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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

LESCO, Inc.

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Shares, without par value

      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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes o          No þ

      As of June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of Common Shares held by nonaffiliates was approximately $71,994,374.

      Number of Common Shares outstanding on February 29, 2004: 8,683,694.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 12, 2004 (the “Proxy Statement”) are incorporated by reference in Part III.

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PART I

General

      The Registrant was incorporated in 1962 under the laws of the State of Ohio. As used in this report, the terms “Company,” “LESCO”, “Registrant”, “we”, “us” and “our” refer to LESCO, Inc. and its consolidated subsidiaries, unless the context requires otherwise.

      LESCO®, Inc. is the largest provider of products for the professional turf care segment of the green industry. We manage the business through two business segments: Selling, which includes our LESCO Service Centers®, Stores-on-Wheels® and direct sales representatives and other direct sales efforts; and Support, which includes all corporate, manufacturing and warehousing activities. See Management’s Discussion and Analysis (MD&A) and Note 1 of the Consolidated Financial Statements for further discussion and analysis of these segments. We further track our sales by two customer sectors (Lawn Care and Golf), by transacting selling location (Service Center and Other Selling Locations) and product lines. See MD&A for further discussion of customer sectors and transacting selling locations. See discussion of product lines below.

Products Lines

      We sell an extensive array of consumable turf care products to the green industry, including fertilizer and combination products, control products, equipment, parts and service, turfgrass seed, and pest control products. These products are marketed under the LESCO name and LESCO branded names. In addition, we sell a diverse line of turf products under suppliers’ brand names.

      Sales by product lines for the years ended December 31, 2003, 2002, and 2001 are as follows:

      Fertilizer and combination products. We sell a broad assortment of standard blended fertilizers and combination products that combine fertilizer with control products. We also custom-blend fertilizer according to customer specifications. Our fertilizers include specialized products for golf course applications, including greens, tees and fairways, products for use in the lawn care industry, and products for trees, shrubs and landscape beds. Fertilizers are generally sold in a granular form, although specialized liquid formulations are also available. The primary raw materials used in the blending of fertilizer are nitrogen, phosphorus, potash and sulfur.

      We blend most of our fertilizer and combination products, except NOVEX®. The majority of our fertilizers are formulated with sulfur-coated urea, Poly Plus®. Sulfur-coated fertilizers are manufactured by spraying dry fertilizers first with sulfur, then with a polymer sealant to seal the sulfur and meter the release of nutrients. We are one of the few manufacturers of these products in the world. Sulfur coating produces a gradual release of nutrients over time, which reduces the number of required applications and the risk of over fertilization. Combination products are processed by coating fertilizers with technical grade herbicides, insecticides or fungicides providing dual action nutrition to the plant as well as the removal of crabgrass, insects and fungus.

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      NOVEX fertilizers are a homogenous, uncoated, controlled-release product manufactured by a third party using a patented technology. NOVEX’s homogenous particles are made up of chemically combined nitrogen, potassium, and phosphorous into one highly effective particle.

      Control products. We offer a full line of turf control products, including both LESCO and third-party branded herbicides, fungicides, insecticides and other specialty chemicals. These products control weed growth, insects and fungal diseases of turf, trees, shrubs and landscape beds, and specialty chemicals that are used to stimulate growing conditions. In order to offer our customers a more complete product line, we sell turf control products produced by major manufacturers.

      Equipment, parts and service. We source a broad assortment of equipment including rotary mowers, spreaders, sprayers, aerators, renovation equipment and aftermarket replacement parts from Commercial Turf Products, Ltd. (CTP), a subsidiary of MTD Consumer Group, Inc. We believe that the LESCO spreader, first introduced in 1982, is an industry leader in sales to the professional sector of the market. In addition, we offer a broad assortment of branded handheld power tools produced by third parties. Equipment sales are supported by a toll-free hotline staffed by trained technicians and repair facilities in or near Service Centers. Parts support is fully computerized, and we are generally able to provide overnight parts delivery nationwide.

      Turfgrass seed. We market LESCO and other brands of turfgrass seed, most of which are certified by authorities of various states to guarantee the purity of the seed. We contract for the production of turfgrass seed with growers in the Pacific Northwest, Western Canada and New Zealand for cool-season grasses and in California for warm-season grasses. In 2003, we had more than 34,136 production acres under contract in these regions. Our seed line includes 32 proprietary varieties as well as 28 standard blends and mixtures. Most of our turfgrass seed is blended and packaged at our facilities. Included in our turfgrass seed line is a variety of mulches and soil amendments that are primarily packaged through contract manufacturers under the LESCO brand.

      Pest control. We offer a full line of pest control products, including both LESCO and third-party branded products. These products control rodent and insect infestation both for residential and commercial uses. Our pest control products are sourced from third parties.

      Other. We offer underground irrigation equipment, protective gear, such as goggles, masks and gloves, and hand tools, such as tree pruners, shovels and rakes. On June 10, 2003, we entered an agreement with Par Aide Products Co. (Par Aide), a leading supplier of golf course accessories, and began distributing Par Aide products, including ball washers, tee markers, sand trap rakes, putting green cups, flags and flagpoles.

      Sources of supply. It is our policy to identify and use multiple sources of supply or acceptable substitutes for all products we sell and all raw materials used in our products. The only exception to this policy is our purchase of proprietary products and the Par Aide agreement.

Intellectual Property

      We own patents of various durations, trademarks, copyrights and other intellectual property, and rely on them to protect our interest in products and technology. We own common law and registered trademarks including, among others, LESCO, ELITE, Poly Plus and NOVEX. LESCO Service Center and LESCO Stores-on-Wheels are registered service marks of LESCO Technologies, LLC.; Aim Lawn Products and Professional Turf Products are trademarks licensed to Aim Lawn & Garden Products, Inc.

Product Improvement and Development

      Our research and development efforts focus on improvements to, and development of, new turf control products and fertilizers, turf care equipment and golf course accessories and new grass seed varieties. We also have a number of agreements with state universities that test turf control products, grass seed and fertilizers.

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Competition

      We compete with a number of companies within each of our product lines including national, regional and local distributors, professional turf care product manufacturers, and local nurseries. Some of these national competitors have greater name brand recognition and greater financial and other resources than we do. Our principal competitors for professional turf control, fertilizer and grass seed product lines include The Andersons Inc., J.R. Simplot Company, Lebanon Seaboard, Deere & Company, ProSource One and Verdicon. Our principal competitors for equipment are Deere & Company, Textron Inc. (Jacobsen), Scag Power Equipment and Toro Company. We compete primarily on the basis of service to customers, product quality, product offering and price.

Seasonality

      Our business is seasonal. Customers in northern states do not have the same year-round requirements for our products as customers in southern states. Nationwide, demand for our products is generally greatest during the second calendar quarter of the year.

Employees

      As of December 31, 2003, we had 1,303 full-time employees, of which 354 were involved in blending and warehouse operations, 784 in sales-related activities and 165 in management and administration. Of the total number of full-time employees, 870 were salaried and 433 were hourly employees. At our Martins Ferry facility, 133 employees are represented by a union which ratified a new three-year agreement on November 14, 2002. On December 31, 2003, LESCO and the union agreed to extend the existing contract through September 30, 2008.

Environmental Matters

      Turf control products sold by us are subject to regulation and registration by the Environmental Protection Agency (the “EPA”) and similar regulatory authorities in various states. The process of obtaining such registration may be lengthy and expensive. The labeling and advertising of turf control products are also subject to EPA regulation. While we generally believe our turf control product labels and advertising materials are consistent with EPA and state guidelines, there can be no assurance that EPA or state regulations or interpretations may not change in the future or that the EPA or any state will not challenge our labeling or advertising materials.

      Fertilizer products are also regulated by individual state departments of agriculture and must generally be registered or licensed in most states in which they are sold. There can be no assurance that the state regulations or interpretations of those regulations will not change in the future or that our registration in any state will not be challenged. We are also required to obtain licenses/permits from a number of governmental agencies in order to conduct various aspects of our business. These licenses/permits are subject to modification and revocation, which could impair our ability to conduct our business in the manner in which, and at the places at which, it is presently conducted.

      Because of the nature of our business, we are subject to various environmental laws and regulations and incur routine costs in complying with these laws and regulations. It is our policy to accrue for non-routine costs relating to environmental matters when a loss is probable and the amount of the loss can be reasonably estimated. For further discussion of environmental matters, see Item 3. Legal Proceedings.

Insurance

      We maintain comprehensive general and product liability insurance coverage at levels which we believe are prudent and most cost-effective. Our insurance programs include various deductible amounts with respect to such coverages. Certain coverages, including environmental pollution, are restricted or have been excluded under current policies. The level of coverage and deductible maintained generally reflect trends in the liability

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      We lease our corporate office building and own or lease our warehouse and blending facilities. We believe these facilities are well-maintained, adequately insured and adequate and suitable for their present and intended uses. Certain of the owned real estate is subject to mortgages as set forth below. We maintain sales offices at each of the following locations except Wellington and Windsor. The location, principal use, site and status of each of our properties as of December 31, 2003 are as follows:

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(8)	These facilities consist of two buildings owned by us. The land is subject to leases, which expire in 2011. We have one, five-year renewal option.
(9)	This facility is subject to a lease, which expires in 2015. We have two, five-year renewal options.

(10)	This facility is subject to two leases, which expire in 2006.

Item 3.     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 3,400 bags of the Company’s Dimension® Crabgrass Preemergent Plus Fertilizer to one of its retail customers in New York State without having proper registration thereof. The complaint seeks a civil penalty of $3,440,000. NYSDEC filed a similar complaint against the retail customer seeking a civil penalty of $3,440,000. The Company intends to indemnify the retail customer for such claim pursuant to a vendor agreement between the parties. The Company 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.

      Not Applicable.

Executive Officers of the Registrant

      The following table sets forth certain information with respect to the Company’s executive officers, including their respective positions with the Company:

      Since April 2002, Michael P. DiMino has been President and Chief Executive Officer of the Company. He was elected director in May 2002. Mr. DiMino joined the Company on December 12, 2001, as President and Chief Operating Officer. From 1998 to 2001, Mr. DiMino was President and Chief Operating Officer of Uniforms to You, a division of Cintas Corporation, the world’s largest provider of employee uniforms to a wide range of industries.

      Steven E. Cochran was appointed Senior Vice President, Sales in October 2002. He joined the Company in June 2002 as Senior Vice President, Marketing and Strategic Sourcing. From 1999 to 2001, Mr. Cochran was Director of National Accounts and Vice President of Marketing of Uniforms to You, a division of Cintas Corporation. From 1990 to 1999, he held various sales, marketing and field operation positions at Cintas Corporation.

      Since October 2002, Jeffrey L. Rutherford has been Senior Vice President, Chief Financial Officer, Treasurer and Secretary of the Company. Mr. Rutherford joined the Company as Senior Vice President and Chief Financial Officer on February 18, 2002. Prior to his employment at LESCO, Mr. Rutherford served as Senior Executive Vice President and Chief Financial Officer from 1997 to 2001 of OfficeMax, Inc., a retailer of office supplies, and from February 1997 to July 1997 as Senior Vice President and Treasurer of that company.

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      Bruce K. Thorn joined the Company on March 18, 2002 as Senior Vice President, Logistics and Operations. From 2000 to 2002, Mr. Thorn was Senior Director for Global Engineering Services for Gap, Inc., a specialty retailer in the apparel industry. From 1997-2000, he was Director of the Distribution Division for Cintas Corporation.

PART II

      Our common shares are traded on the NASDAQ National Market System market under the symbol “LSCO.” The following are the high and low closing prices of our common shares by quarter:

      We paid dividends of $.075 per common share in 2001. Certain provisions of the previous credit agreement prohibited the Company from paying dividends. The current credit agreement allows for the payment of dividends as long as certain conditions are maintained.

      As of February 29, 2004, there were 1,309 holders of record of our common shares.

      See also Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

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Item 6.     Selected Financial Data

Five Year Summary

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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

	•	2003 vs. 2002
	•	2002 vs. 2001

	•	Business Segment Results
	•	Liquidity and Capital Resources
	•	Contractual Obligations, Commitments and Off Balance Sheet Arrangements
	•	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 were as follows for the past three years:

      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

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      The golf industry is a smaller market (estimated at $1.2 billion) and is not expected to grow significantly during the near future, nor do we believe our opportunities are as great in this sector as 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. 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.

      Our historical financial performance and returns on invested capital through 2001 were unacceptable. Based upon the opportunities that were available in our customer sectors and opportunities for improvement in our financial performance, beginning in early 2002 we embarked on a strategy to reposition LESCO in order to effectively capitalize on our opportunities. The following is a summary of the changes we made, along with their financial impacts, if any:

      1. Executive Changes: Beginning in late 2001 through mid-2002, LESCO hired a new executive officer team. Our new team has set a revised strategy for the Company based upon high growth, high return opportunities. The financial metrics used to evaluate opportunities are sales growth and return on invested capital (ROIC). During 2002, we recorded a $3.5 million pre-tax severance charge for executive, senior and middle management terminations.

      2. Asset Rationalization: During 2002, we performed an analysis of our manufacturing facilities, utilizing a methodology balancing sales growth opportunities and ROIC, and decided to rationalize certain under-performing assets. The plan included ceasing operations at, and deciding to sell, two manufacturing facilities (a methylene-urea facility in Disputanta, Virginia and a blending facility in Stockton, California) and the sale of certain other properties. In conjunction with the announcement of the asset rationalization plan, we recorded a $12.0 million pre-tax charge to provide for the planned disposition of the properties. The Disputanta facility was sold in October 2002. The other rationalized facilities remain as assets held for sale as of December 31, 2003.

      3. Inventory Product Life Cycle Program: LESCO historically did not have an effective means of disposing of discontinued inventory. As such, we implemented a product life cycle program which requires all stock keeping units (SKUs) to be identified into one of five categories: active, watch, phase out, discontinued and liquidated. Under the program, the selling price of SKUs identified as discontinued are progressively marked down to zero and liquidated. For financial reporting purposes, the products are marked down to estimated net realizable value when identified as discontinued. In June 2002, in preparation for conversion to the program, we identified 12,000 SKUs for liquidation and recorded a $9.2 million pre-tax markdown charge. During the second half of 2002, we liquidated the markdown product and permanently purged the SKUs from our system. Properly executed, the product life cycle program should assure that, in the future, we mitigate the accumulation of discontinued SKUs.

      4. Launch of Sales Growth Programs: During the second half of 2002, we launched three programs designed to increase sales:

a. Selling Locations, Management Structure and Reporting: In 2002, we reorganized the selling locations through the creation of five geographic zones (Northeast, Mid-Central, Transition, Southeast and West) and a National Accounts zone. The geographic zones are comprised of regional geographic areas. Additionally, we developed separate operating statements (Four-Wall P&Ls) for each selling location (see further discussion Business Segment Results and Note 1 to Consolidated Financial Statements). The restructured management structure and Four-Wall P&Ls provide the requisite

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	management oversight and reporting to effectively identify and address geographic operational opportunities.
	b. New Service Center Program: LESCO had not opened new Service Centers since 1998. Our analysis of Service Center Four-Wall P&Ls and Four-Wall ROIC indicated that with a total capital and working capital investment of $200,000 to $250,000, an average Service Center at maturity generates approximately $1.3 million of sales and a ROIC of approximately 45%. We, thereafter, performed a statistical analysis utilizing historical Service Center operating performance, published industry data and government data relative to the U.S. metropolitan statistical areas. The statistical results indicated ample opportunity to expand the number of Service Centers in the continental United States by over 250 locations. We began a Service Center opening program resulting in 21 new Service Center openings in 2003. We plan to open 25 to 30 Service Centers in 2004.
	c. Expanded Direct Sales Force: Additionally, in late 2002, we expanded our direct sales force to 60 professionals. During the first half of 2003, we evaluated the program’s performance and determined that the program was not performing to our expectations, reducing the program by 38 professionals. During 2003, we incurred approximately $3.3 million of costs related to the program. Through the workforce reduction in June 2003, $1.5 million of these costs were eliminated on a go forward basis.

      5. Capital Restructuring: During 2002 and 2003, we restructured our debt and equity capital structure. The following summarizes these initiatives:

	a. 2002 Refinancing: In January of 2002, we refinanced our private placement notes, revolving credit agreement and accounts receivable securitization with a $122 million senior secured credit facility. The new facility included an amortizing term loan of $7 million and a $115 million revolving credit facility. The term loan was secured by real property and the revolver was secured by inventory and accounts receivable, both bore interest at the London InterBank Offered Rate (LIBOR) plus 2.75% to 3.00%. In conjunction with the refinancing, the private placement note holders received $1.5 million of preferred stock, with an annual payment-in-kind dividend of 7%. Concurrently with the refinancing, we entered into a three-year $40.5 million interest rate swap agreement with a fixed interest rate of 4.2% plus 2.75% to 3.00%. The 2002 refinancing resulted in an early retirement of debt charge of $4.6 million and the recording of deferred financing fees of $3.0 million.
	b. 2003 Refinancing: The 2003 refinancing was composed of the following two initiatives —

	i. Agreements with GE Business Credit Services — 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. The transaction resulted in a pre-tax charge of $4.6 million.
	Concurrently with the sale, the Company and GEBCS entered into a private label business credit program agreement (Credit Agreement). Under the Credit Agreement, GEBCS will extend commercial credit to qualified customers of LESCO and fund the program sales, less program fees and discounts, within three business days. The Credit Agreement also provides the Company the option of extending deferred payment terms to customers through the payment of incremental promotional discounts. The in-transit funds are recognized by the Company as cash equivalents. The program fees and discounts and promotional discounts are recognized as merchant discounts in the Consolidated Statement of Operations. GEBCS is the exclusive owner of the program accounts and, except for the recourse account portfolio retained by the Company, bears all credit losses. The Credit Agreement has a five-year term with automatic three-year renewals unless either party terminates at least six months prior to the end of the expiration of a term.
	ii. Debt refinancing — Also December 30, 2003, the Company entered into a $50 million Revolving Credit Facility (the Facility) which replaced the prior credit facility. Borrowings under the Facility were used to retire the prior credit facility, including the term loan, buy-out the interest rate swap agreement for $1.2 million and buy-back the outstanding preferred stock, including

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	accrued dividends, for $1.7 million. A charge of $1.1 million was recorded to expense the unamortized portion of the deferred financing costs of the prior credit facility.
	The Facility matures December 30, 2006 and is secured by inventory, owned receivables, equipment, investment interests, real property interests, and general intangibles including intellectual property. The Facility bears interest at LIBOR plus 2.0% to 2.5%, based on the level of borrowings, and requires the payment of a facility fee ranging from 0.4% to 0.5% on the unused portion of availability. Availability under the Facility is determined by a borrowing base formula calculated on eligible inventory. As of December 31, 2003, there was $43.7 million available, with unused capacity of $17.9 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. 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 borrowing under the Facility as of December 31, 2003 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 December 31, 2003. The amount of deferred financing charges associated with the Facility included in other non-current assets was $416,000, which will be amortized to expense over the three-year term of the facility.

      6. Other:

	a. Divestiture of Joint Venture: In the fourth quarter of 2003, the Company sold its investment in Commercial Turf Products Ltd. (CTP) to MTD Consumer Group, Inc. (MTD) for a $933,130 promissory note and a release from its guarantee of certain of CTP’s liabilities, including an $8.0 million industrial revenue bond. CTP is a manufacturer of commercial grade riding and walkbehind turf mowers, blowers, turf renovators, spreaders, sprayers, associated accessories and service parts. The note is payable in five equal, annual installments of $186,626 beginning November 15, 2003. The Company recorded a $10,000 gain on the sale.
	Concurrently with the sale, the Company entered into a five-year supply agreement with CTP and MTD. During the term of the agreement, the Company maintains the exclusive rights to market and sell proprietary products, such as commercial grade spreaders, sprayers, renovators and blowers and retains certain customer rights. The Company is not required to exclusively source products from CTP and MTD. Additionally, the Company has the option to exercise a buyout of the agreement prior to the expiration of the five-year term.
	The agreement provides for the following minimum annual purchase targets based on historical purchases and projected growth rates of the Company: $26.2 million in 2004, $28.9 million in 2005, $31.7 million in 2006, $34.7 million in 2007 and $37.8 million in 2008. To the extent our actual annual purchases are less than the applicable minimum purchase targets, the price on purchased products will increase. Pricing during the term of the agreement is based on pricing prior to the supply agreement, adjusted by changes in the Producers Price Index, not to exceed two percent (2%) annually.
	b. Adoption of Statement of Financial Accounting Standards No. 142 (SFAS 142) “Goodwill and Other Intangible Assets” — 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

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	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 its goodwill recording a $4.6 million charge, which is the write-off of the $7.3 million of goodwill net of a tax benefit of $2.7 million, as a cumulative effect of accounting change as of January 1, 2002.
	c. Deferred Tax Asset Valuation Reserves — In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. In making this assessment, the Company considers historical earnings, the scheduled reversal of deferred tax assets and liabilities, projected future taxable income, and tax planning strategies. The recent cumulative losses create uncertainty about the realization of the tax benefits in future years which cannot be overcome by other available evidence. As a result, a valuation allowance of $3.7 million has been recorded as of December 31, 2003 to fully reserve for the Company’s net deferred tax assets. As of December 31, 2002, the Company was uncertain about the realization of its state net operating loss carryforwards. Therefore, as of December 31, 2002, the Company recorded an $889,000 valuation allowance to reserve for the deferred tax asset associated with state net operating loss carryforwards.
	d. Sale of Former Corporate Headquarters — In 2001, we moved to our current leased corporate headquarters in Strongsville, Ohio, from our owned corporate headquarters in Rocky River, Ohio. In 2002, we sold the former corporate headquarters and recorded a $0.2 million gain on the sale.

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CONSOLIDATED RESULTS

      We believe that the most effective analysis of our consolidated results is accomplished through the removal of the financial impacts of certain of the previously discussed strategic initiatives (excluding the growth initiatives and their positive and negative effects). A summary of our financial results excluding the operational impact of these initiatives is as follows:

CONSOLIDATED STATEMENTS OF OPERATIONS

(a)	2003 charges included $2.3 million for early retirement of debt, $4.6 million for loss on sale of accounts receivable and $2.8 million for valuation allowance of deferred tax assets.
(b)	2002 charges included $9.2 million for inventory markdown, $12.0 million for an asset rationalization charge, $3.5 million for severance costs, $4.6 million for debt refinancing, $0.2 million pre-tax gain on sale of former corporate offices, and $0.9 million for valuation allowance of deferred tax assets.

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2003 vs. 2002

      The following table provides supplemental detail of sales by customer sector and transacting selling locations:

      Service Centers: Service Center gross sales reflect sales transacted through our 247 Service Centers in operation as of December 31, 2003, including 21 new Service Centers opened during 2003, and one Service Center closed during 2003 (gross sales in 2003 and 2002 of $0.2 million and $0.5 million, respectively). The total increase of 8.3% reflects a same-store (excluding new and closed units) increase of 5.3% and an increase of 3.0% from new Service Center sales of $9.8 million. We plan to open an additional 25 to 30 Service Centers in 2004.

      Other Selling Locations: All other gross sales reflect sales transacted through our direct sales programs and our Stores-on-Wheels. The decrease of 7.1% is attributable to the decline in consumption of our products by the golf industry through these sales channels. This decline was due to the challenges within the industry, discussed in the preceding Overview, and the industry experiencing inclement weather during 2003, particularly in the Northeast during the important spring selling season. Additionally, we continue to evaluate the returns relative to contract accounts and have instituted disciplines to assure contracts meet acceptable return thresholds. This program has, on occasion, resulted in lost contract sales.

      Freight Revenue and Customer Discounts and Rebates: Freight revenue, which represents fees charged to customers in sales transactions for shipping and handling, remained relatively flat as a percentage of sales. Customer discounts and rebates grew from 0.6% of gross sales to 0.8% due to a new contract account which included a rebate program.

     Gross Profit on Sales:

      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. Average 2003 urea costs increased approximately 50% over 2002 costs, which unabated would have resulted in an estimated 4.0% deterioration in product margin percentage. However, through price increases of approximately 1% and other cost of sales reductions, particularly the cost to blend fertilizer products and inventory shrinkage, we

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      The inventory markdown in 2002 relates to the implementation of the inventory product life cycle program discussed in Overview.

      In late 2002, we decided to expand our distribution network to support our expected growth in Service Center units and comparable-sales increases, which added fixed costs to our operations. As such, we opened distribution hubs in Chicago, Atlanta, and Plano, Texas, adding a cumulative 278,116 square feet of warehousing capacity to our distribution network at an average lease cost of $3.21 per square foot. The opening of these incremental hubs resulted in $1.0 million of incremental start-up costs in 2003. Additionally, the incremental fixed costs were not effectively leveraged by the 2.3% increase in net sales. The combination of start-up costs and incremental fixed costs resulted in the 0.5% deterioration in distribution expense leverage.

     Operating Expenses: