##### Table of Contents



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 September 30, 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
 þ o
 þ o
 o þ




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS (to be updated by K Minahan)ITEM 6. EXHIBITSSIGNATURESEX-2 Asset Purchase AgreementEX-10(A) Retention AgreementEX-10(B) Board of Directors - ResolutionsEX-31(A) 302 Certification for CEOEX-31(B) 302 Certification for CFOEX-32(A) 906 Certification for CEOEX-32(B) 906 Certification for CFO    Table of Contents  
 PART I FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 LESCO, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    158,867
    
    
    $
    152,655
    
    
    $
    447,121
    
    
    $
    436,888Cost of product
    
    
    (108,619
    )
    
    
    (99,632
    )
    
    
    (295,855
    )
    
    
    (288,028
    )Distribution cost
    
    
    (12,962
    )
    
    
    (12,367
    )
    
    
    (39,711
    )
    
    
    (37,635
    )Gross profit on sales
    
    
    37,286
    
    
    
    40,656
    
    
    
    111,555
    
    
    
    111,225Selling expense
    
    
    (24,083
    )
    
    
    (23,285
    )
    
    
    (72,190
    )
    
    
    (67,920
    )General & administrative expense
    
    
    (6,095
    )
    
    
    (7,171
    )
    
    
    (19,852
    )
    
    
    (21,153
    )Merchant discounts and provision for
doubtful accounts
    
    
    (3,458
    )
    
    
    (2,678
    )
    
    
    (9,311
    )
    
    
    (6,859
    )Pre-opening expense
    
    
    (459
    )
    
    
    (55
    )
    
    
    (1,108
    )
    
    
    (964
    )Corporate relocation expense
    
    
    
    
    
    
    (4,928
    )
    
    
    
    
    
    
    (4,928
    )Hurricane/flood expense
    
    
    
    
    
    
    (1,350
    )
    
    
    
    
    
    
    (1,350
    )Vendor contract termination
    
    
    (11
    )
    
    
    
    
    
    
    (474
    )
    
    
    Supply chain transaction expense
    
    
    (19,041
    )
    
    
    
    
    
    
    (19,323
    )
    
    
    Other expense
    
    
    (168
    )
    
    
    (26
    )
    
    
    (114
    )
    
    
    (104
    )Other income
    
    
    139
    
    
    
    51
    
    
    
    444
    
    
    
    357(Loss) earnings before interest and taxes
    
    
    (15,890
    )
    
    
    1,214
    
    
    
    (10,373
    )
    
    
    8,304Interest expense, net
    
    
    (301
    )
    
    
    (104
    )
    
    
    (741
    )
    
    
    (595
    )(Loss) earnings before taxes
    
    
    (16,191
    )
    
    
    1,110
    
    
    
    (11,114
    )
    
    
    7,709Income tax (provision) benefit:Current
    
    
    
    
    
    
    (1,919
    )
    
    
    
    
    
    
    (3,165
    )Deferred
    
    
    7,294
    
    
    
    1,486
    
    
    
    6,520
    
    
    
    158Change in valuation allowance
    
    
    (7,294
    )
    
    
    433
    
    
    
    (6,520
    )
    
    
    2,667
    
    
    
    
    
    
    
    
    
    
    
    (340
    )Net (loss) income
    
    $
    (16,191
    )
    
    $
    1,110
    
    
    $
    (11,114
    )
    
    $
    7,369(Loss) earnings per of common share:Diluted
    
    $
    (1.82
    )
    
    $
    0.12
    
    
    $
    (1.25
    )
    
    $
    0.82Basic
    
    $
    (1.82
    )
    
    $
    0.13
    
    
    $
    (1.25
    )
    
    $
    0.85Average number of common shares and
common share equivalents outstanding:Diluted
    
    
    8,901,528
    
    
    
    9,001,687
    
    
    
    8,869,198
    
    
    
    8,943,441Basic
    
    
    8,901,528
    
    
    
    8,704,694
    
    
    
    8,869,198
    
    
    
    8,693,298
  2




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LESCO, INC.
 CONSOLIDATED BALANCE SHEETS  UNAUDITED
 (Dollars in thousands)
    
    September 30, 2005
    
    
    September 30, 2004
    
    
    December 31, 2004CURRENT ASSETS:Cash and cash equivalents
    
    $
    7,286
    
    
    $
    8,007
    
    
    $
    8,101Accounts receivable, net
    
    
    15,082
    
    
    
    14,306
    
    
    
    16,931Inventories
    
    
    126,915
    
    
    
    110,931
    
    
    
    100,582Other
    
    
    3,305
    
    
    
    3,818
    
    
    
    3,126TOTAL CURRENT ASSETS
    
    
    152,588
    
    
    
    137,062
    
    
    
    128,740Property, plant and equipment, net
    
    
    10,409
    
    
    
    27,310
    
    
    
    26,019Other
    
    
    1,138
    
    
    
    2,245
    
    
    
    1,234$
    164,135
    
    
    $
    166,617
    
    
    $
    155,993CURRENT LIABILITIES:Accounts payable
    
    $
    66,825
    
    
    $
    57,811
    
    
    $
    56,371Accrued liabilities
    
    
    23,672
    
    
    
    23,029
    
    
    
    24,184Revolving credit facility
    
    
    13,454
    
    
    
    
    
    
    
    7,303TOTAL CURRENT LIABILITIES
    
    
    103,951
    
    
    
    80,840
    
    
    
    87,858Long-term debt
    
    
    
    
    
    
    5,875
    
    
    
    Other non-current liabilities
    
    
    2,631
    
    
    
    555
    
    
    
    1,612SHAREHOLDERS EQUITY:Common shareswithout par value19,500,000 shares
authorized; 8,925,844
shares issued and
outstanding at Sept. 30,
2005; 8,704,694 shares
issued and outstanding at
Sept. 30, 2004 and
8,697,194 issued and
outstanding at December
31, 2004
    
    
    892
    
    
    
    871
    
    
    
    870Paid-in capital
    
    
    37,957
    
    
    
    34,970
    
    
    
    34,846Retained earnings
    
    
    20,523
    
    
    
    44,631
    
    
    
    31,637Unearned compensation
    
    
    (1,819
    )
    
    
    (1,125
    )
    
    
    (830
    )TOTAL SHAREHOLDERS EQUITY
    
    
    57,553
    
    
    
    79,347
    
    
    
    66,523$
    164,135
    
    
    $
    166,617
    
    
    $
    155,993
  3




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LESCO, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITED
 Nine Months Ended September 30,(Dollars in thousands)
    
    2005
    
    
    2004OPERATING ACTIVITIES:Net (loss) income
    
    $
    (11,114
    )
    
    $
    7,369Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:Depreciation
    
    
    5,019
    
    
    
    5,536Amortization of deferred financing fees and other
    
    
    118
    
    
    
    129Decrease (increase) in accounts receivable
    
    
    1,849
    
    
    
    (974
    )Sale of accounts receivable
    
    
    
    
    
    
    5,946Increase in inventories
    
    
    (26,333
    )
    
    
    (17,351
    )(Gain) loss on sale/disposal of fixed assets
    
    
    (47
    )
    
    
    96Impairment
of property, plant and equipment
    
    
    14,118
    
    
    
    (Decrease) increase in accounts payable
    
    
    (1,838
    )
    
    
    13,480Amortization of unearned compensation
    
    
    619
    
    
    
    492Decrease in
refundable income tax
    
    
    706
    
    
    
    4,005(Decrease) increase in other current items
    
    
    (1,211
    )
    
    
    4,698NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    
    
    (18,114
    )
    
    
    23,426INVESTING ACTIVITIES:Proceeds on
the sale of property, plant and equipment
    
    
    255
    
    
    
    1,597Purchase of property, plant and equipmentStores
    
    
    (2,792
    )
    
    
    (1,401
    )Non-Stores
    
    
    (882
    )
    
    
    (1,695
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (3,419
    )
    
    
    (1,499
    )FINANCING ACTIVITIES:Increase (decrease) in overdraft balances
    
    
    12,292
    
    
    
    (6,100
    )Proceeds from borrowings
    
    
    527,149
    
    
    
    487,541Reduction of borrowings
    
    
    (520,248
    )
    
    
    (503,082
    )Exercised stock options, net of treasury shares
    
    
    1,525
    
    
    
    216NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    20,718
    
    
    
    (21,425
    )Net change in cash and cash equivalents
    
    
    (815
    )
    
    
    502Cash and cash equivalents  Beginning of the period
    
    
    8,101
    
    
    
    7,505CASH AND CASH EQUIVALENTS  END OF THE PERIOD
    
    $
    7,286
    
    
    $
    8,007Supplemental disclosure of cash flow information:Interest paid, including letters of credit and unused facility fees
    
    $
    (761
    )
    
    $
    (608
    )Income taxes (paid) refunded
    
    $
    (98
    )
    
    $
    3,576
  4




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1. Description of Business and Segment Information
  Segment Information
  5




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Three Months Ended September 30,
    
    

    Nine Months Ended September 30,(Dollars in millions)
    
    2005
    
    
    2004
    
    

    2005
    
    
    2004Net salesStores
    
    $
    142.7
    
    
    $
    129.1
    
    

    $
    383.9
    
    
    $
    354.7Direct Sales
    
    
    16.2
    
    
    
    23.6
    
    

    
    63.2
    
    
    
    82.2Corporate
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    $
    158.9
    
    
    $
    152.7
    
    

    $
    447.1
    
    
    $
    436.9(Loss) earnings before interest and taxesStores
    
    $
    16.1
    
    
    $
    16.9
    
    

    $
    40.6
    
    
    $
    41.5Direct Sales
    
    
    0.1
    
    
    
    (0.7
    )
    

    
    (0.3
    )
    
    
    0.2Corporate
    
    
    (32.1
    )
    
    
    (15.0
    )
    

    
    (50.7
    )
    
    
    (33.4
    )$
    (15.9
    )
    
    $
    1.2
    
    

    $
    (10.4
    )
    
    $
    8.3Capital expendituresStores
    
    $
    0.6
    
    
    $
    0.3
    
    

    $
    2.8
    
    
    $
    1.4Direct Sales
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    Corporate
    
    
    0.4
    
    
    
    0.7
    
    

    
    0.9
    
    
    
    1.7$
    1.0
    
    
    $
    1.0
    
    

    $
    3.7
    
    
    $
    3.1Depreciation expenseStores
    
    $
    0.3
    
    
    $
    0.3
    
    

    $
    0.9
    
    
    $
    0.8Direct Sales
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    Corporate
    
    
    1.4
    
    
    
    1.5
    
    

    
    4.1
    
    
    
    4.7$
    1.7
    
    
    $
    1.8
    
    

    $
    5.0
    
    
    $
    5.5Intangible asset amortization expenseStores
    
    $
    
    
    
    $
    
    
    

    $
    
    
    
    $
    Direct Sales
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    Corporate
    
    
    
    
    
    
    
    
    

    
    0.1
    
    
    
    0.1$
    
    
    
    $
    
    
    

    $
    0.1
    
    
    $
    0.1
 As
of September 30,2005
    
    
    2004Total assetsStores
    
    $
    100.4
    
    
    $
    81.5Direct Sales
    
    
    0.8
    
    
    
    1.4Corporate
    
    
    62.9
    
    
    
    83.7$
    164.1
    
    
    $
    166.6
 Note 2. Summary of Significant Accounting Policies
 Principles of Consolidation :
 Earnings per Share :
  6




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Three Months Ended September 30,
    
    

    Nine Months Ended September 30,(Dollars in thousands, except per share data)
    
    2005
    
    
    2004
    
    

    2005
    
    
    2004Net (loss) income applicable to common shares
    
    $
    (16,191
    )
    
    $
    1,110
    
    

    $
    (11,114
    )
    
    $
    7,369Weighted average number of common shares
outstanding (basic)
    
    
    8,901,528
    
    
    
    8,704,694
    
    

    
    8,869,198
    
    
    
    8,693,298Weighted average dilutive stock options
    
    
    
    
    
    
    296,993
    
    

    
    
    
    
    
    250,143Weighted average number of common and common equivalent shares outstanding (diluted)
    
    
    8,901,528
    
    
    
    9,001,687
    
    

    
    8,869,198
    
    
    
    8,943,441Diluted
(loss) earnings per share
    
    $
    (1.82
    )
    
    $
    0.12
    
    

    $
    (1.25
    )
    
    $
    0.82Basic (loss) earnings per share
    
    $
    (1.82
    )
    
    $
    0.13
    
    

    $
    (1.25
    )
    
    $
    0.85
 Stock Options
 Three Months Ended September 30,
    
    

    Nine Months Ended September 30,(Dollars in thousands, except per share data)
    
    2005
    
    
    2004
    
    

    2005
    
    
    2004Net (loss) income as reported
    
    $
    (16,191
    )
    
    $
    1,110
    
    

    $
    (11,114
    )
    
    $
    7,369Less: stock option expense
    
    
    (112
    )
    
    
    (137
    )
    

    
    (245
    )
    
    
    (420
    )Pro forma net (loss) income
    
    $
    (16,303
    )
    
    $
    973
    
    

    $
    (11,359
    )
    
    $
    6,949(Loss) earnings per diluted shareAs reported
    
    $
    (1.82
    )
    
    $
    0.12
    
    

    $
    (1.25
    )
    
    $
    0.82Pro forma
    
    $
    (1.83
    )
    
    $
    0.11
    
    

    $
    (1.28
    )
    
    $
    0.78(Loss) earnings per basic shareAs reported
    
    $
    (1.82
    )
    
    $
    0.13
    
    

    $
    (1.25
    )
    
    $
    0.85Pro forma
    
    $
    (1.83
    )
    
    $
    0.11
    
    

    $
    (1.28
    )
    
    $
    0.80
 7




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Accounts Receivable
 September 30,
    
    
    December 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    2004Supplier rebate programs
    
    $
    8,730
    
    
    $
    8,958
    
    
    $
    12,139Trade receivablesRecourse
    
    
    
    
    
    
    79
    
    
    
    14Owned  domestic
    
    
    5,202
    
    
    
    6,238
    
    
    
    4,477Owned  international
    
    
    2,190
    
    
    
    1,642
    
    
    
    1,848Other
    
    
    2,231
    
    
    
    966
    
    
    
    1,283Allowance for doubtful accounts
    
    
    (3,271
    )
    
    
    (3,577
    )
    
    
    (2,830
    )$
    15,082
    
    
    $
    14,306
    
    
    $
    16,931
  
    
    Rebates calculated on a percentage of the value of merchandise purchased over a
definitive period of time, generally one year or less. Usually, there is a minimum
purchase requirement, and the rebate percentage may be tiered, increasing as the volume
purchased increases over the minimum requirement.
    
    Rebates calculated on a percentage of the purchased cost of merchandise sold by the
Company over a definitive period of time, generally one year or less.
      8




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##### Table of Contents



September 30,
    
    
    December 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    2004Total recourse account balances
    
    $
    5,250
    
    
    $
    4,799
    
    
    $
    4,679Accounts owned by GEBCS
    
    
    (5,250
    )
    
    
    (4,720
    )
    
    
    (4,665
    )Recourse receivables owned by LESCO
    
    $
    
    
    
    $
    79
    
    
    $
    14
  Inventories
 September 30,
    
    
    December 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    2004Finished goods and purchased inventoriesSelling locations
    
    $
    77,171
    
    
    $
    64,307
    
    
    $
    52,063Distribution hubs and plants
    
    
    37,420
    
    
    
    41,501
    
    
    
    35,119Capitalized procurement, warehousing and distribution costs
    
    
    11,425
    
    
    
    7,193
    
    
    
    8,512Less: Markdown, shrink and vendor discount reserves
    
    
    (3,945
    )
    
    
    (1,528
    )
    
    
    (3,338
    )Inventory held on consignment
    
    
    (5,212
    )
    
    
    (8,856
    )
    
    
    (6,919
    )116,859
    
    
    
    102,617
    
    
    
    85,437Raw Materials
    
    
    10,056
    
    
    
    8,314
    
    
    
    15,145$
    126,915
    
    
    $
    110,931
    
    
    $
    100,582
  Property, Plant and Equipment
   9




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##### Table of Contents



September 30, 2005
    
    September 30, 2004
    
    December 31, 2004Direct
    
    
    
    
    
    
    
    
    
    
    
    
    
    Direct
    
    
    
    
    
    
    
    
    
    
    
    
    
    Direct(Dollars in thousands)
    
    Stores
    
    Sales
    
    Corporate
    
    Total
    
    Stores
    
    Sales
    
    Corporate
    
    Total
    
    Stores
    
    Sales
    
    Corporate
    TotalLand
    
    $
    
    
    
    $
    
    
    
    $
    600
    
    
    $
    600
    
    
    $
    
    
    
    $
    
    
    
    $
    600
    
    
    $
    600
    
    
    $
    
    
    
    $
    
    
    
    $
    600
    
    
    $
    600Buildings and improvements
    
    
    2,350
    
    
    
    
    
    
    
    18,632
    
    
    
    20,982
    
    
    
    1,441
    
    
    
    
    
    
    
    18,527
    
    
    
    19,968
    
    
    
    1,592
    
    
    
    
    
    
    
    18,337
    
    
    
    19,929Machinery and equipment
    
    
    5,072
    
    
    
    7
    
    
    
    20,014
    
    
    
    25,093
    
    
    
    3,882
    
    
    
    22
    
    
    
    20,458
    
    
    
    24,362
    
    
    
    4,083
    
    
    
    22
    
    
    
    20,645
    
    
    
    24,750Furniture and fixtures
    
    
    6,652
    
    
    
    308
    
    
    
    30,473
    
    
    
    37,433
    
    
    
    6,177
    
    
    
    456
    
    
    
    30,941
    
    
    
    37,574
    
    
    
    5,847
    
    
    
    455
    
    
    
    30,455
    
    
    
    36,757Subtotal
    
    
    14,074
    
    
    
    315
    
    
    
    69,719
    
    
    
    84,108
    
    
    
    11,500
    
    
    
    478
    
    
    
    70,526
    
    
    
    82,504
    
    
    
    11,522
    
    
    
    477
    
    
    
    70,037
    
    
    
    82,036Less: Accumulated depreciation
    
    
    (7,539
    )
    
    
    (210
    )
    
    
    (51,832
    )
    
    
    (59,581
    )
    
    
    (6,815
    )
    
    
    (224
    )
    
    
    (48,155
    )
    
    
    (55,194
    )
    
    
    (6,932
    )
    
    
    (239
    )
    
    
    (48,846
    )
    
    
    (56,017
    )Less: Impairment
    
    
    
    
    
    
    
    
    
    
    (14,118
    )
    
    
    (14,118
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Property, plant and equipment, net
    
    $
    6,535
    
    
    $
    105
    
    
    $
    3,769
    
    
    $
    10,409
    
    
    $
    4,685
    
    
    $
    254
    
    
    $
    22,371
    
    
    $
    27,310
    
    
    $
    4,590
    
    
    $
    238
    
    
    $
    21,191
    
    
    $
    26,019
  Three Months Ended Sept 30,
    
    
    Nine Months Ended Sept 30,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Stores
    
    $
    334
    
    
    $
    252
    
    
    $
    885
    
    
    $
    750Direct Sales
    
    
    12
    
    
    
    21
    
    
    
    45
    
    
    
    58Corporate
    
    
    1,371
    
    
    
    1,547
    
    
    
    4,089
    
    
    
    4,728Total
    
    $
    1,717
    
    
    $
    1,820
    
    
    $
    5,019
    
    
    $
    5,536
 Borrowings:
 September 30,
    
    
    December 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    2004Current:Revolving credit facility
    
    $
    13,454
    
    
    $
    
    
    
    $
    7,303Long-term:Industrial revenue bonds
    
    $
    
    
    
    $
    5,875
    
    
    $
    
 Revolving Credit Facility
  10




---



##### Table of Contents



Asset Rationalization and Severance Expense :
 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    354
    
    
    
    354Utilized/payments
    
    
    (52
    )
    
    
    (117
    )
    
    
    (169
    )
    
    
    (469
    )
    
    
    (638
    )Asset rationalization reserves and
severance accruals at September 30, 2005
    
    $
    176
    
    
    $
    105
    
    
    $
    281
    
    
    $
    94
    
    
    $
    375
   11




---



##### Table of Contents



9. Detail of Certain Balance Sheets Accounts:
 September 30,
    
    
    December 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    2004Other current assets:Other prepaids
    
    $
    1,433
    
    
    $
    1,272
    
    
    $
    1,426Prepaid insurance
    
    
    1,623
    
    
    
    1,680
    
    
    
    1,513Notes receivable
    
    
    187
    
    
    
    592
    
    
    
    187Assets held for sale
    
    
    62
    
    
    
    274
    
    
    
    $
    3,305
    
    
    $
    3,818
    
    
    $
    3,126Other non-current assets:Notes receivable
    
    $
    477
    
    
    $
    1,350
    
    
    $
    443Store deposits
    
    
    534
    
    
    
    562
    
    
    
    550Deferred financing charges
    
    
    40
    
    
    
    210
    
    
    
    172Miscellaneous deposits
    
    
    44
    
    
    
    86
    
    
    
    69Other prepaids
    
    
    43
    
    
    
    37
    
    
    
    $
    1,138
    
    
    $
    2,245
    
    
    $
    1,234Accounts payable:Accounts payable
    
    $
    48,636
    
    
    $
    51,949
    
    
    $
    50,519Overdraft balances
    
    
    18,189
    
    
    
    5,783
    
    
    
    5,838Accounts payable to GEBCS for recourse accounts receivable
    
    
    
    
    
    
    79
    
    
    
    14$
    66,825
    
    
    $
    57,811
    
    
    $
    56,371Accrued liabilities:Accrued non-income taxes
    
    $
    3,969
    
    
    $
    3,126
    
    
    $
    3,043Commissions and management bonuses
    
    
    3,593
    
    
    
    4,914
    
    
    
    6,008Salaries and wages
    
    
    1,485
    
    
    
    1,498
    
    
    
    469Insurance  hospitalization and workers compensation
    
    
    2,273
    
    
    
    2,816
    
    
    
    2,794Asset rationalization
    
    
    281
    
    
    
    799
    
    
    
    450Insurance  property and casualty
    
    
    970
    
    
    
    1,092
    
    
    
    1,897Severance
    
    
    94
    
    
    
    26
    
    
    
    209Vendor contract termination
    
    
    
    
    
    
    
    
    
    
    3,287Accrued disposal cost
    
    
    3,415
    
    
    
    
    
    
    
    Other
    
    
    7,592
    
    
    
    8,758
    
    
    
    6,027$
    23,672
    
    
    $
    23,029
    
    
    $
    24,184
 12




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##### Table of Contents



10. Detail of Certain Statements of Operations Accounts:
 Three Months Ended September 30,
    
    

    Nine Months Ended September 30,(Dollars in thousands)
    
    2005
    
    
    2004
    
    

    2005
    
    
    2004Net sales:Gross sales
    
    $
    160,433
    
    
    $
    153,388
    
    

    $
    452,412
    
    
    $
    439,469Agency sales
    
    
    (881
    )
    
    
    (622
    )
    

    
    (1,919
    )
    
    
    (1,049
    )Freight revenue
    
    
    405
    
    
    
    431
    
    

    
    1,015
    
    
    
    1,251Customer discounts, rebates and sales adjustments
    
    
    (1,090
    )
    
    
    (542
    )
    

    
    (4,387
    )
    
    
    (2,783
    )$
    158,867
    
    
    $
    152,655
    
    

    $
    447,121
    
    
    $
    436,888Merchant discounts and provision for doubtful accounts:Merchant discountsMulti-purpose credit programs
    
    $
    (609
    )
    
    $
    (531
    )
    

    $
    (1,591
    )
    
    $
    (1,413
    )Private label business credit programs
    
    
    (2,198
    )
    
    
    (1,743
    )
    

    
    (6,053
    )
    
    
    (4,682
    )Private label promotional discounts
    
    
    (513
    )
    
    
    (225
    )
    

    
    (1,306
    )
    
    
    (378
    )Provision for doubtful accounts
    
    
    (105
    )
    
    
    
    
    

    
    (176
    )
    
    
    Customer finance revenue
    
    
    104
    
    
    
    62
    
    

    
    256
    
    
    
    264Other
    
    
    (137
    )
    
    
    (241
    )
    

    
    (441
    )
    
    
    (650
    )$
    (3,458
    )
    
    $
    (2,678
    )
    

    $
    (9,311
    )
    
    $
    (6,859
    )Other expense:Loss on sale/disposal of fixed assets
    
    $
    (168
    )
    
    $
    (20
    )
    

    $
    (77
    )
    
    $
    (96
    )Other
    
    
    
    
    
    
    (6
    )
    

    
    (37
    )
    
    
    (8
    )$
    (168
    )
    
    $
    (26
    )
    

    $
    (114
    )
    
    $
    (104
    )Other income:Vendor payment discounts
    
    $
    128
    
    
    $
    47
    
    

    $
    415
    
    
    $
    314Other
    
    
    11
    
    
    
    4
    
    

    
    29
    
    
    
    43$
    139
    
    
    $
    51
    
    

    $
    444
    
    
    $
    357Interest expense and facility fees:Borrowings on revolver
    
    $
    (237
    )
    
    $
    (25
    )
    

    $
    (531
    )
    
    $
    (332
    )Other revolver fees
    
    
    (87
    )
    
    
    (56
    )
    

    
    (202
    )
    
    
    (168
    )Other debt and letters of credit costs
    
    
    (18
    )
    
    
    (68
    )
    

    
    (72
    )
    
    
    (203
    )Interest income
    
    
    41
    
    
    
    45
    
    

    
    64
    
    
    
    108$
    (301
    )
    
    $
    (104
    )
    

    $
    (741
    )
    
    $
    (595
    )
 Note 3: Subsequent Event
   13




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##### Table of Contents



Note
4. Supply Chain Transactions
  Three Months Ended
    
    
    Nine Months Ended(Dollars in millions)
    
    September 30, 2005
    
    
    September 30, 2005Asset impairment
    
    $
    14.1
    
    
    $
    14.1Cost of disposal
    
    
    3.4
    
    
    
    3.7Lease
termination
    
    
    0.9
    
    
    
    0.9Bank fees and insurance costs
    
    
    0.6
    
    
    
    0.6$
    19.0
    
    
    $
    19.3
  14




---



##### Table of Contents



LESCO, INC.
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Organization of Information
  
    
    Overview
    
    Results of Operations
    
    Business Segment Results
    
    Liquidity and Capital Resources
    
    Critical Accounting Policies and Estimates
    
    Forward Looking Statements
 OVERVIEW
    Three Months Ended September 30,
    
    

    Nine Months Ended September 30,(Dollars in millions)
    
    2005
    
    
    2004
    
    

    2005
    
    
    2004Lawn Care
    
    $
    122.2
    
    
    $
    112.6
    
    

    $
    361.4
    
    
    $
    339.5Golf
    
    
    38.2
    
    
    
    40.8
    
    

    
    91.0
    
    
    
    100.0$
    160.4
    
    
    $
    153.4
    
    

    $
    452.4
    
    
    $
    439.5
   15




---



##### Table of Contents



RESULTS OF OPERATIONS
 Sales
 Three Months Ended September 30,2005
    
    
    2004
    
    
    % ChangeOther
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherService
    
    
    Stores on
    
    
    Selling
    
    
    
    
    
    
    Service
    
    
    Stores on
    
    
    Selling
    
    
    
    
    
    
    Service
    
    
    Stores on
    
    
    Selling(Dollars in millions)
    
    Centers
    
    
    Wheels
    
    
    Locations
    
    
    Total
    
    
    Centers
    
    
    Wheels
    
    
    Locations
    
    
    Total
    
    
    Centers
    
    
    Wheels
    
    
    Locations
    
    
    TotalLawn care
    
    $
    105.9
    
    
    $
    1.3
    
    
    $
    15.0
    
    
    $
    122.2
    
    
    $
    95.0
    
    
    $
    0.6
    
    
    $
    17.0
    
    
    $
    112.6
    
    
    
    11.5
    %
    
    
    116.7
    %
    
    
    (11.8
    )%
    
    
    8.5
    %Golf
    
    
    12.2
    
    
    
    24.5
    
    
    
    1.5
    
    
    
    38.2
    
    
    
    12.4
    
    
    
    21.2
    
    
    
    7.2
    
    
    
    40.8
    
    
    
    (1.6
    )
    
    
    15.6
    
    
    
    (79.2
    )
    
    
    (6.4
    )Gross sales
    
    $
    118.1
    
    
    $
    25.8
    
    
    $
    16.5
    
    
    $
    160.4
    
    
    $
    107.4
    
    
    $
    21.8
    
    
    $
    24.2
    
    
    $
    153.4
    
    
    
    10.0
    %
    
    
    18.3
    %
    
    
    (31.8
    )%
    
    
    4.6
    %Agency sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33.3Freight revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0Customer discounts,
rebates and sales
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120.0Net sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    158.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    152.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.1
    %
 Nine Months Ended September 30,2005
    
    
    2004
    
    
    % ChangeOther
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherService
    
    
    Stores on
    
    
    Selling
    
    
    
    
    
    
    Service
    
    
    Stores on
    
    
    Selling
    
    
    
    
    
    
    Service
    
    
    Stores on
    
    
    Selling(Dollars in millions)
    
    Centers
    
    
    Wheels
    
    
    Locations
    
    
    Total
    
    
    Centers
    
    
    Wheels
    
    
    Locations
    
    
    Total
    
    
    Centers
    
    
    Wheels
    
    
    Locations
    
    
    TotalLawn care
    
    $
    300.7
    
    
    $
    2.6
    
    
    $
    58.1
    
    
    $
    361.4
    
    
    $
    276.4
    
    
    $
    2.0
    
    
    $
    61.1
    
    
    $
    339.5
    
    
    
    8.8
    %
    
    
    30.0
    %
    
    
    (4.9
    )%
    
    
    6.5
    %Golf
    
    
    28.5
    
    
    
    55.4
    
    
    
    7.1
    
    
    
    91.0
    
    
    
    26.7
    
    
    
    50.1
    
    
    
    23.2
    
    
    
    100.0
    
    
    
    6.7
    
    
    
    10.6
    
    
    
    (69.4
    )
    
    
    (9.0
    )Gross sales
    
    $
    329.2
    
    
    $
    58.0
    
    
    $
    65.2
    
    
    $
    452.4
    
    
    $
    303.1
    
    
    $
    52.1
    
    
    $
    84.3
    
    
    $
    439.5
    
    
    
    8.6
    %
    
    
    11.3
    %
    
    
    (22.7
    )%
    
    
    2.9
    %Agency sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90.0Freight revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16.7
    )Customer discounts, rebates
and sales adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57.1Net sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    447.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    436.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.3
    %
 Service Centers
 16




---



##### Table of Contents



For the Three Months Ended September 30,
    
    
    Variance(Dollars in millions)
    
    2005
    
    
    No. of Stores
    
    
    2004
    
    
    No. of Stores
    
    
    Dollars
    
    
    %Stores opened:Prior to 2003
    
    $
    101.3
    
    
    
    226
    
    
    $
    96.7
    
    
    
    226
    
    
    $
    4.6
    
    
    
    4.8
    %2003
    
    
    7.0
    
    
    
    21
    
    
    
    5.6
    
    
    
    21
    
    
    
    1.4
    
    
    
    25.0Comparative stores
    
    
    108.3
    
    
    
    247
    
    
    
    102.3
    
    
    
    247
    
    
    
    6.0
    
    
    
    5.92004
    
    
    7.4
    
    
    
    27
    
    
    
    5.1
    
    
    
    26
    
    
    
    2.3
    
    
    
    45.12005
    
    
    2.4
    
    
    
    20
    
    
    
    
    
    
    
    0
    
    
    
    2.4
    
    
    
    Total
    
    $
    118.1
    
    
    
    294
    
    
    $
    107.4
    
    
    
    273
    
    
    $
    10.7
    
    
    
    10.0
    %
 For the Nine Months Ended September 30,
    
    
    Variance(Dollars in millions)
    
    2005
    
    
    No. of Stores
    
    
    2004
    
    
    No. of Stores
    
    
    Dollars
    
    
    %Stores opened:Prior to 2003
    
    $
    288.4
    
    
    
    226
    
    
    $
    278.3
    
    
    
    226
    
    
    $
    10.1
    
    
    
    3.6
    %2003
    
    
    18.2
    
    
    
    21
    
    
    
    14.9
    
    
    
    21
    
    
    
    3.3
    
    
    
    22.1Comparative stores
    
    
    306.6
    
    
    
    247
    
    
    
    293.2
    
    
    
    247
    
    
    
    13.4
    
    
    
    4.62004
    
    
    19.4
    
    
    
    27
    
    
    
    9.9
    
    
    
    26
    
    
    
    9.5
    
    
    
    96.02005
    
    
    3.2
    
    
    
    20
    
    
    
    
    
    
    
    0
    
    
    
    3.2
    
    
    
    Total
    
    $
    329.2
    
    
    
    294
    
    
    $
    303.1
    
    
    
    273
    
    
    $
    26.1
    
    
    
    8.6
    %
 Stores-on-Wheels
 Other Selling Locations
 Agency Sales, Freight Revenue and Customer Discounts, Rebates and Sales Adjustments
  17




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##### Table of Contents



Gross Profit on Sales
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in millions)
    
    Dollars
    
    

%
of Net Sales
    
    
    Dollars
    
    

%
of Net Sales
    
    
    Dollars
    
    

%
of Net Sales
    
    
    Dollars
    
    

%
of Net SalesProduct margin
    
    $
    50.2
    
    
    
    31.6
    %
    
    $
    53.1
    
    
    
    34.8
    %
    
    $
    151.3
    
    
    
    33.9
    %
    
    $
    148.8
    
    
    
    34.1
    %Distribution cost
    
    
    (12.9
    )
    
    
    (8.1
    )
    
    
    (12.4
    )
    
    
    (8.1
    )
    
    
    (39.7
    )
    
    
    (8.9
    )
    
    
    (37.6
    )
    
    
    (8.6
    )Gross profit
    
    $
    37.3
    
    
    
    23.5
    %
    
    $
    40.7
    
    
    
    26.7
    %
    
    $
    111.6
    
    
    
    25.0
    %
    
    $
    111.2
    
    
    
    25.5
    %
    Operating Expenses :
 Three Months Ended September 30,2005
    
    
    2004
    
    
    Change% of Net
    
    
    
    
    
    
    % of Net(Dollars in millions)
    
    Dollars
    
    
    Sales
    
    
    Dollars
    
    
    Sales
    
    
    Dollars
    
    
    %
    
    
    Basis PointsSelling expense
    
    $
    24.1
    
    
    
    15.2
    %
    
    $
    23.3
    
    
    
    15.3
    %
    
    $
    0.8
    
    
    
    3.4
    %
    
    
    10
    bpsCorporate relocation expense
    
    
    
    
    
    
    
    
    
    
    4.9
    
    
    
    3.2
    
    
    
    (4.9
    )
    
    
    (100.0
    )
    
    
    320
    bpsHurricane/flood expense
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    0.9
    
    
    
    (1.4
    )
    
    
    (100.0
    )
    
    
    90
    bpsMerchant discounts/provision for
doubtful accounts
    
    
    3.5
    
    
    
    2.2
    
    
    
    2.7
    
    
    
    1.8
    
    
    
    0.8
    
    
    
    29.6
    
    
    
    (40)
    bpsSupply chain transaction expense
    
    
    19.0
    
    
    
    12.0
    
    
    
    
    
    
    
    0.0
    
    
    
    19.0
    
    
    
    
    
    
    
    (1,200)
    bps$
    46.6
    
    
    
    29.3
    %
    
    $
    32.3
    
    
    
    21.2
    %
    
    $
    14.3
    
    
    
    44.3
    %
    
    
    (810)
    bps
 18




---



##### Table of Contents



Nine Months Ended September 30,2005
    
    
    2004
    
    
    Change% of Net
    
    
    
    
    
    
    % of Net(Dollars in millions)
    
    Dollars
    
    
    Sales
    
    
    Dollars
    
    
    Sales
    
    
    Dollars
    
    
    %
    
    
    Basis PointsSelling expense
    
    $
    72.2
    
    
    
    16.1
    %
    
    $
    67.9
    
    
    
    15.5
    %
    
    $
    4.3
    
    
    
    6.3
    %
    
    
    (60)
    bpsCorporate relocation expense
    
    
    
    
    
    
    
    
    
    
    4.9
    
    
    
    1.1
    
    
    
    (4.9
    )
    
    
    (100.0
    )
    
    
    110
    bpsHurricane/flood expense
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    0.3
    
    
    
    (1.4
    )
    
    
    (100.0
    )
    
    
    30
    bpsMerchant discounts/provision for
doubtful accounts
    
    
    9.3
    
    
    
    2.1
    
    
    
    6.9
    
    
    
    1.6
    
    
    
    2.4
    
    
    
    34.8
    
    
    
    (50)
    bpsVendor contract termination
    
    
    0.5
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    Supply chain transaction expense
    
    
    19.3
    
    
    
    4.3
    
    
    
    
    
    
    
    
    
    
    
    19.3
    
    
    
    
    
    
    
    $
    101.3
    
    
    
    22.7
    %
    
    $
    81.1
    
    
    
    18.6
    %
    
    $
    20.2
    
    
    
    24.9
    %
    
    
    (410)
    bps
 Selling Expense
   Corporate Relocation Expense
  Hurricane/Flood Expense
  Merchant Discounts and Provision for Doubtful Accounts
   19




---



##### Table of Contents



Vendor Contract Termination
  Supply Chain Transaction
  General and Administrative Expense:
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(Dollars in millions)
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeGeneral & administrative expense
    
    $
    6.1
    
    
    $
    7.2
    
    
    $
    (1.1
    )
    
    $
    19.9
    
    
    $
    21.2
    
    
    $
    (1.3
    )
    Pre-Opening Expense
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(Dollars in millions)
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangePre-opening expense
    
    $
    0.5
    
    
    $
    0.1
    
    
    $
    0.4
    
    
    $
    1.1
    
    
    $
    1.0
    
    
    $
    0.1Number of Service Centers opened
during the period
    
    
    9
    
    
    
    1
    
    
    
    8
    
    
    
    20
    
    
    
    26
    
    
    
    (6
    )
  20




---



##### Table of Contents



Other Expense/Income:
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in millions)
    
    2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    ChangeOther expense
    
    $
    (0.2
    )
    
    $
    
    
    
    $
    (0.2
    )
    
    $
    (0.1
    )
    
    $
    (0.1
    )
    
    $
    Other income
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )
    
    
    0.4
    
    
    
    0.4
    
    
    
    $
    (0.1
    )
    
    $
    
    
    
    $
    (0.1
    )
    
    $
    0.3
    
    
    $
    0.3
    
    
    $
    
  Interest Expense, Net:
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(Dollars in millions)
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeInterest expense
    
    $
    (0.3
    )
    
    $
    (0.1
    )
    
    $
    (0.2
    )
    
    $
    (0.7
    )
    
    $
    (0.6
    )
    
    $
    (0.1
    )
  Pre-Tax (Loss) Earnings:
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(Dollars in millions)
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change(Loss) earnings before taxes
    
    $
    (16.2
    )
    
    $
    1.1
    
    
    $
    (17.3
    )
    
    $
    (11.1
    )
    
    $
    7.7
    
    
    $
    (18.8
    )
  For the Three Months Ended September 30,2005
    
    
    2004Class of 2005
    
    
    Class of 2004
    
    
    Class of 2003
    
    
    
    
    
    
    
    
    
    
    Class of 2004
    
    
    Class of 2003(Dollars in thousands)
    
    (20 Stores)
    
    
    (27 Stores)
    
    
    (21 Stores)
    
    
    Total
    
    
    
    
    
    
    (26 Stores)
    
    
    (21 Stores)
    
    
    TotalSales
    
    $
    2,369
    
    
    $
    7,385
    
    
    $
    6,947
    
    
    $
    16,701
    
    
    
    
    
    
    $
    5,136
    
    
    $
    5,619
    
    
    $
    10,755Cost of product
    
    
    (1,554
    )
    
    
    (4,845
    )
    
    
    (4,607
    )
    
    
    (11,006
    )
    
    
    
    
    
    
    (3,459
    )
    
    
    (3,858
    )
    
    
    (7,317
    )Distribution cost
    
    
    (180
    )
    
    
    (399
    )
    
    
    (338
    )
    
    
    (917
    )
    
    
    
    
    
    
    (214
    )
    
    
    (203
    )
    
    
    (417
    )Gross profit on sales
    
    
    635
    
    
    
    2,141
    
    
    
    2,002
    
    
    
    4,778
    
    
    
    
    
    
    
    1,463
    
    
    
    1,558
    
    
    
    3,021Selling expense
    
    
    (880
    )
    
    
    (1,374
    )
    
    
    (1,040
    )
    
    
    (3,294
    )
    
    
    
    
    
    
    (1,238
    )
    
    
    (1,090
    )
    
    
    (2,328
    )Merchant discount expense
    
    
    (42
    )
    
    
    (114
    )
    
    
    (112
    )
    
    
    (268
    )
    
    
    
    
    
    
    (70
    )
    
    
    (79
    )
    
    
    (149
    )Pre-opening expense
    
    
    (459
    )
    
    
    
    
    
    
    
    
    
    
    (459
    )
    
    
    
    
    
    
    (55
    )
    
    
    
    
    
    
    (55
    )(Loss) earnings before
interest and taxes
    
    $
    (746
    )
    
    $
    653
    
    
    $
    850
    
    
    $
    757
    
    
    
    
    
    
    $
    100
    
    
    $
    389
    
    
    $
    489
   21




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##### Table of Contents



For the Nine Months Ended September 30,2005
    
    
    2004Class of 2005
    
    
    Class of 2004
    
    
    Class of 2003
    
    
    
    
    
    
    Class of 2004
    
    
    Class of 2003(Dollars in thousands)
    
    (20 Stores)
    
    
    (27 Stores)
    
    
    (21 Stores)
    
    
    Total
    
    
    (26 Stores)
    
    
    (21 Stores)
    
    
    TotalSales
    
    $
    3,230
    
    
    $
    19,338
    
    
    $
    18,152
    
    
    $
    40,720
    
    
    $
    9,904
    
    
    $
    14,859
    
    
    $
    24,763Cost of product
    
    
    (2,128
    )
    
    
    (12,743
    )
    
    
    (12,007
    )
    
    
    (26,878
    )
    
    
    (6,689
    )
    
    
    (10,117
    )
    
    
    (16,806
    )Distribution cost
    
    
    (276
    )
    
    
    (972
    )
    
    
    (891
    )
    
    
    (2,139
    )
    
    
    (590
    )
    
    
    (637
    )
    
    
    (1,227
    )Gross profit on sales
    
    
    826
    
    
    
    5,623
    
    
    
    5,254
    
    
    
    11,703
    
    
    
    2,625
    
    
    
    4,105
    
    
    
    6,730Selling expense
    
    
    (1,463
    )
    
    
    (4,026
    )
    
    
    (3,199
    )
    
    
    (8,688
    )
    
    
    (2,517
    )
    
    
    (3,216
    )
    
    
    (5,733
    )Merchant discount expense
    
    
    (57
    )
    
    
    (289
    )
    
    
    (286
    )
    
    
    (632
    )
    
    
    (132
    )
    
    
    (202
    )
    
    
    (334
    )Pre-opening expense
    
    
    (1,108
    )
    
    
    
    
    
    
    
    
    
    
    (1,108
    )
    
    
    (965
    )
    
    
    
    
    
    
    (965
    )(Loss) earnings before
interest and taxes
    
    $
    (1,802
    )
    
    $
    1,308
    
    
    $
    1,769
    
    
    $
    1,275
    
    
    $
    (989
    )
    
    $
    687
    
    
    $
    (302
    )
  Income Taxes and Net Loss:
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in millions, except per share data)
    
    2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    Change(Loss) earnings before income
taxes
    
    $
    (16.2
    )
    
    $
    1.1
    
    
    $
    (17.3
    )
    
    $
    (11.1
    )
    
    $
    7.7
    
    
    $
    (18.8
    )Income tax (provision) benefit:Current
    
    
    
    
    
    
    (1.9
    )
    
    
    1.9
    
    
    
    
    
    
    
    (3.2
    )
    
    
    3.2Deferred
    
    
    7.3
    
    
    
    1.5
    
    
    
    5.8
    
    
    
    6.5
    
    
    
    0.2
    
    
    
    6.3Change in valuation allowance
    
    
    (7.3
    )
    
    
    0.4
    
    
    
    (7.7
    )
    
    
    (6.5
    )
    
    
    2.7
    
    
    
    (9.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    0.3Net (loss) income
    
    $
    (16.2
    )
    
    $
    1.1
    
    
    $
    (17.3
    )
    
    $
    (11.1
    )
    
    $
    7.4
    
    
    $
    (18.5
    )(Loss) earnings per common share:Diluted
    
    $
    (1.82
    )
    
    $
    0.12
    
    
    
    
    
    
    $
    (1.25
    )
    
    $
    0.82Basic
    
    $
    (1.82
    )
    
    $
    0.13
    
    
    
    
    
    
    $
    (1.25
    )
    
    $
    0.85
   22




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##### Table of Contents



BUSINESS SEGMENT RESULTS
  Stores Segment
  Direct Sales Segment
  Corporate
  Segment Statement of Operations
  Three Months Ended September 30, 2005
    
    
    Three Months Ended September 30, 2004Direct
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Direct(Dollars
in millions)
    
    Stores
    
    
    Sales
    
    
    Corporate
    
    
    Total
    
    
    Stores
    
    
    Sales
    
    
    Corporate
    
    
    TotalNet sales
    
    $
    142.7
    
    
    $
    16.2
    
    
    $
    
    
    
    $
    158.9
    
    
    $
    129.1
    
    
    $
    23.6
    
    
    $
    
    
    
    $
    152.7Cost of product (including
distribution costs)
    
    
    (103.0
    )
    
    
    (14.8
    )
    
    
    (3.8
    )
    
    
    (121.6
    )
    
    
    (91.6
    )
    
    
    (20.5
    )
    
    
    
    
    
    
    (112.1
    )Gross profit on sales
    
    $
    39.7
    
    
    $
    1.4
    
    
    $
    (3.8
    )
    
    $
    37.3
    
    
    $
    37.5
    
    
    $
    3.1
    
    
    $
    
    
    
    $
    40.6Selling expense
    
    
    (21.1
    )
    
    
    (1.0
    )
    
    
    (2.0
    )
    
    
    (24.1
    )
    
    
    (18.5
    )
    
    
    (3.4
    )
    
    
    (1.4
    )
    
    
    (23.3
    )Merchant discounts
    
    
    (2.5
    )
    
    
    (0.3
    )
    
    
    (0.6
    )
    
    
    (3.4
    )
    
    
    (2.1
    )
    
    
    (0.4
    )
    
    
    (0.2
    )
    
    
    (2.7
    )Pre-opening expense
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )General & administrative expense
    
    
    
    
    
    
    
    
    
    
    (6.1
    )
    
    
    (6.1
    )
    
    
    
    
    
    
    
    
    
    
    (7.1
    )
    
    
    (7.1
    )Supply chain transaction expense
    
    
    
    
    
    
    
    
    
    
    (19.1
    )
    
    
    (19.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate relocation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.9
    )
    
    
    (4.9
    )Hurricane/flood expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    (1.3
    )Earnings (loss) before
interest and income taxes
    
    $
    16.1
    
    
    $
    0.1
    
    
    $
    (32.1
    )
    
    $
    (15.9
    )
    
    $
    16.9
    
    
    $
    (0.7
    )
    
    $
    (15.0
    )
    
    $
    1.2
 23




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##### Table of Contents



Nine Months Ended September 30, 2005
    
    
    Nine Months Ended September 30, 2004Direct
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Direct(Dollars
in millions)
    
    Stores
    
    
    Sales
    
    
    Corporate
    
    
    Total
    
    
    Stores
    
    
    Sales
    
    
    Corporate
    
    
    TotalNet sales
    
    $
    383.9
    
    
    $
    63.2
    
    
    $
    
    
    
    $
    447.1
    
    
    $
    354.7
    
    
    $
    82.2
    
    
    $
    
    
    
    $
    436.9Cost of product (including
distribution costs)
    
    
    (274.9
    )
    
    
    (56.8
    )
    
    
    (3.8
    )
    
    
    (335.5
    )
    
    
    (255.3
    )
    
    
    (70.4
    )
    
    
    
    
    
    
    (325.7
    )Gross profit on sales
    
    $
    109.0
    
    
    $
    6.4
    
    
    $
    (3.8
    )
    
    $
    111.6
    
    
    $
    99.4
    
    
    $
    11.8
    
    
    $
    
    
    
    $
    111.2Selling expense
    
    
    (62.0
    )
    
    
    (5.2
    )
    
    
    (5.0
    )
    
    
    (72.2
    )
    
    
    (52.5
    )
    
    
    (10.3
    )
    
    
    (5.1
    )
    
    
    (67.9
    )Merchant discounts
    
    
    (6.4
    )
    
    
    (1.5
    )
    
    
    (1.4
    )
    
    
    (9.3
    )
    
    
    (5.4
    )
    
    
    (1.3
    )
    
    
    (0.2
    )
    
    
    (6.9
    )Pre-opening expense
    
    
    
    
    
    
    
    
    
    
    (1.1
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    (1.0
    )General & administrative expense
    
    
    
    
    
    
    
    
    
    
    (19.8
    )
    
    
    (19.8
    )
    
    
    
    
    
    
    
    
    
    
    (21.2
    )
    
    
    (21.2
    )Supply chain transaction expense
    
    
    
    
    
    
    
    
    
    
    (19.4
    )
    
    
    (19.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate relocation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.9
    )
    
    
    (4.9
    )Vendor contract termination
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Hurricane/flood expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    (1.3
    )Other income
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    0.3Earnings (loss) before
interest and income taxes
    
    $
    40.6
    
    
    $
    (0.3
    )
    
    $
    (50.7
    )
    
    $
    (10.4
    )
    
    $
    41.5
    
    
    $
    0.2
    
    
    $
    (33.4
    )
    
    $
    8.3
 LIQUIDITY AND CAPITAL RESOURCES
  For the Nine Months Ended September 30,(Dollars in millions)
    
    2005
    
    
    2004Cash (used
in) provided by operations
    
    $
    (18.1
    )
    
    $
    23.4Cash used in investing activities
    
    
    (3.4
    )
    
    
    (1.5
    )Cash provided by (used in) financing activities
    
    
    20.7
    
    
    
    (21.4
    )(Decrease) increase in cash and cash equivalents
    
    $
    (0.8
    )
    
    $
    0.5
  For the Nine Months Ended September 30,(Dollars in thousands)
    
    2005
    
    
    2004Cash (used in) provided by operating activities  GAAP
    
    $
    (18.1
    )
    
    $
    23.4Less: Cash received for sale of accounts receivable
    
    
    
    
    
    
    (5.9
    )Adjusted cash (used in) provided by operating activities  non-GAAP
    
    $
    (18.1
    )
    
    $
    17.5
  24




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##### Table of Contents



For the Nine Months Ended September 30,(Dollars in millions)
    
    2005
    
    
    2004Accounts payable
    
    $
    66.8
    
    
    $
    57.8Inventory
    
    $
    126.9
    
    
    $
    110.9Accounts payable leverage
    
    
    52.6
    %
    
    
    52.1
    %
 Capital Expenditures
 For the Nine Months Ended September 30,(Dollars in millions)
    
    2005
    
    
    2004StoresNew
    
    $
    1.5
    
    
    $
    1.1Other
    
    
    1.3
    
    
    
    0.3Manufacturing facilities and corporate systems
    
    
    0.9
    
    
    
    1.7$
    3.7
    
    
    $
    3.1
   Financing Activities
   25




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##### Table of Contents



Contractual Obligations, Commitments and Off Balance Sheet Arrangements
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   Revenue Recognition
   26




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##### Table of Contents



Allowance for Doubtful Accounts
  Inventories
  Income Taxes
  Impairment of Long-Lived Assets
  27




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##### Table of Contents



Accrued Liabilities
  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 Inventory Costs
 Inventory Costs, an amendment of
ARB No. 43, Chapter 4
 Share-Based Payments
 Share-Based Payment
 FORWARD LOOKING STATEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  28




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Controls and Procedures
    
 PART II  OTHER INFORMATION
  
 ITEM 1. LEGAL PROCEEDINGS
  29




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##### Table of Contents



ITEM
5. OTHER INFORMATION
   30




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##### Table of Contents



ITEM 6. EXHIBITS
 Exhibits
    
    Exhibit 2
    
    Asset Purchase Agreement, dated July 26, 2005, between the
Registrant and Turf Care Supply Corp.Exhibit 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 10(a)
    
    Retention Agreement, dated
August 8, 2005, between the
Registrant and Charles H. DennyExhibit 10(b)
    
    Board of Directors resolution for
severance arrangementsExhibit 31(a)
    
    Jeffrey L. Rutherford Rule 13a-14(a)/15d-14(a) CertificationExhibit 31(b)
    
    Michael A. Weisbarth Rule 13a-14(a)/15d-14(a) CertificationExhibit 32(a)
    
    Jeffrey L. Rutherford Section 1350 CertificationExhibit 32(b)
    
    Michael A. Weisbarth Section 1350 Certification
 31




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##### Table of Contents



LESCO, INC.Date:
November 9, 2005
    
    By: /s/ Michael A. WeisbarthMichael A. WeisbarthVice President, Chief Financial Officer,
Controller and Treasurer
 32