-EQUITY> 164,672,866
<SALES> 312,030,958
<TOTAL-REVENUES> 312,030,958
<CGS> 218,596,162
<TOTAL-COSTS> 218,596,162
<OTHER-EXPENSES> 3,036,854
<LOSS-PROVISION> 3,391,780
<INTEREST-EXPENSE> 4,213,732
<INCOME-PRETAX> (3,551,985)
<INCOME-TAX> (1,203,000)
<INCOME-CONTINUING> (2,348,985)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,348,985)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
