| Risk Factors FORWARD-LOOKING STATEMENTS AND RISK FACTORS This Form 10-K contains forward-looking statements that involve risks and uncertainties |
| Our actual results could differ materially from those anticipated in these forward-looking statements as a result of factors both in and out of our control, including the risks faced by us described below and elsewhere in this Form 10-K You should carefully consider the risks described below |
| In addition, the risks described below are not the only ones facing us |
| However, there may be additional risks that are viewed by us as not material at the present time or that are not presently known to us |
| Conditions could change in the future, or new information may come to our attention that could impact our assessment of these risks |
| If any of the events described below were to occur, our business, prospects, financial condition and/or results of operations could be materially adversely affected |
| In any such case, the price of our common shares could decline, and you could lose all or part of your investment in our company |
| 5 _________________________________________________________________ Sales of our products are seasonal and may cause our quarterly operating results and working capital requirements to fluctuate |
| As a result of this seasonality, our inventory and working capital needs fluctuate significantly during the year |
| Furthermore, adverse business or economic conditions during our peak selling season could materially adversely affect our business, financial condition and results of operations |
| Weather conditions during our peak selling season could adversely impact our financial results |
| Weather conditions in North America have a significant impact on the timing of sales in the spring selling season and our overall annual sales |
| Periods of cold and wet weather can slow sales of fertilizer, combination products and control products, while periods of dry, hot weather can decrease pest control product sales |
| In addition, an abnormally cold spring throughout North America could adversely affect fertilizer combination product and control product sales and therefore our results of operations |
| Our dependence on one supplier for substantially all consumable products makes us vulnerable to a disruption in the supply of these products |
| Effective October 1, 2005, the Company sold substantially all of its manufacturing and distribution assets to TCS Concurrently, the Company entered into a transition agreement and a long-term supply agreement with TCS pursuant to which this supplier manufactures or sources for us substantially all consumable goods sold by the Company |
| Consumable goods constituted 86prca of our consolidated net sales for 2005 |
| As a result, any of the following could have a material adverse effect on our business, financial condition and results of operations: • The supplier’s breach of our long-term supply agreement with it; • An adverse change in the financial condition of the supplier; or • An adverse change in the supplier’s ability to manufacture, source and/or deliver desired products on a timely basis |
| The Company has contractual remedies designed to mitigate the risks of TCS’ failure to perform timely or effectively |
| For example, TCS must meet specified service levels or it will incur financial penalties |
| If TCS breaches the supply agreement or terminates it for reasons other than the Company’s breach, the Company will have the option to repurchase the sold assets for a purchase price based on the higher of the depreciated cost or fair market value of the capital assets and certain costs of the inventory |
| This contingency was designed to mitigate the risk of a catastrophic loss resulting from TCS’ breach or failure to perform under the agreement, but the Company may still be harmed, including by suffering a catastrophic loss, if a breach of a failure to perform occurs |
| Since October 1, 2005, the Company has been providing certain services to aid in the transition to TCS of the administration of the supply chain assets |
| Some services, including benefits and payroll administration, terminated at the end of 2005 |
| Other services, including accounting, accounts payable, accounts receivable and tax services, will continue on a month-to-month basis until the earlier of TCS’ cancellation of the services or September 30, 2006 |
| Although few problems have surfaced yet, the Company is aware that additional challenges may arise when the transition period ends and TCS assumes full responsibility for administration of supply chain assets |
| Successful performance of this long-term supply agreement is critical to the Company’s success |
| If the supply relationship is affected adversely, the Company may be unable to replace quickly or effectively the consumable goods manufactured or sourced for us by TCS Significant disruptions could have a dramatic effect on the Company’s performance |
| 6 _________________________________________________________________ We may not be able to successfully execute our Service Center expansion program |
| One of our key business strategies is to expand annually, by 10prca to 15prca of our existing Service Centers’ base, the number of Service Centers we operate |
| Our success in executing this program is dependent on our ability to locate and obtain favorable Service Center sites, negotiate acceptable leases for those sites, open new and relocated Service Centers in a timely manner and adapt management information and other operating systems sufficiently to support Service Center expansion in an efficient and profitable manner |
| Executing this program requires that we attract, hire, train and retain the skilled associates necessary to meet the staffing needs of new Service Center operations in a timely and cost-effective manner |
| The golf market has been contracting and the Company has transitioned to a revised model for sales to this sector |
| Over the last several years, the golf market has contracted as annual rounds of golf played have declined and new course development has slowed |
| Our sales to the golf sector represented 21dtta0prca of the Company’s gross sales in 2005, a decline from 24dtta8prca of the Company’s gross sales in 2004 |
| We do not expect near-term growth in the golf industry, and if the golf market continues to contract, it is possible that our sales to that sector may be materially adversely affected |
| It is also possible that the golf industry may not respond favorably to the Company’s new model for golf course sales |
| In 2005, the Company transitioned from golf sales representatives to a Stores-on-Wheels model |
| The impact of this transition was not fully evident in 2005, and it is possible that the model could prove less effective than the Company anticipates |
| Competition in our industry may hinder our ability to execute our business strategy, achieve profitability or maintain relationships with existing customers |
| We operate in a highly competitive industry |
| We compete against numerous other companies, a number of which are more established in the industry and have substantially greater financial and other resources than we do |
| Our products compete against national and regional products and private label products produced by various suppliers |
| Our largest competitors are The Andersons Inc, JR Simplot Company, Lebanon Seaboard, Deere & Company, ProSource One and United Agricultural Products (UAP — formerly known as Verdicon) |
| Principal competitive factors include location of stores selling the desired products, price and quality of products, in-stock consistency, merchandise assortment and presentation, and customer service |
| We believe we differentiate ourselves from general merchandise, hardware and home center retailers and other specialty retailers by focusing on a specific market segment (ie, the professional turf care sector of the green industry) |
| However, we do face competition from these retailers |
| Our inability to compete effectively could have a material adverse effect on our business, results of operations and financial condition |
| Changes in customer demands could materially adversely affect our sales, results of operations and cash flow |
| Our success depends on our ability to anticipate and respond in a timely manner to changing customer demand and preferences for products and supplies used in their businesses |
| If we misjudge customer demand and preferences, we may overstock unpopular products and be forced to take significant inventory markdowns |
| However, shortages of key items also could have a materially adverse impact on results of operations |
| Public perceptions that the products we sell pose health and environmental risks could adversely affect us |
| We sell a number of complex chemical products bearing our brand name, including fertilizers, combination, control, and pest control products |
| On occasion, customers have alleged that some products failed to perform to warranty, expectations or caused damage or injury to individuals or property |
| Public perception that our products pose health and environmental risks, whether justified or not, could impair our reputation, damage our brand name and adversely affect our business, financial condition and results of operations |
| 7 _________________________________________________________________ Compliance with environmental and other public health regulations could increase our costs of doing business and expose us to additional requirements with which we may be unable to comply |
| Local, state, federal, and, to a lesser extent, foreign laws and regulations governing turf control products and environmental matters affect us in several ways |
| In the United States, all products containing pesticides must be registered with the US Environmental Protection Agency (“US EPA”) and, in many cases, similar state agencies, before they can be sold |
| Fertilizer products are also regulated by state agencies and generally must be registered or licensed in most states in which they are sold |
| The inability to obtain, or the cancellation of, any registration or license could have an adverse effect on our business |
| The severity of the effect would depend on which products were involved, whether another product could be substituted and whether our competitors were similarly affected |
| It is also possible that the US EPA or a third-party registrant of an active ingredient in our products may decide that a pesticide we use in our products will be limited or made unavailable to us |
| We attempt to anticipate regulatory developments and maintain registrations of, and access to, substitute chemicals, but we may not always be able to avoid or minimize these risks |
| For example, in December 2000, the US EPA reached agreement with various parties, including manufacturers of the active ingredient diazinon, requiring a phased withdrawal of products containing diazinon, which chemical was used in certain of our control products |
| We cannot predict the effect of the US EPA’s continuing evaluations of active ingredients used in our products |
| The Company incurs risks of regulatory and environmental compliance related to its on-going operation of LESCO Service Center stores, Stores-on-Wheels vehicles, and direct sales |
| Some of the products that we distribute are subject to regulation by federal, state and local authorities |
| These regulations vary by state, and sometimes, locality |
| Regulations also may require that only certified applicators apply the product, that the product be used only in specified locations or that certain ingredients not be used |
| Selling a restricted-use pesticide without a current license, or to a customer who lacks a license to apply the product, can subject the Company to administrative actions and penalties |
| In addition, the Company is subject to administrative actions and penalties if it sells unregistered or mislabeled pesticide products |
| Even if we are able to comply with all such regulations and obtain all necessary registrations, we cannot provide assurance that our products, particularly pesticide products, will not cause injury to the environment or to people under all circumstances |
| In addition to the regulations already described, local, state and federal agencies regulate the disposal, handling and storage of waste, air and water discharges from our facilities |
| As a result of the sale of our supply chain assets to TCS in October 2005, the Company no longer owns its former manufacturing and distribution facilities in Martins Ferry, Ohio; Hatfield, Massachusetts; Westfield, Massachusetts; Silverton, Oregon; or Sebring, Florida |
| Pursuant to the terms of the Asset Purchase Agreement with TCS, however, we are contractually obligated to indemnify TCS for environmental liabilities at the facilities relating to actions, omissions, events or occurrences prior to the closing date of the sale, and, in limited situations, for certain environmental events occurring after the closing date |
| For example, in 2003 the Ohio EPA conducted a multimedia inspection at the Martins Ferry facility and noted the potential presence of contaminants beyond acceptable limits in the sanitary and storm water discharges from the facility |
| The Company believes that all sanitary discharge issues have been resolved with the Ohio EPA (subject to continued monitoring of discharge levels to ensure no significant adverse changes), but the Ohio EPA expects significant reduction of the ammonia content of the plant’s storm water discharge that has not yet been achieved |
| Although TCS purchased this facility in October 2005, the Company remains liable for the costs of achieving compliance with the Ohio EPA’s mandate |
| In addition to liability for operations at its former production facilities, the Company continues to have potential liability for activities at its former distribution facilities in Stockton, California; Plano, Texas; North Aurora, Illinois; Anaheim, California; and Windsor, New Jersey |
| To that end, the Company is currently 8 _________________________________________________________________ engaged in discussions with state and local agencies to determine the extent of its obligation to remediate the Stockton and Windsor sites |
| We have reserved for future expenditures where our liability for environmental remediation can be assessed with reasonable accuracy, but our liability may exceed reserves for several reasons: • we do not know whether there are conditions of contamination currently unknown to us; • we may not know the extent of contamination, even when the existence of contamination is known to us; and • we cannot predict whether we will be able to utilize the most cost-effective method of remediation, or whether more expensive means will be required |
| If we are found not to be in substantial compliance with applicable environmental and public health laws and regulations, it could have a material impact on future environmental capital expenditures and other environmental expenses and our results of operations, financial position and cash flows |
| Environmental regulations are often complex and are subject to change |
| Regulatory or legislative changes may cause future increases in our operating costs or otherwise affect operations |
| Neither compliance with regulatory requirements nor our environmental procedures can ensure that we will avoid claims for personal injury, property damages or governmental enforcement |
| While we do not anticipate having to make, and historically have not had to make, significant capital expenditures to comply with applicable environmental laws and regulations, due to the frequently changing nature of environmental compliance standards and technology, we cannot predict with any certainty that material capital expenditures will not be required in the future |
| The products that we distribute could expose us to product liability claims |
| Our business exposes us to potential product liability risks in the distribution of certain of our products |
| Although we generally seek to insure against such risks, there can be no assurance that such coverage is adequate or that we will be able to maintain such insurance on acceptable terms |
| A successful product liability claim in excess of our insurance coverage could have a material adverse effect on us and could prevent us from obtaining adequate product liability insurance in the future on commercially reasonable terms |
| Moreover, any adverse publicity arising from claims made against us, even if the claims were not successful, could adversely affect the reputation and sales of our products |
| Our operating results and cash flow are susceptible to fluctuations |
| We expect to continue to experience variability in our net sales, net income and cash flow on a quarterly basis |
| Factors that may contribute to this variability include: • the inherent seasonality of the turf care industry; • weather conditions during peak turf care seasons; • shifts in demand for our products; and • changes in product mix, service levels and pricing by us and our competitors |
| These fluctuations could negatively impact our business and the market price of our common shares |
| Increases in raw material costs directly affect the Company’s profitability |
| Although the Company no longer manufactures its own blended fertilizers and combination products subsequent to the sale of its supply chain assets, our long-term supply agreement with TCS establishes the Company’s cost for these products at TCS’ cost plus a defined margin |
| Accordingly, the Company continues to be subject directly to the variable costs of raw materials, including urea, phosphorus, potash and sulfur, among others |
| Urea, for example, is the nitrogen source for our fertilizer and combination products and a second derivative of natural gas |
| As the cost of natural gas has risen in the last few years, our cost of urea has 9 _________________________________________________________________ increased substantially as well |
| Our ability to pass along these additional costs to customers in the form of price increases is critical to our profitability |