Item 1. BUSINESS
GENERAL
The Registrant was incorporated in 1962 under the laws of the State of Ohio. As used in this report, the terms "Company," "LESCO" and "Registrant" refer to LESCO, Inc.
The Company is engaged in the manufacture and sale of an extensive array of golf course and lawn care products which are marketed throughout the United States, primarily under the LESCO name. These products include fertilizers, turf protection products, grass seed, turf care equipment and replacement parts and golf course accessories. The Company's customers include golf courses, lawn care companies, landscapers, municipalities, theme parks and industrial concerns. Products are marketed directly through the Company's sales organization, which includes localized service centers and a fleet of LESCO tractor trailers operated by salesmen trained in turf care management.
BASIS OF REPORTABLE SEGMENTS
As a result of the Company's structural reorganization announced in January 2000, the Company elected to change the reporting of its business segments as of January 1, 2000, and restated its prior years' presentation to conform to the revised segment reporting. The Company changed from one reportable segment to four reportable operating segments to include Product Supply, Lawn Care, Golf and Corporate, which are defined based on management responsibility.
The Product Supply division manufactures and distributes fertilizers, combination products, golf course accessories and turfgrass seed and is also responsible for purchasing raw materials in addition to purchasing and distributing turf protection products, turf care equipment and related parts, and golf course accessories. The Product Supply division sells exclusively to the Lawn Care and Golf divisions of the Company. However, to more fully utilize production capacity, Product Supply occasionally manufactures for third parties.
The Lawn Care division operates 232 LESCO Service Centers(R), which enable the Company to market its products on a localized basis. The primary products sold by the Lawn Care division are turf care products, including turf control products, fertilizer, grass seed and equipment. The Service Centers market and sell its products principally to smaller lawn care companies, landscapers, nurseries, municipalities, churches and condominium associations. This division also markets and sells its products to large national and regional lawn care customers through a separate group of sales representatives. This division distributes selected products through Home Depot stores in the South, Mid-Atlantic and Northeast areas of the country in addition to selling a consumer line of lawncare products to nationwide retail stores under several brand names, including Scenic Green, Professional Turf Products, TruGreen, ChemLawn and Barefoot.
The Golf division markets and sells its products to private and public golf courses and other customers having large turf areas through Company salesmen who operate a fleet of 78 LESCO Stores-on-Wheels(R). The primary products sold by the Golf division are turf care products, including turf control products, fertilizer, grass seed and equipment. These Stores-on-Wheels are well-stocked with a wide variety of turf care products and golf course accessories which are sold directly from the trucks. The Golf division has conventional sales representatives strategically located in the various markets to help support the Stores-on-Wheels and sell to national golf customers. In addition, this division markets its products internationally, principally through foreign distributors.
The Corporate division includes the administrative functions of the Company, which support the Product Supply, Lawn Care and Golf divisions and include Administration, Finance, Information Services, Legal and Human Resources.
The Company is principally engaged in the manufacturing and marketing of turf care products to the professional sector of the green industry. There are no significant intervening events, which materially affected the financial statements. The Company measures segment profit as operating profit. Net assets is defined as the sum of net accounts receivable, inventory, and net property, plant, and equipment less accounts payable. Management utilizes this information as a basis to calculate the divisional return of capital employed. Depreciation and operating leases for specific Product Supply assets are allocated to Corporate for operating profit measures. Information on segments are as follows (in thousands):
Segment information for periods prior to 1999 is not presented because it is impracticable to prepare the information.
PRODUCTS
The Company manufactures and sells to the green industry an extensive array of turf care products, comprising two major lines: (1) consumable goods, including turf control products, fertilizer and grass seed, and (2) hard goods, including equipment, accessories and other related products such as irrigation equipment, protective gear and hand tools. These products are marketed under the names LESCO(R), LESCO Products, Aim Lawn & Garden Products, Professional Turf Products, Scenic Green, TruGreen, Chemlawn and Barefoot. In addition, the Company sells a diverse line of turf products under the manufacturers' brand names.
Sales by product line for the years ended December 31, 2000, 1999, and 1998 are as follows:
CONSUMABLE GOODS
TURF CONTROL PRODUCTS. The Company offers a full line of turf control products including herbicides, insecticides and fungicides. These products control weed growth, insect infestation and fungal diseases of turf, trees, shrubs and landscape beds. In order to offer its customers a more complete product line, the Company sells turf control products produced by other major manufacturers.
FERTILIZER. The Company sells a broad assortment of standard fertilizers, including combination products that combine fertilizer with turf control products. The Company also custom-blends fertilizer according to its customers' specifications. The Company's fertilizers include specialized products for golf course applications including greens, tees and fairways, products for use in the lawn care industry, and products for trees, shrubs and landscape beds. Fertilizers are generally sold in a granular form, although specialized liquid formulations are also available.
The majority of the fertilizers sold by the Company are formulated with sulfur-coated urea fertilizer. The Company is one of a few manufacturers of these products in the world. Sulfur coating produces a gradual release of nutrients over time, which reduces the number of required applications and the risk of over fertilization. ELITE(R) is the Company's premium brand sulfur-coated urea fertilizer, specially sized and formulated for low-cut turf on golf course greens, tees and fairways.
In early 2000, the Company introduced a new, state-of-the-art line of "smart" fertilizers that is sold under the brand name NovexTM. The Company acquired exclusive worldwide rights to this new patented technology in early 1999. Novex is a homogeneous, uncoated product that permits uniform dispersion of its nutrients into the soil over a controlled time period scientifically selected to achieve optimum performance. This new product line is designed for professional turf care managers and, because of its broad range of applications, will position the Company to enter additional markets such as nurseries, forestries, fisheries, and specialty agriculture applications for high crop value.
TURFGRASS SEED. The Company markets LESCO and other brands of turfgrass seed, most of which are certified by authorities of various states to guarantee the varietal purity of the seed. The Company contracts for the production of turfgrass seed with growers in the Pacific Northwest, Western Canada and New Zealand for cool season grasses and in California for warm season grasses. In 2001, the Company has more than 40,000 production acres under contract in these regions. The Company's seed line includes 32 proprietary varieties as well as 28 standard blends and mixtures.
HARD GOODS
EQUIPMENT AND ACCESSORIES. The Company purchases a broad assortment of equipment including rotary mowers, spreaders, sprayers, aerators, renovation equipment and aftermarket replacement parts from Commercial Turf Products, Ltd. the Company's 50-50 joint venture. The Company believes that the LESCO spreader, first introduced in 1982, is an industry leader in sales to the professional sector of the market. In addition, the Company offers a broad assortment of handheld power tools produced by third parties and a variety of golf course accessories including ball washers, tee markers, sand trap rakes, putting green cups, flags and flagpoles. Equipment sales are supported by a toll-free hotline staffed by trained technicians and repair facilities in Service Centers. The Company has a contract with a third party for the distribution of all parts. Parts support is fully computerized, and the Company is generally able to provide overnight parts delivery nationwide.
OTHER. The Company offers underground irrigation equipment, protective gear such as goggles, masks and gloves, and hand tools such as tree pruners, shovels and rakes. These products are produced for the Company by third parties.
PRODUCT IMPROVEMENT AND DEVELOPMENT
The Company's research and development efforts focus on improvements to and development of new turf control products and fertilizers, turf care equipment and golf course accessories and new grass seed varieties. The Company also has a number of agreements with state universities which test turf control products, grass seed and fertilizers for the Company.
MARKETING AND DISTRIBUTION
LESCO SERVICE CENTERS(R). The Company operates Service Centers which enable the Company to market its products on a localized basis. The Service Centers are generally established in easily accessible industrial parks which allow for sales directly to commercial users. The Company had 232 Service Centers in operation as of December 31, 2000. The Company does not plan to open any Service Centers in 2001. The Service Centers market products principally to smaller lawn care companies, landscapers, nurseries, municipalities, churches and condominium associations.
LESCO STORES-ON-WHEELS(R). The Company markets its products to private and public golf courses and other customers having large turf areas through salesmen who operate a fleet of 75 Stores-on-Wheels consisting of 10 step vans and 65 tractor trailers as of December 31, 2000. These trucks are well-stocked with a wide variety of turf care products and golf course accessories which are sold directly from the trucks. The Company has added 3 Stores-on-Wheels for a total of 78 as of March 2001.
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 typically generate lower gross margins than the Service Centers and Stores-on-Wheels.
OTHER. The Company also markets its products by mail order catalog and participates in national and regional lawn care and golf course trade shows. A telemarketing sales group calls on inactive accounts and contacts customers not currently serviced by the Company's outside sales forces. The Company distributes selected products through Home Depot stores in the South, Mid-Atlantic and Northeast areas of the country. The Company sells a consumer line of lawncare products to nationwide retail stores under several brand names, including Scenic Green, Professional Turf Products, TruGreen, Chemlawn and Barefoot. In addition, the Company markets its products internationally principally through foreign distributors.
TECHNICAL EXPERIENCE OF SALES PERSONNEL. Most of the Company's salespersons are agronomists or horticultural specialists or have had prior experience with lawn care companies or golf courses. The Company believes that the training and experience of its salespersons have helped promote customer reliance on the Company's technical expertise with respect to existing turf care products and new product development in the turf care industry.
MANUFACTURING AND SUPPLIERS
FERTILIZERS AND COMBINATION PRODUCTS. Poly Plus(R) sulfur-coated fertilizers are manufactured by spraying dry fertilizers first with sulfur, then with a polymer sealant to seal the sulfur and retard the release of nutrients. Uncoated fertilizers are blended in accordance with Company or customer specifications. Combination products are processed by impregnating fertilizers with technical grade herbicides, insecticides or fungicides. NovexTM fertilizers are a homogenous, uncoated, control released product manufactured by using the patented technology. Raw materials used in the manufacture of fertilizer are nitrogen, phosphorus, potash and sulfur.
TURF PROTECTION PRODUCTS. In producing both liquid and granular turf protection products, the Company purchases technical-grade or highly concentrated chemicals and blends them with various solvents, emulsifiers and surfactants purchased from various suppliers.
TURF CARE EQUIPMENT AND GOLF COURSE ACCESSORIES. The Company owns 50% of a joint venture, Commercial Turf Products, Ltd. (CTP), with MTD Products Inc. for the manufacture of commercial equipment. Located in Streetsboro, Ohio, the joint venture manufactures commercial lawn care equipment to be sold to both partners. The joint venture commenced operations in May 1997, and began to manufacture equipment in the second half of 1997.
The joint venture manufactures and assembles certain turf care equipment and related replacement parts in its Streetsboro location. CTP purchases metal components and performs manufacturing processes such as stamping, cutting, bending, welding, grinding and punching of many component parts. Using these manufactured components, together with some components purchased from a variety of third party suppliers, CTP assembles rotary mowers, spreaders, sprayers, aerators and turf renovators for sale to each partner. The Company distributes and sells commercial equipment supplied by CTP under the LESCO name primarily through its LESCO Service Centers.
The Company also sells golf course accessories, which are manufactured by various contractors with tooling, dies, and molds owned by the Company. In August 2000, the Company acquired assets of Southern Golf Products, Inc., including product lines consisting of custom made embroidered and silk-screened flags, flagpoles, tee markers, signage, uniforms and promotional apparel.
SOURCES OF SUPPLY. It is the Company's policy to identify and use multiple sources of supply or acceptable substitutes for all raw materials used by the Company in manufacturing its products. The only exception to this policy is the Company's purchase of proprietary products.
COMPETITION
The Company competes with a number of companies within each of its product lines including national, regional and local distributors, turf care product manufacturers and retailers such as mass merchandisers, local nurseries and hardware stores. Some of these national competitors have greater name brand recognition than the Company. The Company's principal competitors for its turf control, fertilizer and grass seed product lines include Andersons, Simplot Partners, Lebanon, Scotts, ProSource One and United Horticultural Supply. The Company's principal competitors for equipment are John Deere, Textron, Scag and Toro. The Company, however, believes that it is the only national company that supplies and sells a full range of products directly to the commercial user. The Company competes primarily on the basis of service to customers and product quality, selection and price.
SEASONALITY AND BACKLOG
The Company's business is seasonal because the customers in northern states do not have the same year-round requirements for products as do customers in southern states. Nationwide, demand for the Company's products is generally greatest during the second quarter of its fiscal year.
The Company offers an early order program to lessen the second quarter demand on its manufacturing and distribution facilities. This program allows the Company to schedule manufacturing and distribution of products prior to the time when customers need such products. This has reduced variations in sales and earnings from quarter to quarter. The Company's backlog as of December 31, 2000 and 1999 was $6,920,000 and $6,552,000, respectively.
EMPLOYEES
As of December 31, 2000, the Company had 1,474 full-time employees, of which 423 were involved in manufacturing and warehouse operations, 635 in sales-related activities and 416 in management and administration. Of the total number of full-time employees, 884 were salaried and 590 were hourly employees. 121 employees at the Company's Martins Ferry facility were 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 generally believes its turf control product labels and advertising materials are consistent with EPA and state guidelines, there can be no assurance that EPA or state regulations or interpretations may not change in the future or that the EPA or any state will not challenge the Company's labeling or advertising materials.
Fertilizer products are currently regulated by individual state departments of agriculture and must generally be registered or licensed in most states in which they are sold. There can be no assurance that the state regulations or interpretations of those regulations will not change in the future or that the Company's registration in any state will not be challenged. The Company is also required to obtain licenses/permits from a number of governmental agencies in order to conduct various aspects of its business. These licenses/permits are subject to modification and revocation, which could impair the Company's ability to conduct its business in the manner in which and at the places at which it is presently conducted.
Because of the nature of the Company's business, the Company is subject to various environmental laws and regulations and incurs routine costs in complying with these laws and regulations. It is the Company's policy to provide for nonroutine costs relating to environmental matters when a loss is probable and the amount of the loss can be reasonably estimated. The Company had $200,000 of reserves for environmental matters at December 31, 2000.
INSURANCE
The Company maintains comprehensive general liability insurance coverage (which includes product liability insurance coverage) at levels which the Company believes are prudent and most cost-effective. The Company's insurance program includes significant deductible amounts with respect to such coverages. Certain coverages, including environmental pollution, are restricted or have been excluded under current policies. The level of coverage and deductible maintained generally reflects trends in the liability insurance industry and is not unique to the Company. The Company regularly evaluates the cost-effectiveness as compared to the risks assumed in determining its insurance program.
Item 2.
Item 2. PROPERTIES
The Company owned its principal executive office building, until it moved to a leased facility on February 9, 2001, and owns or leases its warehouse and manufacturing facilities. The Company believes these facilities are well-maintained, adequately insured and adequate and suitable for their present and intended uses. In addition, the Company leases facilities for temporary storage of inventory products during its peak seasonal demand. The Company maintains sales offices at each of the following locations, including its executive offices. Detail by location as of December 31, 2000 is as follows:
(1) Does not include Service Centers or Stores-on-Wheels. As of December 31, 2000, the Company operated Service Centers in 232 facilities with three owned and 229 leased by the Company. These facilities range in size from 3,400 to 14,000 square feet. The Company owns or leases 75 tractor-trailers for its Stores-on-Wheels.
(2) The Company relocated its executive offices as of February 9, 2001. The property is listed for sale and being actively marketed by a commercial real estate broker.
(3) This facility is subject to two separate leases, a lease for the main distribution center expiring in 2001 with a three-year renewal option, and a lease for an additional 19,200 square feet of warehousing space expiring on October 31, 2001.
(4) This facility consists of two buildings, which are subject to a lease expiring April 30, 2006. The Company has two five-year renewal options.
(5) This facility is subject to a lease expiring December 31, 2003.
(6) These facilities are subject to mortgages in the aggregate amount of $6,209,000 as of December 31, 2000.
(7) This facility is subject to a lease, which expires in 2003. The lease includes a three-year renewal option.
(8) This facility is subject to a lease expiring December 31, 2001 with two five-year renewal options. The Company has a sublease on this facility through December 31, 2001.
(9) These facilities consist of seven buildings. Two buildings are subject to month to month leases. Four buildings are subject to leases expiring in 2001, 2002, 2006 and 2017. The new manufacturing facility is owned by the Company, while the land is subject to a lease which expires in 2017 with four five-year renewal options.
(10) This facility is subject to a lease, which expires in 2009. The lease includes an option to purchase.
(11) These facilities consist of three buildings, which are owned by the Company. The land is subject to leases, which expire in 2011. The Company has a five-year renewal option.
(12) The Company relocated its executive offices as of February 9, 2001. This facility is subject to a lease expiring January 16, 2016. The Company has two five-year renewal options.
Item 3.
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.
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.
Alexander P. Antonio joined the Company in February 2000 as Vice President, and President Golf Division, and held that position until December 31, 2000. Mr. Antonio was Chief Executive Officer of Howard Johnson's Enterprises, Inc., a manufacturer of sophisticated fertilizers, specialty household plant products, and seasonal control products (consumer and commercial customer base), from 1995 until 1998. From 1978 to 1995, Mr. Antonio was Vice President, Marketing and Sales of Miller Compressing Company, a processor and marketer of ferrous and nonferrous scrap. Mr. Antonio was Vice President, Purchasing and Sales of Wisconsin Metal & Chemical Company, a chemical processor of high grade industrial scrap from 1971 to 1978.
R. Breck Denny joined the Company in July 1999 as Vice President, Chief Financial Officer. Mr. Denny was Vice President, Finance & Treasurer (Chief Financial Officer) of Medusa Corporation, a manufacturer of cement and aggregates serving the concrete and building industries, from 1994 until 1998. From 1970 to 1994, Mr. Denny held a number of positions with J. P. Morgan & Company, one of the largest commercial and investment banks in the U.S. From 1988 to 1994, Mr. Denny was Vice President, Advisory/Mergers and Acquisitions. Prior to that, Mr. Denny held the positions of Vice President, Banking from 1982 to 1988; Vice President, Financial Analysis from 1979 to 1982; Assistant Vice President, Financial Analysis from 1976 to 1979, and Assistant Treasurer from 1971 to 1976.
William A. Foley joined the Company in July 1993 as President, Chief Executive Officer and a director. He was elected Chairman of the Board by the Board of Directors in October 1994. 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 1988 to 1990, Mr. Foley was Vice President and General Manager of The Scotts Company Consumer Business Group, a producer and marketer of turf care products. Mr. Foley was Vice President and General Manager of Rubbermaid Specialty Products Division, a producer of rubber and plastic products, from 1984 to 1988, and was Vice President - Sales and Marketing for Anchor Hocking Corporation, a producer of glass products from 1970 to 1984. Mr. Foley is also a director of the following publicly-held companies: Dairy Mart Convenience Stores, Inc., a chain of convenience stores, and Libbey, Inc., a producer of tabletop products.
Charles J. McGonigle is Vice President and President of the Product Supply Division. He joined the Company in April of 1998 as Vice President, Operations. Just prior to his employment with the Company, Mr. McGonigle was Supply Manager for Proctor & Gamble Company, a manufacturer of consumer, commercial and pharmaceutical products. From 1993 to 1997, Mr. McGonigle held the position as Product Supply Manager.
Wayne W. Murawski joined the Company in 1994 as Chief Information Officer and was elected to the position of Vice President, Chief Information Officer in 1995. Prior to his employment with the Company, Mr. Murawski was Chief Information Officer at Imperial Wallcoverings, Inc. a wallpaper producer and a subsidiary of Collins & Aikman, Inc. Previous to that, Mr. Murawski held a similar position at American Consumer Products, Inc. a hardware manufacturer and distributor. From 1980 to 1988, Mr. Murawski was president of COMSOL Corporation, a professional services firm, which implemented large systems projects in Fortune 500 companies. Mr. Murawski's career was founded in the IBM mainframe computing environment. He rose through the ranks of information system departments in technical, supervisory, and project management roles.
Dana L. Wilson is Vice President and President of the Lawn Care and Golf Divisions. He joined the Company in 1988 as a Service Center Manager, and has held positions of increasing responsibility. Thereafter, in 1992, he became a Regional Manager; in 1995, he became Director of Service Centers; in 1998, he became Vice President, Service Center and Lawn Care Sales; in 2000, he became Vice President and President of the Lawn Care Division; and in 2001, he was promoted to his current position. Prior to joining the Company, he held several positions with ChemLawn (nka TruGreen-ChemLawn) from 1980-1988.
PART II
Item 5.
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:
The Company paid an annual dividend of $.15 per Common Share in 2000 and $.14 in 1999. Certain provisions of the principal credit agreement of the Company restrict the right of the Company to pay dividends. See Note 4 of Notes to Financial Statements.
As of March 7, 2001 there were 1,336 holders of record of the Company's Common Shares.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Company sales rose to a record $499.6 million in 2000, an 8.5% increase compared with $460.4 million in 1999, which was a 10.5% increase over 1998 sales of $416.7 million. Each of the Company's key sales groups contributed to overall sales growth, with Service Centers and Golf Course sales contributing the largest increase for 2000 and 1999. The increases reflected volume growth primarily from the maturation of Service Centers previously opened. During 2000, the Company did not open any stores; rather, management focused on increasing sales through the Company's existing network. At the end of 2000, the Company was operating 232 stores in 37 states compared with 234 stores in 1999 and 1998. Comparable store sales for 2000 increased 5.1% compared with a 7.9% increase in 1999.
The Company reported diluted net earnings of $0.86 per share in 2000 compared with $1.36 per share in 1999 and $0.69 per share in 1998. The decrease in earnings per share compared with a year ago was related primarily to higher costs of urea, higher delivery costs and greater expenses at the Company's Novex fertilizer plant. The increase in earnings per share in 1999 compared with 1998 was related primarily to improved sales mix, cost controls and the improved performance at Commercial Turf Products, Ltd. (CTP), the Company's 50/50 commercial equipment joint venture with MTD Products Inc.
The Company's gross profit as a percent of sales in 2000 was 32.4% compared with 33.7% in 1999 and 31.9% in 1998. During 2000, the Company's gross profit percent decreased primarily as a result of an increase in the Company's cost of raw materials and higher manufacturing expenses at the Novex fertilizer plant.
Warehouse and distribution expenses were 8.5% of sales compared with 7.9% in 1999 and 8.1% in 1998. During 2000, the Company's warehouse and distribution expenses increased as a percent of sales due primarily to increased costs relating to outbound freight. These freight cost increases resulted from an increase in the number of direct ship orders to customers and increased transfer costs from the addition of the Novex plant and several outside warehouses.
The Company's selling, general and administrative expenses of $103.3 million in 2000 increased 7.7% over $95.9 million in 1999, which represented an increase of 10.8% over $86.5 million in 1998. Selling, general and administrative expenses as a percent of sales in 2000 remained relatively unchanged compared with 1999 and 1998. The expense increase in 2000 was attributable primarily to the addition of sales and administrative support personnel in the first half of 2000 to support the continuing business growth.
Interest expense increased to $6.9 million from $6.3 million in 1999 and $5.6 million in 1998. The increase in interest expense for both years was attributable primarily to a higher average interest rate and increased working capital needs associated with the growth of the business.
Results of operations for CTP represented a loss of $33,000 in 2000 compared with a $1.2 million loss in 1999 and a $1.8 million loss in 1998. The improvement in performance was attributable primarily to an increase in production volume and better cost control from year to year.
Other - net consists primarily of customer finance charges. Customer finance charges totaled $2.5 million in 2000 compared with $3.2 million in 1999 and $3.5 million in 1998. The decrease in 2000 compared with 1999 was due primarily to a more aggressive collection of aged receivables and the continued success of 1999's program to outsource the Company's equipment financing programs.
The Company's effective tax rate in 2000 was 39.5% compared with 38.4% in 1999 and 37.7% in 1998. The change in effective tax rate from year to year was due primarily to the federal marginal tax rate and the impact of state and local income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, total assets of the Company were $244.9 million compared with $232.8 million at year-end 1999 and $207.7 million at year-end 1998. The increase in assets was attributable to growth in the business combined with working capital increases, capital additions and improvements. Funding for the increase in assets was provided primarily by increased borrowings under the Company's credit facilities.
The Company's debt-to-total capitalization percentage was 50.6% as of December 31, 2000, compared with 51.3% as of December 31, 1999, and 51.5% as of December 31, 1998. The continued decrease was a result of a larger increase in equity, due primarily to increased earnings compared to the smaller increase in debt.
Accounts receivable increased 15.9% in 2000 compared with an 8.5% sales increase. In 1999, accounts receivable increased 3.7% compared with a 10.5% sales increase. The increase in 2000 was due primarily to higher December sales and extended terms programs to larger customers. The increase in 1999 was due primarily to the outsourcing of equipment financing and improved focus on management of receivables. Inventories remained relatively unchanged in 2000, due to efforts to reduce the number of inventory items with low market demand, compared with a 16.2% increase in 1999. Accounts payable decreased in 2000 and 1999, a result of decreased purchasing activity late in the year in an effort to reduce inventories.
During 2000, the Company's expenditures for capital improvements and additions totaled $10.0 million. These expenditures consisted primarily of approximately $5.0 million for the continuing design and implementation of information systems and technology to improve the Company's management of assets and customer service, $1.0 million relating to the Company's Novex plant, $1.0 million relating to the Sebring fertilizer plant and $1.5 million of general improvements to the Company's other manufacturing and distribution facilities. The funding for these projects came primarily from an increase in borrowings under the Company's credit facilities.
The Company is a 50% owner of CTP and accounts for this investment using the equity method of accounting. CTP, which began operations in May 1997, manufactures commercial turf equipment. The Company's share of CTP's 2000, 1999 and 1998 net loss was $33,000, $1.2 million and $1.8 million, respectively, and was recorded as a reduction of the Company's original investment of $700,000 and $3.1 million of advances. The Company has also guaranteed 50% of CTP's long-term obligations, which totaled $13.2 million as of December 31, 2000.
At December 31, 2000, the Company had $43.6 million of debt outstanding on its revolving line of credit. The credit facility, which will mature in April 2003, provides for maximum core borrowings of $60.0 million and allows for maximum seasonal borrowings from March 1 to May 31 of $70.0 million. This credit facility is unsecured and has no prepayment penalty. Interest is payable at the bank's prevailing base rate or at alternative rates based on LIBOR or CD options as elected by the Company. The Company believes the current borrowing capacity is adequate for 2001 and the foreseeable future.
Item 7a.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk relating to interest rates. The Company's debt consists primarily of $50.0 million in fixed-rate, private-placement notes and borrowings under its $60.0 million core and $10.0 million seasonal revolving credit facility with banks, at floating interest rates. The Company has a $7.0 million notional amount interest rate swap, which effectively converts a portion of its revolving credit borrowings to a fixed rate. The estimated fair value of the $50.0 million fixed-rate notes at year end is $53.0 million, based on current borrowing rates available for financing with similar terms and maturities. It would have cost the Company $58,000
to terminate the seven-year, $7.0 million notional amount interest rate swap agreement at December 31, 2000. See the Long-Term Debt Note (Note 4) in the Notes to Consolidated Financial Statements.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of LESCO, Inc. and the report of Ernst & Young LLP, independent auditors, are set forth on the following pages:
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
Item 10.
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.
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.
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.
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.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2). Financial Statements and Financial Statement Schedule.
The following financial statements of LESCO, Inc. are included in Item 8:
Consolidated Balance Sheets--December 31, 2000 and 1999
Consolidated Statements of Income--Years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity--Years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows--Years ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
The following financial statement schedule is included herewith:
Schedule II--Valuation and Qualifying Accounts--December 31, 2000, 1999 and 1998
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(3) See Exhibit Index.
(b) The Registrant has not filed any current report on Form 8-K during the quarter ended December 31, 2000.
(c) Exhibits--The response to this portion of Item 14 is submitted as a separate section of this report.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS LESCO, INC.
(1) Reserves relieved as obsolete inventory is sold or is otherwise disposed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LESCO, Inc.
By /s/ William A. Foley --------------------------- William A. Foley
Date: March 23, 2001
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.
LESCO, INC.
FORM 10-K
EXHIBIT INDEX
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. 333-22685).
6 Incorporated by reference to exhibits, with the corresponding exhibit numbers unless otherwise indicated, filed by Registrant with its Annual Report on Form 10-K for the year ending December 31, 1997.
7 Incorporated by reference to exhibits, with the corresponding exhibit numbers unless otherwise indicated, filed by Registrant with its quarterly report on form 10Q for the quarter ended June 30, 1998.
8 Incorporated by reference to exhibits, with the corresponding exhibit numbers unless otherwise indicated, filed by Registrant with its Annual Report on Form 10-K for the year ended December 31, 1998.
9 Incorporated by reference to exhibits, with the corresponding exhibit numbers unless otherwise indicated, filed by Registrant with its quarterly report on Form 10Q for the quarter ended September 30, 1999.
10 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. 333-49884).
11 Filed herewith.
EXECUTIVE COMPENSATION PLANS
AND ARRANGEMENTS ----------------------------
Exhibits 10(a), 10(k), 10(1), and 10(w) are compensation plans in which executive officers participate.
LESCO, Inc.
REPORT OF MANAGEMENT-- LESCO, INC.
We have prepared the accompanying consolidated financial statements and related information included herein. The primary responsibility for the integrity of the financial information rests with management. This information is prepared in accordance with accounting principles generally accepted in the United States, and includes amounts based upon our best estimates and judgments.
The Company maintains accounting and internal control systems, which are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, and which produce records adequate for preparation of financial information. There are limits inherent in all systems of internal control, based on the recognition that the cost of such systems should be commensurate with the benefits to be derived. We believe our system provides an appropriate balance.
Ernst & Young LLP, independent auditors, is retained to audit LESCO, Inc.'s financial statements. Its accompanying report is based on an audit of LESCO's financial statements conducted in accordance with auditing standards generally accepted in the United States, including a review of internal control and tests of accounting procedures and records.
The Board of Directors pursues its responsibility for these financial statements through the Finance Committee, composed exclusively of independent directors. The Finance Committee meets periodically with internal auditors and our independent auditors, as well as with LESCO management, to discuss the adequacy of financial controls, the quality of financial reporting, and the nature, extent and results of the audit effort. Both the internal auditors and independent auditors have private and confidential access to the Finance Committee at all times.
/s/ William A. Foley
William A. Foley Chairman, President and Chief Executive Officer
/s/ R. Breck Denny
R. Breck Denny Vice President, Chief Financial Officer
/s/ Kenneth J. Kossin, Jr.
Kenneth J. Kossin, Jr. Corporate Controller
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders LESCO, Inc.
We have audited the accompanying consolidated balance sheets of LESCO, Inc. as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statements and schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LESCO, Inc. at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP Cleveland, Ohio February 7, 2001
LESCO, Inc.
LESCO, Inc. CONSOLIDATED STATEMENTS OF INCOME
See Notes to Consolidated Financial Statements
LESCO, Inc.
LESCO, Inc. CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
LESCO, Inc.
See Notes to Consolidated Financial Statements.
LESCO, Inc.
LESCO, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF BUSINESS The Company operates in four business segments, which include Product Supply, Lawn Care, Golf and Corporate. The Company manufactures and markets turf care products, including turf control products, fertilizer, grass seed and equipment, to the professional sector of the green industry. Substantially all of the Company's accounts receivable are due from companies in the green industry located throughout the United States. Credit is extended based on an evaluation of each customer's financial condition and, generally, collateral is not required. Revenue is recognized when goods are shipped to the customer or when title passes, if earlier.
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires estimates and assumptions by management, and actual results may differ from these estimates.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The Consolidated Financial Statements include the accounts of LESCO and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior-year amounts have been reclassified to conform with current-year reporting presentations.
INVENTORIES: Inventories are valued principally at the lower of cost (average cost method) or market.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets. Buildings are depreciated over 15 to 20 years, and machinery, equipment and other depreciable assets over three to 12 years. Expenditures for maintenance and repairs are charged to income as incurred. Additions and improvements are capitalized.
INTANGIBLE ASSETS: Included in "Other Assets" are $11,337,000 and $10,031,000 of intangible assets at December 31, 2000, and 1999, respectively, consisting primarily of goodwill, patents, trademarks, cus- tomer lists and other specifically identifiable assets arising from recent acquisitions, including Pro-Lawn, Tri Delta Fertilizer, Inc. (Tri Delta), Agri- turf, Inc., Cadwell & Jones, Inc. and Southern Golf Products, Inc. These assets are being amortized using the straight-line method over periods of three to 20 years. Accumulated amortization was $2,141,000 and $1,720,000 at December 31, 2000, and 1999, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company assesses the recoverability of its long-lived and intangible assets by determining whether the amortization of the remaining balance over its remaining useful life can be recovered through undiscounted future operating cash flows. If impairment exists, the carrying amount of the related asset is reduced to fair value.
FINANCE CHARGES: "Other - net" in the accompanying Statements of Income includes $2,489,000, $3,171,000 and $3,534,000 in customer finance charges in 2000, 1999 and 1998, respectively.
STOCK OPTIONS: The Company follows the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." Accordingly, the Company follows the accounting provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which, if applicable, recognizes as compensation cost the difference between the fair market value and the exercise price of stock options at the date of grant.
NOTE 2 ACQUISITIONS
On August 28, 2000, a wholly owned subsidiary of the Company completed the asset purchase of Southern Golf Products, Inc. of Peachtree City, Georgia, for 21,790 restricted shares of the Company's common stock totaling $375,000, and $900,000 in former advances to Southern Golf Products, Inc. The asset purchase included working capital, manufacturing equipment and golf accessory assets.
On January 30, 1998, the Company acquired certain assets of Agriturf, Inc. and Cadwell & Jones, Inc. for $8,200,000, including assumption of $2,200,000 of debt. The asset purchase included land, a fertilizer manufacturing facility and related warehouse, working capital and manufacturing equipment. The asset purchase was financed by the Company's credit facility.
The operating results of the acquired businesses have been included in the Statements of Income since the dates of the related acquisitions.
NOTE 3 INVESTMENT IN COMMERCIAL TURF PRODUCTS, LTD.
The Company's 50% investment in Commercial Turf Products, Ltd. (CTP) is accounted for under the equity method of accounting. In addition, the Company has guaranteed 50% of certain liabilities of CTP aggregating $13,160,000, the Company's portion being $6,580,000 at December 31,
LESCO, Inc.
2000. These liabilities mature through 2002 and bear interest at rates ranging from 6.6% to 9.5%. Through December 31, 2000, the Company invested $700,000 in CTP and extended advances of $3,100,000. CTP's financial information at December 31 is as follows:
NOTE 4 LONG-TERM DEBT Long-term debt consists of the following:
In June 1998, the Company issued $50,000,000 in fixed-rate, private placement notes to five insurance companies. The term notes bear a weighted-average interest rate of 6.81%. At issuance, the term notes had maturities ranging from three to 10 years.
The Company's revolving credit agreement with banks, which matures on June 30, 2003, provides for maximum core borrowings of $60,000,000 and allows for maximum seasonal borrowings from March 1 to May 31 of $70,000,000. Interest on $6,600,000 of principal is payable at the bank's prevailing base rate (7.50% at December 31, 2000) or at alternative rates (ranging from 7.57% to 7.77% at December 31, 2000) elected by the Company as provided by the agreement for the remaining principal due. In addition, there is a 0.35% facility fee. At December 31, 2000, $16,400,000 was available for borrowing.
The Company has a seven-year, $7,000,000 notional amount interest rate swap agreement expiring in 2002, which converts existing floating-rate payments for 6.335% fixed-rate payments. The estimated cost to terminate this agreement at December 31, 2000, was $58,000.
The Company has $5,875,000 of industrial revenue bonds outstanding related to its Martins Ferry, Ohio, facility. The bonds will mature in 2014. The bonds are backstopped by an undrawn letter of credit of $6,231,000, which expires in April 2001, and are secured by mortgages on property and equipment acquired with the proceeds (net book value of $6,100,000 at December 31, 2000). Interest is payable quarterly at a rate based on the comparable tax-exempt market rates (5.10% at December 31, 2000). Under certain circumstances, the Company may convert the interest rate to a fixed rate.
The private placement notes, revolving credit agreement and industrial revenue bonds contain various restrictive covenants, including limits on additional borrowings, lease payments and annual dividend payments; maintenance of certain operating and financial ratios; and maintenance of minimum net worth ($72,463,000 as of December 31, 2000). As a result of changes in market conditions and interest rates, the fair market value of the Company's private placement notes is estimated to be $53,000,000 at December 31, 2000. The carrying amount of the Company's other debt approximates fair market value. Interest payments were $7,108,000, $6,396,000 and $5,863,000 in the years ended December 31, 2000, 1999 and 1998, respectively. The annual maturities of long-term debt are as follows:
NOTE 5 LEASES AND OTHER COMMITMENTS
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 2000, 1999 and 1998 was approximately $18,900,000, $16,900,000 and $14,800,000, respectively. Future minimum lease payments are as follows:
At December 31, 2000, the Company was committed to purchasing the seed crop from 40,000 acres of land. The price will be determined at the prevailing market rate.
LESCO, Inc.
NOTE 6 INCOME TAXES
The provision for income taxes in the accompanying Consolidated Statements of Income consists of the following:
The provision for income taxes differs from the statutory rate as follows:
Income tax payments were $6,329,000, $7,200,000 and $2,877,000 in 2000, 1999 and 1998, respectively.
The significant components of deferred tax assets and liabilities are as follows:
As of December 31, 2000, the Company had net operating loss carryforwards of $1.3 million for federal income tax reporting purposes, which will expire in varying amounts, if unused, in years 2001 through 2011. These carryforwards relate to the acquisition of Tri Delta. During 2000, the Company utilized $188,000 of the carryforwards. As a result of the merger of the Tri Delta subsidiary and sufficient earnings trends, the Company determined that the valuation allowance was no longer required. Due to the increase in annual taxable income, the Company recognized a tax expense for the adjustment of deferred tax balances for the effect of an increased graduated tax rate.
NOTE 7 CAPITAL STOCK AND STOCK PLANS
STOCK OPTIONS: The Company has stock option plans that provide for the issuance of incentive stock options; non-qualified stock options; stock appreciation rights (SARs) either in connection with, or independent of, any option; and restricted and other share awards. The plans provide for the issuance of a maximum of 2,928,297 common shares to employees or directors. At December 31, 2000, there were 938,119 shares reserved for future grants, consisting of 803,602 under the 2000 Stock Incentive Plan, 22,100 under the 2000 Broad-Based Stock Option Plan, 25,417 under the 1987 discretionary share awards and 87,000 under the 1995 Directors' Stock Option Plan. Options issued pursuant to any of the Company's plans are exercisable for up to 10 years at an option price equal to the fair market value on the date the option was granted.
The Company has issued in the past, and may issue from time to time in the future, options outside of the Company's plans at an exercise price lower than fair market value in connection with the employment of key employees. Additional paid-in capital includes tax benefits of $60,000, $143,000 and $473,000 relating to the exercise of options in 2000, 1999 and 1998, respectively. The following table summarizes the changes in the outstanding options for the three years ended December 31, 2000:
LESCO, Inc.
The following table summarizes information about stock options outstanding as of December 31, 2000:
The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation expense has been recognized for the stock option plans, as permitted under previous accounting standards. Had compensation cost for the stock option plans been determined based on the fair value at the grant date in accordance with SFAS No. 123, the Company's net income and related earnings per share would have been changed to the pro forma amounts indicated below:
Included in these pro forma disclosures are stock options issued in 2000, 1999 and 1998 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 2000, 1999 and 1998, respectively: dividend yield of 0.97%, 0.87% and 0.71%; expected stock price volatility of 0.32, 0.32 and 0.29; risk-free interest rate of 4.95%, 6.50% and 4.70%; and expected lives of four years. This option valuation model requires input of highly subjective assumptions and, in management's opinion, does not provide a reliable single measure of fair value of its employee stock options.
The Company has an employment agreement with an executive officer that provides for the issuance of non-qualified stock options to purchase up to 300,000 common shares. Such options vested ratably over a five-year period beginning June 30, 1994, and will expire 10 years after each option vested. The exercise price per share is $9.33 for the first 60,000 common shares and $10.00 for the remaining 240,000 common shares. Options for 232,016 shares were outstanding and exercisable at December 31, 2000.
RIGHTS PLAN: The Company has a preferred share purchase rights plan, and declared a distribution of one Preferred Share Purchase Right (Right) on each outstanding common share. The Rights will become exercisable if a person or group acquires 20% or more of the Company's common shares, announces a tender offer for 20% or more of the common shares or is declared an "adverse person" by the Company's Board of Directors. Each Right entitles shareholders to buy one one-hundredth of a share of a new series of participating preferred shares at an exercise price of $75.00.
In addition, if a person or group acquires 20% or more of the Company's outstanding common shares, each Right will entitle its holder (other than such person or members of such group) to purchase one of the Company's common shares (subject to certain adjustments) for a price of $0.50 per share. If, after a person acquires 20% or more of the Company's common shares, the Company is acquired in a merger or other business combination transaction with such person, or 50% or more of its assets or earning power are sold, each Right will entitle its holder to purchase for a price of $0.50 per share a specified number of the acquiring company's common shares.
Prior to the acquisition by a person or group of 20% or more of the Company's common shares, the Rights are redeemable for $0.01 per right at the option of the Board of Directors. The Rights will expire on May 31, 2004.
LESCO, Inc.
PERFORMANCE PLAN: The Company has established long-term performance plans, which grant restricted common share awards to certain officers. These officers are entitled to receive common shares of the Company based upon certain performance criteria over a three-year performance period. Participants in the plans have the rights of shareholders, including the right to receive dividends and the right to vote. Compensation expense of $92,000 was recognized in 1999 under these plans, based upon the probability that certain threshold performance criteria would be met. In 2000, 18,376 shares with a fair market value of $389,000 for the 1998-2000 performance plan were forfeited. In 2000 and 1999, 26,402 and 35,497 shares were granted with a fair market value of $408,000 and $549,000, respectively. This activity is reflected in the Shareholders' Equity as "Unearned Compensation" and "Amortization of Unearned Compensation."
NOTE 8 DEFINED CONTRIBUTION RETIREMENT PLAN
The Company maintains a defined contribution retirement plan for its employees. The Company matches the contributions of participating employees on the basis of percentages specified in the plan. Company contributions to the plan were $791,000, $698,000 and $601,000 for 2000, 1999 and 1998, respectively.
NOTE 9 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earn- ings per share:
NOTE 10 BUSINESS SEGMENT INFORMATION
As a result of the Company's structural reorganization announced in January 2000, the Company elected to change the reporting of its business segments as of January 1, 2000, and restated its prior years' presentation to conform to the revised segment reporting. The Company changed from one reportable segment to four reportable operating segments, to include Product Supply, Lawn Care, Golf and Corporate, which are defined based on management responsibility.
The Product Supply division manufactures and distributes fertilizers, combination products, golf course accessories and turfgrass seed. The division also is responsible for purchasing raw materials and for purchasing and distributing turf protection products, turf care equipment and related parts, and golf course accessories. The Product Supply division sells exclusively to the Lawn Care and Golf divisions of the Company. However, to more fully utilize production capacity, Product Supply occasionally manufactures for third parties.
The Lawn Care division operates 232 LESCO Service Centers, which enable the Company to market its products on a localized basis. The primary products sold by the Lawn Care division are turf care products, including turf control products, fertilizer, grass seed and equipment. The Service Centers market and sell products principally to smaller lawn care companies, landscapers, nurseries, municipalities, churches and condominium associations. This division also markets and sells its products to large national and regional lawn care customers through a separate group of sales representatives. This division distributes selected products through Home Depot(TM) stores in the South, Mid-Atlantic and Northeast areas of the country, and sells a consumer line of lawn care products to nationwide retail stores under several brand names, including Scenic Green, Professional Turf Products, TruGreen, ChemLawn and Barefoot.
The Golf division markets and sells its products to private and public golf courses and other customers with large turf areas through Company sales personnel who operate a fleet of 78 LESCO Stores-on-Wheels. The primary products sold by the Golf division are turf care products, including turf control products, fertilizer, grass seed and equipment. These Stores-on-Wheels are well stocked with a wide variety of turf care products and golf course accessories, which are sold directly from the trucks. The Golf division has conventional sales representatives strategically located in the various markets to support the Stores-on-Wheels and sell to national golf customers. In addition, this division markets its products internationally, principally through foreign distributors.
The Corporate division includes the administrative functions of the Company, which support the Product Supply, Lawn Care and Golf divisions, and include Administration, Finance, Information Services, Legal and Human Resources.
The Company is engaged principally in the manufacture and marketing of turf care products to the professional sector of the green industry.
LESCO, Inc.
No significant intervening events materially affected the financial statements. The Company measures segment profit as operating profit. Net assets is defined as the sum of net accounts receivable, inventory and net property, plant and equipment, less accounts payable. Management utilizes this information as a basis to calculate the divisional return of capital employed. Depreciation and operating leases for specific Product Supply assets are allocated to Corporate for operating profit measures. Information on segments is as follows:
Segment information for periods prior to 1999 is not presented because it is impracticable to prepare the information.
NOTE 11 QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2000, and 1999:
(Loss) earnings per share amounts for each quarter are required to be computed independently and, therefore, may not equal the amount computed on an annual basis. During the fourth quarters of 2000 and 1999, net income decreased and increased by approximately $2,439,000 and $550,000, respectively, due to inventory adjustments. Also, during the fourth quarter of 1999, net income increased by approximately $608,000 due to changes in prior-quarter allowance for doubtful accounts and inventory estimates.