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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549   Form 10-Q þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2005 or o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from           to
 Commission File No. 0-13147  LESCO, Inc. (Exact name of registrant as specified in its charter)
 Ohio(State or other jurisdiction of
incorporation or organization)
    
    34-0904517(I.R.S. Employer Identification No.)1301 East Ninth Street, Suite 1300
Cleveland, Ohio(Address of principal executive offices)
    
    44114(Zip Code)
 Registrants telephone number, including area code
(216) 706-9250 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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes þNo o Number
of Common Shares, without par value, outstanding on May 2, 2005:
8,893,664.   1




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OFITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 6. EXHIBITSSIGNATURESEX-31(A) 302 CEO CertificationEX-31(B) 302 CFO CertificationEX-32(A) 906 CEO CertificationEX-32(B) 906 CFO Certification    Table of Contents  
 PART I FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS LESCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED For the Three Months Ended March 31,(Dollars in thousands, except per share data)
    
    2005
    
    
    2004Net sales
    
    $
    98,054
    
    
    $
    102,044Cost of product
    
    
    (65,013
    )
    
    
    (68,943
    )Distribution cost
    
    
    (9,689
    )
    
    
    (9,494
    )Gross profit on sales
    
    
    23,352
    
    
    
    23,607Selling expense
    
    
    (23,810
    )
    
    
    (21,850
    )General & administrative expense
    
    
    (7,768
    )
    
    
    (7,253
    )Merchant discounts and provision for doubtful accounts
    
    
    (2,050
    )
    
    
    (1,628
    )Pre-opening expense
    
    
    (157
    )
    
    
    (312
    )Other expense
    
    
    (102
    )
    
    
    (1
    )Other income
    
    
    179
    
    
    
    180Loss before interest and taxes
    
    
    (10,356
    )
    
    
    (7,257
    )Interest expense, net
    
    
    (317
    )
    
    
    (355
    )Loss before taxes
    
    
    (10,673
    )
    
    
    (7,612
    )Income tax (provision) benefit:Current
    
    
    
    
    
    
    (340
    )Deferred
    
    
    3,540
    
    
    
    3,309Change in valuation allowance
    
    
    (3,540
    )
    
    
    (3,309
    )
    
    
    
    (340
    )Net loss
    
    $
    (10,673
    )
    
    $
    (7,952
    )Loss per
common share:Diluted
    
    $
    (1.21
    )
    
    $
    (0.92
    )Basic
    
    $
    (1.21
    )
    
    $
    (0.92
    )Average number of common shares and common share equivalents outstanding:Diluted
    
    
    8,818,121
    
    
    
    8,677,507Basic
    
    
    8,818,121
    
    
    
    8,677,507
 See Notes to Consolidated Financial Statements. 2




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LESCO, INC.
CONSOLIDATED BALANCE SHEETS  UNAUDITED (Dollars in thousands)
    
    March 31, 2005
    
    
    March 31, 2004
    
    
    December 31, 2004CURRENT ASSETS:Cash and cash equivalents
    
    $
    9,150
    
    
    $
    12,497
    
    
    $
    8,101Accounts receivable
    
    
    9,653
    
    
    
    13,912
    
    
    
    16,931Inventories
    
    
    130,146
    
    
    
    114,861
    
    
    
    100,582Other
    
    
    3,087
    
    
    
    3,451
    
    
    
    3,126TOTAL CURRENT ASSETS
    
    
    152,036
    
    
    
    144,721
    
    
    
    128,740Property, plant and equipment, net
    
    
    25,506
    
    
    
    30,403
    
    
    
    26,019Other
    
    
    1,196
    
    
    
    2,543
    
    
    
    1,234$
    178,738
    
    
    $
    177,667
    
    
    $
    155,993CURRENT LIABILITIES:Accounts payable
    
    $
    76,059
    
    
    $
    73,405
    
    
    $
    56,371Accrued liabilities
    
    
    19,539
    
    
    
    17,047
    
    
    
    24,184Revolving credit facility
    
    
    24,751
    
    
    
    17,553
    
    
    
    7,303TOTAL CURRENT LIABILITIES
    
    
    120,349
    
    
    
    108,005
    
    
    
    87,858Long-term debt
    
    
    
    
    
    
    5,875
    
    
    
    Deferred  other
    
    
    1,741
    
    
    
    229
    
    
    
    1,612TOTAL LIABILITIES
    
    
    122,090
    
    
    
    114,109
    
    
    
    89,470SHAREHOLDERS EQUITY:Common shareswithout par value
19,500,000 shares authorized; 8,872,914 shares
issued and outstanding at March 31, 2005;
8,694,694 shares issued and outstanding at March
31, 2004 and 8,697,194 issued and outstanding at
December 31, 2004
    
    
    887
    
    
    
    869
    
    
    
    870Paid-in capital
    
    
    37,235
    
    
    
    34,898
    
    
    
    34,846Retained earnings
    
    
    20,964
    
    
    
    29,310
    
    
    
    31,637Unearned compensation
    
    
    (2,438
    )
    
    
    (1,519
    )
    
    
    (830
    )TOTAL SHAREHOLDERS EQUITY
    
    
    56,648
    
    
    
    63,558
    
    
    
    66,523$
    178,738
    
    
    $
    177,667
    
    
    $
    155,993
 See Notes to Consolidated Financial Statements. 3




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LESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITED For the Three Months Ended March 31,(Dollars in thousands)
    
    2005
    
    
    2004OPERATING ACTIVITIES:Net loss
    
    $
    (10,673
    )
    
    $
    (7,952
    )Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:Depreciation
    
    
    1,612
    
    
    
    1,869Amortization of deferred financing fees and other
    
    
    40
    
    
    
    40Loss (gain) on sale/disposal of fixed assets
    
    
    66
    
    
    
    (13
    )Decrease in accounts receivable
    
    
    7,278
    
    
    
    2,247Sale of accounts receivable
    
    
    
    
    
    
    3,119Increase in inventories
    
    
    (29,564
    )
    
    
    (21,281
    )Increase in accounts payable
    
    
    19,526
    
    
    
    29,458Amortization of unearned compensation
    
    
    192
    
    
    
    134(Increase) decrease in current income tax
    
    
    (32
    )
    
    
    3,960Decrease in other items
    
    
    (4,447
    )
    
    
    (1,445
    )NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    
    
    (16,002
    )
    
    
    10,136INVESTING ACTIVITIES:Proceeds on the sale of fixed assets
    
    
    1
    
    
    
    26Purchase of property, plant and equipment
    
    
    (1,166
    )
    
    
    (804
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (1,165
    )
    
    
    (778
    )FINANCING ACTIVITIES:Increase (decrease) in overdraft balances
    
    
    162
    
    
    
    (6,484
    )Proceeds from borrowings
    
    
    143,762
    
    
    
    124,667Reduction of borrowings
    
    
    (126,314
    )
    
    
    (122,655
    )Exercised stock options, net of treasury shares
    
    
    606
    
    
    
    106NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    18,216
    
    
    
    (4,366
    )Net change in cash and cash equivalents
    
    
    1,049
    
    
    
    4,992Cash and cash equivalents  Beginning of the period
    
    
    8,101
    
    
    
    7,505CASH AND CASH EQUIVALENTS  END OF THE PERIOD
    
    $
    9,150
    
    
    $
    12,497Supplemental disclosure of cash flow information:Interest paid, including letters of credit and unused facility fees
    
    $
    (299
    )
    
    $
    (233
    )Income taxes (paid) refunded
    
    $
    (32
    )
    
    $
    3,591
 See Notes to Consolidated Financial Statements. 4




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Description of Business and Segment Information LESCO,
Inc. (LESCO or the Company) is the
nations leading provider of lawn care, landscape, golf course
and pest control products to the $6 billion professional green and
pest control industries. Products distributed include turf control
products, fertilizer, combination fertilizer and control products
(combination products), grass seed, pest control products and equipment.
The Company currently distributes products through 279 Service Centers, 98
Stores-on-Wheels®, 30 direct sales representatives and other direct sales efforts. The Company
operates eight distribution hubs, three fertilizer blending
facilities and a grass seed processing
plant. Segment Information: The Selling and Support segments reported below are the segments of the
Company for which separate information is available and for which operating results are evaluated
regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing
performance. The Company maintains separate operating statements (Four-Wall P&Ls) for each selling
location. These Four-Wall P&Ls include the sales and cost of product and operating expenses
necessary to operate the individual selling locations. The Selling segment operating results
reflect the aggregate Four-Wall P&Ls of the selling locations adjusted for costs of zone and
regional management, sales commission expense and the portion of merchant discounts not charged to
the Four-Wall P&Ls. The Support segment represents the operating results and invested capital of all non-selling
locations including manufacturing facilities (blending facilities and seed processing plant),
distribution hubs and the corporate office. Below are the unaudited results for the Selling and Support segments for the three months
ended March 31: (Dollars in thousands)
    
    2005
    
    
    2004Net salesSelling
    
    $
    98,054
    
    
    $
    102,044Support
    
    
    
    
    
    
    $
    98,054
    
    
    $
    102,044Earnings (loss) before interest and taxesSelling
    
    $
    5,719
    
    
    $
    5,410Support
    
    
    (16,075
    )
    
    
    (12,667
    )$
    (10,356
    )
    
    $
    (7,257
    )Capital expendituresSelling
    
    $
    416
    
    
    $
    595Support
    
    
    750
    
    
    
    209$
    1,166
    
    
    $
    804Depreciation expenseSelling
    
    $
    299
    
    
    $
    272Support
    
    
    1,313
    
    
    
    1,597$
    1,612
    
    
    $
    1,869Intangible asset amortization expenseSelling
    
    $
    
    
    
    $
    Support
    
    
    40
    
    
    
    40$
    40
    
    
    $
    40Identifiable assetsSelling
    
    $
    90,673
    
    
    $
    89,770Support
    
    
    88,065
    
    
    
    87,897$
    178,738
    
    
    $
    177,667
 5




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Note 2. Summary of Significant Accounting Policies 1. Principles of Consolidation:The consolidated financial statements include the accounts of
LESCO and its subsidiaries after elimination of intercompany transactions and accounts. 2. Earnings per Share:The Company presents both basic and diluted earnings per share (EPS)
amounts. Basic EPS is calculated by dividing net loss by the weighted average number of
common shares outstanding during the quarter. Diluted EPS is based upon the weighted average number
of common shares and common share equivalents outstanding during the
quarter utilizing the treasury
stock method for stock options. Common share equivalents are excluded from the EPS computation in
periods in which they have an anti-dilutive effect. Stock options for which the exercise price
exceeds the average market price over the period have an anti-dilutive effect on EPS and,
accordingly, are excluded from the calculation. Weighted average stock options of 327,944 for the three months ended March 31, 2005, and
173,120 for the same period in 2004, were excluded from the diluted EPS calculation because they
were anti-dilutive due to net losses. 3. Stock Options: The Company uses the intrinsic-value method of accounting for stock-based
awards granted to employees and does not issue options below market
price on the date of grant and, accordingly, does not recognize compensation expense for its
stock-based awards to employees in the Consolidated Statements of Operations. The following table
reflects pro forma net loss and loss per share had the Company elected to adopt the fair
value approach of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation: Three Months Ended March 31,(Dollars in thousands, except per share data)
    
    2005
    
    
    2004Net loss as reported
    
    $
    (10,673
    )
    
    $
    (7,952
    )Less: stock option expense, net of tax
    
    
    (74
    )
    
    
    (133
    )Pro forma net loss
    
    $
    (10,747
    )
    
    $
    (8,085
    )Loss per diluted shareAs reported
    
    $
    (1.21
    )
    
    $
    (0.92
    )Pro forma
    
    $
    (1.22
    )
    
    $
    (0.93
    )Loss per basic shareAs reported
    
    $
    (1.21
    )
    
    $
    (0.92
    )Pro forma
    
    $
    (1.22
    )
    
    $
    (0.93
    )
 4. Accounts Receivable: Accounts receivable consist of the following : March 31,
    
    
    December 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    2004Supplier rebate programs
    
    $
    3,135
    
    
    $
    3,559
    
    
    $
    12,139Trade receivablesRecourse
    
    
    
    
    
    
    2,611
    
    
    
    14Owned  domestic
    
    
    6,679
    
    
    
    9,705
    
    
    
    4,477Owned  international
    
    
    1,735
    
    
    
    2,260
    
    
    
    1,848Other
    
    
    931
    
    
    
    706
    
    
    
    1,283Allowance for doubtful accounts
    
    
    (2,827
    )
    
    
    (4,929
    )
    
    
    (2,830
    )$
    9,653
    
    
    $
    13,912
    
    
    $
    16,931
 6




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The Company earns product discounts under various supplier rebate programs, which are recorded
as accounts receivable and a reduction to the cost of inventory when earned. When the related
inventory is sold, the inventory valuation reserves are recognized as reductions to cost of
product. LESCO utilizes GE Capital Financial Inc., dba GE Business Credit Services (GEBCS), for the
Companys private label business credit program. Under its Credit Agreement with GEBCS, GEBCS
extends commercial credit to qualified customers of LESCO and funds the program sales, less program
fees and discounts, within three business days. The Credit Agreement also provides the Company the
option of extending deferred payment terms to customers through the payment of incremental
promotional discounts. The in-transit funds are recognized by the Company as cash equivalents.
The program fees and discounts and promotional discounts are recognized as merchant discounts in
the Consolidated Statement of Operations. GEBCS is the exclusive owner of the program accounts
and, except for the recourse account portfolio discussed below, bears all credit losses. The
initial term of the Credit Agreement is through December 30, 2008 with automatic three-year
renewals unless either party terminates at least six months prior to the end of the expiration of a
term. The owned domestic credit accounts are accounts that did not qualify for sale to GEBCS or for
the credit recourse portfolio. LESCO has retained the ownership and management of the owned
domestic credit accounts. The Credit Agreement does not allow for the ownership of international credit accounts by
GEBCS. As such, LESCO has retained the ownership and management of international accounts. All
international accounts are denominated in U.S. dollars. GEBCS has sole discretion under the Credit Agreement to approve or decline prospective account
holders. LESCO may request GEBCS to include declined accounts in a portfolio of credit recourse
accounts. LESCO bears all credit losses on credit recourse accounts and pays a fee to GEBCS to
manage the credit recourse portfolio. LESCO did not recognize the initial sale of recourse
accounts to GEBCS as of December 30, 2003. Therefore, all recourse receivable balances that
existed at December 30, 2003 (the date of the GEBCS transaction) are recognized as accounts
receivable by the Company, along with a corresponding borrowing from
GEBCS. All of these balances were
subsequently collected by GEBCS and there is no remaining balance at March 31, 2005. Sales activity on
recourse accounts subsequent to December 30, 2003 is not recognized on the Companys balance
sheets. A reconciliation of total recourse account balances to the receivable portion owned by the
Company and recorded in the balance sheets is as follows: March 31,
    
    
    December 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    2004Total recourse account balances
    
    $
    5,221
    
    
    $
    5,973
    
    
    $
    4,679Accounts owned by GEBCS
    
    
    (5,221
    )
    
    
    (3,362
    )
    
    
    (4,665
    )Recourse receivables owned by LESCO
    
    $
    
    
    
    $
    2,611
    
    
    $
    14
 In the allowance for doubtful accounts, the Company provides for expected losses from all
owned receivables and GEBCS-owned recourse accounts. Expected losses are estimated based upon the
number of days the accounts are past due, historical loss experience of the Company, historical
loss experience of credit portfolios with characteristics similar to the Companys portfolio and
the current business environment. 5. Inventories: Inventories consist of the following: March 31,
    
    
    December 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    2004Finished goods and purchased inventoriesSelling locations
    
    $
    68,307
    
    
    $
    61,016
    
    
    $
    52,063Distribution hubs and plants
    
    
    45,616
    
    
    
    43,589
    
    
    
    35,119Capitalized procurement, warehousing and distribution costs
    
    
    10,679
    
    
    
    8,469
    
    
    
    8,512Less: Markdown, shrink and vendor discount reserves
    
    
    (2,380
    )
    
    
    (1,217
    )
    
    
    (3,338
    )Inventory held on consignment
    
    
    (8,757
    )
    
    
    (8,003
    )
    
    
    (6,919
    )113,465
    
    
    
    103,854
    
    
    
    85,437Raw Materials
    
    
    16,681
    
    
    
    11,007
    
    
    
    15,145$
    130,146
    
    
    $
    114,861
    
    
    $
    100,582
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Inventories are valued at the lower of cost (First In, First Out cost method) or market.
Consignment inventory is considered purchased at time of sale while, concurrently, cost of product
is recognized. Procurement, warehousing and distribution costs to bring the products to market are
capitalized to inventory on hand and expensed to distribution cost when the inventory is sold. A
markdown reserve is provided for markdown of inventory to net realizable value. Shrink reserves are
recorded for expected inventory shrink and earned supplier discounts of inventory remaining on
hand. 6. 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 are depreciated over three to 12 years. Leasehold improvements are depreciated
over the life of the initial lease term, which typically is five years. Expenditures for
maintenance and repairs are charged to expense as incurred. Additions and improvements are
capitalized. During the second quarter of 2004, the Company sold its Avon Lake, Ohio distribution facility
for $1.5 million in cash. Based on the remaining net book value of the assets sold, this resulted
in a loss on sale of less than $0.1 million. The distribution operations for customer orders
previously fulfilled from the Avon Lake facility were transferred to a third party logistics
provider based in Columbus, Ohio. The Company currently retains certain properties of demised operations that are being held for
sale. There is $49,000 recorded as an asset for these properties. All future costs incurred to
prepare these sites for sale, including environmental testing and environmental remediation costs
will be capitalized up to the realizable market value of each respective property. Other assets
held for sale of $274,000 were sold in 2004 incurring a $264,000 loss on sale. In January 2005, LESCO announced that it retained Western Reserve Partners LLC to continue and
advance its exploration of supply chain alternatives, including the possibility of the disposition
of all or a portion of its distribution and manufacturing assets that had a net book value of
approximately $15 million at March 31, 2005. The Company's goal is to sell
these assets to a financial or strategic buyer and enter into a long-term supply contract with the
buyer before the end of 2005. Property, plant and equipment, net consists of the following: March 31, 2005
    
    March 31, 2004
    
    December 31, 2004Selling
    
    
    
    
    
    
    
    
    
    
    Selling
    
    
    
    
    
    
    
    
    
    
    Selling(Dollars in thousands)
    
    Locations
    
    
    Support
    
    
    Total
    
    
    Locations
    
    
    Support
    
    
    Total
    
    
    Locations
    
    
    Support
    
    
    TotalLand
    
    $
    
    
    
    $
    600
    
    
    $
    600
    
    
    $
    
    
    
    $
    834
    
    
    $
    834
    
    
    $
    
    
    
    $
    600
    
    
    $
    600Buildings and improvements
    
    
    2,943
    
    
    
    18,238
    
    
    
    21,181
    
    
    
    1,916
    
    
    
    21,596
    
    
    
    23,512
    
    
    
    1,533
    
    
    
    19,150
    
    
    
    20,683Machinery and equipment
    
    
    4,098
    
    
    
    19,708
    
    
    
    23,806
    
    
    
    3,799
    
    
    
    20,493
    
    
    
    24,292
    
    
    
    4,177
    
    
    
    20,459
    
    
    
    24,636Furniture and fixtures
    
    
    5,961
    
    
    
    30,780
    
    
    
    36,741
    
    
    
    6,099
    
    
    
    29,537
    
    
    
    35,636
    
    
    
    6,783
    
    
    
    29,334
    
    
    
    36,117Subtotal
    
    
    13,002
    
    
    
    69,326
    
    
    
    82,328
    
    
    
    11,814
    
    
    
    72,460
    
    
    
    84,274
    
    
    
    12,493
    
    
    
    69,543
    
    
    
    82,036Less: Accumulated depreciation
    
    
    (7,456
    )
    
    
    (49,366
    )
    
    
    (56,822
    )
    
    
    (7,096
    )
    
    
    (46,775
    )
    
    
    (53,871
    )
    
    
    (7,171
    )
    
    
    (48,846
    )
    
    
    (56,017
    )Property, plant and equipment, net
    
    $
    5,546
    
    
    $
    19,960
    
    
    $
    25,506
    
    
    $
    4,718
    
    
    $
    25,685
    
    
    $
    30,403
    
    
    $
    5,322
    
    
    $
    20,697
    
    
    $
    26,019
 Depreciation expense is included in the following: For the Three Months Ended March 31,(Dollars in thousands)
    
    2005
    
    
    2004Cost of product
    
    $
    485
    
    
    $
    517Distribution cost
    
    
    168
    
    
    
    242Selling expense
    
    
    299
    
    
    
    272General and administrative expense
    
    
    660
    
    
    
    838Total
    
    $
    1,612
    
    
    $
    1,869
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7. Borrowings Borrowings consist of the following: March 31,
    
    
    December 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    2004Current:Revolving credit facility
    
    $
    24,751
    
    
    $
    17,553
    
    
    $
    7,303Long-term:Industrial revenue bonds
    
    $
    
    
    
    $
    5,875
    
    
    $
    
 Revolving Credit Facility On December 30, 2003, the Company entered into a $50 million Revolving Credit Facility (the
Facility) which replaced a prior credit facility. The Facility matures December 30, 2006 and is
secured by inventory, owned receivables, equipment, investment interests, real property interests,
and general intangibles including intellectual property. The Facility bears interest at LIBOR plus
2.0% to 2.5%, based on the level of borrowings, and requires the payment of a facility fee ranging
from 0.4% to 0.5% on the unused portion of availability. Availability under the Facility is
determined by a borrowing base formula calculated on eligible inventory. As of March 31, 2005,
there was $46.5 million available under the borrowing base formula, with unused borrowing capacity
of $18.4 million. At March 31, 2005, the Company had borrowings of $24.8 million on the facility.
Letters of credit, up to a maximum of $20 million, are also available under the Facility and are
considered outstanding borrowings when calculating the unused portion of availability. Letters of
credit in the aggregate amount of $3.3 million were outstanding as of March 31, 2005. Letter of
credit fees range from 2.0% to 2.5% with an issuance fee ranging from 0.125% to 0.150%. The Facility requires the maintenance of certain covenants, with the only financial covenant
being the fixed charge coverage ratio. The Company was in compliance with the Facility covenants
as of March 31, 2005. 8. Asset Rationalization and Severance Expense Major components of the remaining reserves and accruals for asset rationalization and
severance expense as of March 31, 2005 and December 31, 2004 are as follows: Asset Rationalization AccrualLease
    
    
    Other Exit
    
    
    
    
    
    
    Severance(Dollars in thousands)
    
    Costs
    
    
    Costs
    
    
    Total
    
    
    Accrual
    
    
    TotalAsset rationalization and severance
accruals at December 31, 2004
    
    $
    228
    
    
    $
    222
    
    
    $
    450
    
    
    $
    209
    
    
    $
    6592005 ActivityAdditions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    9Utilized/payments
    
    
    (40
    )
    
    
    (54
    )
    
    
    (94
    )
    
    
    (87
    )
    
    
    (181
    )Asset rationalization reserves and
severance accruals at March 31, 2005
    
    $
    188
    
    
    $
    168
    
    
    $
    356
    
    
    $
    131
    
    
    $
    487
 9




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##### Table of Contents



9. Detail of Certain Balance Sheets Accounts March 31,
    
    
    December 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    2004Other current assets:Other prepaids
    
    $
    1,860
    
    
    $
    1,761
    
    
    $
    1,426Prepaid insurance
    
    
    991
    
    
    
    824
    
    
    
    1,513Notes receivable
    
    
    187
    
    
    
    592
    
    
    
    187Assets held for sale
    
    
    49
    
    
    
    274
    
    
    
    $
    3,087
    
    
    $
    3,451
    
    
    $
    3,126Other non-current assets:Notes receivable
    
    $
    454
    
    
    $
    1,496
    
    
    $
    443Store deposits
    
    
    539
    
    
    
    574
    
    
    
    550Deferred financing charges
    
    
    121
    
    
    
    387
    
    
    
    172Miscellaneous deposits
    
    
    44
    
    
    
    86
    
    
    
    69Other prepaids
    
    
    38
    
    
    
    
    
    
    
    $
    1,196
    
    
    $
    2,543
    
    
    $
    1,234Accounts payable:Accounts payable
    
    $
    70,035
    
    
    $
    65,424
    
    
    $
    50,519Overdraft balances
    
    
    6,024
    
    
    
    5,370
    
    
    
    5,838Accounts payable to GEBCS for recourse accounts receivable
    
    
    
    
    
    
    2,611
    
    
    
    14$
    76,059
    
    
    $
    73,405
    
    
    $
    56,371Accrued liabilities:Accrued non-income taxes
    
    $
    3,182
    
    
    $
    4,422
    
    
    $
    3,043Commissions and management bonuses
    
    
    1,747
    
    
    
    1,843
    
    
    
    6,008Salaries and wages
    
    
    1,493
    
    
    
    1,238
    
    
    
    469Insurance  hospitalization and workers compensation
    
    
    2,387
    
    
    
    2,270
    
    
    
    2,794Asset rationalization
    
    
    356
    
    
    
    986
    
    
    
    450Insurance  property and casualty
    
    
    1,580
    
    
    
    1,049
    
    
    
    1,897Severance
    
    
    131
    
    
    
    271
    
    
    
    209Vendor contract termination
    
    
    2,849
    
    
    
    
    
    
    
    3,287Other
    
    
    5,814
    
    
    
    4,968
    
    
    
    6,027$
    19,539
    
    
    $
    17,047
    
    
    $
    24,184
 10




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##### Table of Contents



10. Detail of Certain Statements of Operations Accounts For the Three Months Ended March 31,(Dollars in thousands)
    
    2005
    
    
    2004Net sales:Gross sales
    
    $
    99,811
    
    
    $
    102,864Agency sales
    
    
    (322
    )
    
    
    Freight revenue
    
    
    163
    
    
    
    306Customer discounts, rebates and sales adjustments
    
    
    (1,598
    )
    
    
    (1,126
    )$
    98,054
    
    
    $
    102,044Merchant discounts and provisions for doubtful accounts:Merchant discountsMulti-purpose credit programs
    
    $
    (300
    )
    
    $
    (306
    )Private label business credit programs
    
    
    (1,118
    )
    
    
    (1,047
    )Private label promotional discounts
    
    
    (574
    )
    
    
    (209
    )Provision for doubtful accounts
    
    
    (30
    )
    
    
    Customer finance revenue
    
    
    85
    
    
    
    103Other
    
    
    (113
    )
    
    
    (169
    )$
    (2,050
    )
    
    $
    (1,628
    )Other expense:Loss on sale/disposal of fixed assets
    
    
    (66
    )
    
    
    Other
    
    
    (36
    )
    
    
    (1
    )$
    (102
    )
    
    $
    (1
    )Other income:Vendor payment discounts
    
    
    166
    
    
    
    129Other
    
    
    13
    
    
    
    38Gain on sale/disposal of fixed assets
    
    
    
    
    
    
    13$
    179
    
    
    $
    180
 11




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##### Table of Contents



LESCO, INC. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Organization of Information Managements Discussion and Analysis provides a narrative on the Companys financial
performance and condition that should be read in conjunction with the accompanying consolidated
financial statements. It includes the following sections:  
    Overview
    Consolidated Results
    Business Segment Results
    Liquidity and Capital Resources
    Critical Accounting Policies and Estimates
    Forward Looking Statements OVERVIEW LESCO is the nation's leading provider of lawn care, landscape, golf course and pest control products to the $6 billion professional green and pest control industries. The professional users of our products include lawn care and landscape firms and the
employees of a variety of commercial, governmental, institutional and industrial establishments,
including golf courses, sod farms, airports, cemeteries, professional sports organizations,
universities, schools, commercial properties and numerous other organizations that use in-house
employees to maintain lawns, grounds and gardens along with pest management professionals. We track our customers through two customer sectors: Lawn Care and Golf. Gross sales for these sectors for the first quarter of 2005 and 2004 were as follows: (Dollars in millions)
    
    2005
    
    
    2004Lawn Care
    
    $
    84.3
    
    
    $
    85.7Golf
    
    
    15.5
    
    
    
    17.2$
    99.8
    
    
    $
    102.9
 The separation of our customers into these two sectors is important as distribution to the
sectors is vastly different and their growth prospects vary significantly. Our Lawn Care sector includes all non-golf related customers and is dominated by lawn care and
landscape firms. Historically, industry-wide distribution of products into this sector has been
fragmented and inefficient. We believe that our model of Service Centers and direct sales provides
efficiency to the sectors distribution channels through easily accessible, strategically
positioned real estate, where we provide agronomic expertise through our 279 Service Centers and
direct sales associates with products specifically targeted to the Lawn Care sector. We estimate
the market for our consumable Lawn Care products at $6.0 billion of which $2.8 billion is in the
professional sector and $3.2 billion is in the consumer sector. Independent research indicates
that organic growth in the industry is expected to exceed 7% annually for the next several years
due to the aging of the baby boomers and their increasing desire to contract lawn care
professionals, the higher number of two-income families and continued time constraints on
consumers. The golf industry is a smaller market estimated at $1.4 billion and is not expected to grow
significantly during the near future, nor do we believe our opportunities are as great in this
sector as they are in the Lawn Care sector. Over the past few years, the industry has experienced
a decline in annual rounds of golf played, which has decreased the budgets of golf course
superintendents. The ability to capture incremental market share is limited as distribution of
products to the golf industry is dominated by a few national and regional distributors. However,
we anticipate that we will be able to extend our presence in under-serviced markets, as we
implement a more efficient and lower cost Stores-on-Wheels operating model, which we believe will
allow us to expand our fleet and our customer base. We currently
operate 98 Stores-on-Wheels. 12




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##### Table of Contents



RESULTS OF OPERATIONS Sales: The following table provides supplemental detail of sales by customer sector and
transacting selling locations: For the Three Months Ended March 31,2005
    
    
    2004
    
    
    % ChangeOther
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    OtherService
    
    
    Selling
    
    
    
    
    
    
    Service
    
    
    Selling
    
    
    
    
    
    
    Service
    
    
    Selling(Dollars in millions)
    
    Centers
    
    
    Locations
    
    
    Total
    
    
    Centers
    
    
    Locations
    
    
    Total
    
    
    Centers
    
    
    Locations
    
    
    TotalLawn care
    
    $
    64.8
    
    
    $
    19.5
    
    
    $
    84.3
    
    
    $
    65.2
    
    
    $
    20.5
    
    
    $
    85.7
    
    
    
    (0.6
    )%
    
    
    (4.9
    )%
    
    
    (1.6
    )%Golf
    
    
    4.3
    
    
    
    11.2
    
    
    
    15.5
    
    
    
    3.7
    
    
    
    13.5
    
    
    
    17.2
    
    
    
    16.2
    
    
    
    (17.0
    )
    
    
    (9.9
    )Gross sales
    
    $
    69.1
    
    
    $
    30.7
    
    
    
    99.8
    
    
    $
    68.9
    
    
    $
    34.0
    
    
    
    102.9
    
    
    
    0.3
    %
    
    
    (9.7
    )%
    
    
    (3.0
    )Agency sales
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Freight revenue
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    (33.3
    )Customer discounts, rebates and sales adjustments
    
    
    (1.6
    )
    
    
    
    
    
    
    
    
    
    
    (1.2
    )
    
    
    
    
    
    
    
    
    
    
    33.3Net sales
    
    
    
    
    
    
    
    
    
    $
    98.1
    
    
    
    
    
    
    
    
    
    
    $
    102.0
    
    
    
    
    
    
    
    
    
    
    
    (3.8
    )%
 Service Centers: Service Center gross sales reflect sales transacted through our 275
Service Centers in operation as of March 31, 2005, including one new Service Center opened during
the first quarter 2005. The total increase of 0.3% reflects a
same-store sales (excluding stores opened in
2005 and 2004) decrease of 4.1% and an increase of 4.9% from new (2005 and 2004 openings) Service
Center sales of $3.4 million. The comparable-store sales decrease was due to the extended cold
weather and snowfall in March 2005, which delayed sales into April. Same-store sales for the first
two months of 2005 increased 3.3%. We plan to open 30 to 35 Service Centers in 2005. Below is a summary of first quarter 2005 and 2004 Service Center Sales by period opened: For the Three Months Ended March 31,
    
    
    Variance(Dollars in millions)
    
    2005
    
    
    2004
    
    
    Dollars
    
    
    %Stores opened:Prior to 2003
    
    $
    62.1
    
    
    $
    65.5
    
    
    $
    (3.4
    )
    
    
    (5.2
    )%2003
    
    
    3.6
    
    
    
    3.0
    
    
    
    0.6
    
    
    
    20.0Comparative stores
    
    
    65.7
    
    
    
    68.5
    
    
    
    (2.8
    )
    
    
    (4.1
    )2004
    
    
    3.4
    
    
    
    0.4
    
    
    
    3.0
    
    
    
    750.02005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    69.1
    
    
    $
    68.9
    
    
    $
    0.2
    
    
    
    0.3
    %
 Other Selling Locations: All other gross sales reflect sales transacted through our direct
sales programs and our Stores-on-Wheels. The decrease of 9.7% is attributable to the
year-over-year decline in sales to retail and international customers along with a 17.0% decrease
in sales to customers in the golf industry as inclement weather has also delayed the start of
business with golf customers located in Northeast and Midwest regions of the country. We continue
to evaluate the return on investment relative to our contract accounts and have instituted
disciplines to assure contracts meet acceptable return thresholds. This program has, on occasion,
resulted in lost contract sales, and we will continue to cull national account sales that do not
produce an acceptable level of return on our investment. Agency Sales, Freight Revenue and Customer Discounts, Rebates and Sales Adjustments: The
Company has entered into agency agreements with certain of its suppliers whereby the Company
operates as a sales agent of those suppliers. The suppliers retain title to their merchandise
until it is sold by the Company and determine the prices at which LESCO can sell the suppliers
merchandise. As such, the Company recognizes sales on a net basis and records only its product
margin as revenue. Therefore, the $0.3 million of agency sales for first quarter 2005 represent
the portion of gross revenue that exceeds the Companys net product margin. Freight revenue, which
represents fees charged to customers in sales transactions for shipping and handling, remained
relatively flat on a year-over-year basis. Customer discounts and rebates declined slightly in the
first quarter of 2005 compared to the same period in 2004 as the Company remains stringent on its
qualifications for its customers to obtain rebates. Gross Profit on Sales: For the Three Months Ended March 31,2005
    
    
    2004(Dollars in millions)
    
    Dollars
    
    
    % of Net Sales
    
    
    Dollars
    
    
    % of Net SalesProduct margin
    
    $
    33.0
    
    
    
    33.7
    %
    
    $
    33.1
    
    
    
    32.4
    %Distribution cost
    
    
    (9.7
    )
    
    
    (9.9
    )
    
    
    (9.5
    )
    
    
    (9.3
    )Gross profit
    
    $
    23.3
    
    
    
    23.8
    %
    
    $
    23.6
    
    
    
    23.1
    %
 Product
margin improved 130 basis points in the first quarter of 2005 compared to the like
period in 2004. The product margin improvement was achieved through expanding margins in the
Companys combination, control and grass seed product categories. This expansion in product margin
is despite a year-over-year comparative price increase for urea of approximately 14% for the first 13




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##### Table of Contents



quarter of 2005. Urea, our largest single purchased product or raw material, is used as the
nitrogen source for blended fertilizers and combination products. Urea is a second derivative of
natural gas and its cost has increased with the increased cost of natural gas. Urea can represent
approximately 8% to 10% of our cost of sales. For 2005, we entered into a contract with our urea
supplier to fix the cost of a majority of our urea needs at a price reflecting the prevailing
market. The new contract rate for urea purchases increased approximately 14% over the prior year
contract rate. In the first quarter of 2005, our warehouse and distribution costs increased slightly over the
same period in 2004. Due to the year-over-year sales decline, we deleveraged the fixed costs
included in these operating expenses. As a percentage of net sales, these costs increased to 9.9%
in the first quarter of 2005 from 9.3% for the same quarter in 2004. Operating Expenses: For the Three Months Ended March 31,2005
    
    
    2004
    
    
    Change% of Net
    
    
    
    
    
    
    % of Net(Dollars in millions)
    
    Dollars
    
    
    Sales
    
    
    Dollars
    
    
    Sales
    
    
    Dollars
    
    
    %
    
    
    Basis PointsSelling expense
    
    $
    23.8
    
    
    
    24.3
    %
    
    $
    21.8
    
    
    
    21.4
    %
    
    $
    2.0
    
    
    
    9.2
    %
    
    290 bpsMerchant discounts/provision
for doubtful accounts
    
    
    2.1
    
    
    
    2.1
    
    
    
    1.6
    
    
    
    1.6
    
    
    
    0.5
    
    
    
    29.6
    
    
    50   bps$
    25.9
    
    
    
    26.4
    %
    
    $
    23.4
    
    
    
    23.0
    %
    
    $
    2.5
    
    
    
    10.6
    %
    
    340 bps
 Selling Expense Selling expense includes all operating expenses of Service Centers and Stores-on-Wheels,
direct sales, sales management, customer service and marketing expense. Approximately $1.2 million
of the $2.0 million increase in expense is due to incremental operating costs for Service Centers
opened in 2005 and 2004. A portion of the remaining increase on a year-over year basis is due to
various employee incentive and training programs targeted to enhance the Companys focus on
increasing sales and profitability. Merchant Discounts and Provision for Doubtful Accounts As a percentage of net sales, merchant discounts and provision for doubtful accounts expense
increased 50 basis points year-over-year. In December 2003, we entered into a private label
business credit program agreement with GEBCS and sold approximately $57 million of our trade
accounts receivable portfolio to GEBCS and in 2004, we sold an additional $6 million of trade
accounts receivable to GEBCS. For the first quarter of 2005, total merchant discount expense,
including GEBCS, for normal payment terms was 1.5% of net sales.
Promotional discount expense was an incremental 0.6% of net
sales including approximately 0.3% for
extended payment terms for certain customer accounts with the majority incurred for a single, large
national sales account. In the first quarter of 2004, discount expense for normal payment terms was 1.4% of net
sales while promotional discount expense was an additional 0.2% of net sales. General and Administrative Expense: For the Three Months Ended March 31,(Dollars in millions)
    
    2005
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    ChangeGeneral and administrative expense
    
    $
    7.8
    
    
    
    
    
    
    $
    7.3
    
    
    
    
    
    
    $
    0.5
 General and administrative expense increased by $0.5 million in first quarter 2005 to $7.8
million, or 7.9% of net sales, compared to $7.3 million, or 7.1% of net sales, in first quarter
2004. The increase in expense year-over-year is due to the timing of the incurrence of certain
payroll taxes related to employee commissions and management bonus payments. Additionally, the
Company has incurred incremental expenses for license fees to operate in various states along with
initial costs related to the proposed transaction to sell its manufacturing and distribution
assets. The increase in these costs was partially mitigated by an approximate $0.3 million savings
in corporate headquarter expenses as the Company reduced its lease obligation for its corporate
offices in the fourth quarter of 2004. 14




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##### Table of Contents



Pre-Opening Expense For the Three Months Ended March 31,(Dollars in millions)
    
    2005
    
    
    2004
    
    
    ChangePre-opening expense
    
    $
    0.2
    
    
    $
    0.3
    
    
    $
    (0.1
    )Number of Service Centers opened
during the period
    
    
    1
    
    
    
    9
    
    
    
    (8
    )
 Pre-opening expense decreased $0.1 million in first quarter 2005 compared to first quarter
2004 results. Pre-opening expense per new Service Center remained consistent between years.
Pre-opening expense, which consists primarily of grand opening advertising, payroll, supplies,
distribution and storage costs, is expensed as incurred and, thus,
some costs were incurred in
the first quarter of 2005 for stores that are expected to open in the second quarter. Other Expense/(Income): For the Three Months Ended March 31,(Dollars in millions)
    
    2005
    
    
    2004
    
    
    ChangeOther expense
    
    $
    0.1
    
    
    $
    
    
    
    $
    0.1Other income
    
    
    (0.2
    )
    
    
    (0.2
    )
    
    
    $
    (0.1
    )
    
    $
    (0.2
    )
    
    $
    0.1
 The increase in other expense is primarily due to a minor loss that was incurred on the sale
of assets that were no longer utilized in operating the business. Interest Expense, Net: For the Three Months Ended March 31,(Dollars in millions)
    
    2005
    
    
    2004
    
    
    ChangeInterest expense, net
    
    $
    0.3
    
    
    $
    0.4
    
    
    $
    (0.1
    )
 Interest expense, net remained relatively flat in the first quarter of 2005 as compared to the
same quarter in 2004. While the outstanding debt at the end of the first quarter was higher in 2005
compared to 2004 and the interest rate was higher year-over-year, the average debt during the first
quarter of 2005 was lower versus the same period last year. Pre-Tax Earnings: For the Three Months Ended March 31,(Dollars in millions)
    
    2005
    
    
    2004
    
    
    ChangeLoss before taxes
    
    $
    (10.7
    )
    
    $
    (7.6
    )
    
    $
    (3.1
    )
 In
the first quarter 2005, the Company opened one Service Center location to augment the 48 new
Service Center openings in 2004 and 2003. Management views new Service Centers as the primary
method to leverage our cost base and grow earnings consistently over the long term. The Company
currently plans to open 13-16 new Service Centers in the second quarter of 2005. Below are the
operating results for the first quarter of 2005 compared to the same period in 2004 for all Service
Centers opened during 2003, 2004 and the first quarter of 2005: 15




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##### Table of Contents



For the Three Months Ended March 31,2005
    
    
    2004Class of 2005
    
    
    Class of 2004
    
    
    Class of 2003
    
    
    
    
    
    
    Class of 2004
    
    
    Class of 2003(Dollars in thousands)
    
    (1 Store)
    
    
    (27 Stores)
    
    
    (21 Stores)
    
    
    Total
    
    
    (9 Stores)
    
    
    (21 Stores)
    
    
    TotalSales
    
    $
    40
    
    
    $
    3,392
    
    
    $
    3,611
    
    
    $
    7,043
    
    
    $
    450
    
    
    $
    2,957
    
    
    $
    3,407Cost of product
    
    
    (28
    )
    
    
    (2,322
    )
    
    
    (2,439
    )
    
    
    (4,789
    )
    
    
    (305
    )
    
    
    (2,020
    )
    
    
    (2,325
    )Distribution cost
    
    
    (6
    )
    
    
    (214
    )
    
    
    (206
    )
    
    
    (426
    )
    
    
    (96
    )
    
    
    (154
    )
    
    
    (250
    )Gross profit on sales
    
    
    6
    
    
    
    856
    
    
    
    966
    
    
    
    1,828
    
    
    
    49
    
    
    
    783
    
    
    
    832Selling expense
    
    
    (74
    )
    
    
    (1,312
    )
    
    
    (1,038
    )
    
    
    (2,424
    )
    
    
    (229
    )
    
    
    (1,046
    )
    
    
    (1,275
    )Merchant discount expense
    
    
    (1
    )
    
    
    (40
    )
    
    
    (53
    )
    
    
    (94
    )
    
    
    (6
    )
    
    
    (40
    )
    
    
    (46
    )Pre-opening expense
    
    
    (157
    )
    
    
    
    
    
    
    
    
    
    
    (157
    )
    
    
    (312
    )
    
    
    
    
    
    
    (312
    )Loss before
interest and taxes
    
    $
    (226
    )
    
    $
    (496
    )
    
    $
    (125
    )
    
    $
    (847
    )
    
    $
    (498
    )
    
    $
    (303
    )
    
    $
    (801
    )
 As a result of the foregoing factors, including the difficult weather conditions in March
2005 along with the operating results of new Service Centers opened in 2003, 2004 and the first
quarter of 2005 that have not yet matured in their operating results, the Company had a pre-tax
loss of $10.7 million for the quarter ended March 31, 2005 compared to a pre-tax loss of $7.6
million for the quarter ended March 31, 2004. Income Taxes and Net
Loss: For the Three Months Ended March 31,(Dollars in millions, except per share data)
    
    2005
    
    
    2004
    
    
    ChangeLoss before income tax (provision) benefit
    
    $
    (10.7
    )
    
    $
    (7.6
    )
    
    $
    (3.1
    )Income tax (provision) benefit:Current
    
    
    
    
    
    
    (0.4
    )
    
    
    0.4Deferred
    
    
    3.5
    
    
    
    3.3
    
    
    
    0.2Change in valuation allowance
    
    
    (3.5
    )
    
    
    (3.3
    )
    
    
    (0.2
    )
    
    
    
    (0.4
    )
    
    
    0.4Net Loss
    
    $
    (10.7
    )
    
    $
    (8.0
    )
    
    $
    (2.7
    )Loss per common share:Diluted
    
    $
    (1.21
    )
    
    $
    (0.92
    )Basic
    
    $
    (1.21
    )
    
    $
    (0.92
    )
 The net loss for the first quarter 2005 was $10.7 million, or $(1.21) per diluted share,
compared to a net loss of $8.0 million, or $(0.92) per diluted share, for the first quarter 2004. In accordance with the provisions of FAS 109, in the fourth quarter of 2003, the Company
recorded a charge to establish a valuation allowance for its net deferred tax assets, including
amounts related to its net operating loss carryforwards. The Company intends to maintain a full
valuation allowance for its net deferred tax assets and net operating loss carryforwards until
sufficient positive evidence exists to support a reversal of some portion or the remainder of the
allowance. Until such time, except for minor state and local provisions and adjustments to federal
tax refunds, the Company expects to have no reported tax provision or benefit, net of valuation
allowance adjustments. In the first quarter of 2005, LESCO increased its valuation allowance $3.5
million. In the first quarter of 2004, the Company adjusted previously estimated federal tax
refunds by $0.4 million and increased its valuation allowance an additional $3.3 million. For first quarter 2005, the impact of the valuation allowance decreased the Companys income
tax benefit, and increased its net loss by $3.5 million. Because the Company cannot recognize a tax
benefit at its estimated 39% effective tax rate due to its current accounting for its deferred tax
assets, its loss has been increased approximately $0.47 per diluted share. For the first quarter
2004, the Companys loss per diluted share was increased approximately $0.38 due to the same tax
circumstances as in 2005. 16




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##### Table of Contents



BUSINESS SEGMENT RESULTS We manage LESCOs business utilizing two business segments  Selling and Support. Selling Segment We maintain Four-Wall P&Ls for each of our selling locations (Service Centers,
Stores-on-Wheels, direct sales representatives and all other direct selling efforts). These
Four-Wall P&Ls include the sales, cost of sales and operating expenses (including payroll,
benefits, rent, utilities, freight in-bound to selling locations and out-bound to customers)
necessary to operate the individual selling locations. The Selling segment operating results
reflect the aggregate Four-Wall P&Ls of selling locations adjusted for costs of zone and regional
management, sales commission expense and the portion of merchant discounts not charged to the
Four-Wall P&Ls. We allocate resources, including working, fixed and leased capital, to existing and potential
selling locations based upon projected sales and return on invested capital (ROIC). We define ROIC
as the percentage calculated by dividing net operating profit after tax (NOPAT) by invested
capital. For the Selling segment, we calculate ROIC as follows: ROIC =
    
    NOPAT / Invested CapitalNOPAT =
    
    Selling Segment Operating Results
X 61% (1  effective tax rate)Invested Capital =
    
    Accounts Receivable (excluding rebate receivable, see Note 2
to Consolidated Financial Statements); plusInventory (excluding capitalized distribution and procurement
costs, markdown and shrink reserves and credit for inventory
held on consignment  see Note 2 to Consolidated Financial
Statements); plusFixed Capital (see Note 2 to Consolidated Financial Statements)
 Our measures of ROIC may not be the same as other similarly titled captions used by other
companies. For example, we do not capitalize operating leases or utilize average invested capital
over given periods. 17




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##### Table of Contents



Selling Segment Operating Results For the Period Ended March 31,(Dollars in millions)
    
    2005
    
    
    2004Net sales
    
    $
    98.1
    
    
    $
    102.0Cost of product
    
    
    (62.7
    )
    
    
    (69.4
    )Distribution cost
    
    
    (5.5
    )
    
    
    (5.3
    )Gross profit on sales
    
    
    29.9
    
    
    
    27.3Selling expense
    
    
    (21.9
    )
    
    
    (20.0
    )Merchant discounts and provision for doubtful accounts
    
    
    (2.1
    )
    
    
    (1.6
    )Pre-opening expense
    
    
    (0.2
    )
    
    
    (0.3
    )Earnings Before Interest and Taxes (EBIT)  Three months ended March 31,
    
    $
    5.7
    
    
    $
    5.4EBIT  Nine months ended December 31, 2004 and 2003
    
    
    46.2
    
    
    
    52.8Adjustments to nine months EBIT:Merchant discounts (a)
    
    
    
    
    
    
    (4.4
    )Adjusted EBIT   Nine months ended December 31, 2004 and 2003
    
    $
    46.2
    
    
    $
    48.4Adjusted EBIT  Rolling 12 months ended March 31,
    
    $
    51.9
    
    
    $
    53.8Adjusted NOPAT  Rolling 12 months ended March 31,
    
    $
    31.7
    
    
    $
    32.8Invested capital at period endAccounts receivable
    
    $
    6.5
    
    
    $
    10.4Inventory
    
    
    68.3
    
    
    
    61.0Property, plant and equipment, net
    
    
    5.5
    
    
    
    4.7$
    80.3
    
    
    $
    76.1ROIC
    
    
    39.4
    %
    
    
    43.1
    %
   (a)
    
    Merchant discounts for GEBCS fees were not incurred in 2003; however, the sale of
accounts receivable is reflected in the March 31, 2004 accounts receivable balance used to
calculate ROIC for the rolling 12 months ended March 31,
2004. As a result, the 2003 EBIT and NOPAT
is adjusted to reflect merchant discount expense as though the GEBCS transaction occurred
on January 1, 2003. Support Segment The Support segment includes the operating results and invested capital of all non-selling
locations including manufacturing (blending facilities and seed processing plant), distribution
hubs (including in-bound freight costs to the distribution hubs), and corporate costs (including
corporate management of sales, marketing, customer service, accounting and finance, human
resources, information systems, etc.). We believe that these costs are essential to managing the
selling locations and to managing a public company, but are not costs that directly translate into
incremental sales or positive ROIC. Therefore, resources are only allocated to the Support segment
if the result is a net reduction in expenses or the allocation is necessary for the maintenance of
facilities, support
of the expansion of selling locations, maintaining the corporate structure or is mandated by
law or governmental order. Below is the non-GAAP, adjusted ROIC for the Support Segment which
excludes various charges recorded in 2004 and 2003. 18




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##### Table of Contents



Support Segment Operating Results For the Period Ended March 31,(Dollars in millions)
    
    2005
    
    
    2004Net sales
    
    $
    
    
    
    $
    Cost of product (a)
    
    
    (2.3
    )
    
    
    1.0Distribution cost (b)
    
    
    (4.2
    )
    
    
    (4.8
    )Gross loss on sales
    
    
    (6.5
    )
    
    
    (3.8
    )Selling expense (c)
    
    
    (1.9
    )
    
    
    (1.8
    )General & administrative expense
    
    
    (7.8
    )
    
    
    (7.3
    )Other expense (d)
    
    
    (0.1
    )
    
    
    Other income (d)
    
    
    0.2
    
    
    
    0.2EBIT  Three months ended March 31,
    
    $
    (16.1
    )
    
    $
    (12.7
    )EBIT  Nine months ended December 31, 2004 and 2003
    
    $
    (43.5
    )
    
    $
    (44.2
    )Adjustments to nine months EBIT:Corporate relocation expense (e)
    
    
    6.9
    
    
    
    Hurricane/flood expense (e)
    
    
    1.2
    
    
    
    Vendor contract termination (including cost of inventory markdown) (e)
    
    
    5.2
    
    
    
    Early retirement of debt (f)
    
    
    
    
    
    
    2.3Loss from sale of accounts receivable (f)
    
    
    
    
    
    
    4.6Adjusted EBIT   nine months ended December 31, 2004 and 2003
    
    $
    (30.2
    )
    
    $
    (37.3
    )Adjusted EBIT  Rolling 12 months ended March 31,
    
    $
    (46.3
    )
    
    $
    (50.0
    )Adjusted NOPAT  Rolling 12 months ended March 31,
    
    $
    (28.2
    )
    
    $
    (30.5
    )Invested capital
    
    $
    81.4
    
    
    $
    87.0Less: Selling segment invested capital
    
    
    (80.3
    )
    
    
    (76.1
    )Total support segment invested capital
    
    $
    1.1
    
    
    $
    10.9Adjusted ROIC
    
    
    (2567.5
    )%
    
    
    (279.8
    )%
   (a)
    
    Includes various manufacturing and procurement costs reduced by suppliers rebates.(b)
    
    Reflects warehousing expense and freight costs incurred to transport product from manufacturing facilities to hubs.(c)
    
    Represents corporate costs incurred for marketing, customer service and sales management.(d)
    
    Includes all other non-selling, miscellaneous income and expense items that are not incurred in the ordinary course
of business at the Service Centers, Stores-on-Wheels or direct sales channel.(e)
    
    Adjusted EBIT and adjusted NOPAT for 2004 exclude charges for corporate relocation, expenses related to hurricane
and flood damage, and costs associated with the early termination of a vendor supply contract.(f)
    
    Adjusted EBIT and adjusted NOPAT for 2003 exclude charges incurred for the sale of the Companys accounts
receivable portfolio to GEBCS in December 2003 along with the expense associated with the early termination of
debt. As the Support segment operates at a negative ROIC, the Selling segment must provide an
adequate return in order for the Consolidated Company results to generate a positive ROIC. The
Selling segments results continue to be sufficient to support a positive adjusted ROIC on a
Consolidated basis as reflected below: 19




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##### Table of Contents



Consolidated Operating Results For the Period Ended March 31,(Dollars in millions)
    
    2005
    
    
    2004Net sales
    
    $
    98.1
    
    
    $
    102.0Cost of product
    
    
    (65.0
    )
    
    
    (68.9
    )Distribution cost
    
    
    (9.7
    )
    
    
    (9.5
    )Gross profit on sales
    
    
    23.4
    
    
    
    23.6Selling expense
    
    
    (23.8
    )
    
    
    (21.8
    )General & administrative expense
    
    
    (7.8
    )
    
    
    (7.3
    )Merchant discounts and provision for doubtful accounts
    
    
    (2.0
    )
    
    
    (1.6
    )Pre-opening expense
    
    
    (0.2
    )
    
    
    (0.3
    )Other expense
    
    
    (0.1
    )
    
    
    Other income
    
    
    0.1
    
    
    
    0.2EBIT  Three months ended March 31,
    
    $
    (10.4
    )
    
    $
    (7.2
    )EBIT  Nine months ended December 31, 2004 and 2003
    
    $
    2.7
    
    
    $
    8.6Adjustments to nine months EBIT:Corporate relocation expense
    
    
    6.9
    
    
    
    Hurricane/flood expense
    
    
    1.2
    
    
    
    Vendor contract termination (including cost of inventory markdown)
    
    
    5.2
    
    
    
    Merchant discounts
    
    
    
    
    
    
    (4.4
    )Early retirement of debt
    
    
    
    
    
    
    2.3Loss on sale of accounts receivable
    
    
    
    
    
    
    4.6Adjusted EBIT   Nine months ended December 31, 2004 and 2003
    
    $
    16.0
    
    
    $
    11.1Adjusted EBIT  Rolling 12 months ended March 31,
    
    $
    5.6
    
    
    $
    3.9Adjusted NOPAT  Rolling 12 months ended March 31,
    
    $
    3.4
    
    
    $
    2.4Invested capitalDebt
    
    
    24.8
    
    
    
    23.4Equity
    
    
    56.6
    
    
    
    63.6Total Invested capital
    
    $
    81.4
    
    
    $
    87.0Adjusted ROIC
    
    
    4.2
    %
    
    
    2.7
    %
 20




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES A summary of the change in cash and cash equivalents (see Statement of Cash Flows included in
the attached Consolidated Financial Statements) is as follows: For the Three Months Ended March 31,(Dollars in millions)
    
    2005
    
    
    2004Cash (used in) provided by operations
    
    $
    (16.0
    )
    
    $
    10.1Cash used in investing activities
    
    
    (1.2
    )
    
    
    (0.8
    )Cash provided by (used in) financing activities
    
    
    18.2
    
    
    
    (4.3
    )Increase in cash and cash equivalents
    
    $
    1.0
    
    
    $
    5.0
 In January 2005, the Securities and Exchange Commission issued additional guidance for the
reporting of cash flows from the sale of accounts receivable. As such, the cash generated from the
sale of our accounts receivable is now reflected in the Operating Activities section of our cash
flows statement when, historically, it was reflected in Financing Activities. Below is a
reconciliation of GAAP reported cash flows from Operations to a Non-GAAP presentation that excludes
the sale of accounts receivable: For the Three Months Ended March 31,(Dollars in thousands)
    
    2005
    
    
    2004Cash (used in) provided by operating activities  GAAP
    
    $
    (16.0
    )
    
    $
    10.1Less: Cash received for sale of accounts receivable
    
    
    
    
    
    
    (3.1
    )Adjusted cash (used in) provided by operating activities -
non-GAAP
    
    $
    (16.0
    )
    
    $
    7.0
 Cash was used by operations in the first quarter of 2005 as sales declined compared to the first quarter of 2004 due to the inclement weather conditions in the Midwest and
Northeast regions of the country. As a result, the Companys inventories increased while its
related cash payment cycle remained consistent with historical patterns. The net result was a
decrease in accounts payable leverage and an increased use of cash. Accounts payable leverage is summarized as follows: For the Three Months Ended March 31,(Dollars in millions)
    
    2005
    
    
    2004Accounts payable
    
    $
    76.1
    
    
    $
    73.4Less: Payable to GEBCS
    
    
    
    
    
    
    (2.6
    )Adjusted accounts payable
    
    $
    76.1
    
    
    $
    70.8Inventory
    
    $
    130.1
    
    
    $
    114.9Accounts payable leverage
    
    
    58.5
    %
    
    
    61.6
    %
 Payable to GEBCS represents the portion of the receivable portfolio sold to GEBCS on December
30, 2003 that remained uncollected by GEBCS and secured by the Company. All of these balances were
subsequently collected by GEBCS and there is no remaining balance at March 31, 2005. 21




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##### Table of Contents



Capital Expenditures: Our first quarter 2005 capital expenditures can be summarized as
follows: For the Three Months Ended March 31,(Dollars in millions)
    
    2005
    
    
    2004New Service Centers
    
    $
    0.4
    
    
    $
    0.6Manufacturing facilities and corporate systems
    
    
    0.8
    
    
    
    0.2$
    1.2
    
    
    $
    0.8
 We expect to focus our future capital needs primarily on Service Centers. We intend to open 30
to 35 units in 2005, relocate another 20 existing sites to new locations with the intent to
increase customer traffic, and invest in new fixtures for our current base of stores to enhance
merchandise adjacencies and improve the in-store shopping experience. We will continue to maintain
information systems and manufacturing facilities. We currently estimate that ongoing, annual
capital needs will range from $5 million to $6 million, which we expect to fund with cash generated from operations. A new Service Center, on average, requires approximately $50,000 in capital cost and $150,000 of inventory, of
which an estimated 50% or more is leveraged through payment terms with our suppliers. Costs incurred up to the date when the Service Center opens for business,
including lease costs (pre-opening costs), are approximately $25,000 and are expensed when incurred. A new Service Center is expected to achieve break-even operating results for its second
year of operations and thereafter becomes profitable. Typically, it is at least five years before a Service Center achieves a mature level of operating results. Financing Activities In the fourth quarter of 2003, the Company entered into a $50 million Revolving Credit
Facility (the Facility) which replaced a prior credit facility. The Facility matures December 30,
2006 and is secured by inventory, owned receivables, equipment, investment interests, real property
interests, and general intangibles, including intellectual property. The Facility bears interest
at LIBOR plus 2.0% to 2.5% per annum, based on the level of borrowings, and requires the payment of
a facility fee ranging from 0.4% to 0.5% per annum on the unused portion of availability.
Availability under the Facility is determined by a borrowing base formula calculated on eligible
inventory. As of March 31, 2005, there was $46.5 million available under the borrowing base
formula with unused borrowing capacity of $18.4 million. As of March 31, 2005, the Company had
borrowings of $24.8 million on the facility. Letters of credit, up to a maximum of $20 million, are
also available under the Facility and are considered outstanding borrowings when calculating the
unused portion of availability. Letters of credit in the aggregate amount of $3.3 million were
outstanding as of March 31, 2005. Letter of credit fees range from 2.0% to 2.5% with an issuance
fee ranging from 0.125% to 0.150%. The interest rate, facility fee, letter of credit fee and letter of credit issuance fee are
determined based on the Companys fixed charge coverage ratio. The Facility requires the
maintenance of certain covenants, with the only financial covenant being the fixed charge coverage
ratio. The Company was in compliance with the Facility covenants as of March 31, 2005. We believe that the Companys financial condition continues to be strong. Together, its cash
balances, other liquid assets, operating cash flows, access to debt and equity capital markets, and
borrowing capacity provide adequate resources to fund short-term and long-term operating
requirements and future capital expenditures related to Service Center expansion and other
projects. However, the Companys operating cash flow and access to the capital markets can be
impacted by factors outside of its control. Contractual Obligations, Commitments and Off Balance Sheet Arrangements There are no material changes to the Companys contractual obligations and commercial
commitments as reported in its Annual Report on Form 10-K for the year ended December 31, 2004. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to the allowance for doubtful accounts,
inventories, long-lived assets, income taxes, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Management has discussed the development and selection of the critical accounting estimates, and
the disclosures made herein, with the Audit Committee of the Board of Directors and its external
auditors. Actual results may differ from these estimates under different assumptions or conditions. The Companys significant accounting policies are described in the Notes to Consolidated
Financial Statements included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2004. This discussion and analysis of financial condition 22




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##### Table of Contents



contains various references
and disclosures concerning our accounting policies. Additionally, we have identified each of the
following as a critical accounting policy, either because it has the potential to have a
significant impact on our consolidated financial statements, because of the significance of the
financial item to which it relates, or because it requires judgment and estimation due to the
uncertainty involved in measuring at a specific point in time events which will be settled in the
future. Revenue Recognition We recognize revenue when goods are shipped to the customer and title and risk of loss
passes to the customer. We have consigned inventory agreements on certain products. We report
gross revenue from the sales of consigned inventory in accordance with Emerging Issues Task Force
99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Additionally, we have
agency agreements with vendors for which we recognize sales net as an agent. Sales of consigned
inventory were $4.5 million and $4.7 million for the quarter ended March 31, 2005 and 2004,
respectively. Agency commissions included in net sales were $81,000 and $0 for the quarter ended
March 31, 2005 and 2004, respectively. Allowance for Doubtful Accounts Accounts receivable consists primarily of amounts due from vendors under purchase rebate,
cooperative advertising and other contractual programs and trade receivables not financed through
outside programs. The Company earns product discounts under various supplier rebate programs,
which are recorded as accounts receivable and credited to inventory valuation reserves when earned.
The Company provides for expected losses from all owned and recourse accounts in the allowance for
doubtful accounts. Expected losses are estimated based upon the number of days the accounts are
past due, historical loss experience of the Company, historical loss experience of credit
portfolios with characteristics similar to the Companys portfolio and the current business
environment. Bad debt expense recognized for the quarter ended March 31, 2005 and 2004 was $30,000
and $0, respectively. Inventories Inventories are valued principally at the lower of cost (First In, First Out cost method)
or market. Procurement, warehousing and distribution costs are capitalized to inventory on hand and
expensed to distribution cost when the inventory is sold. Vendor rebates earned on purchases are
recorded as a reduction to inventory on hand and recognized when the inventory is sold. The
Company maintains an inventory life cycle program which requires the classification of all Stock
Keeping Units (SKUs) into one of five categories: active, watch, phase out, discontinued and
liquidated. SKUs identified as discontinued will be progressively marked-down to expected net
realizable value over specific periods until the costs are marked down to zero. At that
point, the products are liquidated and purged from the inventory system. Estimated net realizable
value of 20% of cost is based on historical sales of discontinued inventory. We maintain
a reserve for inventory shrink on a specific location basis. This reserve is based on
historical Company-wide experience of 0.2% of sales until the location obtains two physical
inventory audits performed by a third-party inventory control organization. The site-specific
reserve rate is then adjusted to reflect the average shrink rate from the two physical inventory
counts. Actual shrink at the time of each physical inventory count is charged against the reserve. Income Taxes The Company uses the liability method whereby income taxes are recognized during the fiscal
year in which transactions enter into the determination of financial statement income. Deferred tax
assets and liabilities are recognized for the expected future tax consequences of temporary
differences between financial statement and tax bases of assets and liabilities. The Company
assesses the recoverability of its deferred tax assets in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). In
accordance with that standard, the Company recorded a $9.6 million valuation allowance equal to its
net deferred tax assets, including amounts related to its net operating loss carryforwards, as of
March 31, 2005. The Company intends to maintain a full valuation allowance for its net deferred
tax assets until sufficient positive evidence exists to support the reversal of some portion or the
remainder of the allowance. Until such time, the Company will have no reported tax provision, net
of valuation allowance adjustments. Any future decision to reverse a portion or all of the
remaining valuation allowance will be based on consideration of several factors including, but not
limited to, the Companys expectations regarding future taxable income and the Companys cumulative
income or loss in the then most recent three-year period. In the event the Company was to
determine, based on the existence of sufficient positive evidence, that it would be able to realize
its deferred tax assets in the future in excess of its net recorded amount, a reduction of the
valuation allowance would increase income in the period such determination was made. 23




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##### Table of Contents



Impairment of Long-Lived Assets The Company assesses the recoverability of its long-lived 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. Accrued Liabilities Certain accrued liabilities, including employee health insurance and workers compensation,
are estimated based on historical experience and lag analysis due to the difference between the
time the expense is incurred and when the expense is paid. A valuation analysis is performed to
estimate the accrual required for property and casualty insurance claims expense. Accrued
environmental costs are estimated based on the Companys previous environmental contamination and
remediation experience along with site-specific conditions. FORWARD LOOKING STATEMENTS Certain statements included in this report are forward-looking statements that involve a
number of risks and uncertainties and which are based on managements current beliefs, assumptions
and expectations. These forward-looking statements can be identified by the use of predictive or
future tense terms such as anticipate, estimate, expect, believe, project, may, will
or similar terms. These statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Companys actual results may differ materially from
those stated, implied or anticipated in the forward-looking statements, as a result of a number of
factors that include, but are not limited to, the Companys ability to add new Service Centers in
accordance with its plans, which can be affected by local zoning and other governmental regulations
and its ability to find favorable store locations, to negotiate favorable leases, to hire qualified
individuals to operate the Service Centers, and to integrate new Service Centers into the Companys
systems; competitive factors in the Companys business, including pricing pressures; lack of
availability or instability in the cost of raw materials which affects the costs of certain
products; the Companys ability to impose price increases on customers without a significant loss
in revenues; potential rate increases by third-party carriers which affects the cost of delivery of
products; potential regulations; the Companys ability to effectively manufacture, market and
distribute new products; the success of the Companys operating plans; regional weather conditions;
the condition of the industry and the economy; the Companys ability to consummate a transaction
regarding its manufacturing and distribution assets on acceptable terms and conditions; the
possibility that the court could disagree with the Companys assessment of its liability to its
former methylene urea supplier; and the costs and other effects of legal and administrative
proceedings. For a further discussion of risk factors, investors should refer to the Companys
Securities and Exchange Commission reports, including but not limited to the Companys Annual
Report on Form 10-K for the year ended December 31, 2004. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, principally interest rate risk. Market risk can be
measured as the potential negative impact on earnings, cash flows or fair values resulting from a
hypothetical change in interest rates over time. Interest paid on the Companys debt is sensitive
to changes in interest rates. The interest rate for the Companys revolving credit facility is
variable, while the interest component of its operating leases is generally fixed. The Company believes its potential exposure to interest rate risk is not material to the
Companys financial position or the results of its operations. As of March 31, 2005, there had not
been a material change in any of the market risk information disclosed by the Company in its Annual
Report on Form 10-K for the year ended December 31, 2004. See Item 7A. Quantitative and
Qualitative Disclosures About Market Risk on page 35 of the Companys Annual Report on Form 10-K
for the year ended December 31, 2004, filed with the Securities and Exchange Commission on March
16, 2005, for more detailed information regarding market risk. 
 ITEM 4. CONTROLS AND PROCEDURES Controls and Procedures The Company performed an evaluation under the supervision, and with the participation, of the
Companys management, including the President and Chief Executive Officer and Senior Vice President
and Chief Financial Officer, of the effectiveness of the Companys disclosure controls and
procedures as of the end of the period covered by this report. Based on that evaluation, the
Companys management, including the Chief Executive Officer and Senior Vice President and Chief
Financial Officer, concluded that
the Companys disclosure controls and procedures were effective in ensuring that material
information relating to the Company with respect to the period covered by this Annual Report was
recorded, processed, summarized and reported on a timely basis. 24




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A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been detected. Because
of the inherent limitations in a cost-effective control system, misstatements due to error or fraud
may occur and not be detected. During the first quarter, management did not identify any changes in the Companys internal
controls in connection with its evaluation thereof that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting. 
 PART II  OTHER INFORMATION Except as noted below, the items in Part II are inapplicable or, if applicable, would be
answered in the negative. These items have been omitted and no other reference is made thereto. 
 ITEM 1. LEGAL PROCEEDINGS In 2003, an administrative complaint was filed against the Company by the State of New York
Department of Environmental Conservation (NYSDEC) alleging violation of state law regarding the
registration of pesticides. The complaint alleges that the Company distributed 3,400 bags of
Dimension® Crabgrass Preemergent Plus Fertilizer to one of its retail customers in New York State
without having proper registration thereof. The complaint seeks a civil penalty of $3,440,000.
NYSDEC filed a similar complaint against the retail customer seeking a civil penalty of $3,440,000.
The Company intends to indemnify the retail customer for such claim pursuant to a vendor agreement
between the parties. The Company has held discussions with the NYSDEC relative to a settlement. On November 29, 2004, the Company filed a declaratory judgment action, LESCO vs. KPAC
Holdings, Inc., Case No. 1:04CV2573 pending in the United States District Court, Northern District
of Ohio, to obtain a judicial determination of the amount of its liability arising from its
termination of a five-year agreement with KPAC Holdings, Inc. (KPAC), our former methylene urea
supplier (Supply Agreement). The Company had entered into the Supply Agreement in 2002 as part
of an overall transaction by which the supplier purchased certain assets of the Company, including
a plant used to produce methylene urea. The Supply Agreement required the Company to purchase, and
the supplier to produce, minimum monthly quantities of certain products. We filed the declaratory judgment action after the supplier refused the Companys offer to
settle its liability for $2.2 million plus forgiveness of a $1.3 million note receivable due from
the supplier, which the Company believed represented the extent of its potential liability under
the Supply Agreement. The supplier asserted counterclaims against the Company seeking damages in
excess of $7 million for breach of the Supply Agreement, breach of the asset purchase agreement and
breach of an alleged agreement to settle the Companys liability on more favorable terms to the
supplier. The suppliers two shareholders moved to intervene to assert a claim for breach of the
same alleged settlement agreement. We continue to have settlement discussions with the supplier and its two shareholders
and anticipate reaching a resolution agreement in the second quarter of 2005. There are other legal actions, governmental investigations and proceedings pending to
which the Company is a party or to which its property is subject. In the opinion of our
management, after reviewing the information that is currently available with respect to these
matters and consulting with counsel, any liability that may be ultimately incurred with respect to
these matters is not expected to materially affect our consolidated results of operations, cash
flows or financial condition. 25




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ITEM 6. EXHIBITS Exhibits
    
    Exhibits 3(a)
    
    Amended Articles of Incorporation of the Registrant
(included as an exhibit to the Registrants Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002
and incorporated herein by reference).Exhibit 3(b)
    
    Amended Code of Regulations of the Registrant (included as
an exhibit to the Registrants Annual Report on Form 10-K
for the year ended December 31, 2002 and incorporated
herein by reference).Exhibit 31(a)
    
    Michael P. DiMino Rule 13a-14(a)/15d-14(a) CertificationExhibit 31(b)
    
    Jeffrey L. Rutherford Rule 13a-14(a)/15d-14(a) CertificationExhibit 32(a)
    
    Michael P. DiMino Section 1350 CertificationExhibit 32(b)
    
    Jeffrey L. Rutherford Section 1350 Certification
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SIGNATURES Pursuant to the requirements 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.Date:
May 5, 2005
    
    By: /s/ Jeffrey L. RutherfordJeffrey L. RutherfordSenior Vice President, Chief Financial Officer,Treasurer and Secretary
 27