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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, 2004
    
    Commission File No. 0-13147
 or o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period fromto 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.)15885 Sprague RoadStrongsville, Ohio
    
    44136(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code
(440) 783-9250 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 o No þ Number of Common Shares outstanding on May 7, 2004: 8,697,694.    -1-




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITEDCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITEDNOTES TO CONSOLIDATED 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 PROCEEDINGSITEM 6.EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESSection 302 Certification of President and CEOSection 302 Certification of SR VP and CFOSection 906 Certification of President and CEOSection 906 Certification of SR VP and CFO    Table of Contents  
 PART I FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS LESCO, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS- UNAUDITED For the Three Months EndedMarch 31,(Dollars in thousands, except per share data)
    
    2004
    
    2003Net sales
    
    $
    102,044
    
    
    $
    94,450Cost of product
    
    
    (68,947
    )
    
    
    (63,818
    )Distribution cost
    
    
    (9,482
    )
    
    
    (10,302
    )Gross profit on sales
    
    
    23,615
    
    
    
    20,330Selling expense
    
    
    (21,840
    )
    
    
    (20,742
    )General & administrative expense
    
    
    (7,288
    )
    
    
    (7,351
    )Merchant discounts and provision for doubtful accounts
    
    
    (1,628
    )
    
    
    (531
    )Pre-opening expense
    
    
    (222
    )
    
    
    (166
    )Other expense
    
    
    (61
    )
    
    
    (40
    )Other income
    
    
    196
    
    
    
    549Loss before interest and taxes
    
    
    (7,228
    )
    
    
    (7,951
    )Interest expense
    
    
    (384
    )
    
    
    (1,288
    )Loss before income tax (provision) benefit
    
    
    (7,612
    )
    
    
    (9,239
    )Income tax (provision) benefit:Current
    
    
    (340
    )
    
    
    Deferred
    
    
    3,309
    
    
    
    3,492Change in valuation allowance
    
    
    (3,309
    )
    
    
    (340
    )
    
    
    3,492Net loss
    
    $
    (7,952
    )
    
    $
    (5,747
    )Loss per share of common stock:Diluted
    
    $
    (0.92
    )
    
    $
    (0.68
    )Basic
    
    $
    (0.92
    )
    
    $
    (0.68
    )Average
number of common shares and common share
equivalents outstanding:Diluted
    
    
    8,677,507
    
    
    
    8,523,914Basic
    
    
    8,677,507
    
    
    
    8,523,914
 See Notes to Consolidated Financial Statements. -2-




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LESCO, INC.
CONSOLIDATED BALANCE SHEETS March 31, 2004
    
    March 31, 2003
    
    December 31, 2003(Dollars in thousands)
    
    (unaudited)
    
    (unaudited)
    
    (audited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    9,886
    
    
    $
    4,439
    
    
    $
    7,505Accounts receivable
    
    
    13,912
    
    
    
    81,849
    
    
    
    19,278Inventories
    
    
    114,861
    
    
    
    109,794
    
    
    
    93,580Deferred income taxes
    
    
    
    
    
    
    3,003
    
    
    
    Other
    
    
    3,451
    
    
    
    9,254
    
    
    
    6,980TOTAL CURRENT ASSETS
    
    
    142,110
    
    
    
    208,339
    
    
    
    127,343Property, plant and equipment, net
    
    
    30,403
    
    
    
    34,730
    
    
    
    31,481Other
    
    
    2,543
    
    
    
    4,780
    
    
    
    2,541$
    175,056
    
    
    $
    247,849
    
    
    $
    161,365LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    74,037
    
    
    $
    58,248
    
    
    $
    53,874Accrued liabilities
    
    
    13,804
    
    
    
    15,152
    
    
    
    14,626Revolving credit facility
    
    
    17,553
    
    
    
    92,061
    
    
    
    15,513Current portion of debt
    
    
    
    
    
    
    1,150
    
    
    
    28TOTAL CURRENT LIABILITIES
    
    
    105,394
    
    
    
    166,611
    
    
    
    84,041Long-term debt
    
    
    5,875
    
    
    
    9,941
    
    
    
    5,875Deferred  other
    
    
    229
    
    
    
    100
    
    
    
    179TOTAL LIABILITIES
    
    
    111,498
    
    
    
    176,652
    
    
    
    90,095SHAREHOLDERS EQUITY:Preferred shares  without par value  500,000 shares
authorized; 1,656 shares issued and outstanding at
March 31, 2003, liquidation value $1,000 per share
    
    
    
    
    
    
    1,656
    
    
    
    Common shares  without par value 
19,500,000 shares authorized; 8,694,694 shares
issued and
outstanding in 2004; 8,637,563 shares issued and
8,523,914 shares outstanding at March 31, 2003 and
8,668,914 shares issued and outstanding at
December 31, 2003
    
    
    869
    
    
    
    864
    
    
    
    867Paid-in capital
    
    
    34,898
    
    
    
    34,901
    
    
    
    34,619Retained earnings
    
    
    29,310
    
    
    
    36,869
    
    
    
    37,262Unearned compensation
    
    
    (1,519
    )
    
    
    
    
    
    
    (1,478
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (1,138
    )
    
    
    Less: Treasury shares, none in 2004 and 113,649 in 2003
    
    
    
    
    
    
    (1,955
    )
    
    
    TOTAL SHAREHOLDERS EQUITY
    
    
    63,558
    
    
    
    71,197
    
    
    
    71,270$
    175,056
    
    
    $
    247,849
    
    
    $
    161,365
 See Notes to Consolidated Financial Statements. -3-




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LESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS- UNAUDITED For the Three Months EndedMarch 31,(Dollars in thousands)
    
    2004
    
    2003OPERATING ACTIVITIES:Net loss
    
    $
    (7,952
    )
    
    $
    (5,747
    )Adjustments
to reconcile net loss to net cash provided (used) by
operating activities:Depreciation
    
    
    1,869
    
    
    
    1,866Amortization of deferred financing fees and other
    
    
    40
    
    
    
    260Deferred income taxes
    
    
    
    
    
    
    (430
    )Decrease (increase) in accounts receivable
    
    
    2,247
    
    
    
    (13,622
    )Provision for uncollectible accounts receivable
    
    
    
    
    
    
    429Increase in inventories
    
    
    (21,281
    )
    
    
    (22,957
    )Gain on sale of assets
    
    
    (13
    )
    
    
    Increase in accounts payable
    
    
    26,647
    
    
    
    15,810Amortization of unearned compensation
    
    
    134
    
    
    
    Increase (decrease) in other items
    
    
    2,715
    
    
    
    (8,123
    )NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
    
    
    4,406
    
    
    
    (32,514
    )INVESTING ACTIVITIES:Proceeds on the sale of fixed assets
    
    
    26
    
    
    
    Purchase of property, plant and equipment
    
    
    (804
    )
    
    
    (2,658
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (778
    )
    
    
    (2,658
    )FINANCING ACTIVITIES:Sale of accounts receivable
    
    
    3,119
    
    
    
    (Decrease) increase in overdraft balances
    
    
    (6,484
    )
    
    
    3,166Proceeds from borrowings
    
    
    124,667
    
    
    
    127,642Reduction of borrowings
    
    
    (122,655
    )
    
    
    (92,917
    )Exercised stock options, net of treasury shares
    
    
    106
    
    
    
    NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES
    
    
    (1,247
    )
    
    
    37,891Net change in cash and cash equivalents
    
    
    2,381
    
    
    
    2,719Cash and cash equivalents  Beginning of the period
    
    
    7,505
    
    
    
    1,720CASH AND CASH EQUIVALENTS  END OF THE PERIOD
    
    $
    9,886
    
    
    $
    4,439Supplemental disclosure of cash flow information:Interest paid
    
    $
    (233
    )
    
    $
    (1,162
    )Income taxes refunded
    
    $
    3,591
    
    
    $
    51
 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 largest provider of products
for the professional turf care segment of the green industry. Products
distributed include turf control products, fertilizer, combination fertilizer
and control products (combination products), grass seed and equipment. The
Company distributes products through 256 Service Centers, 71 Stores-on-Wheels,
74 direct sales representatives and other direct sales efforts. The Company
operates nine 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 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, working capital interest charge and the portion of merchant discounts
and provision for doubtful accounts not previously 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)
    
    2004
    
    2003Net salesSelling
    
    $
    102,044
    
    
    $
    94,450Support
    
    
    
    
    
    
    $
    102,044
    
    
    $
    94,450Earnings (loss) before interest and taxesSelling
    
    $
    5,744
    
    
    $
    4,984Support
    
    
    (12,972
    )
    
    
    (12,935
    )$
    (7,228
    )
    
    $
    (7,951
    )Capital expendituresSelling
    
    $
    595
    
    
    $
    1,901Support
    
    
    209
    
    
    
    757$
    804
    
    
    $
    2,658Depreciation expenseSelling
    
    $
    272
    
    
    $
    147Support
    
    
    1,597
    
    
    
    1,719$
    1,869
    
    
    $
    1,866Intangible asset amortization expenseSelling
    
    $
    
    
    
    $
    Support
    
    
    40
    
    
    
    260$
    40
    
    
    $
    260Identifiable assetsSelling
    
    $
    87,159
    
    
    $
    150,926Support
    
    
    87,897
    
    
    
    96,923$
    175,056
    
    
    $
    247,849
 Note 2. Summary of Significant Accounting and Reporting Policies 1. Principles of Consolidation:The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and pursuant to rules and -5-




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regulations of the Securities and Exchange Commission. The statements reflect
all adjustments, consisting only of normal recurring accruals, which are, in
the opinion of management, necessary for a fair presentation of the results for
interim periods. For further information, refer to the audited financial
statements and footnotes thereto for the year ended December 31, 2003 included
in the Companys annual report onForm 10-K. The Companys consolidated financial statements for the three months ended
March 31, 2004 and 2003 included in this Quarterly Report on Form 10-Q have
been prepared in accordance with the accounting policies described in the Notes
to Consolidated Financial Statements for the year ended December 31, 2003 which
were included in the Companys Annual Report on Form 10-K filed with the
Securities and Exchange Commission (File No. 0-13147) on March 29, 2004.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted in accordance
with the rules and regulations of the Securities and Exchange Commission. These
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Form 10-K referred to above.
Certain reclassifications have been made to prior year amounts to conform to
the current presentation. Operating results for the three months ended March
31, 2004 are not necessarily indicative of the results to be expected for the
year due to the seasonal nature of the Companys business. 2. Earnings Per Share: The Company presents both basic and diluted
earnings per share (EPS) amounts. Basic EPS is calculated by dividing net
loss, less the preferred dividend in 2003, by the weighted average number of
common shares outstanding during the quarter. Diluted EPS is based upon the
weighted average number of common and common equivalent shares outstanding
during the quarter utilizing the treasury stock method for stock options.
Common equivalent shares are excluded from the computation in periods in which
they have an anti-dilutive effect, such as when the exercise price of stock
options exceeds the average market price for the period or when the Company
incurs a net loss for the period reported. A reconciliation of net loss applicable to common stock and the weighted
average number of common and common equivalent shares outstanding is as
follows: For the Three Months Ended March 31,(Dollars in thousands, except per
share data)
    
    2004
    
    2003Net loss
    
    $
    (7,952
    )
    
    $
    (5,747
    )Preferred stock dividend
    
    
    
    
    
    
    (27
    )Net loss applicable to common stock
    
    $
    (7,952
    )
    
    $
    (5,774
    )Weighted average number of common shares
outstanding (basic)
    
    
    8,677,507
    
    
    
    8,523,914Weighted average dilutive stock options
    
    
    
    
    
    
    Weighted average number of common and common
equivalent shares outstanding (diluted)
    
    
    8,677,507
    
    
    
    8,523,914Diluted loss per share
    
    
    ($0.92
    )
    
    
    ($0.68
    )Basic loss per share
    
    
    ($0.92
    )
    
    
    ($0.68
    )
 Weighted average stock options of 173,120 for the three months ended March
31, 2004, and 163,334 for the same period in 2003 were excluded from the
dilutive EPS calculation because they were anti-dilutive due to net losses. 3. Stock Based Compensation:The Company uses the intrinsic-value method
of accounting for stock-based awards granted to employees and, accordingly,
does not recognize compensation expense for its stock-based awards to employees
in the Consolidated Statements of Operations. -6-




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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: For the Three Months Ended March 31,2004
    
    2003(Dollars in thousands, except per share data)Net loss as reported
    
    $
    (7,952
    )
    
    $
    (5,747
    )Less: stock option expense, net of tax
    
    
    (133
    )
    
    
    (588
    )Pro forma net loss
    
    $
    (8,085
    )
    
    $
    (6,335
    )Loss per diluted shareAs reported
    
    $
    (0.92
    )
    
    $
    (0.68
    )Pro forma
    
    $
    (0.93
    )
    
    $
    (0.74
    )Loss per basic shareAs reported
    
    $
    (0.92
    )
    
    $
    (0.68
    )Pro forma
    
    $
    (0.93
    )
    
    $
    (0.74
    )
 These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over
the vesting period, and additional options may be granted in future periods. 4. Accounts Receivable Accounts receivable consist of the following: March 31,
    
    December 31,(Dollars in thousands)
    
    2004
    
    2003
    
    2003Supplier rebate programs
    
    $
    3,559
    
    
    $
    1,710
    
    
    $
    9,328Trade receivablesOwned  domestic
    
    
    9,705
    
    
    
    83,017
    
    
    
    6,798Owned  international
    
    
    2,260
    
    
    
    1,271
    
    
    
    1,578Recourse
    
    
    2,611
    
    
    
    
    
    
    
    5,751Other
    
    
    706
    
    
    
    676
    
    
    
    709Allowance for doubtful accounts
    
    
    (4,929
    )
    
    
    (4,825
    )
    
    
    (4,886
    )$
    13,912
    
    
    $
    81,849
    
    
    $
    19,278
 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 sales. On December 30, 2003, the Company sold a majority of its trade accounts
receivable portfolio to GE Capital Financial Inc., dba GE Business Credit
Services (GEBCS), for cash proceeds of approximately $57 million. In the first quarter of 2004,
the Company sold additional accounts receivable to GEBCS for cash proceeds of approximately $3 million. Concurrent with the sale, the Company and GEBCS entered a private label
business credit program agreement (Credit Agreement). Under the Credit
Agreement, 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 Statements 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 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. -7-




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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 and pays a fee to GEBCS to manage the credit recourse portfolio. GAAP
does not recognize the sale of recourse accounts to GEBCS. As such, all
recourse receivable balances that existed at December 30, 2003 (the date of the
GEBCS transaction) continue to be recognized as accounts receivable by the
Company, along with a corresponding account payable to GEBCS. Sales activity
on recourse accounts subsequent to December 30, 2003 are not required to be
recognized on the Companys balance sheet. A reconciliation of total recourse
accounts receivable to the balance sheets is as follows: March 31,
    
    December 31,(Dollars in thousands)
    
    2004
    
    2003
    
    2003Total recourse receivables
    
    $
    5,973
    
    
    $
    
    
    
    $
    5,751Recourse receivable generated
subsequent toDecember 30, 2003
    
    
    (3,362
    )
    
    
    
    
    
    
    Recourse receivable per balance sheet
    
    $
    2,611
    
    
    $
    
    
    
    $
    5,751
 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. 5. Inventories Inventories consist of the following: March 31,
    
    December 31,(Dollars in thousands)
    
    2004
    
    2003
    
    2003Finished goods and purchased inventoriesSelling locations
    
    $
    61,016
    
    
    $
    62,738
    
    
    $
    46,858Distribution hubs and plants
    
    
    43,589
    
    
    
    35,995
    
    
    
    36,069Capitalized procurement, warehousing and distribution costs
    
    
    8,469
    
    
    
    9,127
    
    
    
    6,681Less: Markdown and shrink reserves
    
    
    (1,217
    )
    
    
    (2,592
    )
    
    
    (1,563
    )Inventory held on consignment
    
    
    (8,003
    )
    
    
    (8,333
    )
    
    
    (5,832
    )103,854
    
    
    
    96,935
    
    
    
    82,213Raw Materials
    
    
    11,007
    
    
    
    12,859
    
    
    
    11,367$
    114,861
    
    
    $
    109,794
    
    
    $
    93,580
 Inventories are valued at the lower of cost (average cost method) or
market. Consignment inventory is considered purchased and cost of product is
recognized at the time of sale. Procurement, warehousing and distribution
costs are capitalized to inventory on hand and expensed to distribution cost
when the inventory is sold. Markdown and shrink reserves are provided for
markdown of inventory to net realizable value, 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.
Expenditures for maintenance and repairs are charged to expense as incurred.
Additions and improvements are capitalized. -8-




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Property, plant and equipment, net consists of the following: March 31, 2004
    
    March 31, 2003
    
    December 31, 2003Selling
    
    
    
    
    
    
    
    
    
    Selling
    
    
    
    
    
    
    
    
    
    Selling(Dollars in thousands)
    
    Locations
    
    Support
    
    Total
    
    Locations
    
    Support
    
    Total
    
    Locations
    
    Support
    
    TotalLand
    
    $
    
    
    
    $
    834
    
    
    $
    834
    
    
    $
    
    
    
    $
    934
    
    
    $
    934
    
    
    $
    
    
    
    $
    834
    
    
    $
    834Buildings and improvements
    
    
    1,916
    
    
    
    21,596
    
    
    
    23,512
    
    
    
    1,871
    
    
    
    21,517
    
    
    
    23,388
    
    
    
    1,391
    
    
    
    21,174
    
    
    
    22,565Machinery and equipment
    
    
    3,799
    
    
    
    20,493
    
    
    
    24,292
    
    
    
    3,117
    
    
    
    21,756
    
    
    
    24,873
    
    
    
    3,746
    
    
    
    20,549
    
    
    
    24,295Furniture and fixtures
    
    
    6,099
    
    
    
    29,537
    
    
    
    35,636
    
    
    
    4,011
    
    
    
    30,055
    
    
    
    34,066
    
    
    
    6,262
    
    
    
    29,636
    
    
    
    35,898Subtotal
    
    
    11,814
    
    
    
    72,460
    
    
    
    84,274
    
    
    
    8,999
    
    
    
    74,262
    
    
    
    83,261
    
    
    
    11,399
    
    
    
    72,193
    
    
    
    83,592Less: Accumulated depreciation
    
    
    (7,096
    )
    
    
    (46,775
    )
    
    
    (53,871
    )
    
    
    (6,590
    )
    
    
    (41,941
    )
    
    
    (48,531
    )
    
    
    (6,324
    )
    
    
    (45,787
    )
    
    
    (52,111
    )Property, plant and equipment, net
    
    $
    4,718
    
    
    $
    25,685
    
    
    $
    30,403
    
    
    $
    2,409
    
    
    $
    32,321
    
    
    $
    34,730
    
    
    $
    5,075
    
    
    $
    26,406
    
    
    $
    31,481
 Depreciation expense is included in the following: For the Three MonthsEnded March 31,(Dollars in thousands)
    
    2004
    
    2003Cost of product
    
    $
    517
    
    
    $
    697Distribution cost
    
    
    242
    
    
    
    126Selling expense
    
    
    272
    
    
    
    147General and administrative expense
    
    
    838
    
    
    
    896Total
    
    $
    1,869
    
    
    $
    1,866
 7. Borrowings Borrowings consist of the following: March 31,
    
    December 31,(Dollars in thousands)
    
    2004
    
    2003
    
    2003Current:Revolving credit facility
    
    $
    17,553
    
    
    $
    92,061
    
    
    $
    15,513Current portion of long-term debt
    
    
    
    
    
    
    1,150
    
    
    
    28$
    17,553
    
    
    $
    93,211
    
    
    $
    15,541Long-term:Term loan
    
    $
    
    
    
    $
    5,107
    
    
    $
    Industrial revenue bonds
    
    
    5,875
    
    
    
    5,875
    
    
    
    5,875Other debt
    
    
    
    
    
    
    109
    
    
    
    28Less: current portion
    
    
    
    
    
    
    (1,150
    )
    
    
    (28
    )$
    5,875
    
    
    $
    9,941
    
    
    $
    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.
Borrowings under the Facility were used to retire the prior credit facility,
including a term loan, buy-out an interest rate swap agreement and buy-back
outstanding preferred stock. 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. The weighted average interest rate on the Companys
outstanding borrowings under the Facility on March 31, 2004 was 4.0%.
Availability under the Facility is determined by a borrowing base formula
calculated on eligible inventory. As of March 31, 2004, there was $50.0
million available, with unused capacity of $22.2 million. 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, of which $10.2 million were outstanding as of March 31, 2004.
Letter of credit fees range from 2.0% to 2.5% with an issuance fee ranging from
0.125% to 0.150%. -9-




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##### Table of Contents



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, 2004. 8. Asset Rationalization and Severance Expense Major components of the remaining reserves and accruals for asset
rationalization and severance expense as of March 31, 2004 and December 31,
2003 are as follows: Asset Rationalization AccrualOtherLease
    
    Exit
    
    
    
    
    
    Severance(Dollars in thousands)
    
    Costs
    
    Costs
    
    Total
    
    Accrual
    
    TotalAsset
rationalization
and severance
accruals at
December 31, 2003
    
    $
    220
    
    
    $
    830
    
    
    $
    1,050
    
    
    $
    532
    
    
    $
    1,5822004 ActivityAdditions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    73Utilized/payments
    
    
    (9
    )
    
    
    (55
    )
    
    
    (64
    )
    
    
    (334
    )
    
    
    (398
    )Asset rationalization
reserves and
severance accruals at
March 31, 2004
    
    $
    211
    
    
    $
    775
    
    
    $
    986
    
    
    $
    271
    
    
    $
    1,257
 The Company anticipates utilizing the remaining asset rationalization
accrual by the end of 2004. -10-




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##### Table of Contents



9. Detail of Certain Balance Sheets Accounts March 31,
    
    December 31,(Dollars in thousands)
    
    2004
    
    2003
    
    2003Other current assets:Income tax refund receivable
    
    $
    
    
    
    $
    6,052
    
    
    $
    3,740Other prepaids
    
    
    1,761
    
    
    
    1,660
    
    
    
    1,548Prepaid insurance
    
    
    824
    
    
    
    1,075
    
    
    
    1,033Notes receivable
    
    
    592
    
    
    
    467
    
    
    
    385Assets held for sale
    
    
    274
    
    
    
    
    
    
    
    274$
    3,451
    
    
    $
    9,254
    
    
    $
    6,980Other non-current assets:Notes receivable
    
    $
    1,496
    
    
    $
    931
    
    
    $
    1,466Store deposits
    
    
    574
    
    
    
    613
    
    
    
    572Deferred financing charges
    
    
    387
    
    
    
    1,866
    
    
    
    416Assets held for sale
    
    
    
    
    
    
    325
    
    
    
    Miscellaneous deposits
    
    
    86
    
    
    
    90
    
    
    
    87Investment  joint venture
    
    
    
    
    
    
    448
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    507
    
    
    
    $
    2,543
    
    
    $
    4,780
    
    
    $
    2,541Accounts payable:Accounts payable
    
    $
    65,697
    
    
    $
    52,735
    
    
    $
    35,910Overdraft balances
    
    
    5,729
    
    
    
    5,513
    
    
    
    12,213Accounts
payable to GEBCS for recourse
accounts receivable
    
    
    2,611
    
    
    
    
    
    
    
    5,751$
    74,037
    
    
    $
    58,248
    
    
    $
    53,874Accrued liabilities:Accrued non-income taxes
    
    $
    4,422
    
    
    $
    3,050
    
    
    $
    3,510Commissions
    
    
    1,843
    
    
    
    1,029
    
    
    
    2,650Salaries and wages
    
    
    1,238
    
    
    
    553
    
    
    
    1,918Insurance  hospitalization and
workers compensation
    
    
    2,270
    
    
    
    2,371
    
    
    
    2,383Asset rationalization
    
    
    986
    
    
    
    1,789
    
    
    
    1,050Insurance  property and casualty
    
    
    1,049
    
    
    
    1,062
    
    
    
    1,028Severance
    
    
    271
    
    
    
    1,219
    
    
    
    532Interest rate swap
    
    
    
    
    
    
    1,866
    
    
    
    Other
    
    
    1,725
    
    
    
    2,213
    
    
    
    1,555$
    13,804
    
    
    $
    15,152
    
    
    $
    14,626
 -11-




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##### Table of Contents



10. Detail of Certain Statements of Operations Accounts For the Three Months EndedMarch 31,(Dollars in thousands)
    
    2004
    
    2003Net sales:Gross sales
    
    $
    102,864
    
    
    $
    95,512Freight revenue
    
    
    306
    
    
    
    299Customer discounts and rebates
    
    
    (1,126
    )
    
    
    (1,361
    )$
    102,044
    
    
    $
    94,450Merchant discounts and provision for doubtful accounts:Merchant discountsMulti-purpose credit programs
    
    $
    (306
    )
    
    $
    (294
    )Private label business credit programs
    
    
    (1,047
    )
    
    
    Private label promotional discounts
    
    
    (209
    )
    
    
    Provision for doubtful accounts
    
    
    
    
    
    
    (429
    )Customer finance revenue
    
    
    103
    
    
    
    393Other
    
    
    (169
    )
    
    
    (201
    )$
    (1,628
    )
    
    $
    (531
    )Other expense:Severance
    
    $
    (73
    )
    
    $
    (6
    )Gain (loss) on sale/disposal of fixed assets
    
    
    13
    
    
    
    (31
    )Other
    
    
    (1
    )
    
    
    (3
    )$
    (61
    )
    
    $
    (40
    )Other income:Joint venture income
    
    $
    
    
    
    $
    370Payment discounts
    
    
    129
    
    
    
    150Other
    
    
    67
    
    
    
    29$
    196
    
    
    $
    549Interest expense and facility fees:Borrowings on revolver
    
    $
    (270
    )
    
    $
    (838
    )Other revolver fees
    
    
    (43
    )
    
    
    (58
    )Interest rate swap
    
    
    
    
    
    
    (280
    )Other debt and letters of credit costs
    
    
    (71
    )
    
    
    (112
    )$
    (384
    )
    
    $
    (1,288
    )
 -12-




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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 largest provider of products to the professional turf care
segment of the green industry. 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 and gardens. We track our customers through two customer sectors: Lawn Care and Golf. Gross sales for these sectors for the first quarter were as follows: (Dollars in millions)
    
    2004
    
    2003Lawn Care
    
    $
    85.7
    
    
    $
    77.6Golf
    
    
    17.2
    
    
    
    17.9$
    102.9
    
    
    $
    95.5
 The separation of our customers into these two sectors is important as
distribution to the sectors is markedly 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, 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 256
Service Centers and direct sales associates with products specifically targeted
to the Lawn Care sector. We estimate the market for our Lawn Care products at
$7.0 billion, and independent research indicates that organic growth in the
sector is expected to exceed 5% 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 $1.2 billion) and is
not expected to grow significantly in the near future, nor do we believe our
opportunities are as great in this sector as those in the Lawn Care sector.
Additionally, the industry has experienced a decline in annual rounds of golf
being played, which has decreased the budgets of golf course superintendents,
however, that trend appears to be moderating in the first few months of 2004.
The ability to capture incremental market share is limited as distribution of
our products to the golf industry is dominated by a few national and regional
distributors. We anticipate that we will be able to expand our presence in
under-serviced markets, but we are not planning any major expansion of
Stores-on-Wheels or direct golf sales in the near future. -13-




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##### Table of Contents



RESULTS OF OPERATIONS LESCO, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS- UNAUDITED Three Months Ended March 31,(Dollars in thousands)
    
    2004
    
    2003Net sales
    
    $
    102,044
    
    
    $
    94,450Cost of product
    
    
    (68,947
    )
    
    
    (63,818
    )Distribution cost
    
    
    (9,482
    )
    
    
    (10,302
    )Gross profit on sales
    
    
    23,615
    
    
    
    20,330Selling expense
    
    
    (21,840
    )
    
    
    (20,742
    )General & administrative expense
    
    
    (7,288
    )
    
    
    (7,351
    )Merchant discounts and provision for doubtful accounts
    
    
    (1,628
    )
    
    
    (531
    )Pre-opening expense
    
    
    (222
    )
    
    
    (166
    )Other expense
    
    
    (61
    )
    
    
    (40
    )Other income
    
    
    196
    
    
    
    549Loss before interest and taxes
    
    
    (7,228
    )
    
    
    (7,951
    )Interest expense
    
    
    (384
    )
    
    
    (1,288
    )Loss before taxes
    
    $
    (7,612
    )
    
    $
    (9,239
    )
 Sales: Service Centers:Gross sales for LESCO Service Centers® of $68.3 million
reflect sales transacted through our 256 Service Centers in operation as of
March 31, 2004, including nine new service centers opened in the first quarter
of 2004 and the 21 new Service Center openings during 2003. The total increase
of 10% over the prior year first quarter results of $62.0 reflects a same-store
(excluding the 30 new units) increase of 5% and an increase of 5% from new
Service Center sales of $3.4 million. The sales growth was predominantly
generated in the fertilizer and combination product category. The primary
products sold through Service Centers are turf care products, including turf
and pest control products, fertilizer, grass seed and equipment. The Service
Centers market and sell products principally to lawn care companies,
landscapers, public and private golf courses, nurseries, municipalities,
churches and condominium associations. The Company plans to open 25-30 Service
Centers during 2004. Other Selling Locations:The Company also markets and sells products to
private and public golf courses and other customers having large turf areas
through direct sales programs and our fleet of LESCO Stores-on-Wheels®. Through
these selling channels, the Company generated sales of $34.6 million, a 3.3%
increase over the $33.5 million in sales for the first quarter of 2003 as the
combination product category experienced favorable sales trends in this segment
as it did for Service Centers. The Companys direct channel markets and sells
products to large national and regional lawn care customers utilizing sales
representatives, markets products by mail order catalog, and participates in
national and regional lawn care trade shows. A telemarketing sales group calls
on inactive accounts and contacts customers not currently serviced by the
Companys outside sales forces. In addition, products are marketed
internationally, principally through foreign distributors. The Stores-on-Wheels
are well stocked with a wide variety of turf care products and golf course
accessories, which are sold directly from the trucks. The Company operated 71
LESCO Stores-on-Wheels in the first quarter of 2004 and 2003. The primary
products sold through this channel are turf care products, including turf and
pest control, fertilizer, grass seed, hand held equipment and golf course
accessories. -14-




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##### Table of Contents



The following table provides supplemental detail of sales by customer
sector and transacting selling locations for the first quarter of each
respective year: March 31, 2004
    
    March 31, 2003
    
    % ChangeOther
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    OtherService
    
    Selling
    
    
    
    
    
    Service
    
    Selling
    
    
    
    
    
    Service
    
    Selling(Dollars in millions)
    
    Centers
    
    Locations
    
    Total
    
    Centers
    
    Locations
    
    Total
    
    Centers
    
    Locations
    
    TotalLawn care
    
    $
    64.6
    
    
    $
    21.1
    
    
    $
    85.7
    
    
    $
    58.9
    
    
    $
    18.7
    
    
    $
    77.6
    
    
    
    9.7
    %
    
    
    12.8
    %
    
    
    10.4
    %Golf
    
    
    3.7
    
    
    
    13.5
    
    
    
    17.2
    
    
    
    3.1
    
    
    
    14.8
    
    
    
    17.9
    
    
    
    19.4
    
    
    
    (8.7
    )
    
    
    (3.9
    )Gross sales
    
    $
    68.3
    
    
    $
    34.6
    
    
    $
    102.9
    
    
    $
    62.0
    
    
    $
    33.5
    
    
    $
    95.5
    
    
    
    10.2
    %
    
    
    3.3
    %
    
    
    7.7
    %Freight revenue
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    Customer discounts
and rebates
    
    
    
    
    
    
    
    
    
    
    (1.2
    )
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    
    
    
    
    (7.7
    )Net sales
    
    
    
    
    
    
    
    
    
    $
    102.0
    
    
    
    
    
    
    
    
    
    
    $
    94.5
    
    
    
    
    
    
    
    
    
    
    
    8.0
    %
 Freight Revenue and Customer Discounts and Rebates: Freight revenue,
which represents fees charged to customers in sales transactions for shipping
and handling, remained flat year over year both in dollars and as a percentage
of sales. Customer discounts and rebates declined from 1.4% of gross sales to
1.2%. Gross Profit on Sales: March 31, 2004
    
    March 31, 2003(Dollars in millions)
    
    Dollars
    
    % of Net Sales
    
    Dollars
    
    % of Net SalesProduct margin
    
    $
    33.1
    
    
    
    32.4
    %
    
    $
    30.6
    
    
    
    32.4
    %Distribution cost
    
    
    (9.5
    )
    
    
    (9.3
    )
    
    
    (10.3
    )
    
    
    (10.9
    )Gross profit
    
    $
    23.6
    
    
    
    23.1
    %
    
    $
    20.3
    
    
    
    21.5
    %
 Product margin has remained consistent in the first quarter of 2004
compared to the like period in 2003. Our largest single purchased product or
raw material is urea, the nitrogen source for blended fertilizers and
combination products. Urea can represent from approximately 7% to 9% of our
cost of sales. Urea is a second derivative of natural gas and its cost has
increased with the increased cost of natural gas. For 2004, we have entered a
contract with our urea supplier to fix the cost of a majority of our urea needs
at a price reflecting the prevailing market in late 2003; however, our
year-over-year comparative price for urea increased approximately 30% for the
first quarter of 2004. In 2003, we expanded our distribution network to provide support to our
increasing base of Service Centers and to create efficiencies in our
distribution channel and incurred approximately $0.4 million in network
start-up costs in the first quarter 2003. In the first quarter of 2004, we
have leveraged our distribution cost as a percentage of sales and realized cost
savings as this network has begun to mature. We are experiencing more optimal
shipping quantities and direct distribution routes resulting in lower costs.
We expect to leverage our distribution costs as a percentage of sales for the
full year in 2004 as compared to prior year results. Operating Expenses: March 31, 2004
    
    March 31, 2003
    
    Change% of Net
    
    
    
    
    
    % of Net(Dollars in millions)
    
    Dollars
    
    Sales
    
    Dollars
    
    Sales
    
    Dollars
    
    %
    
    Basis PointsSelling expense
    
    $
    21.8
    
    
    
    21.4
    %
    
    $
    20.7
    
    
    
    22.0
    %
    
    $
    1.1
    
    
    
    5.3
    %
    
    (60) bpsMerchant discounts/
provision for doubtful accounts
    
    
    1.6
    
    
    
    1.6
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    1.1
    
    
    
    220.0
    
    
    110 bps$
    23.4
    
    
    
    23.0
    %
    
    $
    21.2
    
    
    
    22.5
    %
    
    $
    2.2
    
    
    
    10.4
    %
    
    50 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. The increase of $1.1 million predominantly relates to new
Service Center operating costs which increased $0.9 million in first quarter
2004 compared to new Service Centers selling expense for the same period last
year. Total new Service Center expense in the first three months for 2004 was
$1.2 million compared to $0.3 million for the like period in 2003. -15-




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##### Table of Contents



Merchant Discounts and Provision for Doubtful Accounts As a percentage of net sales, these expenses increased 1.0%
year-over-year. On December 30, 2003, we sold our trade accounts receivable
portfolio to General Electric Business Credit Services (GEBCS) for $57 million
and entered a private label business credit program agreement with GEBCS. In
the first quarter of 2004, this arrangement has resulted in increased merchant
discounts as we pay program fees and discounts to GEBCS of approximately 1.3%
of sales; however, interest expense, provision for doubtful accounts, the
general and administrative costs to service the in-house program and customer
finance revenue have been significantly reduced as compared to the same period
in 2003. General & Administrative Expense: (Dollars in millions)
    
    March 31, 2004
    
    March 31, 2003
    
    ChangeGeneral and administrative expenses
    
    $
    7.3
    
    
    $
    7.4
    
    
    $
    (0.1
    )
 We have maintained essentially flat general & administrative expense in
the first quarter of 2004, reducing it $0.1 million as compared to the same
period in 2003. The cost savings recognized from tightened expense controls
along with the strategic outsourcing of customer financing to GEBCS have
virtually offset the increase in expense related to more stringent governance
guidelines as well as management bonus and insurance expenses. Pre-Opening Expense (Dollars in millions)
    
    March 31, 2004
    
    March 31, 2003
    
    ChangePre-opening expense
    
    $
    0.2
    
    
    $
    0.2
    
    
    $
    
 Pre-opening expense remained essentially flat in the first quarter 2004
compared to the same period last year. Pre-opening expense, which consists
primarily of grand opening advertising, payroll, supplies and distribution and
storage costs, is expensed as incurred. During the first quarter of 2004, the
Company opened nine new Service Centers and prepared for 17 second quarter
expected openings. Last year during the first quarter, the Company opened 10
new Service Centers. Other (Expense)/Income: (Dollars in millions)
    
    March 31, 2004
    
    March 31, 2003
    
    ChangeOther expense
    
    $
    (0.1
    )
    
    $
    
    
    
    $
    (0.1
    )Other income
    
    
    0.2
    
    
    
    0.5
    
    
    
    (0.3
    )$
    0.1
    
    
    $
    0.5
    
    
    $
    (0.4
    )
 The decrease in net other income predominantly relates to our former joint
venture. There was no income or loss recorded in the first quarter of 2004, as
we sold our ownership in the joint venture in the fourth quarter of 2003, and
$0.4 million of income was recognized in the first quarter of 2003. Interest Expense: (Dollars in millions)
    
    March 31, 2004
    
    March 31, 2003
    
    ChangeInterest expense
    
    $
    0.4
    
    
    $
    1.3
    
    
    $
    (0.9
    )
 Interest expense declined $0.9 million in the first quarter 2004 versus
the first quarter 2003 directly related to the sale of the Companys accounts
receivable portfolio to GEBCS. The sale of the portfolio has reduced the
year-over-year outstanding borrowings on the revolving credit facility during
the first quarter, and eliminated the interest rate swap agreement that was in
place during 2003. Pre-Tax Loss: (Dollars in millions)
    
    March 31, 2004
    
    March 31, 2003
    
    ChangeLoss before taxes
    
    $
    (7.6
    )
    
    $
    (9.2
    )
    
    $
    1.6
 In the first quarter of 2004, the Company opened nine new Service Center
locations. In the first quarter of 2003, the Company opened 10 new Service
Centers and for the full year in 2003 opened 21 new Service Centers.
Management views new Service Centers as the primary method to leverage our cost
base and grow earnings consistently over time. The nine Service Centers in the
class of 2004 generated sales of $0.5 million in the first quarter while the 21
Service Centers from the class of 2003 generated $2.9 million in sales for a
total of $3.4 million in revenues from new Service Centers. This compares to
$0.2 million in revenue generated in the first quarter of 2003 from the 10 new
Service Centers. The 2004 new Service Centers generated an EBIT loss of $0.4
million for the first quarter of 2004 while, for the same period, the 21
Service Centers opened in 2003 generated an EBIT loss of $0.2 million. Total
EBIT -16-




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loss from new Service Centers was $0.6 million in the first quarter of
2004. This compares to an EBIT loss of $0.5 million for the same period in
2003 for the 10 new Service Centers opened last year. Below are the operating
results for the first quarter of 2004 compared to the same period in 2003 for
all new Service Centers: First Quarter2004
    
    2003Class of 2004
    
    Class of 2003
    
    
    
    
    
    Class of 2003(Dollars in thousands)
    
    (9 Stores)
    
    (21 Stores)
    
    Total
    
    (10 Stores)Sales
    
    $
    450
    
    
    $
    2,945
    
    
    $
    3,395
    
    
    $
    238Cost of product
    
    
    (303
    )
    
    
    (1,990
    )
    
    
    (2,293
    )
    
    
    (165
    )Distribution cost
    
    
    (96
    )
    
    
    (155
    )
    
    
    (251
    )
    
    
    (74
    )Gross profit on sales
    
    
    51
    
    
    
    800
    
    
    
    851
    
    
    
    (1
    )Selling expense
    
    
    (233
    )
    
    
    (976
    )
    
    
    (1,209
    )
    
    
    (285
    )Pre-opening expense
    
    
    (222
    )
    
    
    
    
    
    
    (222
    )
    
    
    (166
    )Merchant discount expense
    
    
    (5
    )
    
    
    (31
    )
    
    
    (36
    )
    
    
    Earnings before interest and taxes
    
    $
    (409
    )
    
    $
    (207
    )
    
    $
    (616
    )
    
    $
    (452
    )
 As a result of the foregoing factors, including the operating results of
new Service Centers, the Company had a pre-tax loss of $7.6 million for the
quarter ended March 31, 2004 compared to a pre-tax loss of $9.2 million for the
comparable period last year, an improvement of $1.6 million, or 17%. Income Taxes and Net Loss: (Dollars in millions, except per share
data)
    
    March 31, 2004
    
    March 31, 2003
    
    ChangeLoss before income tax (provision) benefit
    
    $
    (7.6
    )
    
    $
    (9.2
    )
    
    $
    1.6Income tax (provision) benefit:Current
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.4
    )Deferred
    
    
    3.3
    
    
    
    3.5
    
    
    
    (0.2
    )Change in valuation allowance
    
    
    (3.3
    )
    
    
    
    
    
    
    (3.3
    )(0.4
    )
    
    
    3.5
    
    
    
    (3.9
    )Net loss
    
    $
    (8.0
    )
    
    $
    (5.7
    )
    
    $
    (2.3
    )Loss per share of common stock:Diluted
    
    $
    (0.92
    )
    
    $
    (0.68
    )Basic
    
    $
    (0.92
    )
    
    $
    (0.68
    )
 Net loss was $8.0 million, or ($0.92) per diluted share,
in the first quarter of 2004 and $5.7 million, or ($0.68) per diluted share, in
first quarter 2003. 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 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 will have no
reported tax provision or benefit, net of valuation allowance adjustments. In
the first quarter of 2004, the Company adjusted previously estimated federal
tax refunds by $0.4 million. The
impact of the valuation allowance increased the Companys income
tax expense, and net loss, by $3.3 million and increased the net loss
per diluted share by $0.38. -17-




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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 sales, cost of product,
distribution cost (freight in-bound to selling locations and out-bound to
customers) and operating expenses (including payroll, benefits, rent and
utilities) 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, working capital interest charge and the portion of merchant discounts
and provision for doubtful accounts not previously 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 ResultsX 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 similar to other similarly titled captions
used by other companies. For example, we do not capitalize operating leases or
utilize average invested capital over given periods. -18-




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Selling Segment Operating Results For the Period Ended March 31,(Dollars in millions)
    
    2004
    
    2003Net sales
    
    $
    102.0
    
    
    $
    94.5Cost of product
    
    
    (69.4
    )
    
    
    (65.3
    )Distribution cost
    
    
    (5.3
    )
    
    
    (5.0
    )Gross profit on sales
    
    
    27.3
    
    
    
    24.2Selling expense
    
    
    (19.7
    )
    
    
    (18.5
    )Merchant discounts and provision for doubtful accounts
    
    
    (1.6
    )
    
    
    (0.5
    )Pre-opening expense
    
    
    (0.2
    )
    
    
    (0.2
    )EBIT
    
    $
    5.8
    
    
    $
    5.0NOPAT  Three months ended March 31,
    
    $
    3.5
    
    
    $
    3.0NOPAT  Nine months ended December 31, 2003 and 2002
    
    $
    34.0
    
    
    $
    36.7NOPAT  Rolling 12 months ended March 31, 2004 and 2003
    
    $
    37.5
    
    
    $
    39.7Invested capital at period endAccounts receivable
    
    
    10.4
    
    
    
    80.1Inventory
    
    
    61.0
    
    
    
    62.7Property, plant and equipment, net
    
    
    4.7
    
    
    
    2.4$
    76.1
    
    
    $
    145.2ROIC
    
    
    49.3
    %
    
    
    27.3
    %
 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, the support of the expansion of selling locations, the
maintaining of the corporate structure or is mandated by law or governmental
order. -19-




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Support Segment Operating Results For the Period Ended March 31,(Dollars in millions)
    
    2004
    
    2003Net sales
    
    $
    
    
    
    $
    Cost of product (a)
    
    
    0.5
    
    
    
    1.4Distribution cost (b)
    
    
    (4.2
    )
    
    
    (5.3
    )Gross loss on sales
    
    
    (3.7
    )
    
    
    (3.9
    )Selling expense (c)
    
    
    (2.1
    )
    
    
    (2.2
    )General & administrative expense
    
    
    (7.3
    )
    
    
    (7.3
    )Other expense (d)
    
    
    (0.1
    )
    
    
    (0.1
    )Other income (d)
    
    
    0.2
    
    
    
    0.6EBIT
    
    $
    (13.0
    )
    
    $
    (12.9
    )NOPAT  Three months ended March 31,
    
    $
    (7.9
    )
    
    $
    (7.9
    )NOPAT  Nine months ended December 31, 2003 and 2002
    
    $
    (28.5
    )
    
    $
    (37.3
    )NOPAT  Rolling 12 months ended March 31, 2004 and 2003
    
    $
    (36.4
    )
    
    $
    (45.2
    )Invested capitalTotal company invested capital
    
    
    159.2
    
    
    
    226.4Less: Selling segment invested capital
    
    
    (76.1
    )
    
    
    (145.2
    )Support segment invested capital
    
    $
    83.1
    
    
    $
    81.2ROIC
    
    
    (43.8
    %)
    
    
    (55.7
    %)
  (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 through the ordinary course of business at the Service Centers, Stores-on-Wheels or direct sales channel. 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)
    
    2004
    
    2003Cash provided (used) by operations
    
    $
    4.4
    
    
    $
    (32.5
    )Cash used by investing activities
    
    
    (0.8
    )
    
    
    (2.7
    )Cash (used) provided by financing activities
    
    
    (1.2
    )
    
    
    37.9Increase in cash and cash equivalents
    
    $
    2.4
    
    
    $
    2.7
 The cash provided by operations in the first quarter of 2004 was generated
predominantly through improved accounts payable leverage of inventory. This
improvement reflects the Companys enhanced logistics network that allows for
shorter lead time requirements which increases inventory turnover rates and,
correspondingly, accounts payable leverage of inventory purchases, and improved
cash flows. -20-




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Accounts payable leverage is summarized as follows: March 31,(Dollars in millions)
    
    2004
    
    2003Accounts payable
    
    $
    74.0
    
    
    $
    58.2Less: Payable to GEBCS
    
    
    (2.6
    )
    
    
    Adjusted accounts payable
    
    $
    71.4
    
    
    $
    58.2Inventory
    
    $
    114.9
    
    
    $
    109.8Accounts payable leverage
    
    
    62.1
    %
    
    
    53.0
    %
 Payable to GEBCS represents the portion of the receivable portfolio sold
to GEBCS on December 30, 2003 that remains uncollected by GEBCS and secured by
the Company. Capital Expenditures: Our first quarter 2004 capital expenditures can be
summarized as follows: (Dollars in millions)New Service Centers
    
    $
    0.6Manufacturing
    
    
    0.2$
    0.8
 Our capital needs going forward will be predominantly related to new
Service Centers and to maintain information systems and manufacturing
facilities. 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. Borrowings under the Facility were used to retire the prior credit
facility, including a term loan, buy-out an interest rate swap agreement and
buy-back outstanding preferred stock, including accrued dividends, all of which
were outstanding at March 31, 2003. 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, 2004,
there was $50.0 million available, with unused capacity of $22.2 million.
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, of which $10.2 million were outstanding as of March
31, 2004. 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 weighted average interest rate on the Companys outstanding borrowings
under the Facility as of March 31, 2004 was 4.0%. 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, 2004. We believe that the Companys financial condition is strong and that its
cash balances, other liquid assets, operating cash flows, access to debt and
equity capital markets and borrowing capacity, collectively, 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, 2003. 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, intangible assets, long-lived assets, income -21-




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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, 2003. This discussion and analysis
of financial condition contain 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. Sales of consigned
inventory were $4.7 million and $4.6 million for the quarters ended March 31,
2004 and 2003, 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. Inventories Inventories are valued principally at the lower of cost (average 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. We
have an inventory life cycle program which requires the identification 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
will be liquidated. Estimated net realizable value of 20% of cost is based on
historical sales of discontinued inventory. We maintain a reserve for
inventory shrink, based on historical experience of 0.2% of sales. Actual
shrink 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
has provided a $7.0 million valuation allowance equal to its net deferred tax
assets, including amounts related to its net operating loss carryforwards, as
of March 31, 2004. 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. -22-




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Impairment of Long-Lived and Intangible Assets The Company assesses the recoverability of its long-lived and intangible
assets by determining whether the amortization of the remaining balance over
its remaining useful life can be recovered through undiscounted future
operating cash flows. If impairment exists, the carrying amount of the related
asset is reduced to fair value. In September 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and
Other Intangible Assets. SFAS 142 provides that goodwill and indefinite-lived
intangible assets are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives (but with no maximum life). The
Company adopted SFAS No. 142 effective January 1, 2002. Upon adoption, the
Company determined that goodwill impairment existed. The impairment loss was
measured by evaluating the fair value of the goodwill using discounted cash
flow appraisal models. These models indicated that the goodwill of $7.3
million was fully impaired. Upon the adoption of SFAS 142, the Company wrote
off all of its goodwill and there is no amortization expense for goodwill
recorded in the operating results for the quarters ended March 31, 2004 and
2003. 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. 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; and the condition of
the industry and the economy. 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, 2003. 
 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 its debt is sensitive to changes in interest rates.
The interest rate for the Companys revolving credit facility is variable,
while the Companys long-term debt and 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, 2004, 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, 2003. See Item 7A. Quantitative and Qualitative
Disclosures About Market Risk on page 28 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2003, filed with the Securities and
Exchange Commission on March 29, 2004, for more detailed information regarding
market risk. -23-




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ITEM 4. 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 report was recorded,
processed, summarized and reported on a timely basis. 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 quarter, there have been no significant
changes in the Companys internal controls or in other factors that could
significantly affect these controls. -24-




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##### Table of Contents



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 On July 14, 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 3,440 bags of
the Companys Dimension® Crabgrass Pre-emergent Plus Fertilizer to one of its
retail customers in New York State without having proper registration therefor.
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 is in discussions with the
NYSDEC relative to a settlement. 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 financial condition. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)
    
    Exhibits
    
    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 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(b)
    
    Reports on Form 8-K:
 On January 14, 2004, the Company filed a report on Form 8-K relating to the completion of
its previously announced debt restructuring. On March 2, 2004, the Company filed a report on Form 8-K relating to the Companys Earnings
Release for the fourth quarter and full-year ended December 31, 2003. -25-




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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.May 13, 2004
    /s/ Jeffrey L. RutherfordJeffrey L. RutherfordSenior Vice President, Chief Financial Officer,
Treasurer and Secretary -26-